<PAGE>

                                  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

For the fiscal year ended December 31, 2003

or

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

For the transition period from________________________to________________________

Commission File Number: 001-31458

                           Newcastle Investment Corp.
________________________________________________________________________________
             (Exact name of registrant as specified in its charter)

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

1251 Avenue of the Americas, New York, NY             10020
________________________________________________________________________________
(Address of principal executive offices)             (Zip Code)

Registrant's telephone number, including area code: (212) 798-6100

Securities registered pursuant to Section 12 (b) of the Act:

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)

Securities registered pursuant to Section 12 (g) of the Act: None

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

[X]  Yes  [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [ ]

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

[X]  Yes  [ ] No

<PAGE>

The aggregate market value of the voting common stock held by non-affiliates as
of June 30, 2003 (computed based on the closing price on such date as reported
on the NYSE) was: $401.6 million.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.

Common stock, $0.01 par value per share: 34,674,833 outstanding as of February
13, 2004.

DOCUMENTS INCORPORATED BY REFERENCE:

         1.       Portions of the Registrant's definitive proxy statement for
                  the Registrant's 2004 annual meeting, to be filed within 120
                  days after the close of the Registrant's fiscal year,
                  incorporated by reference into Part III of this Annual Report
                  on Form 10-K.

<PAGE>

                           NEWCASTLE INVESTMENT CORP.
                                    FORM 10-K

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                        PAGE
<S>                                                                                                    <C>
                                     PART I

Item 1.  Business                                                                                          1

Item 2.  Properties                                                                                       19

Item 3.  Legal Proceedings                                                                                19

Item 4.  Submission of Matters to a Vote of Security Holders                                              19

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters                            19

Item 6.  Selected Financial Data                                                                          21

Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations                                                                            23

Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                       40

Item 8.  Financial Statements and Supplementary Data                                                      46

         Independent Auditors' Report                                                                     47

         Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002                        48

         Consolidated Statements of Income for the years ended December 31, 2003, 2002
         and 2001                                                                                         49

         Consolidated Statements of Stockholders' Equity and Redeemable Preferred Stock
         for the years ended December 31, 2003, 2002 and 2001                                             50

         Consolidated Statements of Cash Flows for the years ended December 31,
         2003, 2002 and 2001                                                                              52

         Notes to Consolidated Financial Statements                                                       54

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure             86

Item 9A. Controls and Procedures                                                                          86

                                    PART III

Item 10. Directors and Executive Officers of the Registrant                                               86

Item 11. Executive Compensation                                                                           86

Item 12. Security Ownership of Certain Beneficial Owners and Management                                   86

Item 13. Certain Relationships and Related Transactions                                                   86

Item 14. Principal Accountant Fees and Services                                                           86

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                                  87

         Signatures                                                                                       88
</TABLE>

<PAGE>

                                     PART I

ITEM 1.  BUSINESS.

OVERVIEW

Newcastle Investment Corp. ("Newcastle") is a real estate investment and finance
company. We invest in real estate securities and other real estate-related
assets. We seek to deliver stable dividends and attractive risk-adjusted returns
to our stockholders through prudent asset selection and the use of match-funded
financing structures, which reduce our interest rate and financing risks. We
make money by optimizing our "net spread," the difference between the yield on
our investments and the cost of financing these investments.

Our investment activities cover four distinct categories:

1)   Real Estate Securities:        Our principal activity is to underwrite and
                                    acquire a diversified portfolio of
                                    moderately credit sensitive real estate
                                    securities, including commercial mortgage
                                    backed securities (CMBS, including B-notes),
                                    senior unsecured REIT debt issued by
                                    property REITs and real estate related asset
                                    backed securities. We generally target
                                    investments rated A through BB. As of
                                    December 31, 2003, our investments in real
                                    estate securities represented 68% of our
                                    assets and 72% of our equity.

2)   Real Estate Related Loans:     This activity includes loans to well
                                    capitalized real estate operators with
                                    strong track records and compelling business
                                    plans and mortgage loans secured by fee or
                                    leasehold interests in commercial real
                                    estate. As of December 31, 2003, our
                                    investments in real estate related loans
                                    represented 10% of our assets and 10% of our
                                    equity.

3)   Operating Real Estate:         We have acquired operating real estate with
                                    a focus on institutional quality operating
                                    real estate leased primarily to tenants
                                    with, or whose major tenant has, investment
                                    grade credit ratings. As of December 31,
                                    2003, our investments in credit leased
                                    operating real estate represented 4% of our
                                    assets and 5% of our equity.

4)   Residential Mortgage Loans:    We also acquire residential mortgage loans
                                    with high credit borrowers that produce
                                    attractive leveraged returns. As of December
                                    31, 2003, our investments in residential
                                    mortgage loans represented 17% of our assets
                                    and 6% of our equity.

In addition, Newcastle had uninvested cash and other miscellaneous net assets
which represented 1% of our assets and 7% of our equity at December 31, 2003.

Underpinning our investment activities is a disciplined approach to acquiring,
financing and actively managing our assets. Our objective is to acquire a highly
diversified portfolio of debt investments secured by real estate that have
moderate credit risk and sufficient liquidity. Newcastle primarily utilizes a
match-funded financing strategy in order to minimize refinancing and interest
rate risks. This means that we seek both to match the maturities of our debt
obligations with the maturities of our investments, in order to minimize the
risk that we have to refinance our liabilities prior to the maturities of our
assets, and to match the interest rates on our investments with like-kind debt
(i.e. floating or fixed), in order to reduce the impact of changing interest
rates on our earnings. Finally, we actively manage credit exposure through
portfolio diversification and ongoing asset selection and surveillance.
Newcastle, through its manager, has a dedicated team of senior investment
professionals experienced in real estate capital markets, structured finance and
asset management. We believe that these critical skills position us well not
only to make prudent investment decisions but also to monitor and manage the
credit profile of our investments.

Newcastle's stock is traded on the New York Stock Exchange under the symbol
"NCT". Newcastle is a real estate investment trust for federal income tax
purposes and is externally managed and advised by Fortress Investment Group LLC.
Fortress is a global alternative investment and asset management firm with
approximately $5.5 billion of capital under management as of February 2004.
Fortress was founded in 1998 and today employs over 160 people. We believe that
our manager's expertise and significant business relationships with participants
in the fixed income, structured finance and real estate industries has enhanced
our access to investment opportunities which may not be broadly marketed. For
its services, our manager receives a management fee and incentive compensation
pursuant to a management agreement. Our manager, through its affiliates, owned
2,255,109 shares of our common stock and had

                                       1
<PAGE>

options to purchase an additional 1,702,227 shares of our common stock, which
were issued in connection with our equity offerings, representing approximately
10.8% of our common stock on a fully diluted basis, as of February 13, 2004.

OUR STRATEGY

Newcastle's investment strategy focuses predominantly on debt investments
secured by real estate. We do not have specific policies as to the allocation
among type of real estate related assets or investment categories since our
investment decisions depend on changing market conditions. Instead, we focus on
relative value and in-depth risk/reward analysis with an emphasis on asset
quality, diversification, match-funded financing and credit risk management.

Asset Quality and Diversification

As of December 31, 2003, our portfolio of real estate securities portfolio had
an overall weighted average credit rating of BBB, and approximately 78.7% of
these securities had an investment grade rating (BBB- or higher). As of December
31, 2003, 87.9% of the square footage of our operating real estate was occupied
by tenants having investment grade credit ratings. As of December 31, 2003, the
weighted average FICO score at origination of the borrowers underlying our
residential mortgage loan portfolio was 721.

Our real estate securities portfolio is diversified by asset type, industry,
location and issuer. We expect that this diversification will minimize the risk
of capital loss, and will also enhance the terms of our financing structures.

Match-Funded Discipline

Returns on our investments are sensitive to interest rate volatility. We attempt
to minimize exposure to interest rate fluctuation through the use of
match-funded financing structures wherein we seek (i) to match the maturities of
our debt obligations with the maturities of our assets and (ii) to match the
interest rates on our investments with like-kind debt (i.e., floating rate
assets are financed with floating rate debt and fixed rate assets are financed
with fixed rate debt), directly or through the use of interest rate swaps, caps
or other financial instruments, or through a combination of these strategies.
This allows us to minimize the risk that we have to refinance our liabilities
prior to the maturities of our assets and to reduce the impact of changing
interest rates on our earnings. Our manager may elect for us to bear a level of
refinancing risk on a short term or longer term basis, such as is the case with
investments financed with repurchase agreements, when, based on all of the
relevant factors, bearing such risk is advisable. We utilize leverage for the
sole purpose of financing our portfolio and not for the purpose of speculating
on changes in interest rates. As of December 31, 2003, a 100 basis point
increase in short term interest rates would affect our earnings by no more than
$0.7 million per annum.

Credit Risk Management

Credit risk refers to each individual borrower's ability to make required
interest and principal payments on the scheduled due dates. We believe, based on
our due diligence process, that our investments offer attractive risk-adjusted
returns with long-term principal protection under a variety of default and loss
scenarios. While the expected yield on these investments is sensitive to the
performance of the underlying assets, the first risk of default and loss is
borne by the more subordinated securities or other features of the
securitization transaction, in the case of commercial mortgage and asset backed
securities, and the issuer's underlying equity and subordinated debt, in the
case of senior unsecured REIT debt securities. We further minimize credit risk
by actively monitoring our investments and their underlying credit quality and,
where appropriate, repositioning our investments to upgrade their credit quality
and yield. A significant portion of our investments are financed with
collateralized bond obligations, known as CBOs. Our CBO financings offer us
structural flexibility to buy and sell certain investments to manage risk and,
subject to certain limitations, to optimize returns.

FORMATION

We were formed in June 2002 for the purpose of separating the real estate
securities and certain of the credit leased operating real estate businesses
from Newcastle Investment Holdings Corp. Prior to our initial public offering,
Newcastle Investment Holdings contributed to us certain assets and related
liabilities in exchange for 16,488,517 shares of our common stock. For
accounting purposes, this transaction is presented as a reverse spin-off,
whereby Newcastle Investment Corp. is treated as the continuing entity and the
assets that were retained by Newcastle Investment Holdings and not contributed
to us are accounted for as if they were distributed at their historical book
basis through a spin-off to Newcastle Investment Holdings. Our operations
commenced on July 12, 2002. In May 2003, Newcastle Investment Holdings
distributed to its stockholders all of the shares of our common stock that it
owned, and it no longer owns any of our equity.

                                       2
<PAGE>

In October 2002, we sold 7.0 million shares of our common stock in our initial
public offering at a price to the public of $13.00 per share, for net proceeds
of approximately $80.0 million. During 2003, we sold an aggregate of
approximately 7.9 million shares of our common stock in public offerings for net
proceeds of approximately $163.3 million. In January 2004, we sold 3.3 million
shares of our common stock in a public offering at a price to the public of
$26.30 per share, for net proceeds of approximately $85.8 million. Subsequent to
that offering, we had 34,674,833 shares of common stock outstanding.

OUR INVESTMENT ACTIVITIES

Information regarding our business segments is provided in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
Note 3 to our consolidated financial statements which appear in "Financial
Statements and Supplementary Data."

The following is a description of our investments as of December 31, 2003.

REAL ESTATE SECURITIES

Portfolio I: In July 1999, Fortress CBO Investments I, Limited and Fortress CBO
Investments I Corp. issued $500 million face amount of CBOs and other securities
in our first CBO financing. As of December 31, 2003, the underlying collateral
securing our first CBO, which we refer to as CBO I, consisted of (dollars in
thousands):

<TABLE>
<CAPTION>
                                         Weighted Average                          % of Face Amount
                                     ------------------------  --------------------------------------------------------
                       Current Face    S&P           Maturity                                           Health
     Asset Type           Amount     Rating  Coupon   (Years)  Retail  Residential  Office  Industrial   Care   Lodging
---------------------  ------------  ------  ------  --------  ------  -----------  ------  ----------  ------  -------
<S>                    <C>           <C>     <C>     <C>       <C>     <C>          <C>     <C>         <C>     <C>
CMBS                   $    318,261   BB+      6.89%     6.77    35%       18%        21%       10%        6%      2%
Unsecured REIT debt         229,182   BBB      7.21%     6.32    30%       10%        31%       17%        1%      9%
                       ------------  -----   ------  --------
Total/Average          $    547,443   BBB-     7.02%     6.58
                       ============  =====   ======  ========
Uninvested restricted
   cash                $      7,398
</TABLE>

$437.5 million face amount of Senior CBO I bonds were sold to third parties and
we retained $62.5 million of the Subordinate CBO I bonds. The table below sets
forth further information with respect to the structure of CBO I (dollars in
thousands).

<TABLE>
<CAPTION>
                                MOODY'S/S&P                             EXPECTED
                       CLASS      RATINGS    FACE AMOUNT    COUPON     MATURITY(1)
                     ---------  -----------  -----------  -----------  -----------
 <S>                 <C>        <C>          <C>          <C>          <C>
 Senior Bonds......  A            Aaa/AAA    $   322,500  LIBOR +0.65%   July-09
                     B            Aa2/AA          20,000  LIBOR +0.80%   July-09
                     C            A2/NR           62,500         7.85%   July-09
                     D            Baa2/NR         32,500         8.60%   July-09
                                             -----------
      TOTAL........                          $   437,500
                                             ===========

 Subordinate Bonds   E            Ba2        $    17,500         8.00%   July-09
                     Preferred    B2              17,500         9.00%   July-09
                     Common I                     26,400          N/A      N/A
                     Common II                     1,100          N/A      N/A
                                             -----------
      TOTAL........                          $    62,500
                                             ===========
</TABLE>

-----------------------
(1)  Reflects expected maturities based on the bonds' call date. Contractual
 maturities are July 2038.

As of December 31, 2003, we have $117.0 million of invested equity in Portfolio
I, as defined in "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Funds from Operations." This amount is gross of
eliminations.

We act as collateral manager for CBO I and are paid a monthly fee of 1/12 of
0.5% per annum of the principal balance of the CBO I collateral. We have the
discretion to buy and sell up to 15% of the outstanding face of the collateral
annually, and to sell defaulted and credit risk securities on an unlimited
basis. Until July 2004, we are obligated to reinvest principal received from the
collateral. In July 2004, we will have the ability to refinance the Class A and
B Senior CBO I bonds, provided it would not result in a downgrade of any rated
classes of bonds. We will evaluate whether to do so at that time. If we do not
refinance on the scheduled date in 2004, it will result in an additional
allocation of cash flows from certain of the Subordinate CBO I bonds, to the
Class A and B Senior CBO I bonds. To better match the collateral cash flow to
the debt service on the CBO I bonds, we entered into interest rate swap and cap
agreements.

                                       3
<PAGE>

Portfolio II: In April 2002, Newcastle CDO I Limited and Newcastle CDO I Corp.
issued $500 million face amount of CBOs and other securities in our second CBO
financing. As of December 31, 2003, the underlying collateral securing our
second CBO, which we refer to as CBO II, consisted of (dollars in thousands):

<TABLE>
<CAPTION>
                                             Weighted Average                         % of Face Amount
                                       ------------------------  ----------------------------------------------------------
                         Current Face    S&P           Maturity                                           Health
      Asset Type           Amount      Rating  Coupon   (Years)  Retail  Residential  Office  Industrial   Care   Lodging
-----------------------  ------------  ------  ------  --------  ------  -----------  ------  ----------  ------  -------
<S>                      <C>           <C>     <C>     <C>       <C>     <C>          <C>     <C>         <C>     <C>
CMBS                     $    288,519   BBB-     6.20%     6.34     21%       24%        18%        4%        5%      13%
Unsecured REIT debt           105,588   BBB-     7.81%     7.38     47%       11%         6%        1%        5%      20%
Asset backed securities        61,959   A+       7.38%     7.29    N/A       N/A        N/A       N/A       N/A      N/A
                         ------------  -----   ------  --------
Total/Average            $    456,066   BBB-     6.73%     6.71
                         ============  =====   ======  ========

Uninvested restricted
  cash                   $     30,165
</TABLE>

$444.0 million face amount of Senior CBO II bonds were sold to third parties and
we retained $56.0 million of the Subordinate CBO II bonds. The table below sets
forth further information with respect to the structure of CBO II (dollars in
thousands).

<TABLE>
<CAPTION>
                                    MOODY'S/S&P                             EXPECTED
                           CLASS      RATINGS    FACE AMOUNT    COUPON    MATURITY (1)
                         ---------  -----------  -----------  ----------  ------------
<S>                      <C>        <C>          <C>          <C>         <C>
Senior Bonds...........  I            Aaa/AAA    $   372,000  LIBOR+0.55%     Oct-2010
                         II           A3/A --         38,000        7.59%     Oct-2010
                         III          Baa2/BBB        34,000        8.37%     Oct-2010
                                                 -----------

         TOTAL.........                          $   444,000
                                                 ===========

Subordinate Bonds......  IV           Ba2/BB     $    19,000        7.50%     Oct-2010
                         Preferred    NR              37,000         N/A           N/A
                                                 -----------
                                                 $    56,000
                                                 ===========
         TOTAL.........
</TABLE>

-----------------------
(1)  Reflects expected maturities based on the bonds' call date. Contractual
maturities are April 2037, except for the Class I bonds which have a contractual
maturity of April 2032.

As of December 31, 2003, we have $59.2 million of invested equity in Portfolio
II, as defined in "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Funds from Operations." This amount is gross of
eliminations.

We act as collateral manager for CBO II and are paid a quarterly fee of 1/4 of
0.35% of the principal balance of the CBO II collateral. We have the discretion
to buy and sell up to 15% of the outstanding face of the collateral annually,
and to sell defaulted and credit risk securities on an unlimited basis. Until
2007, we are obligated to reinvest principal received from the collateral. To
better match the collateral cash flow to the debt service on the CBO II bonds,
we entered into interest rate swap and cap agreements.

Portfolio III: In March 2003, Newcastle CDO II Limited and Newcastle CDO II
Corp. issued $500 million face amount of CBOs and other securities in our third
CBO financing. As of December 31, 2003, the underlying collateral securing our
third CBO, which we refer to as CBO III, consisted of (dollars in thousands):

<TABLE>
<CAPTION>
                                          Weighted Average                           % of Face Amount
                                       ------------------------  --------------------------------------------------------
                         Current Face   S&P            Maturity                                           Health
       Asset Type          Amount      Rating  Coupon   (Years)  Retail  Residential  Office  Industrial   Care   Lodging
-----------------------  ------------  ------  ------  --------  ------  -----------  ------  ----------  ------  -------
<S>                      <C>           <C>     <C>     <C>       <C>     <C>          <C>     <C>         <C>     <C>
CMBS                     $    332,427   BBB      5.85%     6.15      28%       26%       17%        4%        2%      11%
Unsecured REIT debt            99,470   BBB-     6.96%     8.30      26%       14%       29%        -%       19%       9%
Asset backed securities        62,236   A        4.13%     5.22     N/A       N/A       N/A       N/A       N/A      N/A
                         ------------  -----   ------  --------
Total/Average            $    494,133   BBB      5.85%     6.47
                         ============  =====   ======  ========
Uninvested restricted
 cash                    $      6,202
</TABLE>

                                       4
<PAGE>

$472.0 million face amount of Senior CBO III bonds were sold to third parties
and we retained $28.0 million of the Subordinate CBO III bonds. The table below
sets forth further information with respect to the structure of CBO III (dollars
in thousands).

<TABLE>
<CAPTION>
                                    MOODY'S/S&P/FITCH                             EXPECTED
                           CLASS       RATINGS         FACE AMOUNT    COUPON     MATURITY(1)
                         ---------  -----------------  -----------  -----------  -----------
<S>                      <C>        <C>                <C>          <C>          <C>
Senior Bonds......               I  Aaa/AAA/AAA        $   412,800  LIBOR +0.70%    Mar-2013
                             II-FL  A3/A-/A-                15,000  LIBOR +1.75%    Mar-2013
                             II-FX  A3/A-/A-                35,000        5.715%    Mar-2013
                               III  Baa2/BBB/BBB             9,200        7.436%    Mar-2013
                                                       -----------
     TOTAL........                                     $   472,000
                                                       ===========

Subordinate Bonds        Preferred                     $    28,000          N/A          N/A
                                                       ===========
</TABLE>

-----------------------
(1)  Reflects expected maturities based on the bonds' call date.  Contractual
maturities are March 2038.

As of December 31, 2003, we have $52.5 million of invested equity in Portfolio
III, as defined in "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Funds from Operations."

We act as collateral manager for CBO III and are paid a quarterly fee of -1/4 of
0.35% of the principal balance of the CBO III collateral. We have the discretion
to buy and sell up to 10% of the outstanding face of the collateral annually,
and to sell defaulted and credit risk securities on an unlimited basis. Until
2008, we are obligated to reinvest principal received from the collateral. To
better match the collateral cash flow to the debt service on the CBO III bonds,
we entered into interest rate swap and cap agreements.

Portfolio IV: In September 2003, Newcastle CDO III Limited and Newcastle CDO III
Corp. issued $500 million face amount of CBOs and other securities in our fourth
CBO financing. As of December 31, 2003, the underlying collateral securing our
fourth CBO, which we refer to as CBO IV, consisted of (dollars in thousands):

<TABLE>
<CAPTION>
                                           Weighted Average                         % of Face Amount
                                       ------------------------  --------------------------------------------------------
                         Current Face    S&P           Maturity                                           Health
      Asset Type            Amount     Rating  Coupon   (Years)  Retail  Residential  Office  Industrial   Care   Lodging
-----------------------  ------------  ------  ------  --------  ------  -----------  ------  ----------  ------  -------
<S>                      <C>           <C>     <C>     <C>       <C>     <C>          <C>     <C>         <C>     <C>
CMBS                     $    344,246  BBB       4.52%     4.84      27%      21%       18%         3%        1%      21%
Unsecured REIT debt            97,768  BBB       6.66%     8.39      18%      17%       37%        15%       13%       -%
Asset backed securities        49,467  A         4.76%     6.33     N/A      N/A       N/A        N/A       N/A      N/A
                         ------------- ---     ------  --------
Total/Average            $    491,481  BBB       4.97%     5.70
                         ============= ===     ======  ========
Uninvested restricted
 cash                    $     13,206
</TABLE>

$460.0 million face amount of Senior CBO IV bonds were sold to third parties and
we retained $40.0 million of the Subordinate CBO IV bonds. The table below sets
forth further information with respect to the structure of CBO IV (dollars in
thousands).

<TABLE>
<CAPTION>
                                    MOODY'S/S&P                                   EXPECTED
                           CLASS      RATINGS    FACE AMOUNT     COUPON          MATURITY(2)
                         ---------  -----------  -----------  -----------      -------------
<S>                      <C>        <C>          <C>          <C>                <C>
 Senior Bonds                 I-MM  Aaa/AAA      $   395,000  LIBOR +0.42%(1)    Sep - 2013
                             II-FL  Aa2/AA            15,000  LIBOR +1.25%       Sep - 2013
                             II-FX  Aa2/AA             7,500        6.226%       Sep - 2013
                            III-FL  A2/A              22,500  LIBOR +1.65%       Sep - 2013
                            III-FX  A2/A               5,000        6.616%       Sep - 2013
                             IV-FL  Baa2/BBB          10,000  LIBOR +3.20%       Sep - 2013
                             IV-FX  Baa2/BBB           5,000        8.072%       Sep - 2013
                                                 -----------
      TOTAL........                              $   460,000
                                                 ===========

 Subordinate Bonds               V               $    20,000        8.312%       Sep - 2013
                         Preferred                    20,000          N/A           N/A
                                                 -----------
      TOTAL........                              $    40,000
                                                 ===========
</TABLE>

-----------------------
(1) Includes the costs of certain agreements related to the remarketing of these
    bonds.

(2) Reflects expected maturities based on the bonds' call date. Contractual
    maturities are September 2038.

As of December 31, 2003, we have $48.7 million of invested equity in Portfolio
IV, as defined in "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Funds from Operations."

                                        5

<PAGE>

We act as collateral manager for CBO IV and are paid a monthly fee of 1/12 of
0.35% of the principal balance of the CBO IV collateral. We have the discretion
to buy and sell up to 10% of the outstanding face of the collateral annually,
and to sell defaulted and credit risk securities on an unlimited basis. Until
2008, we are obligated to reinvest principal received from the collateral. To
better match the collateral cash flow to the debt service on the CBO IV bonds,
we entered into interest rate swap and cap agreements.

Portfolio V: In October 2003, we entered into an agreement with a major
financial institution for the right to purchase commercial mortgage backed
securities, senior unsecured REIT debt, real estate loans and asset backed
securities (the "Portfolio V Collateral") for our next real estate securities
portfolio which is targeted to be $450 million. The agreement is treated as a
non-hedge derivative for accounting purposes and is therefore marked-to-market
through current income; a gain of approximately $0.5 million has been recorded
through December 31, 2003. The Portfolio V Collateral is expected to be included
in a financing transaction in which we would acquire the equity interest ("CBO
V"). As of December 31, 2003, approximately $195.0 million of the Portfolio V
Collateral had been accumulated. Through December 31, 2003, we made deposits
aggregating approximately $19.0 million under such agreement (the "Portfolio V
Deposit"). If CBO V is not consummated as a result of our failure to acquire the
equity interest, except as a result of our gross negligence or willful
misconduct, we would be required to either purchase the Portfolio V Collateral
or pay the Realized Loss, as defined, up to the Portfolio V Deposit, less any
Excess Carry Amount, as defined, earned on such deposit. Although we currently
anticipate completing CBO V in the near term, there is no assurance that CBO V
will be consummated or on what terms it will be consummated.

FIN 46R: In December 2003, Financial Accounting Standards Board Interpretation
("FIN") No. 46R "Consolidation of Variable Interest Entities" was issued as a
modification of FIN 46. FIN 46R, which becomes effective in the first quarter of
2004, clarifies the methodology for determining whether an entity is a variable
interest entity ("VIE") and the methodology for assessing who is the primary
beneficiary of a VIE.  Under FIN 46R, only the primary beneficiary of a VIE may
consolidate the VIE. We have historically consolidated our four existing CBO
transactions (the "CBO Entities") because we own the entire equity interest in
each of them, representing a substantial portion of their capitalization, and we
control the management and resolution of their assets. We are in the process of
determining what effect, if any, FIN 46R will have on whether we should continue
to consolidate our CBO Entities.

VIEs are defined as entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. We believe CBO Entities did
not meet the definition of VIEs under FIN 46 but will probably be classified as
VIEs under FIN 46R because our control over such entities is primarily a result
of our rights as their collateral manager rather than a result of our equity
interest.

A VIE is required to be consolidated by its primary beneficiary, and only by its
primary beneficiary, which is defined as the party who will absorb a majority of
the VIE's expected losses or receive a majority of the expected residual returns
as a result of holding variable interests. If the CBO Entities had met the
definition of a VIE under FIN 46, we would have met the FIN 46 criteria to be
the primary beneficiary of the CBO Entities due to our substantial equity
interest.  We are in the process of determining whether we are the primary
beneficiary of each of our CBO Entities under the revised standards of FIN 46R,
which is determined on a case-by-case basis.

If it is determined that we are not the primary beneficiary of a CBO Entity, we
would have to deconsolidate it. A deconsolidation of any of our CBO Entities
would cause a material reduction of our assets and liabilities. However, we
believe that deconsolidation should not have a material affect on our results of
operations.

Other Securities: Other securities primarily represent a portfolio of
approximately $174.9 million (carrying value) of securities collateralized by
first mortgage liens on manufactured housing units, which was acquired in the
fourth quarter of 2003. These securities have a weighted average yield of 8.94%
and a weighted average maturity of 5.67 years at December 31, 2003. We financed
these securities with three floating rate repurchase agreements. We obtained
interest rate swaps in order to hedge our risk of exposure to changes in market
interest rates with respect to this debt.

In January 2004, we purchased $31.5 million face amount of certificates
ultimately secured by all cash flows generated from a pool of wireless
communication towers. These securities were rated B and BB and had a weighted
average yield of approximately 9.00% at purchase. We financed these securities
with approximately $21.3 million of repurchase agreements. We obtained interest
rate swaps in order to hedge our risk of exposure to changes in market interest
rates with respect to this debt.

                                       6
<PAGE>

REAL ESTATE RELATED LOANS

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 the ICH CMO, was previously treated as a
non-consolidated residual interest in such securitization. We exercise no
control over the management or resolution of these assets and our residual
investment in this entity was recorded at $2.9 million prior to its
consolidation. 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. The consolidation did not have any effect on our net basis
in the investment or on our equity and had no material effect on our net income.
The following table sets forth certain information with respect to this loan
portfolio and related bonds payable at December 31, 2003 (dollars in thousands):

<TABLE>
<CAPTION>
                       ICH CMO LOAN PORTFOLIO                                       BONDS
------------------------------------------------------------------  ----------------------------------------
                Unpaid
              Principal    Carrying   Weighted Avg.  Weighted Avg.   Carrying   Weighted Avg.  Weighted Avg.
Loan Count     Balance      Amount        Yield         Maturity      Amount    Funding Cost     Maturity
------------  ---------   ----------  -------------  -------------  ----------  -------------  -------------
<S>           <C>         <C>         <C>            <C>            <C>         <C>            <C>
    138       $  243,809  $  241,334           7.90%   4.63 Years   $  218,506           6.47%   4.46 Years
</TABLE>

In November 2003, we co-invested in a joint venture alongside an affiliate of
our manager, on equal terms, to acquire approximately 130 franchise loans
collateralized by fee and leasehold interests and other assets. The loans were
purchased for approximately $80.0 million, or approximately 72% of face amount.
We, and our manager's affiliate, each own an approximately 38% interest in the
joint venture. The remaining approximately 24% interest is owned by a third
party financial institution. Our investment totaled $30.6 million at December
31, 2003 and is reflected as an investment in an unconsolidated subsidiary on
our consolidated balance sheet.

In November 2003, we acquired an aggregate of $100 million of a $525 million
facility comprised of two secured term loans made to subsidiaries of The Newkirk
Group that own interests in credit leased operating real estate. The loan bears
interest at LIBOR + 4.50% and matures in November 2006. The weighted average
loan to value ratio of the loan we invested in was approximately 67% at December
31, 2003. We financed this investment with an $80 million secured, non-recourse
term loan which bears interest at LIBOR + 1.50% and matures in November 2006.
Both the loan and related financing amortize principal based on collateral
receipts.

OPERATING REAL ESTATE

We own credit leased operating real estate located in Canada and in Belgium
which, in addition to all the risks inherent in the investment in real estate
generally, is also subject to fluctuations in foreign currency exchange rates,
unexpected changes in regulatory requirements, political and economic
instability in certain geographic locations, difficulties in managing
international operations, potentially adverse tax consequences, enhanced
accounting and control expenses and the burden of complying with a wide variety
of foreign laws. A change in foreign currency exchange rates may adversely
impact returns on our non-dollar denominated investments. Our only currency
exposures are to the Euro and the Canadian Dollar. Changes in the currency rates
can adversely impact the fair values and earnings streams of our international
holdings. We generally do not directly hedge our foreign currency risk through
the use of derivatives, due to, among other things, REIT qualification issues.

Bell Canada Portfolio: At December 31, 2003, we owned two office properties and
an industrial property in Canada leased primarily to Bell Canada. We refer to
these properties as the Bell Canada portfolio. The lease of the primary tenant
of one of the office buildings, 2 Fieldway Road, expires in March 2004 and this
tenant has given notice of their intention to vacate. We have not yet identified
a new tenant for this space.

To more effectively monetize lease cash flows and the anticipated value of the
properties in the Bell Canada Portfolio, in April 2002 we issued approximately
$70 million (Canadian dollars) face amount of securities secured by the lease
payments and by the Bell Canada portfolio in a transaction exempt from the
registration requirements of both Canadian and U.S. securities laws. The Series
A and B Notes were sold to third parties and the Series C Notes were retained by
us. Proceeds from sales of the properties are used to repay such notes.

                                       7
<PAGE>

The table below sets forth further information as of December 31, 2003 on the
securities issued (amounts in thousands):

<TABLE>
<CAPTION>
                                              CURRENT
                                               FACE
                                  DBRS       (CANADIAN                 STATED
        SERIES                  RATINGS(1)   DOLLARS) (2)   COUPON    MATURITY
---------------------------    -----------   ------------  --------  ----------
<S>                            <C>           <C>           <C>       <C>
Series A Class I Notes.....    AAA           C$    13,597     6.150% April-2012
Series A Class II Notes....    AA            C$     6,000     6.150% April-2012

Series A Class III Notes...    A+            C$    30,000     6.150% April-2012
Series B Notes.............    A             C$     6,000     7.675% April-2012
                                             ------------

Subtotal...................                  C$    55,597
                                             ------------

Series C Notes.............    BBB           C$    10,000    11.000% April-2012
                                             ------------

TOTAL......................                  C$    65,597
                                             ============
</TABLE>

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

(1) Dominion Bond Rating Service Limited

(2) C$4.0 million of this amount was repaid in January 2004.

