----

----

**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. **

----

| 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)        |

**DOCUMENTS      INCORPORATED BY REFERENCE:**

|   | 1. | Portions                of the Registrant’s definitive proxy statement for the Registrant’s 2006                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. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

**NEWCASTLE      INVESTMENT CORP.**

**FORM      10-K**

**INDEX**

|                    |                                                                                                                                             | **Page** |
|-------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                    | **PART                I**                                                                                                                        |     |
| Item                1.  | Business                                                                                                                                         | 1        |
| Item                1A. | Risk                Factors                                                                                                                      | 12       |
| Item                1B. | Unresolved                Staff Comments                                                                                                         | 22       |
| Item                2.  | Properties                                                                                                                                       | 22       |
| Item                3.  | Legal                Proceedings                                                                                                                 | 22       |
| Item                4.  | Submission                of Matters to a Vote of Security                Holders                                                                | 22       |
|                    |                                                                                                                                             |     |
|                    | **PART                II**                                                                                                                       |     |
| Item                5.  | Market                for Registrant’s Common Equity, Related Stockholder                Matters and Issuer Purchases of Equity Securities | 22       |
| Item                6.  | Selected                Financial Data                                                                                                           | 24       |
| Item                7.  | Management’s                Discussion and Analysis of Financial Condition                and Results of Operations                        | 26       |
| Item                7A. | Quantitative                and Qualitative Disclosures About Market                Risk                                                         | 46       |
| Item                8.  | Financial                Statements and Supplementary                Data                                                                        | 51       |
|                    | Report                of Independent Registered Public Accounting                Firm                                                            | 52       |
|                    | Report                on Internal Control over Financial Reporting of                Independent Registered Public Accounting Firm          | 53       |
|                    | Consolidated                Balance Sheets as of December 31, 2005 and                December 31, 2004                                          | 54       |
|                    | Consolidated                Statements of Income for the years ended December                31, 2005, 2004 and 2003                             | 55       |
|                    | Consolidated                Statements of Stockholders’ Equity for the years                ended December 31, 2005, 2004 and 2003         | 56       |
|                    | Consolidated                Statements of Cash Flows for the years ended                December 31, 2005, 2004 and 2003                         | 58       |
|                    | Notes                to Consolidated Financial                Statements                                                                         | 60       |
| Item                9.  | Changes                in and Disagreements with Accountants on Accounting                and Financial Disclosure                               | 91       |
| Item                9A. | Controls                and Procedures                                                                                                           | 91       |
|                         | Management’s                Report on Internal Control over Financial                Reporting                                             | 91       |
| Item                9B. | Other                Information                                                                                                                 | 91       |
|                    |                                                                                                                                             |     |
|                    | **PART                III**                                                                                                                      |     |
| Item                10. | Directors                and Executive Officers of the                Registrant                                                                 | 92       |
| Item                11. | Executive                Compensation                                                                                                            | 92       |
| Item                12. | Security                Ownership of Certain Beneficial Owners and                Management                                                     | 92       |
| Item                13. | Certain                Relationships and Related                Transactions                                                                     | 92       |
| Item                14. | Principal                Accountant Fees and Services                                                                                            | 92       |
|                    |                                                                                                                                             |     |
|                    | **PART                IV**                                                                                                                       |     |
| Item                15. | Exhibits;                Financial Statement Schedules                                                                                           | 93       |
|                    | Signatures                                                                                                                                       | 94       |

----

**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, 2005, our investments in real estate securities                represented 80% 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,                2005, our investments in real estate related loans represented 9%                of our                assets.                                                                                                                                                                                                                                                                                                 |
|   |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3)     | Residential                Mortgage Loans: | We                acquire residential mortgage loans, including manufactured housing                loans                and subprime residential loans, that we believe will produce attractive                risk-adjusted returns. As of December 31, 2005, our investments in                residential mortgage loans represented 10% of our assets. In addition,                we                acquired a $1.5 billion portfolio of subprime residential loans subsequent                to year end, as described in “Our Investing Activities- Residential                Mortgage Loans” below.                                                                                                         |
|   |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4)     | Operating                Real Estate:      | We                acquire direct and indirect interests in operating real estate. As                of                December 31, 2005, our investments in operating real estate represented                1%                of our assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

----

**Our      Strategy**

|                                             |   | Total                  Portfolio (1) |      | Core                  Investment Portfolio (2) |   |
|--------------------------------------------------|--------|--------------------------------------|-----------|------------------------------------------------|--------|
|                                             |   | December                  31,        |      | December                  31,                  |   |
|                                             |   | 2005                                 |      | 2004                                           |   | 2005 |   | 2004 |   |
| Face                  amount                     |   | $                                    | 6,111,464 |                                           | $      | 4,493,274 |   | $ | 5,413,142 |   | $ | 4,294,092 |   |
| Percentage                  of total assets      |   |                                 | 99        | %                                              |   | 91 | % |   | 87 | % |   | 87 | % |
| Weighted                  average asset yield    |   |                                 | 6.59      | %                                              |   | 5.91 | % |   | 6.85 | % |   | 5.98 | % |
| Weighted                  average liability cost |   |                                 | 5.12      | %                                              |   | 4.15 | % |   | 5.22 | % |   | 4.17 | % |
| Weighted                  average net spread     |   |                                 | 1.47      | %                                              |   | 1.76 | % |   | 1.63 | % |   | 1.81 | % |
|                                             |   |                                 |      |                                           |   |   |   |   |   |   |   |   |   |

----

| (1) | Excluding                  the ICH loans, as described                  below. |
|-----|--------------------------------------------------------------------------------|

| (2) | Excluding                  the ICH loans and Agency RMBS, as described                  below. |
|-----|------------------------------------------------------------------------------------------------|

*Asset      Quality and Diversification*

*Financing      Strategy and Match Funded Discipline*

*i.e.*

----

*Credit      Risk Management*

**Formation**

| Year                                 |   | Shares                    Issued |       | Range                    of IssuePrices                    (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 |   |
| December                    31, 2005 |   |                             | 43,913,409 |                                                           |   |                                      |   |   |   |   |
|                                 |   |                             |       |                                                           |   |                                      |   |   |   |   |

----

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

----

**Our      Investing Activities**

***Real      Estate Securities***

|                                                              |   |                                 |      |          |   |                                 |   | Weighted                  Average         |   |
|-------------------------------------------------------------------|--------|--------------------------------------|-----------|---------------|--------|--------------------------------------|--------|-------------------------------------------|--------|
| Asset                  Type                                       |   | Current                  Face Amount |      | CarryingValue |   | Number                  ofSecurities |   | S&P                  EquivalentRating |   | Coupon |   | Yield |   | Maturity                  (Years) |   |
| CMBS-Conduit                                                      |   | $                                    | 1,455,345 |          | $      | 1,397,329                            |   |                                      | 197    |   |   | BBB- |   |   | 5.84 | % |   | 6.61 | % |   | 7.87 |   |
| CMBS-Large                  Loan                                  |   |                                 | 578,331   |          |   | 584,163                              |   |                                      | 61     |   |   | BBB- |   |   | 6.64 | % |   | 6.75 | % |   | 2.10 |   |
| CMBS-B                  Note                                      |   |                                 | 180,201   |          |   | 180,631                              |   |                                      | 32     |   |   | BBB- |   |   | 6.62 | % |   | 6.95 | % |   | 5.97 |   |
| Unsecured                  REIT Debt                              |   |                                 | 916,262   |          |   | 942,746                              |   |                                      | 99     |   |   | BBB- |   |   | 6.34 | % |   | 5.96 | % |   | 6.95 |   |
| ABS-Manufactured                                     Housing |   |                                 | 178,915   |          |   | 163,066                              |   |                                      | 10     |   |   | A- |   |   | 7.12 | % |   | 8.65 | % |   | 6.64 |   |
| ABS-Home                  Equity                                  |   |                                 | 525,004   |          |   | 524,477                              |   |                                      | 89     |   |   | B |   |   | 6.03 | % |   | 6.10 | % |   | 3.16 |   |
| ABS-Franchise                                                     |   |                                 | 70,837    |          |   | 69,622                               |   |                                      | 18     |   |   | BBB+ |   |   | 6.66 | % |   | 8.12 | % |   | 5.14 |   |
| Agency                  RMBS                                      |   |                                 | 698,322   |          |   | 692,485                              |   |                                      | 19     |   |   | AAA |   |   | 4.76 | % |   | 4.67 | % |   | 4.90 |   |
| Total/Average                                                     |   | $                                    | 4,603,217 |          | $      | 4,554,519                            |   |                                      | 525    |   |   | BBB+ |   |   | 5.99 | % |   | 6.25 | % |   | 5.81 |   |

|                         |   |                             |   |
|------------------------------|--------|----------------------------------|--------|
| Industry                     |   | %                  of FaceAmount |   |
| Residential                  |   |                             | 40.42  | % |
| Retail                       |   |                             | 21.03  | % |
| Office                       |   |                             | 18.73  | % |
| Lodging                      |   |                             | 5.70   | % |
| Health                  Care |   |                             | 4.73   | % |
| Industrial                   |   |                             | 3.63   | % |
| Other                        |   |                             | 5.76   | % |

----

***Real      Estate Related Loans***

| Loan                    Type           |   | CurrentFace                    Amount |    | CarryingValue |   | Loan                    Count |   | Weighted                    Avg. Yield |   | Weighted                    Avg. Maturity                    (Years) |   |
|----------------------------------------|--------|---------------------------------------|---------|---------------|--------|-------------------------------|--------|----------------------------------------|--------|----------------------------------------------------------------------|--------|
| B-Notes                                |   | $                                     | 72,173  |          | $      | 72,520                        |   |                                   | 13     |                                                                 |   | 8.46 | % |   | 2.40 |   |
| Mezzanine                    Loans (1) |   |                                  | 302,740 |          |   | 302,816                       |   |                                   | 8      |                                                                 |   | 8.44 | % |   | 1.94 |   |
| Bank                    Loans          |   |                                  | 56,274  |          |   | 56,563                        |   |                                   | 3      |                                                                 |   | 6.58 | % |   | 2.51 |   |
| Real                    Estate Loans   |   |                                  | 23,082  |          |   | 22,364                        |   |                                   | 1      |                                                                 |   | 20.02 | % |   | 2.00 |   |
| ICH                    Loans (2)       |   |                                  | 165,514 |          |   | 161,288                       |   |                                   | 96     |                                                                 |   | 8.64 | % |   | 1.55 |   |
| Total                                  |   | $                                     | 619,783 |          | $      | 615,551                       |   |                                   | 121    |                                                                 |   | 8.74 | % |   | 1.94 |   |
|                                   |   |                                  |    |          |   |                          |   |                                   |   |                                                                 |   |   |   |   |   |   |

----

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

| (2) | In                October 2003, pursuant to Financial Accounting Standards Board                Interpretation No. 46 “Consolidation of Variable Interest Entities,” we                consolidated an entity that holds a portfolio of commercial mortgage                loans                which has been securitized. This investment, which we refer 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 we reflect the gross loan assets and gross bonds payable of                this                entity on our balance sheet, as well as the related gross interest                income                and expense in our statement of                income. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| CurrentFace                  Amount                                                               |   | Carrying                  Value |   | Loan                  Count |   | Weighted                  Avg. Yield |   |
|---------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|-----------------------------|--------|--------------------------------------|--------|
| $                              28,974 |   | $                               | 17,802 |                        |   | 91                                   |   |   | 16.08 | % |

| ReferenceAsset                                                                               |   | NotionalAmount |    | MarginAmount |   | ReceiveInterest                  Rate |   | PayInterest                  Rate |                            | Maturity                  Date |   | Fair                  Value     |   |
|----------------------------------------------------------------------------------------------|--------|----------------|---------|--------------|--------|---------------------------------------|--------|-----------------------------------|---------------------------------|--------------------------------|--------|---------------------------------|--------|
| Term                  loan to a retail mall                      REIT         |   | $              | 106,083 |         | $      | 18,149                                |   |                              | LIBOR                  + 2.000% |                           |   | LIBOR                  + 0.500% |   |   | Nov                  2008 |   | $ | 1,008 |   |
| Term                  loan to a diversified real estate                  and finance company |   |           | 97,997  |         |   | 19,599                                |   |                              | LIBOR                  + 3.000% |                           |   | LIBOR                  + 0.625% |   |   | Feb                  2008 |   |   | 877 |   |
| Mezzanine                  loan to a hotel company                                           |   |           | 15,000  |         |   | 5,224                                 |   |                              | LIBOR                  +4.985%  |                           |   | LIBOR                  + 1.350% |   |   | Jun                  2007 |   |   | 101 |   |
| Term                  loan to a diversified real estate                  company             |   |           | 94,954  |         |   | 9,495                                 |   |                              | LIBOR                  +1.750%  |                           |   | LIBOR                  + 0.500% |   |   | Aug                  2007 |   |   | 904 |   |
| Term                  loan to a retail company                                               |   |           | 100,000 |         |   | 19,960                                |   |                              | LIBOR                  +3.000%  |                           |   | LIBOR                  + 0.500% |   |   | Dec                  2008 |   |   | 206 |   |
|                                                                                         |   | $              | 414,034 |         | $      | 72,427                                |   |                              |                            |                           |   |                            |   |   |   |   | $ | 3,096 |   |

----

***Residential      Mortgage Loans***

| Loan                  Type                  |   | CurrentFaceAmount |    | Carrying                  Value |   | Loan                  Count |   | Weighted                  Avg.Yield |   | Weighted                  Avg.Maturity                  (Years) (1) |   |
|---------------------------------------------|--------|-------------------|---------|---------------------------------|--------|-----------------------------|--------|-------------------------------------|--------|---------------------------------------------------------------------|--------|
| Residential                  loans          |   | $                 | 326,100 |                            | $      | 333,226                     |   |                                | 919    |                                                                |   | 4.79 | % |   | 2.73 |   |
| Manufactured                  housing loans |   |              | 284,870 |                            |   | 267,456                     |   |                                | 7,067  |                                                                |   | 7.84 | % |   | 5.78 |   |
| Total                                       |   | $                 | 610,970 |                            | $      | 600,682                     |   |                                | 7,986  |                                                                |   | 6.15 | % |   | 4.15 |   |
|                                        |

----

| (1) | Weighted                  average maturity was calculated based on a constant prepayment                  rate (CPR)                  of approximately 30% for residential loans and 10% for manufactured                  housing loans. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

***Operating      Real Estate***

*Bell      Canada Portfolio. *

|                                                                |   |                                                                |   |                                           |   |                                                        |
|--------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|------------------------------------------------|--------|-------------------------------------------------------------|
| **Property                  Address**                                                                  |   | **City                  / Submarket**                               |   | **State/                  Province**           |   | **Net                  Rentable****Sq                  Ft** |   | **Year                  Built/ Renovated** |   | **Use** |   |   |   |   |   |   |   |
| 100                  Dundas St.                                                                        |   | London                  (Centralbusiness                  district) |   | ON                                             |   | 323,411                                                     |   | 1980 |   | Office |   |   |   |   |   |   |   |
|                   |
| **Tenant**                                                                                             |   | **%                  of Total Sq Ft Leased**                        |   | **Tenant                  Net Rentable Sq Ft** |   | **Lease                  Start****Date**                    |   | **Lease                  End****Date** |   | **Annual                  Rent****(1)                  (2)** |   | **Current                  Rent per Sq Ft (1)** |   | **Annual                  Real Estate Taxes (1)** |   | **Tenant                  Credit Rating** |   |
| Bell                  Canada - Office                                                                  |   |                                                                | 89.89  | %                                              |   | 290,706                                                     |   |   | 03/26/98 |   |   | 3/31/06                  (4 | ) | $ | 1,751 |   | $ | 6.02 |   | $ | 1,146 |   |   | A |   |
| Bell                  Canada - Storage                                                                 |   |                                                                | 3.99   | %                                              |   | 12,890                                                      |   |   | 03/26/98 |   |   | 03/31/06 |   |   | 55 |   |   | 4.30 |   |   |  |   |   | A |   |
| Bell                  Canada - Communication                                                           |   |                                                                | 0.52   | %                                              |   | 1,686                                                       |   |   | 03/26/98 |   |   | 03/31/47 |   |   | 29 |   |   | 17.21 |   |   |  |   |   | A |   |
| Mactel                                                                                                 |   |                                                                | 0.16   | %                                              |   | 519                                                         |   |   | 03/01/03 |   |   | (3) |   |   | 4 |   |   | 6.88 |   |   |  |   |   |  |   |
| Tony                  & Fay Gardiner                                                               |   |                                                                | 0.15   | %                                              |   | 475                                                         |   |   | 09/01/02 |   |   | 08/31/07 |   |   | 4 |   |   | 9.04 |   |   |  |   |   |  |   |
| O&Y                  Enterprise Office                                                             |   |                                                                | 0.46   | %                                              |   | 1,478                                                       |   |   | 03/26/98 |   |   | 03/31/06 |   |   | 13 |   |   | 9.04 |   |   |  |   |   |  |   |
| COMTECH                                                                                                |   |                                                                | 0.03   | %                                              |   | 96                                                          |   |   | 01/01/00 |   |   | (3) |   |   | 1 |   |   | 6.88 |   |   |  |   |   |  |   |
| Vacant                                                                                                 |   |                                                                | N/A    |                                           |   | 15,561                                                      |   |   | N/A |   |   | N/A |   |   | N/A |   |   | N/A |   |   |     |   |   |      |   |
| Total                                                                                                  |   |                                                                | 95.20  | %                                              |   | 323,411                                                     |   |   |      |   |   |      |   | $ | 1,857 |   |   |      |   | $ | 1,146 |   |   |      |   |

| **Year**                  | ** ** | **Number                  of Tenant****Leases                  Expiring** | ** ** | **Square                  Feet of****Expiring                  Leases** | ** ** | **Annual                  Rent of****Expiring                  Leases (1)** | ** ** | **%                  of Gross Annual****Rent                  Represented****by                  Expiring Leases** |   |
|---------------------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|--------|
|                      |       |                                                                      |       |                                                                    |       |                                                                        |       |                                                                                                               |   |
| Vacant                    |       |                                                                      | N/A        |                                                                    |       | 15,561                                                                      |       |                                                                                                               | N/A    |   |   | N/A |   |
| 2006                  (4) |       |                                                                      | 5          |                                                                    |       | 305,689                                                                     |       | $                                                                                                                  | 1,824  |   |   | 98.2 | % |
| 2007                      |       |                                                                      | 1          |                                                                    |       | 475                                                                         |       |                                                                                                               | 4      |   |   | 0.2 | % |
| 2047                      |       |                                                                      | 1          |                                                                    |       | 1,686                                                                       |       |                                                                                                               | 29     |   |   | 1.6 | % |
| Total                     |       |                                                                      | 7          |                                                                    |       | 323,411                                                                     |       | $                                                                                                                  | 1,857  |   |   | 100.0 | % |
|                      |       |                                                                      |       |                                                                    |       |                                                                        |       |                                                                                                               |   |   |   |   |   |

