**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-K**

| x | **ANNUAL                REPORT PURSUANT TO SECTION 13 OR 15(d) OF****THE                SECURITIES EXCHANGE ACT OF                1934** |
|---|------------------------------------------------------------------------------------------------------------------------------------------|

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

| **Newcastle                Investment                Corp.**                         |
|--------------------------------------------------------------------------------------|
| (Exact                name of registrant as specified in its                charter) |

| Maryland                                                     |   | 81-0559116                                          |
|--------------------------------------------------------------|--------|-----------------------------------------------------|
| (State                or other jurisdiction of incorporation |   | (I.R.S.                Employer Identification No.) |
| or                organization)                              |   |                                                |

| 1345                Avenue of the Americas, New York,                NY  | 10105                     |
|-------------------------------------------------------------------------------|---------------------------|
| (Address                of principal executive                offices)        | (Zip                Code) |

| Title                of each class:                           | Name                of exchange on which registered: |
|---------------------------------------------------------------|------------------------------------------------------|
| Common                Stock, $0.01 par value per share        | New                York Stock Exchange (NYSE)        |
| 9.75%                Series B Cumulative Redeemable Preferred |                                                 |
| Stock,                $0.01 par value per share               | New                York Stock Exchange (NYSE)        |
| 8.05%                Series C Cumulative Redeemable Preferred |                                                 |
| Stock,                $0.01 par value per share               | New                York Stock Exchange (NYSE)        |

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| Large Accelerated Filer x | Accelerated Filer o | Non-accelerated Filer o |
|---------------------------|---------------------|-------------------------|

**DOCUMENTS      INCORPORATED BY REFERENCE:**

| 1.   | Portions                of the Registrant’s definitive proxy statement for the Registrant’s 2007                annual meeting, to be filed within 120 days after the close of the                Registrant’s fiscal year, are incorporated by reference into Part III of                this Annual Report on Form 10-K. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**CAUTIONARY      STATEMENTS**

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**NEWCASTLE      INVESTMENT CORP.**

**FORM      10-K**

**INDEX**

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|                    |                                                                                                               | **Page** |
|-------------------------|--------------------------------------------------------------------------------------------------------------------|----------|
|                    | **PART                I**                                                                                          |     |
| Item                1.  | Business                                                                                                           | 1        |
| Item                1A. | Risk                Factors                                                                                        | 12       |
| Item                1B. | Unresolved                Staff Comments                                                                           | 23       |
| Item                2.  | Properties                                                                                                         | 23       |
| Item                3.  | Legal                Proceedings                                                                                   | 23       |
| Item                4.  | Submission                of Matters to a Vote of Security Holders                                                 | 23       |
|                         | **PART                II**                                                                                         |     |
| Item                5.  | Market                for Registrant’s Common Equity, Related Stockholder Matters and                Issuer  |     |
|                    | Purchases                of Equity Securities                                                                      | 23       |
| Item                6.  | Selected                Financial Data                                                                             | 25       |
| Item                7.  | Management’s                Discussion and Analysis of Financial Condition and                               |     |
|                    | Results                of Operations                                                                               | 27       |
| Item                7A. | Quantitative                and Qualitative Disclosures About Market Risk                                          | 47       |
| Item                8.  | Financial                Statements and Supplementary Data                                                         | 52       |
|                    | Report                of Independent Registered Public Accounting Firm                                             | 53       |
|                    | Report                on Internal Control over Financial Reporting of Independent                Registered        |     |
|                    | Public                Accounting Firm                                                                              | 54       |
|                    | Consolidated                Balance Sheets as of December 31, 2006 and December 31,                2005            | 55       |
|                    | Consolidated                Statements of Income for the years ended December 31, 2006,                2005        |     |
|                    | and                2004                                                                                            | 56       |
|                    | Consolidated                Statements of Stockholders’ Equity for the years ended                           |     |
|                    | December                31, 2006, 2005 and 2004                                                                    | 57       |
|                    |                                                                                                               |     |
|                    | Consolidated                Statements of Cash Flows for the years ended December 31, 2006, 2005                   |     |
|                    | and                2004                                                                                            | 59       |
|                    | Notes                to Consolidated Financial Statements                                                          | 61       |
| Item                9.  | Changes                in and Disagreements with Accountants on Accounting and Financial                Disclosure | 96       |
| Item                9A. | Controls                and Procedures                                                                             | 96       |
|                    | Management’s                Report on Internal Control over Financial Reporting                              | 96       |
| Item                9B. | Other                Information                                                                                   | 97       |
|                         | **PART                III**                                                                                        |     |
| Item                10. | Directors,                Executive Officers and Corporate Governance                                              | 98       |
| Item                11. | Executive                Compensation                                                                              | 98       |
| Item                12. | Security                Ownership of Certain Beneficial Owners and Management and                Related           |     |
|                    | Stockholder                Matters                                                                                 | 98       |
| Item                13. | Certain                Relationships and Related Transactions, and Director                Independence            | 98       |
| Item                14. | Principal                Accountant Fees and Services                                                              | 98       |
|                         | **PART                IV**                                                                                         |     |
| Item                15. | Exhibits;                Financial Statement Schedules                                                             | 99       |
|                    | Signatures                                                                                                         | 100      |

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**PART      I**

**Item      1.**
**Business.**

**Overview**

| 1)                Real Estate Securities:     | We                underwrite and acquire a diversified portfolio of moderately credit                sensitive real estate securities, including commercial mortgage backed                securities (CMBS), senior unsecured REIT debt issued by property                REITs,                real estate related asset backed securities (ABS) and agency residential                mortgage backed securities (RMBS). We generally target investments                rated A                through BB, except for our agency RMBS which are generally considered                AAA                rated. As of December 31, 2006, our investments in real estate securities                represented 74.6% of our assets. |
|-----------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2)                Real Estate Related Loans:  | We                acquire and originate loans to well capitalized real estate owners                with                strong track records and compelling business plans, including B-notes,                mezzanine loans, bank loans, and real estate loans. As of December                31,                2006, our investments in real estate related loans represented 11.0%                of                our assets.                                                                                                                                                                                                                                                                                                |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3)                Residential Mortgage Loans: | We                acquire residential mortgage loans, including manufactured                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                          | housing                loans and subprime mortgage loans, that we believe will produce attractive                risk-adjusted returns. As of December 31, 2006, our investments in                residential mortgage loans represented 13.7% of our assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4)                Operating Real Estate:      | We                acquire direct and indirect interests in operating real estate. As                of                December 31, 2006, our investments in operating real estate represented                0.6% of our assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

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**Our      Strategy**

|                                                            |   | December                  31, 2006 |      | December                  31, 2005 |   |
|-----------------------------------------------------------------|--------|------------------------------------|-----------|------------------------------------|--------|
|                                                            |   | Face                  Amount       |      | %                  Total           |   | Face                  Amount |   | %                  Total |   |
| Real                  Estate Securities and Related Loans       |   | $                                  | 6,196,179 |                               |   | 71.7 | % | $ | 4,802,172 |   |   | 76.1 | % |
| Agency                  RMBS                                    |   |                               | 1,177,779 |                               |   | 13.6 | % |   | 697,530 |   |   | 11.0 | % |
| Total                  Real Estate Securities and Related Loans |   |                               | 7,373,958 |                               |   | 85.3 | % |   | 5,499,702 |   |   | 87.1 | % |
| Residential                  Mortgage Loans                     |   |                               | 812,561   |                               |   | 9.4 | % |   | 610,970 |   |   | 9.7 | % |
| Other                                                           |   |                               |      |                               |   |   |   |   |   |   |   |   |   |
| Subprime                  Loans Subject to Future Repurchase    |   |                               | 299,176   |                               |   | 3.5 | % |   | - |   |   | 0.0 | % |
| Investment                  in Joint Venture                    |   |                               | 38,469    |                               |   | 0.4 | % |   | 38,164 |   |   | 0.6 | % |
| ICH                  Loans                                      |   |                               | 123,390   |                               |   | 1.4 | % |   | 165,514 |   |   | 2.6 | % |
| Total                  Portfolio                                |   | $                                  | 8,647,554 |                               |   | 100.0 | % | $ | 6,314,350 |   |   | 100.0 | % |

*Asset      Quality and Diversification at December 31, 2006*

| o   | $6.0                billion or 81.5% of this portfolio is rated by third parties, or                had an                implied AAA rating, with a weighted average rating of                BBB+. |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | $1.4                billion or 18.5% of this portfolio is not rated by third parties                but had a                weighted average loan to value ratio of                68.6%. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | 63%                of this portfolio has an investment grade rating (BBB- or                higher). |
|---------------|------------------------------------------------------------------------------------------------------|

| o   | The                weighted average credit spread (i.e., the yield premium on our investments                over the comparable US Treasury or LIBOR) for the core real estate                securities and related loans of $6.2 billion (excluding agency RMBS)                was                2.56%. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Our                real estate securities and loans are diversified by asset type, industry,                location and issuer. |
|---------------|----------------------------------------------------------------------------------------------------------------------------------|

| o   | This                portfolio had 635 investments. The largest investment was $179.5                million                and the average investment size was $11.6                million. |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Our                real estate securities are supported by pools of underlying loans.                For                instance, our CMBS investments had over 21,000 underlying                loans. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | These                residential loans are to high quality borrowers with an average Fair                Isaac                Corp. credit score (“FICO”) of 697. |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Approximately                $142.3 million face amount were held in securitized form, of which                95.7%                was rated investment grade. |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Our                residential and manufactured housing loans were well diversified                with 491                and 18,343 loans, respectively. |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*Financing      Strategy and Match Funded Discipline*

*i.e.*

*Credit      Risk Management*

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**Formation**

| Year                               |   | Shares                  Issued |       | Range                  of Issue Prices                  per Share (1) |   | Net                  Proceeds (millions) |   |
|------------------------------------|--------|--------------------------------|------------|-----------------------------------------------------------------------|--------|------------------------------------------|--------|
|                               |   |                           |       |                                                                  |   |                                     |   |
| Formation                          |   |                           | 16,488,517 |                                                                  |   | N/A                                      |   |   | N/A |   |
| 2002                               |   |                           | 7,000,000  |                                                                  |   | $13.00                                   |   | $ | 80.0 |   |
| 2003                               |   |                           | 7,886,316  |                                                                  |   | $20.35-$22.85                            |   | $ | 163.4 |   |
| 2004                               |   |                           | 8,484,648  |                                                                  |   | $26.30-$31.40                            |   | $ | 224.3 |   |
| 2005                               |   |                           | 4,053,928  |                                                                  |   | $29.60                                   |   | $ | 108.2 |   |
| 2006                               |   |                           | 1,800,408  |                                                                  |   | $29.42                                   |   | $ | 51.2 |   |
| December                  31, 2006 |   |                           | 45,713,817 |                                                                  |   |                                     |   |   |   |   |
| January                  2007      |   |                           | 2,420,000  |                                                                  |   | $31.30                                   |   | $ | 75.0 |   |

| (1) | Excludes prices of shares issued                pursuant to                the exercise of options and of shares issued to Newcastle's independent                directors. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Our      Investing Activities**

***Real      Estate Securities***

|                                      |   |                                 |      |                            |   |                                 |   | Weighted                  Average         |   |
|-------------------------------------------|--------|--------------------------------------|-----------|---------------------------------|--------|--------------------------------------|--------|-------------------------------------------|--------|
| Asset                  Type               |   | Current                  Face Amount |      | Carrying                  Value |   | Number                  ofSecurities |   | S&P                  EquivalentRating |   | Yield |   | Maturity                  (Years) |   |
| CMBS-Conduit                              |   | $                                    | 1,469,298 |                            | $      | 1,452,789                            |   |                                      | 202    |   |   | BBB |   |   | 6.51 | % |   | 6.93 |   |
| CMBS-Large                  Loan          |   |                                 | 714,617   |                            |   | 719,225                              |   |                                      | 53     |   |   | BBB- |   |   | 7.02 | % |   | 2.62 |   |
| CMBS-CDO                                  |   |                                 | 23,500    |                            |   | 21,958                               |   |                                      | 2      |   |   | BB |   |   | 12.03 | % |   | 7.68 |   |
| CMBS-                  B-Note             |   |                                 | 282,677   |                            |   | 276,190                              |   |                                      | 41     |   |   | BB |   |   | 7.51 | % |   | 6.02 |   |
| Unsecured                  REIT Debt      |   |                                 | 1,004,540 |                            |   | 1,025,040                            |   |                                      | 101    |   |   | BBB- |   |   | 6.06 | % |   | 6.17 |   |
| ABS-Manufactured                  Housing |   |                                 | 80,839    |                            |   | 77,700                               |   |                                      | 9      |   |   | BBB- |   |   | 7.79 | % |   | 6.54 |   |
| ABS-Home                  Equity          |   |                                 | 729,292   |                            |   | 710,331                              |   |                                      | 124    |   |   | BBB+ |   |   | 7.89 | % |   | 2.70 |   |
| ABS-Franchise                             |   |                                 | 76,777    |                            |   | 76,707                               |   |                                      | 22     |   |   | BBB |   |   | 8.21 | % |   | 4.80 |   |
| Agency                  RMBS              |   |                                 | 1,177,779 |                            |   | 1,176,358                            |   |                                      | 35     |   |   | AAA |   |   | 5.19 | % |   | 4.27 |   |
| Subtotal/Average                  (A)     |   |                                 | 5,559,319 |                            |   | 5,536,298                            |   |                                      | 589    |   |   | BBB+ |   |   | 6.50 | % |   | 5.04 |   |
| Residual                  interest (B)    |   |                                 | 44,930    |                            |   | 44,930                               |   |                                      | 1      |   |   | NR |   |   | 18.77 | % |   | 2.52 |   |
| Total/Average                             |   | $                                    | 5,604,249 |                            | $      | 5,581,228                            |   |                                      | 590    |   |   | BBB+ |   |   | 6.60 | % |   | 5.02 |   |

| (A) | Implied AAA                rating. |
|-----|------------------------------------|

| (B) | Represents the retained equity from securitization                of                subprime mortgage loans as described in "Residential Mortgage Loans"                below. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                  |   |   |                              |
|---------------------------------------|--------|--------|-----------------------------------|
| Industry                              |   |   | %                  of Face Amount |   |
| Residential                           |   |   | 29.50                             | % |
| Retail                                |   |   | 16.22                             | % |
| Office                                |   |   | 15.02                             | % |
| Subprime                  Residential |   |   | 13.81                             | % |
| Lodging                               |   |   | 6.57                              | % |
| Industrial                            |   |   | 2.00                              | % |
| Health                  Care          |   |   | 1.81                              | % |
| Other                                 |   |   | 15.07                             | % |

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***Real      Estate Related Loans***

| Loan                  Type           |   | CurrentFace                  Amount |      | CarryingValue |   | Loan                  Count |   | Weighted                  Avg. Yield |   | Weighted                  Avg. Maturity                  (Years) |   |
|--------------------------------------|--------|-------------------------------------|-----------|---------------|--------|-----------------------------|--------|--------------------------------------|--------|------------------------------------------------------------------|--------|
| B-Notes                              |   | $                                   | 248,240   |          | $      | 246,798                     |   |                                 | 9      |                                                             |   | 7.98 | % |   | 2.71 |   |
| Mezzanine                  Loans (1) |   |                                | 906,907   |          |   | 904,686                     |   |                                 | 22     |                                                             |   | 8.61 | % |   | 2.67 |   |
| Bank                  Loans          |   |                                | 233,793   |          |   | 233,895                     |   |                                 | 6      |                                                             |   | 7.75 | % |   | 3.92 |   |
| Whole                  Loans         |   |                                | 61,240    |          |   | 61,703                      |   |                                 | 3      |                                                             |   | 12.63 | % |   | 1.81 |   |
| ICH                  Loans           |   |                                | 123,390   |          |   | 121,834                     |   |                                 | 70     |                                                             |   | 7.77 | % |   | 1.10 |   |
| Total                                |   | $                                   | 1,573,570 |          | $      | 1,568,916                   |   |                                 | 110    |                                                             |   | 8.48 | % |   | 2.71 |   |

| (1) | One of                these loans has an $8.9 million contractual exit fee. Newcastle                will begin to accrue this fee if and when management believes it                is probable that such exit fee will be                received. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| CurrentFace                  Amount |         | CarryingValue |   | Loan                  Count |   | Weighted                  Avg.                  Yield |   |
|-------------------------------------|--------------|---------------|--------|-----------------------------|--------|-------------------------------------------------------|--------|
| $                                   |  19,878 |          | $      | 10,249                      |   |                                                  | 57     |   |   | 15.30 | % |

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***Residential      Mortgage Loans***

| Loan                  Type                    |   | CurrentFaceAmount |    | Carrying                  Value |   | Loan                  Count |   | Weighted                  Avg.Yield                  (1) |   | Weighted                  Avg.Maturity                  (Years) (2) |   |
|-----------------------------------------------|--------|-------------------|---------|---------------------------------|--------|-----------------------------|--------|----------------------------------------------------------|--------|---------------------------------------------------------------------|--------|
| Residential                  loans            |   | $                 | 168,649 |                            | $      | 172,839                     |   |                                                     | 491    |                                                                |   | 6.42 | % |   | 2.79 |   |
| Manufactured                  housing loans   |   |              | 643,912 |                            |   | 636,258                     |   |                                                     | 18,343 |                                                                |   | 8.48 | % |   | 6.02 |   |
| Total                                         |   | $                 | 812,561 |                            | $      | 809,097                     |   |                                                     | 18,834 |                                                                |   | 8.03 | % |   | 5.35 |   |
| Subprime                  mortgage loans      |   |              |    |                            |   |                        |   |                                                     |   |                                                                |   |   |   |   |   |   |
| subject                  to future repurchase |   | $                 | 299,176 |                            | $      | 288,202                     |   |                                                     |   |                                                                |   |   |   |   |   |   |

| (1) | Loss                    adjusted. |
|-----|-----------------------------------|

| (2) | Weighted                      average maturity was calculated based on a constant prepayment                      rate (CPR)                      of approximately 30% for residential loans and 9% for manufactured                      housing                      loans. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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***Operating      Real Estate***

| **Property                  Address**     |   | **Use** |   | **Net                  Rentable****Sq                  Ft** |   | **Major                  tenants** |   | **%                  of Total****Sq                  Ft****Leased** |                                  | **Tenant                  Net****Rentable****Sq                  Ft** |   | **Annual                  Rent** |   |
|-------------------------------------------|--------|---------|--------|-------------------------------------------------------------|--------|------------------------------------|--------|---------------------------------------------------------------------|---------------------------------------|-----------------------------------------------------------------------|--------|----------------------------------|--------|
|                                      |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |
|                                      |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |
| 100                  Dundas St. (1) (3)   |   |    | Office |                                                        |   | 312,874                            |   |                                                                | Bell                  Canada (2)      |                                                                       |   | 59.1                             | %      |   | 184,829 |   | $ | 1,294 |   |
| London,                  ON               |   |    |   |                                                        |   |                               |   |                                                                | A                  total of 4 tenants |                                                                  |   | 1.5                              | %      |   | 4,668 |   |   | 26 |   |
|                                      |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   | 60.6                             | %      |   | 189,497 |   |   | 1,320 |   |
|                                      |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
|                                      |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
| Apple                  Valley I           |   |    | Office |                                                        |   | 54,927                             |   |                                                                | A                  total of 8 tenants |                                                                  |   | 65.0                             | %      |   | 35,702 |   |   | 504 |   |
| 1430                  Oak Court           |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
| Beavercreek,                  OH          |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
|                                      |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
| Apple                  Valley II          |   |    | Office |                                                        |   | 29,916                             |   |                                                                | 1                  tenant             |                                                                  |   | 100.0                            | %      |   | 29,916 |   |   | 478 |   |
| 4020                  Executive Drive     |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
| Beavercreek,                  OH          |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
|                                      |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
| Apple                  Valley III         |   |    | Office |                                                        |   | 45,299                             |   |                                                                | 1                  tenant             |                                                                  |   | 77.0                             | %      |   | 34,878 |   |   | 558 |   |
| 4021-29                  Executive Drive  |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
| Beavercreek,                  OH          |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
|                                      |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
| Dayton                  Towne Center      |   |    | Retail |                                                        |   | 33,485                             |   |                                                                | A                  total of 5 tenants |                                                                  |   | 75.2                             | %      |   | 25,197 |   |   | 153 |   |
| 1880                  Needmore Drive      |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
| Dayton,                  OH               |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
|                                      |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
| Airport                  Corporate Center |   |    | Office |                                                        |   | 46,614                             |   |                                                                | A                  total of 7 tenants |                                                                  |   | 50.3                             | %      |   | 23,468 |   |   | 301 |   |
| 303                  Corporate Center Dr  |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
| Vandalia,                  OH             |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
|                                      |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
| 2                  River Place            |   |    | Office |                                                        |   | 42,286                             |   |                                                                | Vacant                                |                                                                  |   | 0.0                              | %      |   | - |   |   | - |   |
| Dayton,                  OH               |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
|                                      |   |    |   |                                                        |   |                               |   |                                                                |                                  |                                                                  |   |                             |   |   |   |   |   |   |   |
| Totals                                    |   |    |   |                                                        |   | 565,401                            |   |                                                                |                                  |                                                                  |   | 59.9                             | %      |   | 338,658 |   | $ | 3,314 |   |

| (1) | Monetary                  amounts for the Canadian property are in U.S. dollars based on                  December                  31, 2006 Canadian dollar exchange ratio of                  1.1659. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | This                  lease charges an administration fee of up to 15% of the operating                  expenses                  reimbursable by the tenant. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | The                  parking garage income for approximately 185 parking stalls is not                  included                  in the annual rent. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------|

| **Year**                        |   | **Square                    Feet of****Expiring                    Leases** |    | **Annual                    Rent of****Expiring                    Leases (1)** |   | **%                    of Gross Annual****Rent                    represented by****Expiring                    Leases** |   |
|---------------------------------|--------|-----------------------------------------------------------------------------|---------|---------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------|--------|
| 2007                            |   |                                                                        | 68,918  |                                                                            | $      | 885                                                                                                                      |   |   | 26.7 | % |
| 2008                            |   |                                                                        | 23,828  |                                                                            |   | 336                                                                                                                      |   |   | 10.1 | % |
| 2009                            |   |                                                                        | 8,528   |                                                                            |   | 113                                                                                                                      |   |   | 3.4 | % |
| 2010                            |   |                                                                        | 15,103  |                                                                            |   | 136                                                                                                                      |   |   | 4.2 | % |
| 2011                            |   |                                                                        | 30,964  |                                                                            |   | 495                                                                                                                      |   |   | 14.9 | % |
| 2012                            |   |                                                                        | 191,317 |                                                                            |   | 1,349                                                                                                                    |   |   | 40.7 | % |
| Leased                    total |   |                                                                        | 338,658 |                                                                            | $      | 3,314                                                                                                                    |   |   | 100.0 | % |
| Vacant                          |   |                                                                        | 226,743 |                                                                            |   |                                                                                                                     |   |   |   |   |
| Total                           |   |                                                                        | 565,401 |                                                                            |   |                                                                                                                     |   |   |   |   |

----

**Our      Financing and Hedging Activities**

*i.e.*

----

*Debt      Obligations*

| Debt                  Obligation           |   |                  CurrentFace Amount |      | Carrying                  Value |   |  Weighted                  Average Funding                  Cost                  (1) |   |  Weighted                  Average Maturity (Years) |   | FaceAmountof                  Floating                  Rate                  Debt |   | CollateralCarryingValue |   | Collateral                  Weighted Average Maturity (Years) |      | FaceAmountof                  Floating Rate Collateral |   | AggregateNotionalAmount                  ofCurrent                  Hedges |   |
|--------------------------------------------|--------|------------------------------------------|-----------|---------------------------------|--------|--------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|-------------------------|--------|---------------------------------------------------------------|-----------|--------------------------------------------------------|--------|----------------------------------------------------------------------------|--------|
|                                       |   |                                     |      |                            |   |                                                                                       |   |                                                     |   |                                                                               |   |                    |   |                                                          |      |                                                   |   |                                                                       |   |
| CBO                  Bonds Payable         |   | $                                        | 4,340,166 |                            | $      | 4,313,824                                                                                  |   |                                                     | 5.73   | %                                                                                  |   | 5.83                    |   | $                                                             | 4,047,216 |                                                   | $      | 4,944,086                                                                  |   |   | 5.05 |   | $ | 1,724,873 |   | $ | 2,168,565 |   |
| Other                  Bonds Payable       |   |                                     | 679,891   |                            |   | 675,844                                                                                    |   |                                                     | 6.63   | %                                                                                  |   | 2.26                    |   |                                                          | 579,952   |                                                   |   | 758,092                                                                    |   |   | 5.23 |   |   | 80,936 |   |   | 575,083 |   |
| Notes                  Payable             |   |                                     | 128,866   |                            |   | 128,866                                                                                    |   |                                                     | 5.68   | %                                                                                  |   | 0.74                    |   |                                                          | 128,866   |                                                   |   | 145,819                                                                    |   |   | 2.79 |   |   | 142,301 |   |   | - |   |
| Repurchase                  Agreements     |   |                                     | 760,346   |                            |   | 760,346                                                                                    |   |                                                     | 5.92   | %                                                                                  |   | 0.08                    |   |                                                          | 760,346   |                                                   |   | 953,383                                                                    |   |   | 2.77 |   |   | 823,901 |   |   | 112,087 |   |
| Repurchase                  Agreements     |   |                                     |      |                            |   |                                                                                       |   |                                                     |   |                                                                               |   |                    |   |                                                          |      |                                                   |   |                                                                       |   |   |   |   |   |   |   |   |   |   |
| subject                  to ABCP           |   |                                     | 1,143,749 |                            |   | 1,143,749                                                                                  |   |                                                     | 4.97   | %                                                                                  |   | 0.08                    |   |                                                          | 1,143,749 |                                                   |   | 1,176,358                                                                  |   |   | 4.27 |   |   | - |   |   | 1,087,385 |   |
| Credit                  Facility           |   |                                     | 93,800    |                            |   | 93,800                                                                                     |   |                                                     | 7.08   | %                                                                                  |   | 0.85                    |   |                                                          | 93,800    |                                                   |   | -                                                                          |   |   | - |   |   | - |   |   | - |   |
| Junior                  Subordinated       |   |                                     |      |                            |   |                                                                                       |   |                                                     |   |                                                                               |   |                    |   |                                                          |      |                                                   |   |                                                                       |   |   |   |   |   |   |   |   |   |   |
| Notes                  Payable             |   |                                     | 100,100   |                            |   | 100,100                                                                                    |   |                                                     | 7.72   | %                                                                                  |   | 29.25                   |   |                                                          | -         |                                                   |   | -                                                                          |   |   | - |   |   | - |   |   | - |   |
| Subtotal                  debt obligations |   | $                                        | 7,246,918 |                            | $      | 7,216,529                                                                                  |   |                                                     | 5.76   | %                                                                                  |   | 4.15                    |   | $                                                             | 6,753,929 |                                                   | $      | 7,977,738                                                                  |   |   | 4.63 |   | $ | 2,772,011 |   | $ | 3,943,120 |   |
| Financing                  on Subprime     |   |                                     |      |                            |   |                                                                                       |   |                                                     |   |                                                                               |   |                    |   |                                                          |      |                                                   |   |                                                                       |   |   |   |   |   |   |   |   |   |   |
| Mortgage                  Loans Subject    |   |                                     |      |                            |   |                                                                                       |   |                                                     |   |                                                                               |   |                    |   |                                                          |      |                                                   |   |                                                                       |   |   |   |   |   |   |   |   |   |   |
| to                  Future Repurchase      |   |                                     | 299,176   |                            |   | 288,202                                                                                    |   |                                                     |   |                                                                               |   |                    |   |                                                          |      |                                                   |   |                                                                       |   |   |   |   |   |   |   |   |   |   |
| Total                  debt obligations    |   | $                                        | 7,546,094 |                            | $      | 7,504,731                                                                                  |   |                                                     |   |                                                                               |   |                    |   |                                                          |      |                                                   |   |                                                                       |   |   |   |   |   |   |   |   |   |   |

**Investment      Guidelines**

| **·  ** | no                investment is to be made which would cause us to fail to qualify                as a                REIT; |
|------------------------|-----------------------------------------------------------------------------------------------------------------------------|

| **·  ** | no                investment is to be made which would cause us to be regulated as                an                investment company; |
|------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|

| **·  ** | no                more than 20% of our total equity, determined as of the date of such                investment, is to be invested in any single                asset; |
|------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **·  ** | our                leverage is not to exceed 90% of the sum of our total debt and our                total                equity; and |
|------------------------|---------------------------------------------------------------------------------------------------------------------------------------|

| ·   | we                are not to co-invest with the manager or any of its affiliates unless                (i)                our co-investment is otherwise in accordance with these guidelines                and                (ii) the terms of such co-investment are at least as favorable to                us as to                the manager or such affiliate (as applicable) making such                co-investment. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**The      Management Agreement**

----

**Policies      With Respect to Certain Other Activities**

----

**Competition**

**Compliance      with Applicable Environmental Laws**

**Employees**

**Corporate      Governance and Internet Address**

----

**Item      1A. Risk Factors**

*Risks      Relating to Our Management*

**We      are dependent on our manager and may not find a suitable replacement if our      manager terminates the management agreement. **

**There      are conflicts of interest in our relationship with our manager.**

----

**Our      directors have approved very broad investment guidelines for our manager and      do      not approve each investment decision made by our manager. **

**We      may change our investment strategy without stockholder consent which may result      in riskier investments than our current investments. **

*Risks      Relating to Our Business*

**We      are subject to significant competition and we may not compete successfully.      **

**Our      determination of how much leverage to apply to our investments may adversely      affect our return on our investments and may reduce cash available for      distribution. **