                                       8
<PAGE>

The following table sets forth certain information with respect to the Bell
Canada portfolio as of December 31, 2003 (dollars, others than per square foot
amounts, in thousands):

                              BELL CANADA PORTFOLIO

<TABLE>
<CAPTION>

   PROPERTY                                            NET RENTABLE  YEAR BUILT/
   ADDRESS      CITY / SUBMARKET (2)  STATE/ PROVINCE     SQ FT      RENOVATED    OWNERSHIP    USE
--------------  --------------------  ---------------  ------------  -----------  ---------  ------
<S>             <C>                   <C>              <C>           <C>          <C>        <C>
                                                                       1972/
                Etobicoke (Toronto)/                                 expanded
2 Fieldway Rd.  Metro West                  ON             177,214     1978         100%     Office

100 Dundas St.  London/ CBD                 ON             325,764     1980         100%     Office

20-40 Norelco
Dr., 83 Signet                                                         1963/                 Industrial/
     Dr.        Toronto/ North York         ON             624,786     1971/1979    100%     Distribution
                                                       -----------
Total                                                    1,127,764
                                                       ===========
<CAPTION>
                                               % OF     TENANT NET                         TENANT
   PROPERTY                                  TOTAL SQ   RENTABLE SQ    LEASE       LEASE   CREDIT
   ADDRESS          TENANT                   FT LEASED       FT      START DATE  END DATE  RATING
--------------  ---------------------------  ---------  -----------  ----------  --------  ------
<S>             <C>                          <C>        <C>          <C>         <C>       <C>
2 Fieldway Rd.      Bell Canada - Office         94.10%     166,753   03/26/98   03/31/04    A
                   Bell Canada - Cafeteria        4.25%       7,533   03/26/98   03/31/04    A
                    Bell Canada - Storage         0.91%       1,619   03/26/98   03/31/04    A
                    O&Y Enterprise Office         0.65%       1,153   03/26/98   03/31/04
                      Hosnya Elshaarawy           0.09%         156   04/01/01   03/31/06

100 Dundas St.      Bell Canada - Office         89.24%     290,706   03/26/98   03/31/06    A
                    Bell Canada - Storage         3.96%      12,890   03/26/98   03/31/06    A
                Bell Canada - Communication       0.52%       1,686   03/26/98   03/31/47    A
                          Mactel                  0.85%       2,759   03/01/03   05/31/04
                    Tony & Fay Gardiner           0.15%         475   09/01/02   08/31/07
                Palmieri's Fine Foods Inc.        0.58%       1,884   10/01/00   09/30/10
                    O&Y Enterprise Office         0.45%       1,478   03/26/98   03/31/06
                         COMTECH                  0.03%          96   01/01/00   12/31/05
20-40 Norelco
Dr., 83 Signet
     Dr.            Bell Canada - Office         98.80%     617,267   03/26/98   03/31/07    A
                   Bell Canada - Cafeteria        0.73%       4,559   03/26/98   03/31/07    A
                    Bell Canada - Storage         0.47%       2,960   03/26/98   03/31/07    A
                                              ---------  ----------
Total                                            98.78%   1,113,974
                                              =========  ==========
<CAPTION>
                                       ANNUAL
                ANNUAL    CURRENT       REAL      LEASE
   PROPERTY      RENT    RENT PER SQ   ESTATE    RENEWAL
   ADDRESS      (1)(3)     FT (1)     TAXES(1)   OPTION
--------------  ------   -----------  --------   ---------
<S>             <C>      <C>          <C>        <C>
2 Fieldway Rd.     900          5.40       685    None (4)
                    58          7.71
                     6          3.86
                     9          7.71
                     1          5.40

100 Dundas St.   1,569          5.40     1,155   One 5 Year
                    50          3.86             One 5 Year
                    26         15.42
                    17          6.17
                     3          6.94
                    38         20.05
                     7          5.01
                     1          6.17
20-40 Norelco
Dr., 83 Signet
     Dr.        $ 3,332  $      5.40     1,100   One 5 Year
                     35         7.71
                     11         3.86
                -------  -----------  --------
Total           $ 6,063  $    116.07  $  2,940
                =======  ===========  ========
</TABLE>

1) Monetary amounts are in U.S. dollars based on the December 31, 2003 Canadian
   dollar exchange rate of 1.2970.

2) CBD means central business district.

3) Certain operating expenses are reimbursed by tenants at rates ranging up to
   15% above actual cost.

4) Tenant has given notice that it will vacate at lease expiration.

                                       9
<PAGE>

SCHEDULE OF LEASE EXPIRATIONS (DOLLARS IN THOUSANDS):

                              BELL CANADA PORTFOLIO

<TABLE>
<CAPTION>
                                                                       % OF GROSS ANNUAL
            NUMBER OF TENANT    SQUARE FEET OF       ANNUAL RENT OF    RENT REPRESENTED
 YEAR        LEASES EXPIRING    EXPIRING LEASES    EXPIRING LEASES(1)  BY EXPIRING LEASES
----------  ----------------    ---------------    ------------------  -------------------
<S>         <C>                 <C>                <C>                 <C>
 2004               5              179,817            $      990             16.33%
 2005               1                   96                     1              0.01%
 2006               4              305,230                 1,627             26.83%
 2007               4              625,261                 3,381             55.77%
 2008               0                    -                     -              0.00%
 2009               0                    -                     -              0.00%
 2010               1                1,884                    38              0.62%
 2047               1                1,686                    26              0.43%
                -----            ---------            ----------         ----------
Total              16            1,113,974            $    6,063            100.00%
                =====            =========            ==========         ==========
</TABLE>

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

(1) Monetary amounts are in U.S. dollars based on the December 31, 2003 Canadian
    dollar to U.S. dollar exchange rate of 1.2970.

LIV Portfolio: As of December 31, 2003, we own eight office and industrial
properties in Belgium leased primarily to government or quasi-governmental
entities, referred to as the LIV portfolio.

The LIV portfolio is financed with a Euro-denominated loan, $74.6 million of
which was outstanding as of December 31, 2003. The loan bears interest at a rate
equal to 5.32% and matures in November 2006.

We have committed to a plan to sell five of the properties in the LIV portfolio.
We are currently in negotiation with a potential buyer of these properties. We
expect a sale of the properties to be completed in the first half of 2004.
Accordingly, these properties have been reclassified to Real Estate Held for
Sale and have been marked down to their estimated fair value less costs of sale,
resulting in a recorded loss of approximately $1.5 million. The operations of
such properties have been reclassified into discontinued operations for all
periods presented. Although we currently anticipate completing this sale in the
near term, there is no assurance that this sale will be completed or on what
terms it will be completed.

                                       10
<PAGE>

The  following  table sets forth  certain  information  with  respect to the LIV
portfolio as of December 31, 2003 (dollars,  other than per square foot amounts,
in thousands):

                                  LIV PORTFOLIO

<TABLE>
<CAPTION>
                                                                               NET
                                                                            RENTABLE SQ   YEAR BUILT/
  PROPERTY ADDRESS                    CITY/ SUBMARKET     STATE/ PROVINCE      FT         RENOVATED      OWNERSHIP     USE
-----------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                 <C>               <C>           <C>           <C>         <C>
ALFA: GOSSETLAAN 54                   Groot-Bijgaarden    Belgium             81,763      1994              100%    Office

BETA: RUE GUIMARD 10                  Brussels            Belgium             119,781     1973/1995         100%    Office

BETA: LEUVENSESTEENWEG 325            Zaventem            Belgium             65,175      1975/1990         100%    Office

CENTRUM: 4 RUE DE LA SCIENCE 4 (2)    Brussels            Belgium             26,651      1952/1998         100%    Office

MELODICUM: DREVE RICHELLE 159 (2)     Waterloo            Belgium             46,231      1930/1990         100%    Office

POLYTROPHYS: RUE BELLIARD 15-17 (2)   Brussels            Belgium             28,180      1974/1996         100%    Office

SEMINOLE: HOGE WEI 5 (2)              Zaventem            Belgium             55,606      1986              100%    Warehouse

TREALEN: RUE BELLIARD 4-6 (2)         Brussels            Belgium             32,206      1987/2001         100%    Office
-----------------------------------------------------------------------------------------------------------------------------
Total                                                                        455,593
=============================================================================================================================

<CAPTION>
                                                                           % OF      TENANT NET    LEASE
                                                                         TOTAL SQ    RENTABLE SQ   START     LEASE END
  PROPERTY ADDRESS                                  TENANT               FT LEASED       FT        DATE        DATE
-----------------------------------------------------------------------------------------------------------------------
<S>                                    <C>                               <C>         <C>          <C>        <C>
ALFA: GOSSETLAAN 54
                                                  Lucent                  25.51%      20,860      12/01/98   04/30/11
                                                  Wella                   17.39%      14,219      01/01/99   12/31/07
                                              United Biscuits             13.95%      11,410      03/01/99   02/28/08
                                                  Job @                   10.02%       8,191      07/01/00   06/30/09
BETA: RUE GUIMARD 10
                                             European Commission         100.00%     119,781      10/01/95   09/30/07
BETA: LEUVENSESTEENWEG 325
                                          Space Application Services       7.27%       4,736      08/15/93   08/14/11
                                                  K & L                    4.38%       2,852      10/01/97   09/30/06
                                                  Integri                 10.17%       6,631      04/01/98   03/31/07
                                           Ifaros (fka Elsevier)          40.38%      26,318      06/01/99   05/31/08
                                                  Aprico                   7.27%       4,736      03/01/00   02/28/09
                                                 Secproof                  1.90%       1,238      01/01/01   12/31/09
                                           Portima/Quality Infor.          4.57%       2,982      03/01/01   02/28/10
CENTRUM: 4 RUE DE LA SCIENCE 4 (2)
                                          Swedish & Finnish Assoc.        13.81%       3,681      08/15/95   08/14/04
                                             Vedior Interim               11.03%       2,939      06/01/96   05/31/05
                                          Local Government Denmark        19.91%       5,307      01/01/00   12/31/08
                                           Government of Belgium          55.25%      14,725      04/01/01   03/31/10
MELODICUM: DREVE RICHELLE 159 (2)
                                                 CBC Banque                4.66%       2,153      11/01/93   10/31/11
                                         Cosmopolis (Battersby Chung)      1.70%         786      07/01/96   06/30/05
                                       Mastercard Europe SPRL (Europay)   91.01%      42,076      01/01/00   12/30/07
                                                 Lunch Time                2.63%       1,216      05/01/00   04/30/09
POLYTROPHYS: RUE BELLIARD 15-17 (2)
                                                 Foratom                  10.73%       3,025      06/01/99   05/31/08
                                                 Foratom                  18.87%       5,317      06/01/97   05/31/06
                                          Alliance for Beverages          10.73%       3,025      02/01/00   01/31/09
                                        Ag. Erogazioni Agricoltura        10.73%       3,025      10/01/00   09/30/09
                                        Czech Trade Promotion Agency       4.39%       1,238      12/01/00   11/30/09
                                                  C.V.N.                  10.73%       3,025      09/01/01   08/31/10
SEMINOLE: HOGE WEI 5 (2)
                                         Noortman / UPS Logistics        100.00%      55,606      07/01/00   06/30/09
TREALEN: RUE BELLIARD 4-6 (2)
                                                 Vacant                    0.00%           0
---------------------------------------------------------------------------------------------------------------------
Total                                                                     81.45%     371,097
=====================================================================================================================

</Table>
<PAGE>
<Table>
<CAPTION>
                                                                           ANNUAL
                                                               CURRENT      REAL
                                                      ANNUAL   RENT PER    ESTATE
  PROPERTY ADDRESS                                   RENT (1)   SQ FT     TAXES (1)
------------------------------------------------------------------------------------
<S>                                                  <C>       <C>        <C>
ALFA: GOSSETLAAN 54                                                       $   65
                                                     $    381  $ 18.24
                                                          211    14.82
                                                          206    18.07
                                                          127    15.49
BETA: RUE GUIMARD 10                                                         496
                                                        3,903    32.59
BETA: LEUVENSESTEENWEG 325                                                    37
                                                           62    13.01
                                                           37    12.93
                                                          130     9.58
                                                          185     7.03
                                                           67    14.11
                                                           17    13.56
                                                           38    12.87
CENTRUM: 4 RUE DE LA SCIENCE 4 (2)                                            66
                                                           75    20.27
                                                           40    13.51
                                                           89    16.80
                                                          284    19.27
MELODICUM: DREVE RICHELLE 159 (2)                                             65
                                                           51    23.61
                                                           13    16.30
                                                          670    15.91
                                                           35    29.01
POLYTROPHYS: RUE BELLIARD 15-17 (2)                                           91
                                                           46    15.26
                                                           83    15.69
                                                           45    14.79
                                                           47    15.66
                                                           21    16.69
                                                           43    14.18
SEMINOLE: HOGE WEI 5 (2)                                                      20
                                                          344     6.20
TREALEN: RUE BELLIARD 4-6 (2)                                                105
                                                            -        -
------------------------------------------------------------------------------------
Total                                                $  7,250             $  945
====================================================================================
</TABLE>

(1) Monetary amounts are in U.S. dollars based on the December 31, 2003 Euro to
    U.S. dollar exchange rate of 0.79397.

(2) Designated as Real Estate Held for Sale at December 31, 2003.

                                       11
<PAGE>

SCHEDULE OF LEASE EXPIRATIONS (DOLLARS IN THOUSANDS):

                                  LIV PORTFOLIO

<TABLE>
<CAPTION>
                                                                        % OF GROSS ANNUAL
          NUMBER OF TENANT     SQUARE FEET OF        ANNUAL RENT OF      RENT REPRESENTED
YEAR       LEASES EXPIRING    EXPIRING LEASES      EXPIRING LEASES(1)   BY EXPIRING LEASES
------------------------------------------------------------------------------------------
<S>       <C>                 <C>                  <C>                  <C>
2004              1                 3,681              $       75               1.03%
2005              2                 3,725                      53               0.72%
2006              2                 8,170                     120               1.66%
2007              4               182,707                   4,915              67.79%
2008              4                46,059                     526               7.26%
2009              8                78,275                     703               9.70%
2010              3                20,731                     365               5.04%
2011              3                27,749                     493               6.80%
-----            --               -------              ----------             ------
TOTAL            27               371,097              $    7,250             100.00%
=====            ==               =======              ==========             ======
</TABLE>

---------
(1) Monetary amounts are in U.S. dollars based on the December 31, 2003 Euro to
    U.S. dollar exchange rate of 0.79397.

Sale Leaseback. We have entered into a letter of intent to purchase
approximately 200 convenience store and retail petroleum sites subject to a
sale-leaseback arrangement under long-term triple net leases. We intend to
structure this transaction through a joint venture, in which we will invest
approximately $30.0 million of equity, with an affiliate of our manager on equal
terms. The transaction is expected to close towards the end of the first quarter
or in the early second quarter of 2004; however, the transaction is subject to
numerous conditions and there is no assurance that we will consummate this
transaction.

RESIDENTIAL MORTGAGE LOANS

As of December 31, 2003, we own a portfolio of floating rate residential
mortgage loans, secured by first priority liens on properties located in the
U.S., that is financed with floating rate repurchase agreements. The following
table sets forth certain information with respect to our mortgage loan portfolio
and related repurchase agreements at December 31, 2003 (dollars in thousands):

<TABLE>
<CAPTION>
                             LOAN PORTFOLIO                                                  REPURCHASE AGREEMENTS
---------------------------------------------------------------------------    ----------------------------------------------
                   Unpaid
                  Principal     Carrying     Weighted Avg.    Weighted Avg.     Carrying       Weighted Avg.  Stated Maturity
Loan Count         Balance       Amount        Net Coupon        Maturity        Amount       Funding Spread        Date
----------       ----------    ----------    -------------    -------------    ----------     --------------  ---------------
<S>              <C>           <C>           <C>              <C>              <C>            <C>             <C>
  1,731          $  578,330    $  586,237     LIBOR+2.14%       4.1 Years      $  557,191      LIBOR + 0.41%     March 2004
</TABLE>

OUR HEDGING ACTIVITIES

We enter into hedging transactions to protect our positions from interest rate
fluctuations and other changes in market conditions. These transactions may
include interest rate swaps, the purchase or sale of interest rate collars, caps
or floors, options, mortgage derivatives and other hedging instruments. These
instruments may be used to hedge as much of the interest rate risk as our
manager determines is in the best interest of our stockholders, given the cost
of such hedges and the need to maintain our status as a REIT. Our manager may
elect to have us bear a level of interest rate risk that could otherwise be
hedged when our manager believes, based on all relevant facts, that bearing such
risks is advisable. We have extensive experience in hedging real estate
positions with these types of instruments. We engage in hedging for the sole
purpose of protecting against interest rate risk and not for the purpose of
speculating on changes in interest rates.

INVESTMENT GUIDELINES

Our general investment guidelines, adopted by our board of directors, include:

     -    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.

                                       12

<PAGE>

In addition, our manager is required to seek the approval of the independent
members of our board of directors before we engage in a material transaction
with another entity managed by our manager or any of its affiliates. These
investment guidelines may be changed by our board of directors without the
approval of our stockholders.

THE MANAGEMENT AGREEMENT

We are party to a management agreement with Fortress Investment Group, dated as
of June 6, 2002, as amended on March 4, 2003, pursuant to which Fortress
Investment Group, our manager, provides for the day-to-day management of our
operations.

The management agreement requires our manager to manage our business affairs in
conformity with the policies and the investment guidelines that are approved and
monitored by our board of directors. Our manager's management is under the
direction of our board of directors. The manager is responsible for (i) the
purchase and sale of real estate securities and other real estate-related
assets, (ii) the financing of our real estate securities and other real
estate-related assets, (iii) management of our real estate, including arranging
for purchases, sales, leases, maintenance and insurance, (iv) the purchase, sale
and servicing of loans for us, and (v) investment advisory services. Our manager
is responsible for our day-to-day operations and performs (or causes to be
performed) such services and activities relating to our assets and operations as
may be appropriate.

We pay our manager an annual management fee equal to 1.5% of our gross equity,
as defined. The management agreement provides that we will reimburse our manager
for various expenses incurred by our manager or its officers, employees and
agents on our behalf, including costs of legal, accounting, tax, auditing,
administrative and other similar services rendered for us by providers retained
by our manager or, if provided by our manager's employees, in amounts which are
no greater than those which would be payable to outside professionals or
consultants engaged to perform such services pursuant to agreements negotiated
on an arm's-length basis.

To provide an incentive for our manager to enhance the value of our common
stock, our manager is entitled to receive an incentive return (the "Incentive
Compensation") on a cumulative, but not compounding, basis in an amount equal to
the product of (A) 25% of the dollar amount by which (1) (a) our funds from
operations, as defined (before the Incentive Compensation) per share of common
stock (based on the weighted average number of shares of common stock
outstanding) plus (b) gains (or losses) from debt restructuring and from sales
of property and other assets per share of common stock (based on the weighted
average number of shares of common stock outstanding), exceed (2) an amount
equal to (a) the weighted average of the price per share of common stock in our
initial public offering and the value attributed to the net assets transferred
to us by Holdings, and in any of our subsequent offerings (adjusted for prior
capital dividends or capital distributions) multiplied by (b) a simple interest
rate of 10% per annum (divided by four to adjust for quarterly calculations)
multiplied by (B) the weighted average number of shares of common stock
outstanding.

The management agreement provides for automatic one-year extensions from and
after June 6, 2003. Our independent directors review our manager's performance
annually and the management agreement may be terminated annually upon the
affirmative vote of at least two-thirds of our independent directors, or by a
vote of the holders of a majority of the outstanding shares of our common stock,
based upon unsatisfactory performance that is materially detrimental to us or a
determination by our independent directors that the management fee earned by our
manager is not fair, subject to our manager's right to prevent such a management
fee compensation termination by accepting a mutually acceptable reduction of
fees. Our manager will be provided with 60 days' prior notice of any such
termination and will be paid a termination fee equal to the amount of the
management fee earned by our manager during the twelve-month period preceding
such termination which may make it more difficult for us to terminate the
management agreement. Following any termination of the management agreement, we
shall be entitled to purchase our manager's right to receive the Incentive
Compensation at a price determined as if our assets were sold for cash at their
then current fair market value (as determined by an appraisal, taking into
account, among other things, the expected future value of the underlying
investments) or otherwise we may continue to pay the Incentive Compensation to
our manager. In addition, if we do not purchase our manager's Incentive
Compensation, our manager may require us to purchase the same at the price
discussed above. In addition, the management agreement may be terminated by us
at any time for cause.

The principals of our manager include Messrs. Wesley R. Edens, Peter L. Briger,
Jr., Robert I. Kauffman, Randal A. Nardone and Michael E. Novogratz.

POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES

We have authority to offer our common stock or other equity or debt securities
in exchange for property and to repurchase or otherwise reacquire our shares or
any other securities and may engage in such activities in the future.

                                       13

<PAGE>

We also may make loans to, or provide guarantees of, our subsidiaries. Although
we have no current intentions of doing so, we may repurchase or otherwise
reacquire our shares or other securities.

Subject to the percentage ownership and gross income and asset tests necessary
for REIT qualification, we may invest in securities of other REITs, other
entities engaged in real estate activities or securities of other issuers,
including for the purpose of exercising control over such entities.

We may engage in the purchase and sale of investments. We do not underwrite the
securities of other issuers.

Our officers and directors may change any of these policies without a vote of
our stockholders.

In the event that we determine to raise additional equity capital, our board of
directors has the authority, without stockholder approval, to issue additional
common stock or preferred stock in any manner and on such terms and for such
consideration it deems appropriate, including in exchange for property.

Decisions regarding the form and other characteristics of the financing for our
investments are made by our manager subject to the general investment guidelines
adopted by our board of directors.

We have financed our assets with the net proceeds of our initial public
offering, follow-on offerings, the issuance of preferred stock, long-term
secured borrowings and short-term borrowings under repurchase agreements. In the
future, operations may be financed by future offerings of equity securities, as
well as short-term and long-term unsecured and secured borrowings. We expect
that, in general, we will employ leverage consistent with the type of assets
acquired and the desired level of risk in various investment environments. Our
governing documents do not explicitly limit the amount of leverage that we may
employ. Instead, the general investment guidelines adopted by our board of
directors limits total leverage to a maximum 9.0 to 1 debt to equity ratio. At
December 31, 2003 and 2002, our debt to equity ratio was approximately 5.4 to 1
and 4.3 to 1, respectively. Our policy relating to the maximum leverage we may
utilize may be changed by our board of directors at any time in the future.

COMPETITION

We are subject to significant competition in seeking investments. We compete
with several other companies for investments, including other REITs, insurance
companies and other investors. Some of our competitors have greater resources
than we do and we may not be able to compete successfully for investments.

COMPLIANCE WITH APPLICABLE ENVIRONMENTAL LAWS

Properties we own or may acquire are or would be subject to various foreign,
federal, state and local environmental laws, ordinances and regulations. Under
these laws, ordinances and regulations, a current or previous owner of real
estate (including, in certain circumstances, a secured lender that succeeds to
ownership or control of a property) may become liable for the costs of removal
or remediation of certain hazardous or toxic substances or petroleum product
releases at, on, under or in its property. These laws typically impose cleanup
responsibility and liability without regard to whether the owner or control
party knew of or was responsible for the release or presence of the hazardous or
toxic substances. The costs of investigation, remediation or removal of these
substances may be substantial and could exceed the value of the property. An
owner or control party of a site may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from a site. Certain environmental laws also impose liability in
connection with the handling of or exposure to asbestos-containing materials,
pursuant to which third parties may seek recovery from owners of real properties
for personal injuries associated with asbestos-containing materials. Our
operating costs and values of these assets may be adversely affected by the
obligation to pay for the cost of complying with existing environmental laws,
ordinances and regulations, as well as the cost of complying with future
legislation, and our income and ability to make distributions to our
stockholders could be affected adversely by the existence of an environmental
liability with respect to our properties. We endeavor to ensure that properties
we own or acquire will be in compliance in all material respects with all
foreign, federal, state and local laws, ordinances and regulations regarding
hazardous or toxic substances or petroleum products.

                                       14

<PAGE>

EMPLOYEES

We are party to a management agreement with Fortress Investment Group LLC
pursuant to which they advise us regarding investments, portfolio management,
and other aspects of our business, and manage our day-to-day operations. As a
result, we have no employees. The employees of Fortress Investment Group LLC are
not a party to any collective bargaining agreement.

CORPORATE GOVERNANCE AND INTERNET ADDRESS

We emphasize the importance of professional business conduct and ethics through
our corporate governance initiatives. Our board of directors consists of a
majority of independent directors; the audit, nominating/corporate governance,
and compensation committees of our board of directors are composed exclusively
of independent directors. We have adopted corporate governance guidelines, and
our manager has adopted a code of business conduct and ethics, which delineate
our standards for our officers and directors, and employees of our manager.

Our internet address is http://www.newcastleinv.com. We make available, free of
charge through a link on our site, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to such
reports, if any, as filed with the SEC as soon as reasonably practicable after
such filing.

Our site also contains our code of business conduct and ethics, senior officer
code of ethics, corporate governance guidelines, and the charters of the audit
committee, nominating/corporate governance committee and compensation committee
of our board of directors.

                                       15

<PAGE>

                              CAUTIONARY STATEMENTS

This report contains certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements relate to, among other things, the operating performance of our
investments and financing needs. Forward-looking statements are generally
identifiable by use of forward-looking terminology such as "may," "will,"
"should," "potential," "intend," "expect," "endeavor," "seek," "anticipate,"
"estimate," "overestimate," "underestimate," "believe," "could," "project,"
"predict," "continue" or other similar words or expressions. Forward-looking
statements are based on certain assumptions, discuss future expectations,
describe future plans and strategies, contain projections of results of
operations or of financial condition or state other forward-looking information.
Our ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Although we believe that the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, our actual results and performance could differ materially from
those set forth in the forward-looking statements. These forward-looking
statements involve risks, uncertainties and other factors that may cause our
actual results in future periods to differ materially from forecasted results.
Factors which could have a material adverse effect on our operations and future
prospects include, but are not limited to, changes in economic conditions
generally and the real estate and bond markets specifically; adverse changes in
the financing markets we access affecting our ability to finance our real estate
securities portfolios in general, or in a manner that maintains our historic net
spreads; changes in interest rates and/or credit spreads, as well as the success
of our hedging strategy in relation to such changes; the quality and size of the
investment pipeline and the rate at which we can invest our cash, including cash
obtained in connection with CBO financings; impairments in the value of the
collateral underlying our real estate securities, real estate related loans and
residential mortgage loans; the relation of any impairments in the value of our
real estate securities portfolio or operating real estate to our judgments as to
whether changes in the market value of our securities are temporary or not and
whether circumstances bearing on the value of our operating real estate warrant
changes in carrying values; changes in the markets; legislative/regulatory
changes; completion of pending investments; the availability and cost of capital
for future investments; competition within the finance and real estate
industries; and other risks detailed from time to time in our SEC reports.

Risks relating to our management, business and company include, specifically:

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
          who manages, or whose affiliate manages, other pooled investment
          vehicles (investment funds, private investment funds, or businesses)
          that invest in real estate securities, real estate related loans and
          operating real estate.

     -    Our directors have approved very broad investment guidelines for our
          manager and do not approve individual investment decisions made by our
          manager.

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

     -    Our investment strategy may evolve, in light of existing market
          conditions and investment opportunities, to continue to take advantage
          of opportunistic investments in real estate-related assets, which may
          involve additional risks depending upon the nature of such assets and
          the forms of financing we use to finance them on a short or long term
          basis.

Risks Relating to our Business

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

     -    The loans we invest in and the loans underlying the mortgage and asset
          backed securities we invest in are subject to delinquency, foreclosure
          and loss, which could result in losses to us.

     -    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.

                                       16

<PAGE>

     -    The real estate securities consisting of B-notes, real estate related
          loans and other direct and indirect interests in pools of real estate
          properties or 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.

     -    Prepayment rates can increase, adversely affecting yields on our
          residential mortgage loans.

     -    Many of our investments are illiquid, including our investments in
          unconsolidated subsidiaries, and we may not be able to vary our
          portfolio in response to changes in economic and other conditions.

     -    Although we seek to match-fund our investments to limit refinance
          risk, in particular with respect to a substantial portion of our
          investments in real estate securities, we do not employ this strategy
          with respect to our investments in residential mortgage loans and
          certain real estate securities and real estate-related loans, which
          increases refinance risks for these investments.

     -    We may not be able to acquire eligible securities for a CBO financing,
          or may not be able to issue CBO securities on attractive terms, which
          may require us to seek more costly financing for our investments or to
          liquidate assets. In addition, following the closing of a CBO
          financing, the rate at which we are able to acquire eligible
          securities may adversely impact our anticipated returns.

     -    We may not be able to match-fund our investments with respect to
          maturities and interest rates, which exposes us to the risk that we
          may not be able to finance or refinance our investments on
          economically favorable terms.

     -    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.

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

     -    Interest rate fluctuations may cause losses.

     -    Our insurance on our real estate in which we have interests and
          insurance on our mortgage loans and real estate securities collateral
          may not cover all losses.

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

     -    Our non-U.S. investments are subject to currency rate exposure and the
          uncertainty of foreign laws and markets.

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 the reduced tax rates
          under recently enacted tax legislation.

     -    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.

     -    The following factors may inhibit or prevent a change of our control,
          which could depress our stock price: Maryland takeover statutes; our
          authorized but unissued common and preferred stock; our stockholder
          rights plan; and our staggered board and other provisions of our
          charter and bylaws.

                                       17

<PAGE>

Readers are cautioned not to place undue reliance on any of these
forward-looking statements, which reflect our management's views as of the date
of this report. The factors noted above could cause our actual results to differ
significantly from those contained in any forward-looking statement. For a
discussion of our critical accounting policies see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Critical Accounting
Policies."

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this report to conform these
statements to actual results.

                                       18

<PAGE>

ITEM 2. PROPERTIES.

Our investments in properties, which comprise our operating real estate business
segment, are described under "Business - Our Investments."

Our manager leases principal executive and administrative offices located at
1251 Avenue of the Americas, New York, NY 10020, 16th floor. Its telephone
number is (212) 798-6100. Our manager is currently considering its need for
additional office space in New York.

ITEM 3. LEGAL PROCEEDINGS.

We are not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of our security holders during the fourth
quarter of 2003.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Our common stock has been listed and is traded on the New York Stock Exchange
(NYSE) under the symbol "NCT" since our initial public offering in October 2002.
The following table sets forth, for the periods indicated, the high, low and
last sale prices in dollars on the NYSE for our common stock and the
distributions we declared with respect to the periods indicated.

<TABLE>
<CAPTION>
                                                                                           Distributions
                    2002                                  High         Low     Last Sale     Declared
----------------------------------------------           ------      ------    ---------   -------------
<S>                                                      <C>         <C>       <C>         <C>
July 12, 2002 through September 30, 2002                  N/A         N/A         N/A          $0.40
October 1, 2002 through October 9, 2002 (1)               N/A         N/A         N/A          $0.06
October 10, 2002 through December 31, 2002 (2)           $15.97      $12.38      $15.97        $0.39
</TABLE>

<TABLE>
<CAPTION>
                                                                                           Distributions
                   2003                                   High        Low      Last Sale     Declared
----------------------------------------------           ------      ------    ---------   -------------
<S>                                                      <C>         <C>       <C>         <C>
First Quarter                                            $16.83      $15.46      $16.73        $0.45
Second Quarter                                           $20.00      $16.50      $19.58        $0.50
Third Quarter                                            $23.24      $19.00      $22.99        $0.50
Fourth Quarter                                           $27.24      $22.64      $27.10        $0.50
</TABLE>

     (1)  Represents the portion of the fourth quarter of 2002 prior to our
          initial public offering.

     (2)  When combined with the $0.06 paid for the period October 1 through
          October 9, represents a regular quarterly dividend of $0.45 per share.

We intend to continue to declare quarterly distributions on our common stock. No
assurance, however, can be given as to the amounts or timing of future
distributions as such distributions are subject to our earnings, financial
condition, capital requirements and such other factors as our board of directors
deems relevant.

On February 13, 2004, the closing sale price for our common stock, as reported
on the NYSE, was $28.02. As of February 13, 2004, there were approximately 46
record holders of our common stock. This figure does not reflect the beneficial
ownership of shares held in nominee name.

                                       19

<PAGE>

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes the total number of outstanding securities in the
incentive plan and the number of securities remaining for future issuance, as
well as the weighted-average exercise price of all outstanding securities as of
December 31, 2003.

<TABLE>
<CAPTION>
                                                                                               NUMBER OF SECURITIES REMAINING
                                           NUMBER OF SECURITIES TO BE      WEIGHTED-AVERAGE     AVAILABLE FOR FUTURE ISSUANCE
                                             ISSUED UPON EXERCISE OF      EXERCISE PRICE OF      UNDER EQUITY COMPENSATION
            PLAN CATEGORY                      OUTSTANDING OPTIONS       OUTSTANDING OPTIONS               PLANS
---------------------------------------    --------------------------    -------------------   ------------------------------
<S>                                        <C>                           <C>                   <C>
EQUITY COMPENSATION PLANS APPROVED
 BY SECURITY HOLDERS:

   Newcastle Investment Corp. Nonqualified
   Stock Option and Incentive Award Plan          1,501,727 (A)                 $17.43                  8,494,233 (B)

EQUITY COMPENSATION PLANS NOT APPROVED
 BY SECURITY HOLDERS:
   None                                               N/A                         N/A                        N/A
</TABLE>

------------------
(A)  Includes options for (i) 1,485,327 shares held by an affiliate of our
     manager; (ii) 2,900 shares held by an employee of our manager; and (iii) an
     aggregate of 13,500 shares held by our directors, other than Mr. Edens.

(B)  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 1,540 shares of our
     common stock awarded in June 2003 to our directors, other than Mr. Edens,
     representing half of the annual automatic stock award to each such director
     for service during the year in which the incentive plan was amended to
     provide for an annual automatic stock award, and of 2,500 shares issued to
     one of our directors upon the exercise of previously granted non-employee
     director options.

                                       20

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth certain selected operating information on a
historical basis. As such, it includes the historical results of operations of
the assets and liabilities distributed to Newcastle Investment Holdings which
are not part of our continuing operations, and therefore the information set
forth for periods prior to the commencement of our operations in July 2002 is
not indicative of our ongoing operations.

The selected historical consolidated financial information set forth below as of
December 31, 2003, 2002, 2001, 2000 and 1999 and for the years ended December
31, 2003, 2002, 2001 and 2000 and 1999 has been derived from our audited
historical consolidated financial statements.

The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and notes thereto included in "Financial
Statements and Supplementary Data."