----

| (1) | Monetary                amounts are in U.S. dollars based on the December 31, 2005 Canadian                dollar                exchange rate of 1.1620. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Certain                operating expenses are reimbursed by tenants at rates ranging up                to 15%                above actual cost. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | These                leases are running month to month. |
|-----|---------------------------------------------------------|

| (4) | 184,504                square feet have been released to Bell Canada for six years commencing                in                April 2006 for $6.02 per square foot per                annum, before adjustment for lease incentives, with one five year                renewal                option. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**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      |   | $                                       | 3,560,953 |                                | $      | 3,530,384                                                                                              |   |                                                         | 5.27   | %                                                                                              |   | 6.55                    |   | $                                                                 | 3,275,603 |                                                       | $      | 4,002,158                                                                          |   |   | 5.86 |   | $ | 1,107,164 |   | $ | 1,960,808 |   |
| Other                      Bonds Payable    |   |                                    | 353,330   |                                |   | 353,330                                                                                                |   |                                                         | 5.94   | %                                                                                              |   | 0.63                    |   |                                                              | 215,624   |                                                       |   | 428,744                                                                            |   |   | 4.23 |   |   | 9,961 |   |   | 227,576 |   |
| Notes                      Payable          |   |                                    | 260,441   |                                |   | 260,441                                                                                                |   |                                                         | 4.70   | %                                                                                              |   | 1.21                    |   |                                                              | 260,441   |                                                       |   | 288,683                                                                            |   |   | 2.69 |   |   | 282,589 |   |   | — |   |
| Repurchase                      Agreements  |   |                                    | 1,048,203 |                                |   | 1,048,203                                                                                              |   |                                                         | 4.68   | %                                                                                              |   | 0.10                    |   |                                                              | 1,048,203 |                                                       |   | 1,170,435                                                                          |   |   | 4.29 |   |   | 341,591 |   |   | 755,368 |   |
| Credit                      Facility        |   |                                    | 20,000    |                                |   | 20,000                                                                                                 |   |                                                         | 6.86   | %                                                                                              |   | 2.55                    |   |                                                              | 20,000    |                                                       |   | —                                                                            |   |   | — |   |   | — |   |   | — |   |
| Total                      debt obligations |   | $                                       | 5,242,927 |                                | $      | 5,212,358                                                                                              |   |                                                         | 5.17   | %                                                                                              |   | 4.59                    |   | $                                                                 | 4,819,871 |                                                       | $      | 5,890,020                                                                          |   |   | 5.27 |   | $ | 1,741,305 |   | $ | 2,943,752 |   |
|                                        |   |                                    |      |                                |   |                                                                                                   |   |                                                         |   |                                                                                           |   |                    |   |                                                              |      |                                                       |   |                                                                               |   |   |   |   |   |   |   |   |   |   |

----

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

**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**

**CAUTIONARY      STATEMENTS**

*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. **

**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. **

----

**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.      **

**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, 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 proceeds of investments we have sold      or      which have been prepaid must be reinvested at lower yields than those of the      investments sold or prepaid.**

**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 Company*

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

**REIT      distribution requirements could adversely affect our liquidity.**

----

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

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

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

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

**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.**

| 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 |   |
|                            |   |   |   |   |   |                       |   |                                    |                       |   |   |   |   |
| 2004                            |   |   | High   |   |   | Low                        |   |                                    | Last                  Sale |   |   | Distributions                  Declared |   |
| First                  Quarter  |   | $      | 33.89  |   | $      | 25.51                      |   | $                                       | 33.70                      |   | $ | 0.600 |   |
| Second                  Quarter |   | $      | 33.40  |   | $      | 24.51                      |   | $                                       | 29.95                      |   | $ | 0.600 |   |
| Third                  Quarter  |   | $      | 31.74  |   | $      | 27.97                      |   | $                                       | 30.70                      |   | $ | 0.600 |   |
| Fourth                  Quarter |   | $      | 32.87  |   | $      | 29.84                      |   | $                                       | 31.78                      |   | $ | 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      |   |                                                                                                             | 1,811,807                    (1 | )                                                                             | $      | 25.14                                                                                                                                  |   |   | 7,320,577                    (2 | ) |
| **Equity                    Compensation Plans Not Approved** |   |                                                                                                             |                            |                                                                          |   |                                                                                                                                   |   |   |   |   |
| **by                    Security Holders:**                   |   |                                                                                                             |                            |                                                                          |   |                                                                                                                                   |   |   |   |   |
| None                                                          |   |                                                                                                             | N/A                             |                                                                          |   | N/A                                                                                                                                    |   |   | N/A |   |
|                                                          |   |                                                                                                             |                            |                                                                          |   |                                                                                                                                   |   |   |   |   |

----

| (1) | Includes                options for (i) 1,170,317 shares held by an affiliate of our manager;                (ii)                627,490 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                5,696                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 2005, and of 861,920 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,** |    |
|                                                                             |   | **2005**                                     |    | **2004** |   | **2003** |   | **2002** |   | **2001** |   |
| **Operating                  Data**                                              |   |                                         |    |   |   |   |   | (2) |   | (1) |   |
| Revenues                                                                         |   |                                         |    |   |   |   |   |   |   |   |   |
| Interest                  income                                                 |   | $                                            | 348,516 |   | $ | 225,761 |   | $ | 133,183 |   | $ | 73,620 |   | $ | 48,729 |   |
| Other                  income                                                    |   |                                         | 29,697  |   |   | 23,908 |   |   | 18,901 |   |   | 18,716 |   |   | 50,348 |   |
|                                                                             |   |                                         | 378,213 |   |   | 249,669 |   |   | 152,084 |   |   | 92,336 |   |   | 99,077 |   |
| Expenses                                                                         |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                  expense                                                |   |                                         | 226,446 |   |   | 136,398 |   |   | 76,877 |   |   | 44,238 |   |   | 30,495 |   |
| Other                  expense                                                   |   |                                         | 42,529  |   |   | 29,259 |   |   | 20,828 |   |   | 18,197 |   |   | 36,865 |   |
|                                                                             |   |                                         | 268,975 |   |   | 165,657 |   |   | 97,705 |   |   | 62,435 |   |   | 67,360 |   |
|                                                                             |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity                  in earnings of unconsolidated subsidiaries               |   |                                         | 5,930   |   |   | 12,465 |   |   | 862 |   |   | 362 |   |   | 2,807 |   |
| Income                  taxes on related taxable subsidiaries                    |   |                                         | (321    | ) |   | (2,508 | ) |   | — |   |   | — |   |   | — |   |
|                                                                             |   |                                         | 5,609   |   |   | 9,957 |   |   | 862 |   |   | 362 |   |   | 2,807 |   |
|                                                                             |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                  from continuing operations                               |   |                                         | 114,847 |   |   | 93,969 |   |   | 55,241 |   |   | 30,263 |   |   | 34,524 |   |
| Income                  from discontinued operations                             |   |                                         | 2,108   |   |   | 4,446 |   |   | 877 |   |   | 1,232 |   |   | 9,147 |   |
| Net                  income                                                      |   |                                         | 116,955 |   |   | 98,415 |   |   | 56,118 |   |   | 31,495 |   |   | 43,671 |   |
| Preferred                  dividends and related accretion                       |   |                                         | (6,684  | ) |   | (6,094 | ) |   | (4,773 | ) |   | (1,162 | ) |   | (2,540 | ) |
| Income                  available for common stockholders                        |   | $                                            | 110,271 |   | $ | 92,321 |   | $ | 51,345 |   | $ | 30,333 |   | $ | 41,131 |   |
| Net                  income per share of common stock, diluted                   |   | $                                            | 2.51    |   | $ | 2.46 |   | $ | 1.96 |   | $ | 1.68 |   | $ | 2.49 |   |
| Income                  from continuing operations per share of common      |        |                                         |    |   |   |   |   |   |   |   |   |   |   |
| stock,                  after preferred dividends and related accretion, diluted |   | $                                            | 2.46    |   | $ | 2.34 |   | $ | 1.93 |   | $ | 1.61 |   | $ | 1.94 |   |
| Weighted                  average number of shares of common stock               |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| outstanding,                  diluted                                            |   |                                         | 43,986  |   |   | 37,558 |   |   | 26,141 |   |   | 18,090 |   |   | 16,493 |   |
| Dividends                  declared per share of common stock                    |   | $                                            | 2.500   |   | $ | 2.425 |   | $ | 1.950 |   | $ | 2.050 |   | $ | 2.000 |   |
|                                                                             |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

|                                                                 |   | **As                  Of December 31,** |      |
|----------------------------------------------------------------------|--------|-----------------------------------------|-----------|
|                                                                 |   | **2005**                                |      | **2004** |   | **2003** |   | **2002** |   | **2001**(1) |   |
| **Balance                  Sheet Data**                              |   |                                    |      |   |   |   |   |   |   |   |   |
| Real                  estate securities, available for sale          |   | $                                       | 4,554,519 |   | $ | 3,369,496 |   | $ | 2,192,727 |   | $ | 1,025,010 |   | $ | 501,509 |   |
| Real                  estate related loans, net                      |   |                                    | 615,551   |   |   | 591,890 |   |   | 402,784 |   |   | 26,417 |   |   | 20,662 |   |
| Residential                  mortgage loans, net                     |   |                                    | 600,682   |   |   | 654,784 |   |   | 586,237 |   |   | 258,198 |   |   | — |   |
| Operating                  real estate, net                          |   |                                    | 16,673    |   |   | 57,193 |   |   | 102,995 |   |   | 113,652 |   |   | 524,834 |   |
| Cash                  and cash equivalents                           |   |                                    | 21,275    |   |   | 37,911 |   |   | 60,403 |   |   | 45,463 |   |   | 31,360 |   |
| Total                  assets                                        |   |                                    | 6,209,699 |   |   | 4,932,720 |   |   | 3,550,299 |   |   | 1,574,828 |   |   | 1,262,509 |   |
| Debt                                                                 |   |                                    | 5,212,358 |   |   | 4,021,396 |   |   | 2,924,552 |   |   | 1,217,007 |   |   | 897,390 |   |
| Total                  liabilities                                   |   |                                    | 5,291,696 |   |   | 4,136,005 |   |   | 3,010,936 |   |   | 1,288,326 |   |   | 928,637 |   |
| Common                  stockholders' equity                         |   |                                    | 815,503   |   |   | 734,215 |   |   | 476,863 |   |   | 284,241 |   |   | 310,545 |   |
| Preferred                  stock                                     |   |                                    | 102,500   |   |   | 62,500 |   |   | 62,500 |   |   | — |   |   | — |   |
|                                                                 |   |                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Supplemental                  Balance Sheet Data**                 |   |                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                  shares outstanding                           |   |                                    | 43,913    |   |   | 39,859 |   |   | 31,375 |   |   | 23,489 |   |   | 16,489 |   |
| Book                  value per share of common stock, subsequent to |   |                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| initial                  public offering                             |   | $                                       | 18.57     |   | $ | 18.42 |   | $ | 15.20 |   | $ | 12.10 |   |   | N/A |   |
|                                                                 |   |                                    |           |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

| (1) | Represents                    the operations and financial position of our                    predecessor. |
|-----|------------------------------------------------------------------------------------------------------------|

| (2) | Includes                    the operations of our predecessor through the date of commencement                    of our                    operations, July 12,                    2002. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                              |   | **Year                  Ended December 31,** |       |
|---------------------------------------------------|--------|----------------------------------------------|------------|
|                                              |   | **2005**                                     |       | **2004** |   | **2003** |   | **2002** |   | **2001** |   |
| **Other                  Data**                   |   |                                         |       |   |   |   |   |   |   |   |   |
| Cash                  Flow provided by (used in): |   |                                         |       |   |   |   |   |   |   |   |   |
| Operating                  activities             |   | $                                            | 98,763     |   | $ | 90,355 |   | $ | 38,454 |   | $ | 21,919 |   | $ | 37,255 |   |
| Investing                  activities             |   |                                         | (1,334,746 | ) |   | (1,332,164 | ) |   | (1,659,026 | ) |   | (683,053 | ) |   | 103,246 |   |
| Financing                  activities             |   |                                         | 1,219,347  |   |   | 1,219,317 |   |   | 1,635,512 |   |   | 675,237 |   |   | (119,716 | ) |
| Funds                  from Operations (FFO) (1)  |   |                                         | 104,031    |   |   | 86,201 |   |   | 54,380 |   |   | 37,633 |   |   | 48,264 |   |
|                                              |   |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

| (1) | We                believe FFO is one appropriate measure of the operating performance                of                real estate companies because it provides investors with information                regarding our ability to service debt and make capital expenditures.                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,** |    |
|-------------------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                                    |   | **2005**                                     |    | **2004** |   | **2003** |   | **2002** |   | **2001** |   |
| **Calculation                  of Funds From Operations (FFO):**        |   |                                         |    |   |   |   |   |   |   |   |   |
| Income                  available for common stockholders               |   | $                                            | 110,271 |   | $ | 92,321 |   | $ | 51,345 |   | $ | 30,333 |   | $ | 41,131 |   |
| Operating                  real estate depreciation                     |   |                                         | 702     |   |   | 2,199 |   |   | 3,035 |   |   | 7,994 |   |   | 12,909 |   |
| Accumulated                  depreciation on operating real estate sold |   |                                         | (6,942  | ) |   | (8,319 | ) |   | — |   |   | (2,847 | ) |   | — |   |
| Other-Fund                  I (1)                                       |   |                                         | — |   |   | — |   |   | — |   |   | 2,153 |   |   | (5,776 | ) |
| Funds                  from operations (FFO)                            |   | $                                            | 104,031 |   | $ | 86,201 |   | $ | 54,380 |   | $ | 37,633 |   | $ | 48,264 |   |
|                                                                    |   |                                         |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

| (1) | Related                  to an investment retained by our                  predecessor. |
|-----|-----------------------------------------------------------------------------------------|

----

**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 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 |   |
| December                  31, 2005 |   |                           | 43,913,409 |                                                 |   |                                     |   |   |   |   |
|                               |   |                           |       |                                                 |   |                                     |   |   |   |   |

----

| (1) | Excludes                  prices of shares issued pursuant to the exercise of options and                  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, 2005  |   | $                                                                     | 321,889 |                                        | $      | 48,844                                 |   | $           | 6,772  |   | $      | 708 |   | $ | 378,213 |   |
| December                  31, 2004  |   | $                                                                     | 225,236 |                                        | $      | 19,135                                 |   | $           | 4,745  |   | $      | 553 |   | $ | 249,669 |   |
| December                  31, 2003  |   | $                                                                     | 134,348 |                                        | $      | 12,892                                 |   | $           | 4,264  |   | $      | 580 |   | $ | 152,084 |   |

**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 |   |
|----------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|---------|-------------------------------------------------------------------|--------|-------------|--------|
|                                                                                         |   | 2005/2004                                                              |    | 2004/2003                                                         |   | 2005/2004   |   | 2004/2003 |   | 2005/2004 |   | 2004/2003 |   |
| Interest                    income                                                           |   | $                                                                      | 122,755 |                                                              | $      | 92,578      |   |   | 54.4 | % |   | 69.5 | % |   | (1 | ) |   | (1 | ) |
| Rental                    and escalation income                                              |   |                                                                   | 1,903   |                                                              |   | 506         |   |   | 40.1 | % |   | 11.9 | % |   | (2 | ) |   | (2 | ) |
| Gain                    on sale of investments                                               |   |                                                                   | 1,991   |                                                              |   | 5,135       |   |   | 10.9 | % |   | 39.0 | % |   | (3 | ) |   | (3 | ) |
| Other                    income                                                              |   |                                                                   | 1,895   |                                                              |   | (634        | )      |   | 222.9 | % |   | (42.7 | %) |   | (4 | ) |   |   |   |
| Interest                    expense                                                          |   |                                                                   | 90,048  |                                                              |   | 59,521      |   |   | 66.0 | % |   | 77.4 | % |   | (1 | ) |   | (1 | ) |
| Property                    operating expense                                                |   |                                                                   | (212    | )                                                                 |   | 148         |   |   | (8.2 | %) |   | 6.1 | % |   | (2 | ) |   | (2 | ) |
| Loan                    and security servicing expense                                       |   |                                                                   | 2,936   |                                                              |   | 903         |   |   | 96.0 | % |   | 41.9 | % |   | (1 | ) |   | (1 | ) |
| Provision                    for credit losses                                               |   |                                                                   | 8,421   |                                                              |   | -           |   |   | N/A |   |   | N/A |   |   | (5 | ) |   |   |   |
| General                    and administrative expense                                        |   |                                                                   | (438    | )                                                                 |   | 1,449       |   |   | (9.5 | %) |   | 46.0 | % |   | (6 | ) |   | (6 | ) |
| Management                    fee to affiliate                                               |   |                                                                   | 2,705   |                                                              |   | 4,152       |   |   | 25.5 | % |   | 64.2 | % |   | (7 | ) |   | (7 | ) |
| Incentive                    compensation to affiliate                                       |   |                                                                   | (332    | )                                                                 |   | 1,733       |   |   | (4.2 | %) |   | 27.8 | % |   | (7 | ) |   | (7 | ) |
| Depreciation                    and amortization                                             |   |                                                                   | 190     |                                                              |   | 46          |   |   | 42.1 | % |   | 11.4 | % |   | (8 | ) |   | (8 | ) |
| Equity                    in earnings of                                                     |   |                                                                   |    |                                                              |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| unconsolidated                    subsidiaries, net of taxes on related taxable subsidiaries |   |                                                                   | (4,348  | )                                                                 |   | 9,095       |   |   | (43.7 | %) |   | 1,055.1 | % |   | (9 | ) |   | (9 | ) |
| Income                    from continuing operations                                         |   | $                                                                      | 20,878  |                                                              | $      | 38,728      |   |   | 22.2 | % |   | 70.1 | % |   |   |   |   |   |   |

----

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

|                                                                                                                                                  |   | 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 third through our eighth CBO financings and the                    acquisition                    of the        |
| related                    collateral.                                                                                                                |   |                                     |    |   |   |   |   |
| (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.                                                                                                              |   |                                     |    |   |   |   |   |

|                                                                                                                                                  |   | Year-to-Year                    Increase |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                                                                  |   | Interest                    Income       |   | Interest                    Expense |   |
|                                                                                                                                                  |   | 2004/2003                                |   | 2004/2003 |   |
| Real                    estate security and loan portfolios (A)                                                                                       |   | $                                        | 43,682 |   | $ | 31,856 |   |
| ABS                    - manufactured housing portfolio                                                                                               |   |                                     | 14,211 |   |   | 4,824 |   |
| Residential                    mortgage loan portfolio                                                                                                |   |                                     | 7,113  |   |   | 4,701 |   |
| ICH                    loan portfolio                                                                                                                 |   |                                     | 13,870 |   |   | 11,878 |   |
| Other                    real estate related loans                                                                                                    |   |                                     | 9,332  |   |   | 3,528 |   |
| Other                    (B)                                                                                                                          |   |                                     | 4,370  |   |   | 2,734 |   |
|                                                                                                                                                  |   | $                                        | 92,578 |   | $ | 59,521 |   |
| (A)                    Represents our second through our seventh CBO financings and                    the                    acquisition of the      |
| related                    collateral.                                                                                                                |   |                                     |   |   |   |   |   |
| (B)                    Primarily due to increasing interest rates on floating rate assets                    and                    liabilities owned |
| during                    the entire period.                                                                                                          |   |                                     |   |   |   |   |   |