----

**Although      we seek to match fund our investments to limit refinance risk and lock in net      spreads, we do not employ this strategy with respect to certain of our      investments, which increases the risks related to refinancing these investments.      **

**The      loans we invest in and the loans underlying the securities and total rate of      return swaps we invest in are subject to delinquency, foreclosure and loss,      which could result in losses to us. **

----

**We      may not be able to finance our investments on a long term basis on attractive      terms, including by means of securitization, which may require us to seek more      costly financing for our investments or to liquidate assets.**

**Both      during the ramp up phase of a potential CBO financing and following the closing      of a CBO financing when we have locked in the liability costs for a CBO during      the reinvestment period, the rate at which we are able to acquire eligible      investments and changes in market conditions may adversely affect our      anticipated returns. **

**Our      returns will be adversely affected when investment held in CBOs are prepaid      or      sold subsequent to the reinvestment period**

** **
** **

**Our      investments may be subject to impairment charges. **

----

**Our      investments in senior unsecured REIT securities are subject to specific risks      relating to the particular REIT issuer and to the general risks of investing      in      subordinated real estate securities, which may result in losses to us.**

**The      real estate related loans and other direct and indirect interests in pools      of      real estate properties or other loans that we invest in may be subject to      additional risks relating to the privately negotiated structure and terms of      the      transaction, which may result in losses to us. **

----

**Insurance      on real estate in which we have interests (including the real estate serving      as      collateral for our real estate securities and loans) may not cover all losses.      **

**Environmental      compliance costs and liabilities with respect to our real estate in which we      have interests may adversely affect our results of operations.**

**Many      or our investments are illiquid and this lack of liquidity could significantly      impede our ability to vary our portfolio in response to changes in economic      and      other conditions or to realize the value at which such investments are carried      if we are required to dispose of them. **

**Interest      rate fluctuations and shifts in the yield curve may cause losses.**

----

**Our      investments in real estate securities and loans are subject to changes in credit      spreads which could adversely affect our ability to realize gains on the sale      of      such investments. **

**Our      hedging transactions may limit our gains or result in losses.**

----

**Prepayment      rates can increase, adversely affecting yields on certain investments, including      our residential mortgage loans. **

*Risks      Relating to Our Taxation as a REIT*

**Our      failure to qualify as a REIT would result in higher taxes and reduced cash      available for distribution to our stockholders. **

----

**Dividends      payable by REITs do not qualify for the reduced tax rates.**

**REIT      distribution requirements could adversely affect our ability to execute our      business plan. **

**The      stock ownership limit imposed by the Internal Revenue Code for REITs and our      charter may inhibit market activity in our stock and restrict our business      combination opportunities. **

**Even      if we remain qualified as a REIT, we may face other tax liabilities that reduce      our cash flow. **

**Complying      with REIT requirements may cause us to forego otherwise attractive      opportunities. **

----

**The      “taxable mortgage pool” rules may increase the taxes that we or our stockholders      may incur, and may limit the manner in which we effect future securitizations.      **

**Maintenance      of our Investment Company Act exemption imposes limits on our operations.**

**ERISA      may restrict investments by plans in our common stock. **

**Maryland      takeover statutes may prevent a change of our control. This could depress our      stock price. **

| ·   | any                person who beneficially owns 10% or more of the voting power of the                corporation's outstanding shares; or |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | an                affiliate or associate of a 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 stock of                the                corporation. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 80%                of the votes entitled to be cast by holders of outstanding shares                of                voting stock of the corporation voting together as a single group;                and |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 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                or held                by an affiliate or associate of the interested stockholder voting                together                as a single voting group. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Our      authorized, but unissued common and preferred stock may prevent a change in      our      control. **

**Our      stockholder rights plan could inhibit a change in our control.**

**Our      staggered board and other provisions of our charter and bylaws may prevent      a      change in our control. **

----

**Item      1B. Unresolved Staff Comments**

**Item      2.**
**Properties.**

**Item      3. Legal Proceedings.**

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

**PART      II**

**Item      5. Market for Registrant’s Common Equity, Related Stockholder Matters, and      Issuer Purchases of Equity Securities.**

| 2006                            |   | High   |   | Low    |   | Last                  Sale |   | Distributions                  Declared |
|---------------------------------|--------|--------|--------|--------|--------|----------------------------|--------|-----------------------------------------|
| First                  Quarter  |   | $27.50 |   | $23.34 |   | $23.92                     |   | $0.625                                  |
| Second                  Quarter |   | $26.30 |   | $22.16 |   | $25.32                     |   | $0.650                                  |
| Third                  Quarter  |   | $28.58 |   | $24.60 |   | $27.41                     |   | $0.650                                  |
| Fourth                  Quarter |   | $32.59 |   | $26.78 |   | $31.32                     |   | $0.690                                  |
|                            |   |   |   |   |   |                       |   |                                    |
| 2005                            |   | High   |   | Low    |   | Last                  Sale |   | Distributions                  Declared |
| First                  Quarter  |   | $31.95 |   | $29.27 |   | $29.60                     |   | $0.625                                  |
| Second                  Quarter |   | $32.31 |   | $28.25 |   | $30.15                     |   | $0.625                                  |
| Third                  Quarter  |   | $31.25 |   | $27.00 |   | $27.90                     |   | $0.625                                  |
| Fourth                  Quarter |   | $27.96 |   | $24.74 |   | $24.85                     |   | $0.625                                  |

----

**Equity      Compensation Plan Information**

| **Plan                  Category**                          |   | **Number                  of Securities to be****Issued                  Upon Exercise of Outstanding Options** |   | **Weighted                  Average****Exercise                  Price of****Outstanding                  Options** |   | **Number                  of Securities Remaining Available for Future Issuance Under Equity                  Compensation Plans** |
|-------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|
| **Equity                  Compensation Plans Approved**     |   |                                                                                                            |   |                                                                                                                |   |                                                                                                                               |
| **by                  Security Holders:**                   |   |                                                                                                            |   |                                                                                                                |   |                                                                                                                               |
| Newcastle                  Investment Corp. Nonqualified    |   |                                                                                                            |   |                                                                                                                |   |                                                                                                                               |
| Stock                  Option and Incentive Award Plan      |   | 1,883,807                  (1)                                                                                  |   | $25.89                                                                                                              |   | 7,148,169                  (2)                                                                                                     |
| **Equity                  Compensation Plans Not Approved** |   |                                                                                                            |   |                                                                                                                |   |                                                                                                                               |
| **by                  Security Holders:**                   |   |                                                                                                            |   |                                                                                                                |   |                                                                                                                               |
| None                                                        |   | N/A                                                                                                             |   | N/A                                                                                                                 |   | N/A                                                                                                                                |

| (1) | Includes                    options for (i) 1,278,014 shares held by an affiliate of our                    manager; (ii)                    591,793 shares granted to our manager and assigned to certain                    of the                    manager’s employees; and (iii) an aggregate of 14,000 shares held by                    our                    directors, other than Mr.                    Edens. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The                maximum available for issuance is equal to 10% of the number of                outstanding equity interests, subject to a maximum of 10,000,000                shares in                the aggregate over the term of the plan. The number of securities                remaining available for future issuance is net of an aggregate of                8,104                shares of our common stock awards to our directors, other than Mr.                Edens,                representing the aggregate annual automatic stock awards to each                such                director for 2003 through 2006, and of 959,920 shares issued to certain                of                our directors and employees of our manager upon the exercise of previously                granted options. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Item      6. Selected Financial Data.**

**Selected      Consolidated Financial Information**

|                                                                             |   | **Year                  Ended December 31,** |    |
|----------------------------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                                             |   | **2006**                                     |    | **2005** |   | **2004** |   | **2003** |   | **2002** |   |
| **Operating                  Data**                                              |   |                                         |    |   |   |   |   |   |   | (1) |   |
| Revenues                                                                         |   |                                         |    |   |   |   |   |   |   |   |   |
| Interest                  income                                                 |   | $                                            | 530,006 |   | $ | 348,516 |   | $ | 225,761 |   | $ | 133,183 |   | $ | 73,620 |   |
| Other                  income                                                    |   |                                         | 22,603  |   |   | 29,697 |   |   | 23,908 |   |   | 18,901 |   |   | 18,716 |   |
|                                                                             |   |                                         | 552,609 |   |   | 378,213 |   |   | 249,669 |   |   | 152,084 |   |   | 92,336 |   |
| Expenses                                                                         |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                  expense                                                |   |                                         | 374,269 |   |   | 226,446 |   |   | 136,398 |   |   | 76,877 |   |   | 44,238 |   |
| Other                  expense                                                   |   |                                         | 56,608  |   |   | 42,529 |   |   | 29,259 |   |   | 20,828 |   |   | 18,197 |   |
|                                                                             |   |                                         | 430,877 |   |   | 268,975 |   |   | 165,657 |   |   | 97,705 |   |   | 62,435 |   |
|                                                                             |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                  before equity in earnings of unconsolidated subsidiaries |   |                                         | 121,732 |   |   | 109,238 |   |   | 84,012 |   |   | 54,379 |   |   | 29,901 |   |
|                                                                             |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity                  in earnings of unconsolidated subsidiaries, net          |   |                                         | 5,968   |   |   | 5,609 |   |   | 9,957 |   |   | 862 |   |   | 362 |   |
|                                                                             |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                  from continuing operations                               |   |                                         | 127,700 |   |   | 114,847 |   |   | 93,969 |   |   | 55,241 |   |   | 30,263 |   |
| Income                  from discontinued operations                             |   |                                         | 223     |   |   | 2,108 |   |   | 4,446 |   |   | 877 |   |   | 1,232 |   |
| Net                  income                                                      |   |                                         | 127,923 |   |   | 116,955 |   |   | 98,415 |   |   | 56,118 |   |   | 31,495 |   |
| Preferred                  dividends and related accretion                       |   |                                         | (9,314  | ) |   | (6,684 | ) |   | (6,094 | ) |   | (4,773 | ) |   | (1,162 | ) |
| Income                  available for common stockholders                        |   | $                                            | 118,609 |   | $ | 110,271 |   | $ | 92,321 |   | $ | 51,345 |   | $ | 30,333 |   |
| Net                  income per share of common stock, diluted                   |   | $                                            | 2.67    |   | $ | 2.51 |   | $ | 2.46 |   | $ | 1.96 |   | $ | 1.68 |   |
| Income                  from continuing operations per share of common stock,    |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| after                  preferred dividends, diluted                              |   | $                                            | 2.67    |   | $ | 2.46 |   | $ | 2.34 |   | $ | 1.93 |   | $ | 1.61 |   |
| Weighted                  average number of shares of common stock               |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| outstanding,                  diluted                                            |   |                                         | 44,417  |   |   | 43,986 |   |   | 37,558 |   |   | 26,141 |   |   | 18,090 |   |
| Dividends                  declared per share of common stock-NCT                |   | $                                            | 2.615   |   | $ | 2.500 |   | $ | 2.425 |   | $ | 1.950 |   | $ | 0.850 |   |
| Dividends                  declared per share of common stock-predecessor        |   |                                         |    |   |   |   |   |   |   |   |   |   |   | $ | 1.200 |   |

|                                                                                                                                                                 |   |                                    |      |     |   |      |   |     |      |     |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|-----------|----------|--------|-----------|--------|----------|-----------|----------|--------|
|                                                                                                                                                                 |   | **As                  Of December 31,** |      |
|                                                                                                                                                                 |   | **2006**                                |      | **2005** |   | **2004**  |   | **2003** |      | **2002** |   |
| **Balance                  Sheet Data**                                                                                                                              |   |                                    |      |     |   |      |   |     |      |     |   |
| Real                  estate securities, available for sale                                                                                                          |   | $                                       | 5,581,228 |     | $      | 4,554,519 |   | $        | 3,369,496 |     | $      | 2,192,727 |   | $ | 1,025,010 |   |
| Real                  estate related loans, net                                                                                                                      |   |                                    | 1,568,916 |     |   | 615,551   |   |     | 591,890   |     |   | 402,784 |   |   | 26,417 |   |
| Residential                  mortgage loans, net                                                                                                                     |   |                                    | 809,097   |     |   | 600,682   |   |     | 654,784   |     |   | 586,237 |   |   | 258,198 |   |
| Operating                  real estate, net                                                                                                                          |   |                                    | 29,626    |     |   | 16,673    |   |     | 57,193    |     |   | 102,995 |   |   | 113,652 |   |
| Cash                  and cash equivalents                                                                                                                           |   |                                    | 5,371     |     |   | 21,275    |   |     | 37,911    |     |   | 60,403 |   |   | 45,463 |   |
| Total                  assets                                                                                                                                        |   |                                    | 8,604,392 |     |   | 6,209,699 |   |     | 4,932,720 |     |   | 3,550,299 |   |   | 1,574,828 |   |
| Debt                                                                                                                                                                 |   |                                    | 7,504,731 |     |   | 5,212,358 |   |     | 4,021,396 |     |   | 2,924,552 |   |   | 1,217,007 |   |
| Total                  liabilities                                                                                                                                   |   |                                    | 7,602,412 |     |   | 5,291,696 |   |     | 4,136,005 |     |   | 3,010,936 |   |   | 1,288,326 |   |
| Common                  stockholders' equity                                                                                                                         |   |                                    | 899,480   |     |   | 815,503   |   |     | 734,215   |     |   | 476,863 |   |   | 284,241 |   |
| Preferred                  stock                                                                                                                                     |   |                                    | 102,500   |     |   | 102,500   |   |     | 62,500    |     |   | 62,500 |   |   | - |   |
|                                                                                                                                                                 |   |                                    |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| **Supplemental                  Balance Sheet Data**                                                                                                                 |   |                                    |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Common                  shares outstanding                                                                                                                           |   |                                    | 45,714    |     |   | 43,913    |   |     | 39,859    |     |   | 31,375 |   |   | 23,489 |   |
| Book                  value per share of common stock                                                                                                                |   | $                                       | 19.68     |     | $      | 18.57     |   | $        | 18.42     |     | $      | 15.20 |   | $ | 12.10 |   |
|                                                                                                                                                                 |   |                                    |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| (1)                  Includes the operations of our predecessor through the date of                  commencement of our operations, July 12,                  2002. |

----

|                                                  |   | **Year                      Ended December 31,** |       |
|-------------------------------------------------------|--------|--------------------------------------------------|------------|
|                                                  |   | **2006**                                         |       | **2005** |   | **2004** |   | **2003** |   | **2002** |   |
| **Other                      Data**                   |   |                                             |       |   |   |   |   |   |   |   |   |
| Cash                      Flow provided by (used in): |   |                                             |       |   |   |   |   |   |   |   |   |
| Operating                      activities             |   | $                                                | 16,322     |   | $ | 98,763 |   | $ | 90,355 |   | $ | 38,454 |   | $ | 21,919 |   |
| Investing                      activities             |   |                                             | (1,963,058 | ) |   | (1,334,746 | ) |   | (1,332,164 | ) |   | (1,659,026 | ) |   | (683,053 | ) |
| Financing                      activities             |   |                                             | 1,930,832  |   |   | 1,219,347 |   |   | 1,219,317 |   |   | 1,635,512 |   |   | 675,237 |   |
| Funds                      from Operations (FFO) (1)  |   |                                             | 119,421    |   |   | 104,031 |   |   | 86,201 |   |   | 54,380 |   |   | 37,633 |   |

| (1) | We                believe FFO is one appropriate measure of the operating performance                of                real estate companies. We also believe that FFO is an appropriate                supplemental disclosure of operating performance for a REIT due to                its                widespread acceptance and use within the REIT and analyst communities.                Furthermore, FFO is used to compute our incentive compensation to our                manager. FFO, for our purposes, represents net income available for                common                stockholders (computed in accordance with GAAP), excluding extraordinary                items, plus depreciation of our operating real estate, and after                adjustments for unconsolidated subsidiaries, if any. We consider                gains and                losses on resolution of our investments to be a normal part of our                recurring operations and, therefore, do not exclude such gains and                losses                when arriving at FFO. Adjustments for unconsolidated subsidiaries,                if any,                are calculated to reflect FFO on the same basis. FFO does not represent                cash generated from operating activities in accordance with GAAP                and                therefore should not be considered an alternative to net income as                an                indicator of our operating performance or as an alternative to cash                flow                as a measure of our liquidity and is not necessarily indicative of                cash                available to fund cash needs. Our calculation of FFO may be different                from                the calculation used by other companies and, therefore, comparability                may                be limited. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                    |   | **Year                  Ended December 31,** |    |
|-------------------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                                    |   | **2006**                                     |    | **2005** |   | **2004** |   | **2003** |   | **2002** |   |
| **Calculation                  of Funds From Operations (FFO):**        |   |                                         |    |   |   |   |   |   |   |   |   |
| Income                  available for common stockholders               |   | $                                            | 118,609 |   | $ | 110,271 |   | $ | 92,321 |   | $ | 51,345 |   | $ | 30,333 |   |
| Operating                  real estate depreciation                     |   |                                         | 812     |   |   | 702 |   |   | 2,199 |   |   | 3,035 |   |   | 7,994 |   |
| Accumulated                  depreciation on operating real estate sold |   |                                         | -       |   |   | (6,942 | ) |   | (8,319 | ) |   | - |   |   | (2,847 | ) |
| Other                  (1)                                              |   |                                         | -       |   |   | - |   |   | - |   |   | - |   |   | 2,153 |   |
| Funds                  from operations (FFO)                            |   | $                                            | 119,421 |   | $ | 104,031 |   | $ | 86,201 |   | $ | 54,380 |   | $ | 37,633 |   |
|                                                                         |   |

----

**Item      7.**
**Management's      Discussion and Analysis of Financial Condition and Results of      Operations.**

**General**

**Market      Considerations**

----

**Formation      and Organization**

| Year                               |   | Shares                  Issued |       | Range                  of Issue                  Prices (1) |   | Net                  Proceeds(millions) |   |
|------------------------------------|--------|--------------------------------|------------|-------------------------------------------------------------|--------|-----------------------------------------|--------|
| Formation                          |   |                           | 16,488,517 |                                                        |   | N/A                                     |   |   | N/A |   |
| 2002                               |   |                           | 7,000,000  |                                                        |   | $13.00                                  |   | $ | 80.0 |   |
| 2003                               |   |                           | 7,886,316  |                                                        |   | $20.35-$22.85                           |   | $ | 163.4 |   |
| 2004                               |   |                           | 8,484,648  |                                                        |   | $26.30-$31.40                           |   | $ | 224.3 |   |
| 2005                               |   |                           | 4,053,928  |                                                        |   | $29.60                                  |   | $ | 108.2 |   |
| 2006                               |   |                           | 1,800,408  |                                                        |   | $29.42                                  |   | $ | 51.2 |   |
| December                  31, 2006 |   |                           | 45,713,817 |                                                        |   |                                    |   |   |   |   |
| January                  2007      |   |                           | 2,420,000  |                                                        |   | $31.30                                  |   | $ | 75.0 |   |

| (1) | Excludes                  prices of shares issued pursuant to the exercise of options and                  of shares                  issued to Newcastle's independent                  directors. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| For                    the Year Ended |   | Real                    Estate Securities and Real                    Estate Related                    Loans |    | Residential                    Mortgage Loans |   | Operating                    Real                    Estate |   | Unallocated |   | Total  |   |
|---------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|---------|-----------------------------------------------|--------|-------------------------------------------------------------|--------|-------------|--------|--------|--------|
| December                    31, 2006  |   | $                                                                                                             | 441,965 |                                          | $      | 105,621                                                     |   | $           | 5,117  |   | $      | (94 | ) | $ | 552,609 |   |
| December                    31, 2005  |   | $                                                                                                             | 321,889 |                                          | $      | 48,844                                                      |   | $           | 6,772  |   | $      | 708 |   | $ | 378,213 |   |
| December                    31, 2004  |   | $                                                                                                             | 225,236 |                                          | $      | 19,135                                                      |   | $           | 4,745  |   | $      | 553 |   | $ | 249,669 |   |

----

**Taxation**

----

**Application      of Critical Accounting Policies**

*Variable      Interest Entities*

*Valuation      and Impairment of Securities*

----

*Revenue      Recognition on Securities*

*Valuation      of Derivatives*

*Impairment      of Loans*

*Revenue      Recognition on Loans*

*Impairment      of Operating Real Estate*

----

*Accounting      Treatment for Certain Investments Financed with Repurchase      Agreements*

----

**Results      of Operations **

|                                                       |   | Year-to-Year                  Increase                  (Decrease) |    | Year-to-Year                  Percent                  Change |   | Explanation |   |
|------------------------------------------------------------|--------|--------------------------------------------------------------------|---------|---------------------------------------------------------------|--------|-------------|--------|
|                                                       |   | 2006/2005                                                          |    | 2005/2004                                                     |   | 2006/2005   |   | 2005/2004 |   | 2006/2005 |   | 2005/2004 |   |
| Interest                  income                           |   | $                                                                  | 181,490 |                                                          | $      | 122,755     |   |   | 52.1 | % |   | 54.4 | % |   | (1) |   |   | (1) |   |
| Rental                  and escalation income              |   |                                                               | (1,786  | )                                                             |   | 1,903       |   |   | (26.9 | %) |   | 40.1 | % |   | (2) |   |   | (2) |   |
| Gain                  on sale of investments               |   |                                                               | (7,965  | )                                                             |   | 1,991       |   |   | (39.2 | %) |   | 10.9 | % |   | (3) |   |   | (3) |   |
| Other                  income                              |   |                                                               | 2,657   |                                                          |   | 1,895       |   |   | 96.8 | % |   | 222.9 | % |   | (4) |   |   | (4) |   |
| Interest                  expense                          |   |                                                               | 147,823 |                                                          |   | 90,048      |   |   | 65.3 | % |   | 66.0 | % |   | (1) |   |   | (1) |   |
| Property                  operating expense                |   |                                                               | 1,442   |                                                          |   | (212        | )      |   | 61.0 | % |   | (8.2 | %) |   | (2) |   |   | (2) |   |
| Loan                  and security servicing expense       |   |                                                               | 951     |                                                          |   | 2,936       |   |   | 15.9 | % |   | 96.0 | % |   | (1) |   |   | (1) |   |
| Provision                  for credit losses               |   |                                                               | 1,017   |                                                          |   | 8,421       |   |   | 12.1 | % |   | N/A |   |   | (5) |   |   | (5) |   |
| Provision                  for losses, loans held for sale |   |                                                               | 4,127   |                                                          |   | -           |   |   | N/A |   |   | N/A |   |   | (6) |   |   | (6) |   |
| General                  and administrative expense        |   |                                                               | 787     |                                                          |   | (438        | )      |   | 18.9 | % |   | (9.5 | %) |   | (7) |   |   | (7) |   |
| Management                  fee to affiliate               |   |                                                               | 693     |                                                          |   | 2,705       |   |   | 5.2 | % |   | 25.5 | % |   | (8) |   |   | (8) |   |
| Incentive                  compensation to affiliate       |   |                                                               | 4,618   |                                                          |   | (332        | )      |   | 60.5 | % |   | (4.2 | %) |   | (8) |   |   | (8) |   |
| Depreciation                  and amortization             |   |                                                               | 444     |                                                          |   | 190         |   |   | 69.3 | % |   | 42.1 | % |   | (9) |   |   | (9) |   |
| Equity                  in earnings of                     |   |                                                               |    |                                                          |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| unconsolidated                  subsidiaries, net          |   |                                                               | 359     |                                                          |   | (4,348      | )      |   | 6.4 | % |   | (43.7 | %) |   | (10) |   |   | (10) |   |
| Income                  from continuing operations         |   | $                                                                  | 12,853  |                                                          | $      | 20,878      |   |   | 11.2 | % |   | 22.2 | % |   |   |   |   |   |   |

| (1)   | Changes                in interest income and expense are primarily due to our acquisition                and                disposition during these periods of interest bearing assets and related                financings, as follows: |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                             |   | Year-to-Year                    Increase |    |
|------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                             |   | Interest                    Income       |    | Interest                    Expense |   |
|                                                             |   | 2006/2005                                |    | 2006/2005 |   |
| Real                    estate security and loan portfolios (A)  |   | $                                        | 68,911  |   | $ | 52,174 |   |
| Agency                    RMBS                                   |   |                                     | 25,738  |   |   | 24,695 |   |
| Other                    real estate related loans               |   |                                     | 42,899  |   |   | 15,342 |   |
| Subprime                    mortgage loan portfolio              |   |                                     | 41,478  |   |   | 29,671 |   |
| Credit                    facility and junior subordinated notes |   |                                     | -       |   |   | 11,305 |   |
| Manufactured                    housing loan portfolio (B)       |   |                                     | 17,323  |   |   | 11,313 |   |
| Other                    (C)                                     |   |                                     | 9,375   |   |   | 16,908 |   |
| Residential                    mortgage loan portfolio (D)       |   |                                     | (6,934  | ) |   | (4,557 | ) |
| Other                    real estate related loans (D)           |   |                                     | (17,300 | ) |   | (9,028 | ) |
|                                                             |   | $                                        | 181,490 |   | $ | 147,823 |   |

| (A)                    Represents our CBO financings and the acquisition of the related                    collateral in the respective years.                                 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (B)                     Primarily due to the acquisition of a manufactured housing loan                    pool in                    the third quarter of 2006.          |
| (C)                     Primarily due to increasing interest rates on floating rate assets                    and                    liabilities owned during the period. |
| (D)                    These loans received paydowns during the period which served                    to offset the                    amounts listed above.                  |

|                                                            |   | Year-to-Year                    Increase |    |
|-----------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                            |   | Interest                    Income       |    | Interest                    Expense |   |
|                                                            |   | 2005/2004                                |    | 2005/2004 |   |
| Real                    estate security and loan portfolios (A) |   | $                                        | 61,251  |   | $ | 48,213 |   |
| Agency                    RMBS                                  |   |                                     | 18,350  |   |   | 16,981 |   |
| Residential                    mortgage loan portfolio          |   |                                     | 1,147   |   |   | 5,727 |   |
| Manufactured                    housing loan portfolio          |   |                                     | 27,717  |   |   | 13,164 |   |
| Other                    real estate related loans              |   |                                     | 20,878  |   |   | 3,809 |   |
| Other                    (B)                                    |   |                                     | 3,181   |   |   | 7,023 |   |
| ABS                    - manufactured housing portfolio (C)     |   |                                     | (2,777  | ) |   | (426 | ) |
| ICH                    loan portfolio (C)                       |   |                                     | (3,963  | ) |   | (3,655 | ) |
| Other                    real estate related loans (C)          |   |                                     | (3,029  | ) |   | (788 | ) |
|                                                            |   | $                                        | 122,755 |   | $ | 90,048 |   |

| (A)                    Represents our CBO financings and the acquisition of the related                    collateral in the respective years.                                  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (B)                    Primarily due to increasing interest rates on floating rate assets                    and                    liabilities owned during the entire period. |
| (C)                    These loans received paydowns during the period which served                    to offset the                    amounts listed above.                   |

----

| (2) | These                changes are primarily the result of the effect of the termination                of a                lease (including the acceleration of lease termination income), the                inception of a new lease (including the associated free rent period),                foreign currency fluctuations and the acquisition of a $12.2 million                portfolio of properties through foreclosure in the first quarter                of                2006. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | These                changes are primarily a result of the volume of sales of real estate                securities. Sales of real estate securities are based on a number                of                factors including credit, asset type and industry and can be expected                to                increase or decrease from time to time. Periodic fluctuations in                the                volume of sales of securities is dependent upon, among other things,                management's assessment of credit risk, asset concentration, portfolio                balance and other factors. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | This                change is primarily the result of investments financed with total                rate of                return swaps which we treat as non-hedge derivatives and mark to                market                through the income statement, which is offset by the $5.5 million                gain                recorded in the first half of 2006 on the derivative used to hedge                the                interim financing of our subprime mortgage loans, which did not qualify                as                a hedge for accounting purposes. This gain was offset by the loss                described in (6) below. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | The                increase from 2004 to 2005 is primarily the result of the acquisition                of                manufactured housing and residential mortgage loan pools at a discount                for                credit quality and $2.9 million of impairment recorded with respect                to the                ICH loans in 2005. The increase from 2005 to 2006 is primarily due                to the                acquisition of manufactured housing loans at a discount for credit                quality                which is offset by less impairment recorded with respect to the ICH                loans. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | This                change represents the unrealized loss on our pool of subprime mortgage                loans which was considered held for sale at March 31, 2006. This                loss was                related to market factors and was offset by the gain described in                (4)                above. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | The                changes in general and administrative expense are primarily increases                as a                result of our increased size, offset by decreased professional fees                in                2005. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | The                increases in management fees are a result of our increased size resulting                from our equity issuances during these periods. The changes in incentive                compensation are primarily a result of our increased earnings, offset                by                FFO losses recorded with respect to the sale of properties during                2004 and                2005. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (9) | The                increase in depreciation is primarily due to the implementation of                new                information systems and the acquisition of a $12.2 million portfolio                of                properties through foreclosure in the first quarter of                2006. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (10) | The                change from 2004 to 2005 is related to an interest in an LLC which                held a                portfolio of convenience and retail gas stores that was acquired                with the                intent to sell. All sales were completed in 2005. The change from                2005 to                2006 is the result of a small improvement in operating performance.                Note                that the amounts shown are net of income taxes on related taxable                subsidiaries. |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Liquidity      and Capital Resources **

