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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                to


Commission file number: 001-32958

Crystal River Capital, Inc.(Exact name of registrant as specified in its charter)

Maryland(State or other jurisdiction of
incorporation or organization)

20-2230150(I.R.S. Employer
Identification No.)Three World Financial Center, 200 Vesey Street, 10th Floor
New York, New York(Address of principal executive offices)

10281-1010(Zip Code)


Registrant's
telephone number, including area code:(212) 549-8400

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes o    No ý

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. Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company ý


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o    No ý

MARKET VALUE

The aggregate market value of the outstanding common stock held by non-affiliates of the registrant as of June 30, 2009 was approximately
$39.5 million (based on the closing sale price of $1.76 per share as reported by the Over-the-Counter Bulletin Board on that date).

OUTSTANDING STOCK

As of March 23, 2010, there were 24,909,256 outstanding shares of common stock. The common stock is traded on the Over-the-Counter
Bulletin Board and on Pink Sheets under the trading symbol "CYRV".

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission (the
"Commission") within 120 days after the close of the registrant's fiscal year.



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CRYSTAL RIVER CAPITAL, INC.



PART I

3Item 1.

Business.

3Item 1A.

Risk Factors.

24Item 1B.

Unresolved Staff Comments.

54Item 2.

Properties.

54Item 3.

Legal Proceedings.

54Item 4.

Submission of Matters to a Vote of Security Holders.

55PART II

56Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.

56Item 6.

Selected Financial Data.

57Item 7.

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

59Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

118Item 8.

Financial Statements and Supplementary Data.

118Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

118Item 9A.

Controls and Procedures.

119Item 9B.

Other Information.

119PART III

120Item 10.

Directors, Executive Officers and Corporate Governance.

120Item 11.

Executive Compensation.

120Item 12.

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

120Item 13.

Certain Relationships and Related Transactions, and Director Independence.

120Item 14.

Principal Accounting Fees and Services.

120PART IV

121Item 15.

Exhibits, Financial Statement Schedules.

121Signatures

122Index to Consolidated Financial Statements

F-1


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EXPLANATORY NOTE

Except where the context suggests otherwise in this report, the terms "Crystal River," "we," "us" and "our" refer to Crystal River Capital, Inc. and its subsidiaries;
"our Manager" refers to our external manager, Crystal River Capital Advisors, LLC and in certain contexts, may refer to our external manager and its affiliates that provide advisory services to
us, including our sub-advisors; "BIM" refers to Brookfield Investment Management Inc., a sub-advisor that has been retained by us and our Manager; "Brookfield
Sub-Advisor" refers to Brookfield Crystal River Capital L.P., a sub-advisor that has been retained by us and our Manager; and "Brookfield" refers to Brookfield Asset
Management Inc., the indirect parent company of our Manager, BIM and Brookfield Sub-Advisor, together with its subsidiaries. References in this report to the rating of a debt
security reflects the lowest of the credit ratings for such security issued by each of Fitch, Inc., Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc.

FORWARD-LOOKING INFORMATION

Some of the statements under "Risk Factors," "Business," "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Annual Report on Form 10-K constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future
plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "goal," "objective," "potential," "project," "should," "will" and "would" or the negative of these terms or other
comparable terminology.

The
forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These
beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, the performance of our
portfolio and our business, financial condition, liquidity and results of operations may vary materially from those expressed, anticipated or contemplated in our forward-looking statements. You should
carefully consider these risks before you invest in our common stock, along with the following factors that could cause actual results to vary from our forward-looking
statements:



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PART I

Item 1.    Business.

Crystal River is a Maryland corporation that has invested in commercial real estate, real estate loans and instruments, real
estate-related securities, such as commercial and residential mortgage-backed securities, and various other asset classes. We have invested primarily in commercial real estate, whole mortgage loans,
mezzanine loans, commercial mortgage-backed securities, or CMBS, and non-Agency residential mortgage-backed securities, or non-Agency RMBS. We also have invested in junior
interests in mortgage loans known as B Notes, mortgage-backed securities issued by U.S. Government sponsored agencies, or Agency MBS, diversified asset-backed securities, or ABS, including consumer
obligations, and collateralized debt obligations, or CDOs. Finally, we have made selective debt and/or equity investments in certain alternative assets to diversify our portfolio and enhance our risk
adjusted returns. We are externally
managed and advised by wholly-owned subsidiaries of Brookfield. We have elected and qualified to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code since the 2005 tax
year. To maintain our tax status as a REIT, we are required to distribute at least 90% of our taxable income, to the extent that we have any, and we are monitoring our balance sheet investments to
meet the asset and income tests necessary to maintain qualification as a REIT.

We
were organized on January 25, 2005 by BIM, which may be deemed to be our promoter, and completed a private offering of our common stock, par value $0.001 per share, which we
refer to as our common stock, in March 2005, in which we raised net proceeds of approximately $405.6 million. In August 2006, we completed our initial public offering, in which we sold
7.5 million shares of our stock and raised net proceeds of $158.6 million.

We
currently own a portfolio consisting of commercial mortgage backed securities, residential mortgage backed securities, commercial mortgage loan products and three commercial real
estate office buildings that are net-leased on a long-term basis to JPMorgan Chase. In the current market, it is very difficult to obtain or refinance leverage against our
portfolio of assets and we currently do not have any investable cash. We make portfolio allocation decisions based on various factors, including expected cash yield, relative value,
risk-adjusted returns, current and projected credit fundamentals, current and projected macroeconomic considerations, current and projected supply and demand, credit and market risk
concentration limits, liquidity, cost and availability of financing and hedging activities, as well as maintaining our REIT qualification and our exclusion from regulation under the Investment Company
Act of 1940, which we refer to as the Investment Company Act. These factors place significant limits on the amount of certain of our targeted investments such as private equity funds,
non-real estate loans and consumer ABS, non-real estate-related CDOs and other equity investments that might be included in our portfolio.

Our
common stock is traded on the Over-the-Counter Bulletin Board and on Pink Sheets under the symbol "CYRV". Historically, our board of directors established our
dividend by analyzing the long-term sustainability of earnings given existing market conditions and the current composition of our portfolio and by analyzing our distribution obligations
as a REIT. This included an analysis of our credit loss assumptions, general level of interest rates and projected hedging costs. In November 2009, our board of directors announced that it had elected
to suspend our quarterly dividend to stockholders to preserve liquidity in consideration of the large increase in the delinquency rate on our CMBS portfolio and the resulting uncertainty regarding our
operating cash flows. In addition, we are prohibited from paying any dividends under the merger agreement described in "BusinessRecent DevelopmentsPossible Acquisition of
Crystal River", which we refer to as the merger agreement.

We
are managed by our Manager, a subsidiary of Brookfield Asset Management Inc., a publicly traded (NYSE:BAM) asset management company with approximately $100 billion of
assets under

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management
at December 31, 2009. Our Manager provides an operating platform that incorporates significant asset origination, risk management, and operational capabilities.

Beginning
in 2007, we determined that we operate in two reportable segments: a Commercial Real Estate segment and a Securities, Loans and Other segment. See Note 17 to our
consolidated financial statements contained elsewhere herein for certain financial information relating to our segments for the year ended December 31, 2009.

Current
market conditions continue to remain challenging. Assets within our portfolio continued to decline in market value throughout 2008 and 2009. Specifically, CMBS and RMBS assets,
which make up the bulk of our securities portfolio, are valued by the marketplace as if they were "interest-only" securities that will only pay interest for another one to two years, with
no principal being paid at maturity. We actively monitor the cash flow that is produced from this portfolio, which also has experienced significant declines as a result of defaults and delinquencies
in the underlying loans.

During
2008 and 2009, we were focused on executing our stated goal of reducing our short-term debt. The first step toward that goal was the sale of our $1.2 billion
Agency MBS portfolio in the first half of 2008 and the application of the sales proceeds to repay our short-term debt, which significantly decreased the size of our balance sheet. Our
short-term debt totaled $1.3 billion at December 31, 2007 and as of December 31, 2009, it stood at $28.9 million. Our current view is that in order to run our
business effectively in the face of current market conditions, our fundamental focus needs to be on maximizing our current and expected cash flows. To this end, our board of directors reduced our
dividend, beginning in the second quarter of 2008, and suspended our dividend, beginning in the fourth quarter of 2009.

Recent Developments



We held cash and cash equivalents of approximately $3.3 million as of December 31, 2009, which excludes restricted cash
of approximately $16.5 million that is used to collateralize our credit default swap and certain other commercial real estate and financing obligations. As of December 31, 2009, we owed
$28.9 million to an affiliate of our Manager under our secured credit facility. Unless earlier terminated as provided in the credit agreement governing the terms of our secured credit facility,
our credit facility terminates on August 31, 2010. If the merger with Brookfield discussed below under "Possible Acquisition of Crystal River" is not consummated, this facility is
not extended and we cannot obtain alternative financing, we do not expect to have sufficient cash on hand or to generate sufficient cash flow from operations to repay such indebtedness. Given the
current lack of liquidity in the credit markets and the current economic climate, we expect to have difficulty obtaining alternative financing if our credit facility is not extended. If we cannot
obtain alternative financing or extend our credit facility, it increases the risk that we will be unable to continue as a going concern. Our independent registered public accounting firm,
Ernst & Young LLP, has issued an opinion on our consolidated financial statements which states that our inability to refinance or extend the maturity of indebtedness maturing in the next
12 months raises substantial doubt about our ability to continue as a going concern.

Our
consolidated financial statements included in this Annual Report on Form 10-K do not reflect any adjustments related to the recoverability of assets and
satisfaction of liabilities that might be necessary should we be unable to continue as a going concern.



On January 29, 2010, we entered into an exchange agreement, which we refer to as the Exchange Agreement, with Taberna Preferred
Funding VIII, Ltd. and Taberna Preferred Funding IX, Ltd., which

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we
collectively refer to as Taberna, pursuant to which we exchanged certain of our assets described below for the outstanding $50.0 million aggregate liquidation preference of trust preferred
securities issued by Crystal River Preferred Trust I and backed by $51.6 million aggregate principal amount of our junior subordinated notes due 2037. Immediately following the closing of the
transaction contemplated by the Exchange Agreement, the junior subordinated notes were cancelled, the indenture under which the notes were issued was discharged and Crystal River Preferred Trust I was
dissolved.

Pursuant
to the Exchange Agreement, we transferred and assigned to Taberna two real estate loans and a CMBS bond, which collectively had an aggregate carrying value for accounting
purposes on our balance sheet as of December 31, 2009 of $6.0 million, and we also paid to Taberna a $1.0 million exchange fee. We also paid $0.5 million to cover all costs
and expenses that were incurred by the collateral manager for Taberna, the indenture trustee and their respective advisors.



On February 24, 2010, we announced that we had concluded our previously-announced review of strategic alternatives and that we
had entered into a definitive merger agreement with Brookfield pursuant to which Brookfield is expected to acquire all the shares of our outstanding common stock that Brookfield does not already own
for cash at a price of $0.60 per share, which we refer to as the Merger.

The
Merger was unanimously approved by the independent members of our board of directors, and by the Special Committee formed to oversee our strategic review process. The transaction is
subject to approval by our stockholders holding a majority of the shares entitled to vote at a special meeting of stockholders, as well as other customary closing conditions. Consummation of the
Merger is not subject to a financing condition and Brookfield has consented to the transaction in its capacity as our senior lender. The merger agreement does not prohibit us from receiving and
evaluating competing bids prior to completion of the Merger and does not require the payment of a termination fee if we accept a superior bid. We will be obligated to reimburse Brookfield for all of
its transaction expenses if the merger agreement is terminated other than as result of a breach by Brookfield (subject to a cap in certain circumstances). The Merger currently is expected to close in
the second quarter of 2010.



Concurrently with entering into the merger agreement with Brookfield, we amended the terms of our revolving credit facility with
Brookfield US Corporation, an affiliate of our Manager, pursuant to which the maturity date of the credit facility was extended to August 31, 2010, unless sooner terminated as provided in the
credit agreement;provided,however, that, notwithstanding the foregoing, the term of the credit
facility will expire upon the latest of (i) May 25, 2010, (ii) the effective time of the Merger and (iii) thirty (30) calendar days following the termination of the
merger agreement, but in no event later than August 31, 2010. In addition, Brookfield US Corporation consented to the Merger and to the separate sale by us of certain of our assets (described
below) as contemplated by the merger agreement.



As contemplated by the merger agreement, on March 9, 2010, we entered into a binding letter of intent, which we refer to as the
Asset Sale LOI, with Ranieri Partners Management LLC, which we refer to as Ranieri, pursuant to which Ranieri (either directly or through an affiliate) agreed to purchase five CMBS bonds from
us, which we refer to as the CMBS Purchase. The five CMBS bonds

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had
a carrying value of approximately $0.9 million as of December 31, 2009. In addition, under the Asset Sale LOI, Ranieri (either directly or through an affiliate) agreed to acquire the
rights to:



Ranieri
has agreed to pay us a total of $8.0 million for the CMBS Purchase, the CDO1 Rights Purchase and the CDO2 Rights Purchase, which we refer to collectively as the
Transaction. The following table provides information with respect to the purchase price to be paid by Ranieri (either directly or
through one or more of its affiliates) and the estimated closing date for each component of the Transaction:

Component of Transaction

Purchase Price

Estimated Closing DateCMBS Purchase

$2,500,000 (plus accrued and unpaid interest through the closing date of this portion of the Transaction)

Closed on March 15, 2010CDO1 Rights Purchase

$3,500,000

Third Quarter/Fourth Quarter 2010 (90 days after obtaining approval of Class A Notes to appoint the Specified Manager)CDO2 Rights Purchase

$2,000,000

June/July 2010


In
connection with the execution of the Asset Sale LOI, one of Ranieri's affiliates paid $1.6 million (20% of the total purchase price) as a deposit on the Transaction. A ratable
portion of the escrowed funds (based on the purchase prices specified above) will be applied to each component of the Transaction upon the closing of that component. The CMBS Purchase closed on
March 15, 2010 and $0.5 million of the deposit was applied against the $2.5 million purchase price for the CMBS bonds. An affiliate of Brookfield is a lender to the Ranieri
affiliate that purchased the CMBS bonds, which such Ranieri affiliate we refer to as the Purchaser, and proceeds from such loan have been used to fund the deposit referenced above and the remainder of
the purchase price for the CMBS bonds and an additional $1.9 million available under the loan may be used to fund a portion of the purchase price for the CDO1 Rights Purchase and the CDO2
Rights Purchase. In addition, an affiliate of Brookfield, which we refer to as the Co-Investor, is a co-investor with the Purchaser in the entity, which we refer to as the
Servicer, that acts as the special servicer for several of the CMBS

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securitizations
in which we have invested, including all of the securitizations in which the bonds that were the subject of the CMBS Purchase are a part. Brookfield and/or its affiliates have, or
prior to the CMBS Purchase had, the ability to designate the special servicer for the securitizations in which the bonds that were the subject of the CMBS Purchase are a part and had designated the
Servicer as the special servicer for those securitizations. The Co-Investor and the Purchaser own approximately 8.5% and 32.3%, respectively, of the Servicer.

We
also agreed to grant to Ranieri a right of first refusal to purchase all or any portion of our interest in two CMBS securitizations if we sell those securities in the future.

The
CMBS Purchase closed on March 15, 2010. The completion of the CDO1 Rights Purchase and the CDO2 Right Purchase are subject to various customary closing conditions as well as
the execution of definitive documentation. The Asset Sale LOI and the Transaction were approved by a special committee of our board of directors, which is comprised entirely of the independent members
of our board of directors, which we refer to as the Special Committee. The Special Committee, with the assistance of Broadpoint.Gleacher, the Special Committee's financial advisor, solicited and
received several bids on the assets that are the subject of the Transaction. The Special Committee selected the Ranieri bid based on the combination of price and other terms, in particular those
providing greater certainty of closing.

Our Manager

We are externally managed and advised by our Manager, a wholly-owned subsidiary of Brookfield that was formed on January 25,
2005 solely for the purpose of serving as our manager, whose officers consist of investment professionals and employees of Brookfield or one or more of its affiliates. As of December 31, 2009,
our Manager had no employees other than our President and Chief Executive Officer, and we and our Manager had no other independent officers and were entirely dependent on Brookfield and its affiliates
for the day-to-day management of our operations. In August 2009, our current Chairman, President and Chief Executive Officer was appointed Chairman of our Board of Directors,
President and Interim Chief Executive Officer in connection with the commencement of our strategic review process. While our directors periodically review our investment guidelines and our investment
portfolio, other than any investments involving our affiliates or our sub-advisors' affiliates or investments proposed by Brookfield Sub-Advisor, which they are required to
review and approve prior to such investments being made, they do not review all of our proposed investments. Our officers have been delegated the responsibility to review and make investments
consistent with our investment strategy and to provide direction and oversight to our sub-advisors. Our Manager did not have any experience managing a REIT prior to its entering into a
management agreement with us and it currently does not provide management or other services to entities other than us.

We
believe our relationship with Brookfield, BIM, our Manager and our sub-advisors has provided us with substantial benefits in sourcing, underwriting and managing our
investments. Our Manager is responsible for administering our business activities and day-to-day operations and uses the resources of Brookfield to support our operations. We
believe that our management agreement and sub-advisory agreements provide us access to broad referral networks, experience in capital markets, credit analysis, debt structuring, hedging
and asset management, as well as corporate operations and governance. Our Manager, together with our sub-advisors, has well-respected, established portfolio management
resources for each of our targeted asset classes and an extensive, mature infrastructure supporting those resources. Our Manager's and our sub-advisors' portfolio
management resources and infrastructure are fully scalable to service our company's activities. We also expect to benefit from our Manager's comprehensive risk management, which addresses not only the
risks of portfolio loss, such as risks relating to price volatility, position sizing and leverage, but also the operational risks such as execution of transactions, clearing of transactions, recording
of transactions, and monitoring of positions that can have major adverse impacts on investment programs.

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Our
Manager and our sub-advisors have senior management teams with extensive experience in identifying and financing, hedging and managing commercial real estate, real estate
loans and instruments, and real estate-related securities, such as CMBS, Agency MBS and RMBS.

Our
Manager is not obligated to dedicate certain of its employees exclusively to us nor is it obligated to dedicate any specific portion of its time to our business. Moreover, none of
our Manager's employees are contractually dedicated to our Manager's obligations to us under our management agreement.

Our Business Strengths

To the extent we have investable cash, we believe the following are our business strengths:



Our Investment Strategy

Currently, we do not have investable capital that would allow us to pursue investment opportunities and, in light of our financial
condition, we do not anticipate having any investable capital in the future.

Our
historic investment strategy is consistent with Brookfield's investment philosophy, which is predicated on the concept of producing stable cash flows and absolute returns. We and
Brookfield believe that the most significant opportunities for out-performance exist between and within sectors, as well as among individual investments. Although we are unable to take
advantage of future investment opportunities, our historic investment strategy and process is further described below.

The
investment process begins with a macroeconomic assessment of the market. Included in the market assessment is the analysis of the interest rate environment, the phase of the real
estate cycle, consumer credit trends, supply and demand relationships, as well as a review of any recently released or pending economic data. Our Manager seeks to determine the relative merits of
sectors by combining the analysis of historical relationships with our Manager's anticipated outlook for the market. Portfolio managers evaluate fundamental and technical developments in each sector,
along with current offerings, recent transactions and market clearing levels and yield spread levels to provide a relative value outlook. This analysis is utilized to determine optimal areas to
allocate credit risk in the portfolio across sectors and maturities and to maximize yield and total return expectations.

The
most important component of our Manager's relative value investment strategy is security selection, a process that is the result of both quantitative and qualitative inputs, as well
as the experience of the portfolio managers. Members of the investment team, utilizing our Manager's proprietary analytics, determine the relative strengths of various securities based on applicable
criteria such as issuer, issue, vintage, credit rating, structure, and geographic exposure. The security selection process focuses on four primary areas: the analysis of credit strength, the analysis
of security structure, the determination of relative value, and a surveillance function. The analysis of credit strength entails the assessment of loan level attributes such as a security's
loan-to-value ratio, ratios like borrower's debt to income, or debt coverage, and loan features and location, as well as trend level attributes such as vintage and issuer.
Security structure involves the comprehensive examination of a security's

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structural
attributes such as credit support, triggers, single asset, conduit, large loan, as well as its yield maintenance provisions and prepayment lock-outs. After these first two
analyses, the relative value of a security versus other candidates is determined through the evaluation of such aspects as yield spread and liquidity. Finally, after purchase, a surveillance function
begins that uses our Manager's analytical tools to determine whether a security continues to perform as expected.

We
opportunistically invested in a diversified investment portfolio of real estate securities, real estate and various other asset classes, subject to maintaining our REIT status and
exclusion from regulation under the Investment Company Act. Accordingly, we have not adopted policies that require us to establish or maintain any specific asset allocations, and our targeted
allocations will vary from time to time as determined by our management team, subject to the oversight of our board of directors.

We
benefit from the full range of experience and depth of resources developed by our Manager and its affiliates in managing approximately $100 billion of assets as of
December 31, 2009. We rely on our Manager's expertise in identifying assets within our target asset classes. Portfolio allocation decisions have been based on various factors, including
expected cash yield, relative value, risk-adjusted returns, current and projected credit fundamentals, current and projected macroeconomic considerations, current and projected supply and
demand, credit and market risk concentration limits, liquidity, cost of financing and financing availability, as well as maintaining our REIT qualification and exclusion from regulation under the
Investment Company Act.

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While currently we have no investable capital, our targeted asset classes and the principal investments that we have made to date in
each, whether directly or indirectly through investments in funds that focus on these asset classes, are as follows:

Asset Class

Principal InvestmentsCommercial Real Estate

Direct Property OwnershipPreferred Equity InvestmentsMortgages and Other Real Estate Debt

Mortgage LoansB NotesMezzanine LoansLand LoansConstruction LoansConstruction Mezzanine LoansMBSCMBS

Investment Grade CMBS
(Senior and Subordinated)Below-Investment Grade CMBS
(Rated and Non-Rated)Agency MBS

Agency Adjustable Rate Mortgages ("ARMs")RMBS

Non-Agency ARMsInvestment Grade RMBSBelow-Investment Grade RMBSNon-Conforming LoansOther RMBSOther asset-backed securities

CDOsConsumer ABSAircraft ABSAlternative Assets

Other Equity Investments


Our
net investment income is generated primarily from the net spread, or difference, between the interest income and rental income we earn on our investment portfolio and the cost of our
borrowings and hedging activities. Our net investment income will vary based upon, among other things, the difference between the interest rates earned on our various interest-earning assets and the
borrowing costs of the liabilities used to finance those investments.

Although
we have focused on the investments described above, our investment decisions depend on prevailing market conditions and the availability of investable capital. We have not
adopted any policy that establishes specific asset allocations among our targeted asset classes. As a result, we cannot predict the percentage of our assets that will be invested in each asset class
or whether we will invest in other classes or investments. Our board of directors does not and will not review all of our proposed investments, but reviews our portfolio at least quarterly and reviews
our investment strategy and policies at least annually. We may change our investment strategy and policies and the percentage of assets that may be invested in each asset class, or in the case of
securities, in a single issuer, without a vote of our stockholders.

The
following discusses the principal investments we have made and our general leverage targets for each type of principal investment. Generally, we attempt to match fund our investments
by matching the maturity of the financing source with the expected maturity of the investment.

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Accordingly,
where appropriate and available, we have used direct mortgage borrowing and CDO issuances or other long-term borrowings to finance long-term assets.

Direct Real Property Ownership.We have made direct investments in income-producing commercial real estate office properties within the
United
States. We currently leverage our direct real estate investments in the range of three to eight times the amount of our equity allocated to the asset class. As of December 31, 2009, the
carrying value of our direct investments in real property totaled $221.8 million. In connection with our direct real property ownership, we have recorded rent enhancement receivables totaling
$11.4 million as of December 31, 2009. Intangible assets and liabilities recorded in connection with our direct real property ownership totaled $69.9 million and
$66.8 million, respectively, as of December 31, 2009.

Whole Mortgage Loans and Bridge Loans.We have originated and purchased direct or indirect interests in whole loans secured by first
mortgages which
provide long-term mortgage financing to commercial property developers and owners that generally have maturity dates ranging from three to ten years. As of December 31, 2009, we had
originated 100% of the aggregate principal amount of whole mortgage loans and bridge loans that we held. We currently leverage our investments in whole mortgage loans and bridge loans in the range of
zero to eight times the amount of our equity allocated to the asset class. As of December 31, 2009, the carrying value of our investments in whole loans was approximately $1.2 million,
with a weighted average coupon rate of 3.48%.

Commercial Real Estate Subordinated Loans.We have invested in direct or indirect interests in commercial real estate subordinated
loans, which we
refer to as B Notes, that may be rated by at least one nationally recognized rating agency. The subordination of a B Note typically is evidenced by an inter-creditor agreement with the holder of the
related A Note. B Notes share certain credit characteristics with subordinated CMBS, in that both reflect an interest in a first mortgage and are subject to more credit risk with respect to the
underlying mortgage collateral than the corresponding senior securities or the A Notes, as the case may be. As opposed to a typical CMBS secured by a large pool of mortgage loans, B Notes typically
are secured by a single property, and the associated credit risk is concentrated in that single property. B Notes also share certain credit characteristics with second mortgages, in that both are
subject to more credit risk with respect to the underlying mortgage collateral than the corresponding first mortgage or the A Note, as the case may be. As of December 31, 2009, we did not have
any investments in B Notes.

Mezzanine Loans.We have originated and purchased direct or indirect interests in mezzanine loans that are subordinated to a first
mortgage loan on a
property and are senior to the borrower's equity in the property. These loans are made to the owner of the property and are secured by pledges of ownership interests in the property and/or the
property owner. The mezzanine lender can foreclose on the pledge interests and thereby succeed to ownership of the property subject to the lien of the first mortgage. As of December 31, 2009,
we had purchased 100% of the aggregate principal amount of mezzanine loans that we held. We currently leverage our investments in mezzanine loans in the range of zero to four times the amount of our
equity allocated to the asset class. As of December 31, 2009, the carrying value of our investments in mezzanine loans was $4.7 million, with a weighted average coupon rate of 7.32%,
which excludes the 15.00% fixed rate coupon for the one mezzanine loan that has been placed on non-accrual status.

Construction Loans and Construction Mezzanine Loans.We have originated or acquired participations in direct or indirect interests in
construction or
rehabilitation loans on commercial properties that generally provide 85% to 90% of total project costs and are secured by first lien mortgages. Construction loans generally would provide us with fees
and interest income at risk adjusted rates and potentially a percentage of net operating income or gross revenues from the property, payable to us on an ongoing basis, and a percentage of any increase
in value of the property, payable upon maturity or refinancing of the loan. As of December 31, 2009, we had originated 100% of the

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aggregate
principal amount of construction loans and construction mezzanine loans that we held, which includes those loans in which we participated in the original syndication. We currently leverage
our investments in construction loans and construction mezzanine loans in the range of zero to four times the amount of our equity allocated to the asset class. As of December 31, 2009, the
carrying value of our investments in construction loans was $0, with a weighted average coupon rate of 16.00% (this loan currently is in default and is not paying cash interest).

Commercial Mortgage Backed Securities.We have invested in CMBS that are secured by, or evidence ownership interests in, a single
commercial mortgage
loan, or a partial or entire pool of mortgage loans secured by commercial properties. These securities may be senior, subordinated, investment grade or non-investment grade. We have
acquired CMBS from private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, finance companies, investment banks and other
entities. We have entered into interest rate swaps, futures, options or other strategies to reduce the impact of changes in interest and financing rates for these investments. We currently leverage
our investments in CMBS in the range of zero to five times the amount of our equity allocated to the asset class. As of December 31, 2009, the carrying value of our investments in CMBS was
approximately $38.1 million, with a weighted average coupon rate of 5.21%.

Agency Mortgage Backed Securities.We have invested in Agency MBS. Agency MBS are securities that represent participations in, are
secured by or
payable from, mortgage loans secured by residential real property, which include agency mortgage pass-through certificates and agency collateralized mortgage obligations, or CMOs. We have
entered into interest rate swaps to reduce the impact of changes in interest and financing rates for these investments. Adjustable rate mortgages, or ARMS, have interest rates that reset periodically,
typically every six or 12 months. Because the interest rates on ARMS adjust periodically based on market conditions, ARMS tend to have interest rates that do not significantly deviate from
current market rates. This, in turn, can cause ARMS to have less price sensitivity to interest rates. Hybrid ARMS have interest rates that have an initial fixed period (typically two, three, five,
seven or ten years) and thereafter reset at regular intervals in a manner similar to traditional ARMS. The investment characteristics of pass-through MBS differ from those of traditional
fixed-income securities. Mortgage prepayments are affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage, and other social and
demographic conditions. Generally, prepayments on pass-through MBS increase during periods of falling mortgage interest rates and decrease during periods of stable or rising mortgage
interest rates. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield on our portfolio. As of December 31, 2009, we had
no investments in Agency MBS.

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Residential Mortgage Backed Securities.We currently own Non-Agency RMBS. Non-Agency RMBS are debt obligations issued by
special purpose vehicles that are backed by residential mortgage loans that generally are not eligible for agency purchase. Non-Agency RMBS generally are issued as CMOs and are backed by
pools of whole mortgage loans. Non-Agency RMBS generally are securitized in senior and subordinated structures, or structured with one or more of the types of credit enhancement. We have
entered into interest rate swaps to reduce the impact of changes in interest and financing rates for these investments. Adjustable rate mortgages, or ARMS, have interest rates that reset periodically,
typically every six or 12 months. Because the interest rates on ARMS adjust periodically based on market conditions, ARMS tend to have interest rates that do not significantly deviate from
current market rates. This, in turn, can cause ARMS to have less price sensitivity to interest rates. Hybrid ARMS have interest rates that have an initial fixed period (typically two, three, five,
seven or ten years) and thereafter reset at regular intervals in a manner similar to traditional ARMS. The investment characteristics of pass-through RMBS differ from those of traditional
fixed-income securities. Mortgage prepayments are affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage, and other social and
demographic conditions. Generally, prepayments on pass-through RMBS increase during periods of falling mortgage interest rates and decrease during periods of stable or rising mortgage
interest rates. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield on our portfolio. We leverage our RMBS investments in the
range of zero to five times the amount of our equity allocated to the asset class. As of December 31, 2009, the carrying value of our investments in RMBS was approximately $4.7 million,
with a weighted average coupon rate of 3.77%.

Other Equity Investments.We have invested in equity securities, which may or may not be related to real estate. These investments may
include direct
purchases of private equity as well as purchases of interests in private equity funds, which may be managed by affiliates of our Manager. We follow a value-oriented investment approach and focus on
the anticipated future cash flows generated by the underlying business, discounted by an appropriate rate to reflect both the risk of achieving those cash flows and the alternative uses for the
capital to be invested. We also consider other factors such as the strength of management, the liquidity of the investment, the underlying value of the assets owned by the issuer, and prices of
similar or comparable securities. To the extent that we hold any of these equity investments through our taxable REIT subsidiary, or TRS, the income from such investments will be subject to corporate
income tax. We currently expect to leverage our other equity investments in the range of zero to three times the amount of our equity allocated to the asset class. As of December 31, 2009, we
had no other equity investments.

Consumer Asset-Backed Securities.We have invested in investment grade and non-investment grade consumer ABS. Consumer ABS are generally
securities for which the underlying collateral consists of assets such as home equity loans, credit card receivables and auto loans. Aircraft ABS are generally collateralized by aircraft leases.
Issuers of consumer and aircraft ABS generally are special purpose entities owned or sponsored by banks and finance companies, captive finance subsidiaries of non-financial corporations or
specialized originators such as credit card lenders. We expect that a significant amount of the consumer and aircraft ABS that we hold at any time will be rated between A1/A and B1/B+ and will have an
explicit rating from at least one nationally-recognized statistical rating agency. As of December 31, 2009, we had no investments in consumer ABS.

Collateralized Debt Obligations.We have invested in the debt and equity tranches of CDOs to gain exposure to corporate bonds, ABS and
other
instruments. Because of our Manager's experience in structuring and managing CDOs, we believe we have a competitive advantage in analyzing investment opportunities in CDOs. In general, CDOs are issued
by special purpose vehicles that hold a portfolio of debt obligation securities. The CDO vehicle issues tranches of debt securities of different seniority and equity to fund the purchase of the
portfolio. The debt tranches are typically rated based on collateral quality, diversification and structural subordination. The equity securities issued by the CDO vehicle are

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the
"first loss" piece of the CDO vehicle's capital structure, but they are also generally entitled to all residual amounts available for payment after the CDO vehicle's obligations to the debt
holders have been satisfied. Some CDO vehicles are "synthetic," in which the credit risk to the collateral pool is transferred to the CDO vehicle by means of a credit derivative such as a credit
default swap. As of December 31, 2009, the carrying value of our investments in the preferred equity of CDOs was $0.

Investment Sourcing

We recognize that investing in our targeted asset classes is highly competitive, and that our Manager competes with many other
investment managers for profitable investment opportunities in these areas. Accordingly, to the extent we have investable cash, we believe the ability to identify and source such opportunities is very
important to our success. We think that the combined and complementary strengths of Brookfield, BIM and Brookfield Sub-Advisor in this regard give us a competitive advantage over such
REITs.

Our
Manager and its affiliates currently source many of their clients' and our investments through their close relationships with a large and diverse group of financial intermediaries,
ranging from major investment banks and brokerage firms to specialty dealers and financial sponsors. On a combined basis, these firms extensively cover our targeted asset classes. Our Manager also
sources many investments from traditional sources, using proprietary deal screening procedures and credit analytics.

Investment Process

To evaluate, invest and manage our investments in commercial real estate, CMBS, RMBS and other ABS, our Manager utilizes Brookfield's
and BIM's proprietary analytical methods in performing scenario analysis to forecast cash flows and expected total returns under different interest rate and credit assumptions. Simulation analysis is
also performed to provide a broader array of potential patterns of return over different interest rate and credit scenarios. Such analysis may be applied to individual securities or to an entire
portfolio. Our Manager also performs relative value analyses of individual securities based on yield, credit rating, average life, expected duration and option-adjusted spreads. Other considerations
in our Manager's investment process include analysis of fundamental economic trends, suitability for investment by a REIT, consumer borrowing trends, home price appreciation and relevant regulatory
developments.

Our
investments in real estate assets and other alternative asset classes are recommended, closed and managed by our Manager, or by one of its affiliates, which includes Brookfield
Sub-Advisor. To evaluate, invest and manage investments in real estate, Brookfield Sub-Advisor, through its affiliates, utilizes its experience and strong track record as an
operator of commercial properties. Relying on Brookfield's local presence in offices in the United States, Canada, Brazil and the United Kingdom, we expect that Brookfield Sub-Advisor is
well positioned to underwrite and analyze real estate investments throughout North America, including the analysis of market conditions and building specific issues (including lease and structural
analysis). Other considerations in the investment process include valuation and analyses of economic conditions and demographic trends as well as supply and demand considerations.

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Our Portfolio

As of December 31, 2009, we had a portfolio of approximately $272.0 million consisting primarily of commercial real
estate, CMBS and RMBS, as shown in the following chart:

Weighted AverageCarrying
Value

Percent of
Total
Investments

Coupon

Months to
Reset(1)

Yield
to
Maturity(2)

Constant
Prepayment
Rate(3)(In thousands)Commercial MBS:Investment grade CMBS

$
3,724


1.4
%

5.20
%




44.67
%Below investment grade CMBS


34,389


12.6


5.21





379.75Total Commercial MBS


38,113


14.0


5.21





347.01Non-Agency Residential MBS:Non-Agency Prime MBS:Investment grade





0.0


0.00


0.00


0.00


0.00Below investment grade


3,194


1.2


4.29


6.55


2,927.99


12.72Total Non-Agency Prime MBS


3,194


1.2


4.29


6.55


2,927.99


12.72Non-Agency Sub-prime MBS:Investment grade





0.0


0.00


0.00


0.00


0.00Below investment grade


1,519


0.6


2.76


0.00


22,401.07


16.94Total Non-Agency Sub-prime MBS


1,519


0.6


2.76


0.00


22,401.07


16.94Total RMBS


4,713


1.8


3.77


4.30


9,204.46


14.17CDO Preferred Stock














Total Securities


42,826


15.8


4.99





1,321.77Real estate loans, net


5,903


2.1


9.58
(4)




25.05Commercial real estate, net


221,754


81.5Other investments


1,550


0.6


7.68





48.53Total investments

$
272,033


100.0
%


(1)Represents
number of months before conversion to floating rate.(2)Non-loss
adjusted yield, which is the yield to par based on the current market price and does not take into account any assumed defaults.(3)Represents
the estimated percentage of principal that will be prepaid over the next 12 months based on historical principal paydowns.(4)Excludes
one of our construction loans and one of our mezzanine loans that are in default and on which no interest is being accrued.


Our portfolio in its current form does not fully balance the interest rate or mark-to-market risks inherent in our MBS
investments, and we are not be able to eliminate all of our portfolio risk through asset allocation. Future dividends and capital appreciation are not guaranteed. Our investments depend on prevailing
market conditions and trends. We have not adopted any policy that establishes specific asset allocations among our targeted asset classes, and our targeted allocations will vary from time to time. As
a result, we cannot predict the percentage of our assets that will be invested in each asset class or whether we will invest in other classes or investments. When we have investable capital, we
generally have incurred total leverage under normal market conditions of up to five times the amount of our equity for most investments other than Agency MBS, which we generally have levered up to 15
times the amount of our equity allocated to this asset class. Our overall long-term average portfolio leverage in normal market conditions is four to six times the amount of our equity. We
may change our

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investment
strategy and policies and the percentage of assets that may be invested in each asset class, or in the case of securities, in a single issuer, without a vote of our stockholders.

As
of December 31, 2009, we had entered into master repurchase agreements with various counterparties and as of such date, we had no outstanding obligations under repurchase
agreements with our counterparties. In addition to repurchase agreements, we rely on a $50.0 million secured credit facility with an affiliate of our Manager that expires on August 31,
2010 (unless sooner terminated as provided in the credit agreement) for capital needed to fund our other investments. In November 2005, we closed our first CDO financing transaction, which we refer to
as CDO 2005-1, and in January 2007, we closed our second CDO financing transaction, which we refer to as CDO 2006-1. We have no restriction on the amount of leverage that we
may use.

As
of December 31, 2009, we had hedged a portion of the CDO liabilities financing our investment portfolio by entering into two interest rate swaps with maturity dates in 2013 and
2018. Each of these interest rate swaps is both contained within a CDO trust, has similar maturity profiles to the originally projected cash flows for the respective CDO liabilities and is not subject
to margin calls. The total notional par value of such swaps was approximately $281.0 million.

Risk Management

Risk management is a cornerstone of our Manager's portfolio management system and we believe these risk management capabilities
distinguish us from many of our competitors. Through our management agreement with our Manager, we benefit from our Manager's comprehensive risk management program, which addresses not only the risks
of portfolio loss, such as risks relating to price volatility, position sizing and leverage, but also the operational risks that can have major adverse impacts on investment programs. Operational
risks include execution of transactions, clearing of transactions, recording of transactions, position monitoring, supervision of traders, portfolio
valuation, counterparty credit and approval, custodian relationships, trader authorization, accounting and regulatory. We also face risks relating to the counterparties on our interest rate and credit
default swaps. In addition, we manage our liquidity risk and our exposure to changing interest rate environments and we continually monitor the credit risks within our investment portfolio.

Our Financing Strategy

Leverage Strategy.In the past, we actively used leverage to increase the potential returns to our stockholders. Currently, there is
little to no
leverage available on favorable economic terms to us. While we currently have three types of leverage; a secured financing line, mortgage financing and CDO debt (our subordinated TRUPs issuance was
repurchased in January 2010), we do not believe that leverage of this nature will be available in order to leverage future investments, if any.

Repurchase Agreements.We have financed certain of our MBS through the use of repurchase agreements. These agreements allow us to
borrow against MBS
that we own. We sell our MBS to a counterparty and agree to repurchase the same MBS from the counterparty at a price equal to the original sales price plus an interest factor. These agreements are
accounted for as debt, secured by the underlying assets. During the term of a repurchase agreement, we earn the principal and interest on the related MBS and pay interest to the counterparty.

As
of December 31, 2009, we had no outstanding obligations under repurchase agreements with any of our counterparties.

Warehouse Facilities.In addition to repurchase agreements, we rely on credit facilities for capital needed to fund our other
investments. These
facilities, referred to as warehouse lines or warehouse facilities, are typically lines of credit from other financial institutions that we can draw from to fund our investments. Warehouse lines are
typically collateralized loans made to investors who invest in securities

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and
loans that in turn pledge the resulting securities and loans to the warehouse lender. Third party custodians, usually large banks, typically hold the securities and loans funded with the warehouse
facility borrowings, including the securities, loans, notes, mortgages and other important loan documentation, for the benefit of the lender, who is deemed to own the securities and loans and, if
there is a default under the warehouse line, for the benefit of the warehouse lender.

The
pool of assets in a warehouse facility typically must meet certain requirements, including term, average life, investment rating, agency rating and sector diversity requirements.
There are also certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs. Failure to comply with
these requirements could result in either the need to post additional collateral or cancellation of the financing facility. As of December 31, 2009, we had no outstanding borrowings under
warehouse lines.

Credit Facilities.In August 2007, we entered into a $100.0 million secured revolving credit facility with an affiliate of our
Manager, in
order to provide us with additional liquidity. In February 2009, we extended the maturity of our secured revolving credit facility to May 2010, decreased the borrowing capacity thereunder to
$50.0 million and, effective as of December 31, 2008, deleted the financial covenants contained in the facility. As of December 31, 2009, we owed $28.9 million under our
secured revolving credit facility.