----

| (2) | These                changes are primarily the result of the effect of the termination                of a                lease (including the acceleration of lease termination income), offset                by                foreign currency fluctuations. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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) | The                  increase from 2004 to 2005 is primarily the result of recent investments                  in total return swaps which are treated                  as non-hedge derivatives and marked to market through the income                  statement. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | The                changes in general and administrative expense are primarily increases                as a                result of our increased size, resulting from our equity issuances                during                the periods presented, offset by decreases in insurance and professional                fees. Professional fees increased in 2004 due to the initial adoption                of                the Sarbanes-Oxley Act of 2002, then decreased in 2005 as a result                of cost                savings in the second year of                adoption. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | 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                these                periods. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | The                increase in depreciation is primarily due to the acquisition of new                information systems. |
|-----|----------------------------------------------------------------------------------------------------------------------------|

| (9) | The                changes in earnings from unconsolidated subsidiaries are primarily                a                result of our late 2003 acquisition of an interest in an LLC which                owns a                portfolio of real estate related loans and our early 2004 acquisition                of                an interest in an LLC which owns a portfolio of convenience and retail                gas                stores, offset by the fact that a significant portion of the latter                portfolio, which was held for sale from the date it was acquired,                was sold                during these periods. 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                  Face Amount |   |   | 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 |   | $      | 426,653                              |   | $      | 423,191                         |   |   | 5.67%                  (2)                                                                      |   |   | Jul                  2038              |   |   | 4.89                                                                                 | %      |   | 3.18                                               |   | $      | 331,653                                          |   | $      | 562,803                 |   |   | 5.01                                                          |   | $      | -                                                      |   | $      | 262,732                                                                    |   |
| Real                  estate securities and loans |   |   | Apr                  2002 |   |   | 444,000                              |   |   | 441,054                         |   |   | 5.43%                  (2)                                                                      |   |   | Apr                  2037              |   |   | 6.56                                                                                 | %      |   | 4.46                                               |   |   | 372,000                                          |   |   | 498,998                 |   |   | 5.61                                                          |   |   | 56,526                                                 |   |   | 290,000                                                                    |   |
| Real                  estate securities and loans |   |   | Mar                  2003 |   |   | 472,000                              |   |   | 468,413                         |   |   | 5.46%                  (2                                                                       |   |   | Mar                  2038              |   |   | 5.08                                                                                 | %      |   | 6.30                                               |   |   | 427,800                                          |   |   | 516,042                 |   |   | 5.25                                                          |   |   | 142,775                                                |   |   | 276,060                                                                    |   |
| Real                  estate securities and loans |   |   | Sep                  2003 |   |   | 460,000                              |   |   | 455,657                         |   |   | 5.16%                  (2)                                                                      |   |   | Sep                  2038              |   |   | 5.38                                                                                 | %      |   | 6.85                                               |   |   | 442,500                                          |   |   | 506,290                 |   |   | 4.71                                                          |   |   | 180,598                                                |   |   | 192,500                                                                    |   |
| Real                  estate securities and loans |   |   | Mar                  2004 |   |   | 414,000                              |   |   | 410,511                         |   |   | 5.15%                  (2)                                                                      |   |   | Mar                  2039              |   |   | 4.94                                                                                 | %      |   | 6.61                                               |   |   | 382,750                                          |   |   | 444,037                 |   |   | 5.27                                                          |   |   | 214,876                                                |   |   | 165,300                                                                    |   |
| Real                  estate securities and loans |   |   | Sep                  2004 |   |   | 454,500                              |   |   | 450,639                         |   |   | 5.09%                  (2)                                                                      |   |   | Sep                  2039              |   |   | 5.03                                                                                 | %      |   | 7.19                                               |   |   | 442,500                                          |   |   | 494,099                 |   |   | 5.80                                                          |   |   | 221,569                                                |   |   | 189,373                                                                    |   |
| Real                  estate securities and loans |   |   | Apr                  2005 |   |   | 447,000                              |   |   | 442,379                         |   |   | 4.85%                  (2)                                                                      |   |   | Apr                  2040              |   |   | 5.10                                                                                 | %      |   | 8.17                                               |   |   | 439,600                                          |   |   | 481,954                 |   |   | 6.54                                                          |   |   | 193,471                                                |   |   | 243,337                                                                    |   |
| Real                  estate securities           |   |   | Dec                  2005 |   |   | 442,800                              |   |   | 438,540                         |   |   | 4.83%                  (2)                                                                      |   |   | Dec                  2050              |   |   | 5.14                                                                                 | %      |   | 9.53                                               |   |   | 436,800                                          |   |   | 497,935                 |   |   | 8.49                                                          |   |   | 97,349                                                 |   |   | 341,506                                                                    |   |
|                                              |   |   |                      |   |   | 3,560,953                            |   |   | 3,530,384                       |   |   |                                                                                            |   |   |                                   |   |   | 5.27                                                                                 | %      |   | 6.55                                               |   |   | 3,275,603                                        |   |   | 4,002,158               |   |   | 5.86                                                          |   |   | 1,107,164                                              |   |   | 1,960,808                                                                  |   |
| Other                  Bonds Payable              |   |   |                      |   |   |                                 |   |   |                            |   |   |                                                                                            |   |   |                                   |   |   |                                                                                 |   |   |                                               |   |   |                                             |   |   |                    |   |   |                                                          |   |   |                                                   |   |   |                                                                       |
| ICH                  loans (3)                    |   |   | (3)                       |   |   | 141,311                              |   |   | 141,311                         |   |   | 6.68%                  (2)                                                                      |   |   | Aug                  2030              |   |   | 6.68                                                                                 | %      |   | 1.46                                               |   |   | 3,605                                            |   |   | 161,288                 |   |   | 1.55                                                          |   |   | 3,605                                                  |   |   | -                                                                          |   |
| Manufactured                  housing loans (4)   |   |   | Jan                  2005 |   |   | 212,019                              |   |   | 212,019                         |   |   | LIBOR                  +1.25%                                                                   |   |   | Jan                  2006(7)           |   |   | 5.45                                                                                 | %      |   | 0.08                                               |   |   | 212,019                                          |   |   | 267,456                 |   |   | 5.78                                                          |   |   | 6,356                                                  |   |   | 227,576                                                                    |   |
|                                              |   |   |                      |   |   | 353,330                              |   |   | 353,330                         |   |   |                                                                                            |   |   |                                   |   |   | 5.94                                                                                 | %      |   | 0.63                                               |   |   | 215,624                                          |   |   | 428,744                 |   |   | 4.23                                                          |   |   | 9,961                                                  |   |   | 227,576                                                                    |   |
| Notes                  Payable                    |   |   |                      |   |   |                                 |   |   |                            |   |   |                                                                                            |   |   |                                   |   |   |                                                                                 |   |   |                                               |   |   |                                             |   |   |                    |   |   |                                                          |   |   |                                                   |   |   |                                                                       |
| Residential                  mortgage loans (4)   |   |   | Nov                  2004 |   |   | 260,441                              |   |   | 260,441                         |   |   | LIBOR+0.16%                                                                                     |   |   | Nov                  2007              |   |   | 4.70                                                                                 | %      |   | 1.21                                               |   |   | 260,441                                          |   |   | 288,683                 |   |   | 2.69                                                          |   |   | 282,589                                                |   |   | -                                                                          |   |
|                                              |   |   |                      |   |   | 260,441                              |   |   | 260,441                         |   |   |                                                                                            |   |   |                                   |   |   | 4.70                                                                                 | %      |   | 1.21                                               |   |   | 260,441                                          |   |   | 288,683                 |   |   | 2.69                                                          |   |   | 282,589                                                |   |   | -                                                                          |   |
| Repurchase                  Agreements (4) (10)   |   |   |                      |   |   |                                 |   |   |                            |   |   |                                                                                            |   |   |                                   |   |   |                                                                                 |   |   |                                               |   |   |                                             |   |   |                    |   |   |                                                          |   |   |                                                   |   |
| Residential                  mortgage loans       |   |   | Rolling                   |   |   | 41,853                               |   |   | 41,853                          |   |   | LIBOR                  + 0.43%                                                                  |   |   | Mar                  2006              |   |   | 4.95                                                                                 | %      |   | 0.25                                               |   |   | 41,853                                           |   |   | 44,543                  |   |   | 2.98                                                          |   |   | 43,511                                                 |   |   | -                                                                          |   |
| Agency                  RMBS (5)                  |   |   | Rolling                   |   |   | 671,526                              |   |   | 671,526                         |   |   | LIBOR                  + 0.13%                                                                  |   |   | Jan                  2006              |   |   | 4.48                                                                                 | %      |   | 0.08                                               |   |   | 671,526                                          |   |   | 692,486                 |   |   | 4.90                                                          |   |   | -                                                      |   |   | 665,965                                                                    |   |
| Real                  estate securities           |   |   | Rolling                   |   |   | 149,546                              |   |   | 149,546                         |   |   | LIBOR                  + 0.58%                                                                  |   |   | Various                  (8)           |   |   | 4.65                                                                                 | %      |   | 0.16                                               |   |   | 149,546                                          |   |   | 166,737                 |   |   | 5.86                                                          |   |   | 31,450                                                 |   |   | 89,403                                                                     |   |
| Real                  estate related loans        |   |   | Rolling                   |   |   | 185,278                              |   |   | 185,278                         |   |   | LIBOR                  + 1.01%                                                                  |   |   | Various                  (8)           |   |   | 5.38                                                                                 | %      |   | 0.08                                               |   |   | 185,278                                          |   |   | 266,669                 |   |   | 1.82                                                          |   |   | 266,630                                                |   |   | -                                                                          |   |
|                                              |   |   |                      |   |   | 1,048,203                            |   |   | 1,048,203                       |   |   |                                                                                            |   |   |                                   |   |   | 4.68                                                                                 | %      |   | 0.10                                               |   |   | 1,048,203                                        |   |   | 1,170,435               |   |   | 4.29                                                          |   |   | 341,591                                                |   |   | 755,368                                                                    |   |
| Credit                  facility (6)              |   |   |                      |   |   | 20,000                               |   |   | 20,000                          |   |   | LIBOR                  +2.50% (9)                                                               |   |   | Jul                  2008              |   |   | 6.86                                                                                 | %      |   | 2.55                                               |   |   | 20,000                                           |   |   | -                       |   |   | -                                                             |   |   | -                                                      |   |   | -                                                                          |   |
| Total                  debt obligations           |   |   |                      |   | $      | 5,242,927                            |   | $      | 5,212,358                       |   |   |                                                                                            |   |   |                                   |   |   | 5.17                                                                                 | %      |   | 4.59                                               |   | $      | 4,819,871                                        |   | $      | 5,890,020               |   |   | 5.27                                                          |   | $      | 1,741,305                                              |   | $      | 2,943,752                                                                  |   |
|                                              |   |   |                      |   |   |                                 |   |   |                            |   |   |                                                                                            |   |   |                                   |   |   |                                                                                 |   |   |                                               |   |   |                                             |   |   |                    |   |   |                                                          |   |   |                                                   |   |   |                                                                       |   |

| (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 $1 billion is available until November                    2006.                                                                                                                                                                                                                                                                                                                                            |
| (6)                    A maximum of $100 million can be drawn (increased from $75 million                    in                    February 2006).                                                                                                                                                                                                                                                                                             |
| (7)                    This financing was replaced with a new term financing in January                    2006; the                    new maturity date is January 2009.                                                                                                                                                                                                                                                                     |
| (8)                    The longest maturity is March 2006.                                                                                                                                                                                                                                                                                                                                                                                     |
| (9)                    In addition, unused commitment fees of between 0.125% and 0.250%                    are                    paid.                                                                                                                                                                                                                                                                                                        |
| (10)                    The counterparties on our repurchase agreements include: Bank                    of America                    Securities LLC ($693.4 million), Bear Stearns Mortgage Capital                    Corporation                    ($181.1 million), Greenwich Capital Markets Inc ($72.2 million),                    Deutsche                    Bank AG ($58.1 million), and other ($43.4                    million). |

----

| 2006       |   | $      | 1,260,222 |   |
|------------|--------|--------|-----------|--------|
| 2007       |   |   | 260,441   |   |
| 2008       |   |   | 20,000    |   |
| 2009       |   |   | -         |   |
| 2010       |   |   | -         |   |
| Thereafter |   |   | 3,702,264 |   |
| Total      |   | $      | 5,242,927 |   |

----

*Other*

| Reference                  Asset                                                             |   | NotionalAmount |    | MarginAmount |   | ReceiveInterest                  Rate |   | PayInterest                  Rate |                            | Maturity                  Date |   | FairValue                       |   |
|----------------------------------------------------------------------------------------------|--------|----------------|---------|--------------|--------|---------------------------------------|--------|-----------------------------------|---------------------------------|--------------------------------|--------|---------------------------------|--------|
| Term                  loan to a retail mall REIT                                             |   | $              | 106,083 |         | $      | 18,149                                |   |                              | LIBOR                  + 2.000% |                           |   | LIBOR                  + 0.500% |   |   | Nov                  2008 |   | $ | 1,008 |   |
| Term                  loan to a diversified real estate                  and finance company |   |           | 97,997  |         |   | 19,599                                |   |                              | LIBOR                  + 3.000% |                           |   | LIBOR                  + 0.625% |   |   | Feb                  2008 |   |   | 877 |   |
| Mezzanine                  loan to a hotelcompany                                            |   |           | 15,000  |         |   | 5,224                                 |   |                              | LIBOR                  +4.985%  |                           |   | LIBOR                  + 1.350% |   |   | Jun                  2007 |   |   | 101 |   |
| Term                  loan to a diversified real estate                  company             |   |           | 94,954  |         |   | 9,495                                 |   |                              | LIBOR                  +1.750%  |                           |   | LIBOR                  + 0.500% |   |   | Aug                  2007 |   |   | 904 |   |
| Term                  loan to a retail company                                               |   |           | 100,000 |         |   | 19,960                                |   |                              | LIBOR                  +3.000%  |                           |   | LIBOR                  + 0.500% |   |   | Dec                  2008 |   |   | 206 |   |
|                                                                                         |   | $              | 414,034 |         | $      | 72,427                                |   |                              |                            |                           |   |                            |   |   |   |   | $ | 3,096 |   |

*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 |   |
| December                  31, 2005 |   |                           | 43,913,409 |                                                 |   |                                     |   |                                        |   |   |   |   |   |

----

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

----

| Held                  by our manager                                                                                    |   |   | 1,170,317 |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|
| Issued                  to our manager and subsequently assigned to                  certain of our manager's employees |   |   | 627,490   |   |
| Held                  by directors and former directors                                                                 |   |   | 14,000    |   |
| Total                                                                                                                   |   |   | 1,811,807 |   |

----

| Accumulated                  other comprehensive income, December 31, 2004                                                          |   | $      | 71,770  |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|
| Net                  unrealized (loss) on securities                                                                                |   |   | (67,077 | )      |
| Reclassification                  of net realized (gain) on securities into earnings                                                |   |   | (16,015 | )      |
| Foreign                  currency translation                                                                                       |   |   | (1,089  | )      |
| Reclassification                  of net realized foreign currency translation into earnings                                        |   |   | (626    | )      |
| Net                  unrealized gain on derivatives designated as cash flow                  hedges                                 |   |   | 56,426  |   |
| Reclassification                  of net realized loss on derivatives designated as cash flow                  hedges into earnings |   |   | 2,175   |   |
| Accumulated                  other comprehensive income, December 31, 2005                                                          |   | $      | 45,564  |   |

| Declared                  for the Period Ended |   | Paid                          |   | Amount                  Per Share |
|------------------------------------------------|--------|-------------------------------|--------|-----------------------------------|
| March                  31, 2003                |   | April                  2003   |   | $0.450                            |
| June                  30, 2003                 |   | July                  2003    |   | $0.500                            |
| September                  30, 2003            |   | October                  2003 |   | $0.500                            |
| December                  31, 2003             |   | January                  2004 |   | $0.500                            |
| 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                            |

*Cash      Flow*

----

**Interest      Rate, Credit and Spread Risk**

*Real      Estate Securities*

** **

----

*Loans*

*Statistics*

|                                             |   | Total                  Portfolio (1) |      | Core                  Investment Portfolio (2) |   |
|--------------------------------------------------|--------|--------------------------------------|-----------|------------------------------------------------|--------|
|                                             |   | December                  31,        |      | December                  31,                  |   |
|                                             |   | 2005                                 |      | 2004                                           |   | 2005 |   | 2004 |   |
| Face                  amount                     |   | $                                    | 6,111,464 |                                           | $      | 4,493,274 |   | $ | 5,413,142 |   | $ | 4,294,092 |   |
| Percentage                  of total assets      |   |                                 | 99        | %                                              |   | 91 | % |   | 87 | % |   | 87 | % |
| Weighted                  average asset yield    |   |                                 | 6.59      | %                                              |   | 5.91 | % |   | 6.85 | % |   | 5.98 | % |
| Weighted                  average liability cost |   |                                 | 5.12      | %                                              |   | 4.15 | % |   | 5.22 | % |   | 4.17 | % |
| Weighted                  average net spread     |   |                                 | 1.47      | %                                              |   | 1.76 | % |   | 1.63 | % |   | 1.81 | % |
|                                             |   |                                 |      |                                           |   |   |   |   |   |   |   |   |   |

| (1)                  Excluding the ICH loans, as described in "Business - Our                  Strategy."                                  |
|--------------------------------------------------------------------------------------------------------------------------------------------|
| (2)                  Excluding the ICH loans and Agency RMBS, as described in "Business                  - Our                  Strategy." |

*Margin*

----

**Off-Balance      Sheet Arrangements**

**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”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Credit                facility                        |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Loan                servicing agreements              |   | We                are a party to servicing agreements with respect to our residential                mortgage loans, including manufactured housing 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% of the outstanding face                amount of                the manufactured housing loans, and approximately 0.11% of the outstanding                face amount of the ICH loans under these agreements.                                                                                                        |
| Contract                                              |   | Terms                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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                                                |   | 2005                  (1)        |      | 2006                                                               |   | 2007-2008 |   | 2009-2010 |   | Thereafter |   | Total |   |
|                                                    |   |                             |      |                                                               |   |   |   |   |   |   |   |   |   |
| CBO                  bonds payable                      |   | $                                | 130,722   |                                                               | $      | - |   | $ | - |   | $ | - |   | $ | 3,560,953 |   | $ | 3,560,953 |   |
| Other                  bonds payable                    |   |                             | 138,380   |                                                               |   | 212,019 |   |   | - |   |   | - |   |   | 141,311 |   |   | 353,330 |   |
| Notes                  payable                          |   |                             | 408,283   |                                                               |   | - |   |   | 260,441 |   |   | - |   |   | - |   |   | 260,441 |   |
| Repurchase                  agreements                  |   |                             | 284,073   |                                                               |   | 1,048,203 |   |   | - |   |   | - |   |   | - |   |   | 1,048,203 |   |
| Credit                  facility                        |   |                             | 42,204    |                                                               |   | - |   |   | 20,000 |   |   | - |   |   | - |   |   | 20,000 |   |
| Interest                  rate swaps, treated as hedges |   |                             | 25,749    |                                                               |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| Non-hedge                  derivative obligations       |   |                             | 907       |                                                               |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| CBO                  wrap agreement                     |   |                             | 481       |                                                               |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| CBO                  backstop agreements                |   |                             | 1,147     |                                                               |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| CBO                  remarketing agreements             |   |                             | 316       |                                                               |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| Loan                  servicing agreements              |   |                             | 4,851     |                                                               |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| Trustee                  agreements                     |   |                             | 747       |                                                               |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| Management                  agreement                   |   |                             | 21,132    |                                                               |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |   | (3 | ) |
| Total                                                   |   | $                                | 1,058,992 |                                                               | $      | 1,260,222 |   | $ | 280,441 |   | $ | - |   | $ | 3,702,264 |   | $ | 5,242,927 |   |
|                                                    |   |                             |      |                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| (1) | Includes                  all payments made under the respective agreements. The management                  agreement payments shown include $13.1 million of management                  fees and expense reimbursements and $8.0 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 O**
**perations      **

|                                                                    |   | For                  the Year Ended December 31, |    |
|-------------------------------------------------------------------------|--------|--------------------------------------------------|---------|
|                                                                    |   | 2005                                             |    | 2004 |   | 2003 |   |
| Income                  available for common stockholders               |   | $                                                | 110,271 |   | $ | 92,321 |   | $ | 51,345 |   |
| Operating                  real estate depreciation                     |   |                                             | 702     |   |   | 2,199 |   |   | 3,035 |   |
| Accumulated                  depreciation on operating real estate sold |   |                                             | (6,942  | ) |   | (8,319 | ) |   | - |   |
| Funds                  from operations (FFO)                            |   | $                                                | 104,031 |   | $ | 86,201 |   | $ | 54,380 |   |