                   SELECTED CONSOLIDATED FINANCIAL INFORMATION
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                               -------------------------------------------------------------------
                                                                  2003         2002           2001           2000           1999
                                                               ---------    ---------      ---------      ---------      ---------
<S>                                                            <C>          <C>            <C>            <C>            <C>
OPERATING DATA                                                                 (B)            (A)            (A)            (A)
Revenues
  Interest income                                              $ 134,669    $  73,172      $  48,967      $  51,702      $  30,354
  Other income                                                    34,509       32,642         64,425         47,751         17,507
                                                               ---------    ---------      ---------      ---------      ---------
                                                                 169,178      105,814        113,392         99,453         47,861

Expenses
  Interest expense                                                81,561       48,121         34,051         35,311         19,741
  Other expense                                                   30,153       25,842         44,389         29,540         20,427
                                                               ---------    ---------      ---------      ---------      ---------
                                                                 111,714       73,963         78,440         64,851         40,168

Equity in earnings (losses) of unconsolidated subsidiaries           862          362          2,807           (980)        (3,615)
                                                               ---------    ---------      ---------      ---------      ---------
Income from continuing operations                                 58,326       32,213         37,759         33,622          4,078
Income (loss) from discontinued operations                        (2,208)        (718)         5,912          9,238          8,734
Cumulative effect of change in accounting principle                    -            -              -              -           (513)
                                                               ---------    ---------      ---------      ---------      ---------
Net Income                                                        56,118       31,495         43,671         42,860         12,299
Preferred dividends and related accretion                         (4,773)      (1,162)        (2,540)        (2,084)             -
                                                               ---------    ---------      ---------      ---------      ---------
Income available for common stockholders                       $  51,345    $  30,333      $  41,131      $  40,776      $  12,299
                                                               =========    =========      =========      =========      =========
Net Income per share of common stock, diluted                  $    1.96    $    1.68      $    2.49      $    2.16      $    0.59
                                                               =========    =========      =========      =========      =========
Income from continuing operations per share of common stock,
  after preferred dividends and related accretion, diluted     $    2.05    $    1.72      $    2.13      $    1.67      $    0.19
                                                               =========    =========      =========      =========      =========
Weighted average number of shares of common stock
  outstanding, diluted                                            26,141       18,090         16,493         18,892         20,917
                                                               =========    =========      =========      =========      =========
Dividends declared per share of common stock                   $    1.95    $    2.05      $    2.00      $    1.50      $    2.04
                                                               =========    =========      =========      =========      =========
</TABLE>

<TABLE>
<CAPTION>
                                                                                   AS OF DECEMBER 31,
                                                       ----------    ----------    ----------    ----------    ----------
                                                          2003          2002          2001          2000          1999
                                                       ----------    ----------    ----------    ----------    ----------
<S>                                                    <C>           <C>           <C>           <C>           <C>
BALANCE SHEET DATA
Real estate securities, available for sale             $2,089,712    $1,069,892    $  522,258    $  509,729    $  504,669
Real estate related loans, net                            341,193             -        10,675       106,957       152,714
Residential mortgage loans, net                           586,237       258,198             -             -             -
Operating real estate, net                                102,995       113,652       524,834       540,539       558,849
Cash and cash equivalents                                  60,403        45,463        31,360        10,575        14,345
Total assets                                            3,533,081     1,572,567     1,262,119     1,331,086     1,381,600
Debt                                                    2,924,552     1,217,007       897,390       975,656       971,260
Stockholders' equity                                      539,363       284,241       310,545       300,655       354,673

SUPPLEMENTAL BALANCE SHEET DATA
Common shares outstanding                                  31,375        23,489        16,489        16,500        20,917
Book value per share of common stock, subsequent to
  initial public offering                              $    15.20    $    12.10           N/A           N/A           N/A
</TABLE>

(A) Represents the operations of our predecessor.

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

                                       21

<PAGE>

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                     -------------------------------------------------------------------------------
                                        2003             2002              2001             2000             1999
                                     -----------      -----------      -----------      -----------      -----------
<S>                                  <C>              <C>              <C>              <C>              <C>
OTHER DATA
Cash Flow provided by (used in):
 Operating activities                $    37,592      $    21,557      $    34,448      $    24,823      $    32,834
 Investing activities                $(1,652,682)     $  (682,691)     $   106,053      $   151,632      $  (683,420)
 Financing activities                $ 1,630,030      $   675,237      $  (119,716)     $  (180,225)     $   589,335
Funds from Operations (FFO) (A)      $    54,380      $    37,633      $    48,264      $    53,523      $    24,707
</TABLE>

(A)  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. 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 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.

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                              --------------------------------------------------------------
                                                                2003         2002          2001          2000         1999
                                                              --------     --------      --------      --------     --------
<S>                                                           <C>          <C>           <C>           <C>          <C>
CALCULATION OF FUNDS FROM OPERATIONS (FFO):
Income available for common stockholders                      $ 51,345     $ 30,333      $ 41,131      $ 40,776     $ 12,299
  Operating real estate depreciation                             3,035        7,994        12,909        12,621        9,927
  Accumulated depreciation on operating real estate sold             -       (2,847)            -             -            -
  Extraordinary item - loss on extinguishment of debt (A)            -            -             -             -        2,341
  Real estate depreciation and amortization-
    unconsolidated subsidiaries (A)                                  -        1,614         2,564           126          140
  Incentive (income) loss accrued from Fund I (A)                    -          609       (14,354)            -            -
  Equity in incentive return accrued by Fund I (A)                   -          (70)        1,645             -            -
  Distributable incentive income from Fund I (A)                     -            -         4,369             -            -
                                                              --------     --------      --------      --------     --------
Funds from operations (FFO)                                   $ 54,380     $ 37,633      $ 48,264      $ 53,523     $ 24,707
                                                              ========     ========      ========      ========     ========
</TABLE>

(A) Related to investments retained by our predecessor.

                                       22

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following should be read in conjunction with our consolidated financial
statements and notes thereto included in "Financial Statements and Supplementary
Data."

GENERAL

We own a diversified portfolio of moderately credit sensitive real estate
securities, including commercial mortgage backed securities (including B-notes),
senior unsecured debt issued by property REITs and real estate related asset
backed securities. Mortgage backed securities are interests in or obligations
secured by pools of mortgage loans. We generally target investments rated A
through BB. We also own, directly and indirectly, interests in loans and pools
of loans, including real estate related loans and residential mortgage loans. We
also own, directly and indirectly, interests in operating real estate, including
credit leased operating real estate in Canada and Belgium. We consider credit
leased operating real estate to be real estate that is leased primarily to
tenants with, or whose major tenant has, investment grade credit ratings.

We seek to match-fund our investments with respect to interest rates and
maturities in order to minimize the impact of interest rate fluctuations on
earnings and reduce the risk of refinancing our liabilities prior to the
maturity of the investments. We seek to finance a substantial portion of our
real estate securities through the issuance of debt securities in the form of
collateralized bond obligations, known as CBOs, which are obligations issued in
multiple classes secured by an underlying portfolio of securities. Our CBO
financings offer us structural flexibility to buy and sell certain investments
to manage risk and, subject to certain limitations, to optimize returns.

Our objective is to maximize the difference between the yield on our investments
and the cost of financing these investments while hedging our interest rate
risk. We emphasize asset quality, diversification, match-funded financing and
credit risk management.

We were formed in June 2002 as a wholly owned subsidiary of Newcastle Investment
Holdings Corp. (referred to as Holdings) for the purpose of separating the real
estate securities and certain of the credit leased operating real estate
businesses from Holdings' other investments. Prior to our initial public
offering, Holdings contributed to us certain assets and liabilities in exchange
for 16,488,517 shares of our common stock. For accounting purposes, this
transaction is presented as a reverse spin-off, whereby Newcastle Investment
Corp. is treated as the continuing entity and the assets that were retained by
Holdings and not contributed to us are accounted for as if they were distributed
at their historical book basis through a spin-off to Holdings. Our operations
commenced on July 12, 2002. On May 19, 2003, Holdings distributed to its
stockholders all of the shares of our common stock that it held, and it no
longer owns any of our equity. Approximately 2.3 million of such shares are held
by an affiliate of our manager. In addition, an affiliate of our manager holds
options to purchase approximately 1.7 million shares of our common stock.

The analysis in this section treats us as the successor to Holdings and
therefore includes historical information, through the date of the commencement
of our operations, regarding operations of Holdings which were distributed to
them and therefore are unrelated to our ongoing operations. Transactions
completed by Holdings related to investments retained by Holdings (not
contributed to us) are referred to as being completed by our predecessor.

In October 2002, we sold 7.0 million shares of our common stock in our initial
public offering at a price to the public of $13.00 per share, for net proceeds
of approximately $80.0 million. During 2003, we sold an aggregate of
approximately 7.9 million shares of our common stock in public offerings for net
proceeds of approximately $163.3 million. In January 2004, we sold 3.3 million
shares of our common stock in a public offering at a price to the public of
$26.30 per share, for net proceeds of approximately $85.8 million. Subsequent to
that offering, we had 34,674,833 shares of common stock outstanding.

We are organized and conduct our operations to qualify as a REIT for federal
income tax purposes. As such, we will generally not be subject to federal income
tax on that portion of our income that is distributed to stockholders if we
distribute at least 90% of our REIT taxable income to our stockholders by
prescribed dates and comply with various other requirements.

We conduct our business by investing in four primary investment categories
(business segments): (i) real estate securities, (ii) real estate related loans,
(iii) operating real estate, primarily credit leased operating real estate,
including a portfolio of properties located in Canada, which we refer to as our
Bell Canada portfolio, and a portfolio of properties located in Belgium, which
we refer to as our LIV portfolio and (iv) residential mortgage loans.

                                       23
<PAGE>

Holdings, our predecessor, conducted its business through four primary segments:
(1) real estate securities, (2) operating real estate, primarily credit leased
operating real estate, (3) its investment in Fortress Investment Fund LLC ("Fund
I") and (4) real estate related loans. Holdings' investments in real estate
securities and a portion of its investments in operating real estate were
contributed to us. The operating real estate and mortgage loans distributed to
Holdings have been treated as discontinued operations, because they constituted
a component of an entity, while the other operations distributed to Holdings,
including the investment in Fund I, have not been treated as such, because they
did not constitute a component of an entity as defined in SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."

In addition to certain of the investments distributed to Holdings as described
above, our discontinued operations include the operations of properties which
have been sold or classified as Real Estate Held for Sale pursuant to SFAS No.
144. For more information on these properties, see Note 6 of our consolidated
financial statements which appear in "Financial Statements and Supplementary
Data."

Revenues attributable to each segment are disclosed below (unaudited) (in
thousands).

<Table>
<Caption>
                                       Real Estate                     Residential
                      Real Estate       Related        Operating        Mortgage
For the Year Ended     Securities        Loans        Real Estate        Loans        Fund I     Unallocated      Total
-------------------------------------------------------------------------------------------------------------------------
<S>                  <C>              <C>             <C>            <C>            <C>         <C>            <C>
December 31, 2003      $ 128,091       $ 6,257        $ 21,358         $ 12,892      $     --      $   580     $ 169,178
December 31, 2002      $  83,259       $    --        $ 17,555         $  1,281      $  3,287      $   432     $ 105,814
December 31, 2001      $  54,961       $    --        $ 18,519         $     --      $ 38,297      $ 1,615     $ 113,392
</Table>

TAXATION

We have elected to be taxed as a real estate investment trust, or REIT, under
the Internal Revenue Code of 1986, as amended (the "Code"), and we intend to
continue to operate in such a manner. Our current and continuing qualification
as a REIT depends on our ability to meet various tax law requirements,
including, among others, requirements relating to the sources of our income, the
nature of our assets, the composition of our stockholders, and the timing and
amount of distributions that we make.

As a REIT, we will generally not be subject to U.S. federal corporate income tax
on our net income that is currently distributed to stockholders. We may,
however, nevertheless be subject to certain state, local and foreign income and
other taxes, and to U.S. federal income and excise taxes and penalties in
certain situations, including taxes on our undistributed income. In addition,
our stockholders may be subject to state, local or foreign taxation in various
jurisdictions, including those in which they or we transact business or reside.
The state, local and foreign tax treatment of us and our stockholders may not
conform to the U.S. federal income tax treatment.

If, in any taxable year, we fail to satisfy one or more of the various tax law
requirements, we could fail to qualify as a REIT. In addition, if Holdings
failed to qualify as a REIT and we are treated as a successor to Newcastle
Holdings, this could cause us to likewise fail to qualify as a REIT. If we fail
to qualify as a REIT for a particular tax year, our income in that year would be
subject to U.S. federal corporate income tax (including any applicable
alternative minimum tax), and we may need to borrow funds or liquidate certain
investments in order to pay the applicable tax, and we would not be compelled by
the Code to make distributions. Unless entitled to relief under certain
statutory provisions, we would also be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification is lost.

Although we currently intend to operate in a manner designed to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
developments may cause us to fail to qualify as a REIT, or may cause our board
of directors to revoke the REIT election.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP"). The preparation of financial statements in conformity
with GAAP requires the use of estimates and assumptions that could affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities and the reported amounts of revenue and expenses. Actual results
could differ from these estimates. A summary of our significant accounting
policies is presented in Note 2 to our consolidated financial statements, which
appear in "Financial Statements and Supplementary Data." The following is a
summary of our accounting policies that are most affected by judgments,
estimates and assumptions.

In December 2003, Financial Accounting Standards Board Interpretation ("FIN")
No. 46R "Consolidation of Variable Interest Entities" was issued as a
modification of FIN 46. FIN 46R, which becomes effective in the first quarter of
2004, clarifies the methodology for determining whether an entity is a variable
interest entity ("VIE") and the methodology for assessing who is the primary
beneficiary of a VIE.

                                       24

<PAGE>
Under FIN 46R, only the primary beneficiary of a VIE may consolidate the VIE. We
have historically consolidated our four existing CBO transactions (the "CBO
Entities") because we own the entire equity interest in each of them,
representing a substantial portion of their capitalization, and we control the
management and resolution of their assets. We are in the process of determining
what effect, if any, FIN 46R will have on whether we should continue to
consolidate our CBO Entities.

VIEs are defined as entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. We believe CBO Entities did
not meet the definition of VIEs under FIN 46 but will probably be classified as
VIEs under FIN 46R because our control over such entities is primarily a result
of our rights as their collateral manager rather than a result of our equity
interest.

A VIE is required to be consolidated by its primary beneficiary, and only by its
primary beneficiary, which is defined as the party who will absorb a majority of
the VIE's expected losses or receive a majority of the expected residual returns
as a result of holding variable interests. If the CBO Entities had met the
definition of a VIE under FIN 46, we would have met the FIN 46 criteria to be
the primary beneficiary of the CBO Entities due to our substantial equity
interest. We are in the process of determining whether we are the primary
beneficiary of each of our CBO Entities under the revised standards of FIN 46R,
which is determined on a case-by-case basis.

If it is determined that we are not the primary beneficiary of a CBO Entity, we
would have to deconsolidate it. A deconsolidation of any of our CBO Entities
would cause a material reduction of our assets and liabilities. However, we
believe that deconsolidation should not have a material affect on our results
of operations.

We have classified our real estate securities as available for sale. As such,
they are carried at fair value with net unrealized gains or losses reported as a
component of accumulated other comprehensive income. Fair value is based
primarily upon multiple broker quotations, as well as counterparty quotations,
which provide valuation estimates based upon reasonable market order indications
or a good faith estimate thereof. These quotations are subject to significant
variability based on market conditions, such as interest rates and credit
spreads. Changes in market conditions, as well as changes in the assumptions or
methodology used to determine fair value, could result in a significant increase
or decrease in our book equity. We must also assess whether unrealized losses on
securities, if any, reflect a decline in value which is other than temporary
and, accordingly, write the impaired security down to its value through
earnings. For example, a decline in value is deemed to be other than temporary
if it is probable that we will be unable to collect all amounts due according to
the contractual terms of a security which was not impaired at acquisition.
Temporary declines in value generally result from change in market factors, such
as market interest rates and credit spreads, or from certain macroeconomic
events, including market disruptions and supply changes, which do not directly
impact our ability to collect amounts contractually due. Significant judgment is
required in this analysis. To date, no such write-downs have been made.

Income on these securities is recognized using a level yield methodology based
upon a number of assumptions that are subject to uncertainties and
contingencies. Such assumptions include the expected disposal date of such
security and the rate and timing of principal and interest receipts (which may
be subject to prepayments, delinquencies and defaults). These uncertainties and
contingencies are difficult to predict and are subject to future events, and
economic and market conditions, which may alter the assumptions.

Similarly, our derivative instruments are carried at fair value pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities," as amended. Fair value is based
on counterparty quotations. To the extent they qualify as hedges under SFAS No.
133, net unrealized gains or losses are reported as a component of accumulated
other comprehensive income; otherwise, they are reported as a component of
current income. Fair values of such derivatives are subject to significant
variability based on many of the same factors as the securities discussed above.
The results of such variability could be a significant increase or decrease in
our book equity and/or earnings.

We purchase, directly and indirectly, real estate related and residential
mortgage loans to be held for investment. We must periodically evaluate each of
these loans for possible impairment. Impairment is indicated when it is deemed
probable that we will be unable to collect all amounts due according to the
contractual terms of the loan. Upon determination of impairment, we would
establish a specific valuation allowance with a corresponding charge to

                                       25
<PAGE>

We purchase, directly and indirectly, real estate related and residential
mortgage loans to be held for investment. We must periodically evaluate each of
these loans for possible impairment. Impairment is indicated when it is deemed
probable that we will be unable to collect all amounts due according to the
contractual terms of the loan. Upon determination of impairment, we would
establish a specific valuation allowance with a corresponding charge to
earnings. Significant judgment is required both in determining impairment and in
estimating the resulting loss allowance. In 2003, a loss allowance of $0.1
million was recorded with respect to the residential mortgage loans in our
portfolio.

Income on these loans is recognized similar to that on our securities and is
subject to similar uncertainties and contingencies.

We own operating real estate held for investment. We review our operating real
estate for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Upon determination of
impairment, we would record a write-down of the asset, which would be charged to
earnings. Significant judgment is required both in determining impairment and in
estimating the resulting write-down. To date, we have determined that no
write-downs have been necessary on the operating real estate in our portfolio.
In addition, when operating real estate is classified as held for sale, it must
be recorded at the lower of its carrying amount or fair value less costs of
sale. Significant judgment is required in determining the fair value of such
properties. At December 31, 2003, we have five properties classified as held for
sale on which an aggregate loss of $1.5 million was recorded in adjusting them
to fair value.

RESULTS OF OPERATIONS

Our independent operations commenced in July 2002 and our initial public
offering was completed in October 2002. In addition, we had one offering of
preferred stock and two offerings of common stock during 2003. These events
resulted in additional capital being deployed to our investments which, in turn,
resulted in changes to our results operations. Furthermore, the results of
operations described below include the operations of our predecessor through
July 12, 2002, the date of the commencement of our operations. Therefore, many
items discussed below prior to such date will not have a continuing impact on
our operations.

The following table summarizes the changes in our results of operations from
year-to-year (dollars in thousands):

<TABLE>
<CAPTION>
                                              Year-to-Year               Year-to-Year
                                          Increase (Decrease)           Percent Change           Explanation
                                       ------------------------     ---------------------   --------------------
                                       2003/2002      2002/2001     2003/2002   2002/2001   2003/2002  2002/2001
                                       ---------      ---------     ---------   ---------   ---------  ---------
<S>                                    <C>            <C>           <C>         <C>         <C>        <C>
Interest income                         $ 61,497        24,205         84.0%       49.4%       (A)        (A)
Rental and escalation income               3,357          (364)        18.7%       (0.2%)      (B)        (B)
Gain on settlement of investments          1,762         2,979         15.4%       35.3%       (C)        (C)
Management fee from affiliate             (4,470)       (4,471)        (100%)     (50.0%)      (D)        (D)
Incentive income from affiliate            1,218       (29,927)         N/A      (104.2%)      (D)        (D)

Interest expense                          33,440        14,070         69.5%       41.3%       (A)        (A)
Property operating expense                 1,108             9         14.0%        0.1%       (B)        (B)
Loan and security servicing expense        1,499           401        228.9%      157.8%       (A)        (A)
General and administrative expense         1,312         1,332         48.3%       96.1%       (E)        (E)
Management fee to affiliate               (2,782)       (5,437)       (30.1%)     (37.0%)      (F)        (F)
Incentive compensation to affiliate        3,370       (14,332)       118.0%      (83.3%)      (F)        (F)
Depreciation and amortization               (196)         (520)        (8.0%)     (17.5%)      (G)        (G)

Equity in earnings of
  unconsolidated subsidiaries                500        (2,445)       138.1%      (87.1%)      (H)        (I)

Income from continuing operations         26,113        (5,546)        81.1%      (14.7%)
</TABLE>

                                       26

<PAGE>

(A)  Changes in interest income and expense are primarily due to our acquisition
     of portfolios of interest bearing assets and related financings, as
     follows:

<TABLE>
<CAPTION>
                                                 Year-to-Year Income (Decrease)
                                        ----------------------------------------------

                                           Interest Income          Interest Expense
                                        ---------------------    ---------------------
                                        2003/2002   2002/2001    2003/2002    2002/2001
                                        ---------   ---------    ---------    ---------
<S>                                     <C>         <C>          <C>          <C>
Real Estate Securities Portfolio II        9,041      25,269        8,073       18,566
Real Estate Securities Portfolio III      22,990         652       14,767            -
Real Estate Securities Portfolio IV        8,942           -        5,134            -
Residential Mortgage Loan Portfolio       11,004       1,281        5,504            -
ICH CMO Loan Portfolio                     5,539        (515)       4,074            -
Other                                      3,981      (2,482)      (4,112)      (4,496)
                                          ------      ------       ------       ------
                                          61,497      24,205       33,440       14,070
</TABLE>

     Changes in loan and security servicing expense are also primarily due to
these acquisitions.

(B)  These changes are primarily the result of foreign currency fluctuations
     with respect to our Bell Canada and LIV portfolios.

(C)  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.

(D)  These items relate to our predecessor's investment in Fund I, prior to its
     distribution to Holdings.

(E)  The increases in general and administrative expense are primarily a result
     of the increased cost of being a public company.

(F)  Excluding management fees and incentive compensation which were passed
     through our predecessor to our manager related to our predecessor's
     investment in Fund I, the changes in management fees and incentive
     compensation were as follows:

<TABLE>
<CAPTION>
                                      Year-to-Year Increase (Decrease)
                                      -------------------------------
                                         2003/2002        2002/2001
                                         ---------        ---------
<S>                                      <C>              <C>
Management Fee to Affiliate                1,688            (966)
Incentive Compensation to Affiliate        2,761             631
</TABLE>

The increase in management fees from 2002 to 2003 is a result of our increased
size resulting from our equity issuances during this period; the decrease from
2001 to 2002 is a result of our distribution to Holdings which decreased our
size. The increases in incentive compensation are primarily a result of our
increased earnings.

(G)  The decreases in depreciation and amortization are primarily the result of
     the distribution of depreciable assets to Holdings.

(H)  The increase in earnings from unconsolidated subsidiaries from 2002 to 2003
     is primarily a result of our 2003 acquisition of an interest in an LLC
     which owns a portfolio of real estate related loans.

(I)  The decrease in earnings from unconsolidated subsidiaries from 2001 to 2002
     is a result of the distribution of our predecessor's investment in Fund I.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measurement of our ability to meet potential cash requirements,
including ongoing commitments to repay borrowings, fund and maintain
investments, and other general business needs. Additionally, to maintain our
status as a REIT under the Internal Revenue Code, we must distribute annually at
least 90% of our taxable income. Our primary sources of funds for liquidity
consist of net cash provided by operating activities, borrowings under loans and
the issuance of debt and equity securities. Our loans and debt securities are
generally secured directly by our investment assets. As of December 31, 2003,
our real estate securities purchased in connection with our four CBO financings
as well as our Bell Canada portfolio and a real estate loan portfolio were
securitized, while our LIV portfolio, our residential mortgage loan portfolio,
several of our other real estate securities and one of our other real estate
related loans served as collateral for loan obligations.

                                       27

<PAGE>

We expect that our cash on hand and our cash flow provided by operations will
satisfy our liquidity needs with respect to our current investment portfolio
over the next twelve months. However, we currently expect to seek additional
capital in order to grow our investment portfolio. We have an effective shelf
registration statement with the SEC which allows us to issue various types of
securities, such as common stock, preferred stock, depository shares, debt
securities and warrants, from time to time, up to an aggregate of $750 million,
of which approximately $588 million remains available subsequent to our January
2004 offering.

We expect to meet our long-term liquidity requirements, specifically the
repayment of our debt obligations, through additional borrowings and the
liquidation or refinancing of our assets at maturity. We believe that the value
of these assets is, and will continue to be, sufficient to repay our debt at
maturity under either scenario. Our ability to meet our long-term liquidity
requirements relating to capital required for the growth of our investment
portfolio is subject to obtaining additional equity and debt financing.
Decisions by investors and lenders to enter into such transactions with us will
depend upon a number of factors, such as our historical and projected financial
performance, compliance with the terms of our current credit arrangements,
industry and market trends, the availability of capital and our investors' and
lenders' policies and rates applicable thereto, and the relative attractiveness
of alternative investment or lending opportunities.

Our ability to execute our business strategy, particularly the growth of our
investment portfolio, depends to a significant degree on our ability to obtain
additional capital. Our core business strategy is dependent upon our ability to
issue the match-funded debt we use to finance our real estate securities and
other real estate related assets at rates that provide a positive net spread. A
significant portion of our investments are financed with collateralized bond
obligations, known as CBOs. If spreads for CBO liabilities widen or if demand
for such liabilities ceases to exist, then our ability to execute future CBO
financings will be severely restricted.

We expect to meet our short-term liquidity requirements generally through our
cash flow provided by operations, as well as investment specific borrowings. In
addition, at December 31, 2003, we had an unrestricted cash balance of $60.4
million. Our cash flow provided by operations differs from our net income due to
four primary factors: (i) accretion of discount or premium on our real estate
securities and loans, discount on our debt obligations, deferred financing costs
and interest rate cap premiums, and deferred hedge gains and losses, (ii) gains
and losses, (iii) depreciation of our operating real estate and (iv)
straight-lined rental income. Proceeds from the sale of real estate securities
which serve as collateral for our CBO financings, including gains thereon, are
required to be retained in the CBO structure until the related bonds are retired
and are therefore not available to fund current cash needs.

Our real estate securities are financed long-term and their credit status is
continuously monitored; therefore, these investments are expected to generate a
generally stable current return, subject to interest rate fluctuations. Our
operating real estate is also financed long-term and primarily leased to credit
tenants with long-term leases and is therefore also expected to generate
generally stable current cash flows. However, the primary tenant of one of the
office buildings in our Bell Canada portfolio intends to vacate in March 2004.
See "Quantitative and Qualitative Disclosures About Market Risk -- Interest Rate
Exposure" below.

With respect to our operating real estate, we expect to incur expenditures of
approximately $0.4 million relating to tenant improvements in connection with
the inception of leases and capital expenditures during the year ending December
31, 2004.

                                       28

<PAGE>

Debt Obligations

The following table presents certain information regarding our debt obligations
as of December 31, 2003 (unaudited) (dollars in thousands):

<TABLE>
<CAPTION>
                                                              Unhedged Weighted
                                                               Average Funding    Final Stated  Weighted Average  Weighted Average
                                Carrying Amount  Face Amount        Cost            Maturity    Funding Cost (A)  Maturity (Years)
                                ---------------  -----------  -----------------   ------------  ----------------  ----------------
<S>                             <C>              <C>          <C>                 <C>           <C>               <C>
CBO Bonds Payable
CBO I                              $  431,802     $  437,500     3.83% (B)          July 2038         4.89%             4.67
CBO II                                439,832        444,000     2.91% (B)         April 2037         6.03%             6.33
CBO III                               467,325        472,000     2.43% (B)         March 2038         4.01%             8.44
CBO IV                                454,574        460,000     2.03% (B)         Sept. 2038         3.60%             8.34
                                   ----------     ----------                                          ----              ----
                                    1,793,533      1,813,500                                          4.61%             6.99
                                   ----------     ----------                                          ----              ----
Other Bonds Payable
Bell Canada Securitization             42,168         42,866        7.01%          April 2012         7.01%             2.09
ICH CMO                               218,506        218,506     6.47% (B)         August 2030        6.47%             4.46
                                   ----------     ----------                                          ----
                                      260,674        261,372                                          6.56%
                                   ----------     ----------                                          ----
Notes Payable
LIV Mortgage                           74,562         74,562        6.10%           Nov. 2006         6.10%             2.92
Real Estate Loan Financing             80,000         80,000     LIBOR+1.50%        Nov. 2006         2.74%             2.96
                                   ----------     ----------                                          ----
                                      154,562        154,562                                          4.36%
                                   ----------     ----------                                          ----
Repurchase Agreements
Residential Mortgage Loans (C)        557,191        557,191     LIBOR+0.41%       March 2004         1.52%             0.25
Other Security #1                       1,457          1,457     LIBOR+1.35%        One Month         2.47%             0.08
Other Security #2 (D)                  18,143         18,143     LIBOR+0.28%        One Month         1.43%             0.08
Other Security #3 (E)                  16,705         16,705     LIBOR+0.50%       March 2004         4.45%             0.25
Other Security #4 (E)                  12,062         12,062     LIBOR+0.50%       March 2004         4.44%             0.25
Other Security #5 (E)                 110,225        110,225     LIBOR+0.70%       March 2004         3.68%             0.25
                                   ----------     ----------                                          ----
                                      715,783        715,783                                          1.97%
                                   ----------     ----------                                          ----
Total debt obligations             $2,924,552     $2,945,217                                          4.12%
                                   ==========     ==========                                          ====
</TABLE>

(A)  Including the effect of applicable hedges.

(B)  Weighted average, including floating and fixed rate classes.

(C)  The counterparty on this repo is Bear Stearns Mortgage Capital Corporation.

(D)  The counterparty on this repo is Deutsche Bank AG.

(E)  The counterparty on this repo is Greenwich Capital Management Inc.

Our long-term debt obligations existing at December 31, 2003 (gross of $20.7
million of discounts) have contractual maturities as follows (unaudited) (in
millions):

<TABLE>
<S>                 <C>
2004                $    726.5
2005                       7.3
2006                     139.6
2007                         -
2008                         -
Thereafter             2,071.8
                    ----------
Total               $  2,945.2
                    ==========
</TABLE>

CBO Bonds Payable

In July 1999, we completed our first CBO financing, CBO I, whereby a portfolio
of real estate securities was contributed to a consolidated subsidiary which
issued $437.5 million face amount of investment grade senior bonds and $62.5
million face amount of non-investment grade subordinated bonds, which were
retained by us, in a private placement. Two classes of the senior bonds bear
floating interest rates. In 1999, we obtained an interest rate swap and cap in
order to hedge our exposure to the risk of changes in market interest rates with
respect to these bonds, at an initial cost of approximately $14.3 million. In
June 2003, we obtained an additional interest rate swap and cap in order to
further hedge our exposure to the risk of changes in market interest rates with
respect to these bonds, at an initial cost of approximately $1.1 million. In
addition, in connection with the sale of two classes of bonds, we entered into
two interest rate swaps and three interest rate cap agreements that do not
qualify for hedge accounting.

                                       29

<PAGE>

In April 2002, we completed our second CBO financing, CBO II, whereby a
portfolio of real estate securities was contributed to a consolidated subsidiary
which issued $444.0 million face amount of investment grade senior bonds and
$56.0 million face amount of non-investment grade subordinated bonds, where were
retained by us, in a private placement. One class of the senior bonds bears a
floating interest rate. We obtained an interest rate swap and cap in order to
hedge our exposure to the risk of changes in market interest rates with respect
to these bonds, at an initial cost of approximately $1.2 million.

In November 2001, we sold the retained subordinated $17.5 million Class E Note
from CBO I to a third party. The Class E Note bore interest at a fixed rate of
8.0% and had a stated maturity of June 2038. The sale of the Class E Note
represented an issuance of debt and was recorded as additional CBO bonds
payable. In April 2002, a wholly owned subsidiary of ours repurchased the Class
E Note. The repurchase of the Class E Note represented a repayment of debt and
was recorded as a reduction of CBO bonds payable. The Class E Note is included
in the collateral for CBO II. The Class E Note is eliminated in consolidation.

In March 2003, we completed our third CBO financing, CBO III, whereby a
portfolio of real estate securities was contributed to a consolidated subsidiary
which issued $472.0 million face amount of investment grade senior bonds and
$28.0 million face amount of non-investment grade subordinated bonds, which were
retained by us, in a private placement. One class of the senior bonds bears a
floating interest rate. We obtained an interest rate swap and cap in order to
hedge our exposure to the risk of changes in market interest rates with respect
to these bonds, at an initial cost of approximately $1.3 million.

In September 2003, we completed our fourth CBO financing, CBO IV, whereby a
portfolio of real estate securities was contributed to a consolidated subsidiary
which issued $460.0 million face amount of investment grade senior bonds and
$40.0 million face amount of non-investment grade subordinated bonds, which were
retained by us, in a private placement. One tranche, the $395.0 million face
amount of Class I-MM bonds, was issued subject to remarketing procedures and
related agreements whereby such bonds are remarketed and sold on a periodic
basis. The Class I-MM bonds are fully insured by a third party with respect to
the timely payment of interest and principal thereon. Four classes of the senior
bonds bear floating interest rates. We obtained an interest rate swap and cap in
order to hedge our exposure to the risk of changes in market interest rates with
respect to these bonds, at an initial cost of approximately $3.1 million.

In October 2003, we entered into an agreement with a major financial institution
for the right to purchase commercial mortgage backed securities, senior
unsecured REIT debt, real estate loans and asset backed securities (the
"Portfolio V Collateral") for our next real estate securities portfolio which is
targeted to be $450 million. The agreement is treated as a non-hedge derivative
for accounting purposes and is therefore marked-to-market through current
income; a gain of approximately $0.5 million has been recorded through December
31, 2003. The Portfolio V Collateral is expected to be included in a financing
transaction in which we would acquire the equity interest ("CBO V"). As of
December 31, 2003, approximately $195.0 million of the Portfolio V Collateral
had been accumulated. Through December 31, 2003, we made deposits aggregating
approximately $19.0 million under such agreement (the "Portfolio V Deposit"). If
CBO V is not consummated as a result of our failure to acquire the equity
interest, except as a result of our gross negligence or willful misconduct, we
would be required to either purchase the Portfolio V Collateral or pay the
Realized Loss, as defined, up to the Portfolio V Deposit, less any Excess Carry
Amount, as defined, earned on such deposit. Although we currently anticipate
completing CBO V in the near term, there is no assurance that CBO V will be
consummated or on what terms it will be consummated.

Other Bonds Payable

In April 2002, we refinanced the Bell Canada portfolio through a securitization
transaction denominated in Canadian dollars. We have retained one class of the
issued bonds. In connection with this securitization, we guaranteed certain
payments under an interest rate swap to be entered into in 2007 if the bonds are
not fully repaid by such date. We believe the fair value of this guarantee is
negligible at December 31, 2003.

In October 2003, pursuant to Financial Accounting Standards Board Interpretation
No. 46 "Consolidation of Variable Interest Entities," we consolidated an entity
which holds a portfolio of commercial mortgage loans which has been securitized.
This investment, which we refer to as the ICH CMO, was previously treated as a
non-consolidated residual interest in such securitization. We exercise no
control over the management or resolution of these assets and our residual
investment in this entity was recorded at $2.9 million prior to its
consolidation. The primary effect of the consolidation is the requirement that
we reflect the gross loan assets (approximately $241 million of mortgage loans)
and gross bonds payable of this entity in our financial statements. The
consolidation did not have any effect on our net basis in the investment or on
our equity and had no material effect on our net income.

                                       30

<PAGE>

Notes Payable

In November 2002, we refinanced the LIV portfolio with a loan denominated in
EUR.

In November 2003, we acquired an aggregate of $100 million of a $525 million
facility comprised of two secured term loans made to subsidiaries of The Newkirk
Group that own interests in credit leased operating real estate. The weighted
average loan to value ratio of the loan we invested in was 67% at December 31,
2003. We financed this investment with an $80 million secured, non-recourse term
loan. Both the loan and related financing amortize principal based on collateral
receipts.