Concurrently
with entering into the merger agreement with Brookfield, we amended the terms of our revolving credit facility with Brookfield US Corporation, an affiliate of our Manager,
pursuant to which the maturity date of the credit facility was extended to August 31, 2010, unless sooner terminated as provided in the credit agreement; provided,however, that, notwithstanding the foregoing, the term of the credit facility will expire upon
the latest of (i) May 25, 2010, (ii) the effective time of the Merger and (iii) thirty (30) calendar days following the termination of the merger agreement, but in
no event later than August 31, 2010. In addition, Brookfield US Corporation consented to the Merger and to the separate sale by us of certain of our assets as contemplated by the merger
agreement.

Term FinancingCDOs.We have in the past financed certain of our assets using term
financing strategies, including CDOs and other match-funded financing structures. CDOs are multiple class debt securities, or bonds, secured by pools of assets, such as mortgage-backed securities and
corporate debt. Unlike typical securitization structures, the underlying assets may be sold, subject to certain limitations, without a corresponding pay-down of the CDO provided the
proceeds are reinvested in qualifying assets. As a result, CDOs enable the sponsor to actively manage, subject to certain limitations, the pool of assets. We believe CDO financing structures, when
available, may be an appropriate financing vehicle for our targeted non-residential real estate asset classes, because they will enable us to obtain long-term cost of funds and
minimize the risk that we have to refinance our liabilities prior to the maturities of our investments while giving us the flexibility to manage credit risk and, subject to certain limitations, to
take advantage of profit opportunities.

As
of December 31, 2009, other than as discussed below with respect to our CDO 2005-1 and our CDO 2006-1 transactions, we had no outstanding borrowings
under term financing structures.

On
November 30, 2005, we closed a $295.3 million private placement of CDOs, our first sponsored CDO financing. These CDOs mature in 2046. We invested the net proceeds from
the financing in accordance with our investment objectives and strategies described in this report. From the date of that issuance through December 31, 2009, we have repaid an aggregate of
$95.2 million of floating rate CDOs issued in the CDO 2005-1 transaction from the proceeds of real estate loans owned by CDO 2005-1 that were prepaid by the borrower and
cash flow from the underlying collateral that was required to pay down senior CDO liabilities as a result of the CDO trust failing certain over-collateralization triggers. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial ConditionLiabilitiesCDO Liabilities". As of
December 31, 2009, the outstanding principal amount of CDOs that were issued by CDO 2005-1 to third parties was approximately $132.3 million and they had a fair value of
approximately $5.7 million.

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On January 17, 2007, we closed a $339.6 million private placement of CDOs, our second sponsored CDO financing. These CDOs mature in 2047. We
invested the net proceeds from the financing in accordance with our investment objectives and strategies described in this report. From the date of that issuance through December 31, 2009, we
have repaid $2.0 million of CDOs issued in the CDO 2006-1 transaction from certain cash flow streams that were required to amortize the CDOs under the terms of the indenture
governing those securities. As of December 31, 2009, the outstanding principal amount of CDOs that were issued by CDO 2006-1 to third parties was approximately $323.0 million
and they had a fair value of approximately $27.9 million.

Our Hedging and Interest Rate Risk Management Strategy

Repurchase agreements generally have maturities of 30 to 90 days and our secured revolving credit facility has a maturity of
August 2010 (unless sooner terminated as provided in the credit agreement), while the weighted average lives of the CMBS, RMBS and commercial real estate loans that we own and generally finance with
these types of borrowings are generally longer. The difference in maturities, in addition to reset dates and reference indices, creates potential interest rate risk.

We
have utilized derivative financial instruments to hedge all or a portion of the interest rate risk associated with certain types of our borrowings. Under the federal income tax laws
applicable to REITs, we generally will be able to enter into certain transactions to hedge indebtedness that we may incur, or plan to incur, to acquire or carry real estate assets, provided that our
total gross income from such hedges and other non-qualifying sources must not exceed 25% of our total gross income.

We
engage in a variety of interest rate management techniques that seek to mitigate changes in interest rates or potentially other influences on the values of our assets. Because of the
tax rules applicable to REITs, we may be required to implement certain of these techniques through a TRS that is fully subject to corporate income taxation. However, no assurances can be given that
these investment and leverage strategies can successfully be implemented. Our interest rate management techniques may include:



These
techniques also may be used in an attempt to protect us against declines in the market value of our assets that result from general trends in debt markets.

We
may, from time to time, enter into interest rate swap agreements to offset the potential adverse effects of rising interest rates under certain short-term repurchase
agreements. The interest rate swap agreements have historically been structured such that we receive payments based on a variable interest rate and make payments based on a fixed interest rate. The
cost of such swap agreements isde minimisas these swaps often trade in a very liquid market and are based on the yield curve, and as the yield curve
flattens, the swap agreements become accretive to our results from operations. The variable interest rate on which payments are received is calculated based on various reset mechanisms for LIBOR. The
repurchase agreements generally have maturities of 30 to 90 days and carry interest rates that correspond to LIBOR rates for those same periods. The swap agreements effectively fix our
borrowing cost and are not held for speculative or trading purposes. Interest rate management techniques do not eliminate risk but seek to mitigate interest rate risk.

As
of December 31, 2009, we had hedged a portion of the CDO liabilities financing our investment portfolio by entering into two interest rate swaps with maturity dates in 2013 and
2018. Each of these interest rate swaps is contained within a CDO trust, and has similar maturity profiles to

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the
originally projected cash flows for the respective CDO liabilities. The total notional par value of such swaps was approximately $281.0 million.

Resolution of Potential Conflicts of Interest in Allocation of Investment Opportunities

BIM, in its management of our securities portfolio pursuant to our sub-advisory agreement, will abide by its conflicts of
interest policy and thus will offer us the right to participate in all investment opportunities that it determines are appropriate for us in view of our investment objectives, policies and strategies
and other relevant factors, subject to the exception that, in accordance with BIM's conflict of interest policy described below, we might not participate in each such opportunity but will on an
overall basis equitably participate with BIM's other clients in all such opportunities. BIM allocates investments to eligible accounts, including Crystal River, based on current demand according to
the market value of the account (which is the amount of available capital that, consistent with such account's investment parameters, may be invested in a proposed investment). An account has current
demand if it has positive market value. If the investment cannot fulfill the pro rata allocation or be allocated in marketable portions, the investment generally is allocated on a rotational basis to
accounts with current demand, with an emphasis placed on those accounts that were excluded in prior allocations, but without any preference given to accounts based on their market value. The
rotational system is determined by BIM's investment committee and is overseen by its chief compliance officer to ensure fair and equitable investment allocation to all accounts in accordance with the
Investment Advisers Act. As of December 31, 2009, BIM managed more than 20 client accounts that had investment strategies that overlapped our investment strategy.

Unlike
BIM, our Manager and Brookfield Sub-Advisor are not bound by BIM's conflict of interest policy and thus are not obligated to offer us any specific investment
opportunities. Any decision to do so will be entirely within our Manager's and Brookfield Sub-Advisor's discretion, and it can be expected that some investments that are appropriate for us
in view of our investment criteria will not be offered to us and will be made by affiliates of Brookfield without our participation.

BIM
historically has managed accounts with similar or overlapping investment strategies and has a conflict-resolution system in place so that we may share equitably with other BIM client
accounts in all investment opportunities, particularly those involving a security with limited supply, that may be suitable for our company and such other client accounts.

The
chairman of BIM's investment committee (or his designee) oversees its conflict-resolution system, and BIM's chief compliance officer regularly monitors the procedural aspects of the
program. The program places particular emphasis on the equitable allocation of scarce investment opportunities, which are situations where BIM is unable to obtain the full amount of the securities
that it wishes to purchase for the relevant client accounts, such as newly-issued debt instruments.

In
these situations, BIM's policy is to first determine and document the amount of the security it wishes to purchase for each of the participating accounts, based on the size,
objectives of the accounts, current client demand and other relevant factors. BIM then places an order for the total of these amounts. If BIM is able to obtain only partial execution of the order, its
policy calls for the allocation of the purchased securities in the same proportion that it would have allocated a full execution of the order. The policy permits departure from such proportional
allocation only if the allocation would result in an inefficiently small amount of the security being purchased for an account. In that case, the policy provides for a "rotational" protocol of
allocating subsequent partial executions so that, on an overall basis, each account is treated equitably.

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Other
conflict-resolution policies of BIM and the terms of our management agreement with our Manager that will apply to the management of our company include controls
for:



Our
Manager may engage other parties, including its affiliates or any of our sub-advisors and/or any of their respective affiliates, to provide services to us or our
subsidiaries, including asset management, property management, leasing, financing and disposition and/or similar services customarily provided to a business similar to ours, provided that, such
services are provided at market rates with standard market terms and, in the case of a sub-advisor or an affiliate of either our Manager or a sub-advisor, the party providing
the services has sufficient qualifications and experience to perform the services at a level of quality comparable to non-affiliated service providers in the area, the cost to our Manager
is no less favorable than can be obtained from an unrelated third party on an arm's length basis and any such arrangements are approved in advance by a majority of our independent directors.

Policies with Respect to Certain Other Activities

If our board of directors determines that additional funding is required, to the extent that conditions in the financial markets
permit, we may raise such funds through additional offerings of equity or debt securities, or through the retention of cash flow (subject to provisions in the Internal Revenue Code concerning
distribution requirements and the taxability of undistributed REIT taxable income) or a combination of these methods. In the event that our board of directors determines to raise additional equity
capital, it 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 as it deems appropriate, at
any time.

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We
have not in the past but may in the future, if market conditions permit, offer equity or debt securities in exchange for property and to repurchase or otherwise reacquire our shares
and may engage in such activities in the future.

In
addition, we have in the past and may in the future, if market conditions permit, borrow money to finance the acquisition of investments. We intend to use traditional forms of
financing, such as credit lines, mortgage financing and warehouse facilities. To the extent available, we also might utilize structured financing techniques, such as CDOs, or repurchase agreement
financing to create attractively priced non-recourse financing at an all-in borrowing cost that is lower than that provided by traditional sources of financing and that provide
long-term, floating rate financing. Our investment guidelines and our portfolio and leverage are periodically reviewed by our board of directors as part of their oversight of our Manager.

We
have in the past and may in the future, subject to gross income and asset tests necessary for REIT qualification, invest in securities of other REITs, other entities engaged in real
estate activities or securities of other issuers. We have not made in the past but to the extent we have any investable cash may in the future make such investments for the purpose of exercising
control over such entities.

We
engage in the purchase and sale of investments. We have in the past and may in the future make loans to third parties in the ordinary course of business for investment purposes. We
will not underwrite the securities of other issuers.

Our
board of directors may change any of these policies without prior notice to you or a vote of our stockholders.

We
intend to furnish our stockholders with annual reports containing consolidated financial statements audited by our independent registered public accounting firm, and we expect to file
quarterly reports containing unaudited consolidated financial statements for each of the first three quarters of each fiscal year with the Commission.

Operating and Regulatory Structure

We have elected and qualified to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended
December 31, 2005 and expect to qualify as a REIT in subsequent tax years. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements
under the Internal Revenue Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution
levels and the concentration of ownership of our capital stock. We believe that we were organized and have operated in conformity with the requirements for qualification and taxation as a REIT under
the Internal Revenue Code, and that our intended manner of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT.

As
a REIT, we generally will not be subject to federal income tax on the REIT taxable income that we distribute currently to our stockholders. If we fail to qualify as a REIT in any
taxable year, we will be subject to federal income tax at regular corporate rates for that year and for the next four tax years (unless we satisfy the IRS that certain limited cure provisions apply).
Even if we qualify for federal taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property. Crystal River Capital TRS Holdings, Inc., our TRS, is a
regular taxable corporation that is subject to federal, state and local income tax on its income.

Our
investment activities are managed by our Manager and supervised by our board of directors. In exchange for those management services, we incur an annual base management fee
determined by our stockholders' equity but not by our performance, as well as an incentive management fee based on our performance.

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We
and our Manager have retained Brookfield Sub-Advisor as a sub-advisor with respect to investments in mortgages and other real estate debt, real estate and
other real estate-related, yield-oriented assets. Each sub-advisor evaluates potential investments, recommends suitable investments and, on our behalf, closes each investment approved by
us and, in the case of certain transactions, the independent members of our board of directors.

Exclusion from Regulation Under the Investment Company Act

We intend to continue to operate our business so that we do not become subject to regulation as an "investment company" under the
Investment Company Act. Because we conduct our business directly and through wholly-owned subsidiaries, we must ensure not only that we, but also each of our subsidiaries, are not subject to
regulation as an "investment company" under the Investment Company Act. For purposes of the ensuing discussion "we" and "our" refer to Crystal River Capital, Inc. alone and not its
subsidiaries.

We
are not an "investment company," as defined in Section 3(a)(1)(C) of the Investment Company Act. We are not engaged in the business of investing, reinvesting, owning, holding
or trading securities, and we do not own "investment securities" having a value that exceeds 40% of the value of our total assets (exclusive of cash items and government securities) on an
unconsolidated basis. In addition, we are not an "investment company," as defined in Section 3(a)(1)(A) of the Investment Company Act, because we are not, nor do we hold ourselves out as being,
primarily engaged in the business of investing, reinvesting or trading in securities.

If
at any time in the future we are considered an "investment company" as defined in Section 3(a)(1)(C) of the Investment Company Act, we intend to qualify for the exclusion from
regulation provided by Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C) is designed for companies that do not issue redeemable securities and are primarily engaged in
the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. To qualify for this exemption, we will need to ensure that at least 55% of our assets
consist of mortgage loans and other assets that are considered the functional equivalent of mortgage loans for purposes of the Investment Company Act, which we refer to as qualifying real estate
assets, and that at least 80% of our assets consist of qualifying real estate assets and real estate-related assets. We do not intend to issue redeemable securities. We also may rely on an exclusion
from regulation provided by Section 3(c)(6) of the Investment Company Act if, from time to time, we engage in our business through one or more majority-owned subsidiaries.

Competition

In the past, our results from operations depended, in large part, on our ability to acquire assets at favorable spreads or with
favorable returns over our borrowing costs. Currently, we, and many of our peers, do not have available capital to make new investments. Additionally, we and many of our peers do not have access to
attractive financing with which to leverage our investments, thus we are less exposed to competition at this time.

When
we have investable capital, we face competition when attempting to make real estate investments, including competition from domestic and foreign financial institutions, other REITs,
life insurance companies, pension funds, partnerships and individual investors. The leasing of real estate is highly competitive. Because we purchased our buildings with long-term leases
in place (the earliest expires in 2021), we generally have not faced competition in attracting tenants to date. If our current leases were to terminate early or we acquired other buildings that did
not have long-term leases (to the extent we had investable capital), our properties would compete for tenants with similar properties primarily on the basis of location, total occupancy
costs (including base rent and operating expenses), services provided and the design and condition of the improvements.

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We have had and expect to continue to have access to Brookfield's and our Manager's and our sub-advisors' professionals and their industry expertise,
which we believe provides us with a competitive advantage and helps us assess investment risks and determine appropriate strategies for our current investments and, to the extent we have investable
cash, any future investments. In addition, in the event that the ability to obtain acceptable leverage returns to our marketplace, we expect that these relationships will enable us to learn about, and
compete more effectively for, financing opportunities with attractive companies in the industries in which we have invested. For additional information concerning the competitive risks we face, see
"Item 1A. Risk FactorsRisks Related To Our Business and Investment StrategyWe operate in a highly competitive market for investment opportunities, and we may not be
able to identify and make investments that are consistent with our investment objectives."

Government Regulation

Our activities, including the financing of our operations, are subject to a variety of federal and state regulations. In addition, a
majority of states have ceilings on interest rates chargeable to certain customers in financing transactions.

Employees

Other than our President and Chief Executive Officer, we have no other employees and all of our investment operations are overseen and
undertaken by our Manager. In accordance with Maryland law, we do have certain officers who administer Crystal River's operations. Other than our President and Chief Executive Officer, whom we
compensate directly, all of our others officers are employees of, and are compensated by, affiliates of our Manager.

Code of Business Conduct and Ethics and Corporate Governance Documents

We have adopted a code of business conduct and ethics that applies to all of our officers, including our principal executive officer
and principal financial and accounting officer, and all of the employees of our Manager. This code of business conduct and ethics is designed to comply with SEC regulations and NASDAQ corporate
governance rules related to codes of conduct and ethics and is posted on our corporate website athttp://www.crystalriverreit.com. In addition, our
corporate governance guidelines and charters for our audit, compensation and corporate governance committees of the board of directors are posted on our corporate website. Copies of our code of
business conduct and ethics, our corporate governance guidelines and our committee charters also are available free of charge, upon request directed to Investor Relations, Crystal River
Capital, Inc., Three World Financial Center, 200 Vesey Street, 10th Floor, New York, NY 10281-1010.

Website Access to Reports

We maintain a website athttp://www.crystalriverreit.com. Through our website, we make
available, free of charge, our annual proxy statement, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the Commission. The Commission maintains a website that contains these reports at http://www.sec.gov.

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Item 1A.    Risk Factors.

Risks Related to Our Business and Investment Strategy

The impending maturity of our senior revolving credit facility and our current financial condition raise substantial doubt regarding our ability to continue as a going
concern. However, our consolidated financial statements are presented on a going concern basis.

Our consolidated financial statements are presented in this report on a going concern basis, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. As of December 31, 2009, we owed $28.9 million to an affiliate of our Manager under our secured credit facility.
Unless terminated earlier as provided in the credit agreement, our credit facility terminates on August 31, 2010. As a result of our possible inability to extend, refinance or repay this
indebtedness, there is substantial doubt about our ability to continue as a going concern. While we have prepared our consolidated financial statements on a going concern basis, if the Merger is not
consummated and we are unable to successfully extend the maturity date of our credit facility or receive additional funding, our ability to continue as a going concern will be in doubt. In such event,
we may have to recapitalize, refinance our obligations, sell some or all of our assets or seek to reorganize under Chapter 11 of the United States Bankruptcy Code. Therefore, we may not be able
to realize our assets and settle our liabilities in the ordinary course of business, adversely impacting amounts actually realized relative to our financial statements. In addition, our ability to
continue as a going concern will be dependent upon our ongoing asset performance and our ability to generate positive operating cash flow. No assurance can be given that we will be successful in
achieving any of these steps or restructuring these arrangements on acceptable terms. Our consolidated financial statements included in this report do not reflect any adjustments related to the
recoverability of assets and satisfaction of liabilities that might be necessary should we be unable to continue as a going concern.

The occurrence of recent adverse developments in the mortgage finance and credit markets may adversely affect our business, our liquidity and our stock price.

In recent years, the mortgage industry has come under enormous pressure due to numerous economic and industry-related factors. Many
companies operating or investing in the mortgage sector have failed and others are facing serious operating and financial challenges. At the same time, many MBS have been downgraded and delinquencies
and credit performance of mortgage loans in the industry have deteriorated. We have faced significant challenges beginning in the second half of 2007 due to these adverse conditions in the mortgage
industry and the difficulties we experienced in pricing and financing some of our MBS, and we expect these challenges to continue. Recent adverse changes in the mortgage finance and credit markets
have eliminated or reduced the availability, or increased the cost, of significant sources of funding for us. Beginning in August 2007 and continuing through the current date, the fair value of our
RMBS and CMBS assets as well as our derivative instruments have decreased, while our margin requirements on our financings and derivatives have increased. The price of our common stock has declined
significantly as a result of these events and there has been a significant impact on our results of our operations. There is no assurance that our stock price will not decline further if, among other
things, MBS prices continue to decline. In addition, significant decreases in the prices of our MBS have and may continue to decrease the carrying value of those investments, which could further
increase our stockholders' deficit below the levels required to be maintained pursuant to some of the instruments governing our borrowing arrangements with third parties. If this occurs, and we are
not successful in obtaining amendments to or waivers of those covenants, we could default under those agreements. An event of default or termination event under these agreements would give the
lender/counterparty the option to accelerate our indebtedness to them. If we are required to repay outstanding borrowings and were unable to negotiate favorable terms of replacement financing, cash
will be negatively affected. This may negatively affect our ability to

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continue
as a going concern. In addition, we may have to sell assets at a time when we might not otherwise choose to do so.

We are currently not making new investments and it is uncertain whether we will be able to make additional investments in the future, which increases the risk that we will
be unable to continue as a going concern.

We have observed a number of IPO filings by recently formed entities with investment strategies focused on commercial and residential
real estate debt markets. Given current market conditions and our lack of investable cash, currently, we are unable to take advantage of new investment opportunities.

In
the event that negative market conditions persist or deteriorate further, and we are not able to achieve a successful disposition of assets or increase our liquidity through
alternative channels, then the
risk increases as to whether we can continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with GAAP applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, our consolidated financial statements do not reflect any adjustments related
to the recoverability of assets and satisfaction of liabilities that might be necessary should we be unable to continue as a going concern.

We have suspended the payment of dividends on our common stock.

For business reasons, in November 2009, our board of directors suspended payment of dividends on shares of our common stock. We can
provide no assurance as to when we will resume paying dividends on our common stock, if at all. In the merger agreement, we have agreed not to pay any dividends to our stockholders.

Periods of adverse market volatility could adversely affect our liquidity.

During periods of increased adverse market volatility, such as the current extended disruption in the global liquidity markets, we are
exposed to the risk that the availability under our funding sources may decline and/or we may have to post additional margin collateral, which may have a material adverse impact on our available
liquidity. As a result, our contingent liquidity reserves may not be sufficient in the event of a material adverse change in the credit markets and related market price market volatility. For example,
as of December 31, 2009, we were required to post cash margin collateral of $10.5 million relating to our use of CDS. Additionally, demands on liquidity may result in further
deleveraging of the portfolio, which could adversely impact our earnings.

The weakness in the mortgage market has caused us to expect increased losses related to our holdings.

The sub-prime market has been severely affected by changes in the lending landscape. Access to mortgages for
sub-prime borrowers has been and is expected to remain substantially limited for the foreseeable future. This limitation on financing generally has had a negative impact on
sub-prime borrowers, especially those whose interest rates on loans are resetting, and has resulted in increased default rates. The severity of the liquidity limitation was largely
unanticipated by the markets. As well, the liquidity issues also affect prime and Alt-A Non-Agency lending, with mortgage rates remaining much higher and many product types
being severely curtailed. At the margin, this has an impact on new demand for homes, which has compressed the home ownership rates and is expected to weigh heavily on future home price performance.
There is a strong correlation between home price growth rates and mortgage loan delinquencies. This comes in addition to the delinquency pressures in the sub-prime market resulting from
weaker underwriting, which put many sub-prime lenders out of business in 2006 and 2007. The market deterioration has caused us to expect increased losses related to our holdings and has
resulted in a lower market value for our holdings. We believe that, at this time, the underlying losses in the sub-prime market have not fully manifested themselves in the

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securitizations.
For the year ended December 31, 2009, we had impairments on RMBS totaling $15.3 million, which included impairments on sub-prime RMBS totaling
$6.2 million.

As
commercial real estate fundamentals have started to weaken, prices on CMBS have declined and yield spreads on CMBS have widened significantly. This widening has forced interest rates
on commercial real estate mortgages wider and the higher mortgage rate environment could depress prices on commercial real estate properties that require financing over the near term. Prices also are
suffering from poor technicals as balance sheet deleveraging caused by the credit crisis is causing forced selling into the market. For the year ended December 31, 2009, we had impairments on
CMBS totaling $62.6 million.

We leverage our investments, which may negatively affect our return on our investments and may reduce cash available for distribution.

To the extent available, we intend to continue to leverage our investments through borrowings, generally through the use of warehouse
facilities, bank credit facilities, secured loans, securitizations (including the issuance of CDOs, when possible), loans to entities in which we hold, directly or indirectly, interests in pools of
assets, and other borrowings, in each case, when markets permit. We are not limited in the amount of leverage we may use other than by general market conditions. The percentage of leverage varies
depending on our ability to obtain credit facilities
and the lenders' and rating agencies' estimate of the stability of the investments' cash flow. Our return on our investments and cash available for distribution to our stockholders may be reduced to
the extent that changes in market conditions increase the cost of our financing relative to the income that can be derived from the assets acquired. Our debt service payments will reduce cash flow
available for distributions to stockholders. We may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or
sale to satisfy the obligations. We have in the past leveraged and may in the future leverage certain of our assets through repurchase agreements. A decrease in the value of these assets may lead to
margin calls, which we will have to satisfy. We may not have the funds available to satisfy any such margin calls and may have to sell assets at a time when we might not otherwise choose to do so.

Further,
credit facility providers and warehouse facility providers may require us to maintain a certain amount of uninvested cash or to set aside unlevered assets sufficient to maintain
a specified liquidity position, which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our
return on assets. In the event that we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly and we could be forced to sell additional investments at a
loss.

Recently adopted amendments to accounting standards will require us to consolidate previous and any potential future securitization transactions, which will have a
significant impact on our consolidated financial statements and net worth.

In June 2009, the Financial Accounting Standards Board, or the FASB, issued FASB ASC 860-10-65-3
(previously SFAS 166) and FASB ASC 810-10-65-2 (previously SFAS 167), which significantly change the accounting for transfers of financial assets and
the criteria for determining whether to consolidate a variable interest entity, or a VIE. FASB ASC 860-10-65-3 eliminates the qualifying special purpose entity, or
the QSPE, concept, establishes conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the financial asset derecognition criteria, revises how interests retained by
the transferor in a sale of financial assets initially are measured, and removes the guaranteed mortgage securitization recharacterization provisions. FASB ASC
810-10-65-2 requires reporting entities to evaluate former QSPEs for consolidation, changes the approach to determining a VIE's primary beneficiary from a mainly
quantitative assessment to an exclusively qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required

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reassessments
to determine whether a company is the primary beneficiary of a VIE. We have evaluated the provisions of these two statements and believe that their application will result in the
consolidation of six of the QSPEs, or more specifically the underlying trusts for certain of the subordinate CMBS, that we owned as of December 31, 2009, which may result in our balance sheet
and statement of operations not being comparable from period to period. Implementation of these standards requires us
to make major operational and system changes to incorporate the additional financial reporting requirements.

Although
we are still assessing the impact of these new accounting standards, we currently expect that the adoption of these accounting standards will require that we consolidate onto
our balance sheet all assets and liabilities and onto our statement of operations all revenues and expenses of the underlying trusts for certain of the subordinate CMBS that we owned after
December 31, 2009. Because of the magnitude and complexity of the operational and system changes that we are making and the limited amount of time available to complete and test our systems
development, there is a risk that unexpected developments could make it difficult for us to implement all of the necessary system changes and internal control processes by the January 1, 2010
effective date. Failure to make these changes by the effective date could have a material adverse impact on us, including on our ability to produce financial reports on a timely basis or to remain in
compliance with the financial covenants in our credit agreement. In addition, making the necessary operational and system changes in a compressed time frame diverts resources from our other business
requirements and corporate initiatives and could result in significantly increased operating costs, which could have a material adverse impact on our operations.

We may be required to post significant amounts of cash collateral at any time to satisfy our margin requirements under many of our financing arrangements, which could
adversely affect our liquidity, results of operations and financial condition.

We invest in derivatives and when available in the future, may finance certain of our investments with debt, such as repurchase
agreements, in each case that are subject to margin calls. Under the terms of these agreements, the value of the derivative contract or the value of the assets underlying the debt is
marked-to-market by the counterparty or the lender at the counterparty's or lender's discretion, including on a daily basis. If the value of the underlying derivative or asset
declines, the counterparty or lender has the ability to require us to post additional margincash or other liquid collateralto compensate for the decline in value of the
derivative or asset. Conversely, if the value of the underlying derivative or asset increases, a portion of the margin we previously posted may be returned to us. We typically are required to post
additional margin in response to any margin call within 24 hours in order to avoid defaulting under the terms of the instrument governing the derivative transaction or financing arrangement.

We
are subject to margin calls at any time, and being forced to post additional margin could adversely affect our business in a number of ways. Posting additional margin decreases our
cash available to make other, higher yielding investments (thereby decreasing our return on equity) or to satisfy other obligations, including future margin calls. If we do not have the funds
available, or otherwise elect not, to satisfy any future margin calls, we could be forced to sell one or more investments at a loss. Moreover, we may be unable, in light of market conditions or other
factors, to sell sufficient assets to satisfy the margin requirements within the timeframe required by counterparties or lenders, which in the case of lenders, would entitle them to seize the
underlying asset and seek payment from us for any shortfall between the value of our obligation to the lender and the value of the asset surrendered. Such a situation would likely result in a rapid
deterioration of our financial condition and possibly necessitate a filing for protection under the United States Bankruptcy Code. As of December 31, 2009, we had exposure to margin calls of
$0.4 million.

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We are dependent on our Manager and our sub-advisors and may not find suitable replacements if our Manager terminates the management agreement.

We are externally managed by our Manager. Other than our President and Chief Executive Officer, all of our officers and all of our
Manager's officers are employees of Brookfield, BIM or certain of their respective affiliates. We have no separate facilities and are completely reliant on our Manager, which has significant
discretion as to the implementation of our operating policies and strategies. We are subject to the risk that our Manager will terminate the management agreement, thereby triggering a termination of
our sub-advisors, and that no suitable replacements will be found to manage us. We believe that our success depends to a significant extent upon the experience of our Manager's executive
officers, whose continued service is not guaranteed. Although we have renewed our management agreement with our Manager for the 2010 year, if our Manager terminates the management agreement, we
may not be able to execute our business plan and may suffer additional losses, which could materially decrease cash available for distribution to our stockholders.

Our Manager has limited prior experience managing a REIT and we cannot assure you that our Manager's past experience will be sufficient to successfully manage our business
as a REIT.

The federal income tax laws impose numerous constraints on the operations of REITs. Our Manager's and its employees' limited experience
in managing a portfolio of assets under REIT and Investment Company Act constraints may hinder their ability to achieve our investment objective. In addition, maintaining our REIT qualification limits
the types of investments we are able to make. We can offer no assurance that our Manager will replicate its historical success or its management team's success in its previous endeavors, and we
caution you that our investment returns
could be substantially lower than the returns achieved by funds managed by our Manager and its affiliates and their other endeavors.

We are dependent upon our Manager's key personnel and the resources of our sub-advisors for our success and the departure of any of these key personnel or the
elimination of resources of our sub-advisors could negatively affect our performance.

We depend on the diligence, skill and network of business contacts of the senior management of our Manager and its affiliates, who
direct the management activities of our Manager. The senior management of our Manager evaluates, negotiates, structures, closes and monitors our investments. Our continued success will depend on the
continued service of the senior management team of our Manager and its affiliates. The departure of any of the senior managers of our Manager, or of a significant number of the investment
professionals or principals of our Manager and its affiliates, could have a material adverse effect on our performance. In addition, we can offer no assurance that our Manager will remain as our
manager or that we will continue to have access to our Manager's and its affiliates' respective principals and professionals or their information and deal flow. We also depend on the resources of our
sub-advisors in connection with sourcing and managing our investments and executing our investment strategy.

Our Manager's incentive fee may have induced it to make certain investments, including speculative investments, that increase the risk of our investment portfolio.

Our Manager's entitlement to an incentive fee may have caused it to invest in high-risk investments. In addition to its
base management fee, our Manager is entitled to receive incentive compensation based entirely upon our achievement of targeted levels of net income. In evaluating investments and other management
strategies, the opportunity to earn incentive compensation based on net income may have led our Manager to place undue emphasis on the maximization of net income at the expense of other criteria, such
as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential generally are riskier or more speculative. This could result in increased risk to
the value of our investment portfolio.

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Our Manager manages our portfolio pursuant to very broad investment guidelines and our board of directors does not approve each investment decision made by our Manager,
which may result in our making riskier investments with which you do not agree and which could cause our operating results and the value of our common stock to decline.

Our Manager is authorized to follow very broad investment guidelines. Although our directors periodically review our investment
guidelines and our investment portfolio, other than any investments involving our affiliates or our sub-advisors' affiliates or investments proposed by Brookfield Sub-Advisor,
which our audit committee is required to review and approve prior to such investments being made, our directors do not review all of our proposed investments. In addition, in conducting periodic
reviews, our directors may rely primarily on information provided to them by our Manager or Brookfield Sub-Advisor. Furthermore, our Manager and Brookfield Sub-Advisor may use
complex strategies in structuring transactions for us and those transactions may be difficult or impossible to unwind. Subject to maintaining our REIT qualification and our exemption from regulation
under the Investment Company Act, our Manager has great latitude within the broad investment guidelines in determining the types of investments it makes for us.

The
failure of our management and our Manager to deploy our capital effectively could result in unfavorable returns, could have a material negative impact on our business, financial
condition, liquidity and results of operations, could materially decrease cash available for distribution to our stockholders and could cause the value of our common stock to decline.

We may change our investment strategy and asset allocation without stockholder consent, which may result in riskier investments or in lower distributions to you.

We have not adopted a policy as to the amounts to be invested in each of our intended investments, including securities rated below
investment grade. Subject to our intention to invest in a portfolio that allows us to qualify as a REIT and remain eligible for an exclusion from regulation as an investment company under the
Investment Company Act, we may change our investment strategy or asset allocation, including the percentage of assets that may be invested in each class, or in the case of securities, in a single
issuer, at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in this report.
A change in our investment strategy may increase our exposure to interest rate risk, default risk, real estate market fluctuations and liquidity risk, all of which could negatively affect the market
price of our common stock and our ability to make distributions to you.

There are conflicts of interest in our relationship with our Manager, which could result in decisions that are not in the best interests of our stockholders and our
financial condition could make it difficult to terminate our management agreement with our Manager.

We are dependent on our Manager for our day-to-day management. Our chief financial officer and vice president
and general counsel also serve as officers and/or directors of Brookfield, BIM or certain of their respective affiliates. As a result, our management agreement with our Manager was negotiated between
related parties, and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.

Termination
of the management agreement with our Manager without cause is difficult and costly. The management agreement provides that it may only be terminated without cause
(a) at the expiration of the current term expiring on December 31, 2010 by notice given at least six months prior to the end of the term, or (b) annually upon the affirmative vote
of at least two-thirds of our independent directors, or by a vote of the holders of at least a majority of the outstanding shares of our common stock, based
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In
addition, termination by Crystal River relating to unsatisfactory performance by our Manager or a determination that the management fee is not fair (subject to our Manager's right to
reduce its fee to a mutually acceptable level) also require that our Manager be provided 180 days' prior notice of any such termination and be paid a termination fee equal to the amount of two
times the sum of the average annual base management fee and the average annual incentive compensation earned by our Manager during the two 12-month periods immediately preceding the date
of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.
These provisions may increase the effective cost to us of terminating the management agreement, thereby restricting our ability to terminate our Manager without cause. In addition, if we do not have
sufficient liquidity to generate cash to pay a termination fee, we could effectively be precluded from terminating the management agreement absent concessions from our Manager. The ability of
Brookfield and BIM and their respective officers and employees to engage in other business activities may reduce the time our Manager spends managing us.

The
management compensation structure that we have agreed to with our Manager may cause our Manager to invest in potentially higher yielding investments. Investments with higher yield
potential generally are riskier or more speculative. The compensation we pay our Manager consists of both a base management fee that is not tied to our performance and an incentive management fee that
is based entirely on our performance. The risk of the base management fee component is that it may not provide sufficient incentive to our Manager to generate attractive risk-adjusted
returns for us. The risk of the incentive fee component is that it may cause our Manager to place undue emphasis on the maximization of GAAP net income at the expense of other criteria, such as
preservation of capital, in order to achieve a higher incentive fee. This could result in increased risk to the value of our investment portfolio. Subject to certain limitations, our Manager will
receive at least 10% of its incentive fee in the form of shares of our common stock, and, at our Manager's option, may receive up to 100% of its incentive fee in the form of shares of our common
stock. Our Manager has agreed not to sell such shares prior to one year after the date such shares are issued. Our Manager has the right in its discretion to allocate these shares to its officers,
employees and other individuals who provide services to us. However, any of these shares that our Manager so allocates will be subject to the same one-year restriction on sale. Any such
shares received would have the benefit of registration rights.

Our Manager and our sub-advisors are not contractually obligated to dedicate their time to us and may engage in other activities that compete with us, which may
result in conflicts of interest that could cause our results of operations to be lower or result in increased risk to the value of our investment portfolio.

The ability of our sub-advisors and their respective officers and employees to engage in other business activities may
result in conflicts of interest and may reduce the time they spend acting as a sub-advisor to us. In addition, the management compensation structure that we and our Manager have agreed to
with Brookfield Sub-Advisor may cause Brookfield Sub-Advisor to source potentially higher yielding investments. Investments with higher yield potential generally are riskier or
more speculative. The compensation our Manager pays Brookfield Sub-Advisor is equal to 20% of the base management fee and incentive management fees we pay to our Manager. The base
management fee is not tied to our performance and the incentive management fee is based entirely on our performance. The risk of the base management fee component is that it may not provide sufficient
incentive to Brookfield Sub-Advisor to generate attractive risk-adjusted returns for us in the investments that they source for us. The risk of the incentive fee component is
that it may cause Brookfield Sub-Advisor to place undue emphasis on the maximization of GAAP net income at the expense of other criteria, such as preservation of capital, in order to
achieve a higher incentive fee. This could result in increased risk to the value of our investment portfolio.

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We may compete with existing and future investment vehicles for access to Brookfield, BIM and our sub-advisors and their affiliates, which may reduce investment
opportunities available to us.

Brookfield currently sponsors several investment vehicles with investment focuses that overlap our investment focus. In addition, at
December 31, 2009, BIM managed more than 20 client accounts and closed-end funds with an investment focus that overlapped our investment focus, and each of Brookfield and BIM may in
the future sponsor or manage other investment vehicles that have overlapping focuses with our investment focus. Accordingly, we compete for access to the benefits that we expect our relationship with
our Manager and our sub-advisors and their affiliates to provide and to the time of their investment professionals to carry out and facilitate our investment activities. Our rights to
participate in investment opportunities with respect to assets managed by BIM are subject to BIM's conflict of interest policy. Brookfield and Brookfield Sub-Advisor are not subject to
BIM's conflict of interest policy and are not obligated to offer us any investment opportunities and any decision to do so will be entirely within their discretion. In addition, we may make
investments that are senior or junior to participations in, or have rights and interests different from or adverse to, the investments made by other vehicles or accounts managed by Brookfield or BIM.
Our interests in such investments may conflict with the interests of such other vehicles or accounts in related investments at the time of
origination or in the event of a default or restructuring of the investment. If a default occurs with respect to such an investment, our Manager will advise our independent directors, who will direct
our Manager with respect to the resolution or disposition of the investment.

We may acquire investments from Brookfield and BIM or their affiliates or otherwise participate in investments in which they have an interest or for which they have a
related investment, which could result in conflicts of interest.

If we have investable cash, we might continue to acquire investments from Brookfield and BIM or their affiliates, make investments that
finance their investments or make co-investments with them. These transactions are not at arm's length, will not be the result of arm's length negotiations and will involve conflicts
between our interests and the interest of Brookfield, BIM and their affiliates in obtaining favorable terms and conditions. There can be no assurance that any procedural protections, such as obtaining
market prices, other reliable indicators of fair market value, independent valuations or appraisals and the prior approval of our independent directors, will be sufficient to ensure that the
consideration we pay for these investments will not exceed their fair market value.

We operate in a highly competitive market for investment opportunities, and we may not be able to identify and make investments that are consistent with our investment
objectives.

A number of entities compete with us to make the types of investments that we plan to make. We compete with other REITs, public and
private funds, commercial and investment banks and commercial finance companies. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing
resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances
or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. We cannot assure you that the competitive pressures we face
will not have a material negative impact on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive
investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

Failure to procure adequate capital and funding would negatively affect our results and may, in turn, negatively affect the market price of shares of our common stock and
our ability to distribute dividends.

We depend upon the availability of adequate funding and capital for our operations. As a REIT, we are required to distribute annually
at least 90% of our REIT taxable income, determined without

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regard
to the deduction for dividends paid and excluding net capital gain, to our stockholders and are therefore not able to retain significant amounts of our earnings for new investments. However,
Crystal River Capital TRS Holdings, Inc., our TRS, is able to retain earnings for investment in new capital, subject to the REIT requirements that place a limitation on the relative value of
TRS stock and securities owned by a REIT. The failure to secure acceptable financing could reduce our taxable income, as our investments would no longer generate the same level of net interest income
due to the lack of funding or increase in funding costs. The reduction in our taxable income in recent quarters has, and future reductions would, reduce our liquidity and our ability to make
distributions to our stockholders. The global credit crisis has significantly limited our ability to access capital, and we cannot assure you that any, or sufficient, funding or capital will be
available to us in the future on terms that are acceptable to us. Therefore, in the event that we cannot obtain sufficient funding on acceptable terms, there may be further declines in the market
price of our common stock and our ability to make distributions.

If we issue senior securities, we will be subject to additional restrictive covenants and limitations on our operating flexibility, which could materially decrease cash
available for distribution to our stockholders.

If we decide to issue senior securities in the future, it is likely that they will be governed by an indenture or other instrument
containing covenants that will restrict our operating flexibility. Holders of senior securities may be granted specific rights, including but not limited to the right to hold a perfected security
interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to require approval to sell assets. Additionally, any
convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock. We, and indirectly our stockholders, will
bear the cost of issuing and servicing such securities.

We may not be able to successfully complete securitization transactions, which could inhibit our ability to grow our business and could negatively affect our results of
operations.