----

|                                                                                            |   | Book                  Equity December 31, 2005 (1) |     | Average                  Invested Common Equity for the Year Ended December                  31, 2005 (2) |   | FFO                  for the Year Ended December                  31, 2005 |   | Return                  on Invested Common Equity (ROE) for the Year Ended December                  31, 2005 (3) |    | ROE                  for the Year Ended December                  31, 2004 (3) |   | ROE                  for the Year Ended December                  31, 2003 (3) |   |
|-------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|----------|-----------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|---------|--------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|--------|
|                                                                                                 |   |                                               |     |                                                                                                      |   |                                                                       |   |                                                                                                              |    |                                                                           |   |                                                                           |   |
| Real                    estate securities and real                    estate related loans |   | $                                                  | 790,990  |                                                                                                      | $      | 700,146                                                                    |   | $                                                                                                                 | 125,028 |                                                                           |   | 17.9                                                                           | %      |   | 20.5 | % |   | 23.2 | % |
| Residential                  mortgage loans                                                     |   |                                               | 86,024   |                                                                                                      |   | 95,148                                                                     |   |                                                                                                              | 8,706   |                                                                           |   | 9.1                                                                            | %      |   | 16.7 | % |   | 25.7 | % |
| Operating                  real estate                                                          |   |                                               | 35,976   |                                                                                                      |   | 47,579                                                                     |   |                                                                                                              | 1,686   |                                                                           |   | 3.5                                                                            | %      |   | 9.2 | % |   | 12.2 | % |
| Unallocated                  (1)                                                                |   |                                               | (139,515 | )                                                                                                         |   | (66,508                                                                    | )      |                                                                                                              | (31,389 | )                                                                              |   | N/A                                                                            |   |   | N/A |   |   | N/A |   |
| Total                  (2)                                                                      |   |                                               | 773,475  |                                                                                                      | $      | 776,365                                                                    |   | $                                                                                                                 | 104,031 |                                                                           |   | 13.4                                                                           | %      |   | 14.5 | % |   | 16.4 | % |
| Preferred                  stock                                                                |   |                                               | 102,500  |                                                                                                      |   |                                                                       |   |                                                                                                              |    |                                                                           |   |                                                                           |   |   |   |   |   |   |   |
| Accumulated                  depreciation                                                       |   |                                               | (3,536   | )                                                                                                         |   |                                                                       |   |                                                                                                              |    |                                                                           |   |                                                                           |   |   |   |   |   |   |   |
| Accumulated                  other comprehensive                  income                        |   |                                               | 45,564   |                                                                                                      |   |                                                                       |   |                                                                                                              |    |                                                                           |   |                                                                           |   |   |   |   |   |   |   |
| Net                  book equity                                                                |   | $                                                  | 918,003  |                                                                                                      |   |                                                                       |   |                                                                                                              |    |                                                                           |   |                                                                           |   |   |   |   |   |   |   |

----

| (1) | Unallocated                FFO represents ($0.4 million) of interest expense, ($6.7 million)                of                preferred dividends and ($24.3 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****December                  31, 2005** |      | **December                  31, 2005** |   |                                                      |   | **Fair                  Value****December                  31, 2005** |
|--------------------------------------------------------------|--------|---------------------------------------------------------------------------|-----------|----------------------------------------|--------|-----------------------------------------------------------|--------|-----------------------------------------------------------------------|
|                                                         |   | **2005**                                                                  |      | **2004**                               |   | **Principal                  Balance or Notional Amount** |   | **Weighted                  Average Yield/ Funding Cost**             |   | **Maturity                  Date** |   | **2005** |   | **2004** |   |
| **Assets:**                                                  |   |                                                                      |      |                                   |   |                                                      |   |                                                                  |   |   |   |   |   |   |   |
| Real                  estate securities,                     |   |                                                                      |      |                                   |   |                                                      |   |                                                                  |   |   |   |   |   |   |   |
| available                  for sale (1)                      |   | $                                                                         | 4,554,519 |                                   | $      | 3,369,496                                                 |   | $                                                                     | 4,603,217 |   |   | 6.25 | % |   | (1) |   | $ | 4,554,519 |   | $ | 3,369,496 |   |
| Real                  estate securities                      |   |                                                                      |      |                                   |   |                                                      |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| portfolio                  deposit (2)                       |   |                                                                      | -         |                                   |   | 25,411                                                    |   |                                                                  | - |   |   | N/A |   |   | N/A |   |   | - |   |   | 25,411 |   |
| Real                  estate related loans (3)               |   |                                                                      | 615,551   |                                   |   | 591,890                                                   |   |                                                                  | 619,783 |   |   | 8.74 | % |   | (3) |   |   | 615,865 |   |   | 600,528 |   |
| Residential                  mortgage loans (4)              |   |                                                                      | 600,682   |                                   |   | 654,784                                                   |   |                                                                  | 610,970 |   |   | 6.15 | % |   | (4) |   |   | 609,486 |   |   | 654,784 |   |
| Interest                  rate caps, treated as hedges (5)   |   |                                                                      | 2,145     |                                   |   | 3,554                                                     |   |                                                                  | 342,351 |   |   | N/A |   |   | (5) |   |   | 2,145 |   |   | 3,554 |   |
| Total                  return swaps (6)                      |   |                                                                      | 3,096     |                                   |   | 399                                                       |   |                                                                  | 414,034 |   |   | N/A |   |   | (6) |   |   | 3,096 |   |   | 399 |   |
| **Liabilities:**                                             |   |                                                                      |      |                                   |   |                                                      |   |                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| CBO                  bonds payable (7)                       |   |                                                                      | 3,530,384 |                                   |   | 2,656,510                                                 |   |                                                                  | 3,560,953 |   |   | 5.27 | % |   | (7) |   |   | 3,594,638 |   |   | 2,720,704 |   |
| Other                  bonds payable (8)                     |   |                                                                      | 353,330   |                                   |   | 222,266                                                   |   |                                                                  | 353,330 |   |   | 5.94 | % |   | (8) |   |   | 356,294 |   |   | 227,510 |   |
| Notes                  payable (9)                           |   |                                                                      | 260,441   |                                   |   | 652,000                                                   |   |                                                                  | 260,441 |   |   | 4.70 | % |   | (9) |   |   | 260,441 |   |   | 652,000 |   |
| Repurchase                  agreements (10)                  |   |                                                                      | 1,048,203 |                                   |   | 490,620                                                   |   |                                                                  | 1,048,203 |   |   | 4.68 | % |   | (10) |   |   | 1,048,203 |   |   | 490,620 |   |
| Credit                  facility (11)                        |   |                                                                      | 20,000    |                                   |   | -                                                         |   |                                                                  | 20,000 |   |   | 6.86 | % |   | (11) |   |   | 20,000 |   |   | - |   |
| Interest                  rate swaps, treated as hedges (12) |   |                                                                      | (41,170   | )                                      |   | 13,239                                                    |   |                                                                  | 2,943,752 |   |   | N/A |   |   | (12) |   |   | (41,170 | ) |   | 13,239 |   |
| Non-hedge                  derivative obligations (13)       |   |                                                                      | 90        |                                   |   | 796                                                       |   |                                                                  | (13 | ) |   | N/A |   |   | (13) |   |   | 90 |   |   | 796 |   |

----

| (1) | These                securities contain various terms, including fixed and floating rates,                self-amortizing and interest only. Their weighted average maturity                is 5.81                years. The fair value of these securities is estimated by obtaining                third                party broker quotations, if available and practicable, and counterparty                quotations.   |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The                fair value of the real estate securities portfolio deposit, which                is                treated as a non-hedge derivative, is estimated by obtaining third                party                broker quotations on the underlying securities, if available and                practicable, and counterparty quotations, including a counterparty                quotation on the portion of the fair value resulting from the Excess                Carry                Amount, as defined, earned on such deposit. See “Management’s Discussion                and Analysis of Financial Condition and Results of Operations-Liquidity                and Capital Resources” for a further discussion of this                deposit. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (3) | 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                            |   | $                                   | 72,173  |                            | $      | 72,520                              |   |                                                               | 8.46   | %                                                                                             |   | 2.40                        |   |   | 73.69 | % | $ | 72,631 |   |
| Mezzanine                  Loans   |   |                                | 302,740 |                            |   | 302,816                             |   |                                                               | 8.44   | %                                                                                             |   | 1.94                        |   |   | 100.00 | % |   | 302,190 |   |
| Bank                  Loans        |   |                                | 56,274  |                            |   | 56,563                              |   |                                                               | 6.58   | %                                                                                             |   | 2.51                        |   |   | 100.00 | % |   | 56,677 |   |
| Real                  Estate Loans |   |                                | 23,082  |                            |   | 22,364                              |   |                                                               | 20.02  | %                                                                                             |   | 2.00                        |   |   | 0.00 | % |   | 23,079 |   |
| ICH                  Loans         |   |                                | 165,514 |                            |   | 161,288                             |   |                                                               | 8.64   | %                                                                                             |   | 1.55                        |   |   | 2.24 | % |   | 161,288 |   |
|                               |   | $                                   | 619,783 |                            | $      | 615,551                             |   |                                                               | 8.74   | %                                                                                             |   | 1.94                        |   |   | 67.06 | % | $ | 615,865 |   |

| (4) | This                aggregate portfolio of residential loans consists of a portfolio                of                floating rate residential mortgage loans as well as a portfolio of                primarily fixed rate manufactured housing loans. The $333.2 million                portfolio of residential mortgage loans has a weighted average maturity                of                2.73 years. The $267.5 million portfolio of manufactured housing                loans has                a weighted average maturity of 5.78 years. These loans 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. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| Notional                    Balance                                  |   | Effective                    Date |   | Maturity                    Date  |   | Capped                    Rate   |   | Strike                    Rate |   | Fair                    Value                                                              |
|----------------------------------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|----------------------------------|--------|--------------------------------|--------|--------------------------------------------------------------------------------------------|
| $          262,732 |   | Current                           |   | March                    2009     |   | 1-Month                    LIBOR |   | 6.50%                          |   | $                               184 |
| 18,000                                                               |   | January                    2010   |   | October                    2015   |   | 3-Month                    LIBOR |   | 8.00%                          |   | 342                                                                                        |
| 8,619                                                                |   | December                    2010  |   | June                    2015      |   | 3-Month                    LIBOR |   | 7.00%                          |   | 567                                                                                        |
| 53,000                                                               |   | May                    2011       |   | September                    2015 |   | 1-Month                    LIBOR |   | 7.50%                          |   | 1,052                                                                                      |
| $          342,351 |   |                              |   |                              |   |                             |   |                           |   | $                            2,145                 |

| (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 6.55 years.                The CBO                bonds payable amortize principal prior to maturity based on collateral                receipts, subject to reinvestment                requirements. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | 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 ICH                bonds amortize principal prior to maturity based on collateral receipts                and have a weighted average maturity of 1.46 years. The manufactured                housing loan bonds have a weighted average maturity of 0.08 years,                bear a                floating rate of interest, and are subject to adjustment monthly                based on                the agreed upon market value of the loan                portfolio. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (9) | The                residential mortgage loan financing has a weighted average maturity                of                1.21 years, bears a floating rate of interest, and is subject to                adjustment monthly based on the agreed upon market value of the loan                portfolio. This                financing was 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. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (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 0.10 years. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (11) | This                facility, which has a weighted average maturity of 2.55 years, bears                a                floating rate of interest. We believe that, for similar financial                instruments with comparable credit risk, the effective rate approximates                a                market rate. We note that two new banks joined the lending group                in                December 2005 at the same rate. Accordingly, the carrying amount                outstanding is believed to approximate fair                value. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (12) | Represents                current swap agreements as follows (in                thousands): |
|------|---------------------------------------------------------------------------------------------|

| Notional                  Balance                                                                                                                                                            |   | Maturity                  Date  |   | Swapped                  Rate   |   | Fixed                  Rate |   | Fair                  Value                                                                               |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|-----------------------------|--------|-----------------------------------------------------------------------------------------------------------|
| $                                             262,732 |   | March                  2009     |   | 1-Month                  LIBOR* |   | 3.1250%                     |   | $                (10,106) |
| 290,000                                                                                                                                                                                      |   | April                  2011     |   | 3-Month                  LIBOR  |   | 5.9325%                     |   | 12,628                                                                                                    |
| 276,060                                                                                                                                                                                      |   | March                  2013     |   | 3-Month                  LIBOR  |   | 3.8650%                     |   | (14,599)                                                                                                  |
| 192,500                                                                                                                                                                                      |   | March                  2015     |   | 1-Month                  LIBOR  |   | 4.8880%                     |   | 478                                                                                                       |
| 165,300                                                                                                                                                                                      |   | March                  2014     |   | 3-Month                  LIBOR  |   | 3.9945%                     |   | (8,492)                                                                                                   |
| 189,373                                                                                                                                                                                      |   | September                  2014 |   | 3-Month                  LIBOR  |   | 4.3731%                     |   | (6,566)                                                                                                   |
| 243,337                                                                                                                                                                                      |   | March                  2015     |   | 1-Month                  LIBOR  |   | 4.8495%                     |   | (331)                                                                                                     |
| 307,355                                                                                                                                                                                      |   | December                  2015  |   | 1-Month                  LIBOR  |   | 4.9885%                     |   | 2,179                                                                                                     |
| 34,151                                                                                                                                                                                       |   | December                  2015  |   | 1-Month                  LIBOR  |   | 5.0098%                     |   | 335                                                                                                       |
| 227,576                                                                                                                                                                                      |   | February                  2014  |   | 1-Month                  LIBOR  |   | 4.2070%                     |   | (5,010)                                                                                                   |
| 5,000                                                                                                                                                                                        |   | November                  2008  |   | 1-Month                  LIBOR  |   | 3.5400%                     |   | (165)                                                                                                     |
| 4,500                                                                                                                                                                                        |   | November                  2018  |   | 1-Month                  LIBOR  |   | 4.4800%                     |   | (88)                                                                                                      |
| 45,600                                                                                                                                                                                       |   | January                  2009   |   | 1-Month                  LIBOR  |   | 3.6500%                     |   | (1,467)                                                                                                   |
| 12,000                                                                                                                                                                                       |   | January                  2015   |   | 1-Month                  LIBOR  |   | 4.5100%                     |   | (334)                                                                                                     |
| 68,606                                                                                                                                                                                       |   | October                  2009   |   | 1-Month                  LIBOR  |   | 3.7150%                     |   | (1,763)                                                                                                   |
| 65,257                                                                                                                                                                                       |   | September                  2009 |   | 1-Month                  LIBOR  |   | 3.7090%                     |   | (1,665)                                                                                                   |
| 22,465                                                                                                                                                                                       |   | December                  2009  |   | 1-Month                  LIBOR  |   | 3.8290%                     |   | (534)                                                                                                     |
| 7,614                                                                                                                                                                                        |   | August                  2009    |   | 1-Month                  LIBOR  |   | 4.0690%                     |   | (128)                                                                                                     |
| 22,091                                                                                                                                                                                       |   | February                  2010  |   | 1-Month                  LIBOR  |   | 4.1030%                     |   | (386)                                                                                                     |
| 34,692                                                                                                                                                                                       |   | April                  2010     |   | 1-Month                  LIBOR  |   | 4.5310%                     |   | (245)                                                                                                     |
| 30,062                                                                                                                                                                                       |   | March                  2010     |   | 1-Month                  LIBOR  |   | 4.5260%                     |   | (212)                                                                                                     |
| 25,328                                                                                                                                                                                       |   | April                  2010     |   | 1-Month                  LIBOR  |   | 4.1640%                     |   | (413)                                                                                                     |
| 42,954                                                                                                                                                                                       |   | March                  2010     |   | 1-Month                  LIBOR  |   | 4.0910%                     |   | (760)                                                                                                     |
| 44,113                                                                                                                                                                                       |   | May                  2010       |   | 1-Month                  LIBOR  |   | 3.9900%                     |   | (925)                                                                                                     |
| 22,037                                                                                                                                                                                       |   | April                  2010     |   | 1-Month                  LIBOR  |   | 3.9880%                     |   | (457)                                                                                                     |
| 38,293                                                                                                                                                                                       |   | September                  2010 |   | 1-Month                  LIBOR  |   | 4.3980%                     |   | (421)                                                                                                     |
| 18,698                                                                                                                                                                                       |   | September                  2010 |   | 1-Month                  LIBOR  |   | 4.4300%                     |   | (190)                                                                                                     |
| 45,174                                                                                                                                                                                       |   | August                  2010    |   | 1-Month                  LIBOR  |   | 4.4865%                     |   | (378)                                                                                                     |
| 28,336                                                                                                                                                                                       |   | August                  2010    |   | 1-Month                  LIBOR  |   | 4.4210%                     |   | (290)                                                                                                     |
| 21,666                                                                                                                                                                                       |   | June                  2010      |   | 1-Month                  LIBOR  |   | 4.4870%                     |   | (180)                                                                                                     |
| 22,818                                                                                                                                                                                       |   | August                  2010    |   | 1-Month                  LIBOR  |   | 4.4900%                     |   | (192)                                                                                                     |
| 44,776                                                                                                                                                                                       |   | July                  2010      |   | 1-Month                  LIBOR  |   | 4.4290%                     |   | (455)                                                                                                     |
| 60,985                                                                                                                                                                                       |   | December                  2010  |   | 1-Month                  LIBOR  |   | 4.7710%                     |   | (78)                                                                                                      |
| 5,433                                                                                                                                                                                        |   | December                  2015  |   | 3-Month                  LIBOR  |   | 4.9618%                     |   | 8                                                                                                         |
| 16,870                                                                                                                                                                                       |   | December                  2015  |   | 3-Month                  LIBOR  |   | 4.9670%                     |   | 32                                                                                                        |
| $                          2,943,752                       |   |                            |   |                            |   |                        |   | $                (41,170) |

|  | * | up                to 6.50% |
|--|---|----------------------------|

| (13) | These                are two essentially offsetting interest rate caps and two essentially                offsetting interest rate swaps, each with notional amounts of $32.5                million, an interest rate cap with a notional balance of $17.5 million,                and four interest rate swaps with an aggregate notional amount of                $19.2                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, the maturity date of the $17.5 million                cap is July 2009, and the maturity dates of the latter four interest                rate                swaps range between November 2008 and January 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,** |      |
|                                                                                                                |   | **2005**                            |      | **2004** |   |
| **Assets**                                                                                                          |   |                                |      |   |   |
| Real                    estate securities, available for sale - Note 4                                              |   | $                                   | 4,554,519 |   | $ | 3,369,496 |   |
| Real                    estate securities portfolio deposit - Note 4                                                |   |                                | —   |   |   | 25,411 |   |
| Real                    estate related loans, net - Note 5                                                          |   |                                | 615,551   |   |   | 591,890 |   |
| Residential                    mortgage loans, net - Note 5                                                         |   |                                | 600,682   |   |   | 654,784 |   |
| Investments                    in unconsolidated subsidiaries - Note 3                                              |   |                                | 29,953    |   |   | 41,230 |   |
| Operating                    real estate, net - Note 6                                                              |   |                                | 16,673    |   |   | 57,193 |   |
| Real                    estate held for sale - Note 6                                                               |   |                                | —   |   |   | 12,376 |   |
| Cash                    and cash equivalents                                                                        |   |                                | 21,275    |   |   | 37,911 |   |
| Restricted                    cash                                                                                  |   |                                | 268,910   |   |   | 77,974 |   |
| Derivative                    assets - Note 7                                                                       |   |                                | 63,834    |   |   | 27,122 |   |
| Receivables                    and other assets                                                                     |   |                                | 38,302    |   |   | 37,333 |   |
|                                                                                                                |   | $                                   | 6,209,699 |   | $ | 4,932,720 |   |
|                                                                                                                |   |                                |      |   |   |   |   |
| **Liabilities                    and Stockholders' Equity**                                                         |   |                                |      |   |   |   |   |
|                                                                                                                |   |                                |      |   |   |   |   |
| **Liabilities**                                                                                                     |   |                                |      |   |   |   |   |
| CBO                    bonds payable - Note 8                                                                       |   | $                                   | 3,530,384 |   | $ | 2,656,510 |   |
| Other                    bonds payable - Note 8                                                                     |   |                                | 353,330   |   |   | 222,266 |   |
| Notes                    payable - Note 8                                                                           |   |                                | 260,441   |   |   | 652,000 |   |
| Repurchase                    agreements - Note 8                                                                   |   |                                | 1,048,203 |   |   | 490,620 |   |
| Credit                    facility - Note 8                                                                         |   |                                | 20,000    |   |   | — |   |
| Derivative                    liabilities - Note 7                                                                  |   |                                | 18,392    |   |   | 39,661 |   |
| Dividends                    payable                                                                                |   |                                | 29,052    |   |   | 25,928 |   |
| Due                    to affiliates - Note 10                                                                      |   |                                | 8,783     |   |   | 8,963 |   |
| Accrued                    expenses and other liabilities                                                           |   |                                | 23,111    |   |   | 40,057 |   |
|                                                                                                                |   |                                | 5,291,696 |   |   | 4,136,005 |   |
|                                                                                                                |   |                                |      |   |   |   |   |
| Commitments                    and contingencies - Notes 9, 10 and 11                                               |   |                                | —   |   |   | — |   |
| **Stockholders'                    Equity**                                                                         |   |                                |      |   |   |   |   |
| Preferred                    stock, $0.01 par value, 100,000,000 shares authorized,                    2,500,000    |   |                                |      |   |   |   |   |
| Redeemable                    preferred stock, $.01 par value, 100,000,000 shares                    authorized,    |   |                                |      |   |   |   |   |
| 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   |   |   | 62,500 |   |
| (Series                    C issued in 2005)                                                                        |   |                                |      |   |   |   |   |
| Common                    stock, $0.01 par value, 500,000,000 shares authorized,                    43,913,409      |   |                                |      |   |   |   |   |
| and                    39,859,481 shares issued and outstanding at                                                  |   |                                |      |   |   |   |   |
| December                    31, 2005 and 2004, respectively                                                         |   |                                | 439       |   |   | 399 |   |
| Additional                    paid-in capital                                                                       |   |                                | 782,735   |   |   | 676,015 |   |
| Dividends                    in excess of earnings - Note 2                                                         |   |                                | (13,235   | ) |   | (13,969 | ) |
| Accumulated                    other comprehensive income - Note 2                                                  |   |                                | 45,564    |   |   | 71,770 |   |
|                                                                                                                |   |                                | 918,003   |   |   | 796,715 |   |
|                                                                                                                |   |                                |      |   |   |   |   |
|                                                                                                                |   | $                                   | 6,209,699 |   | $ | 4,932,720 |   |
|                                                                                                                |   |                                |      |   |   |   |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF INCOME**