----

----

*Debt      Obligations*

| Debt                        Obligation/Collateral                                                                       |   | MonthIssued |                            | Current                        FaceAmount |   |                        Carrying                        Value |   | Unhedged                        Weighted Average                        Funding                        Cost |      | Final                        Stated Maturity |   | Weighted                        Average                        Funding                        Cost                        (1) |   | Weighted                        Average Maturity                        (Years) |                            | FaceAmountof                        Floating Rate                        Debt |   | CollateralCarryingValue |   | Collateral                        Weighted Average Maturity (Years) |   | FaceAmountof                        Floating Rate Collateral |   | AggregateNotionalAmount                        ofCurrent                        Hedges |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|-------------|---------------------------------|-------------------------------------------|--------|-------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------|-----------|----------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|---------------------------------|-------------------------------------------------------------------------------|--------|-------------------------|--------|---------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|--------|
| CBO                        Bonds Payable                                                                                |   |        |                            |                                      |   |                                                              |   |                                                                                                        |      |                                         |   |                                                                                                                          |   |                                                                                 |                            |                                                                          |   |                    |   |                                                                |   |                                                         |   |                                                                                   |   |
| Real                        estate securities                                                                           |   |        | Jul                        1999 |                                      | $      | 398,366                                                           |   | $                                                                                                           | 395,646   |                                         |   | 6.94%                        (2)                                                                                              |   |                                                                                 | Jul                        2038 |                                                                          |   | 5.50%                   |   |                                                                | 1.99   |                                                         | $      | 303,366                                                                                |   | $ | 544,469 |   |   | 4.06 |   | $ | - |   | $ | 255,352 |   |
| Real                        estato securities and loans                                                                 |   |        | Apr                        2002 |                                      |   | 444,000                                                           |   |                                                                                                        | 441,660   |                                         |   | 6.42%                        (2)                                                                                              |   |                                                                                 | Apr                        2037 |                                                                          |   | 6.78%                   |   |                                                                | 3.45   |                                                         |   | 372,000                                                                                |   |   | 498,754 |   |   | 5.15 |   |   | 59,612 |   |   | 296,000 |   |
| Real                        estate securities and loans                                                                 |   |        | Mar                        2003 |                                      |   | 472,000                                                           |   |                                                                                                        | 468,944   |                                         |   | 6.23%                        (2)                                                                                              |   |                                                                                 | Mar                        2038 |                                                                          |   | 5.35%                   |   |                                                                | 5.30   |                                                         |   | 427,800                                                                                |   |   | 515,335 |   |   | 4.56 |   |   | 128,600 |   |   | 285,060 |   |
| Real                        estate securities and loans                                                                 |   |        | Sep                        2003 |                                      |   | 460,000                                                           |   |                                                                                                        | 456,250   |                                         |   | 6.08%                        (2)                                                                                              |   |                                                                                 | Sep                        2038 |                                                                          |   | 5.88%                   |   |                                                                | 5.85   |                                                         |   | 442,500                                                                                |   |   | 505,450 |   |   | 4.28 |   |   | 151,677 |   |   | 207,500 |   |
| Real                        estate securities and loans                                                                 |   |        | Mar                        2004 |                                      |   | 414,000                                                           |   |                                                                                                        | 411,014   |                                         |   | 5.93%                        (2)                                                                                              |   |                                                                                 | Mar                        2039 |                                                                          |   | 5.38%                   |   |                                                                | 5.61   |                                                         |   | 382,750                                                                                |   |   | 446,749 |   |   | 4.76 |   |   | 174,192 |   |   | 177,300 |   |
| Real                        estate securities and loans                                                                 |   |        | Sep                        2004 |                                      |   | 454,500                                                           |   |                                                                                                        | 451,137   |                                         |   | 5.91%                        (2)                                                                                              |   |                                                                                 | Sep                        2039 |                                                                          |   | 5.49%                   |   |                                                                | 6.19   |                                                         |   | 442,500                                                                                |   |   | 499,389 |   |   | 5.08 |   |   | 227,898 |   |   | 209,202 |   |
| Real                        estate securities and loans                                                                 |   |        | Apr                        2005 |                                      |   | 447,000                                                           |   |                                                                                                        | 442,870   |                                         |   | 5.81%                        (2)                                                                                              |   |                                                                                 | Apr                        2040 |                                                                          |   | 5.53%                   |   |                                                                | 7.16   |                                                         |   | 439,600                                                                                |   |   | 491,398 |   |   | 5.82 |   |   | 195,186 |   |   | 242,990 |   |
| Real                        estate securities                                                                           |   |        | Dec                        2005 |                                      |   | 442,800                                                           |   |                                                                                                        | 438,894   |                                         |   | 5.85%                        (2)                                                                                              |   |                                                                                 | Dec                        2050 |                                                                          |   | 5.57%                   |   |                                                                | 8.48   |                                                         |   | 436,800                                                                                |   |   | 512,249 |   |   | 7.23 |   |   | 115,491 |   |   | 341,506 |   |
| Real                        .estate securities and loans                                                                |   |        | Nov                        2006 |                                      |   | 807,500                                                           |   |                                                                                                        | 807,409   |                                         |   | 5.98%                        (2)                                                                                              |   |                                                                                 | Nov                        2052 |                                                                          |   | 5.92%                   |   |                                                                | 7.06   |                                                         |   | 799,900                                                                                |   |   | 930,293 |   |   | 4.69 |   |   | 672,217 |   |   | 153,655 |   |
|                                                                                                                         |   |        |                            |                                      |   | 4,340,166                                                         |   |                                                                                                        | 4,313,824 |                                         |   |                                                                                                                          |   |                                                                                 |                            |                                                                          |   | 5.73%                   |   |                                                                | 5.83   |                                                         |   | 4,047,216                                                                              |   |   | 4,944,086 |   |   | 5.05 |   |   | 1,724,873 |   |   | 2,168,565 |   |
| Other                        Bonds Payable                                                                              |   |        |                            |                                      |   |                                                              |   |                                                                                                        |      |                                         |   |                                                                                                                          |   |                                                                                 |                            |                                                                          |   |                    |   |                                                                |   |                                                         |   |                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ICH                        loans (3)                                                                                    |   |        | (3)                             |                                      |   | 101,925                                                           |   |                                                                                                        | 101,925   |                                         |   | 6.78%                        (2)                                                                                              |   |                                                                                 | Aug                        2030 |                                                                          |   | 6.78%                   |   |                                                                | 1.04   |                                                         |   | 1,986                                                                                  |   |   | 121,834 |   |   | 1.10 |   |   | 1,986 |   |   | - |   |
| Manufactured                        housing loans                                                                       |   |        | Jan                        2006 |                                      |   | 213,172                                                           |   |                                                                                                        | 211,738   |                                         |   | LIBOR                        +1.25%                                                                                           |   |                                                                                 | Jan                        2009 |                                                                          |   | 6.14%                   |   |                                                                | 1.46   |                                                         |   | 213,172                                                                                |   |   | 237,133 |   |   | 6.26 |   |   | 4,977 |   |   | 204,617 |   |
| Manufactured                        housing loans                                                                       |   |        | Aug                        2006 |                                      |   | 364,794                                                           |   |                                                                                                        | 362,181   |                                         |   | LIBOR                        +1.25%                                                                                           |   |                                                                                 | Aug                        2011 |                                                                          |   | 6.87%                   |   |                                                                | 3.07   |                                                         |   | 364,794                                                                                |   |   | 399,125 |   |   | 5.87 |   |   | 73,973 |   |   | 370,466 |   |
|                                                                                                                    |   |        |                            |                                      |   | 679,891                                                           |   |                                                                                                        | 675,844   |                                         |   |                                                                                                                          |   |                                                                                 |                            |                                                                          |   | 6.63%                   |   |                                                                | 2.26   |                                                         |   | 579,952                                                                                |   |   | 758,092 |   |   | 5.25 |   |   | 80,936 |   |   | 575,083 |   |
| Notes                        Payable                                                                                    |   |        |                            |                                      |   |                                                              |   |                                                                                                        |      |                                         |   |                                                                                                                          |   |                                                                                 |                            |                                                                          |   |                    |   |                                                                |   |                                                         |   |                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                        mortgago loans (4)                                                                   |   |        | Nov                        2004 |                                      |   | 128,866                                                           |   |                                                                                                        | 128,866   |                                         |   | LIBOR+                        0.16%                                                                                           |   |                                                                                 | Nov                        2007 |                                                                          |   | 5.68%                   |   |                                                                | 0.74   |                                                         |   | 128,866                                                                                |   |   | 145,819 |   |   | 2.79 |   |   | 142,301 |   |   | - |   |
| Repurchase                        Agreements (4) (7)                                                                    |   |        |                            |                                      |   |                                                              |   |                                                                                                        |      |                                         |   |                                                                                                                          |   |                                                                                 |                            |                                                                          |   |                    |   |                                                                |   |                                                         |   |                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real                        estate securities                                                                           |   |        | Rolling                         |                                      |   | 181,059                                                           |   |                                                                                                        | 181,059   |                                         |   | LIBOR                        + 0.41%                                                                                          |   |                                                                                 | Jan                        2007 |                                                                          |   | 5.62%                   |   |                                                                | 0.08   |                                                         |   | 181,059                                                                                |   |   | 207,374 |   |   | 4.60 |   |   | 101,380 |   |   | 92,457 |   |
| Real                        estate related loans                                                                        |   |        | Rolling                         |                                      |   | 553,944                                                           |   |                                                                                                        | 553,944   |                                         |   | LIBOR                        + 0.69%                                                                                          |   |                                                                                 | Jan                        2007 |                                                                          |   | 6.02%                   |   |                                                                | 0.08   |                                                         |   | 553,944                                                                                |   |   | 718,989 |   |   | 2.21 |   |   | 696,174 |   |   | 19,630 |   |
| Residential                        mortgage loans                                                                       |   |        | Rolling                         |                                      |   | 25,343                                                            |   |                                                                                                        | 25,343    |                                         |   | LIBOR                        + 0.43%                                                                                          |   |                                                                                 | Mar                        2007 |                                                                          |   | 5.79%                   |   |                                                                | 0.23   |                                                         |   | 25,343                                                                                 |   |   | 27,020 |   |   | 2.81 |   |   | 26,347 |   |   | - |   |
|                                                                                                                    |   |        |                            |                                      |   | 760,346                                                           |   |                                                                                                        | 760,346   |                                         |   |                                                                                                                          |   |                                                                                 |                            |                                                                          |   | 5.92%                   |   |                                                                | 0.08   |                                                         |   | 760,346                                                                                |   |   | 953,383 |   |   | 2.77 |   |   | 823,901 |   |   | 112,087 |   |
| Repurchase                        agreementssubject                        to ABCP facility                        (8)  |   |        |                            |                                      |   |                                                              |   |                                                                                                        |      |                                         |   |                                                                                                                          |   |                                                                                 |                            |                                                                          |   |                    |   |                                                                |   |                                                         |   |                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency                        RMBS                                                                                      |   |        | Dec                        2006 |                                      |   | 1,143,749                                                         |   |                                                                                                        | 1,143,749 |                                         |   | 5.41%                                                                                                                         |   |                                                                                 | Jan                        2007 |                                                                          |   | 4.97%                   |   |                                                                | 0.08   |                                                         |   | 1,143,749                                                                              |   |   | 1,176,358 |   |   | 4.27 |   |   | - |   |   | 1,087,385 |   |
| Credit                        facility (5)                                                                              |   |        | May                        2006 |                                      |   | 93,800                                                            |   |                                                                                                        | 93,800    |                                         |   | LIBOR                        +1.75%                                                                                           |   |                                                                                 | Nov                        2007 |                                                                          |   | 7.08%                   |   |                                                                | 0.85   |                                                         |   | 93,800                                                                                 |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Junior                        subordinated notes payable                                                                |   |        | Mar                        2006 |                                      |   | 100,100                                                           |   |                                                                                                        | 100,100   |                                         |   | 7.80%                        (6)                                                                                              |   |                                                                                 | Apr                        2036 |                                                                          |   | 7.72%                   |   |                                                                | 29.25  |                                                         |   | -                                                                                      |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Subtotal                        debt obligations                                                                        |   |        |                            |                                      |   | 7,246,918                                                         |   |                                                                                                        | 7,216,529 |                                         |   |                                                                                                                          |   |                                                                                 |                            |                                                                          |   | 5.76%                   |   |                                                                | 4.15   |                                                         | $      | 6,753,929                                                                              |   | $ | 7,977,738 |   |   | 4.63 |   | $ | 2,772,011 |   | $ | 3,943,120 |   |
| Financing                          on subprime mortgage loans subject to future repurchase                          (8) |   |        | Apr                        2006 |                                      |   | 299,176                                                           |   |                                                                                                        | 288,202   |                                         |   |                                                                                                                          |   |                                                                                 |                            |                                                                          |   |                    |   |                                                                |   |                                                         |   |                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                        debt obligations                                                                           |   |        |                            |                                      | $      | 7,546,094                                                         |   | $                                                                                                           | 7,504,731 |                                         |   |                                                                                                                          |   |                                                                                 |                            |                                                                          |   |                    |   |                                                                |   |                                                         |   |                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| (1) | Including                      the effect of applicable                      hedges. |
|-----|--------------------------------------------------------------------------------------|

| (2) | Weighted                      average, including floating and fixed rate                      classes. |
|-----|--------------------------------------------------------------------------------------------------------|

| (3) | See                        "Business-Our Investing Activities-Real Estate Related Loans"                        above. |
|-----|------------------------------------------------------------------------------------------------------------------------|

| (4) | Subject                          to potential mandatory prepayments based on collateral                          value. |
|-----|-------------------------------------------------------------------------------------------------------------------------|

| (5) | A                            maximum of $200 million can be                            drawn. |
|-----|-----------------------------------------------------------------------------------------------|

| (6) | LIBOR                              + 2.25% after April 2016. |
|-----|--------------------------------------------------------------|

| (7) | The                                counterparties on our repurchase agreements include:                                Bear Stearns Mortgage                                Capital Corporation ($270.6 million), Credit Suisse                                ($216.2 million),                                Deutsche Bank AG ($181.7 million) and other ($91.8                                million). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | See                                  "Liquidity and Capital Resources"                                  below. |
|-----|----------------------------------------------------------------------------------------------------------------|

----

| 2007       |   | $      | 2,126,761 |   |
|------------|--------|--------|-----------|--------|
| 2008       |   |   | -         |   |
| 2009       |   |   | 213,172   |   |
| 2010       |   |   | -         |   |
| 2011       |   |   | 364,794   |   |
| Thereafter |   |   | 4,841,367 |   |
| Total      |   | $      | 7,546,094 |   |

----

----

*Other*

*Stockholders’      Equity*

| Year                               |   | Shares                  Issued |       | Range                  of Issue Prices                  per                  Share (1) |   | Net                  Proceeds (millions) |   | Options                  Granted to                  Manager |   |
|------------------------------------|--------|--------------------------------|------------|----------------------------------------------------------------------------------------|--------|------------------------------------------|--------|--------------------------------------------------------------|--------|
|                               |   |                           |       |                                                                                   |   |                                     |   |                                                         |   |
| Formation                          |   |                           | 16,488,517 |                                                                                   |   | N/A                                      |   |                                                         | N/A    |   |   | N/A |   |
| 2002                               |   |                           | 7,000,000  |                                                                                   |   | $13.00                                   |   | $                                                            | 80.0   |   |   | 700,000 |   |
| 2003                               |   |                           | 7,886,316  |                                                                                   |   | $20.35-$22.85                            |   | $                                                            | 163.4  |   |   | 788,227 |   |
| 2004                               |   |                           | 8,484,648  |                                                                                   |   | $26.30-$31.40                            |   | $                                                            | 224.3  |   |   | 837,500 |   |
| 2005                               |   |                           | 4,053,928  |                                                                                   |   | $29.60                                   |   | $                                                            | 108.2  |   |   | 330,000 |   |
| 2006                               |   |                           | 1,800,408  |                                                                                   |   | $29.42                                   |   | $                                                            | 51.2   |   |   | 170,000 |   |
| December                  31, 2006 |   |                           | 45,713,817 |                                                                                   |   |                                     |   |                                                         |   |   |   |   |   |
| January                  2007      |   |                           | 2,420,000  |                                                                                   |   | $31.30                                   |   | $                                                            | 75.0   |   |   | 242,000 |   |

|  | (1) | Excludes                prices of shares issued pursuant to the exercise of options and of                shares                issued to our independent                directors. |
|--|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Held                  by our manager                                                                                    |   |   | 1,278,014 |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|
| Issued                  to our manager and subsequently assigned to                  certain of our manager's employees |   |   | 591,793   |   |
| Held                  by directors and former directors                                                                 |   |   | 14,000    |   |
| Total                                                                                                                   |   |   | 1,883,807 |   |

----

| Accumulated                  other comprehensive income, December 31, 2005                                                           |   | $      | 45,564 |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Net                  unrealized gain on securities                                                                                   |   |   | 26,242 |   |
| Reclassification                  of net realized (gain) on securities into earnings                                                 |   |   | (282   | )      |
| Foreign                  currency translation                                                                                        |   |   | (26    | )      |
| Net                  unrealized gain on derivatives designated as cash flow                  hedges                                  |   |   | 7,773  |   |
| Reclassification                  of net realized (gain) on derivatives designated as cashflow                  hedges into earnings |   |   | (3,287 | )      |
| Accumulated                  other comprehensive income, December 31, 2006                                                           |   | $      | 75,984 |   |

| Declared                  for the Period Ended |   | Paid   |                          | Amount                  Per Share |   |
|------------------------------------------------|--------|--------|-------------------------------|-----------------------------------|--------|
| March                  31, 2004                |   |   | April                  2004   |                              | $      | 0.600 |   |
| June                  30, 2004                 |   |   | July                  2004    |                              | $      | 0.600 |   |
| September                  30, 2004            |   |   | October                  2004 |                              | $      | 0.600 |   |
| December                  31, 2004             |   |   | January                  2005 |                              | $      | 0.625 |   |
| March                  31, 2005                |   |   | April                  2005   |                              | $      | 0.625 |   |
| June                  30, 2005                 |   |   | July                  2005    |                              | $      | 0.625 |   |
| September                  30, 2005            |   |   | October                  2005 |                              | $      | 0.625 |   |
| December                  31, 2005             |   |   | January                  2006 |                              | $      | 0.625 |   |
| March                  31, 2006                |   |   | April                  2006   |                              | $      | 0.625 |   |
| June                  30, 2006                 |   |   | July                  2006    |                              | $      | 0.650 |   |
| September                  30, 2006            |   |   | October                  2006 |                              | $      | 0.650 |   |
| December                  31, 2006             |   |   | January                  2007 |                              | $      | 0.690 |   |

*Cash      Flow*

----

**Interest      Rate, Credit and Spread Risk**

*Real      Estate Securities*

** **

----

*Loans*

*Statistics*

|                                                            |   | December                  31, 2006 |      | December                  31, 2005 |   |
|-----------------------------------------------------------------|--------|------------------------------------|-----------|------------------------------------|--------|
|                                                            |   | Face                  Amount       |      | %                  Total           |   | Face                  Amount |   | %                  Total |   |
| Real                  Estate Securities and Related Loans       |   | $                                  | 6,196,179 |                               |   | 71.7 | % | $ | 4,802,172 |   |   | 76.1 | % |
| Agency                  RMBS                                    |   |                               | 1,177,779 |                               |   | 13.6 | % |   | 697,530 |   |   | 11.0 | % |
| Total                  Real Estate Securities and Related Loans |   |                               | 7,373,958 |                               |   | 85.3 | % |   | 5,499,702 |   |   | 87.1 | % |
| Residential                  Mortgage Loans                     |   |                               | 812,561   |                               |   | 9.4 | % |   | 610,970 |   |   | 9.7 | % |
| Other                                                           |   |                               |      |                               |   |   |   |   |   |   |   |   |   |
| Subprime                  Loans Subject to Future Repurchase    |   |                               | 299,176   |                               |   | 3.5 | % |   | - |   |   | 0.0 | % |
| Investment                  in Joint Venture                    |   |                               | 38,469    |                               |   | 0.4 | % |   | 38,164 |   |   | 0.6 | % |
| ICH                  Loans                                      |   |                               | 123,390   |                               |   | 1.4 | % |   | 165,514 |   |   | 2.6 | % |
| Total                  Portfolio                                |   | $                                  | 8,647,554 |                               |   | 100.0 | % | $ | 6,314,350 |   |   | 100.0 | % |

*Asset      Quality and Diversification at December 31, 2006*

| ·   | Total                real estate securities and related loans of $7.4 billion face amount,                representing 85.3% of the total                portfolio |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | $6.0                billion or 81.5% of this portfolio is rated by third parties, or                had an                implied AAA rating, with a weighted average rating of                BBB+. |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | $1.4                billion or 18.5% of this portfolio is not rated by third parties                but had a                weighted average loan to value ratio of                68.6%. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | 63%                of this portfolio has an investment grade rating (BBB- or                higher). |
|---------------|------------------------------------------------------------------------------------------------------|

| o   | The                weighted average credit spread (i.e., the yield premium on our investments                over the comparable US Treasury or LIBOR) for the core real estate                securities and related loans of $6.2 billion (excluding agency RMBS)                was                2.56%. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Our                real estate securities and loans are diversified by asset type, industry,                location and issuer. |
|---------------|----------------------------------------------------------------------------------------------------------------------------------|

| o   | This                portfolio had 635 investments. The largest investment was $179.5                million                and the average investment size was $11.6                million. |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Our                real estate securities are supported by pools of underlying loans.                For                instance, our CMBS investments had over 21,000 underlying                loans. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Residential                mortgage loans of $0.8 billion face amount, representing 9.4% of                the total                portfolio |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|

| o   | These                residential loans are to high quality borrowers with an average Fair                Isaac                Corp. credit score (“FICO”) of 697. |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Approximately                $142.3 million face amount were held in securitized form, of which                95.7%                was rated investment grade. |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| o   | Our                residential and manufactured housing loans were well diversified                with 491                and 18,343 loans, respectively. |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Margin*

**Off-Balance      Sheet Arrangements**

| · | In                April 2006, we securitized our portfolio of subprime mortgage loans.                80%                of this transaction was treated as an off-balance sheet financing                as                described in “Liquidity and Capital                Resources.” |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | We                are party to total rate of return swaps which are treated as non-hedge                derivatives. For further information on these investments, see “Liquidity                and Capital Resources.” |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | We                have made investments in four unconsolidated subsidiaries. See Note                3 to                our consolidated financial statements in “Financial Statements and                Supplementary Data.” |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Contractual      Obligations**

| Contract                                                      |   | Terms                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|---------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| CBO                bonds payable                              |   | Described                under “Quantitative and Qualitative Disclosures About Market                Risk”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Other                bonds payable                            |   | Described                under “Quantitative and Qualitative Disclosures About Market                Risk”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Notes                payable                                  |   | Described                under “Quantitative and Qualitative Disclosures About Market                Risk”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Repurchase                agreements                          |   | Described                under “Quantitative and Qualitative Disclosures About Market                Risk”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Repurchase                agreements subject to ABCP facility |   | We                entered into a repurchase agreement with our wholly owned subsidiary                Windsor Funding Trust as described under “Liquidity and Capital                Resources”                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Credit                facility                                |   | Described                under “Quantitative and Qualitative Disclosures About Market                Risk”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Junior                subordinated notes payable              |   | Described                under “Quantitative and Qualitative Disclosures About Market                Risk”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Interest                rate swaps, treated as hedges         |   | Described                under “Quantitative and Qualitative Disclosures About Market                Risk”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Non-hedge                derivative obligations               |   | Described                under “Quantitative and Qualitative Disclosures About Market                Risk”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| CBO                wrap agreement                             |   | Two                classes of our CBO bonds, with an aggregate $718.0 million face amount,                were issued subject to remarketing procedures and related agreements                whereby such bonds are remarketed and sold on a periodic basis. $395.0                million of these bonds are fully insured by a third party with respect                to                the timely payment of interest and principal thereon, pursuant to                a                financial guaranty insurance policy (“wrap”). We pay annual fees of 0.12%                of the outstanding face amount of the bonds under this                agreement. |
|                                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

----

| CBO                backstop agreements      |   | In                connection with the remarketing procedures described above, backstop                agreements have been created whereby a third party financial institution                is required to purchase                the $718.0 million face amount of bonds at the end of any remarketing                period if such bonds could not be resold in the market by the remarketing                agent. We pay annual fees between 0.15% and 0.20% of the outstanding                face                amount of such bonds under these agreements.                                                                                                                                                                                        |
|---------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| CBO                remarketing agreements   |   | In                connection with the remarketing procedures described above, the                remarketing agent is paid an annual fee of 0.05% of the outstanding                face                amount of the bonds under the remarketing agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Subprime                loan securitization |   | We                entered into the securitization of our subprime mortgage loan portfolio                as                described under “Liquidity and Capital Resources.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Loan                servicing agreements    |   | We                are a party to servicing agreements with respect to our residential                mortgage loans, including manufactured housing loans and subprime                mortgage                loans, and our ICH loans. We pay annual fees generally equal to 0.38%                of                the outstanding face amount of the residential mortgage loans, 1.00%                and                0.625% of the outstanding face amount of the two portfolios of                manufactured housing loans, respectively, and approximately 0.11%                of the                outstanding face amount of the ICH loans under these agreements.                Our                subprime loans are held off balance sheet. |
|                                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Trustee                agreements           |   | We                have entered into trustee agreements in connection with our securitized                investments, primarily our CBOs. We pay annual fees of between 0.015%                and                0.020% of the outstanding face amount of the CBO bonds under these                agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Management                agreement         |   | Our                manager is paid an annual management fee of 1.5% of our gross equity,                as                defined, an expense reimbursement, and incentive compensation equal                to 25%                of our FFO above a certain threshold. For more information on this                agreement, as well as historical amounts earned, see Note 10 to our                audited consolidated financial statements under “Financial Statements and                Supplementary Data.”                                                                                                                                                                                                                              |

|                                                                                                        |   | Actual                    Payments |      | Fixed                    and Determinable Payments Due by Period (2) |   |
|-------------------------------------------------------------------------------------------------------------|--------|------------------------------------|-----------|----------------------------------------------------------------------|--------|
| Contract                                                                                                    |   | 2006                    (1)        |      | 2007                                                                 |   | 2008-2009 |   | 2010-2011 |   | Thereafter |   | Total |   |
|                                                                                                        |   |                               |      |                                                                 |   |   |   |   |   |   |   |   |   |
| CBO                    bonds payable                                                                        |   | $                                  | 233,913   |                                                                 | $      | - |   | $ | - |   | $ | - |   | $ | 4,340,166 |   | $ | 4,340,166 |   |
| Other                    bonds payable                                                                      |   |                               | 335,625   |                                                                 |   | - |   |   | 213,172 |   |   | 364,794 |   |   | 101,925 |   |   | 679,891 |   |
| Notes                    payable                                                                            |   |                               | 141,584   |                                                                 |   | 128,866 |   |   | - |   |   | - |   |   | - |   |   | 128,866 |   |
| Repurchase                    agreements                                                                    |   |                               | 2,872,327 |                                                                 |   | 760,346 |   |   | - |   |   | - |   |   | - |   |   | 760,346 |   |
| Repurchase                    agreements subject to ABCP facility                                           |   |                               | 181,605   |                                                                 |   | 1,143,749 |   |   | - |   |   | - |   |   | - |   |   | 1,143,749 |   |
| Financing                      of subprime mortgage loans subject to                      future repurchase |   |                               | -         |                                                                 |   | - |   |   | - |   |   | - |   |   | 299,176 |   |   | 299,176 |   |
| Credit                    facility                                                                          |   |                               | 501,202   |                                                                 |   | 93,800 |   |   | - |   |   | - |   |   | - |   |   | 93,800 |   |
| Junior                    subordinated notes payable                                                        |   |                               | 4,444     |                                                                 |   | - |   |   | - |   |   | - |   |   | 100,100 |   |   | 100,100 |   |
| Interest                    rate swaps, treated as hedges                                                   |   |                               | 3,197     |                                                                 |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| Non-hedge                    derivative obligations                                                         |   |                               | 34        |                                                                 |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| CBO                    wrap agreement                                                                       |   |                               | 481       |                                                                 |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| CBO                    backstop agreements                                                                  |   |                               | 1,292     |                                                                 |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| CBO                    remarketing agreements                                                               |   |                               | 364       |                                                                 |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| Subprime                    loan securitization                                                             |   |                               | 1,462,427 |                                                                 |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| Loan                    servicing agreements                                                                |   |                               | 4,755     |                                                                 |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| Trustee                    agreements                                                                       |   |                               | 826       |                                                                 |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| Management                    agreement                                                                     |   |                               | 21,581    |                                                                 |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| Total                                                                                                       |   | $                                  | 5,765,657 |                                                                 | $      | 2,126,761 |   | $ | 213,172 |   | $ | 364,794 |   | $ | 4,841,367 |   | $ | 7,546,094 |   |

| (1) | Includes                      all payments made under the respective agreements. The management                      agreement payments shown include $14.0                      million of management fees and expense reimbursements and $7.6                      million of                      incentive compensation. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Represents                          debt principal due based on contractual                          maturities. |
|-----|------------------------------------------------------------------------------------------------------------------|

| (3) | These                            contracts do not have fixed and determinable                            payments. |
|-----|--------------------------------------------------------------------------------------------------------------------|