Repurchase Agreements

At December 31, 2003, we owned a portfolio of floating rate residential mortgage
loans with a carrying amount of $586.2 million, a weighted average yield of
2.94% and a weighted average maturity of 4.1 years. This portfolio is financed
with floating rate repurchase agreements.

At December 31, 2003, we owned a $3.9 million subordinate interest in a
securitization which is financed with a repurchase agreement.

In October 2003, we purchased approximately $20.2 million of CMBS securities. We
financed these securities with a repurchase agreement.

In the fourth quarter of 2003, we acquired approximately $174.9 million of
securities collateralized by first mortgage liens on manufactured housing units.
We financed these securities with three floating rate repurchase agreements. We
obtained interest rate swaps in order to hedge our risk of exposure to changes
in market interest rates with respect to this debt, at no initial net cost.

Other

In November 2003, we co-invested in a joint venture alongside an affiliate of
our manager, on equal terms, to acquire approximately 130 franchise loans
collateralized by fee and leasehold interests and other assets. The loans were
purchased for approximately $80.0 million, or approximately 72% of face amount.
We, and our manager's affiliate, each own an approximately 38% interest in the
joint venture. The remaining approximately 24% interest is owned by a third
party financial institution. Our investment totaled $30.6 million at December
31, 2003 and is reflected as an investment in an unconsolidated subsidiary on
our consolidated balance sheet.

Stockholders' Equity

Common Stock Offerings

The following table summarizes information regarding our common stock offerings
since our initial public offering.

<TABLE>
<CAPTION>
                             Shares
                             Issued    Price to Public    Net Proceeds     Options Granted
    Date                   (millions)     per Share        (millions)         to Manager
    ----                   ----------  ---------------    ------------     ---------------
<S>                        <C>         <C>                <C>              <C>
October 2002                   7.0          $13.00            $80.0             700,000
July 2003                      4.6          $20.35            $88.4             460,000
December 2003                  3.3          $22.85            $74.9             328,227
January 2004                   3.3          $26.30            $85.8             330,000
</TABLE>

At December 31, 2003, we had 31,374,833 shares of common stock outstanding.
After the January 2004 offering, we had 34,674,833 shares of common stock
outstanding.

Preferred Stock Offering

In March 2003, we issued 2.5 million shares of 9.75% Series B Cumulative
Redeemable Preferred Stock (the "Series B Preferred") in a public, registered
offering for net proceeds of approximately $60.1 million. The Series B Preferred
has a $25 liquidation preference, no maturity date and no mandatory redemption.
We have the option to redeem the Series B Preferred beginning in March 2008.

                                       31

<PAGE>

Other Comprehensive Income

During the year ended December 31, 2003, our accumulated other comprehensive
income increased due to the following factors (in thousands):

<TABLE>
<S>                                                                       <C>
Accumulated other comprehensive income, December 31, 2002                 $       7,037
 Unrealized gain on securities                                                   23,670
 Realized (gain) on securities: reclassification adjustment                     (13,185)
 Foreign currency translation                                                     4,653
 Foreign currency translation: reclassification adjustment                          396
 Unrealized gain on derivatives designated as cash flow hedges                   16,842
                                                                          -------------

Accumulated other comprehensive income, December 31, 2003                 $      39,413
                                                                          =============
</TABLE>

Our book equity changes as our real estate securities portfolio and derivatives
are marked-to-market each quarter, among other factors. The primary causes of
mark-to-market changes are changes in interest rates and credit spreads. During
the year, the combination of tightening credit spreads and sustained low
interest rates has resulted in a net increase in unrealized gains on our real
estate securities portfolio. In an environment of widening credit spreads and
increasing interest rates, we believe our new investment activities would
benefit. While such an environment would likely result in a decrease in the fair
value of our existing securities portfolio and therefore reduce our book equity
and ability to realized gains on such existing securities, it would not directly
affect our earnings or our cash flow or our ability to pay a dividend.

In addition, the weakening of the U.S. dollar against both the Canadian dollar
and the Euro has resulted in an increase in unrealized gains on our Canadian and
Belgian operating real estate.

Common Dividends Paid

<TABLE>
<CAPTION>
Declared for the Period Ended              Paid          Amount Per Share
-----------------------------          ------------      ----------------
<S>                                    <C>               <C>
September 30, 2002                     October 2002           $0.40
October 9, 2002                        October 2002           $0.06
December 31, 2002                      January 2003           $0.39
March 31, 2003                         April 2003             $0.45
June 30, 2003                          July 2003              $0.50
September 30, 2003                     October 2003           $0.50
December 31, 2003                      January 2004           $0.50
</TABLE>

Our Predecessor

The following is a discussion of our predecessor's historical liquidity and
capital resources, primarily related to operations distributed to them.

In May 1999, Holdings closed on the $399.1 million GSA securitization, which
financed the GSA portfolio of operating real estate. The GSA securitization, and
related assets, were retained by Holdings.

In November 1999, Holdings securitized a U.S. commercial mortgage loan by
issuing $55.6 million of bonds. The bonds were also secured by a $15.0 million
letter of credit. These obligations were repaid in December 2001.

In November 1999, Holdings obtained the $24.8 million GSA Kansas City mortgage,
which was repaid in May 2002 upon the sale of the related asset.

In July 2000, Holdings entered into a $40 million revolving credit agreement,
which bore interest at LIBOR +4.25% and was due in July 2003. Holdings hedged
its exposure to the risk of changes in market interest rates with respect to the
credit agreement by obtaining an interest rate swap. This credit agreement was
retained by Holdings.

                                       32

<PAGE>

Cash Flow

Net cash flow provided by operating activities increased from $21.6 million for
the year ended December 31, 2002 to $37.6 million for the year ended December
31, 2003. It decreased from $34.4 million for the year ended December 31, 2001
to $21.6 million for the year ended December 31, 2002. These changes resulted
from the acquisition and settlement of our investments as described above,
including the distribution of investments to Holdings.

Investing activities provided (used) ($1,652.7 million), ($682.7 million) and
$106.1 million during the years ended December 31, 2003, 2002 and 2001,
respectively. Investing activities consisted primarily of the acquisition of
properties and the investments made in real estate securities and loans, net of
proceeds from the sale or settlement of investments.

Financing activities provided (used) $1,630.0 million, $675.2 million and
($119.7 million) during the years ended December 31, 2003, 2002 and 2001,
respectively. The equity issuances, borrowings and debt issuances described
above served as the primary sources of cash flow from financing activities.
Offsetting uses included the payment of related deferred financing costs
(including the purchase of hedging instruments), the payment of dividends, the
redemption of common and preferred stock and the repayment of debt as described
above.

See the consolidated statements of cash flows in our consolidated financial
statements included in "Financial Statements and Supplementary Data" for a
reconciliation of our cash position (including our predecessor's cash position
prior to the commencement of our operations) for the periods described herein.

CREDIT, SPREAD AND INTEREST RATE RISK

We are subject to credit and interest rate risk with respect to our investments
in real estate securities and loans.

Real Estate Securities

The commercial mortgage and other asset backed securities (including B-notes) we
invest in are generally junior in right of payment of interest and principal to
one or more senior classes, but benefit from the support of one or more
subordinate classes of securities or other form of credit support within a
securitization transaction. The senior unsecured REIT debt securities we invest
in reflect comparable credit risk. Credit risk refers to each individual
borrower's ability to make required interest and principal payments on the
scheduled due dates. We believe, based on our due diligence process, that these
securities offer attractive risk-adjusted returns with long-term principal
protection under a variety of default and loss scenarios. While the expected
yield on these securities is sensitive to the performance of the underlying
assets, the more subordinated securities or other features of the securitization
transaction, in the case of commercial mortgage and other asset backed
securities, and the issuer's underlying equity and subordinated debt, in the
case of senior unsecured REIT debt securities, are designed to bear the first
risk of default and loss. We further minimize credit risk by actively monitoring
our real estate securities portfolio and the underlying credit quality of our
holdings and, where appropriate, repositioning our investments to upgrade the
credit quality and yield on our investments. While we have not experienced any
significant credit losses, in the event of a significant rising interest rate
environment and/or economic downturn, loan and collateral defaults may increase
and result in credit losses that would adversely affect our liquidity and
operating results.

Our real estate securities portfolio is diversified by asset type, industry,
location and issuer. We expect that this diversification also helps to minimize
the risk of capital loss. At December 31, 2003, our real estate securities which
serve as collateral for our CBO financings had an overall weighted average
credit rating of approximately BBB, and approximately 78.7% of these securities
had an investment grade rating (BBB- or higher).

Our real estate securities are also subject to spread risk. Our fixed rate
securities are valued based on a market credit spread over the rate payable on
fixed rate U.S. Treasuries of like maturity. In other words, their value is
dependent on the yield demanded on such securities by the market based on their
credit relative to U.S. Treasuries. Excessive supply of such securities combined
with reduced demand will generally cause the market to require a higher yield on
such securities, resulting in the use of a higher (or "wider") spread over the
benchmark rate (usually the applicable U.S. Treasury security yield) to value
such securities. Under such conditions, the value of our real estate securities
portfolio would tend to decline. Conversely, if the spread used to value such
securities were to decrease (or "tighten"), the value of our real estate
securities portfolio would tend to increase. Our floating rate securities are
valued based on a market credit spread over LIBOR and are effected similarly by
changes in LIBOR spreads. Such changes in the market value of our real estate
securities portfolio may effect our net equity, net income or cash flow directly
through their impact on unrealized gains or losses on available-for-sale
securities, and therefore our ability to realize gains on such securities, or
indirectly through their impact on our ability to borrow and access capital. See
"Quantitative and Qualitative Disclosures About Market Risk-Credit Spread Curve
Exposure" below.

                                       33

<PAGE>

Furthermore, shifts in the U.S. Treasury yield curve, which represents the
market's expectations of future interest rates, would also effect the yield
required on our real estate securities and therefore their value. This would
have similar effects on our real estate securities portfolio and our financial
position and operations to a change in spreads.

Returns on our real estate securities are sensitive to interest rate volatility.
Interest rate changes may also impact our net book value as our securities and
related hedge derivatives are marked - to-market each quarter. Generally, as
interest rates increase, the value of our fixed rate securities, such as
commercial mortgage backed securities, decreases and as interest rates decrease,
the value of such securities will increase. In general, we would expect that
over time, decreases in the value of our real estate securities portfolio
attributable to interest rate changes will be offset to some degree by increases
in the value of our swaps, and vice versa. However, the relationship between
spreads securities and spreads on swaps may vary from time to time, resulting in
a net aggregate book value increase or decline. Our real estate securities
portfolio is predominantly financed to maturity through long-term CBO financings
that are not redeemable as a result of book value changes. Accordingly, unless
there is a material impairment in value that would result in a payment not being
received on a security, changes in the book value of our portfolio will not
directly affect our recurring earnings or our ability to pay a dividend.

Our general financing strategy focuses on the use of match-funded structures.
This means that we seek to match the maturities of our debt obligations with the
maturities of our investments to minimize the risk that we have to refinance our
liabilities prior to the maturities of our assets, and to reduce the impact of
changing interest rates on our earnings.

In addition, we generally match-fund interest rates on our investments with
like-kind debt (i.e., floating rate assets are financed with floating rate debt
and fixed rate assets are financed with fixed rate debt), directly or through
the use of interest rate swaps, caps or other financial instruments, or through
a combination of these strategies, which allows us to reduce the impact of
changing interest rates on our earnings. Our financing strategy is dependent on
our ability to place the match-funded debt we use to finance our real estate
securities at rates that provide a positive net spread. If spreads for CBO
liabilities (i.e., bonds issued by CBOs) widen or if demand for such liabilities
ceases to exist, then our ability to execute future CBO financings will be
severely restricted. See "Quantitative and Qualitative Disclosures About Market
Risk - Interest Rate Exposure" below.

Loans

Similar to our real estate securities portfolio, we are subject to credit and
spread risk with respect to our real estate related and residential mortgage
loan portfolios.

Unlike our real estate securities portfolio, our loans do not benefit from the
support of junior classes of securities, but rather bear the first risk of
default and loss. We believe that this credit risk is mitigated through our due
diligence process and periodic reviews of the borrower's payment history,
delinquency status, and the relationship of the loan balance to the underlying
property value.

Our loan portfolios are diversified by geographic location and by borrower. We
believe that this diversification also helps to minimize the risk of capital
loss.

Our loan portfolios are also subject to spread risk. The majority of such loans
are floating rate loans, which are valued based on a market credit spread to
LIBOR. The value of the loans is dependent upon the yield demanded by the market
based on their credit relative to LIBOR. The value of our floating rate loans
would tend to decline should the market require a higher yield on such loans,
resulting in the use of a higher spread over the benchmark rate (usually the
applicable LIBOR yield). Our fixed rate loans are valued based on a market
credit spread over U.S. Treasuries and are effected similarly by changes in U.S.
Treasury spreads. If the value of our loans subject to repurchase agreements
were to decline, it could affect our ability to refinance such loans upon the
maturity of the related repurchase agreements.

Any credit or spread losses incurred with respect to our loan portfolios would
affect us in the same way as similar losses on our real estate securities
portfolio as described above, except that our loan portfolios are not marked to
market.

                                       34

<PAGE>

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2003, we had the following material off-balance sheet
arrangements:

-    The $19.5 million carrying value of our deposit on our fifth real estate
     securities portfolio, as described above under "-Liquidity and Capital
     Resources." Our potential loss is limited to the amount shown, which is
     included in our consolidated balance sheet.

-    A guarantee of certain payments under an interest rate swap which may be
     entered into in 2007 in connection with the securitization of the Bell
     portfolio.

At this time, we do not anticipate a substantial risk of incurring a loss with
respect to any of the arrangements.

                                       35

<PAGE>

CONTRACTUAL OBLIGATIONS

As of December 31, 2003, we had the following material contractual obligations
(payments in thousands):

<TABLE>
<CAPTION>
             Contract                                                        Terms
             --------                                                        -----
<S>                                      <C>
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"
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 IV wrap agreement                    The largest tranche of our CBO IV bonds, the $395.0 million face amount of Class
                                         I-MM bonds, was issued subject to remarketing procedures and related
                                         agreements whereby such bonds are remarketed and sold on a periodic
                                         basis. The Class I-MM 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 Class I-MM bonds under this agreement.

CBO IV backstop agreement                In connection with the remarketing procedures described above, we are a party to a
                                         backstop agreement whereby a third party financial institution is required to
                                         purchase the Class I-MM 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 of
                                         0.20% of the outstanding face amount of the Class I-MM bonds
                                         under this agreement.

CBO IV remarketing agreement             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 Class
                                         I-MM bonds under the remarketing agreement.

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."
</TABLE>

<TABLE>
<CAPTION>
                                             Actual              Fixed and Determinable Payments Due by Period (B)
                                            Payments      -----------------------------------------------------------------
        Contract                            2003 (A)         2004      2005-2006    2007-2008      Thereafter      Total
        --------                           ---------      ----------   ---------    ---------     -----------   -----------
<S>                                        <C>            <C>          <C>           <C>          <C>           <C>
CBO bonds payable                          $  37,878      $        -   $       -     $     -      $ 1,813,500   $ 1,813,500
Other bonds payable                           11,729           3,040           -           -          258,332       261,372
Notes payable                                  4,471           7,653     146,909           -                -       154,562
Repurchase agreements                        201,859         715,783           -           -                -       715,783
Derivative liabilities                        26,880              (C)         (C)         (C)              (C)           (C)
CBO IV wrap agreement                            239              (C)         (C)         (C)              (C)           (C)
CBO IV backstop agreement                        233              (C)         (C)         (C)              (C)           (C)
CBO IV remarketing agreement                      58              (C)         (C)         (C)              (C)           (C)
Management agreement                          11,729              (C)         (C)         (C)              (C)           (C)
                                           ---------      ----------   ---------     -------      -----------   -----------

Total                                      $ 295,076      $  726,476   $ 146,909     $     -      $ 2,071,832   $ 2,945,217
                                           =========      ==========   =========     =======      ===========   ===========
</TABLE>

(A)  Includes all payments made under the respective agreements. The management
     agreement payments shown include $6.2 million of management fees and
     expense reimbursements and $5.5 million of incentive compensation.

(B)  Represents debt principal due based on contractual maturities.

(C)  These contracts do not have fixed and determinable payments.

                                       36

<PAGE>

INFLATION

Substantially all of our office leases provide for separate escalations of real
estate taxes and operating expenses over a base amount, and/or increases in the
base rent based on changes in a Belgian index with respect to the LIV portfolio.

We believe that inflationary increases in expenses will generally be offset by
the expense reimbursements and contractual rent increases described above.

We believe that our risk of increases in the market interest rates on our
floating rate debt as a result of inflation is largely offset by our use of
match-funding and hedging instruments as described above. See "Quantitative and
Qualitative Disclosure About Market Risk -- Interest Rate Exposure" below.

FUNDS FROM OPERATIONS

We believe Funds from Operations (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. 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 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 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.

                                       37

<PAGE>

Funds from Operations (FFO) is calculated as follows (unaudited) (in thousands):

<TABLE>
<CAPTION>
                                                                                   For the Year Ended December 31,
                                                                                  2003          2002          2001
                                                                               ---------     ---------     ---------
<S>                                                                            <C>           <C>           <C>
Income available for common stockholders                                       $  51,345     $  30,333     $  41,131
  Operating real estate depreciation                                               3,035         7,994        12,909
  Accumulated depreciation on operating real estate sold                               -        (2,847)            -
  Real estate depreciation and amortization-unconsolidated subsidiaries (A)            -         1,614         2,564
  Incentive (income) loss accrued from Fund I (A)                                      -           609       (14,354)
  Equity in incentive return accrued by Fund I (A)                                     -           (70)        1,645
  Distributable incentive income from Fund I (A)                                       -             -         4,369
                                                                               ---------     ---------     ---------
Funds from operations (FFO)                                                    $  54,380     $  37,633     $  48,264
                                                                               =========     =========     =========
</TABLE>

Funds from operations was derived from our segments as follows (unaudited) (in
thousands):

<TABLE>
<CAPTION>
                                                                                             Return on Invested
                                                                                                Common Equity
                                                   Average Invested                          (ROE) for the Year    ROE for the Year
                               Book Equity        Common Equity for      FFO for the Year           Ended               Ended
                            December 31, 2003       the Year Ended            Ended          December 31, 2003    December 31, 2002
                                   (1)          December 31, 2003 (2)   December 31, 2003            (3)                 (3)
                            -----------------   ---------------------   -----------------    ------------------   -----------------
<S>                         <C>                 <C>                     <C>                  <C>                  <C>
Real estate securities         $    351,612          $  266,168              $ 61,408               22.9%               27.6%
Real estate related loans            54,613              10,934                 2,788               29.5%                N/A
Residential mortgage loans           30,222              20,359                 5,224               25.7%               22.2%
Operating real estate                35,891              39,120                 4,755               12.2%                4.3%
Unallocated (1)                     (23,586)             (5,459)              (19,795)               N/A                 N/A
                            -------------------------------------------------------------------------------------------------------
Total (2)                           448,752          $  331,122              $ 54,380               16.4%               15.7%
                                                     ==============================================================================
Preferred stock                      62,500
Accumulated depreciation            (11,302)
Accumulated other
 comprehensive income                39,413
                               ------------
Net book equity                $    539,363
                               ============
</TABLE>

(1)  Unallocated FFO represents ($4,773) of preferred dividends and ($15,022) of
     corporate general and administrative expense, management fees and incentive
     compensation.

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

(3)  FFO divided by average invested common equity.

RELATED PARTY TRANSACTIONS

In January 2004, we purchased from an underwriter $31.5 million face amount of B
and BB rated securities of Global Signal Trust I, a special purpose vehicle
established by Global Signal Inc., at a price resulting in a weighted average
yield of approximately 9.00%. Two of our directors are the CEO and President of
Global Signal, Inc., respectively. A private equity fund managed by an affiliate
of our manager owns a significant portion of Global Signal Inc.'s common stock;
our manager receives from this private equity fund, in addition to management
fees, incentive compensation if the fund's aggregate investment returns exceed
certain thresholds. Pursuant to this underwritten 144A offering, approximately
$418.0 million of Global Signal Trust I securities were issued in 7 classes,
rated AAA though B, of which the B and BB classes constituted $73.0 million. The
balance of the B and BB securities were sold on identical terms to a private
investment fund managed by an affiliate of our manager and to a large third
party mutual fund complex; our manager receives from this private investment
fund, in addition to management fees, incentive compensation if the fund's
aggregate investment returns exceed certain thresholds. The proceeds of the 144A
offering were utilized by Global Signal Inc. to repay an existing credit
facility, to pay an extraordinary dividend of approximately $140 million to its
stockholders of which approximately $67 million was paid to the above-referenced
private equity fund, and for general working capital purposes.


                                       38

<PAGE>

In November 2003, we and a private investment fund managed by an affiliate of
our manager co-invested and each indirectly own an approximately 38% interest in
a limited liability company that has acquired approximately 130 real estate
related loans from a third party financial institution for a purchase price of
approximately $80.0 million. Our investment in this entity, reflected as an
investment in an unconsolidated subsidiary on our consolidated balance sheet,
was approximately $30.6 million at December 31, 2003. Our manager receives from
this private investment fund, in addition to management fees, incentive
compensation if the fund's aggregate investment returns exceed certain
thresholds. The remaining approximately 24% interest in the limited liability
company is owned by the above-referenced third party financial institution.

We have entered into a letter of intent for a sale-leaseback transaction under
long-term triple net leases. We intend to structure this transaction through a
joint venture, in which we will invest approximately $30.0 million of equity,
with a private investment fund managed by an affiliate of our manager, pursuant
to which we will co-invest on equal terms. Our manager receives from this
private investment fund, in addition to management fees, incentive compensation
if the fund's aggregate investment returns exceed certain thresholds. The
transaction is expected to close towards the end of the first quarter or in the
early second quarter of 2004; however, the transaction is subject to numerous
conditions and there is no assurance that we will consummate this transaction.

                                       39

<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk is the exposure to loss resulting from changes in interest rates,
credit spreads, foreign currency exchange rates, commodity prices and equity
prices. The primary market risks that we are exposed to are interest rate risk,
credit spread risk and foreign currency exchange rate risk. These risks are
highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations and
other factors beyond our control. All of our market risk sensitive assets,
liabilities and related derivative positions are for non-trading purposes only.
For a further understanding of how market risk may effect our financial position
or operating results, please refer to the "Application of Critical Accounting
Policies" section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

INTEREST RATE EXPOSURE

Our primary interest rate exposures relate to our real estate securities, loans
and floating rate debt obligations, as well as our interest rate swaps and caps.
Changes in the general level of interest rates can effect our net interest
income, which is the difference between the interest income earned on
interest-earning assets and the interest expense incurred in connection with our
interest-bearing liabilities. Changes in the level of interest rates also can
effect, among other things, our ability to acquire real estate securities and
loans, the value of our real estate securities and loans, and our ability to
realize gains from the settlement of such assets.

While we have not experienced any significant credit losses, in the event of a
significant rising interest rate environment and/or economic downturn, loan and
collateral defaults may increase and result in credit losses that would
adversely affect our liquidity and operating results.

Our general financing strategy focuses on the use of match-funded structures.
This means that we seek to match the maturities of our debt obligations with the
maturities of our investments to minimize the risk that we have to refinance our
liabilities prior to the maturities of our assets, and to reduce the impact of
changing interest rates on our earnings. In addition, we generally match-fund
interest rates on our investments with like-kind debt (i.e., floating rate
assets are financed with floating rate debt and fixed rate assets are financed
with fixed rate debt), directly or through the use of interest rate swaps, caps,
or other financial instruments, or through a combination of these strategies,
which allows us to reduce the impact of changing interest rates on our earnings.

Interest rate swaps are agreements in which a series of interest rate flows are
exchanged with a third party (counterparty) over a prescribed period. The
notional amount on which swaps are based is not exchanged. In general, our swaps
are "pay fixed" swaps involving the exchange of floating rate interest payments
from the counterparty for fixed interest payments from us. This can effectively
convert a floating rate debt obligation into a fixed rate debt obligation.

Similarly, an interest rate cap or floor agreement is a contract in which we
purchase a cap or floor contract on a notional face amount. We will make an
up-front payment to the counterparty for which the counterparty agrees to make
future payments to us should the reference rate (typically one- or three-month
LIBOR) rise above (cap agreements) or fall below (floor agreements) the "strike"
rate specified in the contract. Should the reference rate rise above the
contractual strike rate in a cap, we will earn cap income; should the reference
rate fall below the contractual strike rate in a floor, we will earn floor
income. Payments on an annualized basis will equal the contractual notional face
amount multiplied by the difference between the actual reference rate and the
contracted strike rate.

While a REIT may utilize these types of derivative instruments to hedge interest
rate risk on its liabilities or for other purposes, such derivative instruments
could generate income that is not qualified income for purposes of maintaining
REIT status. As a consequence, we may only engage in such instruments to hedge
such risks within the constraints of maintaining our standing as a REIT. We do
not enter into derivative contracts for speculative purposes nor as a hedge
against changes in credit risk.

While our strategy is to utilize interest rate swaps, caps and match-funded
financings in order to limit the effects of changes in interest rates on our
operations, there can be no assurance that our profitability will not be
adversely affected during any period as a result of changing interest rates. As
of December 31, 2003, a 100 basis point increase in short term interest rates
would effect our earnings by no more than $0.7 million per annum.

Our hedging transactions using derivative instruments also involve certain
additional risks such as counterparty credit risk, the enforceability of hedging
contracts and the risk that unanticipated and significant changes in interest
rates will cause a significant loss of basis in the contract. The counterparties
to our derivative arrangements are major financial institutions with high credit
ratings with which we and our affiliates may also have other financial
relationships.

                                       40

<PAGE>
As a result, we do not anticipate that any of these counterparties will fail to
meet their obligations. There can be no assurance that we will be able to
adequately protect against the foregoing risks and will ultimately realize an
economic benefit that exceeds the related amounts incurred in connection with
engaging in such hedging strategies.

Interest rate changes may also impact our net book value as our real estate
securities and related hedge derivatives are marked - to-market each quarter.
Our loan investments and debt obligations are not marked-to-market. Generally,
as interest rates increase, the value of our fixed rate securities, such as
commercial mortgage backed securities, decreases and as interest rates decrease,
the value of such securities will increase. We seek to hedge changes in value
attributable to changes in interest rates by entering into interest rate swaps
and other derivative instruments. In general, we would expect that over time,
decreases in the value of our real estate securities portfolio attributable to
interest rate changes will be offset to some degree by increases in the value of
our swaps, and vice versa. However, the relationship between spreads on
securities and spreads on swaps may vary from time to time, resulting in a net
aggregate book value increase or decline. Our real estate securities portfolio
is largely financed to maturity through long-term CBO financings that are not
redeemable as a result of book value changes. Accordingly, unless there is a
material impairment in value that would result in a payment not being received
on a security, changes in the book value of our real estate securities portfolio
will not directly affect our recurring earnings or our ability to pay a
dividend. As of December 31, 2003, a 100 basis point increase in short term
interest rates would impact our net book value by approximately $32.5 million.

CREDIT SPREAD CURVE EXPOSURE

Our real estate securities are also subject to spread risk. Our fixed rate
securities are valued based on a market credit spread over the rate payable on
fixed rate U.S. Treasuries of like maturity. In other words, their value is
dependent on the yield demanded on such securities by the market based on their
credit relative to U.S. Treasuries. Excessive supply of such securities combined
with reduced demand will generally cause the market to require a higher yield on
such securities, resulting in the use of a higher (or "wider") spread over the
benchmark rate (usually the applicable U.S. Treasury security yield) to value
such securities. Under such conditions, the value of our real estate securities
portfolio would tend to decline. Conversely, if the spread used to value such
securities were to decrease (or "tighten"), the value of our real estate
securities portfolio would tend to increase. Our floating rate securities are
valued based on a market credit spread over LIBOR and are effected similarly by
changes in LIBOR spreads. Such changes in the market value of our real estate
securities portfolio may effect our net equity, net income or cash flow directly
through their impact on unrealized gains or losses on available-for-sale
securities, and therefore our ability to realize gains on such securities, or
indirectly through their impact on our ability to borrow and access capital.

Furthermore, shifts in the U.S. Treasury yield curve, which represents the
market's expectations of future interest rates, would also effect the yield
required on our real estate securities and therefore their value. This would
have similar effects on our real estate securities portfolio and our financial
position and operations to a change in spreads.

Our loan portfolios are also subject to spread risk. The majority of such loans
are floating rate loans, which are valued based on a market credit spread to
LIBOR. The value of the loans is dependent upon the yield demanded by the market
based on their credit relative to LIBOR. The value of our floating rate loans
would tend to decline should the market require a higher yield on such loans,
resulting in the use of a higher spread over the benchmark rate (usually the
applicable LIBOR yield). Our fixed rate loans are valued based on a market
credit spread over U.S. Treasuries and are effected similarly by changes in U.S.
Treasury spreads. If the value of our loans subject to repurchase agreements
were to decline, it could affect our ability to refinance such loans upon the
maturity of the related repurchase agreements.

Any decreases in the value of our loan portfolios due to spread changes would
effect us in the same way as similar changes to our real estate securities
portfolio as described above, except that our loan portfolios are not marked to
market.

As of December 31, 2003, a 25 basis point movement in credit spreads would
impact our net book value by approximately $26.9 million, but would not directly
affect our earnings or cash flow.

CURRENCY RATE EXPOSURE

Our primary foreign currency exchange rate exposures relate to our operating
real estate and related leases. Our principal direct currency exposures are to
the Euro and the Canadian Dollar. Changes in the currency rates can adversely
impact the fair values and earnings streams of our international holdings. We
have attempted to mitigate this impact in part by utilizing local
currency-denominated financing on our foreign investments to partially hedge, in
effect, these assets.

                                       41

<PAGE>

We have material investments in the LIV portfolio and the Bell Canada portfolio.
These properties are financed utilizing debt denominated in their respective
local currencies (the Euro and the Canadian Dollar). The net equity invested in
these portfolios at December 31, 2003, approximately $5.5 million and $20.9
million, respectively, is exposed to foreign currency exchange risk.

                                       42
<PAGE>

FAIR VALUE

For certain of our financial instruments, fair values are not readily available
since there are no active trading markets as characterized by current exchanges
between willing parties. Accordingly, fair values can only be derived or
estimated for these instruments using various valuation techniques, such as
computing the present value of estimated future cash flows using discount rates
commensurate with the risks involved. However, the determination of estimated
future cash flows is inherently subjective and imprecise. We note that minor
changes in assumptions or estimation methodologies can have a material effect on
these derived or estimated fair values, and that the fair values reflected below
are indicative of the interest rate, credit spread and currency rate
environments as of December 31, 2003 and do not take into consideration the
effects of subsequent interest rate, credit spread or currency rate
fluctuations.

We note that the values of our investments in real estate securities and in
derivative instruments, primarily interest rate hedges on our debt obligations,
are sensitive to changes in market interest rates, interest rate spreads, credit
spreads and other market factors. The value of these investments can vary, and
has varied, materially from period to period.

Interest Rate Risk

We held the following interest rate risk sensitive instruments at December 31,
2003 (unaudited) (in thousands):

<TABLE>
<CAPTION>
                                             CARRYING AMOUNTS                                                   FAIR VALUE
                                               DECEMBER 31,            DECEMBER 31, 2003                        DECEMBER 31,
                                         -----------------------   -------------------------              -----------------------
                                                                   PRINCIPAL      WEIGHTED
                                                                   BALANCE OR     AVERAGE
                                                                    NOTIONAL       YIELD/      MATURITY
                                            2003         2002        AMOUNT     FUNDING COST     DATE        2003         2002
                                         ----------   ----------   ----------   ------------   --------   ----------   ----------
<S>                                      <C>          <C>          <C>          <C>            <C>        <C>          <C>
ASSETS:
   Real estate securities,
     available for sale (A)              $2,089,712   $1,069,892   $2,046,094       6.54%         (A)     $2,089,712   $1,069,892

   Real estate securities
     portfolio deposit (B)                   19,541       37,777          (B)        (B)          (B)         19,541       37,777

   Other securities,
     available for sale (C)                 221,577       11,209      238,283       8.99%         (C)        221,577       11,209

   Real estate related loans (D)            341,193            -      343,668       7.26%         (D)        368,269            -

   Residential mortgage
     loans (E)                              586,237      258,198      578,330       2.94%         (E)        586,237      258,198

   Interest rate caps, treated
     as hedges (F)                            8,294        4,638      583,855        N/A          (F)          8,294        4,638

LIABILITIES:
   CBO bonds payable (G)                  1,793,533      868,497    1,813,500       4.61%         (G)      1,836,628      892,117

   Other bonds payable (H)                  260,674       37,389      261,372       6.56%         (H)        282,014       36,784

   Notes payable (I)                        154,562       62,952      154,562       4.36%         (I)        155,058       58,970

   Repurchase agreements (J)                715,783      248,169      715,783       1.97%         (J)        715,783      248,169

   Interest rate swaps, treated
     as hedges, (K)                          28,881       51,110    1,250,842        N/A          (K)         28,881       51,110

   Non-hedge derivative
     obligations (L)                            747          745          (L)        N/A          (L)            747          745
</TABLE>

---------------
(A)      These securities serve as collateral for our CBO financings and contain
         various terms, including floating and fixed rates, self-amortizing and
         interest only. Their weighted average maturity is 6.36 years. The fair
         value of these securities is estimated by obtaining third party broker
         quotations, if available and practicable, and counterparty quotations.

(B)      The fair value of the real estate securities portfolio deposit, related
         to CBO V, which is treated as a non-hedge derivative, is estimated by
         obtaining a counterparty quotation. See "Management's Discussion and

                                       43
<PAGE>

         Analysis of Financial Condition and Results of Operations-Liquidity and
         Capital Resources" for a further discussion of this deposit.

(C)      These fifteen securities have a weighted average maturity of 5.28
         years. One of these securities represents a subordinate interest in a
         securitization, eight represent asset backed securities and six
         represent CMBS. The fair value of these securities is estimated by
         obtaining third party broker quotations, if available and practicable,
         and counterparty quotations. The fair value of the first security, for
         which a quoted market price is not readily available, is estimated by
         means of a price/yield analysis based on our expected disposition
         strategy for such asset.