In addition to issuing senior securities to raise capital as described above, we may, to the extent consistent with the REIT
requirements, seek to securitize certain of our portfolio investments to generate cash for funding new investments. This would involve creating a special-purpose vehicle, contributing a pool of our
assets to the entity, and selling interests in the entity on a non-recourse basis to purchasers (whom we would expect to be willing to accept a lower interest rate to invest in investment
grade loan pools). We would expect to retain all or a portion of the equity in the securitized pool of portfolio investments. In the past, we have initially financed our investments with relatively
short-term credit facilities and reverse repurchase arrangements. We used these short-term facilities to finance the acquisition of securities until a sufficient quantity of
securities had been accumulated, at which time we would refinance these facilities through a securitization, such as a CDO issuance, or other long-term financing. When we employed this
strategy, we were subject to the risk that we would not be able to acquire, during the period that our short-term facilities were available, a sufficient amount of eligible securities to
maximize the efficiency of a CDO issuance. We also were subject to the risk that we would not be able to obtain short-term credit facilities or would not be able to renew any
short-term credit facilities after they expire should we find it necessary to extend our short-term credit facilities to allow more time to seek and acquire the necessary
eligible securities for a long-term financing. While we are not currently acquiring investments for the purpose of securitizing them through a CDO issuance for the reasons stated below,
the inability to renew our short-term credit facilities may require us to seek more costly financing for our current investments or to liquidate assets.

Conditions
in the capital markets have caused the CDO market to completely shut down. In this regard, as discussed in the "Trends; Current Market Environment; Current Portfolio
Considerations" section of Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K, which we refer to
as our MD&A, our Manager has determined that we

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should
lower our amount of leverage. Downgrades of structured securities by the rating agencies are likely to continue through at least 2010. Large-scale downgrades and other factors have caused a
liquidity crisis, as the downgrades have triggered forced sales of MBS by structured investment vehicles, or SIVs, asset-backed commercial paper issuers, or ABCPs, and financial institutions. The
inability to securitize our portfolio has, and may continue to, hurt our performance and our ability to grow our business. At the same time, the securitization of our portfolio investments might
expose us to losses, as the residual portfolio investments in which we do not sell interests will tend to be riskier and more likely to generate losses.

The use of CDO financings with over-collateralization requirements may continue to have a negative impact on our cash flow.

The terms of our initial CDO financing, CDO 2005-1, required that the principal amount of assets must exceed the principal
balance of the related bonds by a certain amount, which is commonly referred to as "over-collateralization." In this regard, see "Financial
ConditionLiabilitiesCDO Liabilities" in our MD&A for a discussion regarding CDO 2005-1's failure to comply with certain cash flow tests and the resulting
diversion of cash flow from lower-rated debt securities of CDO 2005-1 that we hold to amortize senior debt securities issued by CDO 2005-1 that are held by others. We cannot
assure you that the performance tests will be satisfied. If our assets fail to perform as anticipated, our over-collateralization or other credit enhancement expense associated with our
CDO financings will increase.

An increase in our borrowing costs relative to the interest we receive on our assets may negatively affect our profitability and thus our cash available for distribution to
our stockholders.

As our short-term borrowings mature, we will be required either to enter into new borrowings or to sell certain of our
investments at times when we might not otherwise choose to do so. An increase in short-term interest rates at the time that we seek to enter into new borrowings would reduce the spread
between our returns on our assets and the cost of our borrowings. This would negatively affect our returns on our assets that are subject to prepayment risk, including our commercial loans and our
MBS, which might reduce earnings and, in turn, cash available for distribution to our stockholders.

We may not be able to renew the total return swaps that we enter into, which could adversely affect our leveraging strategy.

In the future, we may leverage certain of our investments through the use of total return swaps, which are swaps in which the
non-floating rate side is based on the total return of an equity instrument or a fixed income instrument with a life longer than the swap. We may wish to renew these swaps, which are for
specified terms, as they mature. However, there is a limited number of providers of such swaps, and there is no assurance the initial swap providers would choose to renew the swaps, and, if they do
not renew, that we would be able to obtain suitable replacement providers. Providers may choose not to renew our total return swaps for a number of reasons, including:



Furthermore,
our ability to invest in total return swaps, other than through a TRS, may be severely limited by the REIT qualification requirements because total return swaps are not
qualifying assets and do not produce qualifying income for purposes of the REIT asset and income tests.

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Hedging against interest rate exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.

Subject to maintaining our qualification as a REIT and our exemption from regulation under the Investment Company Act, we often pursue
various hedging strategies to seek to reduce our exposure to losses from adverse changes in interest rates. Our hedging activity varies in scope based on the level and volatility of interest rates,
the type of assets held, and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:



Our
hedging activity may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders. We have utilized and in the future may utilize
instruments such as forward contracts and interest rate swaps, caps, collars and floors and credit default swaps to seek to hedge against mismatches between the cash flows on our assets and the
interest payments on our liabilities or fluctuations in the relative values of our portfolio positions, in each case resulting from changes in market interest rates. Hedging against a decline in the
values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging
can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the
opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against an interest rate fluctuation that is so generally anticipated that we
are not able to enter into a hedging transaction at an acceptable price.

Although
we may enter into hedging transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if
we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio
positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any
such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.

In
addition, by entering into derivative contracts in connection with hedging transactions, we could be required to fund cash payments in certain circumstances. These potential payments
will be contingent liabilities and therefore may not appear on our balance sheet. Our ability to fund these contingent liabilities will depend on the liquidity of our assets and access to capital at
the time, and the need to fund these contingent liabilities could adversely affect our financial condition.

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Loss of Investment Company Act exclusion would adversely affect us and could cause a decline in the market price of our common stock and limit our ability to distribute
dividends.

Because registration as an investment company would significantly affect our ability to engage in certain transactions or to organize
ourselves in the manner we are currently organized, we intend to maintain our qualification for certain exclusions from registration under the Investment Company Act. Because we conduct our business
directly and through wholly-owned subsidiaries, we must ensure not only that we, but also that each of our subsidiaries, qualify for an exclusion or exemption from regulation under the Investment
Company Act.

If
we fail to satisfy the requirements provided in the Investment Company Act to preserve our exclusion from regulation under the Investment Company Act, we could be required to
materially restructure our activities and to register as an investment company under the Investment Company Act, which could have a material adverse effect on our operating results. Further, if it
were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the Commission,
that we would be unable to enforce contracts with third parties, and that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an
unregistered investment company.

Rapid changes in the values of our MBS and other real estate related investments may make it more difficult for us to maintain our qualification as a REIT or exclusion from
regulation under the Investment Company Act, which may cause us to change our mix of portfolio investments which may not produce optimal returns consistent with our investment strategy.

If the market value or income potential of our MBS and other real estate related investments declines as a result of increased interest
rates, prepayment rates or other factors, we may need to increase our real estate investments and income and/or liquidate our non-qualifying assets in order to maintain our REIT
qualification or exclusion from regulation under the Investment Company Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish.
This difficulty may be exacerbated if the
assets that we need to sell to comply with the requirements for qualification as a REIT or to qualify for an exclusion from regulations under the Investment Company Act have no
pre-existing trading market and cannot easily be sold. To the extent that the assets we need to sell are composed of subordinated MBS, individually-negotiated loans, loan participations or
mezzanine loans for which there is no established trading market, we may have difficulty selling such investments quickly for their fair value. Accordingly, we may have to make investment decisions
that we otherwise would not make absent the REIT and Investment Company Act considerations.

We are highly dependent on communications and information systems operated by Brookfield and BIM or by third parties, and systems failures could significantly disrupt our
business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.

Our business is highly dependent on communications and information systems, including all of BIM's proprietary analytical systems and
models and certain third-party systems and models. Any failure or interruption of our systems or the systems operated by Brookfield or BIM or by third parties on which we rely, as many experienced as
part of system-wide interruptions following the September 11, 2001 terrorist attacks and the East Coast electrical power blackout in August 2003, could cause delays or other
problems in our securities trading activities, including MBS trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our
common stock and our ability to pay dividends.

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Terrorist attacks and other acts of violence or war may affect the market for our common stock, the industry in which we conduct our operations and our profitability.

The terrorist attacks on September 11, 2001 disrupted the U.S. financial markets, including the real estate capital markets, and
negatively affected the U.S. economy in general. Any future terrorist attacks, the anticipation of any such attacks, the consequences of any military or other response by the U.S. and its allies, and
other armed conflicts could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. The economic impact
of these events could also adversely affect the credit quality of some of our loans and investments and the property underlying our MBS. Some of our loans and investments are more susceptible to the
adverse effects discussed above than others, such as hotel loans, which may experience a significant reduction in occupancy rates following any future attacks. We may suffer losses as a result of the
adverse impact of any future attacks and these losses may adversely affect our performance and revenues and may result in volatility of the value of our securities. A prolonged economic slowdown, a
recession or declining real estate values could impair the performance of our investments and harm our financial condition, increase our funding costs, limit our access to the capital markets or
result in a decision by lenders not to extend credit to us. We cannot assure you that
there will not be further terrorist attacks against the United States or U.S. businesses, and we cannot predict the severity of the effect that such future events would have on the U.S. financial
markets, the economy or our business. The types of losses described above resulting from these types of events are uninsurable.

In
addition, the events of September 11 created significant uncertainty regarding the ability of real estate owners of high-profile assets to obtain insurance coverage
protecting against terrorist attacks at commercially reasonable rates, if at all. With the enactment of the Terrorism Risk Insurance Act of 2002 (TRIA), and the subsequent enactment of the Terrorism
Risk Insurance Extension Act of 2005 and the Terrorism Risk Insurance Revision and Extension Act of 2007, which extended TRIA through the end of 2017, insurers must make terrorism insurance available
under their property and casualty insurance policies, but this legislation does not regulate the pricing of such insurance. The absence of affordable insurance coverage may adversely affect the
general real estate lending market, lending volume and the market's overall liquidity and it may reduce the number of suitable investment opportunities available to us and the pace at which we are
able to make investments. If the properties in which we invest are unable to obtain affordable insurance coverage, the value of those investments could decline, and in the event of an uninsured loss,
we could lose all or a portion of our investment.

Risks Related to the Merger

Completion of the Merger is subject to various conditions, and the Merger may not occur even if we obtain stockholder approval. Completion of the Merger is subject to
various risks, including, but not limited to:



As
a result of these risks, there can be no assurance that the Merger will be completed even if we obtain stockholder approval. If our stockholders do not approve the merger proposal or
if the Merger

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is
not completed for any other reason, we expect that our current external manager, under the direction of our board of directors, will continue to serve as our Manager.

Failure to complete the Merger could negatively impact the market price of our common stock. If the Merger is not completed for any reason, we will be subject to a number of
material risks, including the following:



If
the merger agreement is terminated and our board of directors seeks another merger or business combination, we cannot offer any assurance that we will be able to find an acquirer
willing to pay an equivalent or better price than the price to be paid under the merger agreement.

If the Merger is not completed, we may be required to seek protection from our creditors by filing under the U.S. Bankruptcy Code, or an involuntary petition for bankruptcy
may be filed against us.

It is likely that if the Merger is not consummated and no superior bid is received, we may be required to seek protection from our
creditors by filing under the U.S. Bankruptcy Code, or an involuntary petition for bankruptcy may be filed against us in light of our financial condition.

As
stated above, unless extended, our credit agreement will expire upon the latest of (i) May 25, 2010, (ii) the effective time of the Merger and (iii) thirty
(30) calendar days following the termination of the merger agreement, but in no event later than August 31, 2010. Accordingly, if the merger agreement is terminated, it may cause our
credit agreement to terminate earlier than it otherwise would, which will cast substantial doubt on our ability to continue as a going concern.

If
the Merger is not consummated and no superior bid is received, or if the credit agreement is terminated and we are unable to replace our existing credit facility, we may not have
sufficient liquidity for our operations and may be forced to file for bankruptcy protection, or an involuntary petition for bankruptcy may be filed against us, which could eliminate any value for our
equity.

Several lawsuits have been filed against us, the members of our board of directors, Brookfield and B Acquisition Sub Inc. challenging the Merger, and an adverse
judgment in such lawsuits may prevent the Merger from becoming effective or from becoming effective within the expected timeframe.

We, the members of our board of directors, and in some instances Brookfield and B Acquisition Sub Inc. have been named as
defendants in purported class action lawsuits brought by our stockholders challenging the proposed Merger, seeking, among other things, to enjoin the defendants from consummating the Merger on the
agreed-upon terms. If the plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Merger on the agreed-upon terms, the injunction may
prevent the completion of the Merger in the expected timeframe (or altogether). See "Item 3. Litigation" for more information about the putative class action lawsuits related to the Merger that
have been filed.

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Risks Related to Our Investments

Our real estate investments are subject to risks particular to real property, any of which could reduce our returns on such investments and limit our cash available for
distribution to our stockholders.

We own assets secured by real estate and also own real estate directly. Real estate investments will be subject to various risks,
including:



If
any of these or similar events occurs, it may reduce our return from an affected property or investment and reduce or eliminate our ability to make distributions to stockholders.

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

Commercial mortgage loans are secured by multifamily or commercial property and are subject to risks of delinquency and foreclosure,
and risks of loss that are greater than similar risks associated with loans secured by single-family residential properties. The ability of a borrower to repay a loan secured by an income-producing
property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income
or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability to repay the loan may be impaired. Net operating income of an income-producing property can be
affected by, among other things: tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in
laws that increase operating expense or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property,
changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates,
increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God,
terrorism, social unrest and civil disturbances.

Residential
mortgage loans are secured by single-family residential property or 2-4 family residential property and are subject to risks of delinquency, foreclosure, and
loss. The ability of a borrower to repay a loan secured by a residential property is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn,
payment increases under the terms of the loan, acts of God, terrorism, social unrest and civil disturbances, may impair a borrower's ability to repay its loans. ABS are bonds or notes backed by loans
and/or other consumer financial assets. The ability to repay these loans or other financial assets is dependent upon the income or assets of the borrower, or revenue produced by the assets in the case
of commercial assets.

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In
the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral to be
liquidated and the principal and accrued interest of the mortgage loan and other costs, which could have a material adverse effect on our cash flow from operations. In the event of the bankruptcy of a
mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the
bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is
unenforceable under state law, which could result in a total loss of our investment.

Foreclosure
of a mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. RMBS
evidence interests in, or are secured by, pools of residential mortgage loans and CMBS evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage
loans. Accordingly, the MBS in which we invest are subject to all of the risks of the underlying mortgage loans.

In
addition, residential mortgage borrowers may not be prevented by the terms of their mortgage loans from prepaying their loans in whole or in part at any time. Borrowers prepay their
mortgages for many reasons, but typically, when interest rates decline or when home prices rise, borrowers tend to prepay at faster rates. To the extent that the underlying mortgage borrowers in any
of our mortgage loan pools or the pools underlying any of our mortgage-backed securities prepay their loans, we will likely receive funds that will have to be reinvested, and we may need to reinvest
those funds at less desirable rates of return.

Approximately
0.6% of our investment portfolio as of December 31, 2009 was comprised of mortgage-backed securities collateralized by sub-prime residential mortgages.
Sub-prime residential mortgage loans generally are loans to credit impaired borrowers and borrowers that are ineligible to qualify for loans from conventional mortgage sources due to
credit characteristics, higher debt-to-income ratios or less than full documentation standards. Loans to lower credit grade borrowers generally experience
higher-than-average default rates than do conforming mortgage loans. Material differences in expected default rates, loss severities and/or prepayments on the
sub-prime mortgage loans from what was estimated in connection with the original underwriting of such loans could cause reductions in our income and adversely affect our operating results,
with respect to our investments in mortgage-backed securities. If we underestimate the extent of losses that our investments in mortgage-backed securities will incur, then our business, financial
condition, liquidity and results of operations could be adversely affected. For a description of the recent weakness in the sub-prime market, see "Part I. Item 7.
Management's Discussion and Analysis of Financial Condition and Results of OperationsTrends; Current Market Environment; Current Portfolio Considerations."

An increase in the yield spread of our assets may cause the market price of our common stock to drop.

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is the relative yield
spread differential between the assets that we own and their valuation relative to comparable duration Treasuries. Increases in the yield spread differential have lowered the book value of our assets,
which has contributed to the decline in the value of our common stock. Additional increases in the yield spread differential could have a similar effect. Over the last 24 months, yield spreads
on our assets have dramatically widened and the price of our common stock has declined from $14.44 on December 31, 2007 to $0.72 on March 23, 2010.

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Our investments in CMBS generally are subordinated and could subject us to increased risk of losses.

In general, losses on an asset securing a mortgage loan included in a securitization will be borne first by the equity holder of the
property, then by a cash reserve fund or letter of credit provided by the borrower, if any, then by the "first loss" subordinated security holder and then by the "second loss" subordinated security
holder. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in which we invest, we may not be able to recover
all of our investment in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result,
less collateral is available to satisfy interest and principal payments due on the related MBS, the securities in which we invest may effectively become the "first loss" position behind the more
senior securities, which may result in significant losses to us and may be in excess of our underwriting assumptions.

The
prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments but more sensitive to adverse economic downturns or
individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages
underlying MBS to make principal and interest payments or to refinance may be impaired. In this case, existing credit support in the securitization structure may be insufficient to protect us against
loss of our principal on these securities.

As
of December 31, 2009, there were $41.1 million of principal writedowns due to losses on underlying loans within the securitizations of which our CMBS Primary Asset is a
part.

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

A key to our investment strategy is to finance our investments using match funded financing structures, which match assets and
liabilities with respect to maturities and interest rates. This limits our refinance risk, including the risk of being able to refinance an investment or refinance on favorable terms. We generally use
match funded financing structures, such as CDOs, to finance our investments in real estate securities and loans, and long term mortgage financings to finance our owned commercial real estate
properties. However, 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 or when match funded financing structures or other long term financing is not available. The decision not to match fund
certain investments exposes us to additional refinancing risks that may not apply to our other investments. As noted above, the issuance of CDOs has come to a halt.

In
addition, we anticipate that, in most cases, for any period during which our floating rate assets are not match funded with respect to maturity, the income from such assets may
respond more slowly to interest rate fluctuations than the cost of our borrowings. Because of this dynamic, interest income from such investments may rise more slowly than the related interest
expense, with a consequent decrease in our net income. Interest rate fluctuations resulting in our interest expense exceeding interest income would result in operating losses for us from these
investments.

Accordingly,
if we do not or are unable to match fund our investments with respect to maturities and interest rates, we will be exposed to the risk that we may not be able to finance or
refinance our investments on economically favorable terms or may have to liquidate assets at a loss.

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

When we acquire a portfolio of loans and securities that we finance on a short term basis with a view to securitization or other long
term financing, we bear the risk of being unable to securitize the assets or otherwise finance them on a long term basis at attractive prices or in a timely matter, or at all. If it is not possible or
economical for us to securitize or otherwise finance such assets on a long term basis, we may be unable to pay down our short term borrowings, or be required to liquidate the assets at a loss in order
to do so.

As
of December 31, 2009, we had approximately $28.9 million of indebtedness maturing in the next 12 months. When this indebtedness becomes due, any inability to
refinance or extend the maturity of this indebtedness on similar terms could have a material impact on our liquidity, our ability to pay future dividends and our ability to maintain our REIT status.
Some of our investments securing these obligations are illiquid and this lack of liquidity could significantly impede our ability to realize the value at which such investments are carried if we are
required to sell them to satisfy debt maturities.

Our assets may include high yield and subordinated corporate securities that have greater risks of loss than secured senior loans and if those losses are realized, they
could negatively affect our earnings, which could materially decrease cash available for distribution to our stockholders.

Our assets may include high yield and subordinated securities that involve a higher degree of risk than long-term senior
secured loans. First, the high yield securities may not be secured by mortgages or liens on assets. Even if secured, these high yield securities may have higher loan-to-value
ratios than a senior secured loan. Furthermore, our right to payment and the security interest may be subordinated to the payment rights and security interests of the senior lender. Therefore, we may
be limited in our ability to enforce our rights to collect these loans and to recover any of the loan balance through a foreclosure of collateral.

Certain
of these high yield and subordinated securities may have an interest only payment schedule, with the principal amount remaining outstanding and at risk until the maturity of the
obligation. In this case, a borrower's ability to repay its obligation may be dependent upon a liquidity event that will enable the repayment of the obligation.

In
addition to the above, numerous other factors may affect a company's ability to repay its obligation, including the failure to meet its business plan, a downturn in its industry or
negative economic conditions. Deterioration in a company's financial condition and prospects may be accompanied by deterioration in the collateral securing the obligation. Losses in our high yield and
subordinated securities could negatively affect our earnings, which could materially decrease cash available for distribution to our stockholders.

High
yield and subordinated securities from highly leveraged companies may have a greater risk of loss which, in turn, could materially decrease cash available for distribution to our
stockholders.

Leverage
may have material adverse consequences to companies in which we will hold investments. These companies may be subject to restrictive financial and operating covenants. The
leverage may impair the ability of these companies to finance their future operations and capital needs. As a result, these companies may have limited flexibility to respond to changing business and
economic conditions and to business opportunities. A leveraged company's income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used. As a result,
leveraged companies have a greater risk of loss. Losses on our investments could negatively affect our earnings, which could materially decrease cash available for distribution to our stockholders.

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We have invested in the equity securities of CDOs, and such investments involve various significant risks, including that CDO equity receives distributions from the CDO only
if the CDO generates enough income to first pay the holders of its debt securities and its expenses.

We have invested in the equity securities of CDOs. A CDO is a special-purpose vehicle that purchases collateral (such as ABS or MBS)
that is expected to generate a stream of interest or other income. The CDO issues various classes of securities that participate in that income stream, typically one or more classes of debt
instruments and a class of equity securities. The equity is usually entitled to all of the income generated by the CDO after the CDO pays all of the interest due on the debt securities and its
expenses. However, there will be little or no income available to the CDO equity if there are defaults by the issuers of the underlying collateral and those defaults exceed a certain amount. In that
event, the value of our investment in the CDO's equity could decrease substantially. In addition, the equity securities of CDOs are generally illiquid, and because they represent a leveraged
investment in the CDO's assets, the value of the equity securities will generally have greater fluctuations than the values of the underlying collateral.

Investments in mezzanine loans involve greater risks of loss than senior loans secured by income-producing properties.

Investments in mezzanine loans take the form of subordinated loans secured by second mortgages on the underlying property or loans
secured by a pledge of the ownership interests in the entity that directly or indirectly owns the property. These types of investments involve a higher degree of risk than a senior mortgage loan
because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we
may not have full recourse to the assets of the property owning entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or
debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. As a result, we may not recover some or all of our
investment, which could result in losses. In addition, mezzanine loans may have higher loan to value ratios than conventional mortgage loans, resulting in less equity in the property and increasing
the risk of loss of principal. In this regard, we have had to write down a construction mezzanine loan by $14.6 million and a mezzanine loan by $6.4 million to date due to cost overruns
and/or a deteriorating housing market in the locale where the project is located. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
OperationsFinancial ConditionAssetsCommercial Real Estate Loan InvestmentsMezzanine Loans, Construction Loans and Whole Loans."

Increases in interest rates and shifts in the yield curve could negatively affect the value of our investments, which could result in reduced earnings or losses and
negatively affect the cash available for distribution to our stockholders.

We invest indirectly in mortgage loans by purchasing MBS. Under a normal yield curve, an investment in MBS will decline in value if
long-term interest rates increase. Despite Fannie Mae, Freddie Mac or Ginnie Mae guarantees of certain of the MBS we have owned in the past and may own in the future, those guarantees do
not protect us from declines in market value caused by changes in interest rates. Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash
available for distribution to our stockholders.

A
significant risk associated with our investment in MBS is the risk that both long-term and short-term interest rates will increase significantly. If
long-term rates increase significantly, the market value of these MBS would decline and the duration and weighted average life of the investments would increase. We could realize a loss if
the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on the financing agreements we may enter into in order to
finance the purchase of MBS.

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Market
values of our investments may decline without any general increase in interest rates for a number of reasons, such as increases in defaults, increases in voluntary prepayments for
those investments that are subject to prepayment risk, and widening of credit spreads.

Some of our portfolio investments are recorded at fair value as estimated by management and reviewed by our board of directors and, as a result, there is uncertainty as to
the value of these investments.

Some of our portfolio investments are in the form of securities or loans that are not publicly traded. The fair value of securities and
other investments that are not publicly traded is not readily determinable. We value these investments quarterly at fair value as determined under policies approved by our board of directors. Because
such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have
been used if a ready market for these securities existed. The value of our common stock could be adversely affected if our determinations
regarding the fair value of these investments are materially higher than the values that we ultimately realize upon their disposal.

The value of investments denominated or quoted in international currencies may decrease due to fluctuations in the relative rates of exchange among the currencies of
different nations and by exchange control regulations.

If we make investments denominated or quoted in foreign currencies, our investment performance may be negatively affected by a
devaluation of that currency. Further, our investment performance may be negatively affected by currency exchange rates because the U.S. dollar value of investments denominated or quoted in another
currency may increase or decrease in response to changes in the value of the currency in relation to the U.S. dollar.

Declines in the market values of our investments may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash
available for distribution to our stockholders.

A substantial portion of our assets are classified for accounting purposes as "available-for-sale." Changes in
the market values of those assets are directly charged or credited to stockholders' equity. As a result, a decline in values may reduce the book value of our assets. Moreover, if we determine the
decline in value of an available-for-sale security to be other than temporary, such decline will reduce earnings. The total impairment charge for the year ended
December 31, 2009 was $77.9 million.

All
of our repurchase agreements are subject to bilateral margin calls in the event that the collateral securing our obligations under those facilities exceeds or does not meet our
collateralization requirements. The analysis of sufficiency of collateralization is undertaken daily, and the thresholds for adjustment range from $100,000 to $500,000. Since the summer of 2007, due
to the deterioration in the market value of our assets, we received margin calls under several of our repurchase agreements, which resulted in our having to tap our financing sources to post
additional collateral. We did not have any borrowings under repurchase agreements as of December 31, 2009.

A
further decline in the market value of our assets may adversely affect us particularly in instances where we have borrowed money based on the market value of those assets. If the
market value of those assets declines, the lender may require us to post additional collateral to support the loan. If we were unable to post the additional collateral, we would have to sell the
assets at a time when we might not otherwise choose to do so. A reduction in available credit may reduce our earnings and, in turn, cash available for distribution to stockholders.

The lack of liquidity in our investments may harm our business.

We have made investments in assets and securities that are not publicly traded. A portion of these securities may be subject to legal
and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments, such as commercial real estate, subordinated MBS or investments
in timber or power generating assets, may make it difficult for us to

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sell
such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have
previously recorded our investments. Moreover, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our Manager has or could be
attributed with material nonpublic information regarding such business entity. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively
limited.

Failure to comply with negative covenants contained in our credit agreement, our repurchase facilities and other funding agreements will limit available financing under
these agreements.

Certain of our repurchase facility agreements include negative covenants that, if breached, may cause transactions to be terminated
early. Except as noted below, the repurchase facility agreements do not include negative covenants other than those contained in the standard master repurchase agreement as published by the Bond
Market Association. Two of our master repurchase agreements, which did not account for any of our liabilities as of December 31, 2009, provide that they may be terminated if, among other
things, certain material decreases in net asset value occur, we lose our REIT status or our Manager is terminated. An event of default or termination event under the standard master repurchase
agreement or the additional provisions explained above would give our counterparty the option to terminate all repurchase transactions existing with us and make any amount due by us to the
counterparty payable immediately. If we are required to terminate repurchase transactions, to the extent that we had any outstanding, and were unable to negotiate favorable terms of replacement
financing, our cash and our earnings would be negatively affected. This may reduce the amount of capital available for investing and/or may negatively affect our ability to distribute dividends. In
addition, we may have to sell assets at a time when we might not otherwise choose to do so.

The continuation of the current economic slowdown and further declines in real estate values could further impair the performance of our investments and harm our operating
results.

Many of our investments are susceptible to the current economic slowdown, which has led to financial losses in our investments and a
decrease in revenues, net income and assets. Continued unfavorable economic conditions have increased our funding costs and effectively blocked our access to the capital markets. These events are
preventing us from increasing investments and have had a negative impact on our operating results. In this regard, the U.S. economy is in the midst of a recession, with consumer spending on the
decline, credit tightening and unemployment rising. Many financial and economic analysts have predicted that the world economy is in a prolonged recession characterized by high unemployment, limited
availability of credit and decreased consumer and business spending. This economic downturn is expected to adversely affect many of the individuals and businesses that have borrowed money to purchase
real estate and to continue to exert downward pressure on real estate prices. Accordingly, we expect to continue to experience a downturn in the market value of our investments.

We may be exposed to environmental liabilities with respect to properties to which we take title, which could impair the performance of our investments and harm our
operating results.

In the course of our business, we have and may continue to take title to real estate, and, we could be subject to environmental
liabilities with respect to these properties. In these circumstances, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation, and
clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases
at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial
condition, liquidity and results of operations could be materially and adversely affected.

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Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental
authorities and involve risks and costs that could expose us to unexpected economic losses in the future.

The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and
volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or
rising and hedging costs have increased. We expect that from time to time, in addition to the interest rate swaps and credit default swaps into which we had entered as of December 31, 2009, we
could in the future enter into forward contracts, currency swaps and cash flow swaps as part of our hedging strategy.

In
addition, hedging instruments involve risk because they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or
foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the
enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory, commodity and other regulatory requirements and, depending on the identity of the
counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a
party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. Although
generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging
counterparty, and we may not be able to enter into an offsetting contract to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold,
and we may be required to maintain a position until exercise or expiration, which could result in losses.

Subject
to maintaining our qualification as a REIT, part of our investment strategy involves entering into derivative contracts that could require us to fund cash payments in the future
under certain circumstances,e.g., the early termination of the derivative agreement caused by an event of default or other early termination event, or
the decision by a counterparty to request margin securities it is contractually owed under the terms of the derivative contract. The amount due would be equal to the unrealized loss of the open swap
positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our financial results of operations, and our ability to fund these
obligations will depend on the liquidity of our assets and access to capital at the time. The need to fund these obligations could negatively affect our financial condition.

Prepayment rates could negatively affect the value of our MBS, which could result in reduced earnings or losses and negatively affect the cash available for distribution to
our stockholders.

In the case of residential mortgage loans, there are seldom any restrictions on borrowers' abilities to prepay their loans. Homeowners
tend to prepay mortgage loans faster when interest rates decline. Consequently, owners of the loans have to reinvest the money received from the prepayments at the lower prevailing interest rates.
Conversely, homeowners tend not to prepay mortgage loans when interest rates increase. Consequently, owners of the loans are unable to reinvest money that would have otherwise been received from
prepayments at the higher prevailing interest rates. This volatility in prepayment rates may affect our ability to maintain targeted amounts of leverage on our mortgage-backed securities portfolio and
may result in reduced earnings or losses for us and negatively affect the cash available for distribution to our stockholders.

Our Manager's due diligence may not reveal all of an entity's liabilities and may not reveal other weaknesses in its business, which could lead to investment losses.

Before investing in a company, our Manager assesses the strength and skills of the company's management and other factors that our
Manager believes are material to the performance of the

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investment.
In making the assessment and otherwise conducting customary due diligence, our Manager relies on the resources available to it and, in some cases, an investigation by third parties. This
process is particularly important and subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. There can be no assurance
that our Manager's due diligence processes will uncover all relevant facts or that any current or future investment will be successful and not result in investment losses.

We, or other owners of income-producing real property, may not be able to relet or renew leases of properties on favorable terms.

We are subject to the risk that upon expiration of leases for space located at any income-producing property that we purchase or that
serves as collateral for MBS securities that we purchase, the space may not be relet or, if relet, the terms of the renewal or reletting (including the cost of required renovations or concessions to
tenants) may be less favorable than the expiring lease terms. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by a
property. If we, or the other owners of such properties, are unable to relet or renew leases for all or substantially all of the space at any such properties, if the rental rates upon such renewal or
reletting are significantly lower than expected, or if reserves for these purposes prove inadequate, we may be required to reduce or eliminate distributions to our stockholders.

Our reliance on one tenant at all three of our commercial real estate properties and the insolvency or bankruptcy of this tenant could adversely affect our results of
operations.

As of December 31, 2009, we had one tenant, JPMorgan Chase, that accounted for all of our rental income, which was 42.7% of our
total revenues for the year. Our business would be adversely affected if this tenant became insolvent, declared bankruptcy or otherwise refused to pay rent in a timely fashion or at all.

Uninsured losses or a loss in excess of insured limits on commercial real estate may not cover all losses and could adversely affect our financial condition.

There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of
war, that may be uninsurable or not economically insurable. We carry, or we require our tenants to carry, comprehensive general liability, fire, extended coverage and loss of rent insurance on our
properties, with policy specifications and insured limits customarily carried for similar properties. However, with respect to those properties where the leases do not provide for abatement of rent
under any circumstances, we generally do not maintain loss of rent insurance. In addition, there are certain types of losses, such as losses resulting from wars, terrorism or acts of God, that
generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose capital invested in a
property, as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property. Any loss of these
types would adversely affect our financial condition.

Risks Related to Our Organization and Structure

Our charter and bylaws contain provisions that may inhibit potential takeover bids that you and other stockholders may consider favorable, and the market price of our common
stock may be lower as a result.

Our charter and bylaws contain provisions that may have an anti-takeover effect, inhibit a change in our board of directors
and prevent stockholders from receiving a premium on their shares. These provisions include the following:



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Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in
your best interests.

Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability
resulting from:



In
addition, our charter permits us to agree to indemnify our present and former directors and officers for actions taken by them in those capacities to the maximum extent permitted by
Maryland law. Our bylaws require us to indemnify each present or former director or officer, to the maximum extent
permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to
fund the defense costs incurred by our directors and officers.

Our access to confidential information may restrict our ability to take action with respect to some investments, which, in turn, may negatively affect the potential return
to stockholders.

We, directly or through Brookfield, BIM or our Manager may obtain confidential information about the companies in which we have
invested or may invest. If we do possess confidential information about such companies, there may be restrictions on our ability to dispose of, increase the amount of, or otherwise take action with
respect to an investment in those companies. Our management of investment funds could create a conflict of interest to the extent our Manager is aware of inside information concerning potential
investment targets. We have implemented compliance procedures and practices designed to ensure that inside information is not used for making investment decisions on behalf of the funds and to monitor
funds invested. We cannot assure you, however, that these procedures and practices will be effective. In addition, this conflict and these procedures and practices may limit the freedom of our Manager
to make potentially profitable investments, which could negatively affect our operations. These limitations imposed by access to confidential information could therefore negatively affect the
potential market price of our common stock and the ability to distribute dividends.

Tax Risks

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

To qualify as a REIT for federal income tax purposes, we must continually satisfy various tests regarding the sources of our income,
the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. To meet these tests, we may be required to forego investments we might
otherwise make. This difficulty may be exacerbated by the illiquid nature of many of our non-real estate assets. Thus, compliance with the REIT requirements may hinder our investment
performance.

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

Certain of our securitizations have resulted in the creation of taxable mortgage pools for federal income tax purposes. As a REIT, so
long as we own 100% of the equity interests in a taxable mortgage

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pool,
we generally would not be adversely affected by the characterization of the securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as non-U.S.
persons eligible for treaty benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to
increased taxes on a portion of their dividend income from us attributable to the taxable mortgage pool that is characterized as "excess inclusion income." In addition, to the extent that our stock is
owned by tax-exempt "disqualified organizations," such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we
may incur a corporate level tax on the excess inclusion income from the taxable mortgage pool. In that case, we may reduce the amount of our distributions to any disqualified organization whose stock
ownership gave rise to the tax. The Internal Revenue Service has not given clear guidance as to the appropriate method for the calculation of excess inclusion income and, absent such clear guidance,
we have calculated excess inclusion income based upon what we believe to be a reasonable method. Our estimation of excess inclusion income is disclosed in our year end financial statements. In
addition, pursuant to recently issued guidance from the Internal Revenue Service, we are required to allocate excess inclusion income to our shareholders in proportion to dividends paid and to inform
our shareholders of the amount and character of the excess inclusion income allocated to them. Given the lack of guidance, there can be no assurances that we have calculated excess inclusion income in
a manner satisfactory to the Internal Revenue Service.

We
are effectively precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations
that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions. In certain
instances, we have pledged our equity interests in these taxable mortgage pools as collateral under our repurchase agreements, subjecting the pools to the potential loss of their
tax-exempt status in the event that we were forced to sell our interests or our interests were foreclosed upon by a third party that was not afforded the same exemption as us.

Failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce the cash available for distribution to our stockholders.

We operate in a manner that is intended to cause us to qualify as a REIT for federal income tax purposes. However, the federal income
tax laws governing REITs are extremely complex, and administrative interpretations of the federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to
meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. Although we operate in such a
manner so as to qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our
circumstances, no assurance can be given that we will so qualify for any particular year.

If
we fail to qualify as a REIT in any calendar year and we do not qualify for certain statutory relief provisions, we would be required to pay federal income tax on our taxable income.
We might need to borrow money or sell assets in order to pay that tax. Our payment of income tax would decrease the amount of our income available for distribution to our stockholders. Furthermore, if
we fail to maintain our qualification as a REIT and we do not qualify for certain statutory relief provisions, we no longer would be required to distribute substantially all of our REIT taxable income
to our stockholders. Unless our failure to qualify as a REIT were excused under federal tax laws, we could not re-elect REIT status until the fifth calendar year following the year in
which we failed to qualify.

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Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders and could adversely affect our
ability to execute our business plan.

In order to qualify as a REIT, we must distribute to our stockholders, each calendar year, at least 90% of our REIT taxable income,
determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our
taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our
distributions in any calendar year are less than the sum of:



We
intend to continue to distribute our net taxable income to our stockholders in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax and
the 4% nondeductible excise tax. However, there is no requirement that domestic TRSs distribute their after-tax net income to their parent REIT or their stockholders and Crystal River
Capital TRS Holdings, Inc., our TRS, may determine not to make any distributions to us.

Our
taxable income may substantially differ from our net income as determined based on accounting principles generally accepted in the United States, or U.S. GAAP, because, for
example, realized capital losses will be deducted in determining our U.S. GAAP net income, but may not be deductible in computing our taxable income. In addition, we may invest in assets that
generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets, which we refer to as phantom income. Although some types of phantom income are
excluded to the extent they exceed 5% of our REIT taxable income in determining the 90% distribution requirement, we will incur corporate income tax and the 4% nondeductible excise tax with respect to
any phantom income items if we do not distribute those items on an annual basis. As a result of the foregoing, we may generate less cash flow than taxable income in a particular year. In that event,
we may be required to use cash reserves, incur debt on a short-term or long-term basis, or liquidate non-cash assets at rates or times that we regard as unfavorable
to satisfy the distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax in that year. Because certain of our assets may generate substantial mismatches between
taxable income and available cash, the requirement to distribute a substantial portion of our net taxable income could cause us to: (i) sell assets in adverse market conditions,
(ii) borrow on unfavorable terms or (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, in order to comply with
REIT requirements.

In the event CDO I is liquidated, the tax consequences may be materially adverse to us and could significantly reduce our liquidity if we are required to make
material distributions to our stockholders in connection with such liquidation.

In November 2005, we issued collateralized debt obligations through two newly-formed financing subsidiaries, Crystal River CDO
2005-1, Ltd. and Crystal River CDO 2005-1 LLC, which we collectively refer to as CDO I. In January 2007, we issued collateralized debt obligations through
two newly-formed financing subsidiaries, Crystal River Capital Resecuritization 2006-1 Ltd. and Crystal River Capital Resecuritization 2006-1 LLC, which we
collectively refer to as CDO II. CDO I and CDO II represent VIEs with respect to which we have determined we are the primary beneficiary and accordingly, we have consolidated them
in our consolidated financial statements. We determined that we are the primary beneficiary of both CDO I and CDO II as we have the highest level of variability of return due

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to
the credit risk of the underlying assets. For additional information relating to the consolidated assets and liabilities of CDO I and CDO II, see Note 9 to our consolidated
financial statements.

On
September 2, 2009, the trustee of CDO 1 issued a Notice of Event of Default to the collateral manager for CDO I because of a failure by CDO I to pay
interest on the Class D notes. This event of default entitles noteholders of the senior class of notes, the Class A notes, to direct the trustee to take particular actions with respect
to the collateral owned by CDO I and the CDO notes issued by CDO I. The event of default did not trigger a reconsideration event under FASB
ASC 810-10-25-39 through 25-41 (previously FIN 46R) and has no impact on our consolidated financial statements during the third quarter.

In
light of these events, it is possible that CDO I may be liquidated. A liquidation under these circumstances likely would result in a capital loss on our investment in the
assets of CDO I and income from the cancellation of indebtedness with respect to the notes issued by CDO I. The tax consequences of these items may be materially adverse to us and could
significantly reduce our liquidity if we are required to make material distributions to our stockholders in connection with such liquidation in order to maintain our REIT qualification because of the
amount of taxable income (but not cash income) received.

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

Legislation enacted in 2003 generally reduces the maximum tax rate for dividends payable to domestic stockholders that are individuals,
trusts and estates to 15% (through 2010). Dividends payable by REITs, however, are generally not eligible for the reduced rates. Although
this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are
individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could
adversely affect the value of the stock of REITs, including our common stock.

Our ownership of and relationship with our TRS will be limited, and a failure to comply with the limits would jeopardize our REIT status and may result in the application of
a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned
directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting
power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT's assets may consist of stock or securities of one or more TRSs. A TRS will pay
federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT
to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not
conducted on an arm's length basis.