----

**Inflation**

**Funds      from Operations **

|                                                                    |   | For                  the Year Ended December 31, |    |
|-------------------------------------------------------------------------|--------|--------------------------------------------------|---------|
|                                                                    |   | 2006                                             |    | 2005 |   | 2004 |   |
| Income                  available for common stockholders               |   | $                                                | 118,609 |   | $ | 110,271 |   | $ | 92,321 |   |
| Operating                  real estate depreciation                     |   |                                             | 812     |   |   | 702 |   |   | 2,199 |   |
| Accumulated                  depreciation on operating real estate sold |   |                                             | -       |   |   | (6,942 | ) |   | (8,319 | ) |
| Funds                  from operations (FFO)                            |   | $                                                | 119,421 |   | $ | 104,031 |   | $ | 86,201 |   |

|                                                                    | Book                  Equity December 31, |      | Average                  Invested Common Equity for the Year Ended December 31, |   | FFO                  for the Year Ended December 31, |   | Return                  on Invested Common Equity (3) for                  the Year Ended December 31, |    |
|-------------------------------------------------------------------------|-------------------------------------------|-----------|---------------------------------------------------------------------------------|--------|------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|---------|
|                                                                    |  2006                  (1)           |      |  2006                  (2)                                                 |   | 2006                                                 |   | 2006                                                                                                   |    | 2005 |   | 2004 |   |
| Real                  estate securities and                             |                                      |      |                                                                            |   |                                                 |   |                                                                                                   |    |   |   |   |   |   |   |   |   |   |   |
| real                  estate related loans                              | $                                         | 998,473   |                                                                            | $      | 903,165                                              |   | $                                                                                                      | 146,048 |   |   | 16.2 | % |   | 17.9 | % |   | 20.5 | % |
| Residential                  mortgage loans                             |                                      | 125,647   |                                                                            |   | 109,966                                              |   |                                                                                                   | 21,596  |   |   | 19.6 | % |   | 9.1 | % |   | 16.7 | % |
| Operating                  real estate                                  |                                      | 49,085    |                                                                            |   | 46,331                                               |   |                                                                                                   | 3,831   |   |   | 8.3 | % |   | 3.5 | % |   | 9.2 | % |
| Unallocated                  (1)                                        |                                      | (345,521  | )                                                                               |   | (260,045                                             | )      |                                                                                                   | (52,054 | ) |   | N/A |   |   | N/A |   |   | N/A |   |
| Total                  (2)                                              |                                      | 827,684   |                                                                            | $      | 799,417                                              |   | $                                                                                                      | 119,421 |   |   | 14.9 | % |   | 13.4 | % |   | 14.5 | % |
| Preferred                  stock                                        |                                      | 102,500   |                                                                            |   |                                                 |   |                                                                                                   |    |   |   |   |   |   |   |   |   |   |   |
| Accumulated                  depreciation                               |                                      | (4,188    | )                                                                               |   |                                                 |   |                                                                                                   |    |   |   |   |   |   |   |   |   |   |   |
| Accumulated                  othercomprehensive                  income |                                      | 75,984    |                                                                            |   |                                                 |   |                                                                                                   |    |   |   |   |   |   |   |   |   |   |   |
| Net                  book equity                                        | $                                         | 1,001,980 |                                                                            |   |                                                 |   |                                                                                                   |    |   |   |   |   |   |   |   |   |   |   |

| (1) | Unallocated                FFO represents ($11.7 million) of interest expense, ($9.3 million)                of                preferred dividends and ($31.1 million) of corporate general and                administrative expense, management fees and incentive                compensation. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Invested                common equity is equal to book equity excluding preferred stock,                accumulated depreciation and accumulated other comprehensive                income. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | FFO                divided by average invested common                equity. |
|-----|------------------------------------------------------------------------------|

**Related      Party Transactions**

----

----

**Item      7A. Quantitative and Qualitative Disclosures About Market      Risk.**

**Interest      Rate Exposure **

----

**Credit      Spread Exposure**

**Margin**

----

**Fair      Value**

|                                                         |   | **Carrying                  Value** |      |                                   |   |                                                      |   |                                                      |      | **Fair                  Value** |   |
|--------------------------------------------------------------|--------|-------------------------------------|-----------|----------------------------------------|--------|-----------------------------------------------------------|--------|-----------------------------------------------------------|-----------|---------------------------------|--------|
|                                                         |   | **December                  31,**   |      | **December                  31, 2006** |   |                                                      |   | **December                  31,**                         |      |
|                                                         |   | **2006**                            |      | **2005**                               |   | **Principal                  Balance or Notional Amount** |   | **Weighted                  Average Yield/ Funding Cost** |      | **Maturity****Date**            |   | **2006** |   | **2005** |   |
| **Assets:**                                                  |   |                                |      |                                   |   |                                                      |   |                                                      |      |                            |   |   |   |   |   |   |   |   |   |   |   |   |
| Real                  estate securities,                     |   |                                |      |                                   |   |                                                      |   |                                                      |      |                            |   |   |   |   |   |   |   |   |   |   |   |   |
| available                  for sale (1)                      |   | $                                   | 5,581,228 |                                   | $      | 4,554,519                                                 |   | $                                                         | 5,604,249 |                            |   | 6.60 | % |   | (1 | ) | $ | 5,581,228 |   | $ | 4,554,519 |   |
| Real                  estate related loans (2)               |   |                                | 1,568,916 |                                   |   | 615,551                                                   |   |                                                      | 1,573,570 |                            |   | 8.48 | % |   | (2 | ) |   | 1,571,412 |   |   | 615,865 |   |
| Residential                  mortgage loans (3)              |   |                                | 809,097   |                                   |   | 600,682                                                   |   |                                                      | 812,561   |                            |   | 8.03 | % |   | (3 | ) |   | 829,980 |   |   | 609,486 |   |
| Subrpime                  mortgage loans subject to          |   |                                |      |                                   |   |                                                      |   |                                                      |      |                            |   |   |   |   |   |   |   |   |   |   |   |   |
| future                  repurchase (4)                       |   |                                | 288,202   |                                   |   | -                                                         |   |                                                      | 299,176   |                            |   | (4 | ) |   | (4 | ) |   | 288,202 |   |   | - |   |
| Interest                  rate caps, treated as hedges (5)   |   |                                | 1,262     |                                   |   | 2,145                                                     |   |                                                      | 334,971   |                            |   | N/A |   |   | (5 | ) |   | 1,262 |   |   | 2,145 |   |
| Total                  rate of return swaps (6)              |   |                                | 1,288     |                                   |   | 3,096                                                     |   |                                                      | 299,654   |                            |   | N/A |   |   | (6 | ) |   | 1,288 |   |   | 3,096 |   |
| **Liabilities:**                                             |   |                                |      |                                   |   |                                                      |   |                                                      |      |                            |   |   |   |   |   |   |   |   |   |   |   |   |
| CBO                  bonds payable (7)                       |   |                                | 4,313,824 |                                   |   | 3,530,384                                                 |   |                                                      | 4,340,166 |                            |   | 5.73 | % |   | (7 | ) |   | 4,369,540 |   |   | 3,594,638 |   |
| Other                  bonds payable (8)                     |   |                                | 675,844   |                                   |   | 353,330                                                   |   |                                                      | 679,891   |                            |   | 6.63 | % |   | (8 | ) |   | 676,512 |   |   | 356,294 |   |
| Notes                  payable (9)                           |   |                                | 128,866   |                                   |   | 260,441                                                   |   |                                                      | 128,866   |                            |   | 5.68 | % |   | (9 | ) |   | 128,866 |   |   | 260,441 |   |
| Repurchase                  agreements (10)                  |   |                                | 760,346   |                                   |   | 1,048,203                                                 |   |                                                      | 760,346   |                            |   | 5.92 | % |   | (10 | ) |   | 760,346 |   |   | 1,048,203 |   |
| Repurchase                  agreements subject to            |   |                                |      |                                   |   |                                                      |   |                                                      |      |                            |   |   |   |   |   |   |   |   |   |   |   |   |
| ABCP                  facility (10)                          |   |                                | 1,143,749 |                                   |   | -                                                         |   |                                                      | 1,143,749 |                            |   | 4.97 | % |   | (10 | ) |   | 1,143,749 |   |   | - |   |
| Financing                  of subrpime mortgage loans        |   |                                |      |                                   |   |                                                      |   |                                                      |      |                            |   |   |   |   |   |   |   |   |   |   |   |   |
| subject                  to future repurchase (4)            |   |                                | 288,202   |                                   |   | -                                                         |   |                                                      | 299,176   |                            |   | (4 | ) |   | (4 | ) |   | 288,202 |   |   | - |   |
| Credit                  facility (11)                        |   |                                | 93,800    |                                   |   | 20,000                                                    |   |                                                      | 93,800    |                            |   | 7.08 | % |   | (11 | ) |   | 93,800 |   |   | 20,000 |   |
| Junior                  subordinated notes payable (12)      |   |                                | 100,100   |                                   |   | -                                                         |   |                                                      | 100,100   |                            |   | 7.72 | % |   | (12 | ) |   | 101,629 |   |   | - |   |
| Interest                  rate swaps, treated as hedges (13) |   |                                | (42,887   | )                                      |   | (41,170                                                   | )      |                                                      | 3,943,120 |                            |   | N/A |   |   | (13 | ) |   | (42,887 | ) |   | (41,170 | ) |
| Non-hedge                  derivatives (14)                  |   |                                | 360       |                                   |   | 90                                                        |   |                                                      | (14       | )                               |   | N/A |   |   | (14 | ) |   | 360 |   |   | 90 |   |

| (1) | These                securities contain various terms, including fixed and floating rates,                self-amortizing and interest only. Their weighted average maturity                is 5.02                years. The fair value of these securities is estimated by obtaining                third                party broker quotations, if available and practicable, and counterparty                quotations.   |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Represents                the following loans: |
|-----|------------------------------------------------|

| Loan                  Type       |   | Current                  FaceAmount |      | Carrying                  Value |   |  Weighted                  Avg.Yield |   |  Weighted                  AverageMaturity                  (Years) |   | Floating                  Rate Loansas                  a % ofCarrying                  Value |   | Fair                  Value |   |
|----------------------------------|--------|-------------------------------------|-----------|---------------------------------|--------|-------------------------------------------|--------|--------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
| B-Notes                          |   | $                                   | 248,240   |                            | $      | 246,798                                   |   |                                                                     | 7.98   | %                                                                                             |   | 2.71                        |   |   | 73.0 | % | $ | 248,662 |   |
| Mezzanine                  Loans |   |                                | 906,907   |                            |   | 904,686                                   |   |                                                                     | 8.61   | %                                                                                             |   | 2.67                        |   |   | 97.5 | % |   | 904,996 |   |
| Bank                  Loans      |   |                                | 233,793   |                            |   | 233,895                                   |   |                                                                     | 7.75   | %                                                                                             |   | 3.92                        |   |   | 100.0 | % |   | 234,680 |   |
| Whole                  Loans     |   |                                | 61,240    |                            |   | 61,703                                    |   |                                                                     | 12.63  | %                                                                                             |   | 1.81                        |   |   | 100.0 | % |   | 61,240 |   |
| ICH                  Loans       |   |                                | 123,390   |                            |   | 121,834                                   |   |                                                                     | 7.77   | %                                                                                             |   | 1.10                        |   |   | 1.6 | % |   | 121,834 |   |
|                             |   | $                                   | 1,573,570 |                            | $      | 1,568,916                                 |   |                                                                     | 8.48   | %                                                                                             |   | 2.71                        |   |   | 86.7 | % | $ | 1,571,412 |   |

----

| (3) | This                aggregate portfolio of residential loans consists of a portfolio                of                floating rate residential mortgage loans and two portfolios of                substantially fixed rate manufactured housing loans. The $168.6 million                portfolio of residential mortgage loans has a weighted average maturity                of                2.79 years. The $643.9 million portfolios of manufactured housing                loans                have a weighted average maturity of 6.02 years. These loans were                valued by                reference to current market interest rates and credit spreads. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | These                two items, related to the securitization of subprime mortgage loans,                are                equal and offsetting. They each yield 9.24% and are further described                under “Management’s Discussion and Analysis of Financial Condition and                Results of Operations - Liquidity and Capital                Resources”. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Represents                cap agreements as follows: |
|-----|------------------------------------------------------|

|  Notional                  Balance |    |   | Effective                  Date |                           |   | Maturity                  Date |                            |   | Capped                  Rate |                           |   | Strike                  Rate |   |   | Fair                  Value |   |
|-----------------------------------------|---------|--------|---------------------------------|--------------------------------|--------|--------------------------------|---------------------------------|--------|------------------------------|--------------------------------|--------|------------------------------|--------|--------|-----------------------------|--------|
| $                                       | 255,352 |   |                            | Current                        |   |                           | March                  2009     |   |                         | 1-Month                  LIBOR |   |                         | 6.50%  |   | $                           | 31     |   |
|                                    | 18,000  |   |                            | January                  2010  |   |                           | October                  2015   |   |                         | 3-Month                  LIBOR |   |                         | 8.00%  |   |                        | 154    |   |
|                                    | 8,619   |   |                            | December                  2010 |   |                           | June                  2015      |   |                         | 3-Month                  LIBOR |   |                         | 7.00%  |   |                        | 371    |   |
|                                    | 53,000  |   |                            | May                  2011      |   |                           | September                  2015 |   |                         | 1-Month                  LIBOR |   |                         | 7.50%  |   |                        | 706    |   |
| $                                       | 334,971 |   |                            |                           |   |                           |                            |   |                         |                           |   |                         |   |   | $                           | 1,262  |   |

| (6) | Represents                total return swaps which are treated as non-hedge derivatives. The                fair                value of these agreements, which is included in Derivative Assets,                is                estimated by obtaining counterparty quotations. See “Management’s                Discussion and Analysis of Financial Condition and Results of                Operations-Liquidity and Capital Resources” for a further discussion of                these swaps. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | These                bonds were valued by discounting expected future cash flows by a                rate                calculated based on current market conditions for comparable financial                instruments, including market interest rates and credit spreads.                The                weighted average maturity of the CBO bonds payable is 5.83 years.                The CBO                bonds payable amortize principal prior to maturity based on collateral                receipts, subject to reinvestment                requirements. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | The                ICH bonds amortize principal prior to maturity based on collateral                receipts and have a weighted average maturity of 1.04 years. These                bonds                were valued by discounting expected future cash flows by a rate calculated                based on current market conditions for comparable financial instruments,                including market interest rates and credit spreads. The manufactured                housing loan bonds amortize principal prior to maturity based on                collateral receipts and have a weighted average maturity of 2.48                years.                These bonds were valued by reference to current market interest rates                and                credit spreads. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (9) | The                residential mortgage loan financing has a weighted average maturity                of                0.74 years and is subject to adjustment monthly based on the agreed                upon                market value of the loan portfolio. This                financing was valued by reference to current market interest rates                and                credit spreads. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (10) | These                agreements bear floating rates of interest, which reset monthly or                quarterly to a market credit spread, and we believe that, for similar                financial instruments with comparable credit risks, the effective                rates                approximate market rates. Accordingly, the carrying amounts outstanding                are believed to approximate fair value. These agreements have a weighted                average maturity of 0.08 years. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (11) | This                facility, which has a weighted average maturity of 0.85 years, bears                a                floating rate of interest. This facility was valued at par because                management believes it could currently enter into a similar arrangement                under similar terms. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (12) | These                notes have a weighted average maturity of 29.25 years. These notes                were                valued by discounting expected future cash flows by a rate calculated                based on current market conditions for comparable financial instruments,                including market interest rates and credit spreads. The credit spread                used                was obtained from a broker                quotation. |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (13) | Represents                  current swap agreements as follows: |
|------|-----------------------------------------------------------------|

| Year                    of Maturity                                                                       |   | Weighted                    Average                    Maturity |                        | Aggregate                    Notional                    Amount |   | Weighted                    Average Fixed                    Pay Rate |   | Aggregate                    Fair                    Value |   |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------|-----------------------------|-----------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|------------------------------------------------------------|--------|
|                                                                                                      |   |                                                            |                        |                                                            |   |                                                                  |   |                                                       |   |
| Agreements                    which receive 1-Month LIBOR:                                                |   |                                                            |                        |
|                                                                                                      |   |                                                            |                        |                                                            |   |                                                                  |   |                                                       |   |
| 2009                                                                                                      |   |                                                            | May2009                     |                                                            | $      | 331,620                                                               | *      |                                                       | 3.27   | % | $ | (9,517 | ) |
| 2010                                                                                                      |   |                                                            | Jun                    2010 |                                                            |   | 402,533                                                               |   |                                                       | 4.37   | % |   | (6,211 | ) |
| 2011                                                                                                      |   |                                                            | Jun                    2011 |                                                            |   | 591,800                                                               |   |                                                       | 5.24   | % |   | 2,688 |   |
| 2012                                                                                                      |   |                                                            | Jan                    2012 |                                                            |   | 127,001                                                               |   |                                                       | 4.92   | % |   | (546 | ) |
| 2015                                                                                                      |   |                                                            | Jul                    2015 |                                                            |   | 776,996                                                               |   |                                                       | 4.92   | % |   | (7,465 | ) |
| 2016                                                                                                      |   |                                                            | Apr                    2016 |                                                            |   | 728,738                                                               |   |                                                       | 5.18   | % |   | 2,776 |   |
|                                                                                                      |   |                                                            |                        |                                                            |   |                                                                  |   |                                                       |   |   |   |   |   |
| Agreements                    which receive 3-Month LIBOR:                                                |   |                                                            |                        |                                                            |
|                                                                                                      |   |                                                            |                        |                                                            |   |                                                                  |   |                                                       |   |   |   |   |   |
| 2011                                                                                                      |   |                                                            | Apr                    2011 |                                                            |   | 337,000                                                               |   |                                                       | 5.81   | % |   | 7,785 |   |
| 2013                                                                                                      |   |                                                            | Mar                    2013 |                                                            |   | 276,060                                                               |   |                                                       | 3.87   | % |   | (15,183 | ) |
| 2014                                                                                                      |   |                                                            | Jun                    2014 |                                                            |   | 357,852                                                               |   |                                                       | 4.21   | % |   | (17,603 | ) |
| 2016                                                                                                      |   |                                                            | Apr                    2016 |                                                            |   | 13,520                                                                |   |                                                       | 5.57   | % |   | 389 |   |
|                                                                                                      |   |                                                            |                        |                                                            | $      | 3,943,120                                                             |   |                                                       |   |   | $ | (42,887 | ) |
|                                                                                                      |   |                                                            |                        |                                                            |   |                                                                  |   |                                                       |   |   |   |   |   |
| *                    $255,352 of this notional receives 1-Month LIBOR only up to                    6.50% |   |

| (14) | These                      are two essentially offsetting interest rate caps and two essentially                      offsetting interest rate swaps, each with notional amounts                      of $32.5                      million, and an interest rate cap with a notional balance of                      $17.5                      million. The maturity date of the purchased swap is July 2009;                      the                      maturity date of the sold swap is July 2014, the maturity date                      of the                      $32.5 million caps is July 2038 and the maturity date of the                      $17.5 million                      cap is July 2009. The fair value of these agreements is estimated                      by                      obtaining counterparty quotations. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Item      8.**
**Financial      Statements and Supplementary Data.**

----

**Report      of Independent Registered Public Accounting Firm**

----

**Report      on Internal Control over Financial Reporting of Independent Registered Public      Accounting Firm**

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS **

----

|                                                                                                                                 |   | **December                  31,** |      |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-----------|
|                                                                                                                                 |   | **2006**                          |      | **2005** |   |
| **Assets**                                                                                                                           |   |                              |      |   |   |
| Real                  estate securities, available for sale - Note 4                                                                 |   | $                                 | 5,581,228 |   | $ | 4,554,519 |   |
| Real                  estate related loans, net - Note 5                                                                             |   |                              | 1,568,916 |   |   | 615,551 |   |
| Residential                  mortgage loans, net - Note 5                                                                            |   |                              | 809,097   |   |   | 600,682 |   |
| Subprime                  mortgage loans subject to future repurchase - Note 5                                                       |   |                              | 288,202   |   |   | - |   |
| Investments                  in unconsolidated subsidiaries - Note 3                                                                 |   |                              | 22,868    |   |   | 29,953 |   |
| Operating                  real estate, net - Note 6                                                                                 |   |                              | 29,626    |   |   | 16,673 |   |
| Cash                  and cash equivalents                                                                                           |   |                              | 5,371     |   |   | 21,275 |   |
| Restricted                  cash                                                                                                     |   |                              | 184,169   |   |   | 268,910 |   |
| Derivative                  assets - Note 7                                                                                          |   |                              | 62,884    |   |   | 63,834 |   |
| Receivables                  and other assets                                                                                        |   |                              | 52,031    |   |   | 38,302 |   |
|                                                                                                                                 |   | $                                 | 8,604,392 |   | $ | 6,209,699 |   |
|                                                                                                                                 |   |                              |      |   |   |   |   |
| **Liabilities                  and Stockholders' Equity**                                                                            |   |                              |      |   |   |   |   |
|                                                                                                                                 |   |                              |      |   |   |   |   |
| **Liabilities**                                                                                                                      |   |                              |      |   |   |   |   |
| CBO                  bonds payable - Note 8                                                                                          |   | $                                 | 4,313,824 |   | $ | 3,530,384 |   |
| Other                  bonds payable - Note 8                                                                                        |   |                              | 675,844   |   |   | 353,330 |   |
| Notes                  payable - Note 8                                                                                              |   |                              | 128,866   |   |   | 260,441 |   |
| Repurchase                  agreements - Note 8                                                                                      |   |                              | 760,346   |   |   | 1,048,203 |   |
| Repurchase                  agreements subject to ABCP facility - Note 8                                                             |   |                              | 1,143,749 |   |   |   |   |
| Financing                  of subprime mortgage loans subject to future repurchase - Notes                  5 and                  8 |   |                              | 288,202   |   |   | - |   |
| Credit                  facility - Note 8                                                                                            |   |                              | 93,800    |   |   | 20,000 |   |
| Junior                  subordinated notes payable (security for trust preferred) - Note                  8                          |   |                              | 100,100   |   |   | - |   |
| Derivative                  liabilities - Note 7                                                                                     |   |                              | 17,715    |   |   | 18,392 |   |
| Dividends                  payable                                                                                                   |   |                              | 33,095    |   |   | 29,052 |   |
| Due                  to affiliates - Note 10                                                                                         |   |                              | 13,465    |   |   | 8,783 |   |
| Accrued                  expenses and other liabilities                                                                              |   |                              | 33,406    |   |   | 23,111 |   |
|                                                                                                                                 |   |                              | 7,602,412 |   |   | 5,291,696 |   |
|                                                                                                                                 |   |                              |      |   |   |   |   |
| Commitments                  and contingencies - Notes 9, 10 and 11                                                                  |   |                              |      |   |   |   |   |
|                                                                                                                                 |   |                              |      |   |   |   |   |
| **Stockholders'                  Equity**                                                                                            |   |                              |      |   |   |   |   |
| Preferred                  stock, $0.01 par value, 100,000,000 shares authorized, 2,500,000                                          |   |                              |      |   |   |   |   |
| shares                  of 9.75% Series B Cumulative Redeemable Preferred Stock                                                      |   |                              |      |   |   |   |   |
| and                  1,600,000 shares of 8.05% Series C Cumulative Redeemable Preferred                  Stock,                      |   |                              |      |   |   |   |   |
| liquidation                  preference $25.00 per share, issued and outstanding                                                     |   |                              | 102,500   |   |   | 102,500 |   |
| Common                  stock, $0.01 par value, 500,000,000 shares authorized,                  45,713,817                           |   |                              |      |   |   |   |   |
| and                  43,913,409 shares issued and outstanding at                                                                     |   |                              |      |   |   |   |   |
| December                  31, 2006 and 2005, respectively                                                                            |   |                              | 457       |   |   | 439 |   |
| Additional                  paid-in capital                                                                                          |   |                              | 833,887   |   |   | 782,735 |   |
| Dividends                  in excess of earnings - Note 2                                                                            |   |                              | (10,848   | ) |   | (13,235 | ) |
| Accumulated                  other comprehensive income - Note 2                                                                     |   |                              | 75,984    |   |   | 45,564 |   |
|                                                                                                                                 |   |                              | 1,001,980 |   |   | 918,003 |   |
|                                                                                                                                 |   |                              |      |   |   |   |   |
|                                                                                                                                 |   | $                                 | 8,604,392 |   | $ | 6,209,699 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF INCOME**

----

|                                                                                                |   | **Year                  Ended December 31,** |       |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|
|                                                                                                |   | **2006**                                     |       | **2005** |   | **2004** |   |
| **Revenues**                                                                                        |   |                                         |       |   |   |   |   |
| Interest                  income                                                                    |   | $                                            | 530,006    |   | $ | 348,516 |   | $ | 225,761 |   |
| Rental                  and escalation income                                                       |   |                                         | 4,861      |   |   | 6,647 |   |   | 4,744 |   |
| Gain                  on sale of investments, net                                                   |   |                                         | 12,340     |   |   | 20,305 |   |   | 18,314 |   |
| Other                  income, net                                                                  |   |                                         | 5,402      |   |   | 2,745 |   |   | 850 |   |
|                                                                                                |   |                                         | 552,609    |   |   | 378,213 |   |   | 249,669 |   |
| **Expenses**                                                                                        |   |                                         |       |   |   |   |   |   |   |   |
| Interest                  expense                                                                   |   |                                         | 374,269    |   |   | 226,446 |   |   | 136,398 |   |
| Property                  operating expense                                                         |   |                                         | 3,805      |   |   | 2,363 |   |   | 2,575 |   |
| Loan                  and security servicing expense                                                |   |                                         | 6,944      |   |   | 5,993 |   |   | 3,057 |   |
| Provision                  for credit losses                                                        |   |                                         | 9,438      |   |   | 8,421 |   |   | - |   |
| Provision                  for losses, loans held for sale - Note 5                                 |   |                                         | 4,127      |   |   | - |   |   | - |   |
| General                  and administrative expense                                                 |   |                                         | 4,946      |   |   | 4,159 |   |   | 4,597 |   |
| Management                  fee to affiliate - Note 10                                              |   |                                         | 14,018     |   |   | 13,325 |   |   | 10,620 |   |
| Incentive                  compensation to affiliate - Note 10                                      |   |                                         | 12,245     |   |   | 7,627 |   |   | 7,959 |   |
| Depreciation                  and amortization                                                      |   |                                         | 1,085      |   |   | 641 |   |   | 451 |   |
|                                                                                                |   |                                         | 430,877    |   |   | 268,975 |   |   | 165,657 |   |
|                                                                                                |   |                                         |       |   |   |   |   |   |   |   |
| Income                  before equity in earnings of unconsolidated subsidiaries                    |   |                                         | 121,732    |   |   | 109,238 |   |   | 84,012 |   |
| Equity                  in earnings of unconsolidated subsidiaries - Note 3                         |   |                                         | 5,968      |   |   | 5,930 |   |   | 12,465 |   |
| Income                  taxes on related taxable subsidiaries - Note 12                             |   |                                         | -          |   |   | (321 | ) |   | (2,508 | ) |
| Income                  from continuing operations                                                  |   |                                         | 127,700    |   |   | 114,847 |   |   | 93,969 |   |
| Income                  from discontinued operations - Note 6                                       |   |                                         | 223        |   |   | 2,108 |   |   | 4,446 |   |
| **Net                  Income**                                                                     |   |                                         | 127,923    |   |   | 116,955 |   |   | 98,415 |   |
| Preferred                  dividends                                                                |   |                                         | (9,314     | ) |   | (6,684 | ) |   | (6,094 | ) |
| **Income                  Available For Common Stockholders**                                       |   | $                                            | 118,609    |   | $ | 110,271 |   | $ | 92,321 |   |
|                                                                                                |   |                                         |       |   |   |   |   |   |   |   |
| **Net                  Income Per Share of Common Stock**                                           |   |                                         |       |   |   |   |   |   |   |   |
| **Basic**                                                                                           |   | $                                            | 2.68       |   | $ | 2.53 |   | $ | 2.50 |   |
| **Diluted**                                                                                         |   | $                                            | 2.67       |   | $ | 2.51 |   | $ | 2.46 |   |
|                                                                                                |   |                                         |       |   |   |   |   |   |   |   |
| Income                  from continuing operations per share of common                              |   |                                         |       |   |   |   |   |   |   |   |
| stock,                  after preferred dividends                                                   |   |                                         |       |   |   |   |   |   |   |   |
| Basic                                                                                               |   | $                                            | 2.67       |   | $ | 2.48 |   | $ | 2.38 |   |
| Diluted                                                                                             |   | $                                            | 2.67       |   | $ | 2.46 |   | $ | 2.34 |   |
|                                                                                                |   |                                         |       |   |   |   |   |   |   |   |
| Income                  from discontinued operations per share of common stock                      |   |                                         |       |   |   |   |   |   |   |   |
| Basic                                                                                               |   | $                                            | 0.01       |   | $ | 0.05 |   | $ | 0.12 |   |
| Diluted                                                                                             |   | $                                            | 0.00       |   | $ | 0.05 |   | $ | 0.12 |   |
|                                                                                                |   |                                         |       |   |   |   |   |   |   |   |
| **Weighted                  Average Number of Shares of Common Stock                  Outstanding** |   |                                         |       |   |   |   |   |   |   |   |
| **Basic**                                                                                           |   |                                         | 44,268,575 |   |   | 43,671,517 |   |   | 36,943,752 |   |
| **Diluted**                                                                                         |   |                                         | 44,417,113 |   |   | 43,985,642 |   |   | 37,557,790 |   |
|                                                                                                |   |                                         |       |   |   |   |   |   |   |   |
| **Dividends                  Declared per Share of Common Stock**                                   |   | $                                            | 2.615      |   | $ | 2.500 |   | $ | 2.425 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF STOCKHOLDERS’ EQUITY **