(D)      Represents the following loan portfolios (in thousands):

<TABLE>
<CAPTION>
                                                                            Weighted
                                 Loan        Carrying    Weighted Avg.      Average     Floating Rate Loans as
          Name                   Count        Amount         Yield          Maturity    a % of Carrying Amount       Fair Value
------------------------         -----     ------------  -------------     ----------   ----------------------   ------------------
<S>                              <C>       <C>           <C>               <C>          <C>                      <C>
ICH CMO Loans                     138      $    241,334      7.90%         4.63 years              3%            $          268,410
Real Estate Related Loan            1            99,859      5.71%         2.96 years            100%                        99,859
                                           ------------      ----                                                -------------------
                                           $    341,193      7.26%                                               $          368,269
                                           ============      ====                                                ===================
</TABLE>

         The ICH CMO loans were valued by discounting expected future receipts
         by a rate calculated based on current market conditions for comparable
         financial instruments, including market interest rates and credit
         spreads. The other loan bears a floating rate of interest and we
         believe that, for similar financial instruments with comparable credit
         risks, its effective rate approximates a market rate. Accordingly, the
         carrying amount outstanding is believed to approximate fair value.

(E)      This portfolio of mortgage loans bears a floating rate of interest and
         has a weighted maturity of 4.1 years. We believe that, for similar
         financial instruments with comparable credit risks, the effective rate
         on this portfolio approximates a market rate. Accordingly, the carrying
         amount of this portfolio is believed to approximate fair value.

(F)      Represents cap agreements as follows (in thousands):

<TABLE>
<CAPTION>
Notional Balance   Effective Date   Maturity Date     Capped Rate    Strike Rate   Fair Value
----------------   --------------   -------------     -----------    -----------   ----------
<S>                <C>              <C>              <C>             <C>           <C>
$        252,118      Current         March 2009     1-Month LIBOR       6.50%     $    2,939

         252,118      Current       December 2004    1-Month LIBOR       1.32%*           716

          18,000    January 2010     October 2015    3-Month LIBOR       8.00%          1,148

           8,619    December 2010     June 2015      3-Month LIBOR       7.00%          1,280

          53,000      May 2011      September 2015   1-Month LIBOR       7.50%          2,211
----------------                                                                   ----------
$        583,855                                                                   $    8,294
================                                                                   ==========
</TABLE>

* up to 6.50%

         The fair value of these agreements is estimated by obtaining
         counterparty quotations.

(G)      These bonds were valued by discounting expected future payments 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 6.99
         years. The CBO bonds payable amortize principal prior to maturity based
         on collateral receipts, subject to reinvestment requirements.

(H)      The Bell Canada Securitization was valued, in U.S. dollars at the
         period end exchange rate, by discounting expected future payments by a
         rate calculated by imputing a spread over a market index on the date of
         borrowing. It amortizes principal periodically with a balloon payment
         at maturity in April 2012. The ICH CMO Bonds were valued by discounting
         expected future payments by a rate calculated based on current market
         conditions for comparable financial instruments, including market
         interest rates and credit spreads. They amortize principal prior to
         maturity based on collateral receipts and their final stated maturity
         is in June 2008.

(I)      The LIV Mortgage was valued, in U.S. dollars at the period end exchange
         rate, by discounting expected future payments by a rate calculated by
         imputing a spread over a market index on the date of borrowing. It
         amortizes principal periodically with a balloon payment at maturity in
         November 2006. The real estate loan

                                       44
<PAGE>

         financing matures in November 2006, bears a floating rate of interest
         and amortizes principal based on collateral receipts. We believe that,
         for similar financial instruments with comparable credit risks, its
         effective rate approximates a market rate. Accordingly, the carrying
         amount outstanding is believed to approximate fair value.

(J)      These agreements bear floating rates of interest 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 mature in one to three months.

(K)      Represents swap agreements as follows (in thousands):

<TABLE>
<CAPTION>
Notional Balance      Effective Date           Maturity Date        Swapped Rate         Fixed Rate    Fair Value
----------------      --------------           -------------        ------------         ----------    ----------
<S>                   <C>                      <C>                  <C>                  <C>           <C>
 $       90,382           Current                July 2005          1-Month LIBOR          6.1755%     $    3,425
        290,000           Current               April 2011          3-Month LIBOR          5.9325%         32,042
        276,060           Current               March 2013          3-Month LIBOR          3.8650%         (9,644)
        192,500           Current               March 2015          1-Month LIBOR          4.8880%          7,163
        295,400        December 2004            March 2009          1-Month LIBOR*         3.1250%         (4,549)
         11,000           Current              November 2008        1-Month LIBOR          3.5400%              2
          9,000           Current                July 2018          1-Month LIBOR          4.8300%            141
          6,500           Current              November 2018        1-Month LIBOR          4.4800%             88
         80,000           Current              January 2009         1-Month LIBOR          3.6500%            213
---------------                                                                                        ----------
 $    1,250,842                                                                                        $   28,881
===============                                                                                        ==========
</TABLE>

* up to 6.50%

         The fair value of these agreements is estimated by obtaining
         counterparty quotations.

(L)      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 an interest rate cap with a notional balance of
         approximately $62.4 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 date of the
         $62.4 million cap is August 2004. They have been valued by reference to
         counterparty quotations.

Currency Risk

We held the following currency rate risk sensitive balances at December 31, 2003
(unaudited) (U.S. dollars; in thousands, except exchange rates):

<TABLE>
<CAPTION>
                                                                    CURRENT        EFFECT OF A 5%  EFFECT OF A 5%
                                        CARRYING                    EXCHANGE          NEGATIVE       NEGATIVE
                                         AMOUNT        LOCAL        RATE TO          CHANGE IN       CHANGE IN
                                         (USD)        CURRENCY        USD            EURO RATE       CAD RATE
                                      ------------    --------      --------       -------------   -------------
<S>                                   <C>             <C>           <C>            <C>             <C>
Assets:
   LIV portfolio..................    $     78,149      Euro        0.79397        $     (3,907)            N/A
   Bell Canada portfolio..........          54,250      CAD         1.29700                 N/A    $     (2,713)
   LIV other, net.................           1,961      Euro        0.79397                 (98)            N/A
   Bell Canada other, net.........           8,801      CAD         1.29700                 N/A            (440)
Liabilities:
   LIV Mortgage...................          74,562      Euro        0.79397               3,728             N/A
   Bell Canada Securitization.....          42,168      CAD         1.29700                 N/A           2,108
                                                                                   ------------    ------------
   Total at December 31, 2003                                                      $       (277)   $     (1,045)
                                                                                   ============    ============

   Total at December 31, 2002                                                      $       (402)   $       (918)
                                                                                   ============    ============
</TABLE>

---------------
USD refers to U.S. dollars; CAD refers to Canadian dollars.

                                       45
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Financial Statements:

Independent Auditors' Report

Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002

Consolidated Statements of Income for the years ended December 31, 2003, 2002
and 2001

Consolidated Statements of Stockholders' Equity and Redeemable Preferred Stock
for the years ended December 31, 2003, 2002 and 2001

Consolidated Statements of Cash Flow for the years ended December 31, 2003, 2002
and 2001

Notes to Consolidated Financial Statements

All schedules have been omitted because either the required information is
included in our consolidated financial statements and notes thereto or it is not
applicable.

                                       46
<PAGE>

                         Report of Independent Auditors

To the Board of Directors and Stockholders of
Newcastle Investment Corp.

We have audited the accompanying consolidated balance sheets of Newcastle
Investment Corp. and subsidiaries (the "Company") as of December 31, 2003 and
2002, and the related consolidated statements of income, stockholders' equity
and redeemable preferred stock, and cash flows for each of the three years in
the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Newcastle
Investment Corp. and subsidiaries at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles general accepted in the United States.

As discussed in Note 2 and Note 5 to the consolidated financial statements, on
October 1, 2003, the Company adopted Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities."

                                                    /s/ Ernst & Young LLP

February 9, 2004
New York, New York

<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                               ---------------------------
                                                                                   2003           2002
                                                                               ------------   ------------
<S>                                                                            <C>            <C>
ASSETS
  Real estate securities, available for sale - Note 4                          $  2,089,712   $  1,069,892
  Real estate securities portfolio deposit - Note 4                                  19,541         37,777
  Other securities, available for sale -Note 4                                      221,577         11,209
  Real estate related loans, net - Note 5                                           341,193              -
  Investments in unconsolidated subsidiaries - Note 3                                30,640              -
  Operating real estate, net - Note 6                                               102,995        113,652
  Real estate held for sale - Note 6                                                 29,404          3,471
  Residential mortgage loans, net - Note 5                                          586,237        258,198
  Cash and cash equivalents                                                          60,403         45,463
  Restricted cash                                                                    13,132         10,380
  Deferred costs, net                                                                10,304          6,489
  Receivables and other assets                                                       27,943         16,036
                                                                               ------------   ------------
                                                                               $  3,533,081   $  1,572,567
                                                                               ============   ============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
  CBO bonds payable - Note 8                                                   $  1,793,533   $    868,497
  Other bonds payable - Note 8                                                      260,674         37,389
  Notes payable - Note 8                                                            154,562         62,952
  Repurchase agreements - Note 8                                                    715,783        248,169
  Derivative liabilities - Note 7                                                    32,457         54,095
  Dividends payable                                                                  16,703          9,161
  Due to affiliates - Note 10                                                         2,445          1,335
  Accrued expenses and other liabilities                                             17,561          6,728
                                                                               ------------   ------------
                                                                                  2,993,718      1,288,326
                                                                               ------------   ------------

Commitments and contingencies - Notes 9, 10 and 11                                        -              -

STOCKHOLDERS' EQUITY
  Preferred stock, $0.01 par value, 100,000,000 shares authorized, 2,500,000
    shares of Series B Cumulative Redeemable Preferred Stock, liquidation
    preference $25.00 per share, issued and outstanding at December 31, 2003         62,500              -
  Common stock, $0.01 par value, 500,000,000 shares authorized, 31,374,833
    and 23,488,517 shares issued and outstanding at
    December 31, 2003 and 2002, respectively                                            314            235
  Additional paid-in capital                                                        451,806        290,935
  Dividends in excess of earnings - Note 2                                          (14,670)       (13,966)
  Accumulated other comprehensive income - Note 2                                    39,413          7,037
                                                                               ------------   ------------
                                                                                    539,363        284,241
                                                                               ------------   ------------

                                                                               $  3,533,081   $  1,572,567
                                                                               ============   ============
</TABLE>

See notes to consolidated financial statements.

                                       48
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                         YEAR ENDED DECEMBER 31,
                                                                               ------------------------------------------
                                                                                   2003           2002           2001
                                                                               ------------   ------------   ------------
<S>                                                                            <C>            <C>            <C>
REVENUES
  Interest income                                                              $    134,669   $     73,172   $     48,967
  Rental and escalation income                                                       21,330         17,973         18,337
  Gain on settlement of investments                                                  13,179         11,417          8,438
  Management fee from affiliate - Note 3                                                  -          4,470          8,941
  Incentive income from affiliate - Note 3                                                -         (1,218)        28,709
                                                                               ------------   ------------   ------------
                                                                                    169,178        105,814        113,392
                                                                               ------------   ------------   ------------
EXPENSES
  Interest expense                                                                   81,561         48,121         34,051
  Property operating expense                                                          9,015          7,907          7,898
  Loan and security servicing expense                                                 2,154            655            254
  General and administrative expense                                                  4,030          2,718          1,386
  Management fee to affiliate - Notes 3 and 10                                        6,468          9,250         14,687
  Incentive compensation to affiliate - Notes 3 and 10                                6,226          2,856         17,188
  Depreciation and amortization                                                       2,260          2,456          2,976
                                                                               ------------   ------------   ------------
                                                                                    111,714         73,963         78,440
                                                                               ------------   ------------   ------------

Income before equity in earnings of unconsolidated subsidiaries                      57,464         31,851         34,952
Equity in earnings of unconsolidated subsidiaries - Note 3                              862            362          2,807

                                                                               ------------   ------------   ------------
Income from continuing operations                                                    58,326         32,213         37,759
Income (loss) from discontinued operations - Note 6                                  (2,208)          (718)         5,912
                                                                               ------------   ------------   ------------
NET INCOME                                                                           56,118         31,495         43,671
Preferred dividends and related accretion                                            (4,773)        (1,162)        (2,540)
                                                                               ------------   ------------   ------------
INCOME AVAILABLE FOR COMMON STOCKHOLDERS                                       $     51,345   $     30,333   $     41,131
                                                                               ============   ============   ============

NET INCOME PER SHARE OF COMMON STOCK
  BASIC                                                                        $       1.98   $       1.68   $       2.49
                                                                               ============   ============   ============
  DILUTED                                                                      $       1.96   $       1.68   $       2.49
                                                                               ============   ============   ============

Income from continuing operations per share of common
  stock, after preferred dividends and related accretion
  Basic                                                                        $       2.07   $       1.72   $       2.13
                                                                               ============   ============   ============
  Diluted                                                                      $       2.05   $       1.72   $       2.13
                                                                               ============   ============   ============
Income (loss) from discontinued operations per share of common
  stock
  Basic                                                                        $      (0.09)  $      (0.04)  $       0.36
                                                                               ============   ============   ============
  Diluted                                                                      $      (0.09)  $      (0.04)  $       0.36
                                                                               ============   ============   ============

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
  OUTSTANDING
  BASIC                                                                          25,898,288     18,080,298     16,492,708
                                                                               ============   ============   ============
  DILUTED                                                                        26,140,777     18,090,052     16,492,708
                                                                               ============   ============   ============

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK                                   $       1.95   $       2.05   $       2.00
                                                                               ============   ============   ============
</TABLE>

See notes to consolidated financial statements.

                                       49
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                      PREFERRED STOCK        COMMON STOCK
                                                                    -------------------   -------------------
                                                                     SHARES     AMOUNT      SHARES     AMOUNT
                                                                    ---------   -------   ----------   ------
<S>                                                                 <C>         <C>       <C>          <C>
STOCKHOLDERS' EQUITY - DECEMBER 31, 2002                                    -   $     -   23,488,517   $  235
Dividends declared                                                          -         -            -        -
Issuance of preferred stock                                         2,500,000    62,500            -        -
Issuance of common stock                                                    -         -    7,882,276       79
Issuance of common stock to directors                                       -         -        1,540        -
Exercise of common stock options                                            -         -        2,500        -
Comprehensive income:
  Net income                                                                -         -            -        -
  Unrealized gain on securities                                             -         -            -        -
  Realized (gain) on securities: reclassification adjustment                -         -            -        -
  Foreign currency translation                                              -         -            -        -
  Foreign currency translation: reclassification adjustment                 -         -            -        -
  Unrealized (loss) on derivatives designated as cash flow hedges           -         -            -        -

  Total comprehensive income
                                                                    ---------   -------   ----------   ------
STOCKHOLDERS' EQUITY - DECEMBER 31, 2003                            2,500,000   $62,500   31,374,833   $  314
                                                                    =========   =======   ==========   ======

<CAPTION>
                                                                                     DIVIDENDS IN                   TOTAL STOCK-
                                                                      ADDITIONAL       EXCESS OF     ACCUM. OTHER     HOLDERS'
                                                                    PD. IN CAPITAL     EARNINGS      COMP. INCOME      EQUITY
                                                                    --------------   -------------   ------------   ------------
<S>                                                                 <C>              <C>             <C>            <C>
STOCKHOLDERS' EQUITY - DECEMBER 31, 2002                            $      290,935   $     (13,966)  $      7,037   $    284,241
Dividends declared                                                               -         (56,822)             -        (56,822)
Issuance of preferred stock                                                 (2,436)              -              -         60,064
Issuance of common stock                                                   163,242               -              -        163,321
Issuance of common stock to directors                                           30               -              -             30
Exercise of common stock options                                                35               -              -             35
Comprehensive income:
  Net income                                                                     -          56,118              -         56,118
  Unrealized gain on securities                                                  -               -         23,670         23,670
  Realized (gain) on securities: reclassification adjustment                     -               -        (13,185)       (13,185)
  Foreign currency translation                                                   -               -          4,653          4,653
  Foreign currency translation: reclassification adjustment                      -               -            396            396
  Unrealized (loss) on derivatives designated as cash flow hedges                -               -         16,842         16,842
                                                                                                                    ------------
  Total comprehensive income                                                                                              88,494
                                                                    --------------   -------------   ------------   ------------
STOCKHOLDERS' EQUITY - DECEMBER 31, 2003                            $      451,806   $     (14,670)  $     39,413   $    539,363
                                                                    ==============   =============   ============   ============
</TABLE>

Continued on next page.

                                       50
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                    REDEEMABLE PREFERRED STOCK          COMMON STOCK
                                                                    --------------------------       -------------------
                                                                      SHARES          AMOUNT           SHARES     AMOUNT
                                                                    ----------      ----------       ----------   ------
<S>                                                                 <C>             <C>              <C>          <C>
STOCKHOLDERS' EQUITY - DECEMBER 31, 2001                             1,020,517      $   20,410       16,488,517   $  165
Dividends declared by predecessor prior to commencement
  of our operations                                                          -               -                -        -
Distribution to predecessor upon commencement of our
  operations                                                                 -               -                -        -
Dividends declared to predecessor after commencement of our
  operations, but prior to our initial public offering                       -               -                -        -
Redemption of redeemable preferred stock                            (1,020,517)        (20,410)               -        -
Initial public offering of shares of common stock                            -               -        7,000,000       70
Dividends declared subsequent to our initial public offering                 -               -                -        -
Comprehensive income:
  Net income                                                                 -               -                -        -
  Unrealized gain on securities                                              -               -                -        -
  Realized (gain) on securities: reclassification adjustment                 -               -                -        -
  Foreign currency translation                                               -               -                -        -
  Foreign currency translation: reclassification adjustment                  -               -                -        -
  Unrealized (loss) on derivatives designated as cash flow hedges            -               -                -        -
  Realized (gain) on derivatives designated as cash flow
    hedges: reclassification adjustment                                      -               -                -        -

  Total comprehensive income
                                                                    ----------      ----------       ----------   ------
STOCKHOLDERS' EQUITY - DECEMBER 31, 2002                                     -     $         -       23,488,517   $  235
                                                                    ==========      ==========       ==========   ======

STOCKHOLDERS' EQUITY - DECEMBER 31, 2000                             1,020,517      $   20,167       16,499,765   $  165
Dividends declared                                                           -               -                -        -
Redemption of common stock                                                   -               -          (11,248)       -
Accretion of redeemable preferred stock                                      -             243                -        -
Transition adjustment - deferred hedge gains and losses                      -               -                -        -
Comprehensive income:
  Net income                                                                 -               -                -        -
  Unrealized gain on securities                                              -               -                -        -
  Unrealized loss on securities: reclassification adjustment                 -               -                -        -
  Foreign currency translation                                               -               -                -        -
  Foreign currency translation: reclassification adjustment                  -               -                -        -
  Unrealized (loss) on derivatives designated as cash flow hedges            -               -                -        -
  Unrealized loss derivatives designated as cash flow
    hedges: reclassification adjustment                                      -               -                -        -

  Total comprehensive income
                                                                    ----------      ----------       ----------   ------
STOCKHOLDERS' EQUITY - DECEMBER 31, 2001                             1,020,517      $   20,410       16,488,517   $  165
                                                                    ==========      ==========       ==========   ======

<CAPTION>
                                                                                     DIVIDENDS IN                  TOTAL STOCK-
                                                                      ADDITIONAL       EXCESS OF    ACCUM. OTHER     HOLDERS'
                                                                    PD. IN CAPITAL     EARNINGS     COMP. INCOME      EQUITY
                                                                    --------------   ------------   ------------   ------------
<S>                                                                 <C>              <C>            <C>            <C>
STOCKHOLDERS' EQUITY - DECEMBER 31, 2001                            $      309,356   $     (7,767)  $      8,791   $    310,545
Dividends declared by predecessor prior to commencement
  of our operations                                                              -        (20,949)             -        (20,949)
Distribution to predecessor upon commencement of our
  operations                                                               (98,378)             -        (11,075)      (109,453)
Dividends declared to predecessor after commencement of our
  operations, but prior to our initial public offering                           -         (7,584)             -         (7,584)
Redemption of redeemable preferred stock                                         -              -              -              -
Initial public offering of shares of common stock                           79,957              -              -         80,027
Dividends declared subsequent to our initial public offering                     -         (9,161)             -         (9,161)
Comprehensive income:
  Net income                                                                     -         31,495              -         31,495
  Unrealized gain on securities                                                  -              -         62,170         62,170
  Realized (gain) on securities: reclassification adjustment                     -              -         (4,364)        (4,364)
  Foreign currency translation                                                   -              -          4,387          4,387
  Foreign currency translation: reclassification adjustment                      -              -           (496)          (496)
  Unrealized (loss) on derivatives designated as cash flow hedges                -              -        (52,102)       (52,102)
  Realized (gain) on derivatives designated as cash flow
    hedges: reclassification adjustment                                          -              -           (274)          (274)
                                                                                                                   ------------
  Total comprehensive income                                                                                             40,816
                                                                    --------------   ------------   ------------   ------------
STOCKHOLDERS' EQUITY - DECEMBER 31, 2002                            $      290,935   $    (13,966)  $      7,037   $    284,241
                                                                    ==============   ============   ============   ============

STOCKHOLDERS' EQUITY - DECEMBER 31, 2000                            $      309,551   $     (7,666)  $     (1,395)  $    300,655
Dividends declared                                                               -        (43,529)             -        (43,529)
Redemption of common stock                                                    (195)             -              -           (195)
Accretion of redeemable preferred stock                                          -           (243)             -           (243)
Transition adjustment - deferred hedge gains and losses                          -              -          4,064          4,064
Comprehensive income:
  Net income                                                                     -         43,671              -         43,671
  Unrealized gain on securities                                                  -              -         19,695         19,695
  Unrealized loss on securities: reclassification adjustment                     -              -            954            954
  Foreign currency translation                                                   -              -         (3,198)        (3,198)
  Foreign currency translation: reclassification adjustment                      -              -             29             29
  Unrealized (loss) on derivatives designated as cash flow hedges                -              -        (11,563)       (11,563)
  Unrealized loss derivatives designated as cash flow
    hedges: reclassification adjustment                                          -              -            205            205
                                                                                                                   ------------
  Total comprehensive income                                                                                             49,793
                                                                    --------------   ------------   ------------   ------------
STOCKHOLDERS' EQUITY - DECEMBER 31, 2001                            $      309,356   $     (7,767)  $      8,791   $    310,545
                                                                    ==============   ============   ============   ============
</TABLE>

See notes to consolidated financial statements.

                                       51
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                   YEAR ENDED DECEMBER 31,
                                                                                     ------------------------------------------
                                                                                         2003           2002           2001
                                                                                     ------------   ------------   ------------
<S>                                                                                  <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                         $     56,118   $     31,495   $     43,671
  Adjustments to reconcile net income to net cash provided by operating activities
  (inclusive of amounts related to discontinued operations)
    Depreciation and amortization                                                           3,085          8,603         13,996
    Accretion of discount and other amortization                                           (3,761)        (4,767)        (3,284)
    Equity in earnings of unconsolidated subsidiaries                                        (862)          (362)        (2,807)
    Accrued incentive (income) loss from affiliate                                              -          1,218        (11,715)
    Non-cash incentive compensation to affiliate                                                -             14            (83)
    Deferred rent                                                                          (1,853)        (1,353)        (1,964)
    Gain on settlement of investments                                                     (11,789)        (9,619)       (10,386)
    Unrealized gain on non-hedge derivatives                                               (3,696)             -              -
    Non-cash directors' compensation                                                           30              -              -
  Change in
    Restricted cash                                                                        (2,564)        (3,186)         1,308
    Receivables and other assets                                                           (9,403)        (4,449)         2,687
    Due to affiliates                                                                       1,110         (1,506)         3,580
    Accrued expenses and other liabilities                                                 11,177          5,469           (555)
                                                                                     ------------   ------------   ------------
        Net cash provided by operating activities:                                         37,592         21,557         34,448
                                                                                     ------------   ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of real estate securities                                                   (1,203,439)      (695,354)       (73,365)
  Proceeds from sale of real estate securities                                            204,834        276,704        105,722
  Deposit on real estate securities (treated as a derivative)                             (59,676)       (37,125)       (23,631)
  Purchase of other securities                                                           (256,777)       (10,816)        (7,680)
  Proceeds from sale of other securities                                                   50,196              -         10,274
  Purchase of loans                                                                      (633,043)      (259,697)             -
  Repayments of loan and security principal                                               105,848         15,217         75,324
  Proceeds from settlement of loans                                                       164,404            372         29,069
  Purchase and improvement of operating real estate                                          (576)        (2,250)        (4,495)
  Proceeds from sale of operating real estate                                               5,331         42,492              -
  Contributions to unconsolidated subsidiaries                                            (30,871)       (19,991)       (25,829)
  Distributions from unconsolidated subsidiaries                                            1,087          8,265         25,814
  Payment of deferred transaction costs                                                         -           (508)        (5,150)
                                                                                     ------------   ------------   ------------
        Net cash provided by (used in) investing activities                            (1,652,682)      (682,691)       106,053
                                                                                     ------------   ------------   ------------
</TABLE>

Continued on next page.

                                       52
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                   YEAR ENDED DECEMBER 31,
                                                                                     ------------------------------------------
                                                                                         2003           2002           2001
                                                                                     ------------   ------------   ------------
<S>                                                                                  <C>            <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES
  Issuance of CBO bonds payable                                                         921,503        438,787         18,418
  Repayments of CBO bonds payable                                                             -        (17,742)             -
  Issuance of other bonds payable                                                             -         37,001              -
  Repayments of other bonds payable                                                      (6,413)        (8,151)       (64,175)
  Borrowings under notes payable                                                         80,000         62,952              -
  Repayments of notes payable                                                              (906)      (119,670)        (4,157)
  Borrowings under repurchase agreements                                                663,120        246,712         10,000
  Repayments of repurchase agreements                                                  (195,506)             -        (24,837)
  Draws under credit facility                                                                 -         20,000         21,000
  Repayments of credit facility                                                               -         (1,750)       (34,000)
  Minority interest distributions                                                             -              -         (5,090)
  Issuance of common stock                                                              168,610         91,000              -
  Costs related to issuance of common stock                                              (5,289)       (10,185)             -
  Redemption of common stock                                                                  -              -           (195)
  Exercise of common stock options                                                           35              -              -
  Issuance of preferred stock                                                            62,500              -              -
  Costs related to issuance of preferred stock                                           (2,436)             -              -
  Redemption of preferred stock                                                               -        (20,410)             -
  Dividends paid                                                                        (49,280)       (27,522)       (34,796)
  Distribution of cash to predecessor                                                         -        (12,423)             -
  Payment of deferred financing costs                                                    (5,908)        (3,362)        (1,884)
                                                                                   ------------   ------------   ------------
        Net cash provided by (used in) financing activities                           1,630,030        675,237       (119,716)
                                                                                   ------------   ------------   ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     14,940         14,103         20,785
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                           45,463         31,360         10,575
                                                                                   ------------   ------------   ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                           $     60,403   $     45,463   $     31,360
                                                                                   ============   ============   ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

  Cash paid during the period for interest expense                                 $     80,522   $     56,365   $     61,640
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

  Common stock dividends declared but not paid                                     $     15,687   $      9,161   $      8,244
  Preferred stock dividends declared but not paid                                  $      1,016   $          -   $        638
  Deposit used in acquisition of real estate securities (treated as a derivative)  $     81,492   $     23,631   $          -
  Contribution of assets to unconsolidated subsidiary                              $          -   $      1,454   $          -
  Distribution of non-cash assets and liabilities to predecessor                   $          -   $     97,030   $          -
  Consolidation of ICH CMO                                                         $    221,773   $          -   $          -
</TABLE>

See notes to consolidated financial statements.

                                       53
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

1.       ORGANIZATION

         Newcastle Investment Corp. (and subsidiaries, "Newcastle") is a
         Maryland corporation that was formed in June 2002. Newcastle conducts
         its business through four primary segments: (i) real estate securities,
         (ii) real estate related loans, (iii) operating real estate, primarily
         credit leased operating real estate, and (iv) residential mortgage
         loans.

         Newcastle was formed as a wholly owned subsidiary of Newcastle
         Investment Holdings Corp. ("Holdings") for the purpose of separating
         the real estate securities and certain of the credit leased operating
         real estate businesses from Holdings' other investments. Prior to
         Newcastle's initial public offering, Holdings contributed to Newcastle
         certain assets and liabilities in exchange for 16,488,517 shares of
         Newcastle's common stock. For accounting purposes, this transaction is
         presented as a reverse spin-off, whereby Newcastle is treated as the
         continuing entity and the assets that were retained by Holdings and not
         contributed to Newcastle are accounted for as if they were distributed
         at their historical book basis through a spin-off to Holdings.
         Newcastle's operations commenced on July 12, 2002. On May 19, 2003,
         Holdings distributed to its stockholders all of the shares of
         Newcastle's common stock that it held, and it no longer owns any of
         Newcastle's equity. Approximately 2.3 million of such shares are held
         by to an affiliate of the Manager (see below).

         In October 2002, Newcastle sold 7.0 million shares of its common stock
         in a public offering (the "IPO") at a price to the public of $13.00 per
         share, for net proceeds of approximately $80.0 million. In July 2003,
         Newcastle sold 4.6 million shares of its common stock in a public
         offering at a price to the public of $20.35 per share, for net proceeds
         of approximately $88.6 million. In December 2003, Newcastle sold 3.3
         million shares of its common stock in a public offering at a price to
         the public of $22.85 per share, for net proceeds of approximately $75.0
         million. Newcastle had 31,374,833 shares of common stock outstanding at
         December 31, 2003.

         In March 2003, Newcastle issued 2.5 million shares of its 9.75% Series
         B Cumulative Redeemable Preferred Stock (the "Series B Preferred") in a
         public, registered offering for net proceeds of approximately $60.1
         million. The Series B Preferred is non-voting, has a $25 per share
         liquidation preference, no maturity date and no mandatory redemption.
         Newcastle has the option to redeem the Series B Preferred beginning in
         March 2008.

         Newcastle is organized and conducts its operations to qualify as a real
         estate investment trust ("REIT") for federal income tax purposes. As
         such, Newcastle will generally not be subject to federal income tax on
         that portion of its income that is distributed to stockholders if it
         distributes at least 90% of its REIT taxable income to its stockholders
         by prescribed dates and complies with various other requirements.

         Newcastle is party to a management agreement (the "Management
         Agreement") with Fortress Investment Group LLC (the "Manager"), an
         affiliate, under which the Manager advises Newcastle on various aspects
         of its business and manages its day-to-day operations, subject to the
         supervision of Newcastle's board of directors. For its services, the
         Manager receives an annual management fee and incentive compensation,
         both as defined in the Management Agreement. The Manager also manages,
         among other entities, Holdings and Fortress Investment Fund LLC ("Fund
         I"). For a further discussion of the Management Agreement, see Note 10.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         GENERAL

         BASIS OF ACCOUNTING - The accompanying consolidated financial
         statements are prepared in accordance with accounting principles
         generally accepted in the United States ("GAAP"). The consolidated
         financial statements include the accounts of Newcastle and its
         consolidated subsidiaries, subsequent to the date of commencement of
         its operations, and also include the accounts of its predecessor,
         Holdings, prior to such date. All significant intercompany transactions
         and balances have been eliminated. Newcastle consolidates those
         entities in which it has an investment of 50% or more and has control
         over significant operating, financial and investing decisions of the
         entity.

                                       54
<PAGE>


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

         In January 2003, the Financial Accounting Standards Board issued
         Interpretation No. 46 "Consolidation of Variable Interest Entities"
         which explains how to identify variable interest entities and how to
         assess whether to consolidate such entities. As a result of this
         interpretation, Newcastle consolidated the ICH CMO (Note 5).

         In December 2003, Financial Accounting Standards Board Interpretation
         ("FIN") No. 46R "Consolidation of Variable Interest Entities" was
         issued as a modification of FIN 46. FIN 46R, which becomes effective in
         the first quarter of 2004, clarifies the methodology for determining
         whether an entity is a variable interest entity ("VIE") and the
         methodology for assessing who is the primary beneficiary of a VIE.
         Under FIN 46R, only the primary beneficiary of a VIE may consolidate
         the VIE. Newcastle has historically consolidated its four existing CBO
         transactions (the "CBO Entities") because it owns the entire equity
         interest in each of them, representing a substantial portion of their
         capitalization, and it controls the management and resolution of their
         assets. Newcastle is in the process of determining what effect, if any,
         FIN 46R will have on whether it should continue to consolidate the CBO
         Entities.

         VIEs are defined as entities in which equity investors do not have the
         characteristics of a controlling financial interest or do not have
         sufficient equity at risk for the entity to finance its activities
         without additional subordinated financial support from other parties.
         Newcastle believes CBO Entities did not meet the definition of VIEs
         under FIN 46 but will probably be classified as VIEs under FIN 46R
         because Newcastle's control over such entities is primarily a result of
         its rights as their collateral manager rather than a result of its
         equity interest.

         A VIE is required to be consolidated by its primary beneficiary, and
         only by its primary beneficiary, which is defined as the party who will
         absorb a majority of the VIE's expected losses or receive a majority of
         the expected residual returns as a result of holding variable
         interests. If the CBO Entities had met the definition of a VIE under
         FIN 46, Newcastle would have met the FIN 46 criteria to be the primary
         beneficiary of the CBO Entities due to its substantial equity interest.
         Newcastle is in the process of determining whether it is the primary
         beneficiary of each of the CBO Entities under the revised standards of
         FIN 46R, which is determined on a case-by-case basis.

         If it is determined that Newcastle is not the primary beneficiary of a
         CBO Entity, Newcastle would have to deconsolidate it. A deconsolidation
         of any of the CBO Entities would cause a material reduction of
         Newcastle's assets and liabilities. However, Newcastle believes that
         deconsolidation should not have a material affect on Newcastle's
         results of operations.

         For entities over which Newcastle or Holdings exercised significant
         influence, but which did not meet the requirements for consolidation,
         Newcastle uses (and Holdings used) the equity method of accounting
         whereby it records its share of the underlying income of such entities.
         Newcastle owns an equity method investment in a limited liability
         company (Note 3) which is an investment company and therefore maintains
         its financial records on a fair value basis. Newcastle has retained
         such accounting relative to its investment in such company pursuant to
         the Emerging Issues Task Force ("EITF") Issue No. 85-12 "Retention of
         Specialized Accounting for Investments in Consolidation."

         Minority interest represented the ownership in certain consolidated
         subsidiaries held by entities other than Holdings. Newcastle does not
         have any minority interest ownership.

         Holdings is a Maryland corporation that invested in real estate-related
         assets. Its primary businesses were investing in (1) real estate
         securities, (2) operating real estate, primarily credit leased
         operating real estate, (3) Fund I and (4) mortgage loans.