Our
TRS, Crystal River Capital TRS Holdings, Inc., as a domestic TRS, will pay federal, state and local income tax on its taxable income, and its after-tax net income
is available for distribution to us but is not required to be distributed to us. The aggregate value of the TRS stock and securities owned by us should be less than 20% of the value of our total
assets (including the TRS stock and securities). Furthermore, we monitor the value of our investments in TRSs for the purpose of ensuring compliance with the rule that no more than 20% of the value of
our assets may consist of TRS stock and securities (which is applied at the end of each calendar quarter). In addition, we scrutinize all of our transactions with TRSs for the purpose of ensuring that
they are entered into on arm's length terms in order to avoid incurring the 100% excise tax described above. There can be no complete assurance, however,

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that
we will be able to comply with the 20% limitation discussed above or to avoid application of the 100% excise tax discussed above.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Internal Revenue Code substantially limit our ability to hedge MBS and related borrowings. Under these
provisions, our annual gross income from qualifying and non-qualifying hedges, together with any other income not generated from qualifying real estate assets, cannot exceed 25% of our
gross income. In addition, our aggregate gross income from non-qualifying hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As
a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through Crystal River Capital TRS Holdings, Inc. This could increase the cost of our
hedging activities or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.

The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales
for federal income tax purposes.

A REIT's net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other
dispositions of property, other than foreclosure property, but including mortgage loans, held primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we
were able to sell or securitize loans in a manner that was treated as a sale of the loans for federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose
not to engage in certain sales of loans and may limit the structures we utilize for our securitization transactions even though such sales or structures might otherwise be beneficial to us.

It
may be possible to reduce the impact of the prohibited transaction tax and the holding of assets not qualifying as real estate assets for purposes of the REIT asset tests by
conducting certain activities, holding non-qualifying REIT assets or engaging in CDO transactions through our TRSs, subject to certain limitations. To the extent that we engage in such
activities through TRSs, the income associated with such activities may be subject to full corporate income tax.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

At any time, the federal, state or local income tax laws or regulations governing REITs or the administrative interpretations of those
laws or regulations may be amended. We cannot predict when or if any new tax law, regulation or administrative interpretation, or any amendment to any existing tax law, regulation or administrative
interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect
retroactively. We and our stockholders could be adversely affected by any such change in, or any new, tax law, regulation or administrative interpretation.

If we make distributions in excess of our current and accumulated earnings and profits, those distributions will be treated as a return of capital, which will reduce the
adjusted basis of your stock, and to the extent such distributions exceed your adjusted basis, you may recognize a capital gain.

Unless you are a tax-exempt entity, distributions that we make to you generally will be subject to tax as ordinary income
to the extent of our current and accumulated earnings and profits as determined for federal income tax purposes. If the amount we distribute to you exceeds your allocable share of our current and
accumulated earnings and profits, the excess will be treated as a return of capital to the extent of your adjusted basis in your stock, which will reduce your basis in your stock but will not be
subject to tax. To the extent the amount we distribute to you exceeds both your allocable

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share
of our current and accumulated earnings and profits and your adjusted basis, this excess amount will be treated as a gain from the sale or exchange of a capital asset.

Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties.

Our investments in real estate assets as of December 31, 2009 consist of our interests in properties that are consolidated in
our consolidated financial statements. JPMorgan Chase is the tenant for all these properties. The following table sets forth the information with respect to our real estate assets as of
December 31, 2009:

Property Name

Chase Tower Phoenix

1111 Fannin

JPM Chase Call CenterLocation

Phoenix, AZ

Houston, TX

Arlington, TXType

Office

Office

Office% Owned

100.0%

100.0%

100.0%Year Built

1973

1971

2000Date Acquired

March 20, 2007

March 20, 2007

September 25, 2007Net Rentable Square Feet

724,000

428,600

171,500Percentage Leased

100.0%

100.0%

100.0%Lease Expiration(1)

2021

2021

2027Extension Periods

Four 5-year extensions

Four 5-year extensions

Four 10-year extensionsDebt on PropertyInterest Rate

5.509%

5.509%

6.290%Debt on PropertyMaturity Date

April 1, 2017

April 1, 2017

October 1, 2017Debt on PropertyPrincipal Balance

$145,087,300

$53,412,700

$20,880,000


(1)Assumes
tenant does not exercise any extension options.


See
"Schedule IIIReal Estate and Accumulated Depreciation" to our consolidated financial statements for information relating to depreciation of these properties.

Although
we believe our investments are currently adequately covered by insurance consistent with the level of coverage that is standard in our industry, we cannot predict at this time
if we will be able to obtain adequate coverage at a reasonable cost in the future.



Our principal executive and administrative offices are located in office space leased at Three World Financial Center, 200 Vesey
Street, 10th Floor, New York, New York 10281-1010 and are provided by our Manager in accordance with the Management Agreement. Our telephone number is
(212) 549-8400 and our website address ishttp://www.crystalriverreit.com.

Item 3.    Legal Proceedings.

Crystal River is aware of three lawsuits that have been filed by alleged Crystal River shareholders challenging our proposed merger
with Brookfield and naming as defendants Crystal River, our Board of Directors, and in some instances, Brookfield and B Merger Sub, Inc. Additional lawsuits pertaining to the Merger could be
filed in the future. On or around March 2, 2010, plaintiff Fazal Mahmood filed a complaint in the Circuit Court for Baltimore City, Maryland against Crystal River and our Board of Directors
asserting claims on behalf of a putative class of Company shareholders. On March 2, 2010, plaintiffs Milton P. Silva and Shaher Tadros filed a complaint in the Supreme Court of the State of

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New
York, County of New York, against Crystal River, our Board of Directors, Brookfield, and B Merger Sub, Inc. asserting claims on behalf of a putative class of Crystal River shareholders as
well as derivative claims ostensibly on behalf of Crystal River. On March 5, 2010, plaintiff Gary P. Klahr filed a complaint in the Circuit Court for Baltimore City, Maryland against Crystal
River, our Board of Directors, Brookfield, and B Merger Sub, Inc. asserting claims on behalf of a putative class of Crystal River shareholders. In each of these lawsuits, the plaintiffs
generally allege, among other things, that the members of our Board of Directors breached their fiduciary duties towards the plaintiffs and the other public stockholders of Crystal River in connection
with the proposed sale of Crystal River to Brookfield and Merger Sub. Plaintiffs in these lawsuits seek, among other relief, certification of the lawsuits as class actions, an injunction preventing
the Merger from closing, an award of unspecified damages to the plaintiffs and the class, and an award of attorneys' fees and expenses, along with such other relief as the courts deem just and proper.
We intend to vigorously defend these lawsuits.

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

None.

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PART II

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

The New York Stock Exchange, or NYSE, notified us that it was delisting our common stock prior to the opening of the market on
December 2, 2008. On December 2, 2008, our common stock commenced trading on the Pink Sheets, and, on December 9, 2008, commenced trading on the
Over-the-Counter Bulletin Board, in addition to the Pink Sheets. Our common stock trades on the over-the-counter market under the symbol "CYRV."

The
following table sets forth the high and low sale price per share of our common stock as reported on the NYSE Composite Transactions Tape from January 1, 2008 to
December 1, 2008, and on the over-the-counter market from December 2, 2008 to December 31, 2009. The stock price information is based on published
financial sources. Over-the-counter market quotations reflect inter-deal prices, without retail mark-up, mark-down or commissions, and may
not necessarily reflect actual transactions.

High

Low

Dividend2009Fourth Quarter

$
1.40

$
0.31

$
0.00Third Quarter


2.47


0.90


0.10Second Quarter


2.25


1.19


0.10First Quarter


1.47


0.54


0.102008Fourth Quarter

$
2.00

$
0.36

$
0.10Third Quarter


3.66


1.45


0.10Second Quarter


9.86


3.55


0.30First Quarter


15.10


8.08


0.68


The
last reported sale price of our common stock on March 23, 2010 as reported on the over-the-counter market was $0.72. As of March 23, 2010, there
were 16 holders of record of our common stock. Cede & Co. is the holder of record for 24,674,697 shares of our common stock, and it holds such shares as nominee for The Depository Trust
Company.

We
generally intend to distribute each year substantially all of our taxable income (which does not necessarily equal net income as calculated in accordance with generally accepted
accounting principles) to our shareholders so as to comply with the REIT provisions of the Internal Revenue Code.

Our
dividend policy is subject to revision at the discretion of our board of directors. All distributions will be made at the discretion of our board of directors and will depend upon
our taxable income, our financial condition, our maintenance of REIT status and other factors as our board of directors deems relevant. In the merger agreement, we have agreed not to pay any dividends
to our stockholders.

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Information
relating to the dividends we declared in 2008 and 2009 is as follows:

Fiscal Period

Dividend
Amount
per Share

Declaration
Date

Record
Date

Payment
Date

Total
Distribution
(in millions)

Dividend
TypeFirst quarter 2008

$
0.68


03/06/2008


03/31/2008


04/29/2008

$
16.8

RegularSecond quarter 2008


0.30


06/17/2008


06/30/2008


07/28/2008


7.4

RegularThird quarter 2008


0.10


08/11/2008


09/30/2008


10/28/2008


2.5

RegularFourth quarter 2008


0.10


11/03/2008


12/31/2008


01/30/2009


2.5

RegularFirst quarter 2009


0.10


02/25/2009


03/31/2009


04/30/2009


2.5

RegularSecond quarter 2009


0.10


05/06/2009


06/30/2009


07/31/2009


2.5

RegularThird quarter 2009


0.10


08/10/2009


09/30/2009


10/30/2009


2.5

RegularFourth quarter 2009


0.00


n/a


n/a


n/a


0.0

Regular


For
the year ended December 31, 2009, we declared dividends of $0.30 per share, all of which represented a return of capital. For the year ended December 31, 2008, we
declared dividends of $1.18 per share, all of which represented distributions of taxable earnings and profits. We cannot assure you
that we will have sufficient cash available for future quarterly distributions in an amount consistent with historical distributions, or at all. See "Item 1A. Risk Factors."

Equity Compensation Plan Information

The following table provides information about the securities authorized for issuance under our equity compensation plans as of
December 31, 2009:

Plan category

Number of
securities to be
issued upon exercise of
outstanding options,
warrants and rights(1)

Weighted-average
exercise price of
outstanding options,
warrants and rights

Number of
securities remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected
in column (a))(2)(a)

(b)

(c)Equity compensation plans approved by stockholders


130,000


25.00


2,266,680Equity compensation plans not approved by stockholders(3)








Total


130,000


25.00


2,266,680


(1)There
are no outstanding warrants or rights.(2)Amounts
exclude any securities to be issued upon exercise of outstanding options. Includes 450,562 shares of common stock to be issued in respect of
deferred stock units and restricted stock units issued to certain of our independent directors.(3)We
do not have any equity compensation plans that have not been approved by stockholders.


We
did not repurchase, or purchase on behalf of any affiliated purchaser, any shares of our common stock during the year ended December 31, 2009.

Item 6.    Selected Financial Data.

The following table sets forth selected consolidated financial data, which was derived from our historical consolidated financial
statements included in this Annual Report on Form 10-K for the periods then ended.

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You
should read the following information together with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the notes thereto, which begins on Page F-1 of this Form 10-K.

Year Ended
December 31,
2009

Year Ended
December 31,
2008

Year Ended
December 31,
2007

Year Ended
December 31,
2006

March 15, 2005
(commencement
of operations) to
December 31,
2005(In thousands except share and per share data)Consolidated Operating Data:Revenues:Interest and dividend income

$
29,124

$
117,216

$
219,919

$
201,224

$
79,601Rental income, net


21,671


22,225


16,210





Total revenues


50,795


139,441


236,129


201,224


79,601Expenses:Interest expense


24,443


53,543


156,797


139,601


48,425Management and incentive fees, related party(1)





1,226


6,502


7,922


5,448Professional fees


2,919


2,681


3,904


2,722


2,205Depreciation and amortization


12,088


12,088


8,948





Commercial real estate expenses


1,590


1,541


1,011





Provision for loss on real estate loans


7,571


27,073


4,500





Insurance expense


1,883


1,662


936


413


250Other general and administrative expenses(2)


1,643


2,404


1,917


1,153


533Total expenses


52,137


102,218


184,515


151,811


56,861Income (loss) before other revenues (expenses)


(1,342
)

37,223


51,614


49,413


22,740Other revenues (expenses):Realized net gain (loss) on sale of available-for-sale securities, real estate loans and other investments


790


(5,166
)

(1,698
)

(2,128
)

(521
)Realized and unrealized gain (loss) on derivatives


(412
)

(70,679
)

(84,951
)

10,330


(2,497
)Impairment of available-for-sale securities


(77,947
)

(142,916
)

(317,931
)

(10,389
)

(5,782
)Net change in value of assets and liabilities valued under fair value option


(4,085
)

(123,708
)







Foreign currency exchange gain








4,292


580


Income (loss) from equity investments





(40
)

2,610





Other


(5,284
)

(1,806
)

186


(889
)

8Total other expenses


(86,938
)

(344,315
)

(397,492
)

(2,496
)

(8,792
)Net income (loss)

$
(88,280
)
$
(307,092
)
$
(345,878
)
$
46,917

$
13,948Per share information:Net income (loss) per share of common stockBasic

$
(3.50
)
$
(12.35
)
$
(13.86
)
$
2.27

$
0.80Diluted

$
(3.50
)
$
(12.35
)
$
(13.86
)
$
2.27

$
0.80Dividends declared per share of common stock

$
0.30

$
1.18

$
2.72

$
2.71

$
1.55Weighted average shares of common stock outstandingBasic


25,211,260


24,866,206


24,962,708


20,646,637


17,487,500Diluted


25,211,260


24,866,206


24,962,708


20,646,637


17,487,500


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As of December 31,2009

2008

2007

2006

2005Consolidated Balance Sheet Data:Total assets

$
381,953

$
448,301

$
2,479,438

$
3,774,645

$
2,669,769Short-term obligations:Debtrepurchase agreements








1,276,121


2,723,643


1,977,858Debtrepurchase agreements, related party











144,806


16,429Total short-term obligations








1,276,121


2,868,449


1,994,287Secured revolving credit facility, related party


28,920


32,920


67,319





Long-term obligations:Debtcollateralized debt obligations(3)


33,617


45,429


486,608


194,396


227,500Debtnotes payable, related party














35,000Debtjunior subordinated notes


51,550


51,550


51,550





Debtmortgages payable


219,380


219,380


219,380





Debtsenior mortgage-backed notes, related party








99,815





Total long-term obligations


304,547


316,359


857,353


194,396


262,500Stockholders' equity (deficit)


(58,127
)

(37,409
)

110,592


556,314


381,429


(1)Includes
$0, $(27), $555, $1,024 and $627, respectively, of stock based compensation.(2)Includes
$176, $367, $584, $324 and $81, respectively, of stock based compensation.(3)Fair
value as of December 31, 2009 and 2008; cost as of December 31, 2007, 2006 and 2005. Cost as of December 31, 2009 and 2008 is
$455,262 and $467,027, respectively.


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

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere
in this Annual Report on Form 10-K. Historical results set forth are not necessarily indicative of our future financial position and results of operations.

Recent Developments



We held cash and cash equivalents of approximately $3.3 million as of December 31, 2009, which excludes restricted cash
of approximately $16.5 million that is used to collateralize our credit default swap and certain other commercial real estate and financing obligations. As of December 31, 2009, we owed
$28.9 million to an affiliate of our Manager under our secured credit facility. Unless earlier terminated as provided in the credit agreement governing the terms of our secured credit facility,
our credit facility terminates on August 31, 2010. If the Merger is not consummated, this facility is not extended and we cannot obtain alternative financing, we do not expect to have
sufficient cash on hand or to generate sufficient cash flow from operations to repay such indebtedness. Given the current lack of liquidity in the credit markets and the current economic climate, we
expect to have difficulty obtaining alternative financing if our credit facility is not extended. If we cannot obtain alternative financing or extend our credit facility, it increases the risk that we
will be unable to continue as a going concern. Our independent registered public accounting firm, Ernst & Young LLP, has issued an opinion on our consolidated financial statements which
states that our inability to refinance or extend the maturity of indebtedness maturing in the next 12 months raises substantial doubt about our ability to continue as a going concern.

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Our
consolidated financial statements included in this Annual Report on Form 10-K do not reflect any adjustments related to the recoverability of assets and
satisfaction of liabilities that might be necessary should we be unable to continue as a going concern.



On January 29, 2010, we entered into the Exchange Agreement with Taberna, pursuant to which we exchanged certain of our assets
described below for the outstanding $50.0 million aggregate liquidation preference of trust preferred securities issued by Crystal River Preferred Trust I and backed by $51.6 million
aggregate principal amount of our junior subordinated notes due 2037. Immediately following the closing of the transaction contemplated by the Exchange Agreement, the junior subordinated notes were
cancelled, the indenture under which the notes were issued was discharged and Crystal River Preferred Trust I was dissolved.

Pursuant
to the Exchange Agreement, we transferred and assigned to Taberna two real estate loans and a CMBS bond, which collectively had an aggregate carrying value for accounting
purposes on our balance sheet as of December 31, 2009 of $6.0 million, and we also paid to Taberna a $1.0 million exchange fee. We also paid $0.5 million to cover all costs
and expenses that were incurred by the collateral manager for Taberna, the indenture trustee and their respective advisors. For more information on this transaction, see Note 19 to our
consolidated financial statements contained elsewhere herein.



On February 24, 2010, we announced that we had concluded our previously-announced review of strategic alternatives and that we
had entered into a definitive merger agreement with Brookfield pursuant to which Brookfield is expected to acquire all the shares of our outstanding common stock that Brookfield does not already own
for cash at a price of $0.60 per share.

The
Merger was unanimously approved by the independent members of our board of directors, and by the Special Committee formed to oversee our strategic review process. The transaction is
subject to approval by our stockholders holding a majority of the shares entitled to vote at a special meeting of stockholders, as well as other customary closing conditions. Consummation of the
Merger is not subject to a financing condition and Brookfield has consented to the transaction in its capacity as our senior lender. The merger agreement does not prohibit us from receiving and
evaluating competing bids prior to completion of the Merger and does not require the payment of a termination fee if we accept a superior bid. We will be obligated to reimburse Brookfield for all of
its transaction expenses if the
merger agreement is terminated other than as result of a breach by Brookfield (subject to a cap in certain circumstances). The Merger currently is expected to close in the second quarter of 2010. For
more information on this transaction, see Note 19 to our consolidated financial statements contained elsewhere herein.



Concurrently with entering into the merger agreement with Brookfield, we amended the terms of our revolving credit facility with
Brookfield US Corporation, an affiliate of our Manager, pursuant to which the maturity date of the credit facility was extended to August 31, 2010, unless sooner terminated as provided in the
credit agreement;provided,however, that, notwithstanding the foregoing, the term of the credit
facility will expire upon the latest of (i) May 25, 2010, (ii) the effective time of the Merger and (iii) thirty (30) calendar days following the termination of the
merger agreement, but in no event later than August 31, 2010. In addition, Brookfield US Corporation consented to the Merger and to the separate sale by us of certain of our assets as
contemplated by the merger agreement. For more information on this transaction, see Note 19 to our consolidated financial statements contained elsewhere herein.

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As contemplated by the merger agreement, on March 9, 2010, we entered into the Asset Sale LOI with Ranieri, pursuant to which
Ranieri (either directly or through an affiliate) agreed to purchase five CMBS bonds from us. The five CMBS bonds had a carrying value of approximately $0.9 million as of December 31,
2009. In addition, under the Asset Sale LOI, Ranieri (either directly or through an affiliate) agreed to acquire the rights to:



Ranieri
has agreed to pay us a total of $8.0 million for the CMBS Purchase, the CDO1 Rights Purchase and the CDO2 Rights Purchase, which we refer to collectively as the
Transaction. The following table provides information with respect to the purchase price to be paid by Ranieri (either directly or through one or more of its affiliates) and the estimated closing date
for each component of the Transaction:

Component of Transaction

Purchase Price

Estimated Closing DateCMBS Purchase

$2,500,000 (plus accrued and unpaid interest through the closing date of this portion of the Transaction)

Closed on March 15, 2010CDO1 Rights Purchase

$3,500,000

Third Quarter/Fourth Quarter 2010 (90 days after obtaining approval of Class A Notes to appoint the Specified Manager)CDO2 Rights Purchase

$2,000,000

June/July 2010


In
connection with the execution of the Asset Sale LOI, one of Ranieri's affiliates paid $1.6 million (20% of the total purchase price) as a deposit on the Transaction. A ratable
portion of the escrowed funds (based on the purchase prices specified above) will be applied to each component of the Transaction upon the closing of that component. The CMBS Purchase closed on
March 15, 2010 and $0.5 million of the deposit was applied against the $2.5 million purchase price for the CMBS bonds. An affiliate of Brookfield is a lender to the Purchaser, and
proceeds from such loan have been used to fund the deposit referenced above and the remainder of the purchase price for the CMBS bonds and an additional $1.9 million available under the loan
may be used to fund a portion of the purchase price for the CDO1 Rights Purchase and the CDO2 Rights Purchase. In addition, the Co-Investor is a co-investor with the Purchaser
in the Servicer, which acts as the special servicer for several of the CMBS securitizations in which we have invested, including all of the securitizations in which the bonds that were the subject of
the CMBS Purchase are a part. Brookfield and/or its affiliates have, or prior the CMBS Purchase had, the ability to designate the special servicer for the securitizations in which the bonds that were
the subject of the CMBS Purchase are a part and had

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designated
the Servicer as the special servicer for those securitizations. The Co-Investor and the Purchaser own approximately 8.5% and 32.3%, respectively, of the Servicer.

We
also agreed to grant to Ranieri a right of first refusal to purchase all or any portion of our interest in two CMBS securitizations if we sell those securities in the future.

The
CMBS Purchase closed on March 15, 2010. The completion of the CDO1 Rights Purchase and the CDO2 Right Purchase are subject to various customary closing conditions as well as
the execution of
definitive documentation. The Asset Sale LOI and the Transaction were approved by a special committee of our board of directors, which is comprised entirely of the independent members of our board of
directors, which we refer to as the Special Committee. The Special Committee, with the assistance of Broadpoint.Gleacher, the Special Committee's financial advisor, solicited and received several bids
on the assets that are the subject of the Transaction. The Special Committee selected the Ranieri bid based on the combination of price and other terms, in particular those providing greater certainty
of closing.



In November 2009, our board of directors announced that it had elected to suspend the quarterly dividend to holders of shares of our
common stock to preserve liquidity in consideration of the large increase in the delinquency rate on our CMBS portfolio and the resulting uncertainty regarding our operating cash flows. Based on our
current forecasts, we would not be required to make any further distributions in 2009 in order to maintain our REIT status through 2009. The elimination of the common dividend for the remainder of
2009, assuming the same $0.10 quarterly dividend per share that was paid in October 2009, equates to approximately $2.5 million in cash flow savings each quarter. Our board of directors will
continue to evaluate our dividend policy in light of our portfolio performance and relevant provisions of the Internal Revenue Code; however, we are prohibited from paying any dividends under the
merger agreement and do not anticipate having adequate liquidity to pay a dividend in any event.

Overview

We are a specialty finance company formed on January 25, 2005 by BIM to invest in commercial real estate, real estate loans,
real estate related securities, such as commercial and residential mortgage-backed securities, and various other asset classes. We commenced operations in March 2005. We have elected and qualified to
be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005 and expect to qualify as a REIT in subsequent tax years. We manage the composition of
our portfolio so that we will qualify for an exclusion from regulation under the Investment Company Act. We are externally managed by our Manager, a wholly-owned subsidiary of Brookfield.

During
the third quarter of 2009, we observed a number of IPO filings by recently formed entities with investment strategies focused on commercial and residential real estate debt
markets. As permitted by our management agreement (which contains policies to ensure that potential conflicts of interest are managed appropriately), our Manager's parent company is pursuing
opportunities to sponsor new ventures and raise investment capital to be deployed in the real estate debt sector. Our Board of Directors will continue to exercise oversight of our Manager and our
Manager will continue to have the
same obligation to manage our portfolio as set forth in our management agreement (which contains policies to ensure that potential conflicts of interest are managed appropriately).

Given
current market conditions and our lack of investable cash, currently, we are unable to take advantage of new investment opportunities and we do not believe we will be able to take
advantage of new investment opportunities in the future.

Since
we commenced operations in March 2005, we have invested in Agency mortgage-backed securities, non-agency residential mortgage-backed securities, commercial
mortgage-backed securities,

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other
commercial mortgage loan products, including whole loans, A Notes, B Notes, mezzanine loans, and investments in funds that invest in whole loans, A Notes, B Notes, and mezzanine loans, and
purchased commercial real estate properties. A large portion of our investments in MBS hold a deeply subordinated position in the underlying trust structure. We also have taken positions in various
credit default swaps relating to commercial mortgage-backed securities and residential mortgage-backed securities and have entered into interest rate swaps to hedge the basis risk of our floating rate
liabilities. We have leveraged our portfolio in order to achieve attractive risk-adjusted returns. We have issued four types of liabilities:



We
completed a private offering of 17,400,000 shares of our common stock in March 2005 in which we raised net proceeds of approximately $405.6 million. We completed our initial
public offering of 7,500,000 shares of our common stock in August 2006 in which we raised net proceeds of
approximately $158.6 million. Between August 2007 and November 2007, we purchased 299,300 shares of our common stock in open market purchases. As of December 31, 2009, our portfolio was
comprised of commercial mortgage-backed securities (CMBS), commercial real estate loan investments, residential mortgage-backed securities (RMBS) and operating real estate of approximately
$272.0 million, and we have issued debt with a carrying value totaling approximately $333.5 million. The resulting GAAP-reported stockholders' deficit of $58.1 million
represents a reduction of $622.3 million of the net amounts raised in 2005 and 2006. This reduction in stockholders' equity can be attributed to the following general
areas:



We
earn revenues and generate cash through our investments. These revenues are, in turn, used to pay the interest and other costs of our financings (including payments due on interest
rate hedges), to pay for our overhead costs and, when applicable, to pay the management fee. The net earnings after these payments, if any, are used to pay dividends to our stockholders, to further
reduce our liabilities or, when we have investable capital, to re-invest into targeted assets. In order to maintain compliance with the REIT regulations, we are required to pay out at
least 90% of our taxable income as dividends. Typically there are mismatches between taxable income and GAAP income. Due to realized losses that we have incurred to date and the projected decline in
cash flows of some of our assets, we currently expect a portion of our portfolio to generate substantial tax operating losses in 2010 and in future periods.

Trends; Current Market Environment; Current Portfolio Considerations

In July 2007, the commercial real estate finance sector began to show serious signs of liquidity-related distress. This was in addition
to the distress that had already begun in the securitized residential products markets. Now, almost three years into the world-wide financial crisis, commercial real estate credit markets
have begun to experience a second layer of stress, as adverse credit events at the underlying loan level have begun to increase, and, in the residential sector, many of the long-awaited
losses from the high delinquency levels have percolated through the various securitizations that own

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these
loans. The dual factors of diminishing liquidity and increasing incurrence of adverse credit events place a lot of stress on commercial and residential real estate credit investors. The
diminished liquidity negatively impacts the market value of the respective investments whereas the adverse credit events negatively impact the prospective cash flow of the respective investments. The
U.S. federal government enacted several programs with the intent of stabilizing the financing markets. These programs include the Troubled Assets Relief Program (TARP), the Term Asset-Backed
Securities Loan Facility (TALF) and the Public-Private Investment Program (PPIP), among others. While we are cautiously optimistic that such governmental programs will have some positive impact on the
housing markets and the lending environment, we do not believe that the overall market will stabilize until (a) home prices firm up and the impact of these lower home prices works through the
various real estate financing markets, and (b) commercial lending markets become functional and the borrowers in these markets readjust their valuations and expectations to reflect a much less
aggressive lending environment.

Performance
for CMBS investors, including us, is highly dependent upon the credit performance of existing securitized portfolios. We expect that loans that do not have
near-term maturities that were underwritten with the related secured properties having stabilized cash flow in place will tend to perform better during this difficult period. By contrast,
we believe that loans made on transitional, or other value-creating, projects or that have near-term maturities will suffer the greatest. The markets will be greatly impacted by these
loans with near-term maturities; causing the existing credit spread environment to last until the consequences of these near-term loan maturities are better understood. Through
our CMBS portfolio and our commercial real estate loan portfolio, we have exposure to each of these loan types. Our CMBS portfolio, which is comprised solely of fixed rate conduit deals, will start to
have material maturities in the underlying collateral pools in 2010; in addition, the delinquency rate for our CMBS portfolio increased dramatically during the second quarter of 2009, and continued to
increase during the third and fourth quarters of 2009. As delinquencies have increased, our prospective cash flows have been materially lowered.

As
discussed in Note 3 to our consolidated financial statements, "Fair Value Hierarchy", we value our investment securities using current market pricing. The spreads that have
been utilized to value our assets are extremely wide from a historical perspective. These spreads are wide due to the market's view of the risks contained within these types of investments within the
current market environment.
These risks include the market's expectation of increasing delinquencies and losses within residential and commercial mortgage loans, and consequently, in the securitized pools that own these loans.
The market's expectation is also that commercial and residential loans originated in the period from 2005 to 2007 will under-perform prior vintages. These market expectations become embodied in the
modeling assumptions that are used to value securities such as the RMBS and CMBS that we own. The valuation of these assets is extremely sensitive to these assumptions. Additionally, there are many
factors for which there is no relevant comparable data to use in order to help judge that particular factor's impact on future performance. For instance, many of the underlying residential and
commercial mortgages originated during the 2005 to 2007 era have very low interest rate coupons. These low coupons may prove to dampen credit losses that otherwise are expected by the market, although
there can be no assurance of this. As these origination vintages age, performance tiering may become evident; meaning that the 2005 vintage may exhibit stronger performance than the 2006 or 2007
vintages. In the current marketplace, there is no evidence of any meaningful tiering among these three vintages. Additionally, the governmental programs discussed above may have a positive impact on
certain sub-prime borrowers and sub-prime loan pools. Conversely, consumer retail weakness, job losses and a weak economy may result in credit losses exceeding the market's
expectations.

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We believe the following trends may also affect our business:

Uncertain interest rate environmentThe credit market disruption that has persisted since the summer of 2007 continues to have a dramatic effect on
the economy. The distress in the financial markets has led to significant changes in Federal Reserve monetary policy, in the form of lower rates and through direct financing to primary dealers through
the TALF and other programs. However, pressure from a pull-back in lending and credit provision still weighs heavily on the consumer and on the residential housing markets. Continued
weakness in the residential real estate markets and in both the commercial and residential lending environment is likely to persist, and in general should result in slower U.S. economic growth.
Additionally, lower rates have not resulted in dramatically increased prepayment speeds, largely given the constraints around lending, which have even impacted the U.S. government-sponsored entities,
such as Fannie Mae and Freddie Mac.

Normally,
we would expect that our fixed-rate assets would decline in value in a rising interest rate environment. We have engaged in interest rate swaps to hedge a portion
of the risk associated with increases in interest rates. However, because we do not always hedge 100% of our outstanding financing, increases in interest rates could result in a decline in the value
of our portfolio, net of hedges. Similarly, decreases in interest rates could result in an increase in the value of our portfolio. Given the substantial dislocation in asset prices, however, these
traditional relationships
between levels of interest rates and yield spread or price changes, may not exist. In addition, interest rates remain, and are likely to remain for the foreseeable future, at consistent and low
levels.

Prepayment ratesTypically, as interest rates fall, prepayment rates on residential mortgages rise. However, given the global credit crisis, this
cycle could be different as the decline in housing market activity and home price depreciation could keep prepayment rates low as refinancing becomes less accessible. As noted above, lower rates have
not dramatically increased prepayment speeds during the current recession, as more constraints have been placed on lending. Prepayment rates also may be affected by other factors, including, without
limitation, conditions in the housing and financial markets, general economic conditions and the relative interest rates on mortgage loans.

LiquidityManaging liquidity has become a priority for our company. Whereas most of our assets, such as the commercial real estate properties and the
assets held by our CDOs, have been financed with long-term liabilities, some of our assets are financed on a short-term basis while they are in transition toward
longer-term financing solutions. In the current marketplace, however, that long-term financing is not available. These short-term financings are collateralized
borrowings under our revolving credit facility, which will mature on August 31, 2010 or earlier in accordance with its terms. As asset values decline, margin calls from our financing
counterparties place demands on our cash and other liquidity sources. This can force us to sell assets and de-leverage the balance sheet, which could negatively impact earnings and
negatively impact our ability to make distributions to our stockholders. As of December 31, 2009, we had reduced our exposure to margin calls to $0.4 million on our credit default swaps,
and we had unencumbered assets at such date that provided us with $2.5 million of additional borrowing capacity under our secured financing facility.

Weakness of mortgage marketThe sub-prime market has been severely affected by changes in the lending landscape; for now and for the
foreseeable future, access to mortgages for sub-prime borrowers has been substantially limited. This limitation on financing is expected to have an impact on all mortgage loans that are
resetting and is expected to result in increased default rates. The severity of the liquidity limitation was largely unanticipated by the markets. The liquidity issues also affect prime and
Alt-A Non-Agency lending, with the origination of many product types being completely curtailed and lenders requiring high loan-to-value ratios when
providing refinancing to borrowers. At the margin, this has an impact on new demand for homes, which will compress the home ownership rates and weigh heavily on future home price performance. There is
a strong correlation between home price growth rates and mortgage loan delinquencies. This comes in addition to the delinquency pressures in

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the
sub-prime market resulting from weaker underwriting, which put many sub-prime lenders out of business in 2006 and 2007. The market deterioration has caused us to expect
increased losses related to our holdings over time, and in the immediate period, has resulted in a significant decline in the market values of our assets as well as a significant decrease in
anticipated cash flows from our investments. We continually monitor and adjust our cash flow assumptions in light of current and projected market conditions, and we believe that results in an accurate
representation of value on our balance sheet.

We
believe that, at this time, the underlying losses in the sub-prime market have not fully manifested themselves in the securitizations, including those in which we own MBS.
Accordingly, there are a number of factors that can help to mitigate issues before they fully impact the market. The government does have a number of programs that it can utilize to help the
conditions in the residential mortgage industry. Currently, the lending limits for Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Government National Mortgage
Association have been raised. As well, recent legislation has expanded and modernized the FHA programs to make financing available at affordable terms to delinquent borrowers. At the margin, programs
that will have the effect of reducing foreclosure inventory will be helpful to the resolution of home price declines. In addition, given the current interest rate environment, the U.S. government has
little room to further decrease the Fed Funds rate.

Other
markets, such as the Alt-A and Option ARM market have also come under more significant delinquency and pricing pressure beginning in the first quarter of 2008. As a
result of large forced sales and rising delinquency rates on these programs, price declines have been significant even for AAA-rated securities. These price dislocations have also been
felt in the prime markets on both fixed-rate and hybrid arm Non-Agency securities, across most vintages. Performance remains stronger for loans underwritten prior to 2005, and
for fixed rate loans; however, the magnitude of the price declines currently exceeds the expectations of loss for these sectors.

Structured finance transactionsThe dislocations in the sub-prime market have rippled throughout the structured finance markets. Yield
spreads on CMBS and prime Non-Agency RMBS have widened dramatically since the beginning of 2007, resulting in significant negative market value adjustments to our assets. The issuance of
CDOs, which had been a key financing tool for us and for our peers, has come to a halt, cutting off an attractive financing alternative for the foreseeable future.

For
a discussion of additional risks relating to our business see the risk factors disclosed under Part I, Item 1A, "Risk Factors".

Our Business Model

Our interest, dividend and rental income net of interest expense, which we refer to as our net investment income, is generated
primarily from the net spread, or difference, between the interest, dividend and rental income we earn on our investment portfolio and the cost of our borrowings and hedging activities. Our net
investment income will vary based upon, among other things, the difference between the interest rates earned on our various interest-earning assets, the borrowing costs of the liabilities used to
finance those investments and the credit performance of the assets.

Certain
of our investments, including RMBS and subordinate CMBS, currently generate substantial mismatches between taxable income and available cash. In order to meet the requirement to
distribute a substantial portion of our net taxable income, we may need to borrow, sell assets or raise additional equity capital, to the extent possible, although our current financial condition may
preclude us from obtaining new borrowing or raising additional equity capital.

Our
Manager is entitled to receive a base management fee that is based on the amount of our equity (as defined in the management agreement), regardless of the performance of our
portfolio. Accordingly, the payment of our base management fee is not primarily dependent on our profitability

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(except
to the extent that our equity is affected) and may provide us with an incentive to incur losses. We and our Manager agreed that during 2008, we would pay our base management fee to our Manager
in shares of our common stock valued at the weighted average closing price during the last five trading days of the applicable fiscal quarter. Additionally, our Manager is entitled to receive an
incentive management fee that is dependent upon the amount of our GAAP earnings. As a result of our having
negative equity (as defined in the management agreement), we did not pay a management fee to our Manager for the three months ended December 31, 2008 or for the year ended December 31,
2009.

Generally
speaking, compression of credit spreads can increase the unrealized gains on our current investments and reduce our net investment income, while widening credit spreads reduce
the realized and unrealized gains on our current investments (or cause realized and unrealized losses).

Since
2007, credit spreads have widened significantly. The widening of credit spreads and increasing interest rates caused a significant increase in the net unrealized losses on our
available-for-sale securities. Net unrealized losses initially are recorded in accumulated other comprehensive loss. We periodically evaluate our portfolio of
available-for-sale securities for impairment and reclassify such unrealized losses to impairments on available-for-sale securities in our statement of
operations when appropriate, which since the second half of 2007 has caused our book value per share to decrease. One of the key drivers for the widening of credit spreads has been the recent
disruption in the securitized products sectors.

In
addition to widening credit spreads, the disruption in the securitized products markets over the past three years has adversely affected the market in which we operate in a number of
other ways. For example, the market disruption has reduced the trading activity for many securities, resulting in less liquid markets for those securities. As the securities we hold are marked to
market at the end of each quarter, the decreased liquidity and concern over market conditions have resulted in significantly lower valuations of substantially all of our CMBS, RMBS and preferred
equity investments since mid-2007. These lower valuations have affected us by, among other things, decreasing our net book value and in contributing to our decision to record other than
temporary non-cash impairments (discussed below in "Critical Accounting PoliciesValuation of Financial Instruments"). In addition, Standard & Poor's,
Moody's and Fitch recently have issued a series of credit rating downgrades on various real estate securities. Through March 16, 2010, one of the sub-prime RMBS that we owned at
December 31, 2009, which had a carrying value of $0.0 million at December 31, 2009, had been downgraded below its lowest rating at December 31, 2009; three of the prime
RMBS that we owned at December 31, 2009, which had an aggregate carrying value of $0.1 million at December 31, 2009, had been downgraded below their lowest rating at
December 31, 2009 and 20 of the CMBS that we owned at December 31, 2009, which had an aggregate carrying value of $13.1 million at December 31, 2009, had been downgraded
below their lowest rating at December 31, 2009.

We
do not currently know the full extent to which this market disruption will affect us or the markets in which we operate. If the disruption continues, we may experience continued
tightening of liquidity, additional impairment charges and further challenges in raising additional capital and obtaining investment financing on attractive terms. Future market developments may
continue to have a materially negative impact on our business or results of operations. As discussed below under "Liquidity and Capital Resources", if the Merger is not consummated and we
are unable to successfully restructure our borrowing arrangements and we do not receive additional funding, our ability to continue as a going concern will be in doubt.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, or
U.S. GAAP. These accounting principles require us to make some complex and subjective decisions and assessments. These include the fair market value of certain investments, debt

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obligations
and derivative assets and liabilities, the amount and timing of credit losses, prepayment assumptions and other items that affect the reported amounts of certain assets and liabilities as
of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates
(e.g., market values change due to changes in supply and demand, credit performance, prepayments, interest rates or other reasons; yields change due to
changes in credit outlook and loan prepayments) will occur in the near future. Our most critical accounting policies involve decisions and assessments that could affect our reported assets and
liabilities as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made based
upon information available to us at that time. We rely on the experience of Brookfield's, BIM's and our management, along with their analysis of historical and current market data, in order to arrive
at what we believe to be reasonable estimates. See Note 2 to our consolidated financial statements contained elsewhere herein for a complete discussion of our accounting policies. Other than
the adoption of FASB ASC 320-10-65-1 (previously FSP FAS 115-2), as defined below, there have been no material changes to our accounting policies
in 2009. Our estimates are inherently subjective in nature and actual results could differ from our estimates and differences may be material. We have identified our most critical accounting estimates
to be the following:



A fundamental principle of the preparation of financial statements in accordance with GAAP is the assumption that an entity will
continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This
principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our
consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate. As of December 31, 2009, we owed $28.9 million to
an affiliate of our Manager under our secured credit facility. Unless earlier terminated as provided in the credit agreement, our credit facility terminates on August 31, 2010. As a result of
our possible inability to extend, refinance or repay this indebtedness, there is substantial doubt about our ability to continue as a going concern. While we have prepared our consolidated financial
statements on a going concern basis, if the Merger is not consummated and we are unable to successfully restructure our borrowing arrangements or we do not receive additional funding, our ability to
continue as a going concern will be in doubt. Therefore, we may not be able to realize our assets and settle our liabilities in the ordinary course of business. Our consolidated financial statements
included in this report do not reflect any adjustments related to the recoverability of assets and satisfaction of liabilities that might be necessary should we be unable to continue as a going
concern.