----

|                                                                                                                         |   | **Year                    Ended December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|------------|
|                                                                                                                         |   | **2005**                                       |       | **2004** |   | **2003** |   |
| **Revenues**                                                                                                                 |   |                                           |       |   |   |   |   |
| Interest                    income                                                                                           |   | $                                              | 348,516    |   | $ | 225,761 |   | $ | 133,183 |   |
| Rental                    and escalation income                                                                              |   |                                           | 6,647      |   |   | 4,744 |   |   | 4,238 |   |
| Gain                    on sale of investments, net                                                                          |   |                                           | 20,305     |   |   | 18,314 |   |   | 13,179 |   |
| Other                    income                                                                                              |   |                                           | 2,745      |   |   | 850 |   |   | 1,484 |   |
|                                                                                                                         |   |                                           | 378,213    |   |   | 249,669 |   |   | 152,084 |   |
| **Expenses**                                                                                                                 |   |                                           |       |   |   |   |   |   |   |   |
| Interest                    expense                                                                                          |   |                                           | 226,446    |   |   | 136,398 |   |   | 76,877 |   |
| Property                    operating expense                                                                                |   |                                           | 2,363      |   |   | 2,575 |   |   | 2,427 |   |
| Loan                    and security servicing expense                                                                       |   |                                           | 5,993      |   |   | 3,057 |   |   | 2,154 |   |
| Provision                    for credit losses                                                                               |   |                                           | 8,421      |   |   | - |   |   | - |   |
| General                    and administrative expense                                                                        |   |                                           | 4,159      |   |   | 4,597 |   |   | 3,148 |   |
| Management                    fee to affiliate - Note 10                                                                     |   |                                           | 13,325     |   |   | 10,620 |   |   | 6,468 |   |
| Incentive                    compensation to affiliate - Note 10                                                             |   |                                           | 7,627      |   |   | 7,959 |   |   | 6,226 |   |
| Depreciation                    and amortization                                                                             |   |                                           | 641        |   |   | 451 |   |   | 405 |   |
|                                                                                                                         |   |                                           | 268,975    |   |   | 165,657 |   |   | 97,705 |   |
|                                                                                                                         |   |                                           |       |   |   |   |   |   |   |   |
| Income                    before equity in earnings of unconsolidated subsidiaries                                           |   |                                           | 109,238    |   |   | 84,012 |   |   | 54,379 |   |
| Equity                    in earnings of unconsolidated subsidiaries - Note 3                                                |   |                                           | 5,930      |   |   | 12,465 |   |   | 862 |   |
| Income                    taxes on related taxable subsidiaries - Note 12                                                    |   |                                           | (321       | ) |   | (2,508 | ) |   | - |   |
|                                                                                                                         |   |                                           |       |   |   |   |   |   |   |   |
| Income                    from continuing operations                                                                         |   |                                           | 114,847    |   |   | 93,969 |   |   | 55,241 |   |
| Income                    from discontinued operations - Note 6                                                              |   |                                           | 2,108      |   |   | 4,446 |   |   | 877 |   |
| **Net                    Income**                                                                                            |   |                                           | 116,955    |   |   | 98,415 |   |   | 56,118 |   |
| Preferred                    dividends                                                                                       |   |                                           | (6,684     | ) |   | (6,094 | ) |   | (4,773 | ) |
| **Income                    available for common stockholders**                                                              |   | $                                              | 110,271    |   | $ | 92,321 |   | $ | 51,345 |   |
|                                                                                                                         |   |                                           |       |   |   |   |   |   |   |   |
| **Net                    Income Per Share of Common Stock**                                                                  |   |                                           |       |   |   |   |   |   |   |   |
| **Basic**                                                                                                                    |   | $                                              | 2.53       |   | $ | 2.50 |   | $ | 1.98 |   |
| **Diluted**                                                                                                                  |   | $                                              | 2.51       |   | $ | 2.46 |   | $ | 1.96 |   |
|                                                                                                                         |   |                                           |       |   |   |   |   |   |   |   |
| Income                    from continuing operations per share of common stock,                    after preferred dividends |   |                                           |       |   |   |   |   |   |   |   |
| Basic                                                                                                                        |   | $                                              | 2.48       |   | $ | 2.38 |   | $ | 1.95 |   |
| Diluted                                                                                                                      |   | $                                              | 2.46       |   | $ | 2.34 |   | $ | 1.93 |   |
| Income                    (loss) from discontinued operations per share of common                    stock                   |   |                                           |       |   |   |   |   |   |   |   |
| Basic                                                                                                                        |   | $                                              | 0.05       |   | $ | 0.12 |   | $ | 0.03 |   |
| Diluted                                                                                                                      |   | $                                              | 0.05       |   | $ | 0.12 |   | $ | 0.03 |   |
| **Weighted                    Average Number of Shares of Common Stock**                                                     |   |                                           |       |   |   |   |   |   |   |   |
| **Outstanding**                                                                                                              |   |                                           |       |   |   |   |   |   |   |   |
| **Basic**                                                                                                                    |   |                                           | 43,671,517 |   |   | 36,943,752 |   |   | 25,898,288 |   |
| **Diluted**                                                                                                                  |   |                                           | 43,985,642 |   |   | 37,557,790 |   |   | 26,140,777 |   |
|                                                                                                                         |   |                                           |       |   |   |   |   |   |   |   |
| **Dividends                    Declared per Share of Common Stock**                                                          |   | $                                              | 2.500      |   | $ | 2.425 |   | $ | 1.950 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF STOCKHOLDERS’EQUITY**

----

|                                                                                                                                    |   | **Preferred                    Stock** |      | **Common                    Stock** |   |            |   |            |       |                                                  |   |                                                        |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|-------------------------------------|--------|------------|--------|------------|------------|--------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                                                                                    |   | **Shares**                             |      | **Amount**                          |   | **Shares** |   | **Amount** |       | **Additional                    Pd. in Capital** |   | **Dividends                    in Excess of Earnings** |   | **Accum.                    Other Comp. Income** |   | **Total                    Stock-Holders' Equity** |   |
| **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 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 |   |
|                                                                                                                                    |   |                                   |      |                                |   |       |   |       |       |                                             |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **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 realized 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 STOCKHOLDERS’ EQUITY **

----

|                                                                                                      |   | **Preferred                    Stock** |      | **Common                    Stock** |   | **Additional                    Pd. in** |   | **Dividends                    in Excess of** |       | **Accum.                    Other Comp.** |   | **Total                    Stock-Holders'** |   |
|-----------------------------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|-------------------------------------|--------|------------------------------------------|--------|-----------------------------------------------|------------|-------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                      |   | **Shares**                             |      | **Amount**                          |   | **Shares**                               |   | **Amount**                                    |       | **Capital**                               |   | **Earnings**                                |   | **Income** |   | **Equity** |   |
| **Stockholders'                    equity - December 31, 2002**                                           |   |                                   | -         |                                | $      | -                                        |   |                                          | 23,488,517 |                                      | $      | 235                                         |   | $ | 290,935 |   | $ | (13,966 | ) | $ | 7,037 |   | $ | 284,241 |   |
| Dividends                    declared                                                                     |   |                                   | -         |                                |   | -                                        |   |                                          | -          |                                      |   | -                                           |   |   | - |   |   | (56,822 | ) |   | - |   |   | (56,822 | ) |
| Issuance                    of preferred stock                                                            |   |                                   | 2,500,000 |                                |   | 62,500                                   |   |                                          | -          |                                      |   | -                                           |   |   | (2,436 | ) |   | - |   |   | - |   |   | 60,064 |   |
| Issuance                    of common stock                                                               |   |                                   | -         |                                |   | -                                        |   |                                          | 7,882,276  |                                      |   | 79                                          |   |   | 163,242 |   |   | - |   |   | - |   |   | 163,321 |   |
| Issuance                    of common stock to directors                                                  |   |                                   | -         |                                |   | -                                        |   |                                          | 1,540      |                                      |   | -                                           |   |   | 30 |   |   | - |   |   | - |   |   | 30 |   |
| Exercise                    of common stock options                                                       |   |                                   | -         |                                |   | -                                        |   |                                          | 2,500      |                                      |   | -                                           |   |   | 35 |   |   | - |   |   | - |   |   | 35 |   |
| Comprehensive                    income:                                                                  |   |                                   |      |                                |   |                                     |   |                                          |       |                                      |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    income                                                                             |   |                                   | -         |                                |   | -                                        |   |                                          | -          |                                      |   | -                                           |   |   | - |   |   | 56,118 |   |   | - |   |   | 56,118 |   |
| Net                    unrealized gain on securities                                                      |   |                                   | -         |                                |   | -                                        |   |                                          | -          |                                      |   | -                                           |   |   | - |   |   | - |   |   | 23,670 |   |   | 23,670 |   |
| Reclassification                    of net realized (gain) on securities into earnings                    |   |                                   | -         |                                |   | -                                        |   |                                          | -          |                                      |   | -                                           |   |   | - |   |   | - |   |   | (13,185 | ) |   | (13,185 | ) |
| Foreign                    currency translation                                                           |   |                                   | -         |                                |   | -                                        |   |                                          | -          |                                      |   | -                                           |   |   | - |   |   | - |   |   | 4,653 |   |   | 4,653 |   |
| Reclassification                    of net realized foreign currency translation into earnings            |   |                                   | -         |                                |   | -                                        |   |                                          | -          |                                      |   | -                                           |   |   | - |   |   | - |   |   | 396 |   |   | 396 |   |
| Net                    unrealized (loss) on derivatives designated as cash flow                    hedges |   |                                   | -         |                                |   | -                                        |   |                                          | -          |                                      |   | -                                           |   |   | - |   |   | - |   |   | 16,842 |   |   | 16,842 |   |
| Total                    comprehensive income                                                             |   |                                   |      |                                |   |                                     |   |                                          |       |                                      |   |                                        |   |   |   |   |   |   |   |   |   |   |   | 88,494 |   |
| **Stockholders'                    equity - December 31, 2003**                                           |   |                                   | 2,500,000 |                                | $      | 62,500                                   |   |                                          | 31,374,833 |                                      | $      | 314                                         |   | $ | 451,806 |   | $ | (14,670 | ) | $ | 39,413 |   | $ | 539,363 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOW**

----

|                                                                                                                                                                                                 |   | **Year                  Ended December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|
|                                                                                                                                                                                                 |   | **2005**                                     |       | **2004** |   | **2003** |   |
| **Cash                  Flows From Operating Activities**                                                                                                                                            |   |                                         |       |   |   |   |   |
| Net                  income                                                                                                                                                                          |   | $                                            | 116,955    |   | $ | 98,415 |   | $ | 56,118 |   |
| Adjustments                    to reconcile net income to net cash provided by operating activities                    (inclusive of amounts related to discontinued                    operations): |   |                                         |       |   |   |   |   |   |   |   |
| Depreciation                  and amortization                                                                                                                                                       |   |                                         | 818        |   |   | 2,253 |   |   | 3,085 |   |
| Accretion                  of discount and other amortization                                                                                                                                        |   |                                         | (2,645     | ) |   | 1,898 |   |   | (3,761 | ) |
| Equity                  in earnings of unconsolidated subsidiaries                                                                                                                                   |   |                                         | (5,930     | ) |   | (12,465 | ) |   | (862 | ) |
| Distributions                  of earnings from unconsolidated subsidiaries                                                                                                                          |   |                                         | 5,930      |   |   | 12,465 |   |   | 862 |   |
| Deferred                  rent                                                                                                                                                                       |   |                                         | (2,539     | ) |   | (1,380 | ) |   | (1,853 | ) |
| Gain                  on sale of investments                                                                                                                                                         |   |                                         | (20,811    | ) |   | (22,029 | ) |   | (11,789 | ) |
| Unrealized                  gain on non-hedge derivatives                                                                                                                                            |   |                                         | (2,839     | ) |   | (3,332 | ) |   | (3,696 | ) |
| Provision                  for credit losses                                                                                                                                                         |   |                                         | 8,421      |   |   | - |   |   | - |   |
| Non-cash                  directors' compensation                                                                                                                                                    |   |                                         | 67         |   |   | 60 |   |   | 30 |   |
| Change                  in                                                                                                                                                                           |   |                                         |       |   |   |   |   |   |   |   |
| Restricted                  cash                                                                                                                                                                     |   |                                         | (7,980     | ) |   | (8,137 | ) |   | (2,564 | ) |
| Receivables                  and other assets                                                                                                                                                        |   |                                         | 218        |   |   | (5,431 | ) |   | (9,403 | ) |
| Due                  to affiliates                                                                                                                                                                   |   |                                         | (180       | ) |   | 6,518 |   |   | 1,110 |   |
| Accrued                  expenses and other liabilities                                                                                                                                              |   |                                         | 9,278      |   |   | 21,520 |   |   | 11,177 |   |
| Net                  cash provided by operating activities:                                                                                                                                          |   |                                         | 98,763     |   |   | 90,355 |   |   | 38,454 |   |
| **Cash                  Flows From Investing Activities**                                                                                                                                            |   |                                         |       |   |   |   |   |   |   |   |
| Purchase                  of real estate securities                                                                                                                                                  |   |                                         | (1,463,581 | ) |   | (1,426,762 | ) |   | (1,407,948 | ) |
| Proceeds                  from sale of real estate securities                                                                                                                                        |   |                                         | 60,254     |   |   | 193,246 |   |   | 255,030 |   |
| Deposit                  on real estate securities (treated as a derivative)                                                                                                                         |   |                                         | (57,149    | ) |   | (80,311 | ) |   | (59,676 | ) |
| Purchase                  of and advances on loans                                                                                                                                                   |   |                                         | (584,270   | ) |   | (631,728 | ) |   | (685,311 | ) |
| Proceeds                  from settlement of loans                                                                                                                                                   |   |                                         | 1,901      |   |   | 124,440 |   |   | 164,404 |   |
| Repayments                  of loan and security principal                                                                                                                                           |   |                                         | 698,002    |   |   | 428,091 |   |   | 105,848 |   |
| Purchase                  of derivative instruments                                                                                                                                                  |   |                                         | -          |   |   | - |   |   | (5,482 | ) |
| Margin                  deposit on derivative instruments                                                                                                                                            |   |                                         | (53,518    | ) |   | - |   |   | - |   |
| Proceeds                  from sale of derivative instruments                                                                                                                                        |   |                                         | 1,338      |   |   | - |   |   | - |   |
| Payments                  on settlement of derivative instruments                                                                                                                                    |   |                                         | (1,112     | ) |   | - |   |   | - |   |
| Purchase                  and improvement of operating real estate                                                                                                                                   |   |                                         | (182       | ) |   | (141 | ) |   | (576 | ) |
| Proceeds                  from sale of operating real estate                                                                                                                                         |   |                                         | 52,333     |   |   | 71,871 |   |   | 5,331 |   |
| Contributions                  to unconsolidated subsidiaries                                                                                                                                        |   |                                         | -          |   |   | (26,789 | ) |   | (30,871 | ) |
| Distributions                  of capital from unconsolidated subsidiaries                                                                                                                           |   |                                         | 11,277     |   |   | 16,199 |   |   | 225 |   |
| Payment                  of deferred transaction costs                                                                                                                                               |   |                                         | (39        | ) |   | (280 | ) |   | - |   |
| Net                  cash used in investing activities                                                                                                                                               |   |                                         | (1,334,746 | ) |   | (1,332,164 | ) |   | (1,659,026 | ) |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOW**

----

|                                                                                                             |   | **Year                  Ended December 31,**  |      |
|------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|-----------|
|                                                                                                             |   | **2005**                                           |      | **2004** |   | **2003** |   |
| **Cash                  Flows From Financing Activities**                                                        |   |                                               |      |   |   |   |   |
| Issuance                  of CBO bonds payable                                                                   |   |                                               | 880,570   |   |   | 859,719 |   |   | 921,503 |   |
| Repayments                  of CBO bonds payable                                                                 |   |                                               | (10,241   | ) |   | (604 | ) |   | - |   |
| Issuance                  of other bonds payable                                                                 |   |                                               | 246,547   |   |   | - |   |   | - |   |
| Repayments                  of other bonds payable                                                               |   |                                               | (114,780  | ) |   | (41,759 | ) |   | (6,413 | ) |
| Borrowings                  under notes payable                                                                  |   |                                               | -         |   |   | 614,106 |   |   | 80,000 |   |
| Repayments                  of notes payable                                                                     |   |                                               | (391,559  | ) |   | (119,407 | ) |   | (906 | ) |
| Borrowings                  under repurchase agreements                                                          |   |                                               | 815,840   |   |   | 654,254 |   |   | 663,120 |   |
| Repayments                  of repurchase agreements                                                             |   |                                               | (258,257  | ) |   | (879,417 | ) |   | (195,506 | ) |
| Draws                  under credit facility                                                                     |   |                                               | 62,000    |   |   | - |   |   | - |   |
| Repayments                  of credit facility                                                                   |   |                                               | (42,000   | ) |   | - |   |   | - |   |
| Issuance                  of common stock                                                                        |   |                                               | 97,680    |   |   | 222,805 |   |   | 168,610 |   |
| Costs                  related to issuance of common stock                                                       |   |                                               | (1,198    | ) |   | - |   |   | (5,289 | ) |
| Exercise                  of common stock options                                                                |   |                                               | 11,694    |   |   | 1,429 |   |   | 35 |   |
| Issuance                  of preferred stock                                                                     |   |                                               | 40,000    |   |   | - |   |   | 62,500 |   |
| Costs                  related to issuance of preferred stock                                                    |   |                                               | (1,483    | ) |   | - |   |   | (2,436 | ) |
| Dividends                  paid                                                                                  |   |                                               | (113,097  | ) |   | (88,489 | ) |   | (49,280 | ) |
| Payment                  of deferred financing costs                                                             |   |                                               | (2,369    | ) |   | (3,320 | ) |   | (426 | ) |
| Net                  cash provided by financing activities                                                       |   |                                               | 1,219,347 |   |   | 1,219,317 |   |   | 1,635,512 |   |
| **Net                  Increase (Decrease) in Cash and Cash Equivalents**                                        |   |                                               | (16,636   | ) |   | (22,492 | ) |   | 14,940 |   |
| **Cash                  and Cash Equivalents, Beginning of Period**                                              |   |                                               | 37,911    |   |   | 60,403 |   |   | 45,463 |   |
| **Cash                  and Cash Equivalents, End of Period**                                                    |   | $                                                  | 21,275    |   | $ | 37,911 |   | $ | 60,403 |   |
| **Supplemental                  Disclosure of Cash Flow Information**                                            |   |                                               |      |   |   |   |   |   |   |   |
| Cash                  paid during the period for interest expense                                                |   | $                                                  | 213,070   |   | $ | 135,172 |   | $ | 80,522 |   |
| Cash                  paid during the period for income taxes                                                    |   | $                                                  | 448       |   | $ | 2,639 |   | $ | - |   |
| **Supplemental                  Schedule of Non-cash Investing and Financing                  Activities**       |   |                                               |      |   |   |   |   |   |   |   |
| Common                  stock dividends declared but not paid                                                    |   | $                                                  | 27,446    |   | $ | 24,912 |   | $ | 15,687 |   |
| Preferred                  stock dividends declared but not paid                                                 |   | $                                                  | 1,606     |   | $ | 1,016 |   | $ | 1,016 |   |
| Deposits                  used in acquisiton of real estate securities (treated as                  derivatives) |   | $                                                  | 82,334    |   | $ | 75,824 |   | $ | 81,492 |   |
| Consolidation                  of ICH CMO                                                                        |   | $                                                  | -         |   | $ | - |   | $ | 221,773 |   |