         Holdings' investments in real estate securities and a portion of its
         investments operating real estate were transferred to Newcastle in
         connection with it organization. The operating real estate (GSA
         Portfolio - Note 6) and mortgage loans distributed to Holdings have
         been treated as discontinued operations, because they constituted a
         component of an entity, while the other operations distributed to
         Holdings, including the investment in Fund I, have not been treated as
         such, because they did not constitute a component of an entity as
         defined in Statement of Financial Accounting Standards ("SFAS") No. 144
         "Accounting for the Impairment or Disposal of Long-Lived Assets."


                                       55
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

         RISKS AND UNCERTAINTIES -- In the normal course of business, Newcastle
         encounters primarily two significant types of economic risk: credit and
         market. Credit risk is the risk of default on Newcastle's securities,
         loans, leases, and derivatives that results from a borrower's, lessee's
         or derivative counterparty's inability or unwillingness to make
         contractually required payments. Market risk reflects changes in the
         value of investments in securities, loans and real estate or in
         derivatives due to changes in interest rates, spreads or other market
         factors, including the value of the collateral underlying loans and
         securities and the valuation of real estate held by Newcastle.
         Management believes that the carrying values of its investments are
         reasonable taking into consideration these risks along with estimated
         collateral values, payment histories, and other borrower information.

         Newcastle invests in real estate located outside of the United States.
         Newcastle's non-U.S. investments are subject to the same risks
         associated with its United States operations as well as additional
         risks, such as fluctuations in foreign currency exchange rates,
         unexpected changes in regulatory requirements, heightened risk of
         political and economic instability, difficulties in managing
         international operations, potentially adverse tax consequences and the
         burden of complying with a wide variety of foreign laws.

         Additionally, Newcastle is subject to significant tax risks. If
         Newcastle were to fail to qualify as a REIT in any taxable year,
         Newcastle would be subject to U.S. federal corporate income tax
         (including any applicable alternative minimum tax), which could be
         material. In addition, if Holdings failed to qualify as a REIT and
         Newcastle is treated as a successor to Holdings, this could cause
         Newcastle to likewise fail to qualify as a REIT. Unless entitled to
         relief under certain statutory provisions, Newcastle would also be
         disqualified from treatment as a REIT for the four taxable years
         following the year during which qualification is lost.

         USE OF ESTIMATES -- The preparation of financial statements in
         conformity with GAAP requires management to make estimates and
         assumptions that affect the reported amounts of assets and liabilities,
         the disclosure of contingent assets and liabilities at the date of the
         financial statements and the reported amounts of revenue and expenses
         during the reporting period. Actual results could differ from those
         estimates.

         FEDERAL INCOME TAXES AND DIVIDENDS -- Newcastle expects to qualify as a
         REIT under the Internal Revenue Code of 1986, as amended (the "Code").
         A REIT will generally not be subject to U.S. federal corporate income
         tax on that portion of its net income that is distributed to
         stockholders if it distributes at least 90% of its REIT taxable income
         to its stockholders by prescribed dates and complies with various other
         requirements.

         Since Newcastle distributed 100% of its 2003 and 2002 taxable income,
         no provision has been made for U.S. federal corporate income taxes in
         the accompanying consolidated financial statements.

         Distributions relating to 2003 amounted to $1.95 per share of common
         stock. Of this amount, approximately $1.57 was taxable in 2003 and
         $0.38 relates to 2004 for tax purposes. Distributions relating to 2002
         amounted to $0.85 per share of common stock. Of this amount,
         approximately $0.577 was taxable in 2002 and $0.273 relates to 2003 for
         tax purposes. Distributions relating to 2003 and 2002 were taxable as
         follows:

<TABLE>
<CAPTION>
                Dividends Per Share        Ordinary Income     Capital Gains    Return of Capital
                -------------------        ---------------     -------------    -----------------
<S>             <C>                        <C>                 <C>              <C>
2003                $  1.843                    77.66%             22.34%            None

2002                $  0.577                   100.00%              None             None
</TABLE>

         The distributions disclosed above do not include the distributions made
         by our predecessor, Holdings. Holdings made per share distributions of
         $2.00 in 2001 and $1.20 in 2002 prior to the commencement of our
         operations. Holdings also elected to be taxed as a REIT.

                                       56
<PAGE>
NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

         Dividends in Excess of Earnings includes ($14.5 million) related to the
         operations of our predecessor.

         EARNINGS PER SHARE -- Newcastle is required to present both basic and
         diluted earnings per share ("EPS"). Basic EPS is calculated by dividing
         net income available for common stockholders by the weighted average
         number of shares of common stock outstanding during each period.
         Diluted EPS is calculated by dividing net income available for common
         stockholders by the weighted average number of shares of common stock
         outstanding plus the additional dilutive effect of common stock
         equivalents during each period. Newcastle's common stock equivalents
         are its stock options (Note 9). Based upon the treasury stock method,
         Newcastle did not have any dilutive common stock equivalents during
         2001. During 2003 and 2002, based on the treasury stock method,
         Newcastle had 242,489 and 9,754 dilutive common stock equivalents,
         respectively, resulting from its outstanding options. Net income
         available for common stockholders is equal to net income less preferred
         dividends, and less the accretion of the discount on Holdings' Series A
         Preferred which was fully redeemed in June 2002.

         COMPREHENSIVE INCOME - Comprehensive income is defined as the change in
         equity of a business enterprise during a period from transactions and
         other events and circumstances, excluding those resulting from
         investments by and distributions to owners. For Newcastle's purposes,
         comprehensive income represents net income, as presented in the
         statements of operations, adjusted for net foreign currency translation
         adjustments and unrealized gains or losses on real estate securities
         available for sale and derivatives designated as cash flow hedges. The
         following table summarizes our accumulated other comprehensive income:

<TABLE>
<CAPTION>
                                                   December 31,
                                               --------------------
                                                 2003        2002
                                               --------    --------
<S>                                            <C>         <C>
Net unrealized gains on securities             $ 80,361    $ 69,876

Net unrealized (losses) on derivatives
designated as cash flow hedges                  (44,199)    (61,041)

Net foreign currency translation adjustments      3,251      (1,798)
                                               --------    --------

Accumulated other comprehensive income         $ 39,413    $  7,037
                                               ========    ========
</TABLE>

         REVENUE RECOGNITION

         REAL ESTATE SECURITIES AND LOANS RECEIVABLE -- Newcastle invests in
         real estate securities, including commercial mortgage backed securities
         (including B-notes), senior unsecured debt issued by property REITS and
         real estate related asset backed securities. Newcastle also invests in
         loans and pools of loans, including real estate related loans and
         residential mortgage loans. Loans receivable are presented in the
         consolidated balance sheet net of any unamortized discount (or gross of
         any unamortized premium) and an allowance for loan losses. Discounts or
         premiums are accreted into interest income on an effective yield or
         "interest" method, based upon a comparison of actual collections and
         expected collections, through the expected maturity date of the
         security or loan. Income is not accrued on non-performing securities or
         loans; cash received on such securities or loans is treated as income
         to the extent of interest previously accrued. Interest income with
         respect to non-discounted securities or loans is recognized on an
         accrual basis. Deferred fees and costs are recognized as interest
         income over the terms of the securities or loans using the interest
         method. Upon settlement of securities and loans, the excess (or
         deficiency) of net proceeds over the net carrying value of the security
         or loan is recognized as a gain (or loss) in the period of settlement.

         ALLOWANCE FOR SECURITY AND LOAN LOSSES -- Newcastle periodically
         evaluates securities and loans for impairment. Securities and loans are
         considered to be impaired, for financial reporting purposes, when it is
         probable that Newcastle will be unable to collect all principal or
         interest when due according to the contractual terms of the original
         agreements, or, for securities or loans purchased at a discount for
         credit losses, when Newcastle determines that it is probable that it
         will be unable to collect as anticipated. Upon determination of
         impairment, Newcastle establishes specific valuation allowances,
         through provisions for losses, based on the estimated fair value of the
         underlying collateral using a discounted cash flow analysis. The
         allowance for each security or loan is maintained at a level believed
         adequate by management to absorb probable losses, based on periodic
         reviews of actual and expected losses. It is Newcastle's policy to
         establish an allowance for uncollectible interest on performing
         securities or loans that are past due more than 90 days or sooner when,
         in the judgment of management, the probability of collection of
         interest is deemed to be insufficient to warrant further accrual.

                                       57
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

         Upon such a determination, those loans are deemed to be non-performing.
         Actual losses may differ from Newcastle's estimates.

         RENTAL AND ESCALATION INCOME -- Contractual minimum rental income is
         recognized on a straight-line basis over the terms of the related
         operating leases. The excess of straight-line rents above contractual
         amounts was $1.9 million, $1.4 million and $2.0 million during 2003,
         2002 and 2001, respectively. Expense recoveries are included in rental
         and escalation income.

         MANAGEMENT FEE AND INCENTIVE INCOME FROM AFFILIATE -- These income
         items relate to Holdings' investment in Fund I which was not
         transferred to Newcastle and is not part of our ongoing operations. For
         a further discussion of this income, see Note 3.

         EXPENSE RECOGNITION

         INTEREST EXPENSE -- Newcastle finances its investments using both fixed
         and floating rate debt, including repurchase agreements, mortgages,
         securitizations, and other financing vehicles. Certain of this debt has
         been issued at discounts. Discounts are accreted into interest expense
         on the interest method through the expected maturity date of the
         financing.

         DEFERRED COSTS -- Deferred costs consist primarily of costs incurred in
         obtaining financing (amortized over the term of such financing using
         the interest method) and the cost of interest rate caps (amortized as
         described below). During 2003, 2002 and 2001, approximately $1.5
         million, $1.4 million and $1.9 million of such costs were amortized
         into interest expense, respectively.

         DERIVATIVES AND HEDGING ACTIVITIES -- In January 2001, Newcastle
         adopted SFAS No. 133, "Accounting for Derivative Instruments and
         Hedging Activities" as amended by SFAS No. 138, "Accounting for Certain
         Derivative Instruments and Certain Hedging Activities" and SFAS No.
         149, "Amendment of Statement 133 on Derivative Instruments and Hedging
         Activities." SFAS No. 133, as amended, establishes accounting and
         reporting standards for derivative instruments. Specifically, SFAS No.
         133 requires an entity to recognize all derivatives as either assets or
         liabilities in the statement of financial position and to measure those
         instruments at fair value. Additionally, the fair value adjustments
         will affect either stockholders' equity or net income depending on
         whether the derivative instrument qualifies as a hedge for accounting
         purposes and, if so, the nature of the hedging activity.

         For those derivative instruments that are designated and qualify as
         hedging instruments, a company must designate the hedging instrument,
         based upon the exposure being hedged, as either a cash flow hedge, a
         fair value hedge or a hedge of a net investment in a foreign operation.

         Derivative transactions are entered into by Newcastle solely for
         risk-management purposes, except for the real estate securities
         portfolio deposit as described in Note 4. The decision of whether or
         not a given transaction/position (or portion thereof) is hedged is made
         on a case-by-case basis, based on the risks involved and other factors
         as determined by senior management, including restrictions imposed by
         the Code among others. In determining whether to hedge a risk,
         Newcastle may consider whether other assets, liabilities, firm
         commitments and anticipated transactions already offset or reduce the
         risk. All transactions undertaken as hedges are entered into with a
         view towards minimizing the potential for economic losses that could be
         incurred by Newcastle. Generally, all derivatives entered into are
         intended to qualify as hedges under GAAP, unless specifically stated
         otherwise. To this end, terms of hedges are matched closely to the
         terms of hedged items.

         Description of the risks being hedged

                  1)       Interest rate risk, existing positions - Newcastle
                           generally hedges the aggregate 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).

                                       58
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

                        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 fee, 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).

                        In order to "lock in" the rate on the date of forecast,
                        Newcastle may enter into swap agreements whereby
                        Newcastle would receive fixed rate payments in exchange
                        for floating rate payments. The value of such a swap
                        should vary inversely with the expected proceeds of a
                        given fixed rate borrowing in the future, assuming the
                        terms of the swap and borrowing are properly matched. At
                        the date the borrowing occurs, the swap is unwound at a
                        gain or loss which should equal the change in expected
                        proceeds between the date of forecast and the date of
                        consummation which result from changes in market
                        interest rates, effectively hedging such changes. At
                        December 31, 2003, no such derivative transactions were
                        outstanding.

               3)       Foreign currency rate risk, net investments - Newcastle
                        may hedge the aggregate risk of fluctuations in the
                        exchange rate between a foreign currency, in which
                        Newcastle has made a net investment, and the U.S.
                        dollar.

                        In order to reduce the risk, Newcastle may maintain a
                        short position in the applicable foreign currency. The
                        amount of the position would be equal to the anticipated
                        net equity in the foreign investment at a forward date,
                        as denominated in the foreign currency. This effectively
                        locks in the current exchange rate on Newcastle's net
                        equity position for the period of such position. At
                        December 31, 2003, no such derivative transactions were
                        outstanding.

         Cash flow hedges

         Newcastle, including its predecessor Holdings, has employed interest
         rate swaps primarily in four ways: (i) to hedge its exposure to changes
         in market interest rates with respect to its floating rate debt, (ii)
         to hedge the anticipated securitization known as the CBO I financing
         (Note 8), which occurred in July 1999, and (iii) to hedge fluctuations
         in the fair value of the fixed lease payments underlying its operating
         real estate in Canada. Interest on approximately $252.1 million and
         $955.4 million in principal amount of Newcastle's floating rate debt
         was designated as the hedged items to interest rate cap and swap
         agreements at December 31, 2003, respectively.

         To qualify for cash flow hedge accounting, interest rate swaps and caps
         must meet certain criteria, including (1) the items to be hedged expose
         Newcastle to interest rate risk, (2) the interest rate swaps or caps
         are highly effective in reducing Newcastle's exposure to interest rate
         risk, and (3) with respect to an anticipated transaction, such
         transaction is probable. Correlation and effectiveness are periodically
         assessed based upon a comparison of the relative changes in the fair
         values or cash flows of the interest rate swaps and caps and the items
         being hedged.

         For derivative instruments that are designated and qualify as a cash
         flow hedge (i.e. hedging the exposure to variability in expected future
         cash flows that is attributable to a particular risk), the effective
         portion of the gain or loss, and net payments received or made, on the
         derivative instrument is reported as a component of other comprehensive
         income and reclassified into earnings in the same period or periods
         during which the hedged transaction affects earnings. The remaining
         gain or loss on the derivative instrument in excess of the cumulative
         change in the present value of future cash flows of the hedged item, if
         any, is recognized in current earnings during the period of change. No
         material ineffectiveness was recorded during the years ended December
         31, 2003, 2002 or 2001. Costs incurred in connection with the purchase
         of interest rate caps, treated as cash flow hedges, are amortized into
         interest expense based on the estimated value of such cap for each
         period covered by such cap.

                                       59
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

         With respect to interest rate swaps which have been designated as
         hedges of anticipated financings, periodic net payments were recognized
         currently as adjustments to interest expense; any gain or loss from
         fluctuations in the fair value of the interest rate swaps was recorded
         as a deferred hedging gain or loss and treated as a component of the
         anticipated transaction at the time of such transaction. Pursuant to
         SFAS No. 133, such net amounts were reclassified to accumulated other
         comprehensive income at January 1, 2001. In the event the anticipated
         refinancing failed to occur as expected, the deferred hedging credit or
         charge was recognized currently in income. Newcastle's hedges of such
         refinancing were terminated upon the consummation of such refinancing.
         As of December 31, 2003 and 2002, $(3.4 million) and $1.4 million of
         such gains (losses) were deferred, net of amortization, respectively.

         With respect to interest rate swaps which were designated as hedges of
         the fair value of lease payments, periodic net payments and any gain or
         loss from fluctuations in the fair value of the interest rate swaps
         were capitalized as adjustments to deferred rent and are being
         recognized over the term of the leases as adjustments to rental income.
         Pursuant to SFAS No. 133, such net amounts were reclassified to
         accumulated other comprehensive income at January 1, 2001. Newcastle's
         hedge of such payments was terminated in 1999. As of December 31, 2003
         and 2002, $1.4 million and $1.5 million of such losses were deferred,
         net of amortization, respectively.

         SFAS No. 133 resulted in a change in Newcastle's method of accounting
         for interest rate caps and swaps used as hedges. As a result of this
         change, Newcastle recorded a transition gain adjustment to other
         comprehensive income of approximately $4.1 million on January 1, 2001.
         During the years ended December 31, 2003, 2002 and 2001, Newcastle
         recorded an aggregate of $16.8 million, ($52.4 million) and ($11.4
         million) of net gain (loss) to other comprehensive income and an
         aggregate of $4.8 million, $4.6 million and $4.7 million of gain to
         earnings, as an adjustment to interest expense, respectively, related
         to such hedges. Newcastle expects to reclassify approximately $1.8
         million of net gain on derivative instruments from accumulated other
         comprehensive income to earnings during the next twelve months due to
         amortization of net deferred hedge gains.

         With respect to interest rate swaps and caps that have not been
         designated as hedges, any net payments under, or fluctuations in the
         fair value of, such swaps and caps has been recognized currently in
         income.

         Newcastle's derivative financial instruments contain credit risk to the
         extent that its bank counterparties may be unable to meet the terms of
         the agreements. Newcastle minimizes such risk by limiting its
         counterparties to highly rated major financial institutions with good
         credit ratings. In addition, the potential risk of loss with any one
         party resulting from this type of credit risk is monitored. Management
         does not expect any material losses as a result of default by other
         parties. Newcastle does not require collateral.

         MANAGEMENT FEES AND INCENTIVE COMPENSATION TO AFFILIATE -- These
         represent amounts due to the Manager pursuant to the Management
         Agreement as well as amounts due to the Manager related to Holdings'
         investment in Fund I, which were passed through Holdings' income
         statement on a gross basis through the date of the commencement of our
         operations. For further information on the Management Agreement, see
         Note 10. For further information the Fund I related expenses, see Note
         3.

         BALANCE SHEET MEASUREMENT

         INVESTMENT IN REAL ESTATE AND OTHER SECURITIES - Newcastle has
         classified its investments in real estate and other securities as
         available for sale. Securities available for sale are carried at market
         value with the net unrealized gains or losses reported as a separate
         component of accumulated other comprehensive income. At disposition,
         the net realized gain or loss is determined on the basis of the cost of
         the specific investments and is included in earnings. Unrealized losses
         on securities are charged to earnings if they reflect a decline in
         value that is other than temporary.

         INVESTMENT IN LOANS - Real estate related and residential mortgage
         loans receivable are presented net of any unamortized discount (or
         gross of any unamortized premium) and an allowance for loan losses.

         INVESTMENT IN OPERATING REAL ESTATE -- Operating real estate is
         recorded at cost less accumulated depreciation. Depreciation is
         computed on a straight-line basis. Buildings are depreciated over 40
         years. Major improvements are capitalized and depreciated over their
         estimated useful lives.

                                       60
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

         Fees and costs incurred in the successful negotiation of leases are
         deferred and amortized on a straight-line basis over the terms of the
         respective leases. Expenditures for repairs and maintenance are
         expensed as incurred. Newcastle adopted SFAS No. 144 "Accounting for
         the Impairment or Disposal of Long-Lived Assets" in 2002. Pursuant to
         such pronouncement, Newcastle reviews its real estate assets for
         impairment whenever events or changes in circumstances indicate that
         the carrying amount of an asset may not be recoverable. No material
         impairment was recorded during 2003, 2002 or 2001. SFAS No. 144 also
         specifies that long-lived assets to be disposed of by sale, which meet
         certain criteria, should be reclassified to Real Estate Held for Sale
         and measured at the lower of its carrying amount or fair value less
         costs of sale. As of December 31, 2003 Newcastle has five properties
         classified as Real Estate Held for Sale which have been adjusted to
         fair value (Note 6). The results of operations for such an asset,
         assuming such asset qualifies as a "component of an entity" as defined
         in SFAS No. 144, are retroactively reclassified to Income (Loss) from
         Discontinued Operations for all periods presented.

         FOREIGN CURRENCY INVESTMENTS - Assets and liabilities relating to
         foreign investments are translated using exchange rates as of the end
         of each reporting period. The results of Newcastle's foreign operations
         are translated at the weighted average exchange rate for each reporting
         period. Translation adjustments are included as a component of
         accumulated other comprehensive income.

         Foreign exchange contracts may, from time to time, be used to hedge
         Newcastle's net foreign investments. Gains and losses on foreign
         exchange contracts which qualify as hedges of net foreign investments
         as well as changes in the market value of these instruments are
         included in accumulated other comprehensive income. Upon sale or
         liquidation of a foreign investment, the related amount in accumulated
         other comprehensive income is reclassified to transaction gain or loss
         in the period of such liquidation.

         Transaction gains and losses that arise from exchange rate fluctuations
         on transactions denominated in a currency other than the functional
         currency, except those transactions which qualify as a hedge, are
         included currently in income.

         CASH AND CASH EQUIVALENTS AND RESTRICTED CASH - Newcastle considers all
         highly liquid short-term investments with maturities of 90 days or less
         when purchased to be cash equivalents. Substantially all amounts on
         deposit with major financial institutions exceed insured limits.
         Restricted cash consisted of:

<TABLE>
<CAPTION>
                                             December 31,
                                         -------------------
                                           2003       2002
                                         --------   --------
<S>                                      <C>        <C>
Derivative margin accounts               $  2,339   $  1,552
Restricted property operating accounts        604      1,606
Trustee accounts                            8,105      7,222
Reserve accounts                            2,084         --
                                         --------   --------
                                         $ 13,132   $ 10,380
                                         ========   ========
</TABLE>

         STOCK OPTIONS -- Newcastle accounts for stock options granted in
         accordance with SFAS No. 123, "Accounting for Stock-Based Compensation"
         as amended by SFAS No. 148, "Accounting for Stock-Based
         Compensation-Transition and Disclosure" and with EITF Issue No. 96-18
         "Accounting for Equity Instruments That Are Issued to Other Than
         Employees for Acquiring, or in Conjunction with Selling, Loans or
         Services." The fair value of the options issued as compensation to the
         Manager for its successful efforts in raising capital for Newcastle in
         2003 and 2002 was recorded as an increase in stockholders' equity with
         an offsetting reduction of capital proceeds received. Options granted
         to Newcastle's directors were accounted for using the intrinsic value
         method under APB Opinion No. 25, as permitted by SFAS No.123.

3.       INFORMATION REGARDING BUSINESS SEGMENTS

         Newcastle conducts its business through four primary segments: real
         estate securities, real estate related loans, operating real estate and
         residential mortgage loans. Details of Newcastle's investments in such
         segments can be found in Notes 4, 5 and 6, respectively.

                                       61
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

         Holdings conducted its business in four primary segments: real estate
         securities, operating real estate, real estate related loans, and its
         investment in Fund I.

         The real estate securities segment was retained by Newcastle. The
         operating real estate segment, which comprised three portfolios of
         properties, was split as follows: the Bell Canada (Canadian) and LIV
         (Belgian) portfolios were retained by Newcastle while the GSA (U.S.)
         portfolio was distributed to Holdings. The existing real estate related
         loans and Fund I segments were distributed to Holdings.

         The unallocated portion consists primarily of interest on short-term
         investments, general and administrative expenses, management fees and
         incentive compensation pursuant to the Management Agreement, and
         interest on Holdings' credit facility.

                                       62
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

         Summary financial data on Newcastle's segments is given below, together
         with a reconciliation to the same data for Newcastle as a whole
         (including its predecessor, through the date of the commencement of
         Newcastle's operations, as described in Notes 1 and 2):

<TABLE>
<CAPTION>
                                                   Real Estate                   Residential
                                   Real Estate       Related       Operating      Mortgage
                                   Securities         Loans       Real Estate       Loans       Fund I   Unallocated       Total
                                   -----------    -------------   -----------    -----------   --------  -----------    -----------
<S>                                <C>            <C>             <C>            <C>           <C>       <C>            <C>
December 31, 2003 and the
  Year then Ended
Gross revenues                     $   128,091    $       6,257   $    21,358    $    12,892   $    --   $       580    $   169,178
Operating expenses                        (795)             (26)       (9,963)        (1,506)       --       (15,603)       (27,893)
                                   -----------    -------------   -----------    -----------   -------   -----------    -----------
Operating income (loss)                127,296            6,231        11,395         11,386        --       (15,023)       141,285
Interest expense                       (65,888)          (4,304)       (5,207)        (6,162)       --            --        (81,561)
Depreciation and amortization               --               --        (2,260)            --        --            --         (2,260)
Equity in earnings of
  unconsolidated subsidiaries               --              861            --             --        --             1            862
                                   -----------    -------------   -----------    -----------   -------   -----------    -----------
Income (loss) from continuing
  operations                            61,408            2,788         3,928          5,224        --       (15,022)        58,326
Income (loss) from discontinued
  operations                                --               --        (2,208)            --        --            --         (2,208)
                                   -----------    -------------   -----------    -----------   -------   -----------    -----------
Net Income (Loss)                  $    61,408    $       2,788   $     1,720    $     5,224   $    --   $   (15,022)   $    56,118
                                   ===========    =============   ===========    ===========   =======   ===========    ===========
Revenue derived from
  non-US sources:
  Canada                           $        --    $          --   $    16,940    $        --   $    --   $        --    $    16,940
                                   ===========    =============   ===========    ===========   =======   ===========    ===========
  Belgium                          $        --    $          --   $     5,999    $        --   $    --   $        --    $     5,999
                                   ===========    =============   ===========    ===========   =======   ===========    ===========
Total assets                       $ 2,385,265    $     353,779   $   146,635    $   587,831   $    --   $    59,571    $ 3,533,081
                                   ===========    =============   ===========    ===========   =======   ===========    ===========
Long-lived assets
  outside the US:
  Canada                           $        --    $          --   $    54,250    $        --   $    --   $        --    $    54,250
                                   ===========    =============   ===========    ===========   =======   ===========    ===========
  Belgium                          $        --    $          --   $    78,149    $        --   $    --   $        --    $    78,149
                                   ===========    =============   ===========    ===========   =======   ===========    ===========

December 31, 2002 and the Year
  then Ended (A)
Gross revenues                     $    83,259    $          --   $    17,555    $     1,281   $ 3,287   $       432    $   105,814
Operating expenses                        (586)              --        (8,325)          (141)   (3,861)      (10,473)       (23,386)
                                   -----------    -------------   -----------    -----------   -------   -----------    -----------
Operating income (loss)                 82,673               --         9,230          1,140      (574)      (10,041)        82,428
Interest expense                       (40,805)              --        (4,322)          (658)       --        (2,336)       (48,121)
Depreciation and amortization               --               --        (2,026)            --      (329)         (101)        (2,456)
Equity in earnings of
  unconsolidated  subsidiaries              --               --            --             --       303            59            362
                                   -----------    -------------   -----------    -----------   -------   -----------    -----------
Income (loss) from continuing
  operations                            41,868               --         2,882            482      (600)      (12,419)        32,213
Income (loss) from discontinued
  operations                                --             (499)         (219)            --        --            --           (718)
                                   -----------    -------------   -----------    -----------   -------   -----------    -----------
Net Income (Loss)                  $    41,868    $        (499)  $     2,663    $       482   $  (600)  $   (12,419)   $    31,495
                                   ===========    =============   ===========    ===========   =======   ===========    ===========
Revenue derived from
  non-US sources:
  Canada                           $        --    $          --   $    14,015    $        --   $    --   $        --    $    14,015
                                   ===========    =============   ===========    ===========   =======   ===========    ===========
  Belgium                          $        --    $          --   $     5,402    $        --   $    --   $        --    $     5,402
                                   ===========    =============   ===========    ===========   =======   ===========    ===========
  Italy                            $        --    $         180   $        --    $        --   $    --   $        --    $       180
                                   ===========    =============   ===========    ===========   =======   ===========    ===========
Total assets                       $ 1,138,767    $          --   $   128,831    $   259,381   $    --   $    45,588    $ 1,572,567
                                   ===========    =============   ===========    ===========   =======   ===========    ===========
Long-lived assets outside the US:
  Canada                           $        --    $          --   $    49,271    $        --   $    --   $        --    $    49,271
                                   ===========    =============   ===========    ===========   =======   ===========    ===========
  Belgium                          $        --    $          --   $    67,852    $        --   $    --   $        --    $    67,852
                                   ===========    =============   ===========    ===========   =======   ===========    ===========
</TABLE>

(A)      The Fund I and Real Estate Related Loans segments and a portion of both
         the Unallocated segment (through the date of the commencement of our
         operations, July 12, 2002) and the discontinued operations of the
         Operating Real Estate segment represent operations related to
         activities treated as distributed to our predecessor.

                                       63
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

<TABLE>
<CAPTION>
                                                    Real Estate                 Residential
                                      Real Estate     Related      Operating     Mortgage
                                       Securities      Loans      Real Estate      Loans       Fund I      Unallocated     Total
                                      -----------   ----------    -----------   -----------  -----------   -----------   ----------
<S>                                   <C>           <C>           <C>           <C>          <C>           <C>           <C>
December 31, 2001 and the Year
 then Ended (B)
Gross revenues                        $    54,961   $         -   $    18,519   $         -  $    38,297   $     1,615   $  113,392
Operating expenses                           (253)            -        (8,373)            -      (23,295)       (9,492)     (41,413)
                                      -----------   ----------    -----------   -----------  -----------   -----------   ----------
Operating income (loss)                    54,708             -        10,146             -       15,002        (7,877)      71,979
Interest expense                          (26,880)            -        (3,967)            -            -        (3,204)     (34,051)
Depreciation and amortization                   -             -        (1,969)            -         (560)         (447)      (2,976)
Equity in earnings (losses) of
 unconsolidated subsidiaries                    -             -             -             -        5,360        (2,553)       2,807
                                      -----------   ----------    -----------   -----------  -----------   -----------   ----------
Income (loss) from continuing
 operations                                27,828             -         4,210             -       19,802       (14,081)      37,759
Income (loss) from discontinued
 operations                                     -         2,191         3,721             -            -             -        5,912
                                      -----------   ----------    -----------   -----------  -----------   -----------   ----------
Net Income (Loss)                     $    27,828   $     2,191   $     7,931   $         -  $    19,802   $   (14,081)  $   43,671
                                      ===========   ===========   ===========   ===========  ===========   ===========   ==========
Revenue derived from non-US sources:
  Canada                              $         -   $       (17)  $    16,092   $         -  $         -   $         -       16,075
                                      ===========   ===========   ===========   ===========  ===========   ===========   ==========
  Belgium                             $         -   $         -   $     7,219   $         -  $         -   $         -        7,219
                                      ===========   ===========   ===========   ===========  ===========   ===========   ==========
  Italy                               $         -   $       764   $         -   $         -  $         -   $         -          764
                                      ===========   ===========   ===========   ===========  ===========   ===========   ==========
Total assets                          $   567,492   $    12,920   $   565,481   $         -  $    97,562   $    18,664   $1,262,119
                                      ===========   ===========   ===========   ===========  ===========   ===========   ==========
Long-lived assets outside the US:
  Canada                              $         -   $         -   $    51,060   $         -  $         -   $         -   $   51,060
                                      ===========   ===========   ===========   ===========  ===========   ===========   ==========
  Belgium                             $         -   $         -   $    68,399   $         -  $         -   $         -   $   68,399
                                      ===========   ===========   ===========   ===========  ===========   ===========   ==========
</TABLE>

(B) Represents the operations of our predecessor.

UNCONSOLIDATED SUBSIDIARIES

Newcastle has one unconsolidated subsidiary which it accounts for under the
equity method. Holdings held two such investments, neither of which were
transferred to Newcastle; such investments are included in Newcastle's financial
statements through the date of the commencement of Newcastle's operations.

                                       64
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

The following table summarizes the activity affecting the equity held by
Newcastle in unconsolidated subsidiaries:

<TABLE>
<CAPTION>
                                                      Real Estate Loan
                                                         Subsidiary             Austin        Fund I        Total
                                                      ----------------         --------      --------      --------
<S>                                                   <C>                      <C>           <C>           <C>
BALANCE AT DECEMBER 31, 2001                              $      -             $  4,977      $ 68,231      $ 73,208
  Contributions to unconsolidated subsidiaries                   -                3,237        16,754        19,991
  Contribution of assets to unconsolidated
  subsidiaries                                                   -                1,454             -         1,454
  Distributions from unconsolidated
  subsidiaries                                                   -                 (522)       (7,743)       (8,265)
  Equity in earnings of unconsolidated
  subsidiaries                                                   -                   59           303           362
  Equity in OCI of unconsolidated subsidiaries                   -                    -           (15)          (15)
  Other                                                          -                    -          (329)         (329)
  Distribution to Holdings                                       -               (9,205)      (77,201)      (86,406)
                                                          --------             --------      --------      --------

BALANCE AT DECEMBER 31, 2002                                     -                    -             -             -
  Contributions to unconsolidated subsidiaries              30,827                    -             -             -
  Distributions from unconsolidated
  subsidiaries                                              (1,041)                   -             -             -
  Equity in earnings of unconsolidated
  subsidiaries                                                 861                    -             -             -
  Other                                                         (7)                   -             -             -
                                                          --------             --------      --------      --------
BALANCE AT DECEMBER 31, 2003                              $ 30,640             $      -      $      -      $      -
                                                          ========             ========      ========      ========
</TABLE>

Summarized financial information related to Newcastle's unconsolidated
subsidiaries, through the date of their distribution to Holdings, as applicable,
was as follows (in thousands):

<TABLE>
<CAPTION>
                                         Real Estate Loan Subsidiary (A) (B)         Austin (C)               Fund I (A)
                                         -----------------------------------  -----------------------   -----------------------
                                                    December 31,                    December 31,             December 31,
                                         -----------------------------------  -----------------------   -----------------------
                                                        2003                     2002          2001        2002          2001
                                                     ---------                ---------     ---------   ---------     ---------
<S>                                      <C>                                  <C>           <C>         <C>           <C>
Assets                                               $  61,628                $       -     $   7,947   $       -     $ 612,083
Liabilities                                                  -                        -        (2,353)          -             -
Minority interest                                         (348)                       -          (352)          -             -
                                                     ---------                ---------     ---------   ---------     ---------
Equity                                               $  61,280                $       -     $   5,242   $       -     $ 612,083
                                                     =========                =========     =========   =========     =========

Equity held by Newcastle                             $  30,640                $       -     $   4,977   $       -     $  68,231
                                                     =========                =========     =========   =========     =========

                                                        2003                     2002          2001        2002          2001
                                                     ---------                ---------     ---------   ---------     ---------
Revenues                                             $   1,885                $     585     $  (1,370)  $   9,740     $ 141,475
Expenses                                                  (152)                    (477)       (1,302)     (4,470)       (9,941)
Minority interest                                          (10)                     (45)          (16)          -             -
                                                     ---------                ---------     ---------   ---------     ---------
Net income (loss)                                    $   1,723                $      63     $  (2,688)  $   5,270     $ 131,534
                                                     =========                =========     =========   =========     =========

Newcastle's equity in net income (loss)              $     861                $      59     $  (2,553)  $     303     $   5,360
                                                     =========                =========     =========   =========     =========
</TABLE>

(A)  Newcastle's real estate loan subsidiary's, and Fortress Investment Fund
     LLC's, summary financial information is presented on a fair value basis,
     consistent with their internal basis of accounting. Newcastle's equity in
     net income excludes its predecessor's incentive income with respect to
     Fortress Investment Fund LLC.