For each investment we make, we evaluate the underlying entity that issued the securities we acquired or to which we made a loan in
order to determine the appropriate accounting. We refer to guidance in FASB ASC 860-10-50-3 (previously SFAS 140) and FASB ASC
810-10-05-8 (previously FIN 46R) in performing our analysis. FASB ASC 810-10-05-8 addresses the application of FASB ASC
810-10-15-10 (previously ARB 51), to certain entities in which voting rights are not effective in identifying an investor with a controlling financial interest. An
entity is subject to consolidation under FASB ASC 810-10-05-8 if the investors either do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support, are unable to direct the entity's activities, or are not exposed to the entity's losses or entitled to its residual returns ("variable interest
entities" or "VIEs"). Variable interest entities within the scope of FASB ASC 810-10-05-8 are required to be consolidated by their primary beneficiary. The primary
beneficiary of a VIE is determined to be

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the
party that absorbs a majority of the VIE's expected losses, receives the majority of the VIE's expected returns, or both.

Our
ownership of the subordinated classes of CMBS and RMBS from a single issuer may provide us with the right to appoint the special servicer for the applicable trust (that special
servicer will control the foreclosure/workout process on the underlying loans), which we refer to as the Controlling Class CMBS and RMBS. Currently, there are certain exceptions to the scope of FASB
ASC 810-10-50-18, one of which provides that an investor that holds a variable interest in a qualifying special-purpose entity ("QSPE") is not required to
consolidate that entity unless the investor has the unilateral ability to cause the entity to liquidate. FASB ASC 860-10-50-3 (previously SFAS 140) sets
forth the requirements for an entity to qualify as a QSPE. To maintain the QSPE exception, the special-purpose entity must initially meet the QSPE criteria and must continue to satisfy such criteria
in subsequent periods. A special-purpose entity's QSPE status can be impacted in future periods by activities undertaken by its transferor(s) or other involved parties, including the manner in which
certain servicing activities are performed. To the extent that our CMBS or RMBS investments were issued by a special-purpose entity that meets the QSPE requirements, we record those investments at the
purchase
price paid. To the extent the underlying special-purpose entities do not satisfy the QSPE requirements, we follow the guidance set forth in FASB ASC 810-10-05-8 as
the special-purpose entities would be determined to be VIEs.

We
have analyzed the pooling and servicing agreements governing each of our Controlling Class CMBS and RMBS investments and we believe that the terms of those agreements are industry
standard and are consistent with the QSPE criteria. We also have evaluated each of our Controlling Class CMBS and RMBS investments for which we own a greater than 50% interest in the subordinated
class as if the special-purpose entities that issued such securities are not QSPEs. Using the fair value approach to calculate expected losses or residual returns, we have concluded that we would not
be the primary beneficiary of any of the underlying special-purpose entities. Our maximum exposure to loss as a result of our investment in these special-purpose entities totaled $3.8 million
as of December 31, 2009.

In
June 2009, the FASB issued FASB ASC 810-10-65-2 (previously SFAS 167), which amends the consolidation guidance applicable to VIEs. We
currently are evaluating the impact that this new guidance will have on our investment portfolio. See Note 2 to our consolidated financial statements contained elsewhere in this Annual Report
on Form 10-K for a further discussion of the impact of FASB ASC 810-10-65-2 on our consolidated financial statements.



The most significant source of our revenue comes from interest income on our securities and loan investments. Interest income on loans
and securities investments is recognized over the life of the investment using the effective interest method. Mortgage loans generally will be originated or purchased at or near par value and interest
income will be recognized based on the contractual terms of the debt instrument. Any loan fees or acquisition costs on originated loans will be deferred and recognized over the term of the loan as an
adjustment to the yield. Interest income on mortgage-backed securities, which we refer to as MBS, is recognized on the effective interest method as required by FASB ASC
325-40-65-1 (previously FSP EITF 99-20-1). Under FASB ASC 325-40-65-1, management estimates, at
the time of purchase, the future expected cash flows and determines the effective interest rate based on these estimated cash flows and our purchase prices. Subsequent to the purchase and on a
quarterly basis, these estimated cash flows are updated and a revised yield is calculated based on the current amortized cost of the investment. In estimating these cash flows, there are a number of
assumptions that are subject to uncertainties and contingencies. These include the rate and timing of principal payments (including prepayments, repurchases, defaults and liquidations), the pass
through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls have to be estimated due to delinquencies on the underlying mortgage loans and the timing and magnitude
of credit losses

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on
the mortgage loans underlying the securities. These uncertainties and contingencies are difficult to predict and are subject to future events that may affect management's estimates and our interest
income. When current period cash flow estimates are lower than the previous period and fair value is less than an asset's carrying value, we will write down the asset to fair market value and record
an impairment charge in current period earnings.

Through
its extensive experience in investing in MBS, BIM has developed models based on historical data in order to estimate the lifetime prepayment speeds and lifetime credit losses for
pools of mortgage loans. The models are based primarily on loan characteristics, such as loan-to-value ratios ("LTV"), borrower credit scores, loan type, loan rate, property
type, etc., and also include other qualitative factors such as the loan originator and servicer. Once the models have been used to project the base case prepayment speeds and to project the base case
cumulative loss, those outputs are used to create yield estimates and to project cash flows.

Because
mortgage assets amortize over long periods of time (i.e., 25 to 30 years in the case of RMBS assets or 10 years in
the case of CMBS assets), the expected lifetime prepayment experience and the expected lifetime credit losses projected by the models are subject to modification in light of actual experience assessed
from time to time. For each of the purchased mortgage pools, our Manager tracks the actual monthly prepayment experience and the monthly loss experience, if any. To the extent that the actual
performance trend over a 6-12 month period of time does not reasonably
approximate the expected lifetime trend, in consideration of the seasoning of the asset, our Manager may make adjustments to the assumptions and revise yield estimates and projected cash flows.

The
following hypothetical example reflects the impact of a change in the historical prepayment experience:



Constant Prepayment Rate

Yield

Annual
Income

Percent
Difference6%


5.54
%
$
57,129.30


14
%15%


5.09
%
$
52,481.09


5
%20%


4.85
%
$
49,978.37


0
%40%


3.97
%
$
40,754.16


(18
)%60%


3.06
%
$
31,394.35


(37
)%


We
have retained substantially all of the risks and benefits of ownership of our rental properties and therefore we account for leases with our tenants as operating leases. The total
amount of contractual rent that we receive from operating leases is recognized on a straight-line basis over the term of the lease; and a straight-line or free rent receivable,
as applicable, is recorded for the difference between the rental revenue recorded and the contractual amount received. In addition to base rent, the tenants in our commercial real estate properties
also pay substantially all operating costs.

Expense
reimbursement income arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate expenses of the respective property
is accrued in the same period as the related expenses are incurred. These recoverable expenses are included in expenses as commercial real estate expenses.

Income
arising from the operation of parking garages is recognized when the parking spaces are occupied. Expenses related to the operation of parking garages are included in expenses as
commercial real estate expenses.

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We have purchased and originated mezzanine loans and commercial mortgage loans to be held as long-term investments. We
evaluate each of these loans for possible impairment on a quarterly basis. Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual
terms of the loan. In our evaluation of these loans for possible impairment, we develop significant assumptions which include, but are not limited to, the value of the real estate of partnership or
membership interests that secure the mortgage loans, the expected sale period for such real estate, the appropriate discount rate, the fair value of any collateral being used to secure any guarantees
from the borrower and the estimated costs incurred to dispose of such guarantee collateral. Upon a determination of impairment, we will establish a reserve for loan losses and a corresponding charge
to earnings through the provision for loan losses.



We measure financial instruments, derivatives and our collateralized debt obligations at fair value. We account for real estate loans
held for sale at the lower of their carrying amount or fair value less estimated cost to sell. Realized and unrealized gains or losses from our investment securities and collateralized debt
obligations within our CDO entities for which we elected the fair value option are recorded in our statements of operations. Unrealized gains or losses from our investment securities for which we did
not elect the fair value option are recorded through other comprehensive income or loss. Impairments on our available-for-sale
securities are recorded in our consolidated statements of operations. Changes in the carrying amount or fair value of our real estate loans held for sale are recorded in our consolidated statements of
operations.

We
adopted FASB ASC 820-10-50-8 (previously SFAS 157), in the first quarter of 2008. FASB ASC 820-10-50-8
defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and enhances disclosure requirements for fair
value measurements. Additionally and also in the first quarter of 2008, we adopted FASB ASC 825-10-45-1 (previously SFAS 159), and applied this option to the
investment securities and collateralized debt obligations within our CDO legal entities.

FASB
ASC 820-10-05-1 defines "fair value" as the price that would be received on the sale of an asset or that would be paid to transfer a liability in
an orderly transaction between market participants at the measurement date, or an exit price. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates
to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally
have more pricing observability and require less judgment to be utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted have less observability and are measured
at fair value using valuation models that require more judgment. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument
is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions generally.

The
overall valuation process for financial instruments may include adjustments to valuations derived from pricing models. These adjustments may be made when, in management's judgment,
either the size of the position in the financial instrument or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded (such as
counterparty, credit, concentration or liquidity), require that an adjustment be made to the value derived from the pricing models. An adjustment may be made if a trade of a financial instrument is
subject to sales restrictions that would result in a price less than the computed fair value measurement from a quoted market price. Additionally, an adjustment from the price derived from a model
typically reflects management's

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judgment
that other participants in the market for the financial instrument being measured at fair value would also consider such an adjustment in pricing that same financial instrument.

We
have categorized our financial instruments measured at fair value into a three-level classification in accordance with FASB ASC 820-10-50-2. Fair
value measurements of financial instruments that use quoted prices in active markets for identical assets or liabilities generally are categorized as Level 1, and fair value measurements of
financial instruments that
have no direct observable levels generally are categorized as Level 3. The lowest level input that is significant to the fair value measurement of a financial instrument is used to categorize
the instrument and reflects the judgment of management. Financial assets and liabilities presented at fair value in our Balance Sheet generally are categorized as follows:

Level 1Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.



Level 2Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability
through correlation with market data at the measurement date and for the duration of the instrument's anticipated life.



Level 3Inputs that are not observable through correlation with market data (non-binding quotes from dealers in securities and
independent pricing services without observable inputs) and inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement
date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.





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Financial
assets and liabilities presented at fair value and categorized as Level 3 generally are financial instruments that are valued based on quotes from dealers and prices
obtained from independent pricing services that do not have observable inputs with market data. For financial instruments that are priced using broker quotes, we generally obtain only one quote. The
criteria we use to determine whether an illiquid market exists include a lack of binding broker quotes, significant spread widening between bid prices and ask prices and lack of observable trades for
comparable assets. In addition, Level 3 also includes financial instruments that are marked to model using relevant empirical data to extrapolate an estimated fair value. The models' inputs
reflect assumptions that market participants would use in pricing the instrument in a current period transaction and outcomes from the models represent an exit price and expected future cash flows.
Our valuation models are calibrated to the market on a frequent basis. The parameters and inputs are adjusted for assumptions about risk and current market conditions. Changes to inputs in valuation
models are not changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset classes from changes in market conditions. Accordingly, results from
valuation models in one period may not be indicative of future period measurements. Valuations are independently reviewed by employees of our Manager and, where
applicable, valuations are back tested comparing instruments sold to where they were marked. Different judgments and assumptions used in pricing could result in different estimates of value.

In
accordance with FASB ASC 820-10-50-1, valuation techniques used for assets and liabilities accounted for at fair value are generally categorized
into three types:



The
three approaches described within FASB ASC 820-10-50-1 are consistent with generally accepted valuation methodologies. While all three approaches
are not applicable to all assets or liabilities accounted for at fair value, where appropriate and possible, one or more valuation techniques may be used. The selection of the valuation method(s) to
apply considers the definition of an exit price and the nature of the asset or liability being valued and significant expertise and judgment is required. For assets and liabilities accounted for at
fair value, valuation techniques generally are a combination of the market and income approaches. For the year ended December 31, 2009, the application of valuation techniques applied to
similar assets and liabilities has been consistent.

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During the year ended December 31, 2009, our assets measured at fair value on a recurring basis reflected as Level 3 decreased largely as a result
of principal repayments and write-offs on CMBS and Non-Agency RMBS and declines in the projected cash flow on our CMBS and Non-Agency RMBS. The significant amount of our
investment securities reflected as Level 3 is a result of the reduction of liquidity in the capital markets that resulted in a decrease in the observability of the significant inputs used in
determining fair value. Management determined the classification level of each security based upon a review of the pricing source used (non-binding broker quotes, pricing services or fair
value determinations by management).

During
the year ended December 31, 2009, our liabilities measured at fair value on a recurring basis reflected as Level 3 decreased by $34.2 million, as a result of
the derivative liabilities that we closed out during the year and the principal repayments on our CDO obligations. In addition, the decrease in valuation of our derivatives liabilities and our CDO
obligations, which are based on non-binding broker quotes, contributed to the decrease. The significant amount of our collateralized debt obligations reflected as Level 3 is a
result of the reduction of liquidity in the capital markets that resulted in a decrease in the observability of the significant inputs used in determining fair value.

The
following table summarizes the sources from which fair value was determined on our assets and liabilities measured at fair value on a recurring basis that were classified as
Level 3 as of December 31, 2009.

Investment
Securities

%

Derivative
Liabilities

%

Collateralized
Debt Obligations

%($ in millions)Non-binding quote(s) from dealers in securities

$
8.7


20.3
%
$
34.9


100
%
$
33.6


100
%Independent pricing service


31.4


73.4
%




0
%




0
%Fair Value determinations by management


2.7


6.3
%




0
%




0
%Total

$
42.8


100.0
%
$
34.9


100
%
$
33.6


100
%




When the fair value of an available-for-sale security is less than its amortized cost for an extended period,
we consider whether there is an other-than-temporary impairment in the value of the security in accordance with FASB ASC 320-10-50-8A
(previously FSP FAS 115-2, EITF 99-20 and FSP EITF 99-20-1). An impairment that is an "other-than-temporary
impairment" is a decline in the fair value of an investment below its amortized cost attributable to factors that indicate that the decline will not be recovered. Under the guidance of FASB ASC
320-10-50-8A, should an other-than-temporary impairment be deemed to have occurred, the total other-than-temporary
impairment is bifurcated into (i) the amount related to credit losses, and (ii) the amount related to all other factors. The portion of the other-than-temporary
impairment related to credit losses is calculated by comparing the amortized cost of the security to the present value of cash flows expected to be collected, discounted at the security's current
yield, and is recognized through earnings on the consolidated statement of operations. The portion of the other-than-temporary impairment related to all other factors is
recognized as a component of other comprehensive income (loss) on the consolidated balance sheet. Other-than-temporary impairments result in reducing the security's carrying
value to its fair value, which creates a new carrying value for the investment. We compute a revised yield based on the future estimated cash flows as described in "Revenue Recognition"
above. Significant judgments are required in determining impairments, which include making assumptions regarding the estimated prepayments, loss assumptions and the changes in interest rates that are
based on current market conditions.

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Quarterly,
we reevaluate our securities portfolio to determine if there has been an other-than-temporary impairment based upon expected future cash flows.
As a result of this evaluation, under the guidance of FASB ASC 320-10-50-8A, we believe that there has been an adverse change in expected cash flows for the
securities in our portfolio and, therefore, recognized an aggregate other-than-temporary impairment of $69.8 million related to credit losses, as defined under FASB ASC
320-10-50-8A, and has been recorded through earnings. An additional impairment of $8.1 million related to other factors also has been recorded through
earnings based on our assessment that it is more likely than not that these securities will be required to be sold before we recover their amortized cost basis.



In February 2007, the FASB issued FASB ASC 825-10-45-1 (previously SFAS 159). FASB ASC 825
permits entities to choose to measure many financial instruments and certain other items at fair value to improve financial reporting by providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. FASB ASC
825-10-50-28 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. FASB ASC 825-10-50-28 is effective for financial statements issued for fiscal periods beginning after
November 15, 2007. FASB ASC 825-10-50-28 was effective for us beginning January 1, 2008, and had the following effect at adoption (dollars in
thousands):

Historical cost as
of December 31,
2007

Fair value
at date of
adoption

Cumulative
effect
adjustmentCDOs

$
486,608

$
299,034

$
187,574Deferred financing costs on CDOs, net of accumulated amortization


8,152





(8,152
)Net unrealized holding gains on available-for-sale securities
within our CDO entities reclassified to accumulated deficit


1,670Total cumulative effect adjustment

$
181,092


In
addition, we had $290.9 million of notional interest rate positions relating to our CDOs that no longer qualify for hedge accounting at the date of adoption. Starting in 2008,
changes in fair value and net cash settlements are recorded in our statement of operations.



Commercial properties held for investment are carried at cost less accumulated depreciation. In accordance with FASB ASC
805-10-05-2 (previously SFAS 141(R)) upon acquisition, we allocate the purchase price to the components of the commercial properties acquired: the amount
allocated to land is based on its estimated fair value; buildings and existing tenant improvements are recorded at depreciated replacement cost; above- and below-market in-place operating
leases are determined based on the present value of the difference between the rents payable under the contractual terms of the leases and estimated market rents; lease origination costs for
in-place operating leases are determined based on the estimated costs that would be incurred to put the existing leases in place under the same terms and conditions; and tenant
relationships are measured based on the present value of the estimated avoided net costs if a tenant were to renew its lease at expiry, discounted by the probability of such renewal. Based on these
estimates, we allocate the initial purchase price to the applicable assets and liabilities. As final information regarding fair value of the assets acquired and liabilities assumed is

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received
and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized within twelve months of the acquisition date.

Depreciation
on buildings is provided on a straight-line basis over the useful lives of the properties to a maximum of 40 years. Depreciation is determined with
reference to each rental property's carried value, remaining estimated useful life and residual value. Acquired tenant improvements, above- and below-market in-place operating leases and
lease origination costs are amortized on a straight-line basis over the remaining terms of the leases. The value associated with acquired tenant relationships is amortized on a
straight-line basis over the expected term of the relationships. All other tenant improvements and re-leasing costs are deferred and amortized on a straight-line
basis over the terms of the leases to which they relate. Depreciation on buildings and amortization of deferred leasing costs and tenant improvements that are determined to be assets of the company
are recorded in depreciation and amortization expense. All above- and below-market tenant leases and tenant relationships are amortized to revenue. Above- and below-market ground leases are amortized
to commercial real estate expenses.

Properties
are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. For commercial properties, an impairment loss is
recognized when a property's carrying value exceeds its undiscounted future net cash flow. The impairment is measured as the amount by which the carrying value exceeds the estimated fair value.
Projections of future cash flow take into account the specific business plan for each property and management's best estimate of the most probable set of economic conditions anticipated to prevail in
the market.

We
assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows
are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. Application of these assumptions requires the
exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.



Our policies permit us to enter into derivative contracts, including interest rate swaps, currency swaps, interest rate caps and
interest rate swap forwards, as a means of mitigating our interest rate risk on forecasted interest expense associated with the benchmark rate on forecasted rollover/reissuance of repurchase
agreements, or hedged items, for a specified future time period. We currently are using interest rate derivative instruments to mitigate interest rate risk rather than to enhance returns.

In
the normal course of business, we use a variety of derivative instruments to manage, or hedge, interest rate risk. We require that hedging derivative instruments be effective in
reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Some derivative instruments are associated with an
anticipated transaction. In those cases, hedge effectiveness criteria also require that it be probable that the underlying transaction occurs. Instruments that meet these hedging criteria are formally
designated as hedges at the inception of the derivative contract.

To
determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For
the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash
flow analysis, option-pricing models, replacement cost, counterparty default risk and termination cost are used to determine fair value. All methods of assessing fair value result in a general
approximation of value, and such value may never actually be realized.

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In
the normal course of business, we are exposed to the effect of interest rate changes and limit these risks by following established risk management policies and procedures including
the use of derivatives.
To address exposure to interest rates, we use derivatives primarily to hedge the mark-to-market risk of our liabilities with respect to certain of our assets.

FASB
ASC 815-10-05-4 (previously SFAS 133), requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. FASB ASC 815-10-50-4A may increase or decrease reported net
income and stockholders' equity prospectively, depending on future changes in fair value.

At
December 31, 2009, we were a party to two interest rate swaps with a notional par value of approximately $281.0 million; the fair value of our net liability relating to
interest rate swaps was approximately $25.3 million, which is included in our derivative liabilities, and we had accrued interest payable of approximately $0.4 million on our interest
rate swaps at such date. We entered into these interest rate swaps to seek to mitigate our interest rate risk for the specified future time period, which is defined as the term of the swap contracts.
These two interest rate swaps were entered into by our two CDOs and accordingly, our counterparties may not request additional margin collateral from us with respect to these contracts.

As
of December 31, 2009 and December 31, 2008, respectively, we had one and two credit default swaps ("CDS") with notional par values (our maximum exposure to loss) of
$10.0 million and $20.0 million that are reflected on our balance sheet as a derivative liability at their fair value of approximately $9.6 million and $19.1 million,
respectively. The fair value of the CDS depends on a number of factors, primarily premium levels, which are dependent on interest rate spreads. The CDS contracts are valued either by an independent
third party pricing service or by using internally developed and tested market-standard pricing models that calculate the net present value of differences between future premiums on currently quoted
market CDS and the contractual future premiums on our CDS contracts.

We
account for derivative and hedging activities in accordance with FASB ASC 815-10-05-4. FASB ASC 815-10-05-4
requires recognizing all derivative instruments as either assets or liabilities in the balance sheet at their fair value. The accounting for changes in fair value
(i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and
further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument, based upon the exposure
being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. We have no fair value hedges or hedges of a net investment in foreign operations.

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 on the derivative instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (for example, in
"interest expense" when the hedged transactions are interest cash flows associated with floating-rate debt). The remaining gain (loss) on the derivative instrument in excess of the
cumulative changes in the present value of future cash flows of the hedged item, if any, is recognized in the realized and unrealized gain (loss) on derivatives in current earnings during the period
of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in realized and unrealized gain (loss) on derivatives in the current earnings during the

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period
of change. Income and/or expense from interest rate swaps are recognized as a net adjustment to realized and unrealized gain (loss) on derivative. We account for income and expense from
interest rate swaps on an accrual basis over the period to which the payment and/or receipt relates.



The preparation of financial statements in conformity with GAAP requires us to make a significant number of estimates in the
preparation of the financial statements. These estimates include determining the fair market value of certain investments, debt obligations and derivative assets and liabilities, amount and timing of
credit losses, prepayment assumptions, allocation of purchase price to tangible and intangible assets on property acquisitions, and other items that affect the reported amounts of certain assets and
liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates
(e.g., market values change due to changes in supply and demand, credit performance, prepayments, interest rates or other reasons; yields change due to
changes in credit outlook and loan prepayments) will occur in the near future. Our estimates are inherently subjective in nature and actual results could differ from our estimates and differences may
be material.



We operate in a manner that we believe will allow us to be taxed as a REIT and, as a result, we do not expect to pay substantial
corporate-level income taxes. Many of the requirements for REIT qualification, however, are highly technical and complex. If we were to fail to meet these requirements and do not qualify for certain
statutory relief provisions, we would be subject to federal income tax, which could have a material adverse impact on our results of operations and
amounts available for distributions to our stockholders. In addition, Crystal River TRS Holdings, Inc., our TRS, is subject to corporate-level income taxes.

Our
policy for interest and penalties on material uncertain tax positions recognized in our consolidated financial statements is to classify these as interest expense and operating
expense, respectively. However, in accordance with FASB ASC 740-10-05-6 (previously FIN 48), we assessed our tax positions for all open tax years (Federal,
years 2005 through 2009 and State, years 2005 through 2009) as of December 31, 2009 and concluded that we have no material FASB ASC 740-10-05-6 liabilities
to be recognized at this time.

Financial Condition



Our current portfolio consists of commercial mortgage-backed securities, residential mortgage-backed securities, commercial real estate
loan investments, credit default swaps and operating real estate. All of our assets at December 31, 2009 were acquired with the net proceeds of approximately $405.6 million from our
March 2005 private offering of 17,400,000 shares of our common stock, the net proceeds of approximately $158.6 million from our August 2006 initial public offering of 7,500,000 shares of our
common stock, the net proceeds of approximately $48.6 million from our March 2007 issuance of trust preferred securities and our use of leverage.



Our commercial mortgage-backed securities and residential mortgage-backed securities comprise 100% of our investment securities
portfolio. We own these securities either directly on our balance sheet or in one of our two CDOs. We own the equity of each of the CDOs and it is through this equity investment that we participate in
the investment performance of the portion of the investment securities portfolio that is owned by the CDOs. The commercial mortgage-backed securities and

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residential
mortgage-backed securities segment of our portfolio at December 31, 2009 is summarized below:

CMBS

RMBS(In thousands)Amortized cost

$
26,193

$
4,708Unrealized gains


11,920


5Unrealized losses





Fair value

$
38,113

$
4,713


As
of December 31, 2009, the CMBS and RMBS in our portfolio purchased at a net premium or discount relative to their par value and our portfolio had a weighted average amortized
cost of 3.4% and 3.4% of face amount, respectively. The CMBS and RMBS were valued below par at December 31, 2009 because we invested in lower-rated
(i.e., deeply subordinated) bonds in the credit structure and those bonds have been adversely impacted by changes in yield spreads and increased actual
losses on the underlying collateral, as well as increasing delinquency rates, which generally portend higher actual losses in the future.

Our
MBS holdings were as follows at December 31, 2009 ($ in millions):

Outstanding
Face
Amount at
December 31,
2009

Amortized
Cost Basis
Before
Impairments/
Adjustments(1)Weighted AverageFair Value at
December 31,
2009

Number of
Securities(2)

Number
of
Trusts(3)Rating(4)

Coupon

Yield(5)

WAL(6)CMBS

$
778.8

$
575.2

$
38.1


131


43

CCC+


5.21
%

36.96


3.93Non-Agency RMBS-Prime


90.7


160.2


3.2


51


28

CC+


4.29


194.81


2.12Non-Agency RMBS-Sub Prime


47.6


135.0


1.5


24


14

CCC-


2.76


132.21


5.12Preferred Stock


4.9


4.8





2


2










Total

$
922.0

$
875.2

$
42.8


208


87

CCC


4.97


52.11


3.85REIT ONLY (non-CDOs)CMBS

$
270.5

$
149.2

$
5.2


44


20

CC


5.14
%

48.51


2.20Non-Agency RMBS-Prime


35.5


77.3


1.2


23


16

C-


5.67


195.76


1.31Non-Agency RMBS-Sub Prime


13.6


60.0


0.9


11


8

CCC+


3.44


80.22


6.87Preferred Stock


4.9


4.8





2


2










Total

$
324.5

$
291.3

$
7.3


80


46

CC+


5.05


76.39


2.64CDOs ONLYCMBS

$
508.3

$
426.0

$
32.9


94


33

CCC+


5.25
%

35.13


4.20Non-Agency RMBS-Prime


55.2


82.9


2.0


28


20

CCC-


3.41


194.24


2.60Non-Agency RMBS-Sub Prime


34.0


75.0


0.6


13


7

C-


2.49


209.08


2.54Preferred Stock

























Total

$
597.5

$
583.9

$
35.5


135


60

CCC


4.92


47.13


4.08


(1)As
of December 31, 2006.(2)Note
that some securities are owned both by one or more of our CDOs and by the REIT.(3)Note
that securities issued by some trusts are owned both by one or more of our CDOs and by the REIT.(4)Lowest
rating of Moody's, S&P or Fitch; weighted average based on fair value.(5)Yield
as reflected above is the implied loss-adjusted yield based on our expectation of future cash flows
(i.e., taking into account assumed defaults) and the fair value of the security.(6)Loss-adjusted
weighted average remaining life in years.


The estimated weighted average lives of the MBS in the tables above are based upon our prepayment expectations, which are based on both
proprietary and subscription-based financial models.

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Our
prepayment projections consider current and expected trends in interest rates, interest rate volatility, steepness of the yield curve, the mortgage rate of the outstanding loan, time
to reset and the spread margin of the reset.

The
table below summarizes the credit ratings of our MBS investments at December 31, 2009:

CMBS

Prime RMBS

Subprime RMBS

Total(In thousands)AAA

$


$


$


$
AA











A











BBB


3,724








3,724BB


5,451








5,451B


14,659





847


15,506Below B


14,279


3,194


672


18,145Total

$
38,113

$
3,194

$
1,519

$
42,826


Actual
maturities of MBS are generally shorter than stated contractual maturities, as they are affected by the contractual lives of the underlying mortgages, periodic payments of
principal, and prepayments of principal. The stated contractual final maturity of the mortgage loans underlying our portfolio of MBS ranges up to 27 years, but the expected maturity is subject
to change based on the prepayments of the underlying loans. As of December 31, 2009, the average final contractual maturity of the mortgage portfolio was 2036.

The
constant prepayment rate, or CPR, attempts to predict the percentage of principal that will be prepaid over the next 12 months based on historical principal paydowns. As
interest rates rise, the rate of refinancings typically declines, which we believe may result in lower rates of prepayment and, as a result, a lower portfolio CPR.

The
following table summarizes our CMBS and RMBS according to their estimated weighted average life classifications as of December 31, 2009:

CMBS

RMBSWeighted Average Life

Fair Value

Amortized
Cost

Fair Value

Amortized
Cost(In thousands)Less than one year

$


$


$
268

$
268Greater than one year and less than five years


882


882


1,125


1,121Greater than five years


37,231


25,311


3,320


3,319Total

$
38,113

$
26,193

$
4,713

$
4,708


The
estimated weighted-average lives of the MBS in the tables above are based upon a prepayment model obtained through a subscription-based financial information service provider. The
prepayment model considers the current yield, forward yield, steepness of the yield curve, current mortgage rates, mortgage rate of the outstanding loan, loan age, margin and volatility.

The
actual weighted average lives of the MBS in our investment portfolio could be longer or shorter than the estimates in the table above depending on the actual prepayment rates
experienced over the lives of the applicable securities and are sensitive to changes in both prepayment rates and interest rates.

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Our CMBS portfolio consists of CMBS that we own directly (i.e., outside of our CDOs)
and CMBS that are owned by our CDOs. We directly own approximately $5.2 million in fair value of CMBS. These securities have a weighted average rating of CC, are priced at a weighted average
price to par of 1.9%, and are projected to yield 48.51% of their current fair value on a loss-adjusted basis. Approximately 78.0% of the CMBS that we own directly is part of a portfolio
that we refer to as the "CMBS Primary Asset." The CMBS Primary Asset is a sub-portfolio that consists of our holdings in 11 CMBS securitizations in which we, either directly or through our
CDOs, own a portion of the first loss tranche. The CMBS Primary Asset is further illustrated below.

Within
our two CDOs, we own approximately $32.9 million in fair value of CMBS. These securities have a weighted average rating of CCC+, are priced at a weighted average price to
par of 6.5%, and are projected to yield 35.13% of their current fair value on a loss-adjusted basis. However, the receipt of cash flows from this portion of our CMBS portfolio is governed
by the waterfalls within the respective CDO indentures, which are further described below. Approximately 44.9% of the CMBS that we own within our two CDOs are part of the CMBS Primary Asset.

Class Type

Directly
Owned(1)

Owned by
our CDOs

Total

Average
Rating(In thousands)Primary Asset

$
4,057

$
14,785

$
18,842

CCC-Non-Primary Asset


1,142


18,129


19,271

BTotal / Weighted Average

$
5,199

$
32,914

$
38,113

CCC+


(1)Either
by us directly or by one of our non-CDO subsidiaries.


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Table of Contents

CMBS Primary Asset

The following table sets forth some relevant characteristics as of December 31, 2009 of our CMBS Primary Asset.

Deal Name

Number of
Tranches
Currently
Outstanding

Current
Size of
Securitization

Detachment
Point(1)

Original Face
Amount of
Our Current
Holdings(2)

Outstanding
Face Amount
of Our
Holdings at
December 31,
2009

Fair Value
of Our
Holdings at
December 31,
2009

Original Rating
Range of Our
Holdings

Current
Delinquency

Cumulative
Losses to
Date(3)

Weighted
Average
Coupon($ in thousands)BACM 2006-2


7

$
2,626,774


3.03
%
$
32,330

$
28,249

$
697

BB+  NR


4.90
%
$
8,329


5.48
%BACM 2007-2


7


3,148,905


3.15


35,330


35,330


473

BB+  NR


6.12





5.37BSCMS 2005-PWR9


9


2,053,405


5.51


83,001


83,001


2,485

BBB  NR


8.73





4.82BSCMS 2006-PW13


8


2,830,861


4.24


55,816


55,816


4,176

BBB-  NR


4.03





5.46COMM 2007-C9


7


3,049,048


3.84


50,658


50,658


1,838

BB+  NR


2.15





5.24CSMC 2006-C1


8


2,892,659


4.29


82,833


82,833


4,784

BBB-  NR


2.89





5.29CSMC 2006-C4


8


4,220,699


4.08


77,931


75,921


1,393

BBB-  NR


12.96


4,103


5.54GMACC 2005-C1


5


1,227,362


2.06


27,963


25,310


120

BB+  NR


7.55


28,618


4.48WBCMT 2005-C18


8


1,314,540


5.62


39,196


39,196


1,532

BBB  NR


8.80





4.74WBCMT 2006-C29


7


3,363,120


2.63


32,600


32,600


338

BB+  NR


5.39





5.07WBCMT 2007-C31


9


5,812,655


3.27


42,503


42,503


1,006

BB+  NR


6.84





5.13Total/Weighted Average


83

$
32,540,028


3.70
%
$
560,161

$
551,417

$
18,842

BBB  NR


6.45
%
$
41,050


5.18
%


(1)A
deal's detachment point is the senior limit to our credit exposure within that securitization.(2)We
owned two tranches of the GMACC 2005-C1 deal with an original face amount of $25,965 that have experienced a total loss and
accordingly, the number set forth in this column for that deal does not include an amount in respect of those tranches.(3)Actual
losses based on securities we currently own. For GMACC 2005-C1, this includes two tranches with an original face amount of $25,965 that
have experienced a total loss.


82

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The following table sets forth some relevant characteristics of our CMBS portfolio by vintage.

VintageTotal/
Weighted
AverageCMBS Characteristics as of December 31, 2009

2002

2005

2006

2007($ in millions)Weighted Average Rating


B


B-


CCC


CCC-


CCC+Number of Securities


3


37


60


31


131Original Face Amount

$
2.8

$
269.7

$
367.9

$
160.7

$
801.1Outstanding Face Amount

$
2.8

$
253.5

$
361.8

$
160.7

$
778.8Amortized Cost Basis

$
0.9

$
11.3

$
10.0

$
4.0

$
26.2Fair Value

$
0.9

$
16.6

$
15.5

$
5.1

$
38.1Percentage of Total Fair Value(1)


2.36
%

43.57
%

40.68
%

13.39
%

100.0
%Coupon


4.94
%

4.92
%

5.45
%

5.15
%

5.21
%Market Yield(2)


55.10
%

19.94
%

48.79
%

52.95
%

36.96
%Expected Principal Return(3)


100.00
%

10.08
%

3.38
%

0.00
%

5.21
%WAL(4)


2.88


4.91


3.29


2.89


3.93Principal Subordination(5)


3.86
%

1.95
%

1.74
%

1.44
%

1.76
%Delinquency Rate 60+(6)


1.81
%

6.51
%

6.06
%

3.94
%

5.76
%Collateral Cumulative Losses to Date


0.00
%

0.46
%

0.07
%

0.01
%

0.19
%Cumulative Losses to Date(7)


0.00
%

5.98
%

1.64
%

0.00
%

2.78
%


(1)The
proportion of our CMBS portfolio comprised of the respective vintage; based on fair value of our CMBS portfolio as of December 31, 2009.(2)Market
yield as reflected above is the implied loss-adjusted yield based on our expectation of future cash flows
(i.e., taking into account assumed defaults) and the fair value of the security.(3)Percent
of outstanding face amount that we currently project to be returned as principal.(4)Weighted
average life.(5)Weighted
average determined based on outstanding face amounts owned.(6)Delinquencies
in the securitization; weighted average determined based on outstanding face amounts owned.(7)Write-offs
of par on the securities we own; weighted average determined based on original face amounts owned.




Our RMBS portfolio consists of RMBS that we own directly (i.e., outside of our CDOs)
and RMBS that are owned by one of our CDOs. We directly own approximately $2.1 million in fair value of RMBS, which consists of $1.2 million of prime RMBS and $0.9 million of
sub-prime RMBS. The prime bonds have a weighted average rating of C-, are priced at a weighted average price to par of 3.4% and are projected to yield 195.76% of their current
fair value on a loss-adjusted basis. The sub-prime bonds have a weighted average rating of CCC+, are priced at a weighted
average price to par of 6.6% and are projected to yield 80.22% of their current fair value on a loss-adjusted basis.

Within
our two CDOs, we own approximately $2.6 million in value of RMBS, which consists of $2.0 million of prime RMBS and $0.6 million of sub-prime RMBS.
The prime bonds have a weighted average rating of CCC-, are priced at a weighted average price to par of 3.6%, and are projected to yield 194.24% of their current fair value on a
loss-adjusted basis. The sub-prime bonds have a weighted average rating of C-, are priced at a weighted average price to par of 1.8%, and are projected to yield
209.08% of their current fair value on a loss-adjusted basis. However, the receipt of cash flows from

83

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this
portion of our RMBS portfolio is governed by the waterfalls within the respective CDO indentures, which are further described below.

The
following table sets forth some relevant characteristics of our prime RMBS portfolio by vintage.

VintageTotal/
Weighted
AveragePrime RMBS Characteristics as of December 31, 2009

2003

2004

2005

2006

2007($ in millions)Weighted Average Rating


DDD+


DDD+


CC+


C


NR


CC+Number of Securities


4


8


35


3


1


51Outstanding Face Amount

$
3.0

$
8.6

$
75.2

$
3.8

$
0.1

$
90.7Amortized Cost Basis

$
0.3

$
0.2

$
2.6

$
0.1

$
0.0

$
3.2Fair Value

$
0.3

$
0.2

$
2.6

$
0.1

$
0.0

$
3.2Percentage of Total Fair Value(1)


9.38
%

6.25
%

81.25
%

3.12
%

0.0
%

100.0
%Coupon


5.19
%

2.77
%

4.25
%

7.91
%

6.00
%

4.29
%Market Yield(2)


257.55
%

383.06
%

165.95
%

339.60
%

0.00
%

194.81
%Expected Principal Return(3)


64.19
%

14.15
%

4.43
%

0.63
%

0.00
%

7.12
%WAL(4)


3.57


1.85


2.02


0.89


0.23


2.12Principal Subordination(5)


0.12
%

0.35
%

0.66
%

0.60
%

0.00
%

0.61
%Collateral Factor(6)


47.82
%

23.49
%

42.13
%

56.06
%

77.37
%

41.16
%Bond Factor(7)


79.81
%

56.27
%

79.44
%

95.82
%

11.39
%

77.86
%One Month CPR(8)


14.16


15.40


15.29


27.14


15.38


15.76Delinquency Rate 60+(9)


0.58
%

20.66
%

14.96
%

5.17
%

11.10
%

14.62
%Collateral Cumulative Losses to Date


0.03
%

0.71
%

0.51
%

0.23
%

0.28
%

0.50
%Cumulative Losses to Date(10)


9.96
%

9.32
%

12.54
%

0.00
%

87.91
%

11.63
%


(1)The
proportion of our prime RMBS portfolio comprised of the respective vintage; based on fair value of our prime RMBS portfolio as of December 31,
2009.(2)Market
yield as reflected above is the implied loss-adjusted yield based on our expectation of future cash flows
(i.e., taking into account assumed defaults) and the fair value of the security.(3)Percent
of outstanding face amount that we currently project to be returned as principal.(4)Weighted
average life.(5)Weighted
average determined based on outstanding face amount owned.(6)Collateral
factor is the ratio of the current deal balance to the original deal balance.(7)Bond
factor is the ratio of the current bond balance to the original bond balance.(8)Constant
prepayment rate.(9)Delinquencies
in the securitization, weighted average determined based on outstanding face amounts owned.(10)Write-offs
of par on the securities we own; weighted average determined based on original face amounts owned.


84

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The
following table sets forth some relevant characteristics of our sub-prime RMBS portfolio by vintage.

VintageTotal/ Weighted AverageSub-prime RMBS Characteristics as of December 31, 2009

2005

2006

2007($ in millions)Weighted Average Rating


CCC-


B-


NR


CCC-Number of Securities


17


6


1


24Outstanding Face Amount

$
39.4

$
8.2

$
0.0

$
47.6Amortized Cost Basis

$
0.9

$
0.6

$
0.0

$
1.5Fair Value

$
0.9

$
0.6

$
0.0

$
1.5Percentage of Total Fair Value(1)


60.00
%

40.00
%

0.00
%

100.0
%Coupon


2.98
%

1.74
%

2.34
%

2.76
%Market Yield(2)


164.04
%

80.51
%

0.00
%

132.21
%Expected Principal Return(3)


10.41
%

52.19
%

0.00
%

17.60
%WAL(4)


3.48


7.81


0.07


5.12Principal Subordination(5)


2.93
%

3.76
%

0.00
%

3.07
%Current Overcollateralization


0.44
%

1.92
%

0.00
%

0.69
%Excess Spread(6)


0.44
%

0.45
%

0.27
%

0.44
%Collateral Factor(7)


21.57
%

40.32
%

72.45
%

24.85
%Bond Factor(8)


73.37
%

93.55
%

52.29
%

76.83
%One Month CPR(9)


12.83


14.17


16.11


13.06Delinquency Rate 60+(10)


36.42
%

23.73
%

40.19
%

34.23
%Collateral Cumulative Losses to Date


6.56
%

6.48
%

10.54
%

6.55
%Cumulative Losses to Date(11)


9.12
%

1.16
%

96.20
%

29.16
%


(1)The
proportion of our sub-prime RMBS portfolio comprised of the respective vintage; based on fair value of our sub-prime RMBS
portfolio as of December 31, 2009.(2)Market
yield as reflected above is the implied loss-adjusted yield based on our expectation of future cash flows
(i.e., taking into account assumed defaults) and the fair value of the security.(3)Percent
of outstanding face amount that we currently project to be returned as principal.(4)Weighted
average life.(5)Weighted
average determined based on outstanding face amount owned.(6)Represents
the weighted average excess spread over the applicable liability coupon for the month of December 2009, weighted by par amount.(7)Collateral
factor is the ratio of the current deal balance to the original deal balance.(8)Bond
factor is the ratio of the current bond balance to the original bond balance.(9)Constant
prepayment rate.(10)Delinquencies
in the securitization, weighted average determined based on outstanding face amounts owned.(11)Write-offs
of par on the securities we own; weighted average determined based on original face amounts owned.