----

|                                                                                                                                      |   | **Preferred                    Stock** |      | **Common                    Stock** |   |            |   |            |       |                                                               |   |                                                                                 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|-------------------------------------|--------|------------|--------|------------|------------|---------------------------------------------------------------|--------|---------------------------------------------------------------------------------|--------|
|                                                                                                                                      |   | **Shares**                             |      | **Amount**                          |   | **Shares** |   | **Amount** |       |  **Additional****Paid                    in****Capital** |   | **Dividends                    in****Excess                    of****Earnings** |   | **Accumulated****Other                    Comp.****Income** |   | **Total                    Stock-****holders'****Equity** |   |
| **Stockholders'                    equity -****December                    31, 2005**                                                     |   |                                   | 4,100,000 |                                | $      | 102,500    |   |       | 43,913,409 |                                                          | $      | 439                                                                             |   | $ | 782,735 |   | $ | (13,235 | ) | $ | 45,564 |   | $ | 918,003 |   |
| Dividends                    declared                                                                                                     |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | (125,536 | ) |   | - |   |   | (125,536 | ) |
| Issuance                    of common stock                                                                                               |   |                                   | -         |                                |   | -          |   |       | 1,700,000  |                                                          |   | 17                                                                              |   |   | 49,376 |   |   | - |   |   | - |   |   | 49,393 |   |
| Issuance                    of common stock to directors                                                                                  |   |                                   | -         |                                |   | -          |   |       | 2,408      |                                                          |   | -                                                                               |   |   | 60 |   |   | - |   |   | - |   |   | 60 |   |
| Exercise                    of common stock options                                                                                       |   |                                   | -         |                                |   | -          |   |       | 98,000     |                                                          |   | 1                                                                               |   |   | 1,716 |   |   | - |   |   | - |   |   | 1,717 |   |
| Comprehensive                    income:                                                                                                  |   |                                   |      |                                |   |       |   |       |       |                                                          |   |                                                                            |   |   |  |   |   |   |   |   |   |   |   |   |   |
| Net                    income                                                                                                             |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | 127,923 |   |   | - |   |   | 127,923 |   |
| Net                    unrealized (loss) on securities                                                                                    |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | - |   |   | 26,242 |   |   | 26,242 |   |
| Reclassification                    of net realized (gain) on securities into earnings                                                    |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | - |   |   | (282 | ) |   | (282 | ) |
| Foreign                    currency translation                                                                                           |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | - |   |   | (26 | ) |   | (26 | ) |
| Net                    unrealized gain on derivatives designated as cash flow                    hedges                                   |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | - |   |   | 7,773 |   |   | 7,773 |   |
| Reclassification                      of net realized (gain) on derivatives designated cash flowhedges                      into earnings |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | - |   |   | (3,287 | ) |   | (3,287 | ) |
| Total                    comprehensive income                                                                                             |   |                                   |      |                                |   |       |   |       |       |                                                          |   |                                                                            |   |   |   |   |   |   |   |   |   |   |   | 158,343 |   |
| **Stockholders'                    equity -****December                    31, 2006**                                                     |   |                                   | 4,100,000 |                                | $      | 102,500    |   |       | 45,713,817 |                                                          | $      | 457                                                                             |   | $ | 833,887 |   | $ | (10,848 | ) | $ | 75,984 |   | $ | 1,001,980 |   |
|                                                                                                                                      |   |                                   |      |                                |   |       |   |       |       |                                                          |   |                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Stockholders'                    equity -****December                    31, 2004**                                                     |   |                                   | 2,500,000 |                                | $      | 62,500     |   |       | 39,859,481 |                                                          | $      | 399                                                                             |   | $ | 676,015 |   | $ | (13,969 | ) | $ | 71,770 |   | $ | 796,715 |   |
| Dividends                    declared                                                                                                     |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | (116,221 | ) |   | - |   |   | (116,221 | ) |
| Issuance                    of common stock                                                                                               |   |                                   | -         |                                |   | -          |   |       | 3,300,000  |                                                          |   | 33                                                                              |   |   | 96,449 |   |   | - |   |   | - |   |   | 96,482 |   |
| Issuance                    of common stock to directors                                                                                  |   |                                   | -         |                                |   | -          |   |       | 2,008      |                                                          |   | -                                                                               |   |   | 67 |   |   | - |   |   | - |   |   | 67 |   |
| Exercise                    of common stock options                                                                                       |   |                                   | -         |                                |   | -          |   |       | 751,920    |                                                          |   | 7                                                                               |   |   | 11,687 |   |   | - |   |   | - |   |   | 11,694 |   |
| Issuance                    of preferred stock                                                                                            |   |                                   | 1,600,000 |                                |   | 40,000     |   |       | -          |                                                          |   | -                                                                               |   |   | (1,483 | ) |   | - |   |   | - |   |   | 38,517 |   |
| Comprehensive                    income:                                                                                                  |   |                                   |      |                                |   |       |   |       |       |                                                          |   |                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    income                                                                                                             |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | 116,955 |   |   | - |   |   | 116,955 |   |
| Net                    unrealized (loss) on securities                                                                                    |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | - |   |   | (67,077 | ) |   | (67,077 | ) |
| Reclassification                    of net realized (gain) on securities into earnings                                                    |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | - |   |   | (16,015 | ) |   | (16,015 | ) |
| Foreign                    currency translation                                                                                           |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | - |   |   | (1,089 | ) |   | (1,089 | ) |
| Reclassification                    of net realized foreign currency translation into earnings                                            |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | - |   |   | (626 | ) |   | (626 | ) |
| Net                    unrealized gain on derivatives designated as cash flow                    hedges                                   |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | - |   |   | 56,426 |   |   | 56,426 |   |
| Reclassification                    of net realized loss on derivatives designated as cash flow                    hedges into earnings   |   |                                   | -         |                                |   | -          |   |       | -          |                                                          |   | -                                                                               |   |   | - |   |   | - |   |   | 2,175 |   |   | 2,175 |   |
| Total                    comprehensive income                                                                                             |   |                                   |      |                                |   |       |   |       |       |                                                          |   |                                                                            |   |   |   |   |   |   |   |   |   |   |   | 90,749 |   |
| **Stockholders'                    equity -****December                    31, 2005**                                                     |   |                                   | 4,100,000 |                                | $      | 102,500    |   |       | 43,913,409 |                                                          | $      | 439                                                                             |   | $ | 782,735 |   | $ | (13,235 | ) | $ | 45,564 |   | $ | 918,003 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF STOCKHOLDERS’ EQUITY **

----

|                                                                                                                                                                     |   | **Preferred                      Stock** |      | **Common                      Stock** |   |            |   |            |       |                                                     |   |                                                          |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|-----------|---------------------------------------|--------|------------|--------|------------|------------|-----------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                                                                                                                                                     |   | **Shares**                               |      | **Amount**                            |   | **Shares** |   | **Amount** |       | **Additional                      Paid in Capital** |   | **Dividends                      in Excess of Earnings** |   |  **Accumulated                    Other Comp.****Income** |   | **Total                      Stock-holders'****Equity** |   |
| **Stockholders'                      equity - December 31, 2003**                                                                                                        |   |                                     | 2,500,000 |                                  | $      | 62,500     |   |       | 31,374,833 |                                                | $      | 314                                                      |   | $ | 451,806 |   | $ | (14,670 | ) | $ | 39,413 |   | $ | 539,363 |   |
| Dividends                      declared                                                                                                                                  |   |                                     | -         |                                  |   | -          |   |       | -          |                                                |   | -                                                        |   |   | - |   |   | (97,714 | ) |   | - |   |   | (97,714 | ) |
| Issuance                      of common stock                                                                                                                            |   |                                     | -         |                                  |   | -          |   |       | 8,375,000  |                                                |   | 84                                                       |   |   | 222,721 |   |   | - |   |   | - |   |   | 222,805 |   |
| Issuance                      of common stock to directors                                                                                                               |   |                                     | -         |                                  |   | -          |   |       | 2,148      |                                                |   | -                                                        |   |   | 60 |   |   | - |   |   | - |   |   | 60 |   |
| Exercise                      of common stock options                                                                                                                    |   |                                     | -         |                                  |   | -          |   |       | 107,500    |                                                |   | 1                                                        |   |   | 1,428 |   |   | - |   |   | - |   |   | 1,429 |   |
| Comprehensive                      income:                                                                                                                               |   |                                     |      |                                  |   |       |   |       |       |                                                |   |                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                      income                                                                                                                                          |   |                                     | -         |                                  |   | -          |   |       | -          |                                                |   | -                                                        |   |   | - |   |   | 98,415 |   |   | - |   |   | 98,415 |   |
| Net                      unrealized gain on securities                                                                                                                   |   |                                     | -         |                                  |   | -          |   |       | -          |                                                |   | -                                                        |   |   | - |   |   | - |   |   | 34,088 |   |   | 34,088 |   |
| Reclassification                      of net realized (gain) on securities into earnings                                                                                 |   |                                     | -         |                                  |   | -          |   |       | -          |                                                |   | -                                                        |   |   | - |   |   | - |   |   | (14,574 | ) |   | (14,574 | ) |
| Foreign                      currency translation                                                                                                                        |   |                                     | -         |                                  |   | -          |   |       | -          |                                                |   | -                                                        |   |   | - |   |   | - |   |   | 1,984 |   |   | 1,984 |   |
| Reclassification                      of net realized foreign currency translation into earnings                                                                         |   |                                     | -         |                                  |   | -          |   |       | -          |                                                |   | -                                                        |   |   | - |   |   | - |   |   | (1,478 | ) |   | (1,478 | ) |
| Net                      unrealized gain on derivatives designated as cash flow                      hedges                                                              |   |                                     | -         |                                  |   | -          |   |       | -          |                                                |   | -                                                        |   |   | - |   |   | - |   |   | 11,973 |   |   | 11,973 |   |
| Reclassification                        of net unrealized loss on derivatives designated as cash                        flow hedges into                        earnings |   |                                     | -         |                                  |   | -          |   |       | -          |                                                |   | -                                                        |   |   | - |   |   | - |   |   | 364 |   |   | 364 |   |
| Total                      comprehensive income                                                                                                                          |   |                                     |      |                                  |   |       |   |       |       |                                                |   |                                                     |   |   |   |   |   |   |   |   |   |   |   | 130,772 |   |
| **Stockholders'                      equity - December 31, 2004**                                                                                                        |   |                                     | 2,500,000 |                                  | $      | 62,500     |   |       | 39,859,481 |                                                | $      | 399                                                      |   | $ | 676,015 |   | $ | (13,969 | ) | $ | 71,770 |   | $ | 796,715 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOW**

----

|                                                                                                                               |   | **Year                  Ended December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|
|                                                                                                                               |   | **2006**                                     |       | **2005** |   | **2004** |   |
| **Cash                  Flows From Operating Activities**                                                                          |   |                                         |       |   |   |   |   |
| Net                  income                                                                                                        |   | $                                            | 127,923    |   | $ | 116,955 |   | $ | 98,415 |   |
| Adjustments                  to reconcile net income to net cash provided by operating                  activities                 |   |                                         |       |   |   |   |   |   |   |   |
| (inclusive                  of amounts related to discontinued operations):                                                        |   |                                         |       |   |   |   |   |   |   |   |
| Depreciation                  and amortization                                                                                     |   |                                         | 1,085      |   |   | 818 |   |   | 2,253 |   |
| Accretion                  of discount and other amortization                                                                      |   |                                         | (15,365    | ) |   | (2,645 | ) |   | 1,898 |   |
| Equity                  in earnings of unconsolidated subsidiaries                                                                 |   |                                         | (5,968     | ) |   | (5,930 | ) |   | (12,465 | ) |
| Distributions                  of earnings from unconsolidated subsidiaries                                                        |   |                                         | 5,968      |   |   | 5,930 |   |   | 12,465 |   |
| Deferred                  rent                                                                                                     |   |                                         | (1,274     | ) |   | (2,539 | ) |   | (1,380 | ) |
| Gain                  on sale of investments                                                                                       |   |                                         | (13,359    | ) |   | (20,811 | ) |   | (22,029 | ) |
| Unrealized                  gain on non-hedge derivatives and hedge ineffectiveness                                                |   |                                         | (4,284     | ) |   | (2,839 | ) |   | (3,332 | ) |
| Provision                  for credit losses                                                                                       |   |                                         | 9,438      |   |   | 8,421 |   |   | - |   |
| Provision                  for losses, loans held for sale                                                                         |   |                                         | 4,127      |   |   | - |   |   | - |   |
| Purchase                  of loans held for sale - Note 5                                                                          |   |                                         | (1,511,086 | ) |   | - |   |   | - |   |
| Sale                  of loans held for sale - Note 5                                                                              |   |                                         | 1,411,530  |   |   | - |   |   | - |   |
| Non-cash                  directors' compensation                                                                                  |   |                                         | 60         |   |   | 67 |   |   | 60 |   |
| Change                  in                                                                                                         |   |                                         |       |   |   |   |   |   |   |   |
| Restricted                  cash                                                                                                   |   |                                         | 1,400      |   |   | (7,980 | ) |   | (8,137 | ) |
| Receivables                  and other assets                                                                                      |   |                                         | (8,985     | ) |   | 218 |   |   | (5,431 | ) |
| Due                  to affiliates                                                                                                 |   |                                         | 4,682      |   |   | (180 | ) |   | 6,518 |   |
| Accrued                  expenses and other liabilities                                                                            |   |                                         | 10,430     |   |   | 9,278 |   |   | 21,520 |   |
| Net                  cash provided by operating activities:                                                                        |   |                                         | 16,322     |   |   | 98,763 |   |   | 90,355 |   |
| **Cash                  Flows From Investing Activities**                                                                          |   |                                         |       |   |   |   |   |   |   |   |
| Purchase                  of real estate securities                                                                                |   |                                         | (1,295,067 | ) |   | (1,463,581 | ) |   | (1,426,762 | ) |
| Proceeds                  from sale of real estate securities                                                                      |   |                                         | 318,007    |   |   | 60,254 |   |   | 193,246 |   |
| Deposit                  on real estate securities (treated as a derivative)                                                       |   |                                         | -          |   |   | (57,149 | ) |   | (80,311 | ) |
| Purchase                  of and advances on loans                                                                                 |   |                                         | (1,643,062 | ) |   | (584,270 | ) |   | (631,728 | ) |
| Proceeds                  from settlement of loans                                                                                 |   |                                         | 24,750     |   |   | 1,901 |   |   | 124,440 |   |
| Repayments                  of loan and security principal                                                                         |   |                                         | 579,166    |   |   | 698,002 |   |   | 428,091 |   |
| Margin received                  on derivative instruments                                                                    |   |                                         | 50,701     |   |   | - |   |   | - |   |
| Return                  of margin on derivative instruments                                                                        |   |                                         | (50,799    | ) |   | - |   |   | - |   |
| Margin                  deposits on total rate of return swaps (treated as derivative                  instruments)                |   |                                         | (55,922    | ) |   | (53,518  | ) |   | - |   |
| Return                  of margin deposits on total rate of return swaps                                                           |   |                                         |       |   |   |   |   |   |   |   |
| (treated                  as derivative instruments)                                                                               |   |                                         | 81,619     |   |   | - |   |   | - |   |
| Proceeds                  from termination of derivative instruments                                                               |   |                                         | 16,426     |   |   | 1,338 |   |   | - |   |
| Proceeds                  from sale of derivative instruments into Securitization Trust -                  Note                  5 |   |                                         | 5,623      |   |   | - |   |   | - |   |
| Payments                  on settlement of derivative instruments                                                                  |   |                                         | -          |   |   | (1,112 | ) |   | - |   |
| Purchase                  and improvement of operating real estate                                                                 |   |                                         | (1,585     | ) |   | (182 | ) |   | (141 | ) |
| Proceeds                  from sale of operating real estate                                                                       |   |                                         | -          |   |   | 52,333 |   |   | 71,871 |   |
| Contributions                  to unconsolidated subsidiaries                                                                      |   |                                         | (125       | ) |   | - |   |   | (26,789 | ) |
| Distributions                  of capital from unconsolidated subsidiaries                                                         |   |                                         | 7,210      |   |   | 11,277 |   |   | 16,199 |   |
| Payment                  of deferred transaction costs                                                                             |   |                                         | -          |   |   | (39 | ) |   | (280 | ) |
| Net                  cash used in investing activities                                                                             |   |                                         | (1,963,058 | ) |   | (1,334,746 | ) |   | (1,332,164 | ) |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOW**

----

|                                                                                                                  |   | **Year                    Ended December 31,** |       |
|-----------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|------------|
|                                                                                                                  |   | **2006**                                       |       | **2005** |   | **2004** |   |
| **Cash                    Flows From Financing Activities**                                                           |   |                                           |       |   |   |   |   |
| Issuance                    of CBO bonds payable                                                                      |   |                                           | 807,464    |   |   | 880,570 |   |   | 859,719 |   |
| Repayments                    of CBO bonds payable                                                                    |   |                                           | (18,889    | ) |   | (10,241 | ) |   | (604 | ) |
| Issuance                    of other bonds payable                                                                    |   |                                           | 631,988    |   |   | 246,547 |   |   | - |   |
| Repayments                    of other bonds payable                                                                  |   |                                           | (305,428   | ) |   | (114,780 | ) |   | (41,759 | ) |
| Borrowings                    under notes payable                                                                     |   |                                           | -          |   |   | - |   |   | 614,106 |   |
| Repayments                    of notes payable                                                                        |   |                                           | (131,575   | ) |   | (391,559 | ) |   | (119,407 | ) |
| Borrowings                    under repurchase agreements                                                             |   |                                           | 3,953,324  |   |   | 815,840 |   |   | 654,254 |   |
| Repayments                    of repurchase agreements                                                                |   |                                           | (4,241,181 | ) |   | (258,257 | ) |   | (879,417 | ) |
| Issuance                    of repurchase agreement subject to ABCP facility                                          |   |                                           | 1,143,749  |   |   | - |   |   | - |   |
| Draws                    under credit facility                                                                        |   |                                           | 570,400    |   |   | 62,000 |   |   | - |   |
| Repayments                    of credit facility                                                                      |   |                                           | (496,600   | ) |   | (42,000 | ) |   | - |   |
| Issuance                    of junior subordinated notes payable                                                      |   |                                           | 100,100    |   |   | - |   |   | - |   |
| Issuance                    of common stock                                                                           |   |                                           | 50,014     |   |   | 97,680 |   |   | 222,805 |   |
| Costs                    related to issuance of common stock                                                          |   |                                           | (581       | ) |   | (1,198 | ) |   | - |   |
| Exercise                    of common stock options                                                                   |   |                                           | 1,717      |   |   | 11,694 |   |   | 1,429 |   |
| Issuance                    of preferred stock                                                                        |   |                                           | -          |   |   | 40,000 |   |   | - |   |
| Costs                    related to issuance of preferred stock                                                       |   |                                           | -          |   |   | (1,483 | ) |   | - |   |
| Dividends                    paid                                                                                     |   |                                           | (121,493   | ) |   | (113,097 | ) |   | (88,489 | ) |
| Payment                    of deferred financing costs                                                                |   |                                           | (12,177    | ) |   | (2,369 | ) |   | (3,320 | ) |
| Net                    cash provided by financing activities                                                          |   |                                           | 1,930,832  |   |   | 1,219,347 |   |   | 1,219,317 |   |
| **Net                    Increase (Decrease) in Cash and Cash Equivalents**                                           |   |                                           | (15,904    | ) |   | (16,636 | ) |   | (22,492 | ) |
| **Cash                    and Cash Equivalents, Beginning of Period**                                                 |   |                                           | 21,275     |   |   | 37,911 |   |   | 60,403 |   |
| **Cash                    and Cash Equivalents, End of Period**                                                       |   | $                                              | 5,371      |   | $ | 21,275 |   | $ | 37,911 |   |
| **Supplemental                    Disclosure of Cash Flow Information**                                               |   |                                           |       |   |   |   |   |   |   |   |
| Cash                    paid during the period for interest expense                                                   |   | $                                              | 353,545    |   | $ | 213,070 |   | $ | 135,172 |   |
| Cash                    paid during the period for income taxes                                                       |   | $                                              | 244        |   | $ | 448 |   | $ | 2,639 |   |
| **Supplemental                    Schedule of Non-cash Investing and Financing                    Activities**        |   |                                           |       |   |   |   |   |   |   |   |
| Common                    stock dividends declared but not paid                                                       |   | $                                              | 31,543     |   | $ | 27,446 |   | $ | 24,912 |   |
| Preferred                    stock dividends declared but not paid                                                    |   | $                                              | 1,552      |   | $ | 1,606 |   | $ | 1,016 |   |
| Deposits                    used in acquisition of real estate securities (treated as                    derivatives) |   | $                                              | -          |   | $ | 82,334 |   | $ | 75,824 |   |
| Foreclosure                    of loans                                                                               |   | $                                              | 14,780     |   | $ | - |   | $ | - |   |
| Acquisition                    and financing of loans subject to future repurchase                                    |   | $                                              | 286,315    |   | $ | - |   | $ | - |   |
| Retained                    bonds and equity in securitization                                                        |   | $                                              | 96,058     |   | $ | - |   | $ | - |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| **1.  ** | **ORGANIZATION** |
|--------------------|------------------|

| Year                               |   | Shares                  Issued |       | Range                  of Issue Prices                  (1) |   | Net                  Proceeds(millions) |   |
|------------------------------------|--------|--------------------------------|------------|-------------------------------------------------------------|--------|-----------------------------------------|--------|
| Formation                          |   |                           | 16,488,517 |                                                        |   | N/A                                     |   |   | N/A |   |
| 2002                               |   |                           | 7,000,000  |                                                        |   | $13.00                                  |   |   | $80.0 |   |
| 2003                               |   |                           | 7,886,316  |                                                        |   | $20.35-$22.85                           |   |   | $163.4 |   |
| 2004                               |   |                           | 8,484,648  |                                                        |   | $26.30-$31.40                           |   |   | $224.3 |   |
| 2005                               |   |                           | 4,053,928  |                                                        |   | $29.60                                  |   |   | $108.2 |   |
| 2006                               |   |                           | 1,800,408  |                                                        |   | $29.42                                  |   |   | $51.2 |   |
| December                  31, 2006 |   |                           | 45,713,817 |                                                        |   |                                    |   |   |   |   |
| January                  2007      |   |                           | 2,420,000  |                                                        |   | $31.30                                  |   |   | $75.0 |   |

|  | (1) | Excludes                  prices of shares issued pursuant to the exercise of options and                  of shares                  issued to Newcastle's independent                  directors. |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **2.  ** | **SUMMARY                OF SIGNIFICANT ACCOUNTING                POLICIES** |
|--------------------|------------------------------------------------------------------------------|

**GENERAL**

***Basis      of Accounting***
*** ***

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

***Risks      and Uncertainties***

***Use      of Estimates***
*** ***

***Comprehensive      Income***
*** ***

|                                                                                                 |   | December                  31,  |   |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                                 |   | 2006                                |   | 2005 |   |
| Net                  unrealized gains on securities                                                  |   | $                                   | 42,742 |   | $ | 16,782 |   |
| Net                  unrealized gains on derivatives designated as cash flow                  hedges |   |                                | 31,224 |   |   | 26,738 |   |
| Net                  foreign currency translation adjustments                                        |   |                                | 2,018  |   |   | 2,044 |   |
| Accumulated                  other comprehensive income                                              |   | $                                   | 75,984 |   | $ | 45,564 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

**REVENUE      RECOGNITION**

***Real      Estate Securities and Loans Receivable***

***Impairment      of Securities and Loans***
*** ***
** **

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

**EXPENSE      RECOGNITION**

***Interest***
***Expense***
***3⁄4***
*** ***

***Deferred      Costs and Interest Rate Cap Premiums***
*** ***

***Derivatives      and Hedging Activities***

|  | 1) | Interest                rate risk, existing debt obligations - Newcastle generally hedges                the risk                of interest rate fluctuations with respect to its borrowings, regardless                of the form of such borrowings, which require payments based on a                variable                interest rate index. Newcastle generally intends to hedge only the                risk                related to changes in the benchmark interest rate (LIBOR or a Treasury                rate). In order to reduce such risks, Newcastle may enter into swap                agreements whereby Newcastle would receive floating rate payments                in                exchange for fixed rate payments, effectively converting the borrowing                to                fixed rate. Newcastle may also enter into cap agreements whereby,                in                exchange for a premium, Newcastle would be reimbursed for interest                paid in                excess of a certain cap rate. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2) | Interest                rate risk, anticipated transactions - Newcastle may hedge the aggregate                risk of interest rate fluctuations with respect to anticipated                transactions, primarily anticipated borrowings. The primary risk                involved                in an anticipated borrowing is that interest rates may increase between                the date the transaction becomes probable and the date of consummation.                Newcastle generally intends to hedge only the risk related to changes                in                the benchmark interest rate (LIBOR or a Treasury rate). This is generally                accomplished through the use of interest rate                swaps. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3) | Interest                  rate risk, fair value of investments - Newcastle occasionally hedges                  the                  fair value of investments acquired outside of its warehouse agreements                  (Note 4) prior to such investments being included in a CBO financing                  (Note                  8). The primary risk involved is the risk that the fair value of                  such an                  investment will change between the acquisition date and the date                  the terms                  of the related financing are “locked in.” Newcastle generally intends to                  hedge only the risk related to changes in the benchmark interest                  rate                  (LIBOR or a Treasury rate). This is generally accomplished through                  the use                  of interest rate swaps. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

|                                              |   | December                  31, |   |
|---------------------------------------------------|--------|-------------------------------|--------|
| Derivative                  Assets                |   |                          | 2006   |   |   | 2005 |   |
| Interest                  rate caps (A)           |   | $                             | 1,262  |   | $ | 2,145 |   |
| Interest                  rate swaps (A)          |   |                          | 59,551 |   |   | 56,829 |   |
| Total                  rate of return swaps       |   |                          | 1,288  |   |   | 3,096 |   |
| Non-hedge                  derivatives (B)        |   |                          | 783    |   |   | 1,764 |   |
|                                              |   | $                             | 62,884 |   | $ | 63,834 |   |
|                                              |   |                          |   |   |   |   |   |
| Derivative                  Liabilities           |   |                          |   |   |   |   |   |
| Interest                  rate swaps (A)          |   | $                             | 16,664 |   | $ | 15,659 |   |
| Interest                  (receivable) payable    |   |                          | (92    | ) |   | 1,059 |   |
| Non-hedge                  derivatives (B)        |   |                          | 1,143  |   |   | 1,674 |   |
|                                              |   | $                             | 17,715 |   | $ | 18,392 |   |
| (A)                  Treated as hedges            |   |                          |   |   |   |   |   |
| (B)                  Interest rate swaps and caps |   |                          |   |   |   |   |   |

|                                                                                                                           |   | **December                  31,** |      |         |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-----------|--------------|--------|
|                                                                                                                           |   | **2006**                          |      | **2005**     |   |   |   |
| Cash                  flow hedges                                                                                              |   |                         |      |    |   |   |   |
| Notional                  amount                                                                                               |   |                         |      |    |   |   |   |
| Interest                  rate cap agreements                                                                                  |   | $                                 | 334,971   |         | $      | 342,351 |   |   |  |   |
| Interest                  rate swap agreements                                                                                 |   |                              | 3,937,544 |         |   | 2,941,625 |   |   |   |   |
|                                                                                                                           |   |                              |      |         |   |   |   |   |   |   |
| Deferred                  hedge gain (loss) related to anticipated financings, net                  of amortization            |   |                              | (1,585    | )            |   | (3,536 | ) |   |   |   |
| Deferred                  hedge gain (loss) related to dedesignation, net                  of amortization                     |   |                              | (2,554    | )            |   | (202 | ) |   |   |   |
| Expected                  reclassification of deferred hedges from AOCI into earnings                  over the next 12 months |   |                              | (1,251    | )            |   | (1,002 | ) |   |   |   |
|                                                                                                                           |   |                              |      |         |   |   |   |   |   |   |
| Fair                  value hedges                                                                                             |   |                              |      |         |   |   |   |   |   |   |
| Notional                  amount                                                                                               |   |                              | 5,575     |         |   | 2,127 |   |   |   |   |
| Deferred                  hedge gain (loss) related to lease payments, net                  of amortization                    |   |                              | -         |         |   | (129 | ) |   |   |   |
|                                                                                                                           |   |                              |      |         |   |   |   |   |   |   |
| Non-hedge                  Derivatives                                                                                         |   |                              |      |         |   |   |   |   |   |   |
| Notional                  amount of interest rate cap and swap agreements                                                      |   |                              | 147,500   |         |   | 166,700 |   |   |   |   |

|                                                                   |   | **Year                    Ended December 31,** |   |
|------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                   |   | **2006**                                       |   | **2005** |   | **2004** |   |
| Cash                    flow hedges                                    |   |                                      |   |    |   |    |   |
| Gain                    (loss) on the ineffective portion              |   | $                                              | 49     |   | $ | 164 |   | $ | (100 | ) |
| Gain                    (loss) immediately recognized at dedesignation |   |                                           | 5,133  |   |   | 342 |   |   | - |   |
|                                                                   |   |                                           |   |   |   |   |   |   |   |   |
| Fair                    value hedges                                   |   |                                           |   |   |   |   |   |   |   |   |
| Gain                    (loss) on the effective portion (A)            |   |                                           | (333   | ) |   | 7 |   |   | (1 | ) |
| Gain                    (loss) on the ineffective portion              |   |                                           | (22    | ) |   | - |   |   | - |   |
|                                                                   |   |                                           |   |   |   |   |   |   |   |   |
| Non-hedge                    derivatives gain (loss)                   |   |                                           | 6,178  |   |   | 976 |   |   | - |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