(B) Included in the real estate related loan segment.

(C) Included in the unallocated segment.

                                       65
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

     REAL ESTATE LOAN SUBSIDIARY

     In November 2003, Newcastle and a private investment fund managed by an
     affiliate of the Manager co-invested and each indirectly own an
     approximately 38% interest in DBNC Peach Manager LLC, a limited liability
     company that has acquired approximately 130 franchise loans collateralized
     by fee and leasehold interests and other assets from a third party
     financial institution, for a purchase price of approximately $80.0 million.
     The Manager receives from this private investment fund, in addition to
     management fees, incentive compensation if the fund's aggregate investment
     returns exceed certain thresholds. The remaining approximately 24% interest
     in the limited liability company is owned by the above-referenced third
     party financial institution. Newcastle has no additional capital commitment
     to the limited liability company.

     This limited liability company is an investment company and therefore
     maintains its financial records on a fair value basis. Newcastle has
     retained such accounting relative to its investment in such limited
     liability company, which is accounted for under the equity method at fair
     value.

     FUND I

     The managing member of Fund I was Fortress Fund MM LLC (the "Fund I
     Managing Member"), which was owned jointly, through subsidiaries, by
     Holdings, approximately 94%, and the Manager, approximately 6%. A separate
     class of membership interests in the Fund I Managing Member reflected the
     entitlement to the incentive return payable by Fund I, as described below,
     which was owned 50% by the Manager and 50% by Holdings. Holdings and its
     affiliates, including the Fund I Managing Member, had committed to
     contribute an aggregate of $100 million, or approximately 11.5% of Fund I's
     total committed capital, to Fund I. Holdings had committed to fund 100% of
     the capital commitments of its affiliates, including the Fund I Managing
     Member (which had committed $8.7 million or approximately 1% of Fund I's
     total committed capital), to Fund I. Fund I, which was a Delaware limited
     liability company, was owned through membership interests issued in direct
     proportion to capital committed.

     The Fund I Managing Member was entitled to receive an annual management fee
     of up to 1.5% (inclusive of an administrative fee of up to 0.5%) of Fund
     I's invested capital or total equity commitments. Holdings was not charged
     management and administrative fees for its investment in Fund I. Pursuant
     to an agreement with the Fund I Managing Member and the Manager, the
     Manager was entitled to 100% of the management fee paid by Fund I to the
     Fund I Managing Member. Since the management fees paid to the Manager
     flowed through Holdings through its ownership of the Fund I Managing
     Member, they were reflected as gross amounts in both Management Fee from
     Affiliate and Management Fee to Affiliate, although they had no effect on
     net income.

     The Fund I Managing Member was entitled to an incentive return (the
     "Incentive Return") generally equal to 20% of Fund I 's returns, as
     defined. Fund I was managed by the Manager pursuant to the Fund I Managing
     Member's operating agreement and a management agreement between the Manager
     and the Fund I Managing Member. In accordance with those documents, (a) the
     Manager was entitled to 100% of the management fee payable by Fund I, (b)
     the Manager was entitled to 50% of the Incentive Return payable by Fund I,
     (c) Holdings was entitled to 50% of the Incentive Return payable by Fund I,
     and (d) Holdings was entitled to receive 100% of the investment income or
     loss attributable to the capital invested in Fund I by the Fund I Managing
     Member. The Manager of Fund I also manages Newcastle and Holdings. Holdings
     consolidated the financial results of the Fund I Managing Member because
     Holdings owned substantially all of the voting interest in the Fund I
     Managing Member. As a result, Newcastle's consolidated financial statements
     reflect all of the Incentive Return payable to the Fund I Managing Member,
     including the 50% portion payable to the Manager.

                                       66
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

     Holdings had adopted Method 2 of Emerging Issues Task Force Topic D-96
     which specifies that companies with management arrangements that contain a
     performance based incentive return that is not finalized until the end of a
     period of time specified in the contract may record such return as revenue
     in the amount that would be due under the formula at any point in time as
     if the incentive return arrangement was terminated at that date.

     Holdings recorded as incentive income the amount that would be due based on
     the fair value of the assets in Fund I exceeding the required return at a
     specific point in time as if the management arrangement was terminated on
     that date. Based on this methodology, Holdings' incentive income in each
     reporting period reflected changes in the fair value of the assets in Fund
     I. As such, Holdings accrued $27.5 million of Incentive Return through the
     date of the commencement of Newcastle's operations. This amount was
     recorded in Incentive Income from Affiliate. The Manager was entitled to
     50% of this income which Holdings recorded as Incentive Compensation to
     Affiliate.

     AUSTIN

     In 1998, Holdings and Fortress Principal Investment Group LLC ("FPIG"), an
     affiliate of the Manager, formed Austin Holdings Corporation ("Austin").
     FPIG contributed cash, and Holdings contributed its interest in entities
     that owned certain assets, primarily non-performing loans and foreclosed
     real estate intended for sale, which were originally acquired as part of
     loan pool acquisitions. Holdings held non-voting preferred stock of Austin.
     Holdings' preferred stock in Austin represented a 95% economic ownership
     interest in Austin, and had a liquidation preference over the common
     stockholders. FPIG was the holder of all of the common stock which
     represented 100% of the vote and 5% of the economic ownership interest of
     Austin. Austin also owned 100% of the common stock of Ascend Residential
     Holdings, Inc. ("Ascend"). Ascend's primary business was the acquisition,
     rehabilitation and sale of single-family residential properties.

                                       67
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

4.   REAL ESTATE SECURITIES

     The following is a summary of Newcastle's real estate securities at
     December 31, 2003 and 2002, all of which are classified as available for
     sale and are therefore marked to market through other comprehensive income
     pursuant to SFAS No. 115 "Accounting for Certain Investments in Debt and
     Equity Securities." Unrealized losses that are considered other than
     temporary are recognized currently in income. There were no such losses
     incurred through December 31, 2003. The unrealized losses on Newcastle's
     securities are primarily the result of market factors, rather than credit
     impairment, and Newcastle believes their carrying amounts are fully
     recoverable. None of the securities are delinquent. Five of the securities,
     with an aggregate unrealized loss of approximately $1.0 million, have been
     in an unrealized loss position for more than twelve months. The unrealized
     losses on these securities were primarily caused by changes in credit
     spreads which management believes to be temporary; no material loss is
     expected to be realized on such securities.

DECEMBER 31, 2003

<TABLE>
<CAPTION>
                                                                                                      Weighted Average
                                                         Gross Unrealized                      --------------------------------
                            Current Face  Amortized   ----------------------                    S&P                    Maturity
                               Amount     Cost Basis     Gains      Losses     Carrying Value  Rating  Coupon  Yield   (Years)
                            ------------  ----------  ----------  ----------   --------------  ------  ------  ------  --------
<S>                         <C>           <C>         <C>         <C>          <C>             <C>     <C>     <C>     <C>
Portfolio I
  CMBS                       $  318,261   $  290,279  $   21,957  $   (4,523)  $      307,713   BB+     6.89%   8.86%    6.77
  Unsecured REIT debt           229,182      231,116      21,868      (1,175)         251,809   BBB     7.21%   7.05%    6.32
                             ----------   ----------  ----------  ----------   --------------  ------   ----    ----     ----
  Subtotal - Portfolio I        547,443      521,395      43,825      (5,698)         559,522   BBB-    7.02%   8.06%    6.58
                             ----------   ----------  ----------  ----------   --------------  ------   ----    ----     ----
Portfolio II
  CMBS                          288,519      278,560      13,437        (661)         291,336   BBB-    6.20%   7.03%    6.34
  Unsecured REIT debt           105,588      105,047      12,813           -          117,860   BBB-    7.81%   7.88%    7.38
  Asset backed securities        61,959       57,828       1,813      (2,638)          57,003    A+     7.38%   8.82%    7.29
                             ----------   ----------  ----------  ----------   --------------  ------   ----    ----     ----
  Subtotal - Portfolio II       456,066      441,435      28,063      (3,299)         466,199   BBB-    6.73%   7.47%    6.71
                             ----------   ----------  ----------  ----------   --------------  ------   ----    ----     ----
Portfolio III
  CMBS                          332,427      345,195       1,075      (2,771)         343,499   BBB     5.85%   5.26%    6.15
  Unsecured REIT debt            99,470      103,973       5,067         (67)         108,973   BBB-    6.96%   6.22%    8.30
  Asset backed securities        62,236       60,705       1,667        (477)          61,895    A      4.13%   4.81%    5.22
                             ----------   ----------  ----------  ----------   --------------  ------   ----    ----     ----
  Subtotal - Portfolio III      494,133      509,873       7,809      (3,315)         514,367   BBB     5.85%   5.40%    6.47
                             ----------   ----------  ----------  ----------   --------------  ------   ----    ----     ----
Portfolio IV
  CMBS                          344,246      334,061       5,050        (401)         338,710   BBB     4.52%   4.97%    4.84
  Unsecured REIT debt            97,768      101,473       4,594           -          106,067   BBB     6.66%   6.01%    8.39
  Asset backed securities        49,467       46,635       1,242           -           47,877    A      4.76%   5.55%    6.33
                             ----------   ----------  ----------  ----------   --------------  ------   ----    ----     ----
  Subtotal - Portfolio IV       491,481      482,169      10,886        (401)         492,654   BBB     4.97%   5.25%    5.70
                             ----------   ----------  ----------  ----------   --------------  ------   ----    ----     ----
Total Real Estate
  Securities*                $1,989,123   $1,954,872  $   90,583  $  (12,713)  $    2,032,742   BBB     6.16%   6.54%    6.36
                             ==========   ==========  ==========  ==========   ==============  ======   ====    ====     ====

Other Securities-Rated       $  227,155   $  204,018  $    2,801  $     (309)  $      206,510   BBB+    6.67%   8.40%    5.48
Other Securities - Unrated       18,899       15,067           -           -           15,067   N/A    12.27%  16.95%    2.86

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

Total Other Securities       $  246,054   $  219,085  $    2,801  $     (309)  $      221,577           7.10%   8.99%    5.28
                             ==========   ==========  ==========  ==========   ==============           ====    ====     ====
</TABLE>

* Carrying value excludes restricted cash of $57.0 million included in Real
  Estate Securities pending its reinvestment. The total current face amount of
  fixed rate real estate securities was $1,531.6 million, and of floating rate
  securities was $457.5 million.

                                       68
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

DECEMBER 31, 2002

<TABLE>
<CAPTION>

                                                                                                      Weighted Average
                                                         Gross Unrealized                      --------------------------------
                            Current Face  Amortized   ----------------------                    S&P                    Maturity
                               Amount     Cost Basis     Gains      Losses     Carrying Value  Rating  Coupon  Yield   (Years)
                            ------------  ----------  ----------  ----------   --------------  ------  ------  ------  --------
<S>                         <C>           <C>         <C>         <C>          <C>             <C>     <C>     <C>     <C>
Portfolio I
  CMBS                       $  323,025   $  283,991  $   26,999  $   (3,686)  $      307,304    BB     6.72%   9.50%    7.11
  Unsecured REIT debt           234,562      232,892      21,726        (100)         254,518   BBB     7.41%   7.64%    5.48
                             ----------   ----------  ----------  ----------   --------------  ------   ----    ----     ----
  Subtotal - Portfolio I        557,587      516,883      48,725      (3,786)         561,822   BB+     7.01%   8.67%    6.43
                             ----------   ----------  ----------  ----------   --------------  ------   ----    ----     ----
Portfolio II
  CMBS                          299,051      285,035      17,055        (238)         301,852   BBB-    6.35%   7.26%    7.17
  Unsecured REIT debt           113,357      112,475       8,678           -          121,153   BBB-    7.81%   7.87%    7.85
  Asset Bonded Securities        58,155       56,086       1,172      (1,867)          55,391    AA     7.29%   8.23%    7.89
                             ----------   ----------  ----------  ----------   --------------  ------   ----    ----     ----
  Subtotal - Portfolio II       470,563      453,596      26,905      (2,105)         478,396   BBB     6.28%   7.53%    7.41
                             ----------   ----------  ----------  ----------   --------------  ------   ----    ----     ----
Total Real Estate
  Securities*                $1,028,150   $  970,479  $   75,630  $   (5,891)  $    1,040,218   BBB-    6.67%   8.14%    6.88
                             ==========   ==========  ==========  ==========   ==============  ======   ====    ====     ====

Other Securities-Rated       $    5,000   $    3,888  $      137  $        -   $        4,025   AAA     7.39%  12.11%    8.49
Other Securities
  Unrated                        18,953        7,184           -           -            7,184   N/A     7.40%  18.63%    7.50

                             ----------   ----------  ----------  ----------   --------------           ----    ----     ----
Total Other Securities       $   23,953   $   11,072  $      137  $        -   $       11,209           7.40%  16.34%    7.71
                             ==========   ==========  ==========  ==========   ==============           ====    ====     ====
</TABLE>

* Carrying value excludes restricted cash of $29.7 million included in Real
  Estate Securities pending its reinvestment. The total current face amount of
  fixed rate real estate securities was $949.3 million, and of floating rate
  real estate securities was $78.9 million.

The following is a reconciliation of real estate and other securities:

<TABLE>
<CAPTION>
                                            REAL ESTATE SECURITIES                                OTHER SECURITIES
                              --------------------------------------------------  -----------------------------------------------
                                               Market                                             Market
                              Current Face  (Discount)/    Loss      Amortized      Current    (Discount)/    Loss     Amortized
                                 Amount       Premium    Allowance   Cost Basis   Face Amount    Premium    Allowance  Cost Basis
                              ------------  -----------  ---------  ------------  -----------  -----------  ---------  ----------
<S>                           <C>           <C>          <C>        <C>           <C>          <C>          <C>        <C>
BALANCE AT DECEMBER 31, 2001  $   560,572   $  (62,193)  $       -  $   498,379   $   26,343   $  (11,876)  $       -  $  14,467
  Purchases                       729,645      (28,863)          -      700,782       11,834       (1,017)          -     10,817
  Collections of principal         (7,308)           -           -       (7,308)           -            -           -          -
  Cost of securities sold        (254,759)      26,381           -     (228,378)           -            -           -          -
  Accretion                             -        7,004           -        7,004            -         (367)          -       (367)
  Distributions to Holdings             -            -           -            -      (14,224)         379           -    (13,845)
                              -----------   ----------   ---------  -----------   ----------   ----------   ---------  ---------
BALANCE AT DECEMBER 31, 2002    1,028,150      (57,671)          -      970,479       23,953      (12,881)          -     11,072
  Purchases                     1,249,835        7,798           -    1,257,633      279,087      (22,310)          -    256,777
  Collections of principal        (58,834)        (238)          -      (59,072)      (3,455)        (368)          -     (3,823)
  Cost of securities sold        (196,756)       4,495           -     (192,261)     (52,547)       2,351           -    (50,196)
  Accretion                             -        5,639           -        5,639            -          112           -        112
  Transfer                        (10,198)       2,178           -       (8,020)      10,198       (2,178)          -      8,020
  Consolidation of ICH CMO
  (Note 6)                        (23,074)       3,548           -      (19,526)     (11,182)       8,305           -     (2,877)
                              -----------   ----------   ---------  -----------   ----------   ----------   ---------  ---------
BALANCE AT DECEMBER 31, 2003  $ 1,989,123   $  (34,251)  $       -  $ 1,954,872   $  246,054   $  (26,969)  $       -  $ 219,085
                              ===========   ==========   =========  ===========   ==========   ==========   =========  =========
</TABLE>

                                       69
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

     In October 2003, Newcastle entered into an agreement with a major financial
     institution for the right to purchase commercial mortgage backed
     securities, senior unsecured REIT debt, real estate loans and asset backed
     securities (the "Portfolio V Collateral") for its next real estate
     securities portfolio which is targeted to be $450 million. The agreement is
     treated as a non-hedge derivative for accounting purposes and is therefore
     marked-to-market through current income; a gain of approximately $0.5
     million has been recorded in interest income through December 31, 2003. The
     Portfolio V Collateral is expected to be included in a financing
     transaction in which Newcastle would acquire the equity interest ("CBO V").
     As of December 31, 2003, approximately $195.0 million of the Portfolio V
     Collateral had been accumulated. Through December 31, 2003, Newcastle made
     deposits aggregating approximately $19.0 million under such agreement (the
     "Portfolio V Deposit"). If CBO V is not consummated as a result of
     Newcastle's failure to acquire the equity interest, except as a result of
     Newcastle's gross negligence or willful misconduct, Newcastle would be
     required to either purchase the Portfolio V Collateral or pay the Realized
     Loss, as defined, up to the Portfolio V Deposit, less any Excess Carry
     Amount, as defined, earned on such deposit. Although Newcastle currently
     anticipates completing CBO V in the near term, there is no assurance that
     CBO V will be consummated or on what terms it will be consummated.

     Newcastle had entered into similar agreements related to Portfolio III and
     Portfolio IV prior to closing on their related financing. During 2003,
     Newcastle recorded approximately $3.1 million of mark-to-market income on
     these agreements in interest income.

     During 2003, Newcastle recorded gross realized gains of approximately $14.5
     million and gross realized losses of approximately $1.9 million related to
     the sale of real estate securities.

     The securities denoted Portfolio I, Portfolio II, Portfolio III and
     Portfolio IV are encumbered by the CBO I, CBO II, CBO III and CBO IV
     securitizations (Note 8), respectively. Most of the other securities were
     encumbered by repurchase agreements (Note 8) at December 31, 2003.

                                       70
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

5.   REAL ESTATE RELATED LOANS AND RESIDENTIAL MORTGAGE LOANS

     The following is a summary of real estate related loans and residential
     mortgage loans.

<TABLE>
<CAPTION>
                            December 31, 2003                    December 31,                   December 31, 2003
                          ---------------------  ------------------------------------------  -----------------------
                                      Weighted      2003      2002       2003       2002     Delinquent
                          Wtd. Avg.   Average    ---------  ---------  ---------  ---------   Carrying
Description                 Yield     Maturity      Carrying Amount         Face Amount        Amount    Encumbrance
------------------------  ---------  ----------  --------------------  --------------------  ----------  -----------
<S>                       <C>        <C>         <C>        <C>        <C>        <C>        <C>         <C>
ICH Loan Portfolio          7.90%    4.63 Years  $ 241,334  $       -  $ 243,809  $       -  $    5,629  $   218,506
Real Estate Related Loan    5.71%    2.96 Years     99,859          -     99,859          -           -       80,000
Total Real Estate
                                                 ---------  ---------  ---------  ---------  ----------  -----------
 Related Loans                                   $ 341,193  $       -  $ 343,668  $       -  $    5,629  $   298,506
                                                 =========  =========  =========  =========  ==========  ===========

Residential Mortgage
 Loan Portfolio             2.94%    4.14 Years  $ 586,237  $ 258,198  $ 578,330  $ 254,201  $      410  $   557,191
</TABLE>

     The following is a reconciliation of real estate related loans and
     residential mortgage loans.

<TABLE>
<CAPTION>
                                             Real Estate related Loans                       Residential Mortgage Loans
                                ------------------------------------------------  -----------------------------------------------
                                                 Market                                           Market
                                   Current    (Discount)/    Loss      Carrying     Current    (Discount)/    Loss      Carrying
                                 Face Amount    Premium    Allowance    Amount    Face Amount    Premium    Allowance    Amount
                                ------------  -----------  ---------  ----------  -----------  -----------  ---------  ----------
<S>                             <C>           <C>          <C>        <C>         <C>          <C>          <C>        <C>
BALANCE AT DECEMBER 31, 2001    $    25,395   $         -  $(14,720)  $  10,675   $        -   $        -   $      -   $       -
  Purchases/advances                      -             -         -           -      255,550        4,147          -     259,697
  Collections of principal           (6,560)            -         -      (6,560)      (1,349)           -          -      (1,349)
  Cost of loans sold                      -             -      (267)       (267)           -            -          -           -
  Accretion                               -             -         -           -            -         (150)         -        (150)
  Foreign currency translation          432             -      (210)        222            -            -          -           -
  Transfer to unconsolidated
   subsidiary                       (17,355)            -    13,329      (4,026)           -            -          -           -
  Distribution to Holdings           (1,912)            -     1,868         (44)           -            -          -           -
                                -----------   -----------  --------   ---------   ----------   ----------   --------   ---------
BALANCE AT DECEMBER 31, 2002              -             -         -           -      254,201        3,997          -     258,198
  Purchases/advances                100,000             -         -     100,000      524,502        8,116          -     532,618
  Collections of principal           (3,408)            -         -      (3,408)     (39,545)           -          -     (39,545)
  Cost of loans sold                      -             -         -           -     (160,828)      (2,869)         -    (163,697)
  Accretion                               -             -         -           -            -       (1,237)         -      (1,237)
  Loss allowance                          -             -         -           -            -            -       (100)       (100)
  Consolidation of ICH CMO          247,076             -    (2,475)    244,601            -            -          -           -
                                -----------   -----------  --------   ---------   ----------   ----------   --------   ---------
BALANCE AT DECEMBER 31, 2003    $   343,668   $         -  $ (2,475)  $ 341,193   $  578,330   $    8,007   $   (100)  $ 586,237
                                ===========   ===========  ========   =========   ==========   ==========   ========   =========
</TABLE>

     Two residential mortgage loans, with an aggregate carrying amount of $0.4
     million, are on non-performing status and no interest is being accrued
     thereon. A loss reserve of $0.1 million was recorded with respect to these
     loans during the year ended December 31, 2003.

     In October 2003, pursuant to Financial Accounting Standards Bond
     Interpretation No.46 "Consolidation of Variable Interest Entities,"
     Newcastle consolidated an entity which holds a portfolio of commercial
     mortgage loans which has been securitized. This investment, which is
     referred to as the ICH CMO, was previously treated as a non-consolidated
     residual interest in such securitization. Newcastle exercises no control
     over the management or resolution of these assets and its residual
     investment in this entity was recorded at $2.9 million prior to its
     consolidation. 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. The consolidation did not have any
     effect on Newcastle's net basis in the investment or on its equity and had
     no material effect on its net income.

                                       71
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

     In November 2003, Newcastle acquired an aggregate of $100 million of a $525
     million facility comprised of two secured term loans made to subsidiaries
     of The Newkirk Group that own interests in credit leased operating real
     estate. The loan amortizes principal based on collateral receipts.

     The average carrying amount of Newcastle's residential mortgage loans was
     approximately $398.8 million and $39.8 million during 2003 and 2002,
     respectively, on which Newcastle earned approximately $12.9 million and
     $1.3 million of gross revenues, respectively.

     The average carrying amount of Newcastle's real estate related loans,
     excluding loans distributed to Holdings, was approximately $69.1 million
     and $0.0 million during 2003 and 2002, respectively, on which Newcastle
     earned approximately $6.3 million and $0.0 million of gross revenues,
     respectively.

     All of Newcastle's loans owned at such time were transferred to Holdings
     prior to the commencement of Newcastle's operations.

     The residential mortgage loan portfolio is encumbered by repurchase
     agreements (Note 8), the ICH Loan Portfolio is encumbered by the ICH CMO
     Bonds (Note 8) and the real estate related loan is encumbered by the real
     estate loan financing (Note 8).

                                       72
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

6.   OPERATING REAL ESTATE

     The following is a reconciliation of operating real estate assets and
     accumulated depreciation:

<TABLE>
<CAPTION>
                                                           Accumulated
          Operating Real Estate                 Gross      Depreciation        Net
------------------------------------------  ------------   ------------   ------------
<S>                                         <C>            <C>            <C>
BALANCE AT DECEMBER 31, 2001                $    563,782   $    (38,948)  $    524,834
 Improvements                                      2,166              -          2,166
 Foreign currency translation                     11,998           (737)        11,261
 Depreciation                                          -         (7,994)        (7,994)
 Cost of real estate sold                        (44,548)         2,425        (42,123)
 Distribution to Holdings                       (404,715)        35,320       (369,395)
 Transferred to Real Estate Held for Sale         (5,571)           474         (5,097)
                                            ------------   ------------   ------------
BALANCE AT DECEMBER 31, 2002                     123,112         (9,460)       113,652
 Improvements                                        576              -            576
 Foreign currency translation                     25,313         (2,247)        23,066
 Depreciation                                          -         (3,043)        (3,043)
 Transferred to Real Estate Held for Sale        (34,671)         3,415        (31,256)
                                            ------------   ------------   ------------
BALANCE AT DECEMBER 31, 2003                $    114,330   $    (11,335)  $    102,995
                                            ============   ============   ============

Canadian Properties                         $     60,854   $     (6,604)  $     54,250
Belgian Properties                                53,476         (4,731)        48,745
                                            ------------   ------------   ------------
Total                                       $    114,330   $    (11,335)  $    102,995
                                            ============   ============   ============

Real Estate Held for Sale

BALANCE AT DECEMBER 31, 2001                                              $          -
 Transferred from Operating Real Estate                                          5,097
 Mark-to-market                                                                 (1,626)
                                                                          ------------
BALANCE AT DECEMBER 31, 2002                                                     3,471
 Sold                                                                           (3,471)
 Transferred from Operating Real Estate                                         31,256
 Mark-to-market                                                                 (1,852)
                                                                          ------------
BALANCE AT DECEMBER 31, 2003                                              $     29,404
                                                                          ============

Canadian Properties                                                       $          -
Belgian Properties                                                              29,404
                                                                          ------------
Total                                                                     $     29,404
                                                                          ============
</TABLE>

                                       73
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

     All of Newcastle's U.S. properties (the "GSA Portfolio") were distributed
     to Holdings prior to the commencement of Newcastle's operations. Such
     properties were primarily leased to the General Services Administration of
     the U.S. Government. The GSA Portfolio was financed by a securitization
     which was also distributed to Holdings.

     The Canadian properties are primarily leased to Bell Canada, a wholly-owned
     subsidiary of BCE, Inc. and are referred to as the "Bell Canada Portfolio."
     For 2003, 2002 and 2001, approximately 73.8%, 74.4% and 74.9% of
     Newcastle's consolidated rental and escalation income from continuing
     operations was attributable to Bell Canada. The Bell Canada leases expire
     over various dates through 2007. The lease of the primary tenant of one of
     these properties, the smallest property in the portfolio, expires in March
     2004 and this tenant has given notice of their intention to vacate. Each
     Bell Canada lease contains one five-year lease renewal option and provides
     for a significant payment due upon expiration of the lease. These terminal
     payments have been included in the calculation of straight-line rental
     income assuming that each lease is renewed once. The Bell Canada leases
     also provide for the reimbursement of substantially all operating expenses
     and property taxes plus an administrative fee. The Bell Canada Portfolio is
     encumbered by the Bell Canada Securitization (Note 8).

     The Belgian properties are referred to as the "LIV Portfolio" and are
     leased to a variety of tenants, including the European Commission ("EC").
     For 2003, 2002 and 2001, approximately 16.2%, 15.8% and 14.3% of
     Newcastle's consolidated rental and escalation income from continuing
     operations was attributable to the EC. The leases on the Belgian properties
     provide for annual increases in base rent based on the change in a Belgian
     index, as well as payment of increases in operating expenses and real
     estate taxes over base year amounts. The LIV Portfolio is encumbered by the
     Belgian Mortgage (Note 8).

     The following is a schedule of the future minimum rental payments to be
     received under non-cancelable operating leases:

<TABLE>
<S>                     <C>
   2004                 $  11,859
   2005                    10,828
   2006                     8,649
   2007                     4,484
   2008                        41
Thereafter                     71
                        ---------
                        $  35,932
                        =========
</TABLE>

     In May 2002, Holdings sold one of its GSA Properties with a net basis of
     $33.0 million for a net purchase price of approximately $34.1 million, at a
     gain of $1.1 million. In May 2002, Newcastle sold a Belgian property for
     gross proceeds of approximately $8.9 million, at a loss of approximately
     $1.1 million. Pursuant to SFAS No. 144, Newcastle has retroactively
     recorded the operations, including the gain or loss, of such properties in
     Income from Discontinued Operations for all periods presented.

     In August and November 2002, Newcastle entered into contracts to sell two
     commercial properties located in Canada for gross proceeds of approximately
     $2.6 million, at a loss of approximately $1.6 million including the write
     off of accumulated other comprehensive income related to foreign currency
     translation. The sales were completed in April 2003. Pursuant to SFAS No.
     144, Newcastle has retroactively recorded the operations, including the
     loss, of such properties in Income from Discontinued Operations for all
     periods presented.

                                       74
<PAGE>


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

     Newcastle has committed to a plan to sell five of the properties in the LIV
     portfolio. Newcastle is currently in negotiation with a potential buyer of
     these properties. Newcastle expects a sale of the properties to be
     completed in the first half of 2004. Accordingly, these properties have
     been reclassified as Real Estate Held for Sale and have been marked down to
     their estimated fair value less costs of sale, resulting in a recorded loss
     of approximately $1.5 million. Although Newcastle currently anticipates
     completing this sale in the near term, there is no assurance that this sale
     will be completed or on what terms it will be completed. Pursuant to SFAS
     No. 144, Newcastle has retroactively recorded the operations of such
     properties, including the loss described above and interest expense on the
     related mortgage balance which would be repaid upon their sale, in Income
     From Discontinued Operations for all periods presented.

     Gross revenues from discontinued operations, which include those
     investments distributed to Holdings as discussed in Note 2, were
     approximately $1.6 million, $31.0 million and $69.7 million in 2003, 2002
     and 2001, respectively. Interest expense included in discontinued
     operations was approximately $1.5 million, $13.4 million, and $28.7 million
     in 2003, 2002 and 2001 respectively.

                                       75
<PAGE>


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31, 2003
                                                                 COSTS      --------------------------------------------------------
                                                              CAPITALIZE     GROSS
                                               INITIAL COST   SUBSEQ. TO    CARRYING    ACCUM.    NET CARRYING
  TYPE OF PROPERTY              LOCATION            (A)       ACQ'N (A)      AMOUNT      DEPR.     AMOUNT (B)    ENCUMB.    OCC. (C)
---------------------------------------------  ------------   ---------      -----       -----     ----------    -------    --------
<S>                        <C>                 <C>            <C>           <C>         <C>       <C>           <C>         <C>
   Off. Bldg.              Etobicoke, ON         $ 10,831       $  779      $  11,610   $ 1,408     $ 10,202    $  10,734     100%
   Off. Bldg.              London, ON              17,730          369         18,097     2,232       15,865        9,383      96%
   Industrial              Toronto, ON             30,928          209         31,137     2,954       28,183       22,749     100%
                                                 --------       ------      ---------   -------     --------    ---------     ---
SUBTOTAL - CANADA                                  59,489        1,357         60,844     6,594       54,250       42,866      99%
                                                 --------       ------      ---------   -------     --------    ---------     ---
   Off. Bldg.              G. Bijgaarden, BEL      11,892          554         12,446     1,116       11,330       11,491      67%
   Off. Bldg.              Brussels, BEL           32,758           26         32,784     2,870       29,914       35,373     100%
   Off. Bldg.              Zaventem, BEL            8,073          149          8,222       721        7,501        5,772      76%
                                                 --------       ------      ---------   -------     --------    ---------     ---
SUBTOTAL - BELGIUM                                 52,723          729         53,452     4,707       48,745       52,636      84%
                                                 --------       ------      ---------   -------     --------    ---------     ---
SUBTOTAL - OPERATING REAL EASTATE                 112,212        2,086        114,296    11,301      102,995       95,502      96%
                                                 --------       ------      ---------   -------     --------    ---------     ---
   Off. Bldg.              Brussels, BEL              N/A          N/A          7,341       N/A        7,341        4,989     100%
   Off. Bldg.              Waterloo, BEL              N/A          N/A          9,751       N/A        9,751        7,383     100%
   Off. Bldg.              Brussels, BEL              N/A          N/A          4,723       N/A        4,723        3,543      66%
   Warehouse               Zaventem, BEL              N/A          N/A          3,476       N/A        3,476        2,484     100%
   Off. Bldg.              Brussels, BEL              N/A          N/A          4,113       N/A        4,113        3,527       0%
                                                 --------       ------      ---------   -------     --------    ---------     ---
SUBTOTAL - REAL ESTATE HELD FOR SALE                    -            -         29,404         -       29,404       21,926      78%
                                                 --------       ------      ---------   -------     --------    ---------     ---
                           TOTALS:               $112,212       $2,086      $ 143,700   $11,301     $132,399    $ 117,428      94%
                                                 ========       ======      =========   =======     ========    =========     ===

<CAPTION>


                                                              ACQ.
                                               NET RENTABLE   DATE      YEAR BUILT/
  TYPE OF PROPERTY              LOCATION       SQ. FT. (C)    (C)      RENOVATED (C)
---------------------------------------------  -----------    -----    -------------
<S>                        <C>                 <C>            <C>      <C>
   Off. Bldg.              Etobicoke, ON          177,214     10/98        1972/1978
   Off. Bldg.              London, ON             325,764     10/98             1980
   Industrial              Toronto, ON            624,786     10/98     1963/'71/'79
                                                ---------
SUBTOTAL - CANADA                               1,127,764
                                                ---------
   Off. Bldg.              G. Bijgaarden, BEL      81,763     11/99             1994
   Off. Bldg.              Brussels, BEL          119,781     11/99        1973/1995
   Off. Bldg.              Zaventem, BEL           65,175     11/99        1975/1990
                                                ---------
SUBTOTAL - BELGIUM                                266,719
                                                ---------
SUBTOTAL - OPERATING REAL EASTATE               1,394,483
                                                ---------
   Off. Bldg.              Brussels, BEL           26,651     11/99        1952/1998
   Off. Bldg.              Waterloo, BEL           46,231     11/99        1930/1990
   Off. Bldg.              Brussels, BEL           28,180     11/99        1974/1996
   Warehouse               Zaventem, BEL           55,606     11/99             1986
   Off. Bldg.              Brussels, BEL           32,206     11/99        1987/2001
                                                ---------
SUBTOTAL - REAL ESTATE HELD FOR SALE              188,874
                                                ---------
                           TOTALS:              1,583,357
                                                =========
</TABLE>

(A)  Adjusted for changes in foreign currency exchange rates, which aggregated
     $25.2 million of gain and $12.0 million of gain between land, building and
     improvements in 2003 and 2002, respectively.