----

**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                                   |   |
| December                  31, 2005 |   |   | 43,913,409                     |   |   |                                       |   |   |                                    |   |
|                               |   |   |                           |   |   |                                       |   |   |                                    |   |

| **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***
*** ***

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

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

|                                                                                                         |   | December                  31, |   |
|--------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                                         |   | 2005                          |   | 2004 |   |
| Net                  unrealized gains on securities                                                          |   | $                             | 16,782 |   | $ | 99,875 |   |
| Net                  unrealized gains (losses) on derivativesdesignated                  as cash flow hedges |   |                          | 26,738 |   |   | (31,862 | ) |
| Net                  foreign currency translation adjustments                                                |   |                          | 2,044  |   |   | 3,757 |   |
| Accumulated                  other comprehensive income                                                      |   | $                             | 45,564 |   | $ | 71,770 |   |

**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 **

----

| Derivative                  Assets         |   | 2005   |   | 2004   |   |
|--------------------------------------------|--------|--------|--------|--------|--------|
| Interest                  rate caps (A)    |   | $      | 2,145  |   | $      | 3,554 |   |
| Interest                  rate swaps (A)   |   |   | 56,829 |   |   | 21,001 |   |
| Total                  return swaps        |   |   | 3,096  |   |   | 399 |   |
| Non-hedge                  derivatives (B) |   |   | 1,764  |   |   | 2,168 |   |
|                                       |   | $      | 63,834 |   | $      | 27,122 |   |
|                                       |   |   |   |   |   |   |   |
| Derivative                  Liabilities    |   |   |   |   |   |   |   |
| Interest                  rate swaps (A)   |   | $      | 15,659 |   | $      | 34,240 |   |
| Interest                  payable          |   |   | 1,059  |   |   | 2,457 |   |
| Non-hedge                  derivatives (B) |   |   | 1,674  |   |   | 2,964 |   |
|                                       |   | $      | 18,392 |   | $      | 39,661 |   |

| (A)                  Treated as hedges            |   |   |   |   |   |   |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| (B)                  Interest rate swaps and caps |   |   |   |   |   |   |   |

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

**BALANCE      SHEET MEASUREMENT**

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

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

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

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

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

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

|                                                                                        |   | December                  31, |    |
|---------------------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                                        |   | 2005                          |    | 2004 |   |
| Held                  in CBO structures (Note 8) pending                  reinvestment |   | $                             | 173,438 |   | $ | 44,719 |   |
| Total                  return swap margin accounts                                          |   |                          | 72,427  |   |   | 18,190 |   |
| Bond                  sinking funds                                                         |   |                          | 9,532   |   |   | 207 |   |
| Trustee                  accounts                                                           |   |                          | 9,047   |   |   | 9,652 |   |
| Reserve                  accounts                                                           |   |                          | 2,558   |   |   | 2,084 |   |
| Derivative                  margin accounts                                                 |   |                          | 1,908   |   |   | 2,573 |   |
| Restricted                  property operating accounts                                     |   |                          | -       |   |   | 549 |   |
|                                                                                        |   | $                             | 268,910 |   | $ | 77,974 |   |

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

***Preferred      Stock***

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

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

|                                                                                     |   | 2005   |    | 2004   |   | 2003   |   |
|------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|
| Accretion                  of net discount on securities and loans                       |   | $      | (13,432 | )      | $      | (4,282 | )      | $ | (4,532 | ) |
| Amortization                  of net discount on debt obligations                        |   |   | 4,574   |   |   | 4,132  |   |   | 3,800 |   |
| Amortization                  of deferred financing costs and interest rate cap premiums |   |   | 4,417   |   |   | 3,979  |   |   | 1,531 |   |
| Amortization                  of net deferred hedge gains and losses - debt              |   |   | 1,587   |   |   | (2,118 | )      |   | (4,752 | ) |
| Amortization                  of deferred hedge loss - leases                            |   |   | 209     |   |   | 187    |   |   | 192 |   |
|                                                                                     |   | $      | (2,645  | )      | $      | 1,898  |   | $ | (3,761 | ) |

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

----

**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, 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 |   |
| Revenue                  derived from non-US sources:                  |   |                                                                  |      |                                        |   |                                   |   |        |    |   |   |   |   |   |   |   |
| Canada                                                                 |   | $                                                                     | -         |                                        | $      | -                                      |   | $           | 12,157  |   | $      | - |   | $ | 12,157 |   |
| Belgium                                                                |   | $                                                                     | -         |                                        | $      | -                                      |   | $           | 125     |   | $      | - |   | $ | 125 |   |
| 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 |   |
| 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 |   |
| 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 **

----

|                                                                   |   | Real                  Estate Securities and Real Estate Related Loans |      | Residential                  Mortgage Loans |   | Operating                  Real Estate |   | Unallocated |    | Total  |   |
|------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|-----------|---------------------------------------------|--------|----------------------------------------|--------|-------------|---------|--------|--------|
| December                  31, 2003 and the Year then Ended             |   |                                                                  |      |                                        |   |                              |   |        |    |   |   |
| Gross                  revenues                                        |   | $                                                                     | 134,348   |                                        | $      | 12,892                                 |   | $           | 4,264   |   | $      | 580 |   | $ | 152,084 |   |
| Operating                  expenses                                    |   |                                                                  | (821      | )                                           |   | (1,506                                 | )      |        | (2,493  | )      |   | (15,603 | ) |   | (20,423 | ) |
| Operating                  income (loss)                               |   |                                                                  | 133,527   |                                        |   | 11,386                                 |   |        | 1,771   |   |   | (15,023 | ) |   | 131,661 |   |
| Interest                  expense                                      |   |                                                                  | (70,192   | )                                           |   | (6,162                                 | )      |        | (523    | )      |   | - |   |   | (76,877 | ) |
| Depreciation                  and amortization                         |   |                                                                  | -         |                                        |   | -                                      |   |        | (405    | )      |   | - |   |   | (405 | ) |
| Equity                  in earnings of unconsolidated subsidiaries (A) |   |                                                                  | 861       |                                        |   | -                                      |   |        | -       |   |   | 1 |   |   | 862 |   |
| Income                  (loss) from continuing operations              |   |                                                                  | 64,196    |                                        |   | 5,224                                  |   |        | 843     |   |   | (15,022 | ) |   | 55,241 |   |
| Income                  (loss) from discontinued operations            |   |                                                                  | -         |                                        |   | -                                      |   |        | 877     |   |   | - |   |   | 877 |   |
| Net                  income (loss)                                     |   | $                                                                     | 64,196    |                                        | $      | 5,224                                  |   | $           | 1,720   |   | $      | (15,022 | ) | $ | 56,118 |   |
| Revenue                  derived from non-US sources:                  |   |                                                                  |      |                                        |   |                                   |   |        |    |   |   |   |   |   |   |   |
| Canada                                                                 |   | $                                                                     | -         |                                        | $      | -                                      |   | $           | 16,940  |   | $      | - |   | $ | 16,940 |   |
| Belgium                                                                |   | $                                                                     | -         |                                        | $      | -                                      |   | $           | 5,999   |   | $      | - |   | $ | 5,999 |   |
| Total                  assets                                          |   | $                                                                     | 2,756,262 |                                        | $      | 587,831                                |   | $           | 146,635 |   | $      | 59,571 |   | $ | 3,550,299 |   |
| Long-lived                  assets outside the US:                     |   |                                                                  |      |                                        |   |                                   |   |        |    |   |   |   |   |   |   |   |
| Canada                                                                 |   | $                                                                     | -         |                                        | $      | -                                      |   | $           | 54,250  |   | $      | - |   | $ | 54,250 |   |
| Belgium                                                                |   | $                                                                     | -         |                                        | $      | -                                      |   | $           | 78,149  |   | $      | - |   | $ | 78,149 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

**Unconsolidated      Subsidiaries**

|                                                                   |   | Operating                  Real Estate Subsidiary |    | Real                  Estate Loan Subsidiary |   |
|------------------------------------------------------------------------|--------|---------------------------------------------------|---------|----------------------------------------------|--------|
| **Balance                  at December 31, 2003**                      |   | $                                                 | -       |                                         | $      | 30,640 |   |
| Contributions                  to unconsolidated subsidiaries          |   |                                              | 26,789  |                                         |   | - |   |
| Distributions                    from unconsolidated subsidiaries |   |                                              | (17,709 | )                                            |   | (10,955 | ) |
| Equity                    in earnings of unconsolidated subsidiaries   |   |                                              | 8,698   |                                         |   | 3,767 |   |
| **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 |   |

|                                                  |   | Operating                  Real                  Estate Subsidiary                  (A) (B) |    | Real                  Estate Loan Subsidiary (A) (C) |   |
|-------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|---------|------------------------------------------------------|--------|
|                                                  |   | December                  31,                                                               |    | December                  31,                        |   |
|                                                  |   | 2005                                                                                        |    | 2004                                                 |   | 2005 |   | 2004 |   | 2003 |   |
| Assets                                                |   | $                                                                                           | 77,758  |                                                 | $      | 89,222 |   | $ | 35,806 |   | $ | 47,170 |   | $ | 61,628 |   |
| Liabilities                                           |   |                                                                                        | (53,000 | )                                                    |   | (53,000 | ) |   | - |   |   | - |   |   | - |   |
| Minority                  interest                    |   |                                                                                        | (455    | )                                                    |   | (666 | ) |   | (202 | ) |   | (266 | ) |   | (348 | ) |
| Equity                                                |   | $                                                                                           | 24,303  |                                                 | $      | 35,556 |   | $ | 35,604 |   | $ | 46,904 |   | $ | 61,280 |   |
| Equity                  held by Newcastle (D)         |   | $                                                                                           | 12,151  |                                                 | $      | 17,778 |   | $ | 17,802 |   | $ | 23,452 |   | $ | 30,640 |   |
|                                                  |   |                                                                                        |    |                                                 |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |   |                                                                                        | 2005    |                                                 |   | 2004 |   |   | 2005 |   |   | 2004 |   |   | 2003 |   |
| Revenues                                              |   | $                                                                                           | 10,196  |                                                 | $      | 25,011 |   | $ | 6,738 |   | $ | 7,852 |   | $ | 1,885 |   |
| Expenses                                              |   |                                                                                        | (4,896  | )                                                    |   | (7,159 | ) |   | (42 | ) |   | (111 | ) |   | (152 | ) |
| Minority                  interest                    |   |                                                                                        | (97     | )                                                    |   | (328 | ) |   | (39 | ) |   | (44 | ) |   | (10 | ) |
| Net                  income                           |   | $                                                                                           | 5,203   |                                                 | $      | 17,524 |   | $ | 6,657 |   | $ | 7,697 |   | $ | 1,723 |   |
| Newcastle's                  equity in net income (D) |   | $                                                                                           | 2,602   |                                                 | $      | 8,698 |   | $ | 3,328 |   | $ | 3,767 |   | $ | 862 |   |

| (A) | The                unconsolidated subsidiaries’ summary financial information is presented on                a fair value basis, consistent with their internal basis of                accounting. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

| (D) | With                respect to the operating real estate subsidiary, $0.8 million and                $7.2                million of Newcastle’s equity in net income was derived from the company                holding assets available for sale in 2005 and 2004, respectively,                while                $1.8 million and $1.5 million of Newcastle’s equity in net income was                derived from the company holding assets for investment in 2005 and                2004,                respectively. As of December 31, 2004, $5.6 million of the equity                held by                Newcastle related to the company holding assets available for sale                and                $12.2 million related to the company holding assets for investment.                As of                December 31, 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**

| **4.** | **REAL                ESTATE SECURITIES** |
|--------|-------------------------------------------|

**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              |   |                                       | 698,322   |                                        |   | 700,912                                 |   |   | 145    |                                  |   | (8,572                                     | )      |   | 692,485 |   |   | 19 |   |   | AAA |   |   | 4.76 | % |   | 4.67 | % |   | 4.90 |   |
| Total/Average                        (A)        |   | $                                          | 4,603,217 |                                        | $      | 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 $3,584.4                      million,                      and of floating rate securities was $1,018.8                      million. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

|                                                       |   |                                       |      |                                        |   | 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                   |   | $                                          | 2,212,833 |                                        | $      | 2,201,085                         |   | $                            | -      |                                  | $      | (38,770                                    | )      | $ | 2,162,315 |   |   | 264 |   |   | A- |   |   | 5.65 | % |   | 5.67 | % |   | 6.20 |   |
| Twelve                  or More Months                     |   |                                       | 274,127   |                                        |   | 279,868                           |   |                         | -      |                                  |   | (12,756                                    | )      |   | 267,112 |   |   | 42 |   |   | BBB+ |   |   | 5.71 | % |   | 5.32 | % |   | 7.15 |   |
| Total                                                      |   | $                                          | 2,486,960 |                                        | $      | 2,480,953                         |   | $                            | -      |                                  | $      | (51,526                                    | )      | $ | 2,429,427 |   |   | 306 |   |   | A- |   |   | 5.66 | % |   | 5.63 | % |   | 6.31 |   |

**December      31, 2004**

|                                      |   |                                       |      |                                        |   | Gross                  Unrealized  |   |                         |    |                                  | Weighted                  Average |                                  |
|-------------------------------------------|--------|--------------------------------------------|-----------|---------------------------------------------|--------|-----------------------------------------|--------|------------------------------|---------|---------------------------------------|-----------------------------------|---------------------------------------|
| Asset                  Type          |   | Current                  Face Amount  |      | Amortized                  Cost Basis  |   | Gains                                   |   |                  Losses |    | Carrying                  Value  |                              | Number                  of Securities |   | S&P                  EquivalentRating |   |   | Coupon  |   |   | Yield |   |   | Maturity                  (Years)  |   |
| CMBS-Conduit                              |   | $                                          | 1,024,762 |                                        | $      | 995,194                                 |   | $                            | 54,506  |                                  | $                                 | (7,240                                | ) | $ | 1,042,460 |   |   | 162 |   |   | BBB- |   |   | 6.17 | % |   | 6.80 | % |   | 7.53 |   |
| CMBS-Large                  Loan          |   |                                       | 583,758   |                                        |   | 580,383                                 |   |                         | 9,781   |                                  |                              | (168                                  | ) |   | 589,996 |   |   | 68 |   |   | BBB |   |   | 5.16 | % |   | 5.41 | % |   | 2.35 |   |
| CMBS-                  B-Note             |   |                                       | 173,587   |                                        |   | 170,884                                 |   |                         | 2,614   |                                  |                              | (379                                  | ) |   | 173,119 |   |   | 28 |   |   | BB+ |   |   | 6.31 | % |   | 6.58 | % |   | 6.12 |   |
| Unsecured                  REIT Debt      |   |                                       | 735,402   |                                        |   | 750,489                                 |   |                         | 38,433  |                                  |                              | (3,200                                | ) |   | 785,722 |   |   | 90 |   |   | BBB- |   |   | 6.51 | % |   | 6.15 | % |   | 7.34 |   |
| ABS-Manufactured                  Housing |   |                                       | 221,803   |                                        |   | 198,181                                 |   |                         | 5,328   |                                  |                              | (4,494                                | ) |   | 199,015 |   |   | 11 |   |   | B |   |   | 7.10 | % |   | 8.83 | % |   | 5.67 |   |
| ABS-Home                  Equity          |   |                                       | 298,934   |                                        |   | 297,083                                 |   |                         | 3,072   |                                  |                              | (83                                   | ) |   | 300,072 |   |   | 44 |   |   | A- |   |   | 4.16 | % |   | 4.29 | % |   | 4.06 |   |
| ABS-Franchise                             |   |                                       | 77,825    |                                        |   | 75,631                                  |   |                         | 2,493   |                                  |                              | (540                                  | ) |   | 77,584 |   |   | 17 |   |   | BBB+ |   |   | 7.13 | % |   | 8.79 | % |   | 5.25 |   |
| Agency                  RMBS              |   |                                       | 199,182   |                                        |   | 201,803                                 |   |                         | -       |                                  |                              | (275                                  | ) |   | 201,528 |   |   | 3 |   |   | AAA |   |   | 4.69 | % |   | 4.41 | % |   | 3.35 |   |
| Total/Average                  (A)        |   | $                                          | 3,315,253 |                                        | $      | 3,269,648                               |   | $                            | 116,227 |                                  | $                                 | (16,379                               | ) | $ | 3,369,496 |   |   | 423 |   |   | BBB |   |   | 5.89 | % |   | 6.19 | % |   | 5.76 |   |

|                                     |   |   | Current                  FaceAmount  |   |   | Market                  (Discount) / Premium  |   |   | Loss                    Allowance |   |   | Amortized                  Cost Basis  |   |
|------------------------------------------|--------|--------|-------------------------------------------|--------|--------|----------------------------------------------------|--------|--------|-----------------------------------|--------|--------|---------------------------------------------|--------|
| **December                  31, 2003**   |   | $      | 2,173,538                                 |   | $      | (61,173                                            | )      | $      | -                                 |   | $      | 2,112,365                                   |   |
| Purchases                                |   |   | 1,500,549                                 |   |   | 4,084                                              |   |   | -                                 |   |   | 1,504,633                                   |   |
| Collection                  of principal |   |   | (181,008                                  | )      |   | -                                                  |   |   | -                                 |   |   | (181,008                                    | )      |
| Cost                  of securities sold |   |   | (177,826                                  | )      |   | 4,677                                              |   |   | -                                 |   |   | (173,149                                    | )      |
| Accretion                                |   |   | -                                         |   |   | 6,807                                              |   |   | -                                 |   |   | 6,807                                       |   |
| **December                  31, 2004**   |   | $      | 3,315,253                                 |   | $      | (45,605                                            | )      | $      | -                                 |   | $      | 3,269,648                                   |   |
| Purchases                                |   |   | 1,895,580                                 |   |   | (45,385                                            | )      |   | -                                 |   |   | 1,850,195                                   |   |
| Collection                  of principal |   |   | (382,872                                  | )      |   | -                                                  |   |   | -                                 |   |   | (382,872                                    | )      |
| Cost                  of securities sold |   |   | (224,744                                  | )      |   | 18,912                                             |   |   | -                                 |   |   | (205,832                                    | )      |
| Accretion                                |   |   | -                                         |   |   | 6,595                                              |   |   | -                                 |   |   | 6,595                                       |   |
| **December                  31, 2005**   |   | $      | 4,603,217                                 |   | $      | (65,483                                            | )      | $      | -                                 |   | $      | 4,537,734                                   |   |