***Management      Fees and Incentive Compensation to Affiliate***
***3⁄4***
*** ***

**BALANCE      SHEET MEASUREMENT**

***Investment      in Real Estate Securities***
***3⁄4***
*** ***

***Investment      in Loans***
***3⁄4***
*** ***

***Investment      in Operating Real Estate***
*** ***

***Foreign      Currency Investments***
***3⁄4***
*** ***

***Cash      and Cash Equivalents and Restricted Cash***
*** ***
***3⁄4***
*** ***

|                                                                    |   | December                    31, |    |
|-------------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                    |   | 2006                            |    | 2005 |   |
| Held                    in CBO structures pending reinvestment (Note 8) |   | $                               | 123,886 |   | $ | 173,438 |   |
| Total                    rate of return swap margin accounts            |   |                            | 46,760  |   |   | 72,427 |   |
| Bond                    sinking funds                                   |   |                            | 101     |   |   | 9,532 |   |
| Trustee                    accounts                                     |   |                            | 10,031  |   |   | 9,047 |   |
| Reserve                    accounts                                     |   |                            | 1,539   |   |   | 2,558 |   |
| Derivative                    margin accounts                           |   |                            | 1,794   |   |   | 1,908 |   |
| Restricted                    property operating accounts               |   |                            | 58      |   |   | - |   |
|                                                                    |   | $                               | 184,169 |   | $ | 268,910 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

***Stock      Options***
*** ***

***Preferred      Stock***

***Accretion      of Discount and Other Amortization***

|                                                                                     |   | 2006   |    | 2005   |   | 2004    |   |
|------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|
| Accretion                  of net discount on securities and loans                       |   | $      | (27,657 | )      | $      | (13,432 | )      | $ | (4,282 | ) |
| Amortization                  of net discount on debt obligations                        |   |   | 7,328   |   |   | 4,574   |   |   | 4,132 |   |
| Amortization                  of deferred financing costs and interest rate cap premiums |   |   | 4,434   |   |   | 4,417   |   |   | 3,979 |   |
| Amortization                  of net deferred hedge gains and losses - debt              |   |   | 401     |   |   | 1,587   |   |   | (2,118 | ) |
| Amortization                  of deferred hedge loss - leases                            |   |   | 129     |   |   | 209     |   |   | 187 |   |
|                                                                                     |   | $      | (15,365 | )      | $      | (2,645  | )      | $ | 1,898 |   |

***Securitization      of Subprime Mortgage Loans***
* *

***Accounting      Treatment for Certain Investments Financed with Repurchase Agreements***
**3⁄4**
** **

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

***Recent      Accounting Pronouncements***

*Investment      Companies *

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| **3.** | **INFORMATION                  REGARDING BUSINESS SEGMENTS AND UNCONSOLIDATED                  SUBSIDIARIES** |
|--------|---------------------------------------------------------------------------------------------------------------|

|                                                                   |   | Real                  Estate Securities and Real Estate Related Loans |      | Residential                  Mortgage Loans |   |  Operating                  Real                  Estate |   | Unallocated |   | Total  |   |
|------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|-----------|---------------------------------------------|--------|---------------------------------------------------------------|--------|-------------|--------|--------|--------|
| December                  31, 2006 and the Year then Ended             |   |                                                                  |      |                                        |   |                                                     |   |        |   |   |   |
| Gross                  revenues                                        |   | $                                                                     | 441,965   |                                        | $      | 105,621                                                       |   | $           | 5,117  |   | $      | (94 | ) | $ | 552,609 |   |
| Operating                  expenses                                    |   |                                                                  | (2,961    | )                                           |   | (17,844                                                       | )      |        | (4,059 | )      |   | (30,659 | ) |   | (55,523 | ) |
| Operating                  income (loss)                               |   |                                                                  | 439,004   |                                        |   | 87,777                                                        |   |        | 1,058  |   |   | (30,753 | ) |   | 497,086 |   |
| Interest                  expense                                      |   |                                                                  | (296,368  | )                                           |   | (66,181                                                       | )      |        | -      |   |   | (11,720 | ) |   | (374,269 | ) |
| Depreciation                  and amortization                         |   |                                                                  | -         |                                        |   | -                                                             |   |        | (812   | )      |   | (273 | ) |   | (1,085 | ) |
| Equity                  in earnings of unconsolidated subsidiaries (A) |   |                                                                  | 3,412     |                                        |   | -                                                             |   |        | 2,550  |   |   | 6 |   |   | 5,968 |   |
| Income                  (loss) from continuing operations              |   |                                                                  | 146,048   |                                        |   | 21,596                                                        |   |        | 2,796  |   |   | (42,740 | ) |   | 127,700 |   |
| Income                  (loss) from discontinued operations            |   |                                                                  | -         |                                        |   | -                                                             |   |        | 223    |   |   | - |   |   | 223 |   |
| Net                  income (loss)                                     |   |                                                                  | 146,048   |                                        |   | 21,596                                                        |   |        | 3,019  |   |   | (42,740 | ) |   | 127,923 |   |
| Preferred                  dividends                                   |   |                                                                  | -         |                                        |   | -                                                             |   |        | -      |   |   | (9,314 | ) |   | (9,314 | ) |
| Income                  (loss) available for common stockholders       |   | $                                                                     | 146,048   |                                        | $      | 21,596                                                        |   | $           | 3,019  |   | $      | (52,054 | ) | $ | 118,609 |   |
| Revenue                  derived from non-US sources:                  |   |                                                                  |      |                                        |   |                                                          |   |        |   |   |   |   |   |   |   |   |
| Canada                                                                 |   | $                                                                     | -         |                                        | $      | -                                                             |   | $           | 3,671  |   | $      | - |   | $ | 3,671 |   |
| Total                  assets                                          |   | $                                                                     | 7,366,684 |                                        | $      | 1,179,547                                                     |   | $           | 48,518 |   | $      | 9,643 |   | $ | 8,604,392 |   |
| Long-lived                  assets outside the US:                     |   |                                                                  |      |                                        |   |                                                          |   |        |   |   |   |   |   |   |   |   |
| Canada                                                                 |   | $                                                                     | -         |                                        | $      | -                                                             |   | $           | 16,553 |   | $      | - |   | $ | 16,553 |   |
| December                  31, 2005 and the Year then Ended             |   |                                                                  |      |                                        |   |                                                          |   |        |   |   |   |   |   |   |   |   |
| Gross                  revenues                                        |   | $                                                                     | 321,889   |                                        | $      | 48,844                                                        |   | $           | 6,772  |   | $      | 708 |   | $ | 378,213 |   |
| Operating                  expenses                                    |   |                                                                  | (4,163    | )                                           |   | (10,384                                                       | )      |        | (2,456 | )      |   | (24,885 | ) |   | (41,888 | ) |
| Operating                  income (loss)                               |   |                                                                  | 317,726   |                                        |   | 38,460                                                        |   |        | 4,316  |   |   | (24,177 | ) |   | 336,325 |   |
| Interest                  expense                                      |   |                                                                  | (196,026  | )                                           |   | (29,754                                                       | )      |        | (251   | )      |   | (415 | ) |   | (226,446 | ) |
| Depreciation                  and amortization                         |   |                                                                  | -         |                                        |   | -                                                             |   |        | (528   | )      |   | (113 | ) |   | (641 | ) |
| Equity                  in earnings of unconsolidated subsidiaries (A) |   |                                                                  | 3,328     |                                        |   | -                                                             |   |        | 2,281  |   |   | - |   |   | 5,609 |   |
| Income                  (loss) from continuing operations              |   |                                                                  | 125,028   |                                        |   | 8,706                                                         |   |        | 5,818  |   |   | (24,705 | ) |   | 114,847 |   |
| Income                  (loss) from discontinued operations            |   |                                                                  | -         |                                        |   | -                                                             |   |        | 2,108  |   |   | - |   |   | 2,108 |   |
| Net                  income (loss)                                     |   |                                                                  | 125,028   |                                        |   | 8,706                                                         |   |        | 7,926  |   |   | (24,705 | ) |   | 116,955 |   |
| Preferred                  dividends                                   |   |                                                                  | -         |                                        |   | -                                                             |   |        | -      |   |   | (6,684 | ) |   | (6,684 | ) |
| Income                  (loss) available for common stockholders       |   | $                                                                     | 125,028   |                                        | $      | 8,706                                                         |   | $           | 7,926  |   | $      | (31,389 | ) | $ | 110,271 |   |
| Revenue                  derived from non-US sources:                  |   |                                                                  |      |                                        |   |                                                          |   |        |   |   |   |   |   |   |   |   |
| Canada                                                                 |   | $                                                                     | -         |                                        | $      | -                                                             |   | $           | 12,157 |   | $      | - |   | $ | 12,157 |   |
| Total                  assets                                          |   | $                                                                     | 5,544,818 |                                        | $      | 606,320                                                       |   | $           | 36,306 |   | $      | 22,255 |   | $ | 6,209,699 |   |
| Long-lived                  assets outside the US:                     |   |                                                                  |      |                                        |   |                                                          |   |        |   |   |   |   |   |   |   |   |
| Canada                                                                 |   | $                                                                     | -         |                                        | $      | -                                                             |   | $           | 16,673 |   | $      | - |   | $ | 16,673 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

|                                                                   |   | Real                  Estate Securities and Real Estate Related Loans |      | Residential                  Mortgage Loans |   |  Operating                  Real                  Estate |   | Unallocated |    | Total  |   |
|------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|-----------|---------------------------------------------|--------|---------------------------------------------------------------|--------|-------------|---------|--------|--------|
| December                  31, 2004 and the Year then Ended             |   |                                                                  |      |                                        |   |                                                     |   |        |    |   |   |
| Gross                  revenues                                        |   | $                                                                     | 225,236   |                                        | $      | 19,135                                                        |   | $           | 4,745   |   | $      | 553 |   | $ | 249,669 |   |
| Operating                  expenses                                    |   |                                                                  | (828      | )                                           |   | (2,319                                                        | )      |        | (2,678  | )      |   | (22,983 | ) |   | (28,808 | ) |
| Operating                  income (loss)                               |   |                                                                  | 224,408   |                                        |   | 16,816                                                        |   |        | 2,067   |   |   | (22,430 | ) |   | 220,861 |   |
| Interest                  expense                                      |   |                                                                  | (124,930  | )                                           |   | (10,863                                                       | )      |        | (605    | )      |   | - |   |   | (136,398 | ) |
| Depreciation                  and amortization                         |   |                                                                  | -         |                                        |   | -                                                             |   |        | (445    | )      |   | (6 | ) |   | (451 | ) |
| Equity                  in earnings of unconsolidated subsidiaries (A) |   |                                                                  | 3,767     |                                        |   | -                                                             |   |        | 6,190   |   |   | - |   |   | 9,957 |   |
| Income                  (loss) from continuing operations              |   |                                                                  | 103,245   |                                        |   | 5,953                                                         |   |        | 7,207   |   |   | (22,436 | ) |   | 93,969 |   |
| Income                  (loss) from discontinued operations            |   |                                                                  | -         |                                        |   | -                                                             |   |        | 4,446   |   |   | - |   |   | 4,446 |   |
| Net                  income (loss)                                     |   |                                                                  | 103,245   |                                        |   | 5,953                                                         |   |        | 11,653  |   |   | (22,436 | ) |   | 98,415 |   |
| Preferred                  dividends                                   |   |                                                                  | -         |                                        |   | -                                                             |   |        | -       |   |   | (6,094 | ) |   | (6,094 | ) |
| Income                  (loss) available for common stockholders       |   | $                                                                     | 103,245   |                                        | $      | 5,953                                                         |   | $           | 11,653  |   | $      | (28,530 | ) | $ | 92,321 |   |
| Revenue                  derived from non-US sources:                  |   |                                                                  |      |                                        |   |                                                          |   |        |    |   |   |   |   |   |   |   |
| Canada                                                                 |   | $                                                                     | -         |                                        | $      | -                                                             |   | $           | 13,203  |   | $      | - |   | $ | 13,203 |   |
| Belgium                                                                |   | $                                                                     | -         |                                        | $      | -                                                             |   | $           | 10,602  |   | $      | - |   | $ | 10,602 |   |
| Total                  assets                                          |   | $                                                                     | 4,136,203 |                                        | $      | 658,643                                                       |   | $           | 108,322 |   | $      | 29,552 |   | $ | 4,932,720 |   |
| Long-lived                  assets outside the US:                     |   |                                                                  |      |                                        |   |                                                          |   |        |    |   |   |   |   |   |   |   |
| Canada                                                                 |   | $                                                                     | -         |                                        | $      | -                                                             |   | $           | 57,193  |   | $      | - |   | $ | 57,193 |   |
| Belgium                                                                |   | $                                                                     | -         |                                        | $      | -                                                             |   | $           | 12,376  |   | $      | - |   | $ | 12,376 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

**Unconsolidated      Subsidiaries**

|                                                               |   | Operating                  Real                  Estate |   | Real                  Estate Loan |   |
|--------------------------------------------------------------------|--------|---------------------------------------------------------|--------|-----------------------------------|--------|
| **Balance                  at December 31, 2004**                  |   | $                                                       | 17,778 |                              | $      | 23,452 |   |
| Contributions                  to unconsolidated subsidiaries      |   |                                                    | -      |                              |   | - |   |
| Distributions                  from unconsolidated subsidiaries    |   |                                                    | (8,229 | )                                 |   | (8,978 | ) |
| Equity                  in earnings of unconsolidated subsidiaries |   |                                                    | 2,602  |                              |   | 3,328 |   |
| **Balance                  at December 31, 2005**                  |   | $                                                       | 12,151 |                              | $      | 17,802 |   |
| Contributions                  to unconsolidated subsidiaries      |   |                                                    | -      |                              |   | - |   |
| Distributions                  from unconsolidated subsidiaries    |   |                                                    | (2,173 | )                                 |   | (11,041 | ) |
| Equity                  in earnings of unconsolidated subsidiaries |   |                                                    | 2,550  |                              |   | 3,488 |   |
| **Balance                  at December 31, 2006**                  |   | $                                                       | 12,528 |                              | $      | 10,249 |   |

|                                              |   |                                          |    |                                  |   |
|---------------------------------------------------|--------|-----------------------------------------------|---------|---------------------------------------|--------|
|                                              |   | OperatingReal                  Estate (A) (C) |    | Real                  Estate Loan (B) |   |
|                                              |   | December                  31,                 |    | December                  31,         |   |
|                                              |   | 2006                                          |    | 2005                                  |   | 2004 |   | 2006 |   | 2005 |   | 2004 |   |
| Assets                                            |   | $                                             | 78,381  |                                  | $      | 77,758 |   | $ | 89,222 |   | $ | 20,615 |   | $ | 35,806 |   | $ | 47,170 |   |
| Liabilities                                       |   |                                          | (52,856 | )                                     |   | (53,000 | ) |   | (53,000 | ) |   | - |   |   | - |   |   | - |   |
| Minority                  interest                |   |                                          | (470    | )                                     |   | (455 | ) |   | (666 | ) |   | (116 | ) |   | (202 | ) |   | (266 | ) |
| Equity                                            |   | $                                             | 25,055  |                                  | $      | 24,303 |   | $ | 35,556 |   | $ | 20,499 |   | $ | 35,604 |   | $ | 46,904 |   |
| Equity                  held by Newcastle         |   | $                                             | 12,528  |                                  | $      | 12,151 |   | $ | 17,778 |   | $ | 10,249 |   | $ | 17,802 |   | $ | 23,452 |   |
|                                              |   |                                          | 2006    |                                  |   | 2005 |   |   | 2004 |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
| Revenues                                          |   | $                                             | 8,626   |                                  | $      | 10,196 |   | $ | 25,011 |   | $ | 7,048 |   | $ | 6,738 |   | $ | 7,852 |   |
| Expenses                                          |   |                                          | (3,430  | )                                     |   | (4,896 | ) |   | (7,159 | ) |   | (32 | ) |   | (42 | ) |   | (111 | ) |
| Minority                  interest                |   |                                          | (96     | )                                     |   | (97 | ) |   | (328 | ) |   | (40 | ) |   | (39 | ) |   | (44 | ) |
| Net                  income                       |   | $                                             | 5,100   |                                  | $      | 5,203 |   | $ | 17,524 |   | $ | 6,976 |   | $ | 6,657 |   | $ | 7,697 |   |
| Newcastle's                  equity in net income |   | $                                             | 2,550   |                                  | $      | 2,602 |   | $ | 8,698 |   | $ | 3,488 |   | $ | 3,328 |   | $ | 3,767 |   |

| (A) | Included                in the operating real estate segment. |
|-----|---------------------------------------------------------------|

| (B) | Included                in the real estate securities and real estate related loans                segment. |
|-----|-------------------------------------------------------------------------------------------------------------|

| (C) | With                respect to the operating real estate subsidiary, no income was recorded                from the company holding assets available for sale in 2006 and $0.8                million and $7.2 million was derived from holding assets available                for                sale in 2005 and 2004, respectively. The remaining of Newcastle’s equity                in net income was derived from the company holding assets for investment                in 2006, 2005 and 2004, respectively. As of December 31, 2006 and                2005,                all of the equity held by Newcastle related to the company holding                assets                for investment. This subsidiary is more fully described                below. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

**Operating      Real Estate Subsidiary**

**Real      Estate Loan Subsidiary**

**Trust      Preferred Subsidiary**

**ABCP      Subsidiary**

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

**4.**
**REAL      ESTATE SECURITIES**

**December      31, 2006**

|                                      |   |                                 |      |                                  |   | Gross                  Unrealized |   |   |   |                            |   | Weighted                  Average    |   |
|-------------------------------------------|--------|--------------------------------------|-----------|---------------------------------------|--------|-----------------------------------|--------|--------|--------|---------------------------------|--------|--------------------------------------|--------|
| Asset                  Type               |   | Current                  Face Amount |      | Amortized                  Cost Basis |   | Gains                             |   | Losses |   | Carrying                  Value |   | Number                  ofSecurities |   | S&P                  EquivalentRating |   | Coupon |   | Yield |   | Maturity                  (Years) |   |
| CMBS-Conduit                              |   | $                                    | 1,469,298 |                                  | $      | 1,421,069                         |   | $      | 41,465 |                            | $      | (9,745                               | )      | $ | 1,452,789 |   |   | 202 |   |   | BBB |   |   | 5.84% |   |   | 6.51% |   |   | 6.93 |   |
| CMBS-Large                  Loan          |   |                                 | 714,617   |                                  |   | 712,655                           |   |   | 6,991  |                            |   | (421                                 | )      |   | 719,225 |   |   | 53 |   |   | BBB- |   |   | 6.85% |   |   | 7.02% |   |   | 2.62 |   |
| CMBS-CDO                                  |   |                                 | 23,500    |                                  |   | 20,820                            |   |   | 1,265  |                            |   | (127                                 | )      |   | 21,958 |   |   | 2 |   |   | BB |   |   | 9.47% |   |   | 12.03% |   |   | 7.68 |   |
| CMBS-                  B-Note             |   |                                 | 282,677   |                                  |   | 270,257                           |   |   | 6,141  |                            |   | (208                                 | )      |   | 276,190 |   |   | 41 |   |   | BB |   |   | 6.85% |   |   | 7.51% |   |   | 6.02 |   |
| Unsecured                  REIT Debt      |   |                                 | 1,004,540 |                                  |   | 1,017,280                         |   |   | 18,923 |                            |   | (11,163                              | )      |   | 1,025,040 |   |   | 101 |   |   | BBB- |   |   | 6.36% |   |   | 6.06% |   |   | 6.17 |   |
| ABS-Manufactured                  Housing |   |                                 | 80,839    |                                  |   | 76,347                            |   |   | 1,744  |                            |   | (391                                 | )      |   | 77,700 |   |   | 9 |   |   | BBB- |   |   | 6.68% |   |   | 7.79% |   |   | 6.54 |   |
| ABS-Home                  Equity          |   |                                 | 729,292   |                                  |   | 713,135                           |   |   | 4,677  |                            |   | (7,481                               | )      |   | 710,331 |   |   | 124 |   |   | BBB+ |   |   | 7.15% |   |   | 7.89% |   |   | 2.70 |   |
| ABS-Franchise                             |   |                                 | 76,777    |                                  |   | 76,264                            |   |   | 1,713  |                            |   | (1,270                               | )      |   | 76,707 |   |   | 22 |   |   | BBB |   |   | 7.28% |   |   | 8.21% |   |   | 4.80 |   |
| Agency                  RMBS              |   |                                 | 1,177,779 |                                  |   | 1,182,946                         |   |   | 2,144  |                            |   | (8,732                               | )      |   | 1,176,358 |   |   | 35 |   |   | AAA |   |   | 5.22% |   |   | 5.19% |   |   | 4.27 |   |
| Subtotal/Average                  (A)     |   |                                 | 5,559,319 |                                  |   | 5,490,773                         |   |   | 85,063 |                            |   | (39,538                              | )      |   | 5,536,298 |   |   | 589 |   |   | BBB+ |   |   | 6.20% |   |   | 6.50% |   |   | 5.04 |   |
| Residual                  interest (B)    |   |                                 | 44,930    |                                  |   | 44,930                            |   |   | -      |                            |   | -                                    |   |   | 44,930 |   |   | 1 |   |   | NR |   |   | 0.00% |   |   | 18.77% |   |   | 2.52 |   |
| Total/Average                             |   | $                                    | 5,604,249 |                                  | $      | 5,535,703                         |   | $      | 85,063 |                            | $      | (39,538                              | )      | $ | 5,581,228 |   |   | 590 |   |   | BBB+ |   |   | 6.15% |   |   | 6.60% |   |   | 5.02 |   |

| (A) | The                    total current face amount of fixed rate securities was $4.4 billion,                    and                    of floating rate securities was $1.2                    billion. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (B) | Represents                      the equity from the Securitization Trust as described in Note                      5. This                      security has been treated as part of the                      residential mortgage loan segment - see Note 3. The residual                      does not have                      a stated coupon and therefore its coupon has                      been treated as zero for purposes of the                      table. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                       |   |                                 |      |                                  |   | Gross                  Unrealized |   |   |   |                            |   | Weighted                  Average    |   |
|------------------------------------------------------------|--------|--------------------------------------|-----------|---------------------------------------|--------|-----------------------------------|--------|--------|--------|---------------------------------|--------|--------------------------------------|--------|
|                                                       |   | Current                  Face Amount |      | Amortized                  Cost Basis |   | Gains                             |   | Losses |   | Carrying                  Value |   | Number                  ofSecurities |   | S&P                  EquivalentRating |   | Coupon |   | Yield |   | Maturity                  (Years) |   |
| Securities                  in an Unrealized Loss Position |   |                                 |      |                                  |   |                              |   |   |   |                            |   |                                 |   |   |   |   |   |   |
| Less                  Than Twelve Months                   |   | $                                    | 700,782   |                                  | $      | 683,237                           |   | $      | -      |                            | $      | (8,731                               | )      | $ | 674,506 |   |   | 84 |   |   | A- |   |   | 6.55% |   |   | 7.28% |   |   | 4.11 |   |
| Twelve                  or More Months                     |   |                                 | 1,600,903 |                                  |   | 1,622,047                         |   |   | -      |                            |   | (30,807                              | )      |   | 1,591,240 |   |   | 185 |   |   | A |   |   | 5.56% |   |   | 5.29% |   |   | 5.46 |   |
| Total                                                      |   | $                                    | 2,301,685 |                                  | $      | 2,305,284                         |   | $      | -      |                            | $      | (39,538                              | )      | $ | 2,265,746 |   |   | 269 |   |   | A |   |   | 5.86% |   |   | 5.88% |   |   | 5.05 |   |

**December      31, 2005**

|                                      |   |                                 |      |                                  |   | Gross                  Unrealized |   |   |   |                            |   | Weighted                  Average    |   |
|-------------------------------------------|--------|--------------------------------------|-----------|---------------------------------------|--------|-----------------------------------|--------|--------|--------|---------------------------------|--------|--------------------------------------|--------|
| Asset                  Type               |   | Current                  Face Amount |      | Amortized                  Cost Basis |   | Gains                             |   | Losses |   | Carrying                  Value |   | Number                  ofSecurities |   | S&P                  EquivalentRating |   | Coupon |   | Yield |   | Maturity                  (Years) |   |
| CMBS-Conduit                              |   | $                                    | 1,455,345 |                                  | $      | 1,397,868                         |   | $      | 26,367 |                            | $      | (26,906                              | )      | $ | 1,397,329 |   |   | 197 |   |   | BBB- |   |   | 5.84% |   |   | 6.61% |   |   | 7.87 |   |
| CMBS-Large                  Loan          |   |                                 | 578,331   |                                  |   | 575,444                           |   |   | 9,096  |                            |   | (377                                 | )      |   | 584,163 |   |   | 61 |   |   | BBB- |   |   | 6.64% |   |   | 6.75% |   |   | 2.10 |   |
| CMBS-                  B-Note             |   |                                 | 180,201   |                                  |   | 176,228                           |   |   | 4,732  |                            |   | (329                                 | )      |   | 180,631 |   |   | 32 |   |   | BBB- |   |   | 6.62% |   |   | 6.95% |   |   | 5.97 |   |
| Unsecured                  REIT Debt      |   |                                 | 916,262   |                                  |   | 931,777                           |   |   | 20,804 |                            |   | (9,835                               | )      |   | 942,746 |   |   | 99 |   |   | BBB- |   |   | 6.34% |   |   | 5.96% |   |   | 6.95 |   |
| ABS-Manufactured                  Housing |   |                                 | 178,915   |                                  |   | 162,410                           |   |   | 2,422  |                            |   | (1,766                               | )      |   | 163,066 |   |   | 10 |   |   | A- |   |   | 7.12% |   |   | 8.65% |   |   | 6.64 |   |
| ABS-Home                  Equity          |   |                                 | 525,004   |                                  |   | 523,363                           |   |   | 3,429  |                            |   | (2,315                               | )      |   | 524,477 |   |   | 89 |   |   | B |   |   | 6.03% |   |   | 6.10% |   |   | 3.16 |   |
| ABS-Franchise                             |   |                                 | 70,837    |                                  |   | 69,732                            |   |   | 1,113  |                            |   | (1,223                               | )      |   | 69,622 |   |   | 18 |   |   | BBB+ |   |   | 6.66% |   |   | 8.12% |   |   | 5.14 |   |
| Agency                  RMBS              |   |                                 | 697,530   |                                  |   | 700,912                           |   |   | 145    |                            |   | (8,572                               | )      |   | 692,485 |   |   | 19 |   |   | AAA |   |   | 4.76% |   |   | 4.67% |   |   | 4.90 |   |
| Total/Average                  (A)        |   | $                                    | 4,602,425 |                                  | $      | 4,537,734                         |   | $      | 68,108 |                            | $      | (51,323                              | )      | $ | 4,554,519 |   |   | 525 |   |   | BBB+ |   |   | 5.99% |   |   | 6.25% |   |   | 5.81 |   |

| (A) | The                    total current face amount of fixed rate securities was $3.6 billion,                    and                    of floating rate securities was $1.0                    billion. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| **5.** | **REAL                ESTATE RELATED LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE                LOANS** |
|--------|---------------------------------------------------------------------------------------------------------------------|

|                                     |   | December                  31,       |      |  December                  31, 2006             |   |
|------------------------------------------|--------|-------------------------------------|-----------|------------------------------------------------------|--------|
|                                     |   | 2006                                |      | 2005                                                 |   | 2006 |   | 2005 |   |    |   |    |   |    |   |    |   |
| Loan                  Type               |   | CurrentFace                  Amount |      | Carrying                  Value                  (D) |   | LoanCount |   | Wtd.                  Avg. Yield |   | WeightedAverageMaturity(Years)                  (E) |   | Delinquent                  Carrying Amount (F) |   |
| B-Notes                                  |   | $                                   | 248,240   |                                                 | $      | 72,173 |   | $ | 246,798 |   | $ | 72,520 |   |   | 9 |   |   | 7.98% |   |   | 2.71 |   | $ | - |   |
| Mezzanine                  Loans (A)     |   |                                | 906,907   |                                                 |   | 302,740 |   |   | 904,686 |   |   | 302,816 |   |   | 22 |   |   | 8.61% |   |   | 2.67 |   |   | - |   |
| Bank                  Loans              |   |                                | 233,793   |                                                 |   | 56,274 |   |   | 233,895 |   |   | 56,563 |   |   | 6 |   |   | 7.75% |   |   | 3.92 |   |   | - |   |
| Whole                  Loans             |   |                                | 61,240    |                                                 |   | 23,082 |   |   | 61,703 |   |   | 22,364 |   |   | 3 |   |   | 12.63% |   |   | 1.81 |   |   | - |   |
| ICH                  Loans (B)           |   |                                | 123,390   |                                                 |   | 165,514 |   |   | 121,834 |   |   | 161,288 |   |   | 70 |   |   | 7.77% |   |   | 1.10 |   |   | 3,530 |   |
| Total                  Real Estate       |   |                                |      |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related                  Loans           |   | $                                   | 1,573,570 |                                                 | $      | 619,783 |   | $ | 1,568,916 |   | $ | 615,551 |   |   | 110 |   |   | 8.48% |   |   | 2.71 |   | $ | 3,530 |   |
|                                     |   |                                |      |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                  Loans       |   | $                                   | 168,649   |                                                 | $      | 326,100 |   | $ | 172,839 |   | $ | 333,226 |   |   | 491 |   |   | 6.42% |   |   | 2.79 |   | $ | 4,742 |   |
| Manufactured                             |   |                                |      |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Housing                  Loans           |   |                                | 643,912   |                                                 |   | 284,870 |   |   | 636,258 |   |   | 267,456 |   |   | 18,343 |   |   | 8.48% |   |   | 6.02 |   |   | 8,199 |   |
| Total                  Residential       |   |                                |      |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage                  Loans          |   | $                                   | 812,561   |                                                 | $      | 610,970 |   | $ | 809,097 |   | $ | 600,682 |   |   | 18,834 |   |   | 8.03% |   |   | 5.35 |   | $ | 13,571 |   |
| Subprime                  Mortgage loans |   |                                |      |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| subject                  to Future       |   |                                |      |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Repurchase                  (C)          |   | $                                   | 299,176   |                                                 |   |   |   | $ | 288,202 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|  | (A) | One                of these loans has an 8.9 million contractual exit fee which                Newcastle will begin to accrue when management believes it is probable                that such exit fee will be received. These loans are comprised as                follows: |
|--|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | $      | 100,000 |   | $      | 100,000 |   | $      | 100,023 |   | $      | 100,052 |   |   | 1  |   |   | 8.58 | % |   | 1.79 |   |   |   |   |
|--------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|----|--------|--------|------|---|--------|------|--------|--------|--------|--------|
|   |   |   | 70,000  |   |   | -       |   |   | 70,000  |   |   | -       |   |   | 1  |   |   | 8.35 | % |   | 1.28 |   |   |   |   |
|   |   |   | 87,500  |   |   | -       |   |   | 87,500  |   |   | -       |   |   | 1  |   |   | 9.59 | % |   | 3.36 |   |   |   |   |
|   |   |   | 108,690 |   |   | -       |   |   | 108,518 |   |   | -       |   |   | 1  |   |   | 8.30 | % |   | 1.80 |   |   |   |   |
|   |   |   | 87,664  |   |   | -       |   |   | 87,689  |   |   | -       |   |   | 1  |   |   | 7.07 | % |   | 9.53 |   |   |   |   |
|   |   |   | 453,053 |   |   | 202,740 |   |   | 450,956 |   |   | 202,764 |   |   | 17 |   |   | 8.84 | % |   | 1.83 |   |   |   |   |
|   |   | $      | 906,907 |   | $      | 302,740 |   | $      | 904,686 |   | $      | 302,816 |   |   | 22 |   |   | 8.61 | % |   | 2.67 |   |   |   |   |

|  | (B) | In                2003, pursuant to FIN No. 46, Newcastle consolidated an entity which                holds                a portfolio of commercial mortgage loans which has been securitized.                This                investment, which is referred to as ICH, was previously treated as                a                non-consolidated residual interest in such securitization. The primary                effect of the consolidation is the requirement that Newcastle reflect                the                gross loan assets and gross bonds payable of this entity in its financial                statements. |
|--|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (C) | See                below. |
|--|-----|---------------------------|

|  | (D) | The                aggregate United States federal income tax basis for such assets                at                December 31, 2006 was approximately equal to their book                basis. |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (E) | The                weighted average maturity for the residential loan portfolio and                the                manufactured housing loan portfolio were calculated based on constant                prepayment rates (CPR) of approximately 30% and 9%,                respectively. |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (F) | This                face amount of loans is 60 or more days                delinquent. |
|--|-----|----------------------------------------------------------------------------------------|