85

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Our investment policies allow us to acquire equity securities, including common and preferred shares issued by other real estate
investment trusts. At December 31, 2009, we held two investments in equity securities, each with a fair value of $0. These investment securities are classified as available for sale and thus
carried at fair value on our balance sheet with changes in fair value recognized in accumulated other comprehensive income until realized or determined to be other than temporarily impaired.



The following sets forth information regarding the changes in the carrying value of our investment securities during the year ended
December 31, 2009:

Activity During Year Ended December 31, 2009Security Description

December 31,
2008
Estimated
Fair Value

Sales

Principal
Paydowns/
Write-offs

Discount/
(Premium)
Amortization

Impairments

Mark-to-
Market
Adjustments

December 31,
2009
Estimated
Fair Value(In millions)CMBS

$
58.1

$


$
(0.2
)
$
(11.8
)
$
(62.6
)
$
54.6

$
38.1Non-Agency RMBS


14.8





(6.3
)

(3.3
)

(15.3
)

14.8


4.7Preferred stock


0.0

















Total

$
72.9

$


$
(6.5
)
$
(15.1
)
$
(77.9
)
$
69.4

$
42.8


The following sets forth information regarding the changes in the carrying value of our investment securities during the year ended
December 31, 2008:

Activity During Year Ended December 31, 2008Security Description

December 31,
2007
Estimated
Fair Value

Sales

Principal
Paydowns

Discount/
(Premium)
Amortization

Impairments

Mark-to-
Market
Adjustments

December 31,
2008
Estimated
Fair Value(In millions)CMBS

$
399.4

$
(4.2
)
$
(0.3
)
$
8.6

$
(79.1
)
$
(266.3
)
$
58.1Agency MBS


1,246.7


(1,178.0
)

(60.4
)

(0.4
)




(7.9
)

Non-Agency RMBS


168.4





(10.1
)

10.4


(62.7
)

(91.2
)

14.8Preferred stock


0.7











(1.1
)

0.4


0.0Total

$
1,815.2

$
(1,182.2
)
$
(70.8
)
$
18.6

$
(142.9
)
$
(365.0
)
$
72.9




At December 31, 2009, our commercial real estate loan investments are reported as held for investment (carried at amortized
cost) and held for sale (carried at fair value). Real estate loans that are held for investment are periodically reviewed for impairment. As of December 31, 2009, we reported loans held for
sale totaling $5.9 million and loans held for investment totaling $0. During the year ended December 31, 2009, we had loan loss reserves of $6.8 million on our real estate loans
held for investment and valuation allowances of $0.8 million on our real estate loans held for sale. Our commercial real estate loan investments as of December 31, 2009 are summarized
below. In connection with the repurchase and discharge of our junior subordinated notes in January 2010, we exchanged one mezzanine loan and one whole loan with carrying values of $4.7 million
and $1.2 million, respectively, as part of the consideration.

86

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Table of Contents



Mezzanine Loans(1)

Construction
Loans(2)

Whole Loans(3)

Total/
Weighted
AverageFixed Rate

Floating
Rate

Fixed
Rate

Floating
Rate

Fixed
Rate

Floating
Rate

Fixed
Rate

Floating
Rate(In millions)Outstanding Face Amount

$
17.4

$


$
14.6

$


$


$
1.7

$
32.0

$
1.7Carrying Value


4.7














1.2


4.7


1.2Amortized Cost


17.4





14.6








1.7


32.0


1.7Fair Value


4.7














1.2


4.7


1.2Number of Loans


2





1








1


3


1Number of loans that are delinquent


1





1











2


Weighted average interest rate


7.32
%(4)


%


%(5)


%


%

n/a


7.32
%(6)

n/aWeighted average spread over LIBOR


n/a



%

n/a



%


%

3.25
%

n/a


3.25
%


(1)Mezzanine
loans amount excludes $6.4 million of valuation allowance and $6.4 million of loan loss allowance.(2)Construction
loans amount excludes $14.6 million of loan loss allowance.(3)Whole
loans amount excludes $0.4 million of valuation allowance.(4)One
mezzanine loan has been placed on non-accrual status.(5)This
construction loan has been placed on non-accrual status.(6)Excludes
15.00% fixed rate for the mezzanine loan on non-accrual status and 16.00% fixed rate for the construction loan on
non-accrual.




At December 31, 2009, our commercial real estate portfolio is reported at cost of approximately $221.8 million, net of
accumulated depreciation of approximately $17.7 million. The commercial real estate portfolio consists of three high-quality office buildings that are 100% leased on a
triple-net basis to JPMorgan Chase. The buildings are financed with long-term fixed-rate mortgage loans.

The
tables below summarize our commercial real estate investments at December 31, 2009, all of which were office properties:

Total(In millions)Land

$
17.4Buildings and improvements


222.1Commercial real estate, at cost

$
239.5Accumulated depreciation


(17.7
)Commercial real estate, net of depreciation

$
221.8




Location

Tenant

Year of
Lease
Expiry(1)

Total Area

Book Value
per sq. ft.

Book
Value(2)

Mortgage
Debt

Net
Book
Equity(000s sq. ft.)



($ in millions)Houston, Texas

JPMorgan Chase


2021


428.6

$
136.5

$
58.5

$
53.4

$
5.1Arlington, Texas

JPMorgan Chase


2027


171.5


121.9


20.9


20.9


0.0Phoenix, Arizona

JPMorgan Chase


2021


724.0


201.0


145.5


145.1


0.4Total







1,324.1


169.9

$
224.9

$
219.4

$
5.5


(1)Does
not assume the exercise of any extension options.(2)Book
value includes intangible assets and intangible liabilities, but excludes rent-enhancement and straight-line rent receivables.


87

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Table of Contents

During the years ended December 31, 2009, 2008 and 2007, we received $3.4 million, $3.7 million and $1.6 million, respectively, in net
cash receipts pursuant to our ownership of our commercial real estate portfolio, as illustrated below:

Year Ended December 31,2009

2008

2007(In millions)Rental revenue

$
11.4

$
11.1

$
7.6Rent enhancement


3.1


3.4


1.8Parking garage revenue, net


1.8


2.1


1.6Mortgage interest expense


(12.4
)

(12.5
)

(9.1
)Real estate tax


(0.4
)

(0.3
)

(0.2
)Miscellaneous expenses


(0.1
)

(0.1
)

(0.1
)Net cash receipts

$
3.4

$
3.7

$
1.6




At December 31, 2009, we had rent enhancement receivables from related parties totaling $11.4 million. The rent
enhancements were negotiated as part of our purchase of our commercial real estate properties and reflect the below-market nature of the leases on those properties at the time we purchased them. We
have pledged these rent enhancement receivables as collateral to the lenders under the mortgages that we used to finance the purchase of our commercial real estate properties. While the affiliates of
our Manager that are obligated to make these rent enhancement payments have made all required payments to date, there can be no assurance that they will not default on such payments in the future and
the obligors have limited resources against which we could enforce our rights.



At December 31, 2009, we had interest receivable of approximately $2.0 million relating to our MBS investments.



As of December 31, 2009, we had engaged in credit default swaps, or CDS, which are accounted for as derivatives. CDS are
derivative securities that attempt to replicate the credit risk involved with owning a particular unrelated third party security, which we refer to as a reference obligation. We enter into CDS on
three types of securities: RMBS, CMBS and the CMBX
and ABX indices. Investing in assets through CDS subjects us to additional risks. When we enter into a CDS with respect to an asset, we do not have any legal or beneficial interest in the reference
obligation but have only a contractual relationship with the counterparty, typically a broker-dealer or other financial institution, and do not have the benefit of any collateral or other security or
remedies that would be available to holders of the reference obligation or the right to receive information regarding the underlying obligors or issuers of the reference obligation. In addition, in
the event of insolvency of a CDS counterparty, we would be treated as a general creditor of the counterparty to the extent the counterparty does not post collateral and, therefore, we may be subject
to significant counterparty credit risk. As of December 31, 2009, we were party to CDS with one counterparty. CDS are relatively new instruments, the terms of which may contain ambiguous
provisions that are subject to interpretation, with consequences that could be adverse to us.

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Table of Contents

Currently,
we are the seller of protection. The seller of protection through CDS is exposed to those risks associated with owning the underlying reference obligation. The seller,
however, does not receive periodic interest payments, but instead it receives periodic premium payments for assuming the credit risk of the reference obligation. These risks are called "credit events"
and generally consist of failure to pay principal, failure to pay interest, write-downs, implied write-downs and distressed ratings downgrades of the reference obligation.

For
some CDS, upon the occurrence of a credit event with respect to a reference obligation, the buyer of protection may have the option to deliver the reference obligation to the seller
of protection in part or in whole at par or to elect cash settlement. In this event, should the buyer of protection elect cash settlement for a credit event that has occurred, it will trigger a
payment, the amount of which is based on the proportional amount of failure or write-down. In the case of a distressed ratings downgrade, the buyer of protection must deliver the reference
obligation to the seller of protection, and there is no cash settlement option. In most cases, however, the CDS is a pay as you go CDS, in which case, at the point a write-down or an
interest shortfall occurs, the protection seller pays the protection buyer a cash amount, and the contract remains outstanding until such time as the reference obligation has a factor of zero. In most
of these instances, it will create a loss for the protection seller.

As
of December 31, 2009, we were a party to one CDS with a maturity of June 2035 with an aggregate notional par amount (maximum exposure to loss) of $10.0 million. At
December 31, 2009, the fair value of our net liability relating to credit default swap contracts was $9.6 million, compared to a net liability of $19.1 million at
December 31, 2008, primarily as a result of the occurrence of a credit event on the reference obligation underlying one of our CDS on which we sold protection, which required us to make
payments on that CDS in the amount of $10 million during the year ended December 31, 2009. As of December 31, 2009, we had approximately $10.5 million of margin cash posted
as collateral on $10.0 million of notional CDS and we were subject to additional potential margin calls totaling $0.4 million.



As of December 31, 2009, we had engaged in interest rate swaps as a means of mitigating our interest rate risk on forecasted
interest expense associated with borrowings for a specified future time period, which is the term of the applicable borrowing. An interest rate swap is a contractual agreement entered into by two
counterparties under which each agrees to make periodic payments to the other for an agreed period of time based upon a notional amount of principal. Under the most common form of interest rate swap,
a series of payments calculated by applying a fixed rate of interest to a notional amount of principal is exchanged for a stream of payments similarly calculated but using a floating rate of interest.
This is a fixed-floating interest rate swap. We hedge our floating rate debt by entering into fixed-floating interest rate swap agreements whereby we swap the floating rate of interest on the
liability we are hedging for a fixed rate of interest. An interest rate swap forward is an interest rate swap based on an interest rate to be set at an agreed future date. As of December 31,
2009, we were a party to interest rate swaps with maturities ranging from December 2013 to June 2018 with a notional par amount of approximately $281.0 million. Under the swap agreements in
place at December 31, 2009, we receive interest at rates that reset periodically, generally every three months, and pay a rate fixed at the initiation of, and for the life of, the swap
agreements.

The
valuation of our interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative.
This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The
fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash
payments (or receipts).

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Table of Contents

The
variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

To
comply with the provisions of FASB ASC 820-10-50-9 (previously SFAS 157), we incorporate credit valuation adjustments to appropriately
reflect both our own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of
nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral posting, thresholds, mutual puts and guarantees. For the year ended
December 31, 2009, we recorded $8.9 million into earnings as a gain, which is reflected in realized and unrealized gain (loss) on derivatives on our consolidated statement of operations,
relating to our nonperformance risk.

The
current market value of interest rate swaps is heavily dependent on the current market fixed rate, the credit value adjustment for non-performance by our counterparties,
the credit value
adjustment for our non-performance, the corresponding term structure of floating rates (known as the yield curve) as well as the expectation of changes in future floating rates. As
expectations of future floating rates change, the market value of interest rate swaps changes. At December 31, 2009, the fair value of our liability relating to those swaps was
$25.3 million.

There
can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Moreover, no hedging activity can
completely insulate us from the risks associated with changes in interest rates and prepayment rates. We generally intend to hedge as much of the interest rate risk as our Manager determines is in the
best interests of our stockholders, after considering the cost of such hedging transactions and our desire to maintain our status as a REIT. Our policies do not contain specific requirements as to the
percentages or amount of interest rate risk that our Manager is required to hedge.



Our liabilities as of December 31, 2009 consist of $4.5 million of accounts payable, accrued expenses and interest and
dividends payable, $35.4 million of derivative liabilities, $66.8 million of intangible liabilities, $28.9 million in short-term liabilities and $304.6 million
in long-term liabilities that are matched to the assets that the liabilities finance. Of our long-term liabilities, $33.6 million is the fair value of the rated notes
that were issued in conjunction with our two CDOs. The remainder of the $271.0 million of our long-term liabilities consists of $219.4 million of mortgages payable used to
finance our commercial real estate properties and $51.6 million of junior subordinated notes issued to a trust that sold trust preferred securities (the junior subordinated notes were
repurchased and discharged in January 2010). During 2009, we reduced the amount of our liabilities, as illustrated in the following table:

Activity During 2009Type of Liability

Balance as of
December 31,
2008

Net
Paydowns

Mark-to-
Market
Adjustments

Balance as of
December 31,
2009(In millions)Collateralized debt obligations

$
45.4

$
(11.8
)
$


$
33.6Junior subordinated notes(1)


51.6








51.6Mortgages payable


219.4








219.4Secured revolving credit facility, related party


32.9


(4.0
)




28.9Total

$
349.3

$
(15.8
)
$


$
333.5


(1)Repurchased
and discharged in January 2010.


90

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We
previously have entered into repurchase agreements to finance some of our purchases of investment securities and real estate loans. Borrowings under these agreements were secured by
our investment securities and real estate loans and bore interest rates that have historically moved in close relationship to LIBOR. As of December 31, 2009, we were not utilizing any of those
arrangements, we had no outstanding obligations under repurchase agreements and all collateral pledged against repurchase borrowings had been returned to us.

At
December 31, 2009, we had $51.6 million of junior subordinated notes outstanding. The junior subordinated notes are the sole assets owned by our subsidiary trust,
Crystal River Preferred Trust I, and mature in April 2037. We have the right to redeem these notes at par on or after April 2012. Interest is payable quarterly at a fixed rate of 7.68%
(ten-year LIBOR plus 2.75%) through April 2012 and thereafter at a floating rate equal to three-month LIBOR plus 2.75%. In
January 2010, our junior subordinated notes were repurchased and discharged in exchange for certain of our assets. See note 19 to our consolidated financial statements elsewhere in this Annual
Report on form 10-K for more information on that transaction.

At
December 31, 2009, we had $219.4 million of mortgage loans outstanding with a weighted-average borrowing rate of 5.58% that are secured by our commercial properties
located in Houston, Texas; Phoenix, Arizona; and Arlington, Texas and by the rent enhancement receivables from affiliates of our Manager relating to those properties. We have guaranteed a portion of
this indebtedness to our lenders in respect of the rent enhancement receivables, related party, and the amount of this guarantee decreases each month as payments are made to us in respect of the rent
enhancement receivables, related party. The total amount of such indebtedness that we guaranteed as of December 31, 2009 was approximately $9.4 million, and as of March 15, 2010,
the total amount of such guarantee had been reduced to approximately $8.6 million.

At
December 31, 2009, we had $28.9 million of borrowings outstanding under our secured revolving credit facility with an affiliate of our Manager. The credit facility
provides for borrowings of up to $50.0 million in the aggregate, subject to a borrowing base limitation, and expires in August 2010, unless sooner terminated as provided in the credit
agreement. The secured facility bears interest at LIBOR + 2.50%. At December 31, 2009, we had pledged $33.4 million of assets as collateral under this facility and had
unused availability of approximately $2.5 million.



We have issued two CDOs. Our first CDO, which we refer to as CDO I, closed in 2005, and our second CDO, which refer to as
CDO II, was priced in late 2006 and closed in early 2007. For each CDO, we sold a certain amount of senior notes, as illustrated in the chart below, to third party investors and retained all of
the junior notes. For CDO I, we retained approximately $146.5 million par amount of junior securities (representing the Class E notes through the equity), and for CDO II,
we retained approximately $65.5 million par amount of junior securities (representing the Class J notes through the equity). The notes issued by each of the CDOs are governed by an
indenture, which is administered by a trustee. The indentures each prescribe a "cash flow waterfall" that dictates how the receipt of principal and interest received from the underlying collateral
securing the notes is allocated to the various classes of issued notes, including the junior notes that we own. Generally speaking, our rights to cash flows pursuant to these waterfalls are
subordinate in right to the senior classes. Additionally, CDO I has additional protections for the benefit of the holders of the senior notes, which require that the underlying pool of
securities comprising the collateral be in compliance with various performance criteria, commonly referred to as "performance triggers," or simply "Triggers". If the underlying collateral in
CDO I is in compliance with the Triggers, then the cash flow waterfalls are unaffected; if the underlying collateral in CDO I is out of compliance with the Triggers, then cash flow to
certain junior notes is diverted to accelerate the amortization of the senior notes, until such time as the underlying collateral in CDO I is back in compliance with the Triggers. The Triggers
for CDO I are

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illustrated
in the chart below. CDO II does not contain any Triggers, but it does have a traditional waterfall, which includes, among other things, utilizing all payments received in respect of
"defaulted securities" to amortize the senior-most CDO liabilities.

Beginning
in June 2008, CDO I began to fail certain over-collateralization triggers. During this period of failure, all notes subordinate to the most senior class with
a relevant trigger failure will not receive their quarterly interest payments. The money that otherwise would be paid to those classes is used instead to pay down the principal balance of the
senior-most outstanding notes. During the year ended December 31, 2009, we received $0 in cash receipts pursuant to our ownership of the Class E notes through the equity of
CDO I and $0.5 million was diverted to amortize senior notes issued by CDO I, as illustrated below:

CDO I

Original Par
Value

Cash Interest
Received

Cash Diverted
to Amortize
Senior Notes(in millions)Class E Notes

$
23.3

$


$
0.4Class F Notes


25.3





0.1Class G Notes


10.8





Class H Notes


4.8





Equity


n/a





Total




$


$
0.5


During
the year ended December 31, 2009, we received $3.3 million in cash receipts pursuant to our ownership of the Class J notes through the equity of
CDO II, as illustrated below, and $1.8 million was diverted to amortize senior notes issued by CDO II:

CDO II

Original Par
Value

Cash Interest
Received

Cash Diverted
to Amortize
Senior Notes(in millions)Class J Notes

$
10.1

$
0.7

$
Class K Notes


9.8


0.7


Equity


n/a


1.9


1.8Total




$
3.3

$
1.8


In
September 2009, the trustee of CDO 1 issued a "Notice of Event of Default" to the collateral manager for CDO I because of a failure by CDO I to pay interest on
the Class D notes. This event of
default entitles noteholders of the senior class of notes, the Class A notes, to direct the trustee to take particular actions with respect to the collateral owned by CDO I and the CDO
notes issued by CDO I. The event of default did not trigger a reconsideration event under FASB ASC 810-10-25-39 through 25-41 (previously
FIN 46R) and has no impact on our consolidated financial statements during the year ended December 31, 2009.

In
light of these events, it is possible that CDO I may be liquidated. A liquidation under these circumstances likely would result in a capital loss on our investment in the
assets of CDO I and income from the cancellation of indebtedness with respect to the notes issued by CDO I. The tax consequences of these items may be materially adverse to us and could
significantly reduce our liquidity if we are required to make material distributions to our stockholders in connection with such liquidation.

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Table of Contents

A
summary of the terms of our two CDOs as of December 31, 2009 is set forth below:

($ in thousands)

CDO I



CDO II



TotalBalance SheetAssetsFace Amount

$
208,961



$
388,465



$
597,426Amortized Cost Basis


3,880




21,789




25,669Fair Value


6,435




29,101




35,536Debt(1)(2)Face Amount


132,260




323,002




455,262Fair Value


5,723




27,894




33,617Equity

$
712



$
1,207



$
1,919Average
Rating



Average
Rating



Average
RatingCollateral Composition(3)CMBS

$
119,806

CCC-

$
388,465

B-

$
508,271

CCC+Prime MBS


55,202

CCC-







55,202

CCC-Sub-Prime MBS


33,953

C-







33,953

C-Cash







1,016




1,016Total

$
208,961



$
389,481



$
598,442


(1)Excludes
the non-investment grade notes and preference shares that we retained.(2)The
notes issued by CDO II were downgraded in 2010.(3)Collateral
composition amounts are based on par value, which is the metric used to calculate whether the triggers pass or fail.


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Table of Contents

CDO I

CDO IICDO Overview:Effective Date


Nov-05

Jan-07End of Collateral Replacement Period


Dec-08

n/aOptional Call Date(1)


Jan-09

n/aAuction Call Date


Dec-13

n/aAvg. Debt Spread (bps)(2)


58

57CDO Cash Flow Triggers:Over CollateralizationClass A/B/C/DIssue Date


165.88
%
n/aCurrent


36.55
%
n/aTrigger


153.56
%
n/aClass EIssue Date


150.42
%
n/aCurrent


30.82
%
n/aTrigger


142.15
%
n/aClass FIssue Date


134.87
%
n/aCurrent


26.27
%
n/aTrigger


128.59
%
n/aInterest CoverageClass A/B/C/DCurrent


(10.21
)%
n/aTrigger


164.06
%
n/aClass ECurrent


(8.91
)%
n/aTrigger


142.15
%
n/aClass FCurrent


(7.40
)%
n/aTrigger


119.09
%
n/a


---



Stockholders' deficit at December 31, 2009 was approximately $58.1 million and included $9.2 million of net
unrealized and realized losses on interest rate agreements accounted for as cash flow hedges presented as a component of accumulated other comprehensive income (loss),
which was offset in part by $2.1 million of net unrealized holdings gains on available-for-sale securities.

Results of Operations for the Year Ended December 31, 2009 compared to the Year Ended December 31, 2008



Our net loss for the year ended December 31, 2009 was $88.3 million, or $3.50 per weighted average basic and diluted
share outstanding, compared with a net loss of $307.1 million, or $12.35 per

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weighted
average basic and diluted share outstanding, for the year ended December 31, 2008. Net loss decreased by $218.8 million from 2008 to 2009 for the reasons set forth below.



The following table sets forth information regarding our revenues:

Year Ended
December 31,

Variance2009

2008

Amount

%(In millions)RevenuesInterest and dividend income:CMBS

$
22.3

$
50.8

$
(28.5
)

(56.1
)%Agency MBS





16.2


(16.2
)

(100.0
)Non-Agency RMBS


5.5


42.4


(36.9
)

(87.0
)Real estate loans


1.1


6.6


(5.5
)

(83.3
)Other interest and dividend income


0.2


1.2


(1.0
)

(83.3
)Total interest and dividend income


29.1


117.2


(88.1
)

(75.2
)Rental income, net


21.7


22.2


(0.5
)

(2.3
)Total revenues

$
50.8

$
139.4

$
(88.6
)

(63.6
)%


Interest
income for the year ended December 31, 2009 with respect to CMBS decreased by $28.5 million, or 56.1%, compared to interest income for the year ended
December 31, 2008 because of lower non-cash amortization resulting from the adoption of a new accounting principle and lower cash receipts due to interest shortfalls. Interest
income with respect to Agency MBS for the year ended December 31, 2009 decreased by $16.2 million, or 100.0%, compared to interest income from Agency MBS for the year ended
December 31, 2008 as we divested of those investments in March 2008. Interest income with respect to Non-Agency RMBS for the year ended December 31, 2009 decreased by
$36.9 million, or 87.0%, compared to interest income from Non-Agency RMBS for the year ended December 31, 2008 as a result of lower non-cash amortization
resulting from the adoption of a new accounting principle and lower cash receipts due to interest shortfalls, in addition to the impact of lower interest rates during 2009. Interest income with
respect to real estate loans for the year ended December 31, 2009 decreased $5.5 million, or 83.3%, compared to interest income from real estate loans for the year ended
December 31, 2008 because we had fewer investments in that asset class during 2009, a mezzanine loan was placed on non-accrual status and interest rates were lower during 2009.
Interest income on real estate loans also was lower in 2009 due to principal paydowns and loan sales totaling $130.7 million in 2008. Other interest and dividend income for the year ended
December 31, 2009 decreased $1.0 million, or 83.3%, compared to other interest and dividend income for the year ended December 31, 2008 due to lower interest income earned on
restricted cash balances during 2009 and a decrease in dividends from our preferred stock investments during 2009.

Of
the $50.8 million in revenues for the year ended December 31, 2009, $65.9 million was received in cash and $(15.1) million was a non-cash revenue
reduction from the amortization of
premiums on bonds based on the revised cost values. This is compared to $121.3 million in cash and $18.1 million of non-cash revenue from the accretion of discounts on bonds
purchased at prices below their par value for the year ended December 31, 2008.

Cash
flow, and accordingly, interest income, for the subordinate bonds within both our CMBS and Non-Agency RMBS portfolios is expected to trend down in the future as losses
are realized in the respective securitizations.

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The following table sets forth information regarding our total expenses:

Year Ended
December 31,

Variance2009

2008

Amount

%(In millions)ExpensesInterest expense:Repurchase agreementsAgency MBS

$


$
11.6

$
(11.6
)

(100.0
)%Repurchase agreementsother than Agency MBS





1.1


(1.1
)

(100.0
)Interest rate swap expense (income)


1.3


2.0


(0.7
)

(35.0
)CDO notes


5.7


17.7


(12.0
)

(67.8
)Senior mortgage-backed notes, related party





1.7


(1.7
)

(100.0
)Mortgages payable


12.4


12.5


(0.1
)

(0.8
)Junior subordinated notes


4.0


4.0





0.0Secured revolving credit facility, related party


0.9


2.7


(1.8
)

(66.7
)Amortization of deferred financing costs


0.1


0.2


(0.1
)

(50.0
)Total interest expense


24.4


53.5


(29.1
)

(54.4
)Management fees and incentive fees, related party





1.2


(1.2
)

(100.0
)Professional fees


2.9


2.6


0.3


11.5Depreciation and amortization


12.1


12.1





0.0Insurance expense


1.9


1.7


0.2


11.8Compensation and directors' fees


0.8


0.5


0.3


60.0Public company expense


0.5


0.7


(0.2
)

(28.6
)Commercial real estate expenses


1.6


1.5


0.1


6.7Provision for loan loss


7.6


27.1


(19.5
)

(72.0
)Other expenses


0.3


1.3


(1.0
)

(76.9
)Total expenses

$
52.1

$
102.2

$
(50.1
)

(49.0
)


Interest
expense relating to repurchase agreements for the year ended December 31, 2009 decreased $12.7 million, or 100.0%, compared to interest expense relating to
repurchase agreements for the year ended December 31, 2008 because we did not utilize repurchase agreement financing during 2009. Interest expense relating to CDO notes for the year ended
December 31, 2009 decreased $12.0 million, or 67.8%, compared to interest expense relating to CDO notes for the year ended December 31, 2008 as a result of CDO principal
repayments during 2008 and 2009 and due to lower interest rates on our floating rate CDO notes in 2009 than in 2008. For the year ended December 31, 2009, interest expense relating to senior
mortgage-backed notes, related party, decreased $1.7 million, or 100.0%, compared to interest expense relating to senior mortgage-backed notes, related party, for the year ended
December 31, 2008 as a result of the repayment in full of those notes during June and July 2008. For the year ended December 31, 2009, interest expense relating to our secured revolving
credit facility, related party, decreased $1.8 million, or 66.7%, compared to interest expense relating to our secured revolving credit facility, related party, for the year ended
December 31, 2008 as the outstanding balance under this facility was significantly lower during 2009 and interest rates charged on borrowings under this facility were lower in 2009 than in
2008.

Expenses
for the year ended December 31, 2009 for base management fees, incentive fees and amortization related to restricted stock and options granted to our Manager decreased
$1.2 million, or 100%, compared to such expenses for the year ended December 31, 2008 primarily as a result of our $307.1 million net loss in 2008, which has caused our
stockholders' equity to be in a deficit position

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since
December 31, 2008. We also incurred a $7.6 million loan loss relating to our real estate loans during the year ended December 31, 2009.

Our
Manager has waived its right to request reimbursement from us of third-party expenses that it incurred through December 31, 2009, which amount we otherwise would have been
required to reimburse to our Manager. The management agreement with our Manager, which was negotiated before our business model was implemented, provides that we will reimburse our Manager for certain
third party expenses that it incurs on our behalf, including rent and utilities. BIM incurs such costs and did not allocate any such expenses to our Manager from our inception in 2005 through
December 31, 2009.



Other expenses for the year ended December 31, 2009 totaled approximately $86.9 million, compared with other expenses of
$344.3 million for the year ended December 31, 2008, a decrease of $257.4 million, or 74.8%.

Other
expenses for the year ended December 31, 2009 consisted primarily of:



Other
expenses for the year ended December 31, 2008 consisted primarily of:





We have made an election to be taxed as a REIT under Section 856(c) of the Internal Revenue Code of 1986, as amended, commencing
with the tax year ended December 31, 2005. As a REIT, we generally are not subject to federal income tax to the extent that we distribute our taxable income. To maintain qualification as a
REIT, we must distribute at least 90% of our REIT taxable income to our shareholders and meet certain other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to
federal income tax on our taxable income at regular corporate rates. We may also be subject to certain state and local taxes on our income and property. Under certain circumstances, federal income and
excise taxes may be due on our undistributed taxable income.

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At December 31, 2009 and 2008, we were in compliance with all REIT requirements and, accordingly, have not provided for income tax expense on our REIT
taxable income for the year ended December 31, 2009 or for the year ended December 31, 2008. We also have a domestic taxable REIT subsidiary that is subject to tax at regular corporate
rates. The deferred tax benefit is attributable to a net operating loss carryforward, primarily generated by the disposition of certain credit default swaps and accrued management fees associated with
our investment in a private equity fund that was held in the TRS.

As
of December 31, 2009, we had recorded a $16.0 million valuation allowance on deferred tax assets of $16.0 million attributable to income tax net operating loss
carryforward relating to our TRS. The valuation allowance is based on management's estimate that our TRS is not expected to generate sufficient taxable income to recover the deferred tax assets. As of
December 31, 2009, we had a net operating loss carryforward of $35.3 million. Almost all of the net operating loss carryforward expires in 2027.

Results of Operations for the Year Ended December 31, 2008 compared to the Year Ended December 31, 2007



Our net loss for the year ended December 31, 2008 was $307.1 million or $12.35 per weighted average basic and diluted
share outstanding, compared with a net loss of $345.9 million or $13.86 per weighted average basic and diluted share outstanding for the year ended December 31, 2007. Net loss decreased
by $38.8 million from 2007 to 2008 for the reasons set forth below.



The following table sets forth information regarding our revenues:

Year Ended
December 31,

Variance2008

2007

Amount

%(In millions)RevenuesInterest and dividend income:CMBS

$
50.8

$
45.3

$
5.5


12.1
%Agency MBS


16.2


102.1


(85.9
)

(84.1
)Non-Agency RMBS


42.4


43.7


(1.3
)

(3.0
)ABS





3.0


(3.0
)

(100.0
)Real estate loans


6.6


17.1


(10.5
)

(61.4
)Other interest and dividend income


1.2


8.7


(7.5
)

(86.2
)Total interest and dividend income


117.2


219.9


(102.7
)

(46.7
)Rental income, net


22.2


16.2


6.0


37.0Total revenues

$
139.4

$
236.1

$
(96.7
)

(41.0
)%


Interest
income for the year ended December 31, 2008 with respect to CMBS increased $5.5 million, or 12.1%, over interest income for 2007 because of the net
acquisition during 2007 of $103.0 million in CMBS and the inclusion of interest income for a full year in 2008 on those CMBS, which was offset in part by lower interest rates during 2008.
Interest income for the year ended December 31, 2008 with respect to Agency MBS and ABS decreased by $85.9 million, or 84.1%, and $3.0 million, or 100%, respectively, over 2007 as
we divested of those investments in March 2008 and in the fourth quarter of 2007, respectively. Interest income for the year ended December 31, 2008 with respect to Non-Agency RMBS
decreased by $1.3 million, or 3.0%, over 2007 as a result of lower interest rates during 2008. Interest income for the year ended December 31, 2008 with respect to real

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estate
loans decreased $10.5 million, or 61.4%, over 2007 because we had fewer investments in that asset class during 2008, because interest rates were lower during 2008 and because we placed
one of our loans on non-accrual status on January 1, 2008. Interest income on real estate loans was also lower in 2008 due to principal paydowns and loan sales totaling
$130.7 million in 2008. Other interest and dividend income for the year ended December 31, 2008 decreased $7.5 million, or 86.2%, due to lower interest income earned on restricted
cash balances during 2008 and a decrease in dividends from our preferred stock investments during 2008. For the year ended December 31, 2008, rental income from our commercial property
investments increased $6.0 million, or 37.0%, over rental income for 2007 because we made our investments in commercial properties in late March 2007 (two properties) and late September 2007
(one property) and the 2008 amounts reflect rental income for the entire year for all three commercial properties.

Of
the $139.4 million in revenues for the year ended December 31, 2008, $121.3 million was received in cash and $18.1 million was non-cash revenue
from the accretion of discounts on bonds purchased at prices below their par value, compared to $216.4 million and $19.7 million, respectively, for the year ended December 31,
2007.

Cash
flow, and accordingly, interest income, for the subordinate bonds within both our CMBS and Non-Agency RMBS portfolios is expected to trend down in the future as losses
are realized in the respective securitizations.

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The following table sets forth information regarding our total expenses:

Year Ended
December 31,

Variance2008

2007

Amount

%(In millions)ExpensesInterest expense:Repurchase agreementsAgency MBS

$
11.6

$
103.4

$
(91.8
)

(88.8
)%Repurchase agreementsother than Agency MBS


1.1


10.8


(9.7
)

(89.8
)Repurchase agreementsrelated party





1.2


(1.2
)

(100.0
)Interest rate swap expense (income)


2.0


(9.1
)

11.1


(122.0
)CDO notes


17.7


29.7


(12.0
)

(40.4
)Senior mortgage-backed notes, related party


1.7


4.0


(2.3
)

(57.5
)Mortgages payable


12.5


9.1


3.4


37.4Junior subordinated notes


4.0


3.1


0.9


29.0Short-term debt





0.6


(0.6
)

(100.0
)Secured revolving credit facility, related party


2.7


0.3


2.4


800.0Margin borrowing





0.1


(0.1
)

(100.0
)Amortization of deferred financing costs


0.2


3.4


(3.2
)

(94.1
)Other





0.2


(0.2
)

(100.0
)Total interest expense


53.5


156.8


(103.3
)

(65.9
)Management fees and incentive fees, related party


1.2


6.5


(5.3
)

(81.5
)Professional fees


2.6


3.9


(1.3
)

(33.3
)Depreciation and amortization


12.1


9.0


3.1


34.4Insurance expense


1.7


0.9


0.8


88.9Directors' fees


0.5


0.7


(0.2
)

(28.6
)Public company expense


0.7


0.5


0.2


40.0Commercial real estate expenses


1.5


1.0


0.5


50.0Provision for loan loss


27.1


4.5


22.6


502.2Other expenses


1.3


0.7


0.6


85.7Total expenses

$
102.2

$
184.5

$
(82.3
)

(44.6
)


Interest
expense relating to repurchase agreements, including with related parties, for the year ended December 31, 2008 decreased $102.7 million, or 89.0%, over 2007
because of lower repurchase agreement borrowings related to Agency MBS as a result of our sale during 2007 and March 2008 of approximately $2.1 billion of Agency MBS. Interest expense relating
to CDO notes for the year ended December 31, 2008 decreased $12.0 million, or 40.4%, over 2007 as a result of CDO principal repayments during 2007 and 2008 and due to lower interest
rates on our floating rate CDO notes in 2008 than in 2007. Interest income from interest rate swaps for the year ended December 31, 2008 decreased $11.1 million, or 122.0%, over 2007
because interest rates were lower in 2008 than in 2007 and because we had lower notional amount of interest rate swaps in place during 2008. In addition, we are no longer eligible for hedge accounting
treatment on our interest rate swaps in our CDO structures due to our election to mark our CDO liabilities to market in accordance with FASB ASC 825-10-45-1
(previously SFAS 159). For the year ended December 31, 2008, interest expense relating to junior subordinated notes and mortgages payable increased $0.9 million, or 29.0%, and
$3.4 million, or 37.4%, respectively, over 2007 as we first utilized these financing sources commencing midway through 2007. For the year ended December 31, 2008, interest expense
relating to senior mortgage backed notes, related party, decreased $2.3 million, or 57.5%, as a result of the repayment in full of those notes

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during
June 2008 and July 2008. For the year ended December 31, 2008, interest expense relating to our secured revolving credit facility, related party, increased $2.4 million, or
800.0%, as we first utilized this financing source commencing late in 2007. In addition, amortization of deferred financing costs for the year ended December 31, 2008 decreased by
$3.2 million, or 94.1%, over 2007 primarily because we recorded to equity as a cumulative effect adjustment all deferred financing costs relating to our CDOs on January 1, 2008 when we
elected to mark our CDO liabilities to market under FASB ASC 825-10-45-1.

Expenses
for the year ended December 31, 2008 also included base management fees, incentive fees and amortization related to restricted stock and options granted to our Manager
totaling approximately $1.2 million. Expenses for 2007 included base management fees and incentive fees totaling approximately $5.9 million and amortization of approximately
$0.6 million related to restricted stock and options granted to our Manager. Management fee expenses decreased in 2008 compared to 2007 primarily due to the $345.9 million net loss in
2007 and the $307.1 million net loss in 2008, which reduced the management fee for 2008 compared to 2007. In addition, for the year ended December 31, 2008, we had depreciation and
amortization expense of $12.1 million and commercial real estate expenses of $1.5 million relating to our commercial property investments, compared to $9.0 million and
$1.0 million, respectively, for 2007, because we acquired our first commercial properties in March 2007. We also incurred a $9.7 million loan loss relating to one of our construction
loans in 2008 compared with a $4.5 million loan loss for the same loan in 2007, and we incurred a $17.4 million loan loss in 2008 relating to designating certain of our commercial whole
loans and mezzanine loans as loans held for sale during the year ended December 31, 2008.

Our
Manager has waived its right to request reimbursement from us of third-party expenses that it incurred through December 31, 2008, which amount we otherwise would have been
required to reimburse to our Manager. The management agreement with our Manager, which was negotiated before our business model was implemented, provides that we will reimburse our Manager for certain
third party expenses that it incurs on our behalf, including rent and utilities. BIM incurs such costs and
did not allocate any such expenses to our Manager from our inception in 2005 through December 31, 2008, as our Manager's use of such services was deemed to be immaterial. Brookfield currently
is determining the amount of such rent and utility costs that will be allocated to our Manager commencing January 1, 2009, and we will be responsible for reimbursing such costs allocable to our
operations absent any further waiver of reimbursement by our Manager. There are no contractual limitations on our obligation to reimburse our Manager for third party expenses and our Manager may incur
such expenses consistent with the grant of authority provided to it pursuant to the management agreement without any additional approval of our board of directors being required. In addition, our
Manager may defer our reimbursement obligation from any quarter to a future period;provided,however,
that we will record any necessary accrual for any such reimbursement obligations when required by U.S. GAAP, and our Manager has advised us that it will promptly invoice us for such
reimbursements consistent with sound financial accounting policies.



Other expenses for the year ended December 31, 2008 totaled approximately $344.3 million, compared with other expenses of
$397.5 million for the year ended December 31, 2007, a decrease of $53.2 million, or 13.4%.

Other
expenses for the year ended December 31, 2008 consisted primarily of $70.7 million of realized and unrealized loss on derivatives, primarily as a result of realized
and unrealized losses on CDS of $16.5 million, realized losses on settlement of interest rate swaps of $21.0 million, unrealized losses on hedge ineffectiveness of $10.8 million
and unrealized losses on economic hedges undesignated of $22.7 million; $5.2 million of realized net loss on the sale of available-for-sale securities, real
estate loans and other investments; $123.7 million of recognized loss relating to net changes in the values of

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assets
and liabilities carried under the fair value option of FASB ASC 825-10-45-1 (we elected the fair value option under FASB ASC
825-10-45-1 in 2008); and a $142.9 million loss on impairment of available-for-sale securities, which was comprised of a
$81.1 million impairment relating to CMBS, Non-Agency RMBS and preferred stock investments caused by adverse changes in cash flow assumptions, and a $61.8 million impairment
caused by an other than temporary decline in market values due to spread widening.

Other
expenses for the year ended December 31, 2007 consisted primarily of $85.0 million of realized and unrealized loss on derivatives, primarily as a result of realized
and unrealized losses on CDS of $76.1 million, realized and unrealized loss on our settlement of two foreign currency swaps of $5.1 million and an increase in unrealized losses on
economic hedges of $3.1 million; realized net loss on the sale of available-for-sale securities, real estate loans and other
investments of $1.7 million; and a $317.9 million loss on impairment of available-for-sale securities, which was comprised of a $19.7 million impairment
relating to CMBS and Agency MBS that we no longer intend to hold to maturity or until the recovery of our cost, and a $70.6 million impairment relating to CMBS, Non-Agency RMBS and
preferred stock investments, which was caused by adverse changes in cash flow assumptions and a $227.6 million impairment caused by an other than temporary decline in market values due to
spread widening. This decrease was offset in part by $2.6 million of income from equity investments and $4.3 million of realized foreign currency exchange gain.