----

**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 AND RESIDENTIAL MORTGAGE                LOANS** |
|--------|--------------------------------------------------------------------------------------------|

|                                 |   | December                  31,       |    |  December                  31, 2005 |   |
|--------------------------------------|--------|-------------------------------------|---------|------------------------------------------|--------|
|                                 |   | 2005                                |    | 2004                                     |   | 2005 |   | 2004 |   |   |   |   |   |   |   |   |   |
| Loan                  Type           |   | CurrentFace                  Amount |    | Carrying                  Value (C)      |   | LoanCount |   | Wtd.                  Avg. Yield |   | Weighted                    Average Maturity(Years)                    (D) |   | Delinquent                  Carrying Amount (E) |   |
| B-Notes                              |   | $                                   | 72,173  |                                     | $      | 132,777 |   | $ | 72,520 |   | $ | 133,344 |   |   | 13 |   |   | 8.46 | % |   | 2.40 |   | $ | - |   |
| Mezzanine                  Loans (A) |   |                                | 302,740 |                                     |   | 80,000 |   |   | 302,816 |   |   | 80,052 |   |   | 8 |   |   | 8.44 | % |   | 1.94 |   |   | - |   |
| Bank                  Loans          |   |                                | 56,274  |                                     |   | 146,909 |   |   | 56,563 |   |   | 146,909 |   |   | 3 |   |   | 6.58 | % |   | 2.51 |   |   | - |   |
| Real                  Estate Loans   |   |                                | 23,082  |                                     |   | 29,555 |   |   | 22,364 |   |   | 28,911 |   |   | 1 |   |   | 20.02 | % |   | 2.00 |   |   | - |   |
| ICH                  Loans (B)       |   |                                | 165,514 |                                     |   | 205,147 |   |   | 161,288 |   |   | 202,674 |   |   | 96 |   |   | 8.64 | % |   | 1.55 |   |   | 22,136 |   |
| Total                  Real Estate   |   |                                |    |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related                  Loans       |   | $                                   | 619,783 |                                     | $      | 594,388 |   | $ | 615,551 |   | $ | 591,890 |   |   | 121 |   |   | 8.74 | % |   | 1.94 |   | $ | 22,136 |   |
|                                 |   |                                |    |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                  Loans   |   | $                                   | 326,100 |                                     | $      | 645,381 |   | $ | 333,226 |   | $ | 654,784 |   |   | 919 |   |   | 4.79 | % |   | 2.73 |   | $ | 3,699 |   |
| Manufactured                         |   |                                |    |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Housing                  Loans       |   |                                | 284,870 |                                     |   | - |   |   | 267,456 |   |   | - |   |   | 7,067 |   |   | 7.84 | % |   | 5.78 |   |   | 2,927 |   |
| Total                  Residential   |   |                                |    |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage                  Loans      |   | $                                   | 610,970 |                                     | $      | 645,381 |   | $ | 600,682 |   | $ | 654,784 |   |   | 7,986 |   |   | 6.15 | % |   | 4.15 |   | $ | 6,626 |   |

|  | (A) | One                of these loans has a contractual exit fee which Newcastle will begin                to                accrue if and when management believes                it is probable that such exit fee will be received. These loans are                comprised of the following: |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                       |   |   |   |   |   |    |   |   |   |   |   |   |   |   |   |
|----------------------------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| $                  50,000  |   | $      | 50,000 |   | $      | 50,003  |   | $      | 50,008 |   |   | 1      |   |   | 7.10   | % |   | 0.71 |   | $ | - |   |
| 38,000                     |   |   | -      |   |   | 38,016  |   |   | -      |   |   | 1      |   |   | 8.51   | % |   | 1.81 |   |   | - |   |
| 100,000                    |   |   | -      |   |   | 100,052 |   |   | -      |   |   | 1      |   |   | 7.60   | % |   | 2.53 |   |   | - |   |
| 58,630                     |   |   | -      |   |   | 58,662  |   |   | -      |   |   | 1      |   |   | 8.87   | % |   | 1.70 |   |   | - |   |
| 56,110                     |   |   | 30,000 |   |   | 56,083  |   |   | 30,044 |   |   | 4      |   |   | 10.64  | % |   | 2.32 |   |   | - |   |
| $                  302,740 |   | $      | 80,000 |   | $      | 302,816 |   | $      | 80,052 |   |   | 8      |   |   | 8.44   | % |   | 1.94 |   | $ | - |   |

|  | (B) | In                October 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) | The                aggregate United States federal income tax basis for such assets                at                December 31, 2005 was approximately equal to their book                basis. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (D) | 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 10%,                respectively. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (E) | This                face amount of loans is 60 or more days delinquent. $14.8 million                of the                delinquent ICH Loans were transferred out of the securitization trust                and                the related properties were foreclosed on in                2006. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

|                                              |   |                                       |     |                                        |   |                            |   |                            |   |                                 |   |                                       |   |                            |     |                            |   |
|---------------------------------------------------|--------|--------------------------------------------|----------|---------------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|--------------------------------------|--------|--------------------------------------------|--------|---------------------------------|----------|---------------------------------|--------|
|                                              |   | Real                  Estate Related Loans |     | Residential                  Mortgage Loans |   |
|                                              |   | Current                  Face Amount       |     | Market                  (Discount)/Premium  |   | Loss                  Allowance |   | Carrying                  Value |   | Current                  Face Amount |   | Market                  (Discount)/Premium |   | Loss                  Allowance |     | Carrying                  Value |   |
| **Balance                  at December 31, 2003** |   | $                                          | 405,308  |                                        | $      | (49                             | )      | $                               | (2,475 | )                                    | $      | 402,784                                    |   | $                               | 578,330  |                            | $      | 8,007 |   | $ | (100 | ) | $ | 586,237 |   |
| Purchases/advances                                |   |                                       | 281,340  |                                        |   | 15                              |   |                            | -      |                                 |   | 281,355                                    |   |                            | 347,318  |                            |   | 3,055 |   |   | - |   |   | 350,373 |   |
| Collections                  of principal         |   |                                       | (92,425  | )                                           |   | -                               |   |                            | 2      |                                 |   | (92,423                                    | )      |                            | (154,660 | )                               |   | - |   |   | - |   |   | (154,660 | ) |
| Cost                  of loans sold               |   |                                       | -        |                                        |   | -                               |   |                            | -      |                                 |   | -                                          |   |                            | (125,607 | )                               |   | 874 |   |   | - |   |   | (124,733 | ) |
| Accretion                                         |   |                                       | 165      |                                        |   | 9                               |   |                            | -      |                                 |   | 174                                        |   |                            | -        |                            |   | (2,533 | ) |   | - |   |   | (2,533 | ) |
| Loss                  allowance                   |   |                                       | -        |                                        |   | -                               |   |                            | -      |                                 |   | -                                          |   |                            | -        |                            |   | - |   |   | 100 |   |   | 100 |   |
| **Balance                  at December 31, 2004** |   | $                                          | 594,388  |                                        | $      | (25                             | )      | $                               | (2,473 | )                                    | $      | 591,890                                    |   | $                               | 645,381  |                            | $      | 9,403 |   | $ | - |   | $ | 654,784 |   |
| Purchases/advances                                |   |                                       | 341,676  |                                        |   | (505                            | )      |                            | -      |                                 |   | 341,171                                    |   |                            | 327,855  |                            |   | (18,150 | ) |   | - |   |   | 309,705 |   |
| Collections                  of principal         |   |                                       | (319,830 | )                                           |   | -                               |   |                            | -      |                                 |   | (319,830                                   | )      |                            | (359,905 | )                               |   | - |   |   | - |   |   | (359,905 | ) |
| Accretion                                         |   |                                       | -        |                                        |   | 524                             |   |                            | -      |                                 |   | 524                                        |   |                            | -        |                            |   | 1,666 |   |   | - |   |   | 1,666 |   |
| Paid-in-kind                  interest            |   |                                       | 4,648    |                                        |   | -                               |   |                            | -      |                                 |   | 4,648                                      |   |                            | -        |                            |   | - |   |   | - |   |   | - |   |
| Loss                  allowance                   |   |                                       | -        |                                        |   | -                               |   |                            | (2,852 | )                                    |   | (2,852                                     | )      |                            | -        |                            |   | - |   |   | (5,568 | ) |   | (5,568 | ) |
| Realized                  losses                  |   |                                       | (1,099   | )                                           |   | -                               |   |                            | 1,099  |                                 |   | -                                          |   |                            | (2,361   | )                               |   | - |   |   | 2,361 |   |   | - |   |
| **Balance                  at December 31, 2005** |   | $                                          | 619,783  |                                        | $      | (6                              | )      | $                               | (4,226 | )                                    | $      | 615,551                                    |   | $                               | 610,970  |                            | $      | (7,081 | ) | $ | (3,207 | ) | $ | 600,682 |   |

| ReferenceAsset                                                                              |   | NotionalAmount |    | MarginAmount |   | ReceiveInterest                  Rate |   | PayInterest                  Rate |                            | Maturity                  Date |   | FairValue                       |   |
|---------------------------------------------------------------------------------------------|--------|----------------|---------|--------------|--------|---------------------------------------|--------|-----------------------------------|---------------------------------|--------------------------------|--------|---------------------------------|--------|
| Term                  loan to a retail mall REIT                                            |   | $              | 106,083 |         | $      | 18,149                                |   |                              | LIBOR                  + 2.000% | %                              |   | LIBOR                  + 0.500% |   |   | Nov                  2008 |   | $ | 1,008 |   |
| Term                  loan to a diversified realestate                  and finance company |   |           | 97,997  |         |   | 19,599                                |   |                              | LIBOR                  + 3.000% | %                              |   | LIBOR                  + 0.625% |   |   | Feb                  2008 |   |   | 877 |   |
| Mezzanine                  loan to a hotel company                                          |   |           | 15,000  |         |   | 5,224                                 |   |                              | LIBOR                  + 4.985% | %                              |   | LIBOR                  + 1.350% |   |   | Jun                  2007 |   |   | 101 |   |
| Term                  loan to a diversified realestate                  company             |   |           | 94,954  |         |   | 9,495                                 |   |                              | LIBOR                  +1.750%  | %                              |   | LIBOR                  + 0.500% |   |   | Aug                  2007 |   |   | 904 |   |
| Term                  loan to a retail company                                              |   |           | 100,000 |         |   | 19,960                                |   |                              | LIBOR                  +3.000%  | %                              |   | LIBOR                  + 0.500% |   |   | Dec                  2008 |   |   | 206 |   |
|                                                                                        |   | $              | 414,034 |         | $      | 72,427                                |   |                              |                            |                           |   |                            |   |   |   |   | $ | 3,096 |   |

----

**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, 2003**         |   | $      | 114,330 |   | $      | (11,335                                     | )      | $      | 102,995 |   |
| Improvements                                              |   |   | 148     |   |   | -                                           |   |   | 148     |   |
| Foreign                  currency translation             |   |   | 8,899   |   |   | (1,094                                      | )      |   | 7,805   |   |
| Depreciation                                              |   |   | -       |   |   | (2,137                                      | )      |   | (2,137  | )      |
| Transferred                  to Real Estate Held for Sale |   |   | (57,686 | )      |   | 6,068                                       |   |   | (51,618 | )      |
| **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  |   |
|                                                      |   |   |    |   |   |                                        |   |   |    |   |
| Real                  Estate Held for Sale                |   |   |    |   |   |                                        |   |   |    |   |
| **Balance                  at December 31, 2003**         |   |   |    |   |   |                                        |   | $      | 29,404  |   |
| Improvements                                              |   |   |    |   |   |                                        |   |   | 73      |   |
| Foreign                  currency translation             |   |   |    |   |   |                                        |   |   | (735    | )      |
| Sold                                                      |   |   |    |   |   |                                        |   |   | (67,984 | )      |
| Transferred                  from Operating Real Estate   |   |   |    |   |   |                                        |   |   | 51,618  |   |
| **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**         |   |   |    |   |   |                                        |   | $      | -       |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| 2006   |   | $      | 745   |   |
|--------|--------|--------|-------|--------|
| 2007   |   |   | 1,114 |   |
| 2008   |   |   | 1,111 |   |
| 2009   |   |   | 1,111 |   |
| 2010   |   |   | 278   |   |
|   |   | $      | 4,359 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

|                                  |   |                        |   |                                                                    |   |                                |   |                                                               |   |
|---------------------------------------|--------|-----------------------------|--------|-------------------------------------------------------------------------|--------|-------------------------------------|--------|--------------------------------------------------------------------|--------|
| **Type                  of Property** |   | **Location**                |   | **Net                  Rentable**** Sq.                  Ft. (A)** |   | **Acq'n                  Date (A)** |   | **Year                  Built/****Renovated                  (A)** |   |
|                                  |   |                        |   |                                                                    |   |                                |   |                                                               |   |
| Off.                  Bldg.           |   | London,                  ON |   | 323,411                                                                 |   | 10/98                               |   | 1980                                                               |   |

|                                                          |   |                                                                            |   | **December                  31, 2005** |   |
|---------------------------------------------------------------|--------|---------------------------------------------------------------------------------|--------|----------------------------------------|--------|
| **Initial                  Cost (B)**                         |   | **Costs                  Capitalized****Subseq.                  to Acq'n (B)** |   | **Gross****Carrying****Amount**        |   | **Accum.                  Depr.** |   | **Net                  Carrying Value (C)** |   | **Encumb.** |   | **Occ.                  (A)** |   |
|                                                          |   |                                                                            |   |                                   |   |   |   |   |   |   |   |   |   |
| $                        19,790 |   | $                                                                               | 419    |                                   | $      | 20,209 |   | $ | (3,536 | ) | $ | 16,673 |   | $ | - |   |   | 95.2 | % |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

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

|                                                        |   | Carrying                  Value |      | Principal                  Balance or Notional Amount |   | Estimated                  Fair Value |   |
|-------------------------------------------------------------|--------|---------------------------------|-----------|-------------------------------------------------------|--------|---------------------------------------|--------|
|                                                        |   | December                  31,   |      | December                  31,                         |   | December                  31,         |   |
|                                                        |   | 2005                            |      | 2004                                                  |   | 2005                                  |   | 2005 |   | 2004 |   |
| **Assets:**                                                 |   |                            |      |                                                  |   |                                  |   |   |   |   |   |
| Real                  estate securities, available for sale |   | $                               | 4,554,519 |                                                  | $      | 3,369,496                             |   | $ | 4,603,217 |   | $ | 4,554,519 |   | $ | 3,369,496 |   |
| Real                  estate securities portfolio deposit   |   |                            | -         |                                                  |   | 25,411                                |   |   | - |   |   | - |   |   | 25,411 |   |
| Real                  estate related loans                  |   |                            | 615,551   |                                                  |   | 591,890                               |   |   | 619,783 |   |   | 615,865 |   |   | 600,528 |   |
| Residential                  mortgage loans                 |   |                            | 600,682   |                                                  |   | 654,784                               |   |   | 610,970 |   |   | 609,486 |   |   | 654,784 |   |
| Interest                  rate caps, treated as hedges (A)  |   |                            | 2,145     |                                                  |   | 3,554                                 |   |   | 342,351 |   |   | 2,145 |   |   | 3,554 |   |
| Total                  return swaps (A)                     |   |                            | 3,096     |                                                  |   | 399                                   |   |   | 414,034 |   |   | 3,096 |   |   | 399 |   |
| **Liabilities:**                                            |   |                            |      |                                                  |   |                                  |   |   |   |   |   |   |   |   |   |   |
| CBO                  bonds payable                          |   |                            | 3,530,384 |                                                  |   | 2,656,510                             |   |   | 3,560,953 |   |   | 3,594,638 |   |   | 2,720,704 |   |
| Other                  bonds payable                        |   |                            | 353,330   |                                                  |   | 222,266                               |   |   | 353,330 |   |   | 356,294 |   |   | 227,510 |   |
| Notes                  payable                              |   |                            | 260,441   |                                                  |   | 652,000                               |   |   | 260,441 |   |   | 260,441 |   |   | 652,000 |   |
| Repurchase                  agreements                      |   |                            | 1,048,203 |                                                  |   | 490,620                               |   |   | 1,048,203 |   |   | 1,048,203 |   |   | 490,620 |   |
| Credit                  facility                            |   |                            | 20,000    |                                                  |   | -                                     |   |   | 20,000 |   |   | 20,000 |   |   | - |   |
| Interest                  rate swaps, treated as hedges (B) |   |                            | (41,170   | )                                                     |   | 13,239                                |   |   | 2,943,752 |   |   | (41,170 | ) |   | 13,239 |   |
| Non-hedge                  derivative obligations (C)       |   |                            | 90        |                                                  |   | 796                                   |   |   | See                  below |   |   | 90 |   |   | 796 |   |
|                                                        |   |                            |      |                                                  |   |                                  |   |   |   |   |   |   |   |   |   |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