(B)  The aggregate United States federal income tax basis for such assets at
     December 31, 2003 was approximately $118.4 million.

(C)  Unaudited.

                                       76
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

7.   FAIR VALUE OF FINANCIAL INSTRUMENTS

     For certain of Newcastle's financial instruments, fair values are not
     readily available since there are no active trading markets as
     characterized by current exchanges between willing parties. Accordingly,
     fair values can only be derived or estimated for these instruments using
     various valuation techniques, such as computing the present value of
     estimated future cash flows using discount rates commensurate with the
     risks involved. However, the determination of estimated future cash flows
     is inherently subjective and imprecise. It should be noted that minor
     changes in assumptions or estimation methodologies can have a material
     effect on these derived or estimated fair values, and that the fair values
     reflected below are indicative of the interest rate, credit spread and
     currency rate environments as of December 31, 2003 and do not take into
     consideration the effects of subsequent interest rate, credit spread or
     currency rate fluctuations.

     The carrying amounts and estimated fair values of Newcastle's financial
     instruments at December 31, 2003 were as follows:

<TABLE>
<CAPTION>
                                                                 Carrying     Principal Balance or    Estimated Fair
                                                                  Amount         Notional Amount           Value
                                                                  ------         ---------------           -----
<S>                                                             <C>               <C>                  <C>
ASSETS:
   Real estate securities, available for sale                   $ 2,089,712       $ 2,046,094          $ 2,089,712
   Real estate securities portfolio deposit                          19,541         See below               19,541
   Other securities, available for sale                             221,577           238,283              221,577
   Real estate related loans                                        341,193           343,668              368,269
   Residential mortgage loans                                       586,237           578,330              586,237
   Interest rate caps, treated as hedges (A)                          8,294           583,855                8,294
LIABILITIES:
   CBO bonds payable                                              1,793,533         1,813,500            1,836,628
   Other bonds payable                                              260,674           261,372              282,014
   Notes payable                                                    154,562           154,562              155,058
   Repurchase agreements                                            715,783           715,783              715,783
   Interest rate swaps, treated as hedges (B)                        28,881         1,250,842               28,881
   Non-hedge derivative obligations (C)                                 747         See below                  747
</TABLE>

(A) Included in Deferred Costs, Net. The longest cap maturity is October 2015.

(B) Included in Derivative Liabilities. The longest swap maturity is April 2011.

(C) Included in Derivative Liabilities. The longest maturity is July 2038.

                                       77
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

     The methodologies used and key assumptions made to estimate fair value are
     as follows:

     REAL ESTATE SECURITIES, AVAILABLE FOR SALE -- The fair value of these
     securities is estimated by obtaining third party broker quotations, if
     available and practicable, and counterparty quotations.

     REAL ESTATE SECURITIES PORTFOLIO DEPOSIT -- The fair value of this deposit,
     related to CBO V, which is treated as a non-hedge derivative, is estimated
     by obtaining a counterparty quotation. This deposit is more fully described
     in Note 4.

     OTHER SECURITIES, AVAILABLE FOR SALE -- The fair value of these securities
     is estimated by obtaining third party broker quotations, if available and
     practicable, and counterparty quotations. The fair value of one security,
     for which a quoted market price is not readily available, is estimated by
     means of price/yield analysis based on Newcastle's expected disposition
     strategy for such asset.

     REAL ESTATE RELATED LOANS -- The ICH CMO loans were valued by discounting
     expected future receipts by a rate calculated based on current market
     conditions for comparable financial instruments, including market interest
     rates and credit spreads. The other loan bears a floating rate of interest
     and Newcastle believes that, for similar financial instruments with
     comparable credit risks, its effective rate approximates a market rate.
     Accordingly, the carrying amount outstanding is believed to approximate
     fair value.

     RESIDENTIAL MORTGAGE LOANS -- This portfolio of mortgage loans bears a
     floating rate of interest. Newcastle believes that, for similar financial
     instruments with comparable credit risks, the effective rate on this
     portfolio approximates a market rate. Accordingly, the carrying amount of
     this portfolio is believed to approximate fair value.

     INTEREST RATE CAP AND SWAP AGREEMENTS AND NON-HEDGE DERIVATIVE OBLIGATIONS
     -- The fair value of these agreements is estimated by obtaining
     counterparty quotations.

     CBO BONDS PAYABLE -- These bonds were valued by discounting expected future
     payments by a rate calculated based on current market conditions for
     comparable financial instruments, including market interest rates and
     credit spreads.

     OTHER BONDS PAYABLE -- The Bell Canada Securitization was valued, in U.S.
     dollars at the period end exchange rate, by discounting expected future
     payments by a rate calculated by imputing a spread over a market index on
     the date of borrowing. The ICH CMO Bonds were valued by discounting
     expected future payments by a rate calculated based on current market
     conditions for comparable financial instruments, including market interest
     rates and credit spreads.

     NOTES PAYABLE -- The LIV Mortgage was valued, in U.S. dollars at the period
     end exchange rate, by discounting expected future payments by a rate
     calculated by imputing a spread over a market index on the date of
     borrowing. The real estate loan financing bears a floating rate of
     interest. Newcastle believes that, for similar financial instruments with
     comparable credit risks, its effective rate approximates a market rate.
     Accordingly, the carrying amount outstanding is believed to approximate
     fair value.

     REPURCHASE AGREEMENTS -- These agreements bear floating rates of interest
     and Newcastle believes 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.

     NON-HEDGE DERIVATIVE OBLIGATIONS -- These obligations are valued by
     reference to counterparty quotations. These obligations represent 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 amount of $17.5 million, and an interest
     rate cap with a notional amount of approximately $62.4 million.

                                       78
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

8.   DEBT OBLIGATIONS

     The following table presents certain information regarding Newcastle's debt
     obligations:

<TABLE>
<CAPTION>
                                                               Unhedged Weighted                                   Weighted Average
                                                                Average Funding   Final Stated  Weighted Average  Expected Remaining
                                Carrying Amount   Face Amount        Cost           Maturity    Funding Cost (A)     Life (Years)
                                ---------------   -----------        ----           --------    ----------------     ------------
<S>                             <C>               <C>          <C>                <C>           <C>               <C>
CBO Bonds Payable
CBO I                            $   431,802      $   437,500       3.83%(B)        July 2038        4.89%               4.67
CBO II                               439,832          444,000       2.91%(B)       April 2037        6.03%               6.33
CBO III                              467,325          472,000       2.43%(B)       March 2038        4.01%               8.44
CBO IV                               454,574          460,000       2.03%(B)       Sept. 2038        3.60%               8.34
                                 -----------      -----------                                        ----                ----
                                   1,793,533        1,813,500                                        4.61%               6.99
                                 -----------      -----------                                        ----                ----
Other Bonds Payable
Bell Canada Securitization            42,168           42,866       7.01%          April 2012        7.01%               2.09
ICH CMO                              218,506          218,506       6.47%(B)      August 2030        6.47%               4.46
                                 -----------      -----------                                        ----
                                     260,674          261,372                                        6.56%
                                 -----------      -----------                                        ----
Notes Payable
LIV Mortgage                          74,562           74,562        6.10%          Nov. 2006        6.10%               2.92
Real Estate Loan Financing            80,000           80,000     LIBOR+1.50%       Nov. 2006        2.74%               2.96
                                 -----------      -----------                                        ----
                                     154,562          154,562                                        4.36%
                                 -----------      -----------                                        ----
Repurchase Agreements
Residential Mortgage Loans (C)       557,191          557,191     LIBOR+0.41%      March 2004        1.52%               0.25
Other Security #1                      1,457            1,457     LIBOR+1.35%       One Month        2.47%               0.08
Other Security #2 (D)                 18,143           18,143     LIBOR+0.28%       One Month        1.43%               0.08
Other Security #3 (E)                 16,705           16,705     LIBOR+0.50%      March 2004        4.45%               0.25
Other Security #4 (E)                 12,062           12,062     LIBOR+0.50%      March 2004        4.44%               0.25
Other Security #5 (E)                110,225          110,225     LIBOR+0.70%      March 2004        3.68%               0.25
                                 -----------      -----------                                        ----
                                     715,783          715,783                                        1.97%
                                 -----------      -----------                                        ----
Total debt obligations           $ 2,924,552      $ 2,945,217                                        4.12%
                                 ===========      ===========                                        ====
</TABLE>

(A)  Including the effect of applicable hedges.

(B)  Weighted average, including floating and fixed rate classes.

(C)  The counterparty on this repo is Bear Stearns Mortgage Capital Corporation.

(D)  The counterparty on this repo is Deutsche Bank AG.

(E)  The counterparty on this repo is Greenwich Capital Management Inc.

     CBO Bonds Payable

     In July 1999, Newcastle completed its first CBO financing ("CBO I"),
     whereby a portfolio of real estate securities (Note 4) was contributed to a
     consolidated subsidiary which issued $437.5 million face amount of
     investment grade senior bonds and $62.5 million face amount of
     non-investment grade subordinated bonds, which were retained by Newcastle,
     in a private placement. Two classes of the senior bonds bear floating
     interest rates. In 1999, Newcastle obtained an interest rate swap and cap
     in order to hedge its exposure to the risk of changes in market interest
     rates with respect to these bonds, at an initial cost of approximately
     $14.3 million. In June 2003, Newcastle obtained an additional interest rate
     swap and cap in order to further hedge its exposure to the risk of changes
     in market interest rates with respect to these bonds, at an initial cost of
     approximately $1.1 million. In addition, in connection with the sale of two
     classes of bonds, Newcastle entered into two interest rate swaps and three
     interest rate cap agreements that do not qualify for hedge accounting.
     Changes in the values of these instruments have been recorded currently in
     income.

     In April 2002, Newcastle completed its second CBO financing ("CBO II"),
     whereby a portfolio of real estate securities (Note 4) was contributed to a
     consolidated subsidiary which issued $444.0 million face amount of

                                       79
<PAGE>


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

     investment grade senior bonds and $56.0 million face amount of
     non-investment grade subordinated bonds, which were retained by Newcastle,
     in a private placement. One class of the senior bonds bears a floating
     interest rate. Newcastle obtained an interest rate swap and cap in order to
     hedge its exposure to the risk of changes in market interest rates with
     respect to these bonds, at an initial cost of approximately $1.2 million.

     In November 2001, Newcastle sold the retained subordinated $17.5 million
     Class E Note from CBO I to a third party. The Class E Note bore interest at
     a fixed rate of 8.0% and had a stated maturity of June 2038. The sale of
     the Class E Note represented an issuance of debt and was recorded as
     additional CBO Bonds Payable. In April 2002, a wholly-owned subsidiary of
     Newcastle repurchased the Class E Note. The repurchase of the Class E Note
     represented a repayment of debt and was recorded as a reduction of CBO
     Bonds Payable. The Class E Note is included in the collateral for CBO II.
     The Class E Note is eliminated in consolidation.

     In March 2003, Newcastle completed its third CBO financing ("CBO III"),
     whereby a portfolio of real estate securities (Note 4) was contributed to a
     consolidated subsidiary which issued $472.0 million face amount of
     investment grade senior bonds and $28.0 million face amount of
     non-investment grade subordinated bonds, which were retained by Newcastle,
     in a private placement. One class of the senior bonds bears a floating
     interest rate. Newcastle obtained an interest rate swap and cap in order to
     hedge its exposure to the risk of changes in market interest rates with
     respect to these bonds, at an initial cost of approximately $1.3 million.

     In September 2003, Newcastle completed its fourth CBO financing ("CBO IV"),
     whereby a portfolio of real estate securities (Note 4) was contributed to a
     consolidated subsidiary which issued $460.0 million face amount of
     investment grade senior bonds and $40.0 million face amount of
     non-investment grade subordinated bonds, which were retained by Newcastle,
     in a private placement. One tranche, the $395.0 million face amount of
     Class I-MM bonds, was issued subject to remarketing procedures and related
     agreements whereby such bonds are remarketed and sold on a periodic basis.
     The Class I-MM bonds are fully insured by a third party with respect to the
     timely payment of interest and principal thereon. Four classes of the
     senior bonds bear floating interest rates. Newcastle obtained an interest
     rate swap and cap in order to hedge its exposure to the risk of changes in
     market interest rates with respect to these bonds, at an initial cost of
     approximately $3.1 million.

     Other Bonds Payable

     In April 2002, Newcastle refinanced the Bell Canada portfolio (Note 6)
     through a securitization transaction (the "Bell Canada Securitization")
     denominated in Canadian dollars. Newcastle has retained one class of the
     issued bonds. In connection with this securitization, Newcastle guaranteed
     certain payments under an interest rate swap to be entered into in 2007, if
     the Bell Canada Securitization is not fully repaid by such date. Newcastle
     believes the fair value of this guarantee is negligible at December 31,
     2003.

     In October 2003, Newcastle consolidated an entity which holds a portfolio
     of commercial mortgage loans which has been securitized. The primary effect
     of the consolidation is the requirement that Newcastle reflect the gross
     loans assets (approximately $241 million of mortgage loans, Note 5) and
     gross bonds payable of this entity in its financial statements.

     Notes Payable

     In November 2002, Newcastle refinanced the LIV portfolio (Note 6) with a
     loan (the "LIV Mortgage") denominated in EUR.

     In November 2003, Newcastle acquired an aggregate of $100 million (Note 5)
     of a $525 million facility comprised of two secured term loans made to
     subsidiaries of The Newkirk Group that own interests in credit leased
     operating real estate. Newcastle financed this investment with an $80
     million secured, non-recourse term loan. Both the loan and related
     financing amortize principal based on collateral receipts.

                                       80
<PAGE>


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

     Repurchase Agreements

     Newcastle owns a portfolio of residential mortgage loans (Note 5) financed
     by a repurchase agreement.

     Newcastle owns a subordinated interest in a securitization financed by a
     repurchase agreement.

     In October 2003, Newcastle purchased approximately $20.2 million of CMBS
     securities. Newcastle financed these securities with a repurchase
     agreement.

     In the fourth quarter of 2003, Newcastle acquired approximately $174.9
     million of securities (Note 4) collateralized by first mortgage liens on
     manufactured housing units. Newcastle financed these securities with three
     floating rate repurchase agreements. Newcastle obtained interest rate swaps
     in order to hedge its risk of exposure to changes in market interest rates
     with respect to this debt.

     Predecessor

     Newcastle's predecessor had two primary debt obligations which were
     distributed to it upon Newcastle's formation, a securitization which was
     secured by the GSA Portfolio (Note 6) and a credit facility. Interest on
     the securitization is included in discontinued operations through the date
     of Newcastle's formation; interest on the credit facility is included in
     interest expense through such date.

     Newcastle's debt obligations (gross of $20.7 million of discounts at
     December 31, 2003) have contractual maturities as follows (in millions):

<TABLE>
<S>                          <C>
    2004                     $   726.5
    2005                           7.3
    2006                         139.6
    2007                             -
    2008                             -
Thereafter                     2,071.8
                             ---------
                             $ 2,945.2
                             =========
</TABLE>



9.   STOCK OPTION PLAN

     In June 2002, Newcastle (with the approval of the board of directors)
     adopted a nonqualified stock option and incentive award plan (the
     "Newcastle Option Plan") for officers, directors, consultants and advisors,
     including the Manager and its employees. The maximum available for issuance
     is equal to 10% of the number of outstanding equity interests of Newcastle,
     subject to a maximum of 10,000,000 shares in the aggregate over the term of
     the plan.

     The non-employee directors have been, in accordance with the Newcastle
     Option Plan, automatically granted options to acquire an aggregate of
     16,000 shares of common stock at a weighted average exercise price of
     approximately $15.69 per share, which were fully exercisable upon issuance.
     The fair value of such options was not material at the date of grant.

     Through December 31, 2003, for the purpose of compensating the Manager for
     its successful efforts in raising capital for Newcastle, the Manager has
     been granted options representing the right to acquire 1,488,227 shares of
     common stock at a weighted average exercise price of approximately $17.44
     per share, with such price subject to adjustment as necessary to preserve
     the value of such options in connection with the occurrence of certain
     events (including capital dividends and capital distributions made by
     Newcastle). The Manager options represented an amount equal to 10% of the
     shares of common stock of Newcastle sold in its public offerings and the
     value of such options was recorded as an increase in stockholders' equity
     with an offsetting reduction of capital proceeds received. The options
     granted to the Manager, which may be assigned by the Manager to its
     employees, were fully vested on the date of grant and one thirtieth of the
     options become exercisable on the first day of each of the following thirty
     calendar months, or earlier upon the occurrence of certain events, such as
     a change in control of Newcastle or the termination of the Management
     Agreement. The options expire ten years from the date of issuance.

                                       81
<PAGE>


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

     The following table summarizes our outstanding options at December 31,
     2003:

<TABLE>
<CAPTION>
                    Date of Grant/                               Weighted Average            Fair Value
 Recipient             Exercise           Number of Options       Exercise Price            At Grant Date
 ---------             --------           -----------------       --------------            -------------
<S>                 <C>                   <C>                    <C>                       <C>
 Directors             Various                       16,000           $15.69                 Not Material
Manager (B)          October 2002                   700,000           $13.00               $0.4 million (A)
Manager (B)           July 2003                     460,000           $20.35               $0.8 million (A)
  Manager            December 2003                  328,227           $22.85               $0.4 million (A)
 Exercised              2003                         (2,500)          $13.90
                                          -----------------           ------
Outstanding                                       1,501,727           $17.43
                                          =================           ======
</TABLE>

     (A) The fair value of the options was estimated by reference to 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:

<TABLE>
<CAPTION>
Date of Grant/                                                        Expected Life
   Exercise             Volatility           Dividend Yield              (Years)               Risk-Free Rate
   --------             ----------           --------------              -------               --------------
<S>                     <C>                  <C>                      <C>                      <C>
 October 2002              15%                   13.85%                     10                      4.05%
  July 2003                15%                    9.83%                     10                      3.63%
December 2003              15%                    8.75%                     10                      4.23%
</TABLE>

     (B) In December 2003, 1,750 of the October 2002 options and 1,150 of the
         July 2003 options were transferred by the Manager to one of its
         employees. In January 2004, 68,250 of the October 2003 options and
         44,850 of the July 2003 options were transferred to such employee.

10.  MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS

     Newcastle entered into the Management Agreement with the Manager in June
     2002, which provided for an initial term of one year with automatic
     one-year extensions, subject to certain termination rights. After the
     initial one year term, the Manager's performance is reviewed annually and
     the Management Agreement may be terminated by Newcastle by payment of a
     termination fee, as defined in the Management Agreement, equal to the
     amount of management fees earned by the Manager during the twelve
     consecutive calendar months immediately preceding the termination, upon the
     affirmative vote of at least two-thirds of the independent directors, or by
     a majority vote of the holders of common stock. Pursuant to the Management
     Agreement, the Manager, under the supervision of Newcastle's board of
     directors, formulates investment strategies, arranges for the acquisition
     of assets, arranges for financing, monitors the performance of Newcastle's
     assets and provides certain advisory, administrative and managerial
     services in connection with the operations of Newcastle. For performing
     these services, Newcastle pays the Manager an annual management fee equal
     to 1.5% of the gross equity of Newcastle, as defined. Holdings' management
     agreement with the Manager contained substantially the same terms.

     The Management Agreement provides that Newcastle will reimburse the Manager
     for various expenses incurred by the Manager or its officers, employees and
     agents on Newcastle's behalf, including costs of legal, accounting, tax,
     auditing, administrative and other similar services rendered for Newcastle
     by providers retained by the Manager or, if provided by the Manager's
     employees, in amounts which are no greater than those which would be
     payable to outside professionals or consultants engaged to perform such
     services pursuant to agreements negotiated on an arm's-length basis.

     To provide an incentive for the Manager to enhance the value of the common
     stock, the Manager is entitled to receive an incentive return (the
     "Incentive Compensation") on a cumulative, but not compounding, basis in an
     amount equal to the product of (A) 25% of the dollar amount by which (1)
     (a) the Funds from Operations, as defined (before the Incentive
     Compensation) of Newcastle per share of common stock (based on the weighted
     average number of shares of common stock outstanding) plus (b) gains (or
     losses) from debt restructuring and from sales of property and other assets


                                       82
<PAGE>

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

     per share of common stock (based on the weighted average number of shares
     of common stock outstanding), exceed (2) an amount equal to (a) the
     weighted average of the price per share of common stock in the IPO and the
     value attributed to the net assets transferred to us by Holdings, and in
     any subsequent offerings by Newcastle (adjusted for prior capital
     dividends or capital distributions) multiplied by (b) a simple interest
     rate of 10% per annum (divided by four to adjust for quarterly
     calculations) multiplied by (B) the weighted average number of shares of
     common stock outstanding. An affiliate of the Manager was entitled to a
     similar incentive return from Holdings.

<TABLE>
<CAPTION>
                                                                    AMOUNTS INCURRED (IN MILLIONS)
                                                             ------------------------------------------
                                                             2003               2002               2001
                                                             ----               ----               ----
<S>                                                          <C>                <C>                <C>
Management Fee....................................           $6.0               $4.3               $4.8
Expense Reimbursements............................           $0.5               $0.5               $0.9
Incentive Compensation ...........................           $6.2               $3.5               $2.8
</TABLE>

     At December 31, 2003, an affiliate of the Manager owned 2,255,109 shares of
     Newcastle's common stock and had options to purchase an additional
     1,485,327 shares of Newcastle's common stock (Note 9).

     At December 31, 2003, Due To Affiliates is comprised $1.7 million of
     incentive compensation payable and $0.7 million of management fees and
     expense reimbursements payable to the Manager.

     Newcastle has made investments in three assets in which affiliates of the
     Manager have also invested. These investments are described in Notes 3
     (real estate loan subsidiary) and 12 (two investments made subsequent to
     December 31, 2003).

11.  COMMITMENTS AND CONTINGENCIES

     REMARKETING AGREEMENTS -- One tranche of Newcastle's CBO IV bonds (Note 8),
     the $395.0 million face amount of Class I-MM bonds, was issued subject to
     remarketing procedures and related agreements whereby such bonds are
     remarketed and sold on a periodic basis. The Class I-MM 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"). Newcastle pays annual fees of 0.12% of the outstanding face
     amount of the Class I-MM bonds under this agreement.

     In connection with the remarketing procedures described above, Newcastle is
     a party to a backstop agreement whereby a third party financial institution
     is required to purchase the Class I-MM bonds at the end of any remarketing
     period if such bonds could not be resold in the market by the remarketing
     agent. Newcastle pays an annual fee of 0.20% of the outstanding face amount
     of the Class I-MM bonds under this agreement.

     In addition, the remarketing agent is paid an annual fee of 0.05% of the
     outstanding face amount of the Class I-MM bonds under the remarketing
     agreement.

     REAL ESTATE SECURITIES PORTFOLIO DEPOSIT -- Newcastle has the option to
     purchase certain real estate securities from an investment bank. To the
     extent that such securities decline in value, Newcastle must either
     purchase such securities or lose an amount equal to the lesser of such
     decline or its deposit. See Note 4.

     GUARANTEE OF SWAP PAYMENTS -- In connection with the Bell Canada
     Securitization (Note 8), Newcastle has guaranteed certain payments under an
     interest rate swap to be entered into in 2007, if the Bell Canada
     Securitization is not fully repaid by such date. Newcastle believes the
     fair value of this guarantee is negligible at December 31, 2003.

     STOCKHOLDER RIGHTS AGREEMENT -- Newcastle has adopted a stockholder rights
     agreement (the "Rights Agreement"). Pursuant to the terms of the Rights
     Agreement, Newcastle will attach to each share of common stock one
     preferred stock purchase right (a "Right"). Each Right entitles the
     registered holder to purchase from Newcastle a unit consisting of one
     one-hundredth of a share of Series A Junior Participation Preferred Stock,
     par value $0.01 per share, at a purchase price of $70 per unit. Initially,
     the Rights are not exercisable and are attached to and transfer and trade
     with the outstanding shares of common stock. The Rights will separate from
     the common stock and will become exercisable upon the acquisition or tender
     offer to acquire a 15% beneficial ownership interest by an acquiring
     person, as defined. The effect of the Rights Agreement will be to dilute
     the acquiring party's beneficial interest. Until a Right is exercised, the
     holder thereof, as such, will have no rights as a stockholder of Newcastle.

                                       83
<PAGE>


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

     LITIGATION -- Newcastle is a defendant in legal actions from transactions
     conducted in the ordinary course of business. Management, after
     consultation with legal counsel, believes the ultimate liability, if any,
     arising from such actions which existed at December 31, 2003 will not
     materially affect Newcastle's consolidated results of operations or
     financial position.

     ENVIRONMENTAL COSTS -- As a commercial real estate owner, Newcastle is
     subject to potential environmental costs. At December 31, 2003, management
     of Newcastle is not aware of any environmental concerns that would have a
     material adverse effect on Newcastle's consolidated financial position or
     results of operations.

     DEBT COVENANTS -- Newcastle's debt obligations contain various customary
     loan covenants. Such covenants do not, in management's opinion, materially
     restrict Newcastle's investment strategy or ability to raise capital.
     Newcastle is in compliance with all of its loan covenants at December 31,
     2003.

12.  SUBSEQUENT EVENTS

     In January 2004, Newcastle sold 3.3 million shares of its common stock in a
     public offering at a price to the public of $26.30 per share, for net
     proceeds of approximately $85.8 million. In connection with this offering,
     Newcastle granted options to the Manager to purchase 330,000 shares of
     Newcastle's common stock at the public offering price.

     In January 2004, Newcastle purchased from an underwriter $31.5 million face
     amount of B and BB rated securities of Global Signal Trust I, a special
     purpose vehicle established by Global Signal Inc., at a price resulting in
     a weighted average yield of approximately 9.00%. Newcastle financed these
     securities with approximately $21.3 million of repurchase agreements.
     Newcastle obtained interest rate swaps in order to hedge its risk of
     exposure to changes in market interest rates with respect to this debt. Two
     of Newcastle's directors are the CEO and President of Global Signal, Inc.,
     respectively. A private equity fund managed by an affiliate of the Manager
     owns a significant portion of Global Signal Inc.'s common stock; the
     Manager receives from this private equity fund, in addition to management
     fees, incentive compensation if the fund's aggregate investment returns
     exceed certain thresholds. Pursuant to this underwritten 144A offering,
     approximately $418.0 million of Global Signal Trust I securities were
     issued in 7 classes, rated AAA though B, of which the B and BB classes
     constituted $73.0 million. The balance of the B and BB securities were sold
     on identical terms to a private investment fund managed by an affiliate of
     the Manager and to a large third party mutual fund complex; the Manager
     receives from this private investment fund, in addition to management fees,
     incentive compensation if the fund's aggregate investment returns exceed
     certain thresholds. The proceeds of the 144A offering were utilized by
     Global Signal Inc. to repay an existing credit facility, to pay an
     extraordinary dividend of approximately $140 million to its stockholders of
     which approximately $67 million was paid to the above-referenced private
     equity fund, and for general working capital purposes.

     Newcastle has entered into a letter of intent to purchase approximately 200
     convenience store and retail petroleum sites subject to a sale-leaseback
     arrangement under long-term triple net leases. Newcastle intends to
     structure this transaction through a joint venture, in which we will invest
     approximately $30.0 million of equity, with an affiliate of the Manager on
     equal terms. The transaction is expected to close towards the end of the
     first quarter or in the early second quarter of 2004; however, the
     transaction is subject to numerous conditions and there is no assurance
     that Newcastle will consummate this transaction.

                                       84
<PAGE>


NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(dollars in tables in thousands, except per share data)

13.  SUMMARY QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

The following is unaudited summary information on Newcastle's quarterly
operations. The distribution of investments, and related liabilities, to
Holdings and the commencement of Newcastle's independent operations occurred at
the beginning of the quarter ended September 30, 2002. Therefore, periods prior
to this quarter are not reflective of Newcastle's ongoing operations nor are
they comparable to subsequent quarters.

<TABLE>
<CAPTION>
                                                                                                2003
                                                                   ---------------------------------------------------------------
                                                                                     QUARTER ENDED
                                                                   ---------------------------------------------------
                                                                                             September 30              Year Ended
                                                                   March 31 (A)  June 30 (A)     (A)       December 31 December 31
                                                                   ------------  ----------- ------------  ----------- -----------
<S>                                                                <C>           <C>         <C>           <C>         <C>
Gross Revenues                                                       $ 32,685     $ 40,025     $ 41,906     $ 54,562   $ 169,178
Operating expenses                                                     (6,308)      (6,647)      (6,558)      (8,380)    (27,893)
                                                                     --------     --------     --------     --------   ---------
Operating income                                                       26,377       33,378       35,348       46,182     141,285
Interest expense                                                      (14,514)     (19,537)     (19,849)     (27,661)    (81,561)
Depreciation and amortization                                            (523)        (563)        (565)        (609)     (2,260)
Equity in earnings of unconsolidated subsidiaries                           -            -            -          862         862
                                                                     --------     --------     --------     --------   ---------
Income from continuing operations                                      11,340       13,278       14,934       18,774      58,326
Income (loss) from discontinued operations                               (237)         139         (228)      (1,882)     (2,208)
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 accretions
   Basic                                                             $   0.47     $   0.51     $   0.49     $   0.60    $   2.07
                                                                     ========     ========     ========     ========    ========
   Diluted                                                           $   0.47     $   0.50     $   0.49     $   0.59    $   2.05
                                                                     ========     ========     ========     ========    ========
Income (loss) from discontinued operations per share of common
   stock
   Basic                                                             $  (0.01)    $  (0.00)    $  (0.01)    $  (0.07)   $  (0.09)
                                                                     ========     ========     ========     ========    ========
   Diluted                                                           $  (0.01)    $  (0.00)    $  (0.01)    $  (0.07)   $  (0.09)
                                                                     ========     ========     ========     ========    ========
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
                                                                     ========     ========     ========     ========    ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                2002
                                                                   ---------------------------------------------------------------
                                                                                     QUARTER ENDED
                                                                   ---------------------------------------------------
                                                                                             September 30              Year Ended
                                                                   March 31 (A)  June 30 (A)     (A)       December 31 December 31
                                                                   ------------  ----------- ------------  ----------- -----------
<S>                                                                <C>           <C>         <C>           <C>         <C>
Gross Revenues                                                        $ 9,826     $ 38,692     $ 27,436     $ 29,860    $105,814
Operating expenses                                                       (628)     (12,792)      (4,285)      (5,681)    (23,386)
                                                                      -------     --------     --------     --------    --------
Operating income                                                        9,198       25,900       23,151       24,179      82,428
Interest expense                                                       (8,061)     (12,762)     (13,204)     (14,094)    (48,121)
Depreciation and amortization                                            (671)        (757)        (514)        (514)     (2,456)
Equity in earnings of unconsolidated subsidiaries                        (452)         814            -            -         362
                                                                      -------     --------     --------     --------    --------
Income from continuing operations                                          14       13,195        9,433        9,571      32,213
Income (loss) from discontinued operations                                857          193       (1,929)         161        (718)
Preferred dividends and related accretion                                (638)        (524)           -            -      (1,162)
                                                                      -------     --------     --------     --------    --------
Income available for common stockholders                              $   233     $ 12,864     $  7,504     $  9,732    $ 30,333
                                                                      =======     ========     ========     ========    ========
Net Income per share of common stock, basic and diluted               $  0.01     $   0.78     $   0.46     $   0.43    $   1.68
                                                                      =======     ========     ========     ========    ========
Income (loss) from continuing operations per share of common
   stock, after preferred dividends and related accretion,
   basic and diluted                                                  $ (0.04)    $   0.77     $   0.57     $   0.42    $   1.72
                                                                      =======     ========     ========     ========    ========
Income (loss) from discontinued operations per share of
   common stock, basic and diluted                                    $  0.05     $   0.01     $  (0.11)    $   0.01    $  (0.04)
                                                                      =======     ========     ========     ========    ========
Weighted average number of shares of common stock
   outstanding

   Basic                                                               16,489       16,489       16,489       22,804      18,080
                                                                      =======     ========     ========     ========    ========
   Diluted                                                             16,489       16,489       16,489       22,843      18,090
                                                                      =======     ========     ========     ========    ========
</TABLE>

                                       85
<PAGE>

(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 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 (see Note 5).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

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 Act, 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.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Incorporated by reference to our definitive proxy statement for the 2004 annual
meeting of stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
within 120 days after the fiscal year ended December 31, 2003.

ITEM 11. EXECUTIVE COMPENSATION.

Incorporated by reference to our definitive proxy statement for the 2004 annual
meeting of stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
within 120 days after the fiscal year ended December 31, 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Incorporated by reference to our definitive proxy statement for the 2004 annual
meeting of stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
within 120 days after the fiscal year ended December 31, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Incorporated by reference to our definitive proxy statement for the 2004 annual
meeting of stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
within 120 days after the fiscal year ended December 31, 2003.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Incorporated by reference to our definitive proxy statement for the 2004 annual
meeting of stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
within 120 days after the fiscal year ended December 31, 2003.

                                       86
<PAGE>



                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

     (a) and (d) Financial statements and schedules:

         See "Financial Statements and Supplementary Data."

     (b) Reports on Form 8-K filed by the registrant during its fiscal quarter
         ended December 31, 2003:

         Current report on Form 8-K, filed with the SEC on November 7, 2003,
         reporting Item 12 "Results of Operations and Financial Condition."

         Current report on Form 8-K, filed with the SEC on November 25, 2003,
         reporting Item 5 "Other Events."

     (c) 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  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).

             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.

                                       87
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized:

                                                      NEWCASTLE INVESTMENT CORP.

                                                      March 9, 2004

                                                      By: /s/ Wesley R. Edens
                                                         -----------------------
                                                      Wesley R. Edens
                                                      Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates indicated.

March 9, 2004

By: /s/ Wesley R. Edens
   ---------------------
Wesley R. Edens
Chief Executive Officer

March 9, 2004

By: /s/ Debra A. Hess
   ------------------
Debra A. Hess
Chief Financial Officer

March 9, 2004

By: /s/ David J. Grain
   -------------------
David J. Grain
Director

March 9, 2004

By: /s/ Stuart A. McFarland
   ------------------------
Stuart A. McFarland
Director

March 9, 2004

By: /s/ David K. McKown
   --------------------
David K. McKown
Director

March 9, 2004

By: /s/ Peter M. Miller
   --------------------
Peter M. Miller
Director

                                       88
<PAGE>

                                  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  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).

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.