We have made an election to be taxed as a REIT under Section 856(c) of the Internal Revenue Code of 1986, as amended, commencing
with the tax year ended December 31, 2005. As a REIT, we generally are not subject to federal income tax. To maintain qualification as a REIT, we must distribute at least 90% of our REIT
taxable income to our shareholders and meet certain other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular
corporate rates. We may also be subject to certain state and local taxes on our income and property. Under certain circumstances, federal income and excise taxes may be due on our undistributed
taxable income.

At
December 31, 2008 and 2007, we were in compliance with all REIT requirements and, accordingly, have not provided for income tax expense on our REIT taxable income for the year
ended December 31, 2008 or for the year ended December 31, 2008. We also have a domestic taxable REIT subsidiary that is subject to tax at regular corporate rates. The deferred tax
benefit is attributable to the mark to market adjustments for net operating loss deductions, credit default swaps, and accrued management fees associated with our investment in a private equity fund
held in the TRS.

In
2008, we recorded a $16.2 million valuation allowance on deferred tax assets of $16.2 million attributable to income tax net operating loss carryforward relating to our
TRS. The valuation allowance is based on management's estimate that our TRS is not expected to generate sufficient taxable income to recover the deferred tax assets. As of December 31, 2008, we
had a net operating loss carryforward of $35.5 million. The net operating loss carryforward expires in 2027.

Liquidity and Capital Resources

We held cash and cash equivalents of approximately $3.3 million at December 31, 2009, which excludes restricted cash of
approximately $16.5 million that is used to collateralize our credit default swap and certain other commercial real estate and financing obligations. As of December 31, 2009, we owed
$28.9 million to an affiliate of our Manager under our secured revolving credit facility. Unless earlier terminated as provided in the credit agreement, our credit facility terminates on
August 31, 2010. If the Merger is not consummated and this facility is not extended and we cannot obtain alternative financing, we do not expect to have sufficient cash on hand or to generate
sufficient cash

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flow
from operations to repay such indebtedness. Given the current lack of liquidity in the credit markets and the current economic climate, we expect to have difficulty obtaining alternative
financing if our credit facility is not extended and if we cannot obtain alternative financing or extend our credit facility, it increases the risk that we will be unable to continue as a going
concern. Our independent registered public accounting firm, Ernst & Young LLP, has issued an opinion on our consolidated financial statements which states that our inability to refinance
or extend the maturity of indebtedness maturing in the next 12 months raises substantial doubt about our ability to continue as a going concern.

We
require cash to fund our operating expenses. Our cash resources include cash on hand, cash flow from operations, principal and interest payments received from investments, cash from
the sale of investments, borrowings under our secured credit facility, and when available (and when we deem appropriate), borrowings under reverse repurchase agreements. As discussed above, we do not
anticipate having investable cash for investment for the foreseeable future.

We
held cash and cash equivalents of approximately $3.3 million at December 31, 2009. This excludes the restricted cash balance of approximately $16.5 million, which
consists of $10.5 million that is used to collateralize our credit default swap, $3.4 million that serves as collateral for a potential loss contingency for yield maintenance payments
related to the sale of 11 of our whole loans to a third party and $2.6 million that collateralizes certain other commercial real estate and financing obligations.

Our
operating activities provided net cash of approximately $17.9 million for the year ended December 31, 2009, which was primarily a result of a net loss of
$88.3 million offset by net changes in assets and liabilities carried under the fair value option of FASB ASC 825-10-45-1 (previously SFAS 159) of
$4.1 million, non-cash impairment charges relating to available-for-sale securities of $77.9 million, an increase in the provision for loan loss of
$7.6 million, amortization of net realized cash flow hedge loss of $1.4 million, accretion of net premium on investment securities and real estate loans of $15.1 million and
non-cash depreciation and amortization of $12.1 million.
Operating activities also provided net cash from a net increase in accounts payable and accrued expenses and interest payable of $1.3 million. This was offset in part by other
non-cash activities, including unrealized gain on derivatives of $12.3 million, amortization of intangible liabilities of $5.5 million, and by a net decrease in other
receivables and prepaid expenses and other assets of $1.2 million.

Our
operating activities provided net cash of approximately $39.9 million for the year ended December 31, 2008, which was primarily a result of a net loss of
$307.1 million being comprised in part of unrealized loss on derivatives of $64.0 million, net changes in assets and liabilities carried under the fair value option of FASB ASC
825-10-45-01 (previously SFAS 159) of $123.7 million, non-cash impairment charges relating to available-for-sale
securities of $142.9 million, provision for loan loss of $27.1 million, non-cash depreciation and amortization of $12.1 million, amortization and write-off
of deferred financing costs of $1.1 million and a realized net loss on available-for-sale securities, real estate loans and other investments of $4.8 million.
Operating activities provided further net cash from a net decrease in interest receivable of $7.8 million and the receipt of restricted cash from the settlement of swaps of $7.1 million.
This was offset in part by other non-cash activities, including accretion of net discount on investment securities and real estate loans of $18.1 million and amortization of
intangible liabilities of $5.5 million. The increase in cash was also further offset by a net decrease in accounts payable and accrued liabilities, due to Manager and interest payable of
$12.4 million, a net decrease in other receivables, prepaid expenses and other assets of $1.8 million and $10.5 million of net payments on the settlement of derivatives.

Our
operating activities provided net cash of approximately $35.1 million for the year ended December 31, 2007, which was primarily a result of a net loss of
$345.9 million being comprised in part of realized and unrealized loss on derivatives of $88.8 million, non-cash impairment charges relating to
available-for-sale securities of $317.9 million, provision for loan loss of $4.5 million, non-cash

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depreciation
and amortization of stock based compensation, deferred financing costs and real estate assets of $13.5 million, an increase in the return on investment from equity investments of
$2.6 million, and a realized net loss on available-for-sale securities, real estate loans and other investments of $1.7 million. Operating activities provided
further net cash from a net decrease in interest receivable of $7.9 million. This was offset in part by other non-cash activities, including accretion of net discount on investment
securities and real estate loans of $19.4 million, a gain on foreign currency translation of $4.3 million, amortization of intangible liabilities and deferred gains on derivatives of
$6.3 million, income from equity investments of $2.6 million, accretion of interest on real estate loans of $2.5 million and the reversal of a deferred tax liability of
$0.9 million. The increase in cash was also further offset by a net decrease in accounts payable and accrued liabilities, due to Manager and interest payable of $17.6 million, a net
increase in other receivables, prepaid expenses and other assets of $2.7 million and $1.9 million of payments on the settlement of derivatives.

Our
investing activities provided net cash of $4.9 million for the year ended December 31, 2009 primarily from proceeds from rent enhancement of $3.1 million,
principal repayments from investment securities and real estate loans totaling $1.9 million and net receipts of restricted cash from credit default swaps of $10.2 million. This was
partially offset by net cash paid to terminate swaps of $10.0 million.

Our
investing activities provided net cash of $1,403.4 million for the year ended December 31, 2008 primarily from proceeds received from the sale of
available-for-sale securities of $1,178.4 million, proceeds from the repayment at maturity of real estate loans of $9.7 million, proceeds from the sale of real
estate loans and other investments of $152.5 million, proceeds from rent enhancement of $3.4 million, principal repayments from investment securities and real estate loans totaling
$74.1 million and net receipts of restricted cash from other investments of $16.2 million. This was partially offset by net cash paid to terminate swaps of $30.2 million.

Our
investing activities provided net cash of $860.7 million for the year ended December 31, 2007 primarily from proceeds received from the sale of
available-for-sale securities of $1,643.1 million, proceeds from the sale of real estate loans and other investments of $78.2 million, proceeds from the
redemption of real estate loans of $37.0 million, proceeds from rent enhancement of $1.8 million, principal repayments from investment securities and real estate loans totaling
$398.5 million, net proceeds received from acquisition of credit default swaps of $4.9 million and return of capital from equity investments of $5.9 million. This was partially
offset by the purchase of available-for-sale securities of $893.1 million, the purchase and funding of equity investments of $42.1 million, the acquisition of
commercial real estate and real estate loans totaling $291.4 million, net cash paid to terminate swaps of $48.0 million, net deposits of restricted cash for credit default swaps of
$32.9 million and net deposits of restricted cash for investment of $1.0 million.

Our
financing activities used net cash of $25.7 million for the year ended December 31, 2009 primarily due to dividends paid of $9.9 million, principal repayments of
CDOs of $11.8 million and payments on borrowings under our secured revolving credit facility with a related party of $4.0 million.

Our
financing activities used net cash of $1,464.6 million for the year ended December 31, 2008 primarily due to net payments on repurchase agreements of
$1,276.1 million, dividends paid of $43.5 million, principal repayments of CDOs and senior mortgage-backed securities of $119.4 million, payments on the settlement of derivatives
of $10.5 million and payments on borrowings under our secured revolving credit facility with a related party of $34.4 million. This was partially offset by net receipts from restricted
cash of $19.3 million.

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Our financing activities used net cash of $907.3 million for the year ended December 31, 2007 primarily due to net payments on repurchase
agreements, including with related parties, of $1,592.3 million, dividends paid of $67.4 million, principal repayments of CDOs and senior mortgage-backed securities of
$34.4 million, payments of deferred financing costs of $9.4 million, payments on the settlement of designated derivatives of $10.0 million and the repurchase of common stock of
$4.5 million. This was partially offset by the issuance of CDOs of $325.0 million, the issuance of senior mortgage-backed notes to a related party of $101.5 million, proceeds from
mortgage notes payable of $219.4 million, proceeds from junior subordinated debentures of $50.0 million, proceeds from borrowings under secured revolving credit facility with a related
party of $67.3 million, net receipts from restricted cash of $44.7 million and proceeds from the settlement of derivatives of $4.9 million.

Our
source of funds as of December 31, 2009 consisted of borrowings under our secured revolving credit facility (which had unused availability of $2.5 million as of
December 31, 2009), which we used to refinance the acquisition financing of certain of our investments and to provide margin with respect to such borrowings and certain of our derivative
transactions. Based on our current investment portfolio and the terms of our secured revolving credit facility, we currently do not expect to be able to borrow additional funds under our secured
revolving credit facility, even if necessary to fund our current operations. Increases in short-term interest rates or widening of interest rate spreads could negatively affect the
valuation of our mortgage-related assets, which could cause the lender under our secured revolving credit facility (an affiliate of our Manager) to require more collateral to secure its loans to us to
the extent that we have any such collateral to pledge. Without additional equity capital, it is unlikely that we would be to able obtain debt financing for investment activity or for any other
purpose, including funding our operating expenses.

For
our short-term (one year or less) and long-term liquidity and compliance with collateralization requirements under our secured revolving credit facility (if
the pledged collateral decreases in value or in the event of margin calls created by prepayments of the pledged collateral) and our derivatives transactions (if the value of our liability with respect
to any such transaction decreases), we also rely on the cash flow from operations, primarily monthly principal and interest payments to be received on our investments, cash flow from the sale of our
investments and rental income from our commercial real estate investments.

As
a result of the disposition of our Agency MBS portfolio and the repayment of all of our repurchase agreement financing in 2008, we currently are not exposed to the risk of margin
calls on our short-term financings, but as of December 31, 2009, we were exposed to the risk of margin calls totaling $0.4 million with respect to our derivatives
transactions.

Our
ability to meet our long-term (greater than one year) liquidity and cash resource requirements in excess of our borrowing capacity will be subject to obtaining additional
debt financing and/or equity capital. Such financing will depend on market conditions for capital raises and for the investment of any proceeds. We do not believe that raising equity capital is a
viable option for us in light of our financial condition. Without additional capital, we will be unable to resume investment activity and may be unable to confront liquidity problems as our debt
obligations begin to mature and if we cannot obtain alternative financing or extend the maturity of these debt obligations, it increases the risk that we are unable to continue as a going concern.
Upon liquidation, holders of our debt securities and shares of preferred stock, if any, and lenders with respect to other borrowings will receive a distribution of our available assets prior to the
holders of our common stock. In addition, as discussed above, if delinquency trends continue to rise, our revenue will continue to be adversely impacted as well.

In
November 2009, our board of directors announced that it had elected to suspend the quarterly dividend to holders of shares of our common stock to preserve liquidity in consideration
of the large increase in the delinquency rate on our CMBS portfolio and the resulting uncertainty regarding our operating cash flows. Based on our current forecasts, we would not be required to make
any

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distributions
in 2010 in order to maintain our REIT status through 2010. The elimination of the common dividend for the remainder of 2009, assuming the same $0.10 quarterly dividend per share that was
paid in October 2009, equated to approximately $2.5 million in cash flow savings each quarter. Our board of directors will continue to evaluate our dividend policy in light of our portfolio
performance and relevant provisions of the Internal Revenue Code; however, we are prohibited under the Merger Agreement from paying dividends at the present time.

In
March 2007, our unconsolidated statutory trust, Crystal River Preferred Trust I, issued $50.0 million of trust preferred securities to a third party investor. The trust
preferred securities have a 30-year term, maturing in April 2037, are redeemable at par on or after April 2012 and
pay interest at a fixed rate of 7.68% for the first five years ending April 2012, and thereafter, at a floating rate of three month LIBOR plus 2.75%. These trust preferred securities were repurchased
and discharged in full in January 2010.



As of December 31, 2009, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance, or special-purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As of December 31, 2009, we had no outstanding commitment to fund real estate loans.



As of March 15, 2005, we had entered into a management agreement with our Manager. Our Manager is entitled to receive a base
management fee, incentive compensation, reimbursement of certain expenses and, in certain circumstances, a termination fee, all as described in the management agreement. During 2008, we and our
Manager agreed that our base management fee would be paid in shares of our common stock, instead of cash. See "Related Party Transactions." Such fees and expenses do not have fixed and
determinable payments and therefore have not been included in the table below.

During
the year ended December 31, 2009, we did not make any advances to fund real estate loans and as of December 31, 2009, we had no outstanding commitment to fund real
estate loans. See Note 10 to our consolidated financial statements included elsewhere herein. During the first quarter of 2008, we sold our investment in private equity funds and were released
from our capital commitment related to that investment.

In
June and July 2008, we sold 13 whole loans to a third party. See Note 5 to our consolidated financial statements included elsewhere herein. In connection with the sale of 11 of
those loans, we entered into a yield maintenance agreement that serves to protect the buyer against potential prepayments of those 11 whole loans. In accordance with the agreement, we deposited
$4.1 million into a restricted trust account to serve as collateral for the potential loss contingency. The agreement provides for the quarterly release to either the buyer or us of a
proportionate share of the collateral contingent on any prepayments of the 11 whole loans. Our maximum loss contingency under this agreement at the time of sale totaled $4.1 million. The
initial accrued loss contingency was recorded as additional realized loss on the sale of real estate loans in our statement of operations during 2008. As of December 31, 2009, we accrued a loss
contingency totaling $0.1 million (compared to our maximum exposure to loss of
$3.2 million as of such date) based on assumptions developed by management relating to the timing and value of expected prepayments on the 11 loans.

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The
table below sets forth information about our contractual obligations as of December 31, 2009. In addition to the amounts set forth in the table, we also are subject to
interest rate swaps for which we cannot estimate future payments due.

Payment due by PeriodContractual Obligations

Total

Less than
1 year

13 years

35 years

More than
5 years(In thousands)Contractual Debt ObligationsCollateralized debt obligations(1)

$
455,262

$


$


$


$
455,262Junior subordinated notes(2)


51,550











51,550Mortgage payable


219,380


40


506


574


218,260Secured revolving credit facility, related party(3)


28,920


28,920








Operating Lease ObligationsHouston ground lease


1,627


25


50


50


1,502Total

$
756,739

$
28,985

$
556

$
624

$
726,574


(1)Amount
is based on unpaid principal balance. As of December 31, 2009, the difference between fair value and unpaid principal balance is $421,645.(2)In
January 2010, we repurchased and discharged this indebtedness.(3)See
"Related Party Transactions" below.


Our
secured revolving credit facility contains covenants, including maintaining our REIT status. As of December 31, 2009, we were in compliance with all of the covenants under the
credit facility.

REIT Taxable Income

In order to maintain our qualification as a REIT and to avoid corporate-level income tax on the income we distribute to our
stockholders, we are required to distribute at least 90% of our REIT taxable income (which includes net short-term capital gains) on an annual basis. This requirement could adversely
affect our liquidity and capital resources. Under the Merger Agreement with Brookfield, we are prohibited from paying any dividends without Brookfield's consent.

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REIT
taxable income is calculated according to the requirements of the Internal Revenue Code, rather than GAAP. The following table reconciles GAAP net loss to estimated REIT taxable
income for the years ended December 31, 2009, December 31, 2008 and December 31, 2007:

Year Ended
December 31,
2009

Year Ended
December 31,
2008

Year Ended
December 31,
2007(In thousands)GAAP net loss

$
(88,280
)
$
(307,092
)
$
(345,878
)Adjustments to GAAP net loss:Net loss of our Taxable REIT Subsidiary


9


488


35,467Share based compensation


176


(69
)

414Net tax adjustments related to interest income


21,673


(12,749
)

2,840Book derivative loss in excess of tax loss (income in excess of tax income)


(8,124
)

18,267


40,691Deductible REMIC losses


(132,789
)

(5,044
)

Capital loss limitation


15,322


36,350


9,056Impairment losses not deductible for tax purposes


77,947


142,916


317,931Net change in assets and liabilities valued under fair value option


4,085


123,708


Loan loss allowances not deductible for tax purposes


6,781


27,973


4,500GAAP/tax difference on rent escalation and lease amortization


(1,319
)

(1,542
)

(996
)Other





(89
)

691Net adjustments to GAAP net loss


(16,239
)

330,209


410,594REIT taxable income (loss)

$
(104,519
)
$
23,117

$
64,716


We
believe that the presentation of our REIT taxable income is useful to investors because it demonstrates to investors the minimum amount of distributions we must make in order to
maintain our qualification as a REIT and not be obligated to pay federal and state income taxes. However, we do
not expect that the amount of distributions we make will necessarily correlate to our REIT taxable income as under the merger agreement with Brookfield, we are prohibited from making distributions to
our stockholders without the consent of Brookfield. REIT taxable income will not necessarily bear any close relation to cash flow. Accordingly, we do not consider REIT taxable income to be a reliable
measure of our liquidity although the related distribution requirement can impact our liquidity and capital resources. Moreover, there are limitations associated with REIT taxable income as a measure
of our financial performance over any period. As a result, REIT taxable income should not be considered as a substitute for our GAAP net income as a measure of our financial performance.

Impact of Inflation

Our operating results depend in part on the difference between the interest income earned on our interest-earning assets and the
interest expense incurred in connection with our interest-bearing liabilities. Changes in the general level of interest rates prevailing in the economy in response to changes in the rate of inflation
or otherwise can affect our income by affecting the spread between our interest-earning assets and interest-bearing liabilities, as well as, among other things, the value of our interest-earning
assets and interest-bearing liabilities. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political
considerations, and other factors beyond our control. We employ the use of correlated hedging strategies to limit the effects of changes in interest rates on our operations, including engaging in
interest rate swaps to minimize our exposure to changes in interest rates. There can be no assurance that we will be able to adequately protect against the foregoing risks or that we will ultimately
realize

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an
economic benefit from any hedging contract into which we enter. Our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors
consistent with our obligation to distribute to our stockholders at least 90% of our REIT taxable income on an annual basis to maintain our REIT qualification; in each case, our activities and balance
sheet are measured with reference to historical cost and or fair market value without considering inflation.

Quantitative and Qualitative Disclosures about Market Risk

The principal objective of our asset/liability management activities is to maximize net investment income, while minimizing levels of
interest rate risk. Net investment income and interest expense are subject to the risk of interest rate fluctuations. To mitigate the impact of fluctuations in interest rates, we use interest rate
swaps to effectively convert variable rate liabilities to fixed-rate liabilities for proper matching with fixed-rate assets. Each
derivative used as an economic hedge is matched with an asset or liability with which it has a high correlation. The swap agreements are generally held-to-maturity and we do
not use derivative financial instruments for trading purposes. We use interest rate swaps to effectively convert variable rate debt to fixed-rate debt for the financed portion of
fixed-rate assets. The differential to be paid or received on these agreements is recognized as an adjustment to the interest expense related to debt and is recognized on the accrual
basis.

As
of December 31, 2009, the primary component of our market risk was interest rate risk, as described below. Although we do not seek to avoid risk completely, we do believe the
risk can be quantified from historical experience and we seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with
the risks we undertake.

Interest Rate RiskWe are subject to interest rate risk in connection with most of our investments and our related debt obligations, which generally
are linked to LIBOR. We mitigate this risk through utilization of derivative contracts, primarily interest rate swap agreements. With respect to our commercial real estate investments, we manage
interest rate risk through the use of fixed-rate mortgage loans.

Yield Spread RiskMost of our investments are also subject to yield spread risk. The majority of these securities are fixed-rate
securities, which 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, as based on their credit relative to U.S. Treasuries. An excessive supply of these securities combined with reduced demand will generally cause the market to
require a higher yield on these 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 these securities.
Under these conditions, the value of our real estate securities portfolio would tend to decrease. Conversely, if the spread used to value these securities were to decrease or "tighten," the value of
our real estate securities would tend to increase. Such changes in the market value of our real estate securities portfolio may affect our net equity or cash flow either directly through their impact
on unrealized gains or losses on available-for-sale securities by diminishing our ability to realize gains on such securities, or indirectly through their impact on our ability
to borrow and access capital.

Effect on Net Investment IncomeIn the past, we have funded a portion of our investments with short-term borrowings under repurchase
agreements. During periods of rising interest rates, the borrowing costs associated with those investments tend to increase while the income earned on such investments could remain substantially
unchanged. This results in a narrowing of the net interest spread between the related assets and borrowings and may even result in losses.

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On
December 31, 2009, we were party to two interest rate swap contracts. The following table summarizes the expiration dates of these contracts and their notional amounts (in
thousands):

Expiration Date

Notional
Amount2013

$
40,4932018


240,467Total

$
280,960


Hedging
techniques are partly based on assumed levels of prepayments of our fixed-rate and hybrid adjustable-rate RMBS. If prepayments are slower or faster than
assumed, the life of the RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies
involving the use of derivative securities are highly complex and may produce volatile returns.

Extension RiskWe have in the past invested in, and may in the future invest in, Agency MBS and RMBS, some of which have interest rates that are fixed
for the first few years of the loan (typically three, five, seven or 10 years) and thereafter reset periodically on the same basis as adjustable-rate Agency MBS and RMBS. We compute
the projected weighted average life of our Agency MBS and RMBS based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when a
fixed-rate or hybrid adjustable-rate residential mortgage-backed security is acquired with borrowings, we may, but are not required to, enter into an interest rate swap
agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related Agency MBS and
RMBS. This strategy is designed to
protect us from rising interest rates because the borrowing costs are fixed for the duration of the fixed-rate portion of the related residential mortgage-backed security.

However,
if prepayment rates decrease in a rising interest rate environment, the life of the fixed-rate portion of the related Agency MBS and RMBS could extend beyond the
term of the swap agreement or other hedging instrument. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the end of the hedging
instrument while the income earned on the Agency MBS and RMBS would remain fixed. This situation may also cause the market value of the Agency MBS and RMBS that we own to decline, with little or no
offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Hybrid Adjustable-Rate Agency MBS Interest Rate Cap RiskWe have in the past also invested in hybrid adjustable-rate Agency
MBS, which are based on mortgages that typically are subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the security's interest yield may change during any
given period. However, our borrowing costs pursuant to repurchase agreements that we have historically used to finance our Agency MBS generally are not subject to similar restrictions. Therefore, in a
period of increasing interest rates, interest rate costs on our borrowings could increase without limitation by caps, while the interest-rate yields on our hybrid
adjustable-rate Agency MBS would effectively be limited by caps. This problem will be magnified to the extent we acquire hybrid adjustable-rate Agency MBS that are not based on
mortgages that are fully indexed. In addition, the underlying mortgages may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal
outstanding. This could result in our receipt of less cash income on our hybrid adjustable-rate Agency MBS than we need in order to pay the interest cost on our related borrowings. These
factors could lower our net investment income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.

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Interest Rate Mismatch RiskWe may fund a portion of our investments with borrowings that, after the effect of hedging, have interest rates based on
indices and repricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and repricing terms of our investments. Thus, we anticipate that in most such cases the
interest rate indices and repricing terms of our mortgage assets and our funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. Therefore,
our cost of funds would likely rise or fall more quickly than would our earnings rate on assets. During periods of changing interest rates, such interest
rate mismatches could negatively impact our financial condition, cash flows and results of operations. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above.

Our
analysis of risks is based on management's experience, estimates, models and assumptions. These analyses rely on models that utilize estimates of fair value and interest rate
sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models
and the projected results shown in this Annual Report on Form 10-K.

Prepayment RiskPrepayments are the full or partial repayment of principal prior to the original term to maturity of a mortgage loan and typically
occur due to refinancing of mortgage loans. Prepayment rates for existing RMBS generally increase when prevailing interest rates fall below the market rate existing when the underlying mortgages were
originated. In addition, prepayment rates on adjustable-rate and hybrid adjustable-rate RMBS generally increase when the difference between long-term and
short-term interest rates declines or becomes negative. Prepayments of RMBS could harm our results of operations in several ways. Some adjustable-rate mortgages underlying our
adjustable-rate RMBS may bear initial "teaser" interest rates that are lower than their "fully-indexed" rates, which refers to the applicable index rates plus a margin. In the event that
such an adjustable-rate mortgage is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, the holder of the related RMBS would have held such security while it was
less profitable and lost the opportunity to receive interest at the fully-indexed rate over the expected life of the adjustable-rate RMBS. Finally, in the event that we are unable to
acquire new mortgage assets to replace the prepaid assets, our financial condition, cash flow and results of operations could be negatively affected.

Credit RiskOur portfolio of commercial real estate loans and securities is subject to a high degree of credit risk. Credit risk is the exposure to
loss from debtor defaults. Default rates are subject to a wide variety of factors, including, but not limited to, property performance, property management, supply and demand factors, construction
trends, consumer behavior, regional economics, interest rates, the strength of the United States economy and other factors beyond our control.

All
loans are subject to a certain probability of default. We have underwritten our CMBS and RMBS investments assuming the underlying loans will suffer a certain dollar amount of
defaults and the defaults will lead to some level of realized losses. Loss adjusted yields are computed based on these assumptions and applied to each class of security supported by the cash flow on
the underlying loans. The most significant variables affecting loss adjusted yields include, but are not limited to, the number of defaults, the severity of loss that occurs subsequent to a default
and the timing of the actual loss. The different rating levels of CMBS will react differently to changes in these assumptions. The lowest rated securities generally are more sensitive to changes in
timing of actual losses. The higher rated securities are more sensitive to the severity of losses.

We
generally assume that substantially all of the principal of a non-rated security will not be recoverable over time. The timing and the amount of the loss of principal are
the key assumptions to determine the economic yield of these securities. Timing is of paramount importance because we will assume substantial losses of principal on the non-rated
securities, therefore the longer the principal balance remains outstanding the more interest the holder receives to support a greater economic

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return.
Alternatively, if principal is lost faster than originally assumed, there is less opportunity to receive interest and a lower return or loss may result.

If
actual principal losses on the underlying loans exceed assumptions, the higher rated securities will be affected more significantly as a loss of principal may not have been assumed.
We manage credit risk through the underwriting process, establishing loss assumptions and monitoring of loan performance. Before acquiring an interest in the controlling class security (represented by
a majority ownership interest in the most subordinate tranche) in a proposed pool of loans, we perform a rigorous analysis of all of the proposed underlying loans. Information from this review is then
used to establish loss assumptions. We assume that a certain portion of the loans will default and calculate an expected or loss adjusted yield based on that assumption. After the securities have been
acquired, we monitor the performance of the loans, as well as external factors that may affect their value.

Factors
that indicate a higher loss severity or acceleration of the timing of an expected loss will cause a reduction in the expected yield and therefore reduce our earnings.
Furthermore, we may be required to write down a portion of the accreted cost basis of the affected assets through a charge to income.

We
also have invested in commercial real estate loans, primarily mezzanine loans, bridge loans, A Notes, B Notes, loans to real estate companies, whole mortgage loans, first mortgage
participations and net leased real estate. We have also invested in residential mortgages and related securities. These investments will be subject to credit risk. The extent of our credit risk
exposure will be dependent on risks associated with commercial and residential real estate. Property values and net operating income derived from such properties are subject to volatility and may be
affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors);
local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); changes or continued weakness in specific industry segments; construction
quality, age and design; demographic factors; retroactive changes to building or similar codes; and increases in operating expenses (such as energy costs). In the event a borrower's net operating
income decreases, the borrower may have difficulty repaying our loans, which could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the
potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses. When we underwrite the origination of a commercial real estate loan, we do not underwrite to
an expected loss; when we underwrite the purchase of a commercial real estate loan, we may underwrite to an expected loss based on the price of the loan.

Effect on Fair ValueAnother component of interest rate risk is the effect changes in interest rates will have on the market value of our assets. We
face the risk that the market value of our assets will increase or decrease at different rates than that of our liabilities, including our hedging instruments. We primarily assess our interest rate
risk by estimating the duration of our assets and the duration of our liabilities. Duration essentially measures the market price volatility of financial instruments as interest rates change. We
generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different duration numbers for the same securities.



The following interest rate sensitivity analysis is measured using an option-adjusted spread model combined with a proprietary
prepayment model. We shock the curve up and down 100 basis points and analyze the change in interest rates, prepayments and cash flows through a Monte Carlo simulation. We then calculate an average
price for each scenario, which is used in our risk management analysis.

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The following sensitivity analysis table shows the estimated impact on the fair value of our interest rate-sensitive investments, CDO liabilities,
senior mortgage-backed notes, mortgages payable, junior subordinated notes, secured revolving credit facility indebtedness and swaps, at December 31, 2009, assuming rates instantaneously fall
100 basis points and rise 100 basis points:

Interest Rates
Fall 100
Basis Points

Unchanged

Interest Rates
Rise 100
Basis Points(Dollars in thousands)Mortgage assets and other investment securities(1)Fair value

$
43,962

$
42,826

$
42,246Change in fair value

$
1,136




$
(580
)Change as a percent of fair value


2.65
%




(1.35
)%Real estate loans, including real estate loans held for saleFair value

$
6,087

$
5,903

$
5,720Change in fair value

$
184




$
(183
)Change as a percent of fair value


3.12
%




(3.10
)%Other assets(2)Fair value

$
243

$
243

$
243Change in fair value


n/m





n/mChange as a percent of fair value


n/m





n/mCDO liabilitiesFair value

$
(33,617
)
$
(33,617
)
$
(33,617
)Change in fair value


n/m





n/mChange as a percent of fair value


n/m





n/mMortgages payableFair value

$
(155,565
)
$
(147,873
)
$
(140,182
)Change in fair value

$
(7,692
)



$
7,691Change as a percent of fair value


5.20
%




(5.20
)%Junior subordinated notesFair value

$
(8,409
)
$
(8,087
)
$
(7,907
)Change in fair value

$
(322
)



$
180Change as a percent of fair value


3.98
%




(2.23
)%Secured revolving credit facility, related partyFair value

$
(28,631
)
$
(28,631
)
$
(28,631
)Change in fair value


n/m





n/mChange as a percent of fair value


n/m





n/mUndesignated interest rate swapsFair value

$
(26,554
)
$
(25,308
)
$
(24,161
)Change in fair value

$
(1,246
)



$
1,147Change as a percent of notional value


(0.44
)%




0.41
%Credit default swapsFair value

$
(9,824
)
$
(9,628
)
$
(9,447
)Change in fair value

$
(196
)



$
181Change as a percent of notional value


(1.96
)%




1.81
%


(1)The
fair value of all of our investment securities is included.(2)The
fair value of our other investment securities that are sensitive to interest rate changes is included. n/m = not
meaningful


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The
following sensitivity analysis table shows the estimated impact on the fair value of our interest rate-sensitive investments, CDO liabilities, senior mortgage-backed
notes, mortgages payable, junior subordinated notes, secured revolving credit facility indebtedness and swaps, at December 31, 2008, assuming rates instantaneously fall 100 basis points and
rise 100 basis points:

Interest Rates
Fall 100
Basis Points

Unchanged

Interest Rates
Rise 100
Basis Points(Dollars in thousands)Mortgage assets and other investment securities(1)Fair value

$
73,945

$
72,916

$
71,483Change in fair value

$
1,029




$
(1,433
)Change as a percent of fair value


1.41
%




(1.97
)%Real estate loans, including real estate loans held for saleFair value

$
13,885

$
13,578

$
13,383Change in fair value

$
307




$
(195
)Change as a percent of fair value


2.26
%




(1.44
)%Other assets(2)Fair value

$
297

$
297

$
297Change in fair value


n/m





n/mChange as a percent of fair value


n/m





n/mCDO liabilitiesFair value

$
(45,429
)
$
(45,429
)
$
(45,429
)Change in fair value


n/m





n/mChange as a percent of fair value


n/m





n/mMortgages payableFair value

$
(134,921
)
$
(128,235
)
$
(121,550
)Change in fair value

$
(6,686
)



$
6,685Change as a percent of fair value


5.21
%




(5.21
)%Junior subordinated notesFair value

$
(10,210
)
$
(9,865
)
$
(9,519
)Change in fair value

$
(345
)



$
346Change as a percent of fair value


3.50
%




(3.50
)%Secured revolving credit facility, related partyFair value

$
(32,112
)
$
(32,112
)
$
(32,112
)Change in fair value


n/m





n/mChange as a percent of fair value


n/m





n/mUndesignated interest rate swapsFair value

$
(42,206
)
$
(37,659
)
$
(34,061
)Change in fair value

$
(4,547
)



$
3,598Change as a percent of notional value


(1.60
)%




1.26
%Credit default swapsFair value

$
(19,150
)
$
(19,140
)
$
(19,130
)Change in fair value

$
(10
)



$
10Change as a percent of notional value


(0.05
)%




0.05
%


(1)The
fair value of all of our investment securities is included.(2)The
fair value of our other investment securities that are sensitive to interest rate changes is included. n/m = not
meaningful


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It
is important to note that the impact of changing interest rates on fair value can change significantly when interest rates change beyond 100 basis points from current levels.
Therefore, the volatility in the fair value of our assets could increase significantly when interest rates change beyond 100 basis points. In addition, other factors affect the fair value of our
interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions.
Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above, and such difference might be material and adverse
to our stockholders.

Currency RiskFrom time to time, we may make investments that are denominated in a foreign currency through which we may be subject to foreign
currency exchange risk. Changes in currency rates can adversely affect the fair values and earnings of our non-U.S. holdings. We attempt to mitigate this impact by utilizing currency swaps
on our foreign currency-denominated investments or foreign currency forward commitments to hedge the net exposure. As of December 31, 2009 and December 31, 2008, we held no investments
denominated in foreign currency and accordingly, we were not exposed to foreign currency exchange risk.

Related Party Transactions

Please refer to the discussion under "Recent DevelopmentsPossible Acquisition of Crystal River" for a
discussion of the merger agreement we have entered into with Brookfield and to the discussion under "Recent DevelopmentsBinding Letter of Intent for Asset Sale" for a
discussion of the letter of intent that we signed with respect to the sale of certain of our CMBS and collateral manager appointment rights to affiliates of our Manager.

We
have entered into a management agreement, as amended (the "Agreement"), with our Manager. The current term of the Agreement expires in December 2010, and the Agreement will be
automatically renewed for a one-year term each December 31 thereafter unless we or our Manager terminate the Agreement. The Agreement provides that our Manager will provide us with
investment management services and certain administrative services and will perform our day-to-day operations. The monthly base management fee for such services is equal to
1.5% of one-twelfth of our equity, as defined in the Agreement, payable in arrears. We paid the base management fee for the year ended December 31, 2008 in shares of our common
stock, rather than in cash. In May 2008, we issued 68,338 shares of our common stock to our Manager in respect of the base management fee for the quarter ended March 31, 2008 at a price per
share of $10.15; in August 2008, we issued 99,998 shares of our common stock to our Manager in respect of the base management fee for the quarter ended June 30, 2008 at a price per share of
$4.18; and in November 2008, we issued 29,969 shares of our common stock to our Manager in respect of the base management fee for the quarter ended September 30, 2008 at a price per share of
$1.93.

In
addition, under the Agreement, our Manager earns a quarterly incentive fee equal to 25% of the amount by which the quarterly net income per share, as defined in the Agreement (which
principally excludes the effect of stock compensation and the unrealized change in derivatives), exceeds an amount equal to the product of the weighted average of the price per share of the common
stock we issued in our March 2005 private offering and in our August 2006 initial public offering and the price per share of common stock in any subsequent offerings by us, multiplied by the higher of
(i) 2.4375% or (ii) 25% of the then applicable 10 year Treasury note rate plus 0.50%, multiplied by the then weighted average number of outstanding shares for the quarter. The
incentive fee is paid quarterly. The Agreement provides that 10% of the incentive management fee is to be paid in shares of our common stock (providing that such payment does not result in our Manager
owning directly or indirectly more than 9.8% of our issued and outstanding common stock) and the balance is to be paid in cash. Our Manager may, at its sole discretion, elect to receive a greater
percentage of its incentive management fee in shares of our common stock. The incentive management fees included in our

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consolidated
statements of operations that were incurred during the years ended December 31, 2009, 2008 and 2007 were $0, $0 and $0.1 million, respectively.

The
Agreement may be terminated upon the affirmative vote of at least two-thirds of the independent members of our board of directors after the expiration of the initial term
and by providing at least 180 days prior notice based upon either: (i) unsatisfactory performance by our Manager that is materially detrimental to us, or (ii) a determination by
the independent members of our board of directors that the management fees payable to our Manager are not fair (subject to our Manager's right to prevent a compensation termination by agreeing to a
mutually acceptable reduction of the management fees). If we terminate the Agreement, then we must pay our Manager a termination fee equal to twice the sum of the average annual base and incentive
fees earned by our Manager during the two twelve-month periods immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date
of termination.

We
issued to our Manager 84,000 shares of our restricted common stock and granted options to purchase 126,000 shares of our common stock for a 10 year period at a price of $25 per
share in March 2005. We issued to certain of our directors a total of 2,000 shares of restricted stock in May 2007, 2,000 shares of restricted stock in June 2008 and 4,000 shares of restricted stock
in June 2009, all of which vest on the first anniversary of the date of issuance. For the years ended December 31, 2009, 2008 and 2007, the base management fee expense was $0,
$1.3 million and $5.8 million, respectively. Included in the management fee expense for the years ended December 31, 2009, 2008 and 2007 was $0, $0 and $0.6 million,
respectively, of amortization of stock-based compensation related to restricted stock and options granted.

The
Agreement provides that we are required to reimburse our Manager for certain expenses incurred by our Manager on our behalf provided that such costs and reimbursements are no greater
than that which would be paid to outside professionals or consultants on an arm's length basis. For the years ended December 31, 2009, 2008 and 2007, we were not charged any reimbursable costs
by our Manager.

In
January 2007, we purchased a $28.5 million investment in BREF One, LLC, which we refer to as the Fund, a real estate finance fund sponsored by Brookfield, the indirect
parent of our Manager, and managed by a Brookfield subsidiary, and incurred a $10.4 million unfunded capital commitment to the Fund. The acquisition was made from two subsidiaries of
Brookfield. During the first quarter of 2008, we sold our interest in the Fund to an affiliate of our Manager at its carrying value of $35.7 million and we were released from our unfunded
capital commitment to the Fund. During the year ended December 31, 2008, we had less than $0.1 million of equity losses from our investment in the Fund and during the year ended
December 31, 2007, we had $2.6 million of equity income from our investment in the Fund.

In
February 2007, we entered into a sale and purchase agreement with BREOF BNK Fannin LP and BREOF BNK Phoenix LLC, two subsidiaries of a real estate opportunity fund
sponsored by Brookfield and managed by a Brookfield subsidiary, to acquire two commercial properties as described in Note 6 to our financial statements for a total value of
$234.7 million. We paid the purchase price for the properties with the proceeds from a $198.5 million mortgage loan from an external lender that bears interest at an annual fixed rate of
5.509% and matures on April 1, 2017 and with available cash. In addition to the sale and purchase agreement, we entered into rent enhancement agreements with BREOF BNK Fannin LP and
BREOF BNK Phoenix LLC under which we will receive monthly rent enhancement payments through 2015 totaling $15.9 million.

In
April 2007, we issued $115.0 million of senior mortgage-backed notes through a newly-formed subsidiary, CRZ ABCP Financing LLC. We retained $9.3 million of senior
subordinated mortgage-backed notes and $4.3 million of subordinated mortgage-backed notes. CRZ ABCP Financing LLC held assets, consisting of commercial whole mortgage loans, which served
as collateral for the

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mortgage-backed
notes. Senior mortgage-backed notes in the aggregate principal amount of $101.5 million were issued to an affiliate of our Manager with floating coupons with an interest rate of
three-month LIBOR plus 0.35%. Interest on the senior mortgage-backed notes was payable monthly. The senior mortgage-backed notes had a maturity of April 2017 and the outstanding principal was due at
maturity. Early repayments of the underlying mortgage loans require repayment of a portion of the senior mortgage-backed notes. The senior mortgage-backed notes were treated as a secured financing,
and were non recourse to us. Proceeds from the sale of the senior mortgage-backed notes issued were used to repay outstanding debt under our repurchase agreements. The senior mortgage-backed notes
were repaid in their entirety during the year ended December 31, 2008.