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

***Real      Estate Securities Portfolio Deposit***
***3⁄4***

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

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

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

***CBO      Bonds Payable***

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

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

***Repurchase      Agreements***

***Credit      Facility***
*** ***

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

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

| Debt                    Obligation/Collateral       |   | MonthIssued |                        | CurrentFace                    Amount   |   | 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 |   |
|-----------------------------------------------------|--------|-------------|-----------------------------|---------------------------------------------------|--------|---------------------------------------------|--------|-------------------------------------------------------------------------------------------------|-----------|------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|------------------------------------------------------|-----------|----------------------------------------------------------|--------|--------------------------------------|--------|-----------------------------------------------------------------|--------------------------------|-----------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|--------|
|                                                |   |        |                        | December                    31,         |   | December                    31,   |   | December                    31, 2005                                                       |      |
| CBO                    Bonds Payable                |   |        |                        | 2005                                              |   | 2004                                        |   | 2005                                                                                            |      | 2004                                     |   |                                                                                       |   |                                                 |      |                                                     |   |                                 |   |                                                            |                           |                                                                        |   |                                                                           |   |   |   |   |   |
| Real                    estate securities           |   |        | Jul                    1999 |                                              | $      | 426,653                                     |   | $                                                                                               | 436,895   |                                     | $      | 423,191                                                                                    |   | $                                                    | 432,893   |                                                     |   | 5.67%                    (2)         |   |                                                            | Jul                    2038    |                                                                        |   | 4.89                                                                           | %      |   | 3.18 |   | $ | 331,653 |   | $ | 562,803 |   |   | 5.01 |   | $ | - |   | $ | 262,732 |   |
| Real                    estate securities and loans |   |        | Apr                    2002 |                                              |   | 444,000                                     |   |                                                                                            | 444,000   |                                     |   | 441,054                                                                                    |   |                                                 | 440,427   |                                                     |   | 5.43%                    (2)         |   |                                                            | Apr                    2037    |                                                                        |   | 6.56                                                                           | %      |   | 4.46 |   |   | 372,000 |   |   | 498,998 |   |   | 5.61 |   |   | 56,526 |   |   | 290,000 |   |
| Real                    estate securities and loans |   |        | Mar                    2003 |                                              |   | 472,000                                     |   |                                                                                            | 472,000   |                                     |   | 468,413                                                                                    |   |                                                 | 467,905   |                                                     |   | 5.46%                    (2)         |   |                                                            | Mar                    2038    |                                                                        |   | 5.08                                                                           | %      |   | 6.30 |   |   | 427,800 |   |   | 516,042 |   |   | 5.25 |   |   | 142,775 |   |   | 276,060 |   |
| Real                    estate securities and loans |   |        | Sep                    2003 |                                              |   | 460,000                                     |   |                                                                                            | 460,000   |                                     |   | 455,657                                                                                    |   |                                                 | 455,115   |                                                     |   | 5.16%                    (2)         |   |                                                            | Sep                    2038    |                                                                        |   | 5.38                                                                           | %      |   | 6.85 |   |   | 442,500 |   |   | 506,290 |   |   | 4.71 |   |   | 180,598 |   |   | 192,500 |   |
| Real                    estate securities and loans |   |        | Mar                    2004 |                                              |   | 414,000                                     |   |                                                                                            | 414,000   |                                     |   | 410,511                                                                                    |   |                                                 | 410,018   |                                                     |   | 5.15%                    (2)         |   |                                                            | Mar                    2039    |                                                                        |   | 4.94                                                                           | %      |   | 6.61 |   |   | 382,750 |   |   | 444,037 |   |   | 5.27 |   |   | 214,876 |   |   | 165,300 |   |
| Real                    estate securities and loans |   |        | Sep                    2004 |                                              |   | 454,500                                     |   |                                                                                            | 454,500   |                                     |   | 450,639                                                                                    |   |                                                 | 450,152   |                                                     |   | 5.09%                    (2)         |   |                                                            | Sep                    2039    |                                                                        |   | 5.03                                                                           | %      |   | 7.19 |   |   | 442,500 |   |   | 494,099 |   |   | 5.80 |   |   | 221,569 |   |   | 189,373 |   |
| Real                    estate securities and loans |   |        | Apr                    2005 |                                              |   | 447,000                                     |   |                                                                                            | -         |                                     |   | 442,379                                                                                    |   |                                                 | -         |                                                     |   | 4.85%                    (2)         |   |                                                            | Apr                    2040    |                                                                        |   | 5.10                                                                           | %      |   | 8.17 |   |   | 439,600 |   |   | 481,954 |   |   | 6.54 |   |   | 193,471 |   |   | 243,337 |   |
| Real                    estate securities and loans |   |        | Dec                    2005 |                                              |   | 442,800                                     |   |                                                                                            | -         |                                     |   | 438,540                                                                                    |   |                                                 | -         |                                                     |   | 4.82%                    (2)         |   |                                                            | Dec                    2050    |                                                                        |   | 5.14                                                                           | %      |   | 9.53 |   |   | 436,800 |   |   | 497,935 |   |   | 8.49 |   |   | 97,349 |   |   | 341,506 |   |
|                                                |   |        |                        |                                              |   | 3,560,953                                   |   |                                                                                            | 2,681,395 |                                     |   | 3,530,384                                                                                  |   |                                                 | 2,656,510 |                                                     |   |                                 |   |                                                            |                           |                                                                        |   | 5.27                                                                           | %      |   | 6.55 |   |   | 3,275,603 |   |   | 4,002,158 |   |   | 5.86 |   |   | 1,107,164 |   |   | 1,960,808 |   |
| Other                    Bonds Payable              |   |        |                        |                                              |   |                                        |   |                                                                                            |      |                                     |   |                                                                                       |   |                                                 |      |                                                     |   |                                 |   |                                                            |                           |                                                                        |   |                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Bell                    Canada portfolio            |   |        | Apr                    2002 |                                              |   | -                                           |   |                                                                                            | 42,885    |                                     |   | -                                                                                          |   |                                                 | 42,422    |                                                     |   | 7.02%                                |   |                                                            | Repaid                         |                                                                        |   | -                                                                              |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| ICH                    loans (3)                    |   |        | (3)                         |                                              |   | 141,311                                     |   |                                                                                            | 179,844   |                                     |   | 141,311                                                                                    |   |                                                 | 179,844   |                                                     |   | 6.68%                    (2)         |   |                                                            | Aug                    2030    |                                                                        |   | 6.68                                                                           | %      |   | 1.46 |   |   | 3,605 |   |   | 161,288 |   |   | 1.55 |   |   | 3,605 |   |   | - |   |
| Manufactured                    housing loans (4)   |   |        | Jan                    2005 |                                              |   | 212,019                                     |   |                                                                                            | -         |                                     |   | 212,019                                                                                    |   |                                                 | -         |                                                     |   | LIBOR                    +1.25%      |   |                                                            | Jan                    2006(7) |                                                                        |   | 5.45                                                                           | %      |   | 0.08 |   |   | 212,019 |   |   | 267,456 |   |   | 5.78 |   |   | 6,356 |   |   | 227,576 |   |
|                                                |   |        |                        |                                              |   | 353,330                                     |   |                                                                                            | 222,729   |                                     |   | 353,330                                                                                    |   |                                                 | 222,266   |                                                     |   |                                 |   |                                                            |                           |                                                                        |   | 5.94                                                                           | %      |   | 0.63 |   |   | 215,624 |   |   | 428,744 |   |   | 4.23 |   |   | 9,961 |   |   | 227,576 |   |
| Notes                    Payable                    |   |        |                        |                                              |   |                                        |   |                                                                                            |      |                                     |   |                                                                                       |   |                                                 |      |                                                     |   |                                 |   |                                                            |                           |                                                                        |   |                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real                    estate related loan         |   |        | Nov                    2003 |                                              |   | -                                           |   |                                                                                            | 67,523    |                                     |   | -                                                                                          |   |                                                 | 67,523    |                                                     |   | LIBOR+1.50%                          |   |                                                            | Repaid                         |                                                                        |   | -                                                                              |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Real                    estate related loan         |   |        | Feb                    2004 |                                              |   | -                                           |   |                                                                                            | 40,000    |                                     |   | -                                                                                          |   |                                                 | 40,000    |                                                     |   | LIBOR+1.50%                          |   |                                                            | Repaid                         |                                                                        |   | -                                                                              |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Residential                    mortgage loans (4)   |   |        | Nov                    2004 |                                              |   | 260,441                                     |   |                                                                                            | 544,477   |                                     |   | 260,441                                                                                    |   |                                                 | 544,477   |                                                     |   | LIBOR+0.15%                          |   |                                                            | Nov                    2007    |                                                                        |   | 4.70                                                                           | %      |   | 1.21 |   |   | 260,441 |   |   | 288,683 |   |   | 2.69 |   |   | 282,589 |   |   | - |   |
|                                                |   |        |                        |                                              |   | 260,441                                     |   |                                                                                            | 652,000   |                                     |   | 260,441                                                                                    |   |                                                 | 652,000   |                                                     |   |                                 |   |                                                            |                           |                                                                        |   | 4.70                                                                           | %      |   | 1.21 |   |   | 260,441 |   |   | 288,683 |   |   | 2.69 |   |   | 282,589 |   |   | - |   |
| Repurchase                    Agreements (4) (10)   |   |        |                        |                                              |   |                                        |   |                                                                                            |      |                                     |   |                                                                                       |   |                                                 |      |                                                     |   |                                 |   |                                                            |                           |                                                                        |   |                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                    mortgage loans       |   |        | Rolling                     |                                              |   | 41,853                                      |   |                                                                                            | 67,382    |                                     |   | 41,853                                                                                     |   |                                                 | 67,382    |                                                     |   | LIBOR                    + 0.43%     |   |                                                            | Mar                    2006    |                                                                        |   | 4.95                                                                           | %      |   | 0.25 |   |   | 41,853 |   |   | 44,543 |   |   | 2.81 |   |   | 43,511 |   |   | - |   |
| Agency                    RMBS (5)                  |   |        | Rolling                     |                                              |   | 671,526                                     |   |                                                                                            | 195,754   |                                     |   | 671,526                                                                                    |   |                                                 | 195,754   |                                                     |   | LIBOR                    + 0.13%     |   |                                                            | Jan                    2006    |                                                                        |   | 4.48                                                                           | %      |   | 0.08 |   |   | 671,526 |   |   | 692,486 |   |   | 4.90 |   |   | - |   |   | 665,965 |   |
| Real                    estate securities           |   |        | Rolling                     |                                              |   | 149,546                                     |   |                                                                                            | 171,209   |                                     |   | 149,546                                                                                    |   |                                                 | 171,209   |                                                     |   | LIBOR                    + 0.39%     |   |                                                            | Various                    (8) |                                                                        |   | 4.65                                                                           | %      |   | 0.16 |   |   | 149,546 |   |   | 166,737 |   |   | 5.84 |   |   | 31,450 |   |   | 89,403 |   |
| Real                    estate related loans        |   |        | Rolling                     |                                              |   | 185,278                                     |   |                                                                                            | 56,275    |                                     |   | 185,278                                                                                    |   |                                                 | 56,275    |                                                     |   | LIBOR                    + 1.01%     |   |                                                            | Various                    (8) |                                                                        |   | 5.38                                                                           | %      |   | 0.08 |   |   | 185,278 |   |   | 266,669 |   |   | 1.82 |   |   | 266,630 |   |   | - |   |
|                                                |   |        |                        |                                              |   | 1,048,203                                   |   |                                                                                            | 490,620   |                                     |   | 1,048,203                                                                                  |   |                                                 | 490,620   |                                                     |   |                                 |   |                                                            |                           |                                                                        |   | 4.68                                                                           | %      |   | 0.10 |   |   | 1,048,203 |   |   | 1,170,435 |   |   | 4.29 |   |   | 341,591 |   |   | 755,368 |   |
| Credit                    facility (6)              |   |        |                        |                                              |   | 20,000                                      |   |                                                                                            | -         |                                     |   | 20,000                                                                                     |   |                                                 | -         |                                                     |   | LIBOR                    + 2.50% (9) |   |                                                            | Jul                    2008    |                                                                        |   | 6.86                                                                           | %      |   | 2.55 |   |   | 20,000 |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Total                    debt obligations           |   |        |                        |                                              | $      | 5,242,927                                   |   | $                                                                                               | 4,046,744 |                                     | $      | 5,212,358                                                                                  |   | $                                                    | 4,021,396 |                                                     |   |                                 |   |                                                            |                           |                                                                        |   | 5.17                                                                           | %      |   | 4.59 |   | $ | 4,819,871 |   | $ | 5,890,020 |   |   | 5.25 |   | $ | 1,741,305 |   | $ | 2,943,752 |   |

| (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 $1 billion is available until November                    2006. |
|-----|-------------------------------------------------------------------------------------------------|

| (6) | A                    maximum of $100 million can be drawn (increased from $75 million                    in                    February 2006). |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | This                    financing was replaced with a new term financing in January 2006;                    the new                    maturity date is January                    2009. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | The                  longest maturity is March                  2006. |
|-----|-----------------------------------------------------------------------|

| (9) | In                  addition, unused commitment fees of between 0.125% and 0.250% are                  paid. |
|-----|--------------------------------------------------------------------------------------------------------------|

| (10) | The                  counterparties on our repurchase agreements include: Bank of America                  Securities LLC ($693.4million), Bear Stearns Mortgage Capital Corporation                  ($181.1 million), Greenwich Capital Markets Inc ($72.2 million),                  Deutsche                  Bank AG ($58.1 million), and other ($43.4                  million). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

| 2006       |   | $      | 1,260,222 |   |
|------------|--------|--------|-----------|--------|
| 2007       |   |   | 260,441   |   |
| 2008       |   |   | 20,000    |   |
| 2009       |   |   | -         |   |
| 2010       |   |   | -         |   |
| Thereafter |   |   | 3,702,264 |   |
|       |   | $      | 5,242,927 |   |

----

**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                AverageExercise                Price |   | Fair                ValueAt                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 | ) |
| Exercised                (B) |   |                                  | Prior                to 2005 |                                   |   | (110,000                                                     | )      | $                                                               | 13.31  |   |   |   |   |
| Exercised                (B) |   |                                  | 2005                         |                                   |   | (751,920                                                     | )      | $                                                               | 15.55  |   |   |   |   |
| Outstanding                  |   |                                  |                         |                                   |   | 1,811,807                                                    |   | $                                                               | 25.14  |   |   |   |   |

|  | (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 | % |

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

|                          |   |   |    | Year                  Assigned |   |
|-------------------------------|--------|--------|---------|--------------------------------|--------|
|                          |   |   |    |                           |   |   |   |
| Strike                  Price |   | 2004   |    | 2003                           |   | TotalInception                  to Date |   |
| $13.00                        |   |   | 267,750 |                           |   | 1,750 |   |   | 269,500 |   |
| $20.35                        |   |   | 192,050 |                           |   | 1,150 |   |   | 193,200 |   |
| $22.85                        |   |   | 139,355 |                           |   | - |   |   | 139,355 |   |
| $26.30                        |   |   | 127,050 |                           |   | - |   |   | 127,050 |   |
| $31.40                        |   |   | 62,563  |                           |   | - |   |   | 62,563 |   |
| Total                         |   |   | 788,768 |                           |   | 2,900 |   |   | 791,668 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

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

**Manager**

|                                  |   | **Amounts                Incurred (in millions)** |   |
|---------------------------------------|--------|---------------------------------------------------|--------|
|                                  |   | **2005**                                          |   | **2004** |   | **2003** |   |
| Management                Fee         |   | $                                                 | 12.8   |   | $ | 10.1 |   | $ | 6.0 |   |
| Expense                Reimbursement  |   |                                              | 0.5    |   |   | 0.5 |   |   | 0.5 |   |
| Incentive                Compensation |   |                                              | 7.6    |   |   | 8.0 |   |   | 6.2 |   |

**Other      Affiliates**

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

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

***Remarketing      Agreements***

***Real      Estate Securities Portfolio Deposit***

***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** |
|---------|-----------------------------------------------|

|   |   |   | Book                      BasisDividends                      Per Share (A) |   |   | Tax                        BasisDividends                        Per Share (A) |   |   | Ordinary/Qualified                      Income |   |   | Captial                  Gains   |   |   | Return                  of Capital   |   |
|--------|--------|--------|-----------------------------------------------------------------------------|--------|--------|--------------------------------------------------------------------------------|--------|--------|------------------------------------------------|--------|--------|--------------------------------------------|--------|--------|------------------------------------------------|--------|
| 2005   |   | $      | 2.500                                                                       |   | $      | 2.540                                                                          |   |   | 86.41                                          | %      |   | 13.59                                      | %      |   | None                                           |   |
|   |   |   |                                                                        |   |   |                                                                           |   |   |                                           |   |   |                                       |   |   |                                           |   |
| 2004   |   | $      | 2.425                                                                       |   | $      | 2.432                                                                          |   |   | 76.60                                          | %      |   | 23.40                                      | %      |   | None                                           |   |
|   |   |   |                                                                        |   |   |                                                                           |   |   |                                           |   |   |                                       |   |   |                                           |   |
| 2003   |   | $      | 1.950                                                                       |   | $      | 1.843                                                                          |   |   | 77.66                                          | %      |   | 22.34                                      | %      |   | None                                           |   |
|   |   |   |                                                                        |   |   |                                                                           |   |   |                                           |   |   |                                       |   |   |                                           |   |
|   |   |   |                                                                        |   |   |                                                                           |   |   |                                           |   |   |                                       |   |   |                                           |   |

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

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

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

|                                                                            |   | **2005**                            |    |
|---------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                            |   | **Quarter                  Ended**  |    |   |   |
|                                                                            |   | March                  31 (A)            |    | June                  30 (A) |   | September                  30 (A) |   | December                  31 |   | Year                  Ended 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 |   |

|                                                                            |   | **2004**                            |    |
|---------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                            |   | **Quarter                  Ended**  |    |   |   |
|                                                                            |   | March                  31 (A)            |    | June                  30 (A) |   | September                  30 (A) |   | December                  31 |   | Year                  EndedDecember                  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 |   |

----

**NEWCASTLE      INVESTMENT CORP. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS **

----

|                                                                            |   | **2003**                            |    |
|---------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                            |   | **Quarter                  Ended**  |    |   |   |
|                                                                            |   | March                  31 (A)            |    | June                  30 (A) |   | September                  30 (A) |   | December                  31 |   | Year                  Ended December                  31 |   |
| Gross                  Revenues                                                 |   | $                                        | 28,429  |   | $ | 35,577 |   | $ | 37,905 |   | $ | 50,173 |   | $ | 152,084 |   |
| Operating                  expenses                                             |   |                                     | (4,231  | ) |   | (4,880 | ) |   | (5,004 | ) |   | (6,308 | ) |   | (20,423 | ) |
| Operating                  income                                               |   |                                     | 24,198  |   |   | 30,697 |   |   | 32,901 |   |   | 43,865 |   |   | 131,661 |   |
| Interest                  expense                                               |   |                                     | (13,336 | ) |   | (18,348 | ) |   | (18,693 | ) |   | (26,500 | ) |   | (76,877 | ) |
| Depreciation                  and amortization                                  |   |                                     | (80     | ) |   | (101 | ) |   | (105 | ) |   | (119 | ) |   | (405 | ) |
| Equity                  in earnings of unconsolidated subsidiaries (B)          |   |                                     | -       |   |   | - |   |   | - |   |   | 862 |   |   | 862 |   |
| Income                  from continuing operations                              |   |                                     | 10,782  |   |   | 12,248 |   |   | 14,103 |   |   | 18,108 |   |   | 55,241 |   |
| Income                  (loss) from discontinued operations                     |   |                                     | 321     |   |   | 1,169 |   |   | 603 |   |   | (1,216 | ) |   | 877 |   |
| Preferred                  dividends                                            |   |                                     | (203    | ) |   | (1,524 | ) |   | (1,523 | ) |   | (1,523 | ) |   | (4,773 | ) |
| Income                  available for common stockholders                       |   | $                                        | 10,900  |   | $ | 11,893 |   | $ | 13,183 |   | $ | 15,369 |   | $ | 51,345 |   |
| Net                  Income per share of common stock                           |   |                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                           |   | $                                        | 0.46    |   | $ | 0.51 |   | $ | 0.48 |   | $ | 0.53 |   | $ | 1.98 |   |
| Diluted                                                                         |   | $                                        | 0.46    |   | $ | 0.50 |   | $ | 0.48 |   | $ | 0.52 |   | $ | 1.96 |   |
| Income                  from continuing operations per share of common          |   |                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| stock,                  after preferred dividends and related accretion         |   |                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                           |   | $                                        | 0.45    |   | $ | 0.46 |   | $ | 0.46 |   | $ | 0.57 |   | $ | 1.94 |   |
| Diluted                                                                         |   | $                                        | 0.45    |   | $ | 0.45 |   | $ | 0.46 |   | $ | 0.56 |   | $ | 1.92 |   |
| Income                  (loss) from discontinued operations per share of common |   |                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| stock                                                                           |   |                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                           |   | $                                        | 0.01    |   | $ | 0.05 |   | $ | 0.02 |   | $ | (0.04 | ) | $ | 0.04 |   |
| Diluted                                                                         |   | $                                        | 0.01    |   | $ | 0.05 |   | $ | 0.02 |   | $ | (0.04 | ) | $ | 0.04 |   |
| Weighted                  average number of shares of common stock              |   |                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| outstanding                                                                     |   |                                     |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                           |   |                                     | 23,489  |   |   | 23,489 |   |   | 27,340 |   |   | 29,197 |   |   | 25,898 |   |
| Diluted                                                                         |   |                                     | 23,620  |   |   | 23,679 |   |   | 27,620 |   |   | 29,563 |   |   | 26,141 |   |

|  | (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*

|                                            |   |   |   |
|-------------------------------------------------|--------|--------|--------|
| By:              /s/ Wesley R. Edens       |   |   |   |
| Wesley              R. Edens                    |   |   |        |
| Chairman              of the              Board |   |   |   |
|                                            |   |   |   |
|                                            |   |   |   |
| By: /s/ Debra A.              Hess         |   |   |   |
| Debra              A. Hess            |   |   |   |
| Chief Financial Officer                    |   |   |   |
|                                            |   |   |   |

**Item        9B. Other Information.**

----

**PART      III**

**Item      10. Directors and Executive Officers of the      Registrant.**

**Item      11. Executive Compensation.**

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

**Item      13. Certain Relationships and Related      Transactions.**

**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 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. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 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. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**SIGNATURES**

|         |                                    |                                               |
|--------------|-----------------------------------------|----------------------------------------------------|
|         | NEWCASTLE              INVESTMENT CORP. |
|         |                                    |
|         | March 15, 2006                     |
|    |                               |                                          |
|         | By:                           | /s/ Wesley              R.              Edens |
|         | Wesley              R. Edens            |
|         | Chairman              of the Board      |

| March 15, 2006                               |   |   |   |
|---------------------------------------------------|--------|--------|--------|
|                                              |   |   |   |
|                                              |   |   |   |
| By:              /s/ Wesley R. Edens         |   |   |   |
| Wesley              R. Edens                      |   |   |        |
| Chief              Executive              Officer |   |   |   |

| March 15, 2006                                  |   |   |   |
|------------------------------------------------------|--------|--------|--------|
|                                                 |   |   |   |
|                                                 |   |   |   |
| By:              /s/ Debra              A. Hess |   |   |   |
| Debra              A. Hess                           |   |   |        |
| Chief              Financial              Officer    |   |   |   |

| March 15, 2006                                      |   |   |   |
|----------------------------------------------------------|--------|--------|--------|
|                                                     |   |   |   |
|                                                     |   |   |   |
| By:              /s/ Kevin              J. Finnerty |   |   |   |
| Kevin              J. Finnerty                           |   |   |        |
| Director                                                 |   |   |   |

| March 15, 2006                             |   |   |   |
|-------------------------------------------------|--------|--------|--------|
|                                            |   |   |   |
|                                            |   |   |   |
| By:                /s/ Stuart A. McFarland |   |   |   |
| Stuart                A. McFarland              |   |   |        |
| Director                                        |   |   |   |

| March 15, 2006                                        |   |   |   |
|------------------------------------------------------------|--------|--------|--------|
|                                                       |   |   |   |
|                                                       |   |   |   |
| By:                /s/ David                K. McKown |   |   |   |
| David                K. McKown                             |   |   |        |
| Director                                                   |

| March 15, 2006                                    |   |   |   |
|--------------------------------------------------------|--------|--------|--------|
|                                                   |   |   |   |
|                                                   |   |   |   |
| By:              /s/ Peter              M. Miller |   |   |   |
| Peter              M. Miller                           |   |   |        |
| Director                                               |

----

**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 | 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, 2002, Exhibit                4.1). |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10.1 | Amended                and Restated Management and Advisory Agreement by and among the Registrant                and 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. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 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. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----