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

|                                              |   | Real                  Estate Related                  Loans |   |  Residential                  Mortgage Loans |   |
|---------------------------------------------------|--------|-------------------------------------------------------------|--------|---------------------------------------------------|--------|
| **Balance                  at December 31, 2004** |   | $                                                           | (2,473 | )                                                 | $      | - |   |
| Provision                  for credit losses      |   |                                                        | (2,852 | )                                                 |   | (5,568 | ) |
| Realized                  losses                  |   |                                                        | 1,099  |                                              |   | 2,361 |   |
| **Balance                  at December 31, 2005** |   | $                                                           | (4,226 | )                                                 | $      | (3,207 | ) |
| Provision                  for credit losses      |   |                                                        | (1,154 | )                                                 |   | (8,284 | ) |
| Realized                  losses                  |   |                                                        | 3,230  |                                              |   | 4,235 |   |
| **Balance                  at December 31, 2006** |   | $                                                           | (2,150 | )                                                 | $      | (7,256 | ) |

***Securitization      of Subprime Mortgage Loans***

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| Weighted                  average life (years) of residual interest |   |   | 3.1   |
|---------------------------------------------------------------------|--------|--------|-------|
| Expected                  credit losses                             |   |   | 5.3%  |
| Weighted                  average constant prepayment rate          |   |   | 28.0% |
| Discount                  rate                                      |   |   | 18.8% |

| Total                  securitized loans (unpaid principal balance)               |   | $      | 1,192,763 |   |
|-----------------------------------------------------------------------------------|--------|--------|-----------|--------|
| Loans                  subject to future repurchase (carrying value)              |   | $      | 288,202   |   |
| Retained                  interests (fair value)                                  |   | $      | 79,105    |   |
|                                                                              |   |   |      |   |
| Weighted                  average life (years) of residual interest               |   |   | 2.52      |   |
|                                                                              |   |   |      |   |
| Expected                  credit losses                                           |   |   | 5.1%      |   |
| Effect                  on fair value of retained interests of 10% adverse change |   | $      | (3,160    | )      |
| Effect                  on fair value of retained interests of 20% adverse change |   | $      | (5,460    | )      |
|                                                                              |   |   |      |   |
| Weighted                  average constant prepayment rate                        |   |   | 31.0%     |   |
| Effect                  on fair value of retained interests of 10% adverse change |   | $      | (3,806    | )      |
| Effect                  on fair value of retained interests of 20% adverse change |   | $      | (6,435    | )      |
|                                                                              |   |   |      |   |
| Discount                  rate                                                    |   |   | 18.8%     |   |
| Effect                  on fair value of retained interests of 10% adverse change |   | $      | (2,175    | )      |
| Effect                  on fair value of retained interests of 20% adverse change |   | $      | (4,272    | )      |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| Loan                  unpaid principal balance (UPB)    |   | $ | 1,192,763 |   |
|---------------------------------------------------------|--------|---|-----------|--------|
| Delinquencies                  of 60 or more days (UPB) |   | $ | 52,281    |   |
| Net                  credit losses                      |   | $ | 57        |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| **6.** | **OPERATING                REAL ESTATE** |
|--------|------------------------------------------|

| Operating                    Real Estate                     |   | Gross  |    | Accumulated                    Depreciation |   | Net    |   |
|--------------------------------------------------------------|--------|--------|---------|---------------------------------------------|--------|--------|--------|
| **Balance                    at December 31, 2004**          |   | $      | 65,691  |                                        | $      | (8,498 | )      | $ | 57,193 |   |
| Improvements                                                 |   |   | -       |                                        |   | -      |   |   | - |   |
| Foreign                    currency translation              |   |   | (422    | )                                           |   | (28    | )      |   | (450 | ) |
| Depreciation                                                 |   |   | -       |                                        |   | (704   | )      |   | (704 | ) |
| Transferred                    to Real Estate Held for Sale  |   |   | (45,060 | )                                           |   | 5,694  |   |   | (39,366 | ) |
| **Balance                    at December 31, 2005**          |   | $      | 20,209  |                                        | $      | (3,536 | )      | $ | 16,673 |   |
| Foreclosed                    loans                          |   |   | 12,486  |                                        |   | -      |   |   | 12,486 |   |
| Improvements                                                 |   |   | 1,301   |                                        |   | -      |   |   | 1,301 |   |
| Foreign                    currency translation              |   |   | (32     | )                                           |   | 7      |   |   | (25 | ) |
| Fully                    depreciated assets                  |   |   | (150    | )                                           |   | 150    |   |   | - |   |
| Depreciation                                                 |   |   | -       |                                        |   | (809   | )      |   | (809 | ) |
| **Balance                    at December 31, 2006**          |   | $      | 33,814  |                                        | $      | (4,188 | )      | $ | 29,626 |   |
|                                                         |   |   |    |                                        |   |   |   |   |   |   |
| Real                    Estate Held for Sale                 |   |   |    |                                        |   |   |   |   |   |   |
| **Balance                    at December 31, 2004**          |   |   |    |                                        |   |   |   | $ | 12,376 |   |
| Improvements                                                 |   |   |    |                                        |   |   |   |   | 182 |   |
| Foreign                    currency translation              |   |   |    |                                        |   |   |   |   | (1,620 | ) |
| Sold                                                         |   |   |    |                                        |   |   |   |   | (50,304 | ) |
| Transferred                    from Operating Real Estate    |   |   |    |                                        |   |   |   |   | 39,366 |   |
| **Balance                    at December 31, 2005 and 2006** |   |   |    |                                        |   |   |   | $ | - |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| 2007   |   | $      | 3,084  |   |
|--------|--------|--------|--------|--------|
| 2008   |   |   | 2,300  |   |
| 2009   |   |   | 2,116  |   |
| 2010   |   |   | 1,954  |   |
| 2011   |   |   | 1,751  |   |
|   |   | $      | 11,205 |   |

|                                       |   | Year                  Ended December 31, |   |
|--------------------------------------------|--------|------------------------------------------|--------|
|                                       |   | 2006                                     |   | 2005 |   | 2004 |   |
| Interest                  and other income |   | $                                        | 18     |   | $ | 4,744 |   | $ | 15,301 |   |
| Net                  gain on sale          |   |                                     | 419    |   |   | 780 |   |   | 3,778 |   |
| Gross                  revenues            |   |                                     | 437    |   |   | 5,524 |   |   | 19,079 |   |
| Interest                  expense          |   |                                     | -      |   |   | 804 |   |   | 5,885 |   |
| Other                  expenses            |   |                                     | 214    |   |   | 2,612 |   |   | 8,748 |   |
| Net                  income                |   | $                                        | 223    |   | $ | 2,108 |   | $ | 4,446 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| **Type                  of Property** |   | **Location**                     |   | **Net                  Rentable****Sq.                  Ft. (A)** |   | **Acquisition                  Date** |   | **Year                  Built/****Renovated                  (A)** |   |
|---------------------------------------|--------|----------------------------------|--------|-------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------------------------------------|--------|
|                                  |   |                             |   |                                                              |   |                                  |   |                                                               |   |
| Canada                  Portfolio     |   |                             |   |                                                              |   |                                  |   |                                                               |   |
| Office                  Building      |   | London,                  ON      |   | 312,874                                                           |   | Oct                  98               |   | 1982                                                               |   |
|                                  |   |                             |   |                                                              |   |                                  |   |                                                               |   |
| Ohio                  Portfolio       |   |                             |   |                                                              |   |                                  |   |                                                               |   |
| Office                  Building      |   | Beavercreek,                  OH |   | 54,927                                                            |   | Mar                  06               |   | 1986                                                               |   |
| Office                  Building      |   | Beavercreek,                  OH |   | 29,916                                                            |   | Mar                  06               |   | 1986                                                               |   |
| Office                  Building      |   | Beavercreek,                  OH |   | 45,299                                                            |   | Mar                  06               |   | 1986                                                               |   |
| Retail                                |   | Dayton,                  OH      |   | 33,485                                                            |   | Mar                  06               |   | 1989                                                               |   |
| Office                  Building      |   | Vandalia,                  OH    |   | 46,614                                                            |   | Mar                  06               |   | 1987                                                               |   |
| Office                  Building      |   | Dayton,                  OH      |   | 42,286                                                            |   | Mar                  06               |   | 1985                                                               |   |

|                              |   |                                  |   |                                                                 |   |                                       |   |                                          |   |                                                            |   |                               |   |
|-----------------------------------|--------|---------------------------------------|--------|----------------------------------------------------------------------|--------|--------------------------------------------|--------|-----------------------------------------------|--------|-----------------------------------------------------------------|--------|------------------------------------|--------|
|                              |   |                                  |   |                                                                 |   | **December                  31, 2006**     |   |
| **Portfolio**                     |   | **Initial                  Cost (B)** |   | **Costs                  Capitalized Subsequent to Acquisition (B)** |   | **Gross                  Carrying Amount** |   | **Accumulated                  Depreciation** |   | **Net                  Carrying****Value                  (C)** |   | **Occupancy                  (A)** |   |
|                              |   |                                  |   |                                                                 |   |                                       |   |                                          |   |                                                            |   |                               |   |
| Canada                  Portfolio |   | $                                     | 19,758 |                                                                 | $      | 688                                        |   | $                                             | 20,446 |                                                            | $      | (3,893                             | )      | $ | 16,553 |   |   | 60.6% |   |
| Ohio                  Portfolio   |   |                                  | 12,486 |                                                                 |   | 882                                        |   |                                          | 13,368 |                                                            |   | (295                               | )      |   | 13,073 |   |   | 59.1% |   |

| (A) | Unaudited. |
|-----|------------|

| (B) | For                  the Canada portfolio, adjusted for changes in foreign currency                  exchange                  rates, which aggregated $0.0 million of                  gain and $0.7 million of gain between land, building and improvements                  in                  2006 and 2005, respectively and net of                  fully depreciated assets of $0.2                  million. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (C) | The                  aggregate United States federal income tax basis for such assets                  at                  December 31, 2006 was equal to its net carrying                  value. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| **7.** | **FAIR                VALUE OF FINANCIAL                INSTRUMENTS** |
|--------|-----------------------------------------------------------------------|

|                                                                  |   | CarryingValue                 |      | Principal                  Balance or Notional Amount |   | EstimatedFair                  Value |   |
|-----------------------------------------------------------------------|--------|-------------------------------|-----------|-------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                  |   | December                  31, |      | December                  31,                         |   | December                  31,        |   |
|                                                                  |   | 2006                          |      | 2005                                                  |   | 2006                                 |   | 2006 |   | 2005 |   |
| **Assets:**                                                           |   |                          |      |                                                  |   |                                 |   |   |   |   |   |
| Real                  estate securities, available for sale           |   | $                             | 5,581,228 |                                                  | $      | 4,554,519                            |   | $ | 5,604,249 |   | $ | 5,581,228 |   | $ | 4,554,519 |   |
| Real                  estate related loans                            |   |                          | 1,568,916 |                                                  |   | 615,551                              |   |   | 1,573,570 |   |   | 1,571,412 |   |   | 615,865 |   |
| Residential                  mortgage loans                           |   |                          | 809,097   |                                                  |   | 600,682                              |   |   | 812,561 |   |   | 829,980 |   |   | 609,486 |   |
| Subprime                  mortgage loans subject to future repurchase |   |                          | 288,202   |                                                  |   | -                                    |   |   | 299,176 |   |   | 288,202 |   |   | - |   |
| Interest                  rate caps, treated as hedges (A)            |   |                          | 1,262     |                                                  |   | 2,145                                |   |   | 334,971 |   |   | 1,262 |   |   | 2,145 |   |
| Total                  return swaps (A)                               |   |                          | 1,288     |                                                  |   | 3,096                                |   |   | 299,654 |   |   | 1,288 |   |   | 3,096 |   |
| **Liabilities:**                                                      |   |                          |      |                                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |
| CBO                  bonds payable                                    |   |                          | 4,313,824 |                                                  |   | 3,530,384                            |   |   | 4,340,166 |   |   | 4,369,540 |   |   | 3,594,638 |   |
| Other                  bonds payable                                  |   |                          | 675,844   |                                                  |   | 353,330                              |   |   | 679,891 |   |   | 676,512 |   |   | 356,294 |   |
| Notes                  payable                                        |   |                          | 128,866   |                                                  |   | 260,441                              |   |   | 128,866 |   |   | 128,866 |   |   | 260,441 |   |
| Repurchase                  agreements                                |   |                          | 760,346   |                                                  |   | 1,048,203                            |   |   | 760,346 |   |   | 760,346 |   |   | 1,048,203 |   |
| Repurchase                  agreements subject to ABCP                |   |                          | 1,143,749 |                                                  |   | -                                    |   |   | 1,143,749 |   |   | 1,143,749 |   |   | - |   |
| Financing                  of subprime mortgage loans subject to      |   |                          |      |                                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |
| future                  repurchase                                    |   |                          | 288,202   |                                                  |   | -                                    |   |   | 299,176 |   |   | 288,202 |   |   | - |   |
| Credit                  facility                                      |   |                          | 93,800    |                                                  |   | 20,000                               |   |   | 93,800 |   |   | 93,800 |   |   | 20,000 |   |
| Junior                  subordinated notes payable                    |   |                          | 100,100   |                                                  |   | -                                    |   |   | 100,100 |   |   | 101,629 |   |   | - |   |
| Interest                  rate swaps, treated as hedges (B)           |   |                          | (42,887   | )                                                     |   | (41,170                              | )      |   | 3,943,120 |   |   | (42,887 | ) |   | (41,170 | ) |
| Non-hedge                  derivative obligations (C)                 |   |                          | 360       |                                                  |   | 90                                   |   |   | See                  below |   |   | 360 |   |   | 90 |   |

|  | (A) | Included                    in Derivative Assets. The longest cap maturity is October 2015.                    The                    longest total rate of return swap maturity is December                    2008. |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (B) | Included                    in Derivative Assets or Liabilities, as applicable. A positive                    number                    represents a liabilty. The longest swap maturity is June                    2016. |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (C) | Included                    in Derivative Assets or Liabilities, as applicable. A positive                    number                    represents a liabilty. The longest maturity is July 2038. |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

***Real      Estate Securities, Available for Sale***
***3⁄4***
*** ***

***Real      Estate Related Loans***
***3⁄4***

***Residential      Mortgage Loans***
***3⁄4***

***Subprime      Mortgage Loans Subject to Future Repurchase and related      Financing***

***Interest      Rate Cap and Swap Agreements, Total Rate of Return Swaps and Non-Hedge      Derivative Obligations***

***CBO      Bonds Payable***

***Other      Bonds Payable***
*** ***

***Notes      Payable***
*** ***

***Repurchase      Agreements***

***Credit      facility***

***Junior      Subordinated Notes Payable***
*—      *
* *

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

| **8.** | **DEBT                OBLIGATIONS** |
|--------|-------------------------------------|

| Debt                  Obligation/ Collateral                                                                     |   | MonthIssued |                      | Current                   Face Amount |   | Carrying                   Value |   | Unhedged                  Weighted                  Average                  Funding                  Cost |      | Final                  Stated Maturity |   | WeightedAverage                  Funding                  Cost                  (1) |   | WeightedAverageMaturity                  (Years) |      | FaceAmount                  ofFloatingRate                  Debt |   | CollateralCarryingValue        |   | Collateral                  Weighted Average Maturity (Years) |                      | FaceAmountof                  Floating                  Rate Collateral |   | AggregateNotionalAmount                  ofCurrent                  Hedges |   |
|------------------------------------------------------------------------------------------------------------------|--------|-------------|---------------------------|--------------------------------------------|--------|---------------------------------------|--------|------------------------------------------------------------------------------------------------------------|-----------|----------------------------------------|--------|-------------------------------------------------------------------------------------|--------|--------------------------------------------------|-----------|------------------------------------------------------------------|--------|--------------------------------|--------|---------------------------------------------------------------|---------------------------|-------------------------------------------------------------------------|--------|----------------------------------------------------------------------------|--------|
|                                                                                                             |   |        |                      | December                  31,              |   | December                  31,         |   | December                  31, 2006                                                                         |      |
| CBO                  Bonds \Payable                                                                              |   |        |                      | 2006                                       |   | 2005                                  |   | 2006                                                                                                       |      | 2005                                   |   |                                                                                |   |                                             |      |                                                             |   |                           |   |                                                          |                      |                                                                    |   |                                                                       |   |   |   |   |   |
| Real                  estate securities                                                                          |   |        | Jul                  1999 |                                       | $      | 398,366                               |   | $                                                                                                          | 426,653   |                                   | $      | 395,646                                                                             |   | $                                                | 423,191   |                                                             |   | 6.94%                  (2)     |   |                                                          | Jul                  2038 |                                                                    |   | 5.50%                                                                      |   |   | 1.99 |   | $ | 303,366 |   | $ | 544,469 |   |   | 4.06 |   | $ | - |   | $ | 255,352 |   |
| Real                  estate securities and loans                                                                |   |        | Apr                  2002 |                                       |   | 444,000                               |   |                                                                                                       | 444,000   |                                   |   | 441,660                                                                             |   |                                             | 441,054   |                                                             |   | 6.42%                  (2)     |   |                                                          | Apr                  2037 |                                                                    |   | 6.78%                                                                      |   |   | 3.45 |   |   | 372,000 |   |   | 498,754 |   |   | 5.15 |   |   | 59,612 |   |   | 296,000 |   |
| Real                  estate securities and loans                                                                |   |        | Mar                  2003 |                                       |   | 472,000                               |   |                                                                                                       | 472,000   |                                   |   | 468,944                                                                             |   |                                             | 468,413   |                                                             |   | 6.23%                  (2)     |   |                                                          | Mar                  2038 |                                                                    |   | 5.35%                                                                      |   |   | 5.30 |   |   | 427,800 |   |   | 515,335 |   |   | 4.56 |   |   | 128,600 |   |   | 285,060 |   |
| Real                  estate securities and loans                                                                |   |        | Sep                  2003 |                                       |   | 460,000                               |   |                                                                                                       | 460,000   |                                   |   | 456,250                                                                             |   |                                             | 455,657   |                                                             |   | 6.08%                  (2)     |   |                                                          | Sep                  2038 |                                                                    |   | 5.88%                                                                      |   |   | 5.85 |   |   | 442,500 |   |   | 505,450 |   |   | 4.28 |   |   | 151,677 |   |   | 207,500 |   |
| Real                  estate securities and loans                                                                |   |        | Mar                  2004 |                                       |   | 414,000                               |   |                                                                                                       | 414,000   |                                   |   | 411,014                                                                             |   |                                             | 410,511   |                                                             |   | 5.93%                  (2)     |   |                                                          | Mar                  2039 |                                                                    |   | 5.38%                                                                      |   |   | 5.61 |   |   | 382,750 |   |   | 446,749 |   |   | 4.76 |   |   | 174,192 |   |   | 177,300 |   |
| Real                  estate securities and loans                                                                |   |        | Sep                  2004 |                                       |   | 454,500                               |   |                                                                                                       | 454,500   |                                   |   | 451,137                                                                             |   |                                             | 450,639   |                                                             |   | 5.91%                  (2)     |   |                                                          | Sep                  2039 |                                                                    |   | 5.49%                                                                      |   |   | 6.19 |   |   | 442,500 |   |   | 499,389 |   |   | 5.08 |   |   | 227,898 |   |   | 209,202 |   |
| Real                  estate securities and loans                                                                |   |        | Apr                  2005 |                                       |   | 447,000                               |   |                                                                                                       | 447,000   |                                   |   | 442,870                                                                             |   |                                             | 442,379   |                                                             |   | 5.81%                  (2)     |   |                                                          | Apr                  2040 |                                                                    |   | 5.53%                                                                      |   |   | 7.16 |   |   | 439,600 |   |   | 491,398 |   |   | 5.82 |   |   | 195,186 |   |   | 242,990 |   |
| Real                  estate securities                                                                          |   |        | Dec                  2005 |                                       |   | 442,800                               |   |                                                                                                       | 442,800   |                                   |   | 438,894                                                                             |   |                                             | 438,540   |                                                             |   | 5.85%                  (2)     |   |                                                          | Dec                  2050 |                                                                    |   | 5.57%                                                                      |   |   | 8.48 |   |   | 436,800 |   |   | 512,249 |   |   | 7.23 |   |   | 115,491 |   |   | 341,506 |   |
| Real                  estate securities and loans                                                                |   |        | Nov                  2006 |                                       |   | 807,500                               |   |                                                                                                       | -         |                                   |   | 807,409                                                                             |   |                                             | -         |                                                             |   | 5.98%                  (2)     |   |                                                          | Nov                  2052 |                                                                    |   | 5.92%                                                                      |   |   | 7.06 |   |   | 799,900 |   |   | 930,293 |   |   | 4.69 |   |   | 672,217 |   |   | 153,655 |   |
|                                                                                                             |   |        |                      |                                       |   | 4,340,166                             |   |                                                                                                       | 3,560,953 |                                   |   | 4,313,824                                                                           |   |                                             | 3,530,384 |                                                             |   |                           |        |                                                          |                      |                                                                    |   | 5.73%                                                                      |   |   | 5.83 |   |   | 4,047,216 |   |   | 4,944,086 |   |   | 5.05 |   |   | 1,724,873 |   |   | 2,168,565 |   |
| Other                  Bonds Payable                                                                             |   |        |                      |                                       |   |                                  |   |                                                                                                       |      |                                   |   |                                                                                |   |                                             |      |                                                             |   |                           |   |                                                          |                      |                                                                    |   |                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ICH                  loans (3)                                                                                   |   |        | (3)                       |                                       |   | 101,925                               |   |                                                                                                       | 141,311   |                                   |   | 101,925                                                                             |   |                                             | 141,311   |                                                             |   | 6.78%                  (2)     |   |                                                          | Aug                  2030 |                                                                    |   | 6.78%                                                                      |   |   | 1.04 |   |   | 1,986 |   |   | 121,834 |   |   | 1.10 |   |   | 1,986 |   |   | - |   |
| Manufactured                  housing loans                                                                      |   |        | Jan                  2006 |                                       |   | 213,172                               |   |                                                                                                       | 212,019   |                                   |   | 211,738                                                                             |   |                                             | 212,019   |                                                             |   | LIBOR                  +1.25%  |   |                                                          | Jan                  2009 |                                                                    |   | 6.14%                                                                      |   |   | 1.46 |   |   | 213,172 |   |   | 237,133 |   |   | 6.26 |   |   | 4,977 |   |   | 204,617 |   |
| Manufactured                  housing loans                                                                      |   |        | Aug                  2006 |                                       |   | 364,794                               |   |                                                                                                       | -         |                                   |   | 362,181                                                                             |   |                                             | -         |                                                             |   | LIBOR                  +1.25%  |   |                                                          | Aug                  2011 |                                                                    |   | 6.87%                                                                      |   |   | 3.07 |   |   | 364,794 |   |   | 399,125 |   |   | 5.87 |   |   | 73,973 |   |   | 370,466 |   |
|                                                                                                             |   |        |                      |                                       |   | 679,891                               |   |                                                                                                       | 353,330   |                                   |   | 675,844                                                                             |   |                                             | 353,330   |                                                             |   |                           |   |                                                          |                      |                                                                    |   | 6.63%                                                                      |   |   | 2.26 |   |   | 579,952 |   |   | 758,092 |   |   | 5.23 |   |   | 80,936 |   |   | 575,083 |   |
| Notes                  Payable                                                                                   |   |        |                      |                                       |   |                                  |   |                                                                                                       |      |                                   |   |                                                                                |   |                                             |      |                                                             |   |                           |   |                                                          |                      |                                                                    |   |                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                  mortgage loans (4)                                                                  |   |        | Nov                  2004 |                                       |   | 128,866                               |   |                                                                                                       | 260,441   |                                   |   | 128,866                                                                             |   |                                             | 260,441   |                                                             |   | LIBOR+0.16%                    |   |                                                          | Nov                  2007 |                                                                    |   | 5.68%                                                                      |   |   | 0.74 |   |   | 128,866 |   |   | 145,819 |   |   | 2.79 |   |   | 142,301 |   |   | - |   |
| Repurchase                  Agreements (4) (8)                                                                   |   |        |                      |                                       |   |                                  |   |                                                                                                       |      |                                   |   |                                                                                |   |                                             |      |                                                             |   |                           |   |                                                          |                      |                                                                    |   |                                                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real                  estate securities                                                                          |   |        | Rolling                   |                                       |   | 181,059                               |   |                                                                                                       | 149,546   |                                   |   | 181,059                                                                             |   |                                             | 149,546   |                                                             |   | LIBOR                  + 0.41% |   |                                                          | Jan                  2007 |                                                                    |   | 5.62%                                                                      |   |   | 0.08 |   |   | 181,059 |   |   | 207,374 |   |   | 4.60 |   |   | 101,380 |   |   | 92,457 |   |
| Real                  estate related loans                                                                       |   |        | Rolling                   |                                       |   | 553,944                               |   |                                                                                                       | 185,278   |                                   |   | 553,944                                                                             |   |                                             | 185,278   |                                                             |   | LIBOR                  + 0.69% |   |                                                          | Jan                  2007 |                                                                    |   | 6.02%                                                                      |   |   | 0.08 |   |   | 553,944 |   |   | 718,989 |   |   | 2.21 |   |   | 696,174 |   |   | 19,630 |   |
| Residential                  mortgage loans                                                                      |   |        | Rolling                   |                                       |   | 25,343                                |   |                                                                                                       | 41,853    |                                   |   | 25,343                                                                              |   |                                             | 41,853    |                                                             |   | LIBOR                  + 0.43% |   |                                                          | Mar                  2007 |                                                                    |   | 5.79%                                                                      |   |   | 0.23 |   |   | 25,343 |   |   | 27,020 |   |   | 2.81 |   |   | 26,347 |   |   | - |   |
|                                                                                                             |   |        |                      |                                       |   | 760,346                               |   |                                                                                                       | 376,677   |                                   |   | 760,346                                                                             |   |                                             | 376,677   |                                                             |   |                           |   |                                                          |                      |                                                                    |   | 5.92%                                                                      |   |   | 0.08 |   |   | 760,346 |   |   | 953,383 |   |   | 2.77 |   |   | 823,901 |   |   | 112,087 |   |
| Repurchase                  agreements subject to ABCP facility (7)                                              |   |        |                      |                                       |   |                                  |   |                                                                                                       |      |                                   |   |                                                                                |   |                                             |      |                                                             |   |                           |   |                                                          |                      |                                                                    |   |                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency                  RMBS                                                                                     |   |        | Dec                  2006 |                                       |   | 1,143,749                             |   |                                                                                                       | 671,526   |                                   |   | 1,143,749                                                                           |   |                                             | 671,526   |                                                             |   | 5.41%                          |   |                                                          | Jan                  2007 |                                                                    |   | 4.97%                                                                      |   |   | 0.08 |   |   | 1,143,749 |   |   | 1,176,358 |   |   | 4.27 |   |   | - |   |   | 1,087,385 |   |
|                                                                                                             |   |        |                      |                                       |   |                                  |   |                                                                                                       |      |                                   |   |                                                                                |   |                                             |      |                                                             |   |                           |   |                                                          |                      |                                                                    |   |                                                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit                  facility (5)                                                                             |   |        | May                  2006 |                                       |   | 93,800                                |   |                                                                                                       | 20,000    |                                   |   | 93,800                                                                              |   |                                             | 20,000    |                                                             |   | LIBOR                  + 1.75% |   |                                                          | Nov                  2007 |                                                                    |   | 7.08%                                                                      |   |   | 0.85 |   |   | 93,800 |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Junior                  subordinated notes payable                                                               |   |        | Mar                  2006 |                                       |   | 100,100                               |   |                                                                                                       | -         |                                   |   | 100,100                                                                             |   |                                             | -         |                                                             |   | 7.80%                  (6)     |   |                                                          | Apr                  2036 |                                                                    |   | 7.72%                                                                      |   |   | 29.25 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Subtotal                  debt obligations                                                                       |   |        |                      |                                       |   | 7,246,918                             |   |                                                                                                       | 5,242,927 |                                   |   | 7,216,529                                                                           |   |                                             | 5,212,358 |                                                             |   |                           |   |                                                          |                      |                                                                    |   | 5.76%                                                                      |   |   | 4.15 |   | $ | 6,753,929 |   | $ | 7,977,738 |   |   | 4.63 |   | $ | 2,772,011 |   | $ | 3,943,120 |   |
|                                                                                                             |   |        |                      |                                       |   |                                  |   |                                                                                                       |      |                                   |   |                                                                                |   |                                             |      |                                                             |   |                           |   |                                                          |                      |                                                                    |   |                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financing                    on subprime mortgage loans subject to future                    repurchase (3) |   |        | Apr                  2006 |                                       |   | 299,176                               |   |                                                                                                       | -         |                                   |   | 288,202                                                                             |   |                                             | -         |                                                             |   |                           |   |                                                          |                      |                                                                    |   |                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                  debt obligations                                                                          |   |        |                      |                                       | $      | 7,546,094                             |   | $                                                                                                          | 5,242,927 |                                   | $      | 7,504,731                                                                           |   | $                                                | 5,212,358 |                                                             |   |                           |   |                                                          |                      |                                                                    |   |                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| (1) | Including                  the effect of applicable hedges. |
|-----|-------------------------------------------------------------|

| (2) | Weighted                  average, including floating and fixed rate                  classes. |
|-----|------------------------------------------------------------------------------------------------|

| (3) | See                  Note 5. |
|-----|------------------------------|

| (4) | Subject                  to potential mandatory prepayments based on collateral                  value. |
|-----|---------------------------------------------------------------------------------------------------------|

| (5) | A                  maximum of $200 million can be                  drawn. |
|-----|---------------------------------------------------------------------------|

| (6) | LIBOR                  + 2.25% after April 2016. |
|-----|--------------------------------------------------|

| (7) | ABCP                  means asset backed commercial paper. See                  below. |
|-----|----------------------------------------------------------------------------------------|

| (8) | The                  counterparties on our repurchase agreements include: Bear Stearns                  Mortgage                  Capital Corporation ($270.6 million), Credit Suisse ($216.2 million),                  Deutsche Bank AG ($181.7 million) and other ($91.8                  million). |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| 2007       |   | $      | 2,126,761 |   |
|------------|--------|--------|-----------|--------|
| 2008       |   |   | -         |   |
| 2009       |   |   | 213,172   |   |
| 2010       |   |   | -         |   |
| 2011       |   |   | 364,794   |   |
| Thereafter |   |   | 4,841,367 |   |
|       |   | $      | 7,546,094 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| **9.** | **STOCK                OPTION PLAN AND EARNINGS PER                SHARE** |
|--------|----------------------------------------------------------------------------|