In
August 2007, we entered into a $100.0 million unsecured 364-day credit facility with Brookfield US Corporation, an affiliate of our Manager. Under the terms of the
credit facility, if our current manager, Crystal River Capital Advisors, LLC, or another wholly owned subsidiary of Brookfield Asset Management Inc. is not acting as our manager, then
Brookfield US Corporation may accelerate all amounts due under our revolving credit facility. Indebtedness outstanding under the unsecured credit facility bore interest at LIBOR + 4.00%.
In November 2007, we and Brookfield US Corporation amended the terms of the facility, effective as of September 30, 2007, to convert the facility to a secured revolving credit facility that
provides for borrowings of up to $100.0 million in the aggregate and to reduce the interest rate to LIBOR + 2.50%. On March 7, 2008, we and Brookfield US Corporation
amended the terms of the facility, effective as of December 31, 2007, to extend the term of the facility from November 2008 to May 2009, to revise the financial covenant relating to minimum net
worth and to eliminate the financial covenants relating to minimum net income (as defined in the facility), compliance with a maximum leverage ratio and compliance with an interest rate sensitivity
requirement. On August 7, 2008, we and Brookfield US Corporation amended the terms of the facility, effective as of June 30, 2008, to revise the financial covenant relating to minimum
net worth. On February 26, 2009, we and Brookfield US Corporation amended the terms of the facility to extend the term of the facility from May 2009 to May 2010, to lower the borrowing capacity
under the facility from $100.0 million to $50.0 million and, effective as of December 31, 2008, to delete the financial covenant relating to minimum net worth. On
February 23, 2010, we and Brookfield US Corporation amended the terms of the facility to extend the term of the facility from May 2010 to August 31, 2010 unless sooner terminated as
provided in the credit agreement. The secured facility bears interest at LIBOR + 2.50%. The credit facility and the amendments were approved by the independent members of our board of
directors. As of December 31, 2009, we owed $28.9 million under this facility, we had pledged MBS, real estate loans and a portion of the equity in our commercial real estate investments
with an aggregate carrying value of $33.4 million to secure the $28.9 million of borrowings outstanding at such date and we had $2.5 million of unused availability under this
facility. The credit agreement contains customary representations, warranties and covenants, including covenants requiring us to maintain our REIT status and limiting dividends, liens, mergers, asset
sales and other fundamental changes. As of December 31, 2009, we were in compliance with all of the covenants under the credit agreement.

In
August 2007, we sold one whole loan to an affiliate of our Manager at its carrying value plus accrued interest receivable for total proceeds of $45.4 million.

In
September 2007, we entered into a sale and purchase agreement with BREOF BNK2 Arlington LP, a subsidiary of a real estate opportunity fund sponsored by Brookfield and managed
by a Brookfield subsidiary, to acquire one commercial property as described in Note 5 to our financial statements for a total value of $26.5 million. We paid the purchase price for the
property with the proceeds from a $20.9 million mortgage loan from an external lender that bears interest at an annual fixed rate of 6.29% and matures on October 1, 2017 and with
available cash. In addition to the sale and purchase agreement, we entered into rent enhancement agreements with BREOF BNK2

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Arlington LP
under which we will receive monthly rent enhancement payments through 2019 totaling $6.9 million.

We
and our Manager have entered into sub-advisory agreements with other affiliated entities and the fees payable under such agreements will be paid from any management fees
earned by our Manager. In addition, certain of these affiliated sub-advisory entities introduced investments to us for purchase that we acquired for a total of $289.0 million and
$21.4 million during the year ended December 31, 2007; our affiliated sub-advisory entities did not introduce any investments to us that we acquired during the years ended
December 31, 2009 or December 31, 2008. The purchase price of three commercial real estate properties that we purchased in March 2007 and September 2007 from an affiliate of our Manager,
at a total cost of approximately $260.5 million, were determined as part of a competitive bid process, and the purchase price of our investment in a private equity fund managed by an affiliate
of our Manager, at a total initial cost of approximately $28.5 million, was acquired at its book value assuming hypothetical liquidation. All such acquisitions were approved in advance by the
independent members of our board of directors.

Risk Management

To the extent consistent with maintaining our REIT status, we seek to manage our interest rate risk exposure to protect our portfolio
of RMBS and other mortgage securities and related debt against the effects of major interest rate changes. We generally seek to manage our interest rate risk by:



Item 7A.    Quantitative and Qualitative Disclosures about Market Risk.

See the discussion of quantitative and qualitative disclosures about market risk in the "Quantitative and Qualitative Disclosures About
Market Risk" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 above.

Item 8.    Financial Statements and Supplementary Data.

The financial statements required by this item and the reports of the independent registered public accounting firm thereon appear on
pages F-2 to F-80 and S-1 to S-5. See accompanying Index to the Consolidated Financial Statements on page F-1. The
supplementary financial data required by Item 302 of Regulation S-K appears in Note 19 to the consolidated financial statements.

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

None.

118

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Table of Contents

Item 9A.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Also, we have investments in certain unconsolidated entities. As we do not control these entities, our disclosure controls
and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

As
of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered
by this report.

Management's Annual Report on Internal Control over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, we concluded that our internal control over financial reporting was effective as of
December 31, 2009.

Attestation Report of Registered Public Accounting Firm

Our independent registered public accounting firm, Ernst & Young LLP, independently assessed the effectiveness of our
internal control over financial reporting and issued an attestation report on our internal control over financial reporting. Ernst & Young's report appears on page F-4 of
this Form 10-K.

Changes in Internal Controls

There have been no significant changes in our "internal control over financial reporting" (as defined in
Rule 13a-15(f) of the Exchange Act) that occurred during the year ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

Item 9B.    Other Information.

None.

119

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Table of Contents

PART III

In accordance with General Instruction G.(3) of Form 10-K certain information required by this
Part III will either be incorporated into this Form 10-K by reference to our definitive proxy statement (our "2010 Proxy Statement") for our 2010 Annual Meeting of
Stockholders filed within 120 days after December 31, 2009 or will be included in an amendment to this Form 10-K filed within 120 days after December 31,
2009. To the extent such information is included in our 2010 Proxy Statement within 120 days after December 31, 2010, it is expected to be incorporated by reference to the sections of
our 2010 Proxy Statement specified below.

Item 10.    Directors, Executive Officers and Corporate Governance.

The information appearing in our 2010 Proxy Statement under the following headings is incorporated herein by
reference:



Item 11.    Executive Compensation.

The information appearing in our 2010 Proxy Statement under the following headings is incorporated herein by
reference:



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

The information appearing in our 2010 Proxy Statement under the following heading is incorporated herein by
reference:



The
information under "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesEquity Compensation Plan
Information" in this Annual Report on Form 10-K is also incorporated herein by reference.

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

The information appearing in our 2010 Proxy Statement under the following headings is incorporated herein by
reference:



Item 14.    Principal Accounting Fees and Services.

The information appearing in our 2010 Proxy Statement under the following heading is incorporated herein by
reference:



120

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Table of Contents

PART IV

Item 15.    Exhibits, Financial Statement Schedules.

See
the accompanying Index to Financial Statement Schedules on page F-1.

See
the accompanying Index to Financial Statement Schedules on page F-1.

The
information below under the heading "Exhibit Index" is incorporated herein by reference.

121

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Table of Contents

SIGNATURES

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

CRYSTAL RIVER CAPITAL, INC.March 26, 2010

/s/ RODMAN L. DRAKEDate

Rodman L. DrakeChairman of the Board
President and Chief Executive Officer


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

March 26, 2010

/s/ RODMAN L. DRAKEDate

Rodman L. DrakeChairman of the Board
President and Chief Executive Officer
(Principal Executive Officer)March 26, 2010

/s/ CRAIG J. LAURIEDate

Craig J. LaurieDirector
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)March 26, 2010

/s/ JANET GRAHAMDate

Janet Graham, DirectorMarch 26, 2010

/s/ HARALD HANSENDate

Harald Hansen, DirectorMarch 26, 2010

/s/ WILLIAM F. PAULSENDate

William F. Paulsen, DirectorMarch 26, 2010

/s/ LOUIS P. SALVATOREDate

Louis P. Salvatore, Director


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EXHIBIT INDEX

Exhibit
Number

Description2.1

Agreement and Plan of Merger, dated as of February 23, 2010, by and among Brookfield Asset Management Inc., B Acquisition Sub Inc., and Crystal River Capital, Inc. (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K (File No. 001-32958) filed on February 24, 2010 and incorporated herein by reference).3.1

Articles of Amendment and Restatement of Crystal River Capital, Inc. (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K (File No. 001-32958) filed on March 30, 2007 and
incorporated herein by reference).3.2

Amended and Restated Bylaws of Crystal River Capital, Inc. (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 001-32958) filed on December 19, 2008 and incorporated
herein by reference).4.1

Form of Certificate of Common Stock for Crystal River Capital, Inc. (filed as Exhibit 4.1 to the Company's Registration Statement on Amendment No. 3 to Form S-11 (File No. 333-130256) filed on
July 13, 2006 and incorporated herein by reference).10.1
(a)
Amended and Restated Management Agreement, dated as of July 11, 2006, between Crystal River Capital, Inc. and Hyperion Brookfield Crystal River Capital Advisors, LLC (filed as Exhibit 10.1(a) to
the Company's Registration Statement on Amendment No. 3 to Form S-11 (File No. 333-130256) filed on July 13, 2006 and incorporated herein by reference).10.1
(b)
Sub-Advisory Agreement, dated as of July 10, 2006, among Crystal River Capital, Inc., Hyperion Brookfield Crystal River Capital Advisors, LLC and Brookfield Crystal River Capital L.P. (filed as
Exhibit 10.1(b) to the Company's Registration Statement on Amendment No. 3 to Form S-11 (File No. 333-130256) filed on July 13, 2006 and incorporated herein by reference).10.1
(c)
Sub-Advisory Agreement, dated as of March 3, 2009, among Crystal River Capital, Inc., Hyperion Brookfield Crystal River Capital Advisors, LLC and Hyperion Brookfield Asset Management, Inc. (filed
as Exhibit 10.1(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-32958) filed on March 3, 2009 and incorporated herein by reference)10.2
(a)
Crystal River Capital, Inc. 2005 Long Term Incentive Plan, as amended (filed as Exhibit 10.3(a) to the Company's Registration Statement on Amendment No. 3 to Form S-11 (File No. 333-130256)
filed on July 13, 2006 and incorporated herein by reference).10.2
(b)
Form of Restricted Stock Award Agreement (filed as Exhibit 10.3(b) to the Company's Registration Statement on Amendment No. 3 to Form S-11 (File No. 333-130256) filed on July 13, 2006 and
incorporated herein by reference).10.2
(c)
Form of Stock Option Agreement (filed as Exhibit 10.3(c) to the Company's Registration Statement on Amendment No. 3 to Form S-11 (File No. 333-130256) filed on July 13, 2006 and incorporated
herein by reference).10.2
(d)
Form of Restricted Stock Unit Award Agreement (filed as Exhibit 10.3(d) to the Company's Registration Statement on Amendment No. 3 to Form S-11 (File No. 333-130256) filed on July 13, 2006 and
incorporated herein by reference).


123

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Table of Contents

Exhibit
Number

Description10.2
(e)
Compensation arrangements with directors (incorporated herein by reference to the information under the caption "EXECUTIVE AND DIRECTOR COMPENSATONCompensation of Directors" in the Company's Definitive
Schedule 14A filed on April 28, 2009).10.3
(a)
Amended and Restated Revolving Credit Agreement between Brascan (US) Corporation, as Lender, and Crystal River Capital, Inc., as Borrower, dated as of November 8, 2007 (filed as Exhibit 99.1 to the
Company's Current Report on Form 8-K (File No. 001-32958) filed on November 14, 2007 and incorporated herein by reference).10.3
(b)
First Amendment to Amended and Restated Revolving Credit Agreement between Brookfield US Corporation (f/k/a Brascan (US) Corporation), as Lender, and Crystal River Capital, Inc., as Borrower, dated as of
March 7, 2008 (filed as Exhibit 10.4(B) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (File No. 001-32958) filed on March 13, 2008 and incorporated herein by
reference).10.3
(c)
Second Amendment to Amended and Restated Revolving Credit Agreement between Brookfield US Corporation (f/k/a Brascan (US) Corporation), as Lender, and Crystal River Capital, Inc., as Borrower, dated as of
August 7, 2008 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008 (File No. 001-32958) filed on August 11, 2008 and incorporated herein by
reference).10.3
(d)
Third Amendment to Amended and Restated Revolving Credit Agreement between Brookfield US Corporation (f/k/a Brascan (US) Corporation), as Lender, and Crystal River Capital, Inc., as Borrower, dated as of
February 26, 2009 (filed as Exhibit 10.4(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-32958) filed on March 3, 2009 and incorporated herein by reference).10.3
(e)
Fourth Amendment to Amended and Restated Revolving Credit Agreement by and between Brookfield US Corporation and Crystal River Capital, Inc., dated as of February 23, 2010 (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K (File No. 001-32958) filed on February 24, 2010 and incorporated herein by reference).10.4
*
Exchange Agreement, dated as of January 29, 2010, by and among Crystal River Capital, Inc., Taberna Preferred Funding VIII, Ltd. and Taberna Preferred Funding IX, Ltd.11.1

Statements regarding Computation of Earnings per Share (data required by Statement of Financial Accounting Standard No. 128, Earnings per Share, is provided in Note 15 to the consolidated financial
statements contained in this report).21.1
*
Subsidiaries of Crystal River Capital, Inc.23.1
*
Consent of Ernst & Young LLP.31.1
*
Certification of Rodman L. Drake, Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
*
Certification of Craig J. Laurie, Treasurer and Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
*
Certification of Rodman L. Drake, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


124

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Table of Contents

Exhibit
Number

Description32.2
*
Certification of Craig J. Laurie, Treasurer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


Represents
a management contract or compensatory plan or arrangement.*Filed
herewith.


125

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Index to Consolidated Financial Statements and Schedules



Management's Responsibility for Financial Statements

F-2Reports of Independent Registered Public Accounting Firm

F-3Audited Financial Statements

F-5Consolidated Balance Sheets as of December 31, 2009 and 2008

F-5Consolidated Statements of Operations for the years ended December 31, 2009, 2008
and 2007

F-6Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 2009, 2008 and 2007

F-7Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007

F-8Notes to Consolidated Financial Statements

F-10Schedule IIValuation and Qualifying Accounts and
Reserves

S-1Schedule IIIReal Estate and Accumulated
Depreciation

S-2Schedule IVMortgage Loans on Real Estate

S-4


All
other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.

F-1

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Table of Contents

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

Crystal River Capital, Inc.'s management is responsible for the integrity and objectivity of all financial information included
in this Annual Report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial statements
include amounts that are based on the best estimates and judgments of management. All financial information in this Annual Report on Form 10-K is consistent with that in the
consolidated financial statements.

Ernst &
Young LLP, an independent registered public accounting firm, has audited these consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and has expressed herein its unqualified opinion on those financial statements.

The
Audit Committee of the Board of Directors, which oversees Crystal River Capital, Inc.'s financial reporting process on behalf of the Board of Directors, is composed entirely
of independent directors (as defined by the Nasdaq Marketplace Rules). The Audit Committee meets periodically with management, the independent accountants, and the internal auditors to review matters
relating to the Company's financial statements and financial reporting process, annual financial statement audit,
engagement of independent accountants, internal audit function, system of internal controls, and legal compliance and ethics programs as established by Crystal River Capital, Inc.'s management
and the Board of Directors. The internal auditors and the independent registered public accounting firm periodically meet alone with the Audit Committee and have access to the Audit Committee at any
time.

Dated:
March 26, 2010

Rodman L. Drake
President and
Chief Executive Officer

Craig J. Laurie
Chief Financial Officer
and Treasurer


F-2

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Crystal River Capital, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Crystal River Capital, Inc. and Subsidiaries (the "Company") as
of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended
December 31, 2009. Our audits also included the financial statement schedules listed in the Index as Item 15(a)(2). These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 the Company at December 31, 2009 and
2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.

As
discussed in Note 2 to the consolidated financial statements, the Company's inability to refinance or extend the maturity of indebtedness maturing in the next 12 months
raises substantial doubt about its ability to continue as a going concern. Management's plans as to this matter also are described in Note 2. The 2009 consolidated financial statements and
financial statement schedules do not include any adjustments that might result from the outcome of this uncertainty.

Also
as discussed in Note 2 to the consolidated financial statements, in 2009 the Company adopted Financial Accounting Standards Board ("FASB") Staff Position Financial Accounting
Standard ("FAS") 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary
Impairments(codified in FASB Accounting Standard Codification ("ASC") 320,InvestmentsDebt and Equity Securities)
and in 2008 the Company adopted FASB Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(codified in FASB
ASC 825,Financial Instruments).

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 24, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP


New
York, New York
March 24, 2010

F-3

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Crystal River Capital, Inc. and Subsidiaries

We have audited Crystal River Capital, Inc. and Subsidiaries' (the "Company") internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting, under Item 9A. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, Crystal River Capital, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31,
2009, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of
December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended
December 31, 2009 and our report dated March 24, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP


New
York, New York
March 24, 2010

F-4

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Table of Contents



Crystal River Capital, Inc. and Subsidiaries        Consolidated Balance Sheets        (in thousands, except share and per share data)

December 31,2009

2008ASSETS:Investment securities, at fair valueCommercial MBS:Available-for-sale

$
5,227

$
14,317Held-for-trading


32,886


43,776Non-Agency Residential MBS:Available-for-sale


2,091


7,298Held-for-trading


2,622


7,525Real estate loans





9,034Real estate loans held for sale


5,903


5,058Commercial real estate, net


221,754


228,259Other investments


1,550


1,550Intangible assets


69,908


75,541Cash and cash equivalents


3,336


6,239Restricted cash


16,489


26,107Receivables:Principal paydown


8


10Interest


2,049


4,152Rent enhancement receivables, related party


11,439


13,828Other receivables


4,188


3,135Prepaid expenses and other assets


1,046


939Deferred financing costs, net


1,457


1,533Total Assets

$
381,953

$
448,301LIABILITIES AND STOCKHOLDERS' DEFICIT:Liabilities:Accounts payable and accrued expenses

$
2,836

$
2,652Dividends payable





2,511Intangible liabilities


66,785


72,265Collateralized debt obligations, at fair value


33,617


45,429Junior subordinated notes


51,550


51,550Mortgages payable


219,380


219,380Secured revolving credit facility, related party


28,920


32,920Interest payable


1,614


1,357Derivative liabilities


35,378


57,646Total Liabilities


440,080


485,710Commitments and ContingenciesStockholders' Deficit:Preferred Stock, par value $0.001 per share, 100,000,000 shares authorized, no shares issued and outstanding





Common Stock, $0.001 par value, 500,000,000 shares authorized, 24,909,256 and 24,905,252 shares issued and outstanding at December 31, 2009 and 2008,
respectively


25


25Additional paid-in capital


564,832


564,560Accumulated other comprehensive loss


(7,087
)

(9,815
)Accumulated deficit


(615,897
)

(592,179
)Total Stockholders' Deficit


(58,127
)

(37,409
)Total Liabilities and Stockholders' Deficit

$
381,953

$
448,301


See accompanying notes to consolidated financial statements.

F-5

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Table of Contents



Crystal River Capital, Inc. and Subsidiaries        Consolidated Statements of Operations        (in thousands, except share and per share data)

Year Ended
December 31,
2009

Year Ended
December 31,
2008

Year Ended
December 31,
2007Revenues:Interest and dividend income:Interest incomeinvestment securities

$
27,848

$
109,453

$
194,130Interest incomereal estate loans


1,144


6,567


17,080Other interest and dividend income


132


1,196


8,709Total interest and dividend income


29,124


117,216


219,919Rental income, net


21,671


22,225


16,210Total revenues


50,795


139,441


236,129Expenses:Interest expense


24,443


53,543


156,797Management fees, related party





1,226


6,378Professional fees


2,919


2,681


3,904Depreciation and amortization


12,088


12,088


8,948Incentive fees








124Insurance expense


1,883


1,662


936Compensation and directors' fees


834


451


695Public company expense


482


668


522Commercial real estate expenses


1,590


1,541


1,011Provision for loss on real estate loans


7,571


27,073


4,500Other expenses


327


1,285


700Total expenses


52,137


102,218


184,515Income (loss) before other revenues (expenses)


(1,342
)

37,223


51,614Other revenues (expenses):Realized net gain (loss) on sale of available-for-sale securities, real estate loans and other investments


790


(5,166
)

(1,698
)Realized and unrealized loss on derivatives


(412
)

(70,679
)

(84,951
)Total other-than-temporary impairments on available-for-sale securities


(10,860
)

(142,916
)

(317,931
)Portion of other-than-temporary impairments recognized in other comprehensive income


(67,087
)




Net change in assets and liabilities valued under fair value option


(4,085
)

(123,708
)

Foreign currency exchange gain








4,292Income (loss) from equity investments





(40
)

2,610Other


(5,284
)

(1,806
)

186Total other expenses


(86,938
)

(344,315
)

(397,492
)Net loss

$
(88,280
)
$
(307,092
)
$
(345,878
)Per share information:Net loss per share of common stock:Basic

$
(3.50
)
$
(12.35
)
$
(13.86
)Diluted

$
(3.50
)
$
(12.35
)
$
(13.86
)Dividends declared per share of common stock

$
0.30

$
1.18

$
2.72Weighted average shares of common stock outstanding:Basic


25,211,260


24,866,206


24,962,708Diluted


25,211,260


24,866,206


24,962,708


See accompanying notes to consolidated financial statements.

F-6

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries        Consolidated Statements of Changes in Stockholders' Equity (Deficit)        For the Years Ended
December 31, 2009, 2008 and 2007        (in thousands, except share data)

Common StockAccumulated
Other
Comprehensive
Income (Loss)Shares

Par
Value

Additional
Paid-In
Capital

Accumulated
Deficit

Total

Comprehensive
Income (Loss)Balance at December 31, 2006


25,021,800

$
25

$
566,285

$
13,212

$
(23,208
)
$
556,314Net loss














(345,878
)

(345,878
)
$
(345,878
)Net unrealized holdings gain on available-for-sale securities











6,176





6,176


6,176Unrealized loss on cash flow hedges











(29,499
)




(29,499
)

(29,499
)Deferred loss on settled cash flow hedges











(3,143
)




(3,143
)

(3,143
)Amortization of net realized gains on cash flow hedges











(2,227
)




(2,227
)

(2,227
)Comprehensive loss



















$
(374,571
)Dividends declared on common stock














(67,796
)

(67,796
)Dividends on deferred stock units








66








66Offering costs








(50
)







(50
)Stock repurchases


(299,300
)




(4,523
)







(4,523
)Issuance (forfeiture) of stock based compensation:

















Forfeiture of restricted stock


(20,000
)













Issuance of restricted stock


2,000














Issuance of common stock to manager


445





12








12Amortization of stock based compensation








1,140








1,140Balance at December 31, 2007


24,704,945

$
25

$
562,930

$
(15,481
)
$
(436,882
)
$
110,592Cumulative effect of the adoption of FASB ASC 825-10-45-01











(1,670
)

181,092


179,422Net loss














(307,092
)

(307,092
)
$
(307,092
)Realization of deferred unrealized gains on available-for-sale securities











(7,344
)




(7,344
)

(7,344
)Realization of deferred unrealized losses on cash flow hedges











13,181





13,181


13,181Amortization of net realized losses on cash flow hedges











1,499





1,499


1,499Comprehensive loss



















$
(299,756
)Dividends declared on common stock and deferred stock units














(29,297
)

(29,297
)Shares issued for dividend reinvestment


2














Issuance of stock in lieu of cash for management fee


198,305





1,170








1,170Issuance of stock based compensation:Issuance of restricted stock


2,000





11








11Issuance of deferred stock units








122








122Amortization of stock based compensation








327








327Balance at December 31, 2008


24,905,252

$
25

$
564,560

$
(9,815
)
$
(592,179
)
$
(37,409
)Cumulative effect of the adoption of FASB ASC 320-10-65-1











(72,126
)

72,126




$
(72,126
)Net loss














(88,280
)

(88,280
)

(88,280
)Net change in available-for-sale securities











73,485





73,485


73,485Amortization of net realized losses on cash flow hedges











1,369





1,369


1,369Comprehensive loss



















$
(85,552
)Dividends declared on common stock and deferred stock units














(7,564
)

(7,564
)Shares issued for dividend reinvestment


4














Issuance of stock based compensation:Issuance of restricted stock


4,000





7








7Issuance of deferred stock units








124








124Amortization of stock based compensation








141








141Balance at December 31, 2009


24,909,256

$
25

$
564,832

$
(7,087
)
$
(615,897
)
$
(58,127
)


See accompanying notes to consolidated financial statements.

F-7

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries        Consolidated Statements of Cash Flows        (in thousands)

Year Ended
December 31, 2009

Year Ended
December 31, 2008

Year Ended
December 31, 2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(88,280
)
$
(307,092
)
$
(345,878
)Adjustments to reconcile net loss to net cash provided by operating activities:Amortization of stock based compensation


178


327


1,140Amortization of net premium (accretion of net discount) on investment securities and real estate loans


15,106


(18,062
)

(19,426
)Realized net (gain) loss on sale of available-for-sale securities, real estate loans and other investments


(790
)

4,759


1,685Impairment of available-for-sale securities


77,947


142,916


317,931Provision for loss on real estate loans


7,571


27,073


4,500Net change in assets and liabilities valued under fair value option


4,085


123,708


Accretion of interest on real estate loans and other investments


(235
)

(263
)

(2,475
)Amortization of net realized cash flow hedge (gain) loss


1,369


1,499


(2,227
)Unrealized (gain) loss on derivatives


(12,346
)

63,964


88,763Amortization and write-off of deferred financing costs


75


1,065


3,538Management fee expense paid in stock





1,170


12(Income) loss from equity investment





40


(2,610
)Change in deferred income tax








(900
)Gain on foreign currency exchange








(4,330
)Depreciation and amortization


12,088


12,088


8,948Amortization of intangible liabilities


(5,480
)

(5,480
)

(4,057
)Amortization of underwriting costs on available-for-sale securities and loans








170Other


5,376


1,881


859Changes in operating assets and liabilities:Net receipt of restricted cash for failed swaps





7,144


Net deposits of restricted cash


(245
)




Payments on settlement of derivatives





(10,528
)

(756
)Interest receivable


2,103


7,656


7,003Interest receivable, derivative


(6
)

169


898Rent enhancement receivables, related party


(751
)

(880
)

(601
)Other receivables


(1,045
)

(527
)

(2,003
)Prepaid expenses and other assets


(126
)

(362
)

(125
)Return on capital from equity investments








2,610Accounts payable and accrued expenses


973


(65
)

(2,195
)Due to Manager





(678
)

(1,362
)Interest payable


257


(7,899
)

(10,161
)Interest payable, derivative


75


(3,719
)

(3,851
)Net cash provided by operating activities


17,899


39,904


35,100CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of available-for-sale securities








(893,057
)Acquisition of and contributions to interest in other investments








(42,095
)Acquisition of commercial real estate and rent enhancement receivable








(261,204
)Return of capital from equity investment





426


5,884Underwriting costs on available-for-sale securities and real estate loans








(230
)Principal payments on investment securities and real estate loans


1,925


74,136


398,451Proceeds from the sale of available-for-sale securities





1,178,357


1,643,130Proceeds from the sale and repayment of real estate loans and other investments





162,156


115,211Proceeds from rent enhancement


3,140


3,365


1,778Proceeds received from acquisition of credit default swaps








5,328Proceeds paid for acquisition of credit default swaps








(459
)Cash received to terminate swaps








6,471Cash paid to terminate swaps


(10,000
)

(30,249
)

(54,429
)Net receipts of (deposits to) restricted cash for investment


(334
)

3,972


(1,000
)Net receipts of (deposits to) restricted cash from credit default swaps


10,200


12,211


(32,908
)Funding of real estate loans





(929
)

(30,211
)Net cash provided by investing activities


4,931


1,403,445


860,660


F-8

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(in thousands)

Year Ended
December 31, 2009

Year Ended
December 31, 2008

Year Ended
December 31, 2007CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of junior subordinated notes held by trust that issued trust preferred securities








50,000Payment on settlement of derivatives





(10,466
)

(9,969
)Proceeds from the settlement of derivatives








4,932Net change in cash collateral payable








(1,960
)Issuance of collateralized debt obligations








324,956Proceeds from mortgages payable








219,380Proceeds from senior mortgage-backed notes, related party








101,500Principal repayments on collateralized debt obligations


(11,766
)

(19,581
)

(32,744
)Principal repayments on senior mortgage-backed notes, related party





(99,815
)

(1,685
)Net receipts from restricted cash


(3
)

19,272


44,685Payment of deferred financing costs








(9,359
)Dividends paid


(9,964
)

(43,521
)

(67,416
)Repurchase of common stock








(4,523
)Net payments on repurchase agreements





(1,276,121
)

(1,447,522
)Net payments on repurchase agreements, related party








(144,806
)Net (payments on) proceeds from term revolver, related party


(4,000
)

(34,399
)

67,319Other








(50
)Net cash used in financing activities


(25,733
)

(1,464,631
)

(907,262
)Net decrease in cash and cash equivalents


(2,903
)

(21,282
)

(11,502
)Cash and cash equivalents at beginning of period


6,239


27,521


39,023Cash and cash equivalents at end of period

$
3,336

$
6,239

$
27,521Supplemental disclosure of cash flows:Cash paid during the period for interest

$
22,739

$
63,759

$
167,784Cash paid during the period for income taxes








292Supplemental disclosure of noncash investing and financing activities:Dividends declared, not yet paid





2,498


16,828Principal paydown receivable


8


10


914Equity investment in trust








1,550Capitalization of interest on other investments








1,112Cumulative effect upon adoption of FASB ASC 825-10-45-1





179,422


Classification of real estate loans as held for sale


1,246


139,865


Noncash component of dividends on deferred stock units


112


95


81


See accompanying notes to consolidated financial statements.

F-9

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries    Notes to Consolidated Financial Statements    December 31, 2009    (dollars in thousands, except per share data)

1. ORGANIZATION

References herein to "we," "us" or "our" refer to Crystal River Capital, Inc. and its subsidiaries unless the context specifically requires otherwise.

We
are a Maryland corporation that was formed in January 2005 for the purpose of acquiring and originating a diversified portfolio of commercial and residential real estate assets and
structured finance investments. We commenced operations on March 15, 2005, when we completed an offering of 17,400,000 shares of common stock (the "Private Offering"), and we completed our
initial public offering of 7,500,000 shares of common stock (the "Public Offering") on August 2, 2006. We are externally managed and are advised by Crystal River Capital Advisors, LLC
(the "Manager") as more fully explained in Note 14.

We
elected to be taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code for the 2005 tax year. To maintain our tax status as a REIT, we plan to distribute at
least 90% of our taxable income. In view of our election to be taxed as a REIT, we have tailored our balance sheet investment program to originate or acquire loans and investments to produce a
portfolio that meets the asset and income tests necessary to maintain qualification as a REIT.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

Our consolidated financial statements include the accounts of Crystal River Capital, Inc., three wholly-owned subsidiaries
created in connection with the issuance of our collateralized debt obligations and senior mortgage-backed notes, wholly-owned subsidiaries established for financing purposes, three wholly-owned
subsidiaries established to own interests in real property and our domestic taxable REIT subsidiary ("TRS"). All significant intercompany balances and transactions have been eliminated in
consolidation.

Going Concern

We held cash and cash equivalents of approximately $3,336 at December 31, 2009, which excludes restricted cash of approximately
$16,489 that is used to collateralize our credit default swap and certain other commercial real estate and financing obligations. As of December 31, 2009, we owed $28,920 to an affiliate of our
Manager under our secured credit facility. Unless earlier terminated as provided in the Credit Agreement, our credit facility terminates on August 31, 2010. If the merger with an affiliate of
our Manager that is discussed in Note 19 is not consummated and this facility is not extended and we cannot obtain alternative financing, we do not expect to have sufficient cash on hand or to
generate sufficient cash flow from operations to repay such indebtedness. Given the current lack of liquidity in the credit markets and the current economic climate, we expect to have difficulty
obtaining alternative financing if our credit facility is not extended. If we cannot obtain alternative financing or extend our credit facility, it increases the risk that we will be unable to
continue as a going concern. Our independent registered public accounting firm, Ernst & Young LLP, has issued an opinion on our consolidated financial statements which states that our
inability to refinance or extend the maturity of indebtedness maturing in the next 12 months raises substantial doubt about our ability to continue as a going concern.

F-10

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Our consolidated financial statements included in this report do not reflect any adjustments related to the recoverability of assets and liabilities that might be necessary should we be
unable to continue as a going concern.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP")
requires us to make a significant number of estimates in the preparation of the financial statements. These estimates include determining the fair market value of certain investments, debt obligations
and derivative assets and liabilities, the amount and timing of credit losses, prepayment assumptions, allocation of purchase price to tangible and intangible assets or property acquisitions, and
other items that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during
the reporting period. It is likely that changes in these estimates (e.g., market values change due to changes in supply and demand, credit performance,
prepayments, interest rates or other reasons; yields change due to changes in credit outlook and loan prepayments) will occur in the near future. Our estimates are inherently subjective in nature and
actual results could differ from our estimates and differences may be material.

Cash and Cash Equivalents

We classify highly liquid investments with original maturities of 90 days or less from the date of purchase as cash equivalents.
Cash and cash equivalents may include cash and short term investments. Short term investments are stated at cost, which approximates their fair value, and may consist of investments in money market
accounts.

Restricted Cash

Restricted cash consists primarily of funds held on deposit with brokers to serve as collateral for credit default swap agreements,
certain commercial real estate and financing obligations, funds held by the trustee for CDO II (See Note 9) and funds held in escrow for one of our financing subsidiaries relating to a
yield-maintenance agreement for certain real estate loans that we sold in June 2008 (See Note 10).

Securities

We invest in commercial mortgage-backed securities ("CMBS"), U.S. Agency mortgage pass-through certificates, which are
securities issued or guaranteed by the Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") or Government National Mortgage Association ("Ginnie
Mae") and Agency Collateralized Mortgage Obligations issued by Fannie Mae or Freddie Mac backed by mortgage pass-through securities and evidenced by a series of bonds or certificates
issued in multiple classes (collectively, "Agency MBS"), Non-Agency residential mortgage-backed securities ("Non-Agency RMBS", and collectively with Agency MBS, "RMBS") and
other real estate debt and equity instruments. We account for our investments in

F-11

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

CMBS,
Agency MBS, Non-Agency RMBS, asset-backed securities ("ABS") and other real estate and equity instruments, which we refer to as our investment securities, in accordance with FASB ASC
320-10-50-2 (previously SFAS 115). We classify our securities as either available-for-sale or
held-for-trading because we may dispose of them prior to maturity in response to changes in the market, liquidity needs or other events, even if we have no current intention of
selling them in the immediate future.

All
investment securities are reported at fair value, based on quoted market prices provided by independent pricing sources, when available, from quotes provided by dealers who make
markets in certain securities, or from our management's estimates in cases where the investments are illiquid. In making these estimates, our management utilizes pricing information obtained from
dealers who make markets in these securities. However, under certain circumstances we may adjust these values based on our knowledge of the securities and the underlying collateral. Our management
also uses a discounted cash flow model, which utilizes prepayment and loss assumptions based upon historical experience, economic factors and the characteristics of the underlying cash flow to
substantiate the fair value of the securities. The assumed discount rate is based upon the yield of comparable securities. The
determination of future cash flows and the appropriate discount rates are inherently subjective and, as a result, actual results may vary from our management's estimates.

Unrealized
gains and losses for investment securities for which we have not elected the fair value option under FASB ASC 825-10-45-1 (previously
SFAS 159) are recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity (deficit), unless unrealized loss amounts are determined to be impaired as
described below. For investment securities for which we have elected the fair value option, we reclassified these securities from available-for-sale to
held-for-trading and changes in the fair value of these securities are recorded in our consolidated statements of operations. This reclassification was not the result of a
change to our intent as it relates to these securities. As a result of the adoption of FASB ASC 825-10-45-1 on January 1, 2008, we recorded a cumulative
effect adjustment of $181,092 as an increase to stockholders' deficit and reclassified all unrealized gains on our securities that served as collateral for our CDOs to accumulated deficit from
accumulated other comprehensive loss. Electing the fair value option for the investment securities and CDOs (including derivatives) for our CDO entities enables us to correlate more closely the values
of the assets and liabilities that are paired within the same securitization entity and to reduce the complexity of accounting, especially for derivatives under FASB ASC
815-10-50-1 (previously SFAS 133).

Periodically,
all available-for-sale securities are evaluated for other-than-temporary impairment in accordance with FASB ASC
320-10-65-1 (previously FSP FAS 115-2), and FASB ASC 310-20-60-1 (previously EITF 99-20),
as amended by FASB ASC 325-40-65-1 (previously FSP EITF 99-20-1). An impairment that is an
"other-than-temporary impairment" is a decline in the fair value of an investment below its amortized cost attributable to factors that indicate the decline will not be
recovered. Under the guidance of FASB ASC 320-10-65-1, should an other-than-temporary impairment be deemed to have occurred, the total
other-than-temporary impairment is bifurcated into (i) the amount related to credit losses, and (ii) the amount related to all other factors. The portion of the
other-than-temporary impairment related to credit losses is calculated by comparing the amortized cost

F-12

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

of
the security to the present value of cash flows expected to be collected, discounted at the security's current yield, and is recognized through earnings on the consolidated statement of operations.
The portion of the other-than-temporary impairment related to all other factors is recognized as a component of other comprehensive income (loss) on the consolidated balance
sheet.

Real Estate Loans

Real estate loans are carried at cost, net of unamortized loan origination costs and fees, discounts, repayments, sales of partial
interests in loans and unfunded commitments, unless the loan is deemed to be impaired. We account for our real estate loans in accordance with FASB ASC 310-20-05-2
(previously SFAS 91).

Real
estate loans are evaluated for possible impairment on a periodic basis in accordance with FASB ASC 310-10-35-13 (previously SFAS 114).
Impairment occurs when we determine that it is probable that we will not be able to collect all amounts due according to the contractual terms of the loan. Upon determination of an impairment, we
establish a reserve for loan losses and recognize a corresponding charge to the statement of operations through a provision for loan losses. Significant judgments are required in determining
impairment, including making assumptions regarding the value of the loan and the value of the real estate, partnership interest or other collateral that secures the loan, current economic conditions,
the potential for natural disasters, loan portfolio composition, delinquency trends, credit losses to date on underlying loans and remaining credit protection. If the credit performance of our real
estate loans is different than expected, we adjust the allowance for loan losses to a level deemed appropriate by management to provide for estimated losses inherent in the real estate loan portfolio.
Once a loan is 90 days or more delinquent, or a borrower declares bankruptcy, we adjust the value of our accrued interest receivable to what we believe to be collectible and stop accruing
interest on that loan.

Real Estate Loans Held for Sale

Real estate loans that we have committed to sell or that we have the intent and ability to sell in the near future are classified as
real estate loans held for sale. These real estate loans are carried at the lower of cost or fair value on a loan-by-loan basis. Any market valuation adjustments on these loans
are recognized in our consolidated statements of operations in accordance with FASB ASC 948-10-05-4 (previously SFAS 65). The fair value of loans held for
sale is based on actual bids or, in the absence of such bids, management's discounted cash flow analysis.

Commercial Real Estate

Commercial properties held for investment are carried at cost less accumulated depreciation. In accordance with FASB ASC
805-10-05-4 (previously SFAS 141R), upon acquisition, we allocate the purchase price to the components of the commercial properties acquired: the amount
allocated to land is based on its estimated fair value; buildings and existing tenant improvements are recorded at depreciated replacement cost; the values of above- and below-market
in-place operating leases are determined based on the present value of the difference between the rents payable under the

F-13

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

contractual
terms of the leases and estimated market rents; lease origination costs for in-place operating leases are determined based on the estimated costs that would be incurred to put
the existing leases in place under the same terms and conditions; and tenant relationships are measured based on the present value of the estimated avoided net costs if a tenant were to renew its
lease at expiry, discounted by the probability of such renewal.

Depreciation
on buildings is provided on a straight-line basis over the useful lives of the properties to a maximum of 40 years. Depreciation is determined with
reference to each rental property's carried value, remaining estimated useful life and residual value. Acquired tenant improvements, above- and below-market in-place operating leases and
lease origination costs are amortized on a straight-line basis over the remaining terms of the leases. The value associated with acquired tenant relationships is amortized on a
straight-line basis over the expected term of the relationships. All other tenant improvements and re-leasing costs are deferred and amortized on a straight-line
basis over the terms of the leases to which they relate. Depreciation on buildings and amortization of deferred leasing costs and tenant improvements that are determined to be assets of the company
are recorded in depreciation and amortization expense. All above- and below-market tenant leases and tenant relationships are amortized to rental income. Above- and below-market ground leases are
amortized to commercial real estate expenses.

Properties
are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. For commercial properties, an impairment loss is
recognized when a property's carrying value exceeds its undiscounted future net cash flow. The impairment is measured as the amount by which the carrying value exceeds the estimated fair value.
Projections of future cash flow take into account the specific business plan for each property and management's best estimate of the most probable set of economic conditions anticipated to prevail in
the market. We recorded no impairment losses on our commercial real estate investments during the years ended December 31, 2009 or 2008.

Accounting For Derivative Financial Instruments and Hedging Activities

We account for our derivative and hedging activities in accordance with FASB ASC 