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| Recipient                       |   | Date                  of Grant/Exercise |   | Number                  of Options |   | Weighted                  Average Exercise                  Price |   | Fair                  Value At Grant Date                  (Millions) |
|---------------------------------|--------|-----------------------------------------|--------|------------------------------------|--------|-------------------------------------------------------------------|--------|-----------------------------------------------------------------------|
| Directors                       |   | Various                                 |   | 18,000                             |   | $17.38                                                            |   | Not                  Material                                         |
| Manager                  (B)    |   | October                  2002           |   | 700,000                            |   | $13.00                                                            |   | $0.4                  (A)                                             |
| Manager                  (B)    |   | July                  2003              |   | 460,000                            |   | $20.35                                                            |   | $0.8                  (A)                                             |
| Manager                  (B)    |   | December                  2003          |   | 328,227                            |   | $22.85                                                            |   | $0.4                  (A)                                             |
| Manager                  (B)    |   | January                  2004           |   | 330,000                            |   | $26.30                                                            |   | $0.6                  (A)                                             |
| Manager                  (B)    |   | May                  2004               |   | 345,000                            |   | $25.75                                                            |   | $0.5                  (A)                                             |
| Manager                  (B)    |   | November                  2004          |   | 162,500                            |   | $31.40                                                            |   | $0.5                  (A)                                             |
| Manager                  (B)    |   | January                  2005           |   | 330,000                            |   | $29.60                                                            |   | $1.1                  (A)                                             |
| Manager                  (B)    |   | November                  2006          |   | 170,000                            |   | $29.42                                                            |   | $0.5                  (A)                                             |
| Excercised                  (B) |   | Prior                  to 2006          |   | (861,920)                          |   | $15.27                                                            |   |                                                                  |
| Excercised                  (B) |   | 2006                                    |   | (98,000)                           |   | $18.06                                                            |   |                                                                  |
| Outstanding                     |   |                                    |   | 1,883,807                          |   | $25.89                                                            |   |                                                                  |

|  | (A) | The                  fair value of the options was estimated using a binomial option                  pricing                  model. Since the Newcastle Option Plan has characteristics significantly                  different from those of traded options, and since the assumptions                  used in                  such model, particularly the volatility assumption, are subject                  to                  significant judgment and variability, the actual value of the options                  could vary materially from management’s estimate. The assumptions used in                  such model were as follows: |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  Date                of Grant |   |  Volatility |   |  Dividend                Yield |   | Expected                Life (Years) |   |  Risk-Free                Rate |
|------------------------------------|--------|------------------|--------|-------------------------------------|--------|--------------------------------------|--------|-------------------------------------|
| October                2002        |   | 15%              |   | 13.85%                              |   | 10                                   |   | 4.05%                               |
| July                2003           |   | 15%              |   | 9.83%                               |   | 10                                   |   | 3.63%                               |
| December                2003       |   | 15%              |   | 8.75%                               |   | 10                                   |   | 4.23%                               |
| January                2004        |   | 15%              |   | 7.60%                               |   | 10                                   |   | 4.23%                               |
| May                2004            |   | 15%              |   | 9.32%                               |   | 10                                   |   | 4.77%                               |
| November                2004       |   | 18%              |   | 7.64%                               |   | 10                                   |   | 4.21%                               |
| January                2005        |   | 21%              |   | 8.45%                               |   | 10                                   |   | 4.27%                               |
| November                2006       |   | 21%              |   | 8.84%                               |   | 5                                    |   | 4.69%                               |

|  | (B) | The                  Manager assigned certain of its options to its employees as                  follows: |
|--|-----|------------------------------------------------------------------------------------------------------------|

|                                     |   | Total                                                |    |
|-------------------------------------|--------|-----------------------------------------------------------|---------|
| Strike                  Price  |   | Inception                  to                  Date  |    |
|                                |   |                                                      |    |
| $13.00                         |   |                                                      | 269,500 |   |
| $20.35                         |   |                                                      | 193,200 |   |
| $22.85                         |   |                                                      | 139,355 |   |
| $26.30                         |   |                                                      | 127,050 |   |
| $31.40                         |   |                                                      | 62,563  |   |
| $29.42                         |   |                                                      | 85,425  |   |
|                                |   |                                                      |    |   |
| Total                          |   |                                                      | 877,093 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| **10.** | **MANAGEMENT                AGREEMENT AND RELATED PARTY                TRANSACTIONS** |
|---------|---------------------------------------------------------------------------------------|

**Manager**

|                                  |   | **Amounts                Incurred (in millions)** |   |
|---------------------------------------|--------|---------------------------------------------------|--------|
|                                  |   | **2006**                                          |   | **2005** |   | **2004** |   |
| Management                Fee    |   |                                              | $13.5  |   |   | $12.8 |   |   | $10.1 |   |
| Expense                Reimbursement  |   |                                              | 0.5    |   |   | 0.5 |   |   | 0.5 |   |
| Incentive                Compensation |   |                                              | 12.2   |   |   | 7.6 |   |   | 8.0 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

**Other      Affiliates**

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| **11.** | **COMMITMENTS                AND CONTINGENCIES** |
|---------|--------------------------------------------------|

***Remarketing      Agreements***

***Loan      Commitment—***

***Stockholder      Rights Agreement***

***Litigation***

***Environmental      Costs***
***3⁄4***

***Debt      Covenants***
***3⁄4***
*** ***

***Exit      Fee***
***3⁄4***
*** ***

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| **12.** | **INCOME                TAXES AND DIVIDENDS** |
|---------|-----------------------------------------------|

|   |   | Dividends                  Per Share (A) |   | Ordinary/                  |   | Capital                           |   |   |    |
|--------|--------|------------------------------------------|--------|----------------------------|--------|-----------------------------------|--------|--------|---------|
|        |   | Book                  Basis              |   | Tax                  Basis |   | Qualified                  Income |   | Gains  |    | Return                  of Capital |   |
| 2006   |   |                                     | $2.615 |                       |   | $2.948                            |   |   | 100.00% |   |   | - |   |   | None |   |
|   |   |                                     |   |                       |   |                              |   |   |    |   |   |   |   |   |   |   |
| 2005   |   |                                     | $2.500 |                       |   | $2.540                            |   |   | 86.41%  |   |   | 13.59% |   |   | None |   |
|   |   |                                     |   |                       |   |                              |   |   |    |   |   |   |   |   |   |   |
| 2004   |   |                                     | $2.425 |                       |   | $2.432                            |   |   | 76.60%  |   |   | 23.40% |   |   | None |   |

|  | (A) | Any                  excess of book basis dividends over tax basis dividends would generally                  be                  carried forward to the next year for tax                  purposes. |
|--|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **13.** | **SUBSEQUENT                EVENTS** |
|---------|--------------------------------------|

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

**14.**
**SUMMARY      QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)**

| **2006**                                                                                                                                           |   | **Quarter                  Ended** |                               | Year                  Ended  |                        |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|------------------------------------|------------------------------|-----------------------------|
|                                                                                                                                               |   | March                  31 (A)      |                               | June                  30 (A) |                        | September                  30 (A) |   | December                  31 |   | December                  31 |   |
| Gross                  Revenues                                                                                                                    |   | $                                  | 123,548                            |                         | $                           | 129,027 |   | $ | 144,094 |   | $ | 155,940 |   | $ | 552,609 |   |
| Operating                  expenses                                                                                                                |   |                               | (16,911                            | )                            |                        | (10,999 | ) |   | (13,032 | ) |   | (14,581 | ) |   | (55,523 | ) |
| Operating                  income                                                                                                                  |   |                               | 106,637                            |                         |                        | 118,028 |   |   | 131,062 |   |   | 141,359 |   |   | 497,086 |   |
| Interest                  expense                                                                                                                  |   |                               | (76,965                            | )                            |                        | (87,909 | ) |   | (100,239 | ) |   | (109,156 | ) |   | (374,269 | ) |
| Depreciation                  and amortization                                                                                                     |   |                               | (199                               | )                            |                        | (278 | ) |   | (290 | ) |   | (318 | ) |   | (1,085 | ) |
| Equity                  in earnings of unconsolidated subsidiaries (B)                                                                             |   |                               | 1,195                              |                         |                        | 1,215 |   |   | 1,506 |   |   | 2,052 |   |   | 5,968 |   |
| Income                  from continuing operations                                                                                                 |   |                               | 30,668                             |                         |                        | 31,056 |   |   | 32,039 |   |   | 33,937 |   |   | 127,700 |   |
| Income                  (loss) from discontinued operations                                                                                        |   |                               | 251                                |                         |                        | (26 | ) |   | (12 | ) |   | 10 |   |   | 223 |   |
| Preferred                  dividends                                                                                                               |   |                               | (2,328                             | )                            |                        | (2,329 | ) |   | (2,328 | ) |   | (2,329 | ) |   | (9,314 | ) |
| Income                  available for common stockholders                                                                                          |   | $                                  | 28,591                             |                         | $                           | 28,701 |   | $ | 29,699 |   | $ | 31,618 |   | $ | 118,609 |   |
| Net                  Income per share of common stock                                                                                              |   |                               |                               |                         |                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                              |   | $                                  | 0.65                               |                         | $                           | 0.65 |   | $ | 0.68 |   | $ | 0.70 |   | $ | 2.68 |   |
| Diluted                                                                                                                                            |   | $                                  | 0.65                               |                         | $                           | 0.65 |   | $ | 0.67 |   | $ | 0.70 |   | $ | 2.67 |   |
| Income                    from continuing operations per share of common stock, after preferred                    dividends and related accretion |   |                               |                               |                         |                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                              |   | $                                  | 0.64                               |                         | $                           | 0.65 |   | $ | 0.68 |   | $ | 0.70 |   | $ | 2.67 |   |
| Diluted                                                                                                                                            |   | $                                  | 0.64                               |                         | $                           | 0.65 |   | $ | 0.67 |   | $ | 0.70 |   | $ | 2.67 |   |
|                                                                                                                                                    |   |                               |                               |                         |                        |   |   |   |   |   |   |   |   |   |   |   |
| Income                    (loss) from discontinued operations per share of common                    stock                                         |   |                               |                               |                         |                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                              |   | $                                  | 0.01                               |                         | $                           | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.01 |   |
| Diluted                                                                                                                                            |   | $                                  | 0.01                               |                         | $                           | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |
| Weighted                    average number of shares of common stock outstanding                                                                   |   |                               |                               |                         |                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                              |   |                               | 43,945                             |                         |                        | 43,991 |   |   | 44,000 |   |   | 45,129 |   |   | 44,269 |   |
| Diluted                                                                                                                                            |   |                               | 44,064                             |                         |                        | 44,071 |   |   | 44,137 |   |   | 45,385 |   |   | 44,417 |   |
|                                                                                                                                               |   |                               |                               |                         |                        |   |   |   |   |   |   |   |   |   |   |   |
| **2005**                                                                                                                                           |   |                               | **Quarter                  Ended** |                         | Year                  Ended |   |
|                                                                                                                                                    |   | March                  31 (A)      |                               | June                  30 (A) |                        | September                  30 (A) |   | December                  31 |   | December                  31 |   |
| Gross                  Revenues                                                                                                                    |   | $                                  | 83,663                             |                         | $                           | 92,065 |   | $ | 99,850 |   | $ | 102,635 |   | $ | 378,213 |   |
| Operating                  expenses                                                                                                                |   |                               | (9,114                             | )                            |                        | (8,832 | ) |   | (12,934 | ) |   | (11,008 | ) |   | (41,888 | ) |
| Operating                  income                                                                                                                  |   |                               | 74,549                             |                         |                        | 83,233 |   |   | 86,916 |   |   | 91,627 |   |   | 336,325 |   |
| Interest                  expense                                                                                                                  |   |                               | (48,766                            | )                            |                        | (55,791 | ) |   | (58,681 | ) |   | (63,208 | ) |   | (226,446 | ) |
| Depreciation                  and amortization                                                                                                     |   |                               | (136                               | )                            |                        | (135 | ) |   | (182 | ) |   | (188 | ) |   | (641 | ) |
| Equity                  in earnings of unconsolidated subsidiaries (B)                                                                             |   |                               | 1,853                              |                         |                        | 1,393 |   |   | 1,061 |   |   | 1,302 |   |   | 5,609 |   |
| Income                  from continuing operations                                                                                                 |   |                               | 27,500                             |                         |                        | 28,700 |   |   | 29,114 |   |   | 29,533 |   |   | 114,847 |   |
| Income                  (loss) from discontinued operations                                                                                        |   |                               | 1,184                              |                         |                        | 781 |   |   | 86 |   |   | 57 |   |   | 2,108 |   |
| Preferred                  dividends                                                                                                               |   |                               | (1,523                             | )                            |                        | (1,524 | ) |   | (1,523 | ) |   | (2,114 | ) |   | (6,684 | ) |
| Income                  available for common stockholders                                                                                          |   | $                                  | 27,161                             |                         | $                           | 27,957 |   | $ | 27,677 |   | $ | 27,476 |   | $ | 110,271 |   |
| Net                  Income per share of common stock                                                                                              |   |                               |                               |                         |                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                              |   | $                                  | 0.63                               |                         | $                           | 0.64 |   | $ | 0.63 |   | $ | 0.63 |   | $ | 2.53 |   |
| Diluted                                                                                                                                            |   | $                                  | 0.62                               |                         | $                           | 0.63 |   | $ | 0.63 |   | $ | 0.63 |   | $ | 2.51 |   |
|                                                                                                                                                    |   |                               |                               |                         |                        |   |   |   |   |   |   |   |   |   |   |   |
| Income                    from continuing operations per share of common stock, after preferred                    dividends and related accretion |   |                               |                               |                         |                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                              |   | $                                  | 0.60                               |                         | $                           | 0.62 |   | $ | 0.63 |   | $ | 0.63 |   | $ | 2.48 |   |
| Diluted                                                                                                                                            |   | $                                  | 0.59                               |                         | $                           | 0.61 |   | $ | 0.63 |   | $ | 0.63 |   | $ | 2.46 |   |
| Income                  (loss) from discontinued operations per share of common stock                                                              |   |                               |                               |                         |                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                              |   | $                                  | 0.03                               |                         | $                           | 0.02 |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.05 |   |
| Diluted                                                                                                                                            |   | $                                  | 0.03                               |                         | $                           | 0.02 |   | $ | 0.00 |   | $ | 0.00 |   | $ | 0.05 |   |
| Weighted                  average number of shares of common stock outstanding                                                                     |   |                               |                               |                         |                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                              |   |                               | 43,222                             |                         |                        | 43,768 |   |   | 43,790 |   |   | 43,897 |   |   | 43,672 |   |
| Diluted                                                                                                                                            |   |                               | 43,629                             |                         |                        | 44,127 |   |   | 44,121 |   |   | 44,059 |   |   | 43,986 |   |

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**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

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| **2004**                                                                                                                                       |   | **Quarter                  Ended** |    | Year                  Ended  |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|---------|------------------------------|--------|
|                                                                                                                                           |   | March                  31 (A)      |    | June                  30 (A) |   | September                  30 (A) |   | December                  31 |   | December                  31 |   |
| Gross                  Revenues                                                                                                                |   | $                                  | 55,309  |                         | $      | 61,612 |   | $ | 63,146 |   | $ | 69,602 |   | $ | 249,669 |   |
| Operating                  expenses                                                                                                            |   |                               | (7,333  | )                            |   | (6,354 | ) |   | (7,822 | ) |   | (7,299 | ) |   | (28,808 | ) |
| Operating                  income                                                                                                              |   |                               | 47,976  |                         |   | 55,258 |   |   | 55,324 |   |   | 62,303 |   |   | 220,861 |   |
| Interest                  expense                                                                                                              |   |                               | (28,091 | )                            |   | (32,615 | ) |   | (33,612 | ) |   | (42,080 | ) |   | (136,398 | ) |
| Depreciation                  and amortization                                                                                                 |   |                               | (113    | )                            |   | (95 | ) |   | (108 | ) |   | (135 | ) |   | (451 | ) |
| Equity                  in earnings of unconsolidated subsidiaries (B)                                                                         |   |                               | 1,223   |                         |   | 2,218 |   |   | 3,179 |   |   | 3,337 |   |   | 9,957 |   |
| Income                  from continuing operations                                                                                             |   |                               | 20,995  |                         |   | 24,766 |   |   | 24,783 |   |   | 23,425 |   |   | 93,969 |   |
| Income                  (loss) from discontinued operations                                                                                    |   |                               | 856     |                         |   | (1,591 | ) |   | 185 |   |   | 4,996 |   |   | 4,446 |   |
| Preferred                  dividends                                                                                                           |   |                               | (1,523  | )                            |   | (1,524 | ) |   | (1,523 | ) |   | (1,524 | ) |   | (6,094 | ) |
| Income                  available for common stockholders                                                                                      |   | $                                  | 20,328  |                         | $      | 21,651 |   | $ | 23,445 |   | $ | 26,897 |   | $ | 92,321 |   |
| Net                  Income per share of common stock                                                                                          |   |                               |    |                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                          |   | $                                  | 0.59    |                         | $      | 0.60 |   | $ | 0.61 |   | $ | 0.70 |   | $ | 2.50 |   |
| Diluted                                                                                                                                        |   | $                                  | 0.58    |                         | $      | 0.59 |   | $ | 0.60 |   | $ | 0.69 |   | $ | 2.46 |   |
| Income                  from continuing operations per share of common stock,                  after preferred dividends and related accretion |   |                               |    |                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                          |   | $                                  | 0.57    |                         | $      | 0.64 |   | $ | 0.61 |   | $ | 0.56 |   | $ | 2.38 |   |
| Diluted                                                                                                                                        |   | $                                  | 0.56    |                         | $      | 0.63 |   | $ | 0.60 |   | $ | 0.55 |   | $ | 2.34 |   |
| Income                  (loss) from discontinued operations per share of common stock                                                          |   |                               |    |                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                          |   | $                                  | 0.02    |                         | $      | (0.04 | ) | $ | 0.00 |   | $ | 0.14 |   | $ | 0.12 |   |
| Diluted                                                                                                                                        |   | $                                  | 0.02    |                         | $      | (0.04 | ) | $ | 0.00 |   | $ | 0.14 |   | $ | 0.12 |   |
| Weighted                  average number of shares of common stock outstanding                                                                 |   |                               |    |                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                          |   |                               | 34,402  |                         |   | 36,161 |   |   | 38,234 |   |   | 38,941 |   |   | 36,944 |   |
| Diluted                                                                                                                                        |   |                               | 34,976  |                         |   | 36,671 |   |   | 38,883 |   |   | 39,663 |   |   | 37,558 |   |

| (A) | The                Income Available for Common Stockholders shown agrees with Newcastle’s                quarterly report(s) on Form 10-Q as filed with the Securities and                Exchange                Commission. However, individual line items may vary from such report(s)                due to the operations of properties sold, or classified as held for                sale,                during subsequent periods being retroactively reclassified to Income                for                Discontinued Operations for all periods presented (Note                5). |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (B) | Net                    of income taxes on related taxable                    subsidiaries. |
|-----|--------------------------------------------------------------------------------------------|

----

**Item      9. Changes in and Disagreements with Accountants on Accounting and Financial      Disclosure.**

**Item      9A. Controls and Procedures.**

| (a) | Disclosure                Controls and Procedures. The Company’s management, with the participation                of the Company’s Chief Executive Officer and Chief Financial Officer, has                evaluated the effectiveness of the Company’s disclosure controls and                procedures (as such term is defined in Rules 13a-15(e) and 15d -15(e)                under the Securities Exchange Act of 1934, as amended (the “Exchange                Act”)) as of the end of the period covered by this report. The Company’s                disclosure controls and procedures are designed to provide reasonable                assurance that information is recorded, processed, summarized and                reported                accurately and on a timely basis. Based on such evaluation, the Company’s                Chief Executive Officer and Chief Financial Officer have concluded                that,                as of the end of such period, the Company’s disclosure controls and                procedures are effective. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

**Management’s      Report on Internal Control Over Financial Reporting**

| ·   | pertain                to the maintenance of records that in reasonable detail accurately                and                fairly reflect the transactions and dispositions of the assets of                the                Company; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | provide                reasonable assurance that transactions are recorded as necessary                to permit                preparation of financial statements in accordance with accounting                principles generally accepted in the United States, and that receipts                and                expenditures of the Company are being made only in accordance with                authorizations of management and directors of the Company; and |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | provide                reasonable assurance regarding prevention or timely detection of                unauthorized acquisition, use or disposition of the Company’s assets that                could have a material effect on the financial                statements. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Internal      Control-Integrated Framework*

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**Item      9B. Other Information.**

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**PART      III**

**Item      10. Directors, Executive Officers AND Corporate      Governance.**

**Item      11. Executive Compensation.**

**Item      12. Security Ownership of Certain Beneficial Owners and Management and Related      Stockholder Matters.**

**Item      13. Certain Relationships and Related Transactions, Director      Independence.**

**Item      14. Principal Accountant Fees and Services. **

----

**PART      IV**

**Item      15. Exhibits; Financial Statement Schedules.**

|   | (a) | and                (c) Financial statements and                schedules: |
|--------|-----|---------------------------------------------------------------------------|

|  | (b) | Exhibits                filed with this Form 10-K: |
|--|-----|----------------------------------------------------|

|  | 3.1 | Articles                of Amendment and Restatement (incorporated by reference to the                Registrant’s Registration Statement on Form S-11 (File No. 333-90578),                Exhibit 3.1). |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3.2 | Articles                Supplementary relating to the Series B Preferred Stock (incorporated                by                reference to the Registrant’s Quarterly Report on Form 10-Q for the period                ended March 31, 2003, Exhibit 3.3). |
|--|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3.3 | Articles                Supplementary relating to the Series C Preferred Stock (incorporated                by                reference to the Registrant’s Report on Form 8-K, Exhibit 3.3, filed on                October 25, 2005). |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3.4 | By-laws                (incorporated by reference to the Registrant’s Registration Statement on                Form S-11, (File No. 333-90578), Exhibit                3.2). |
|--|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 4.1 | Rights                Agreement between the Registrant and American Stock Transfer and                Trust                Company, as Rights Agent, dated October 16, 2002 (incorporated by                reference to the Registrant’s Quarterly Report on Form 10-Q for the period                ended September 30, 2003, Exhibit                4.1). |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 10.1 | Amended                and Restated Management and Advisory Agreement by and among the Registrant                and FIG LLC (formerly known as Fortress Investment Group LLC), dated                June                23 2003 (incorporated by reference to the Registrant’s Statement on Form                S-11 (File No. 333-106135), Exhibit                10.1). |
|--|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 10.2 | Newcastle                Investment Corp. Nonqualified Stock Option and Incentive Award Plan                Amended and Restated Effective as of February 11, 2004 (incorporated                by                reference to the Registrant’s Annual Report on Form 10-K for the year                ended December 31, 2005, Exhibit                10.2). |
|--|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 12.1 | Statements                re: Computation of Ratios |
|--|------|-----------------------------------------------------|

|  | 21.1 | Subsidiaries                of the Registrant. |
|--|------|------------------------------------------------|

|  | 23.1 | Consent                of Ernst & Young LLP, independent                accountants. |
|--|------|------------------------------------------------------------------------------------------|

|  | 31.1 | Certification                    of Chief Executive Officer as adopted pursuant to Section 302                    of the                    Sarbanes-Oxley Act of                    2002. |
|--|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 31.2 | Certification                  of Chief Financial Officer as adopted pursuant to Section 302 of                  the                  Sarbanes-Oxley Act of 2002. |
|--|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|  | 32.2 | Certification                    of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,                    as adopted                    pursuant to Section 906 of the Sarbanes-Oxley Act of                    2002. |
|--|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | NEWCASTLE                INVESTMENT CORP. |
|--------|-------------------------------------------|
|   |                                      |
|   |                                      |
|   | February                26, 2007          |
|   |                                      |
|   | By:                /s/ Wesley R. Edens    |
|   | Wesley                R. Edens            |
|   | Chairman                of the Board      |

----

**Exhibit      Index**

|  | 3.1 | Articles                of Amendment and Restatement (incorporated by reference to the                Registrant’s Registration Statement on Form S-11 (File No. 333-90578),                Exhibit 3.1). |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3.2 | Articles                Supplementary relating to the Series B Preferred Stock (incorporated                by                reference to the Registrant’s Quarterly Report on Form 10-Q for the period                ended March 31, 2003, Exhibit 3.3). |
|--|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3.3 | Articles                Supplementary relating to the Series C Preferred Stock (incorporated                by                reference to the Registrant’s Report on Form 8-K, Exhibit 3.3, filed on                October 25, 2005). |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3.4 | Amended                and Restated By-laws (incorporated by reference to the Registrant’s                Current Report on Form 8-K (Exhibit 3.1, filed on May 5,                2006). |
|--|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 4.1 | Rights                Agreement between the Registrant and American Stock Transfer and                Trust                Company, as Rights Agent, dated October 16, 2002 (incorporated by                reference to the Registrant’s Quarterly Report on Form 10-Q for the period                ended September 30, 2002, Exhibit                4.1). |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 10.1 | Amended                and Restated Management and Advisory Agreement by and among the Registrant                and FIG LLC (formerly known as Fortress Investment Group LLC), dated                June                23, 2003 (incorporated by reference to the Registrant’s Statement on Form                S-11 (File No. 333-106135), Exhibit                10.1). |
|--|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 10.2 | Newcastle                Investment Corp. Nonqualified Stock Option and Incentive Award Plan                Amended and Restated Effective as of February 11, 2004 (incorporated                by                reference to the Registrant’s Annual Report on Form 10-K for the year                ended December 31, 2005, Exhibit                10.2). |
|--|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 12.1 | Statements                re: Computation of Ratios |
|--|------|-----------------------------------------------------|

|  | 21.1 | Subsidiaries                of the Registrant. |
|--|------|------------------------------------------------|

|  | 23.1 | Consent                of Ernst & Young LLP, independent                accountants. |
|--|------|------------------------------------------------------------------------------------------|

|  | 31.1 | Certification                of Chief Executive Officer as adopted pursuant to Section 302 of                the                Sarbanes-Oxley Act of 2002. |
|--|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 31.2 | Certification                of Chief Financial Officer as adopted pursuant to Section 302 of                the                Sarbanes-Oxley Act of 2002. |
|--|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|  | 32.2 | Certification                    of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,                    as adopted                    pursuant to Section 906 of the Sarbanes-Oxley Act of                    2002. |
|--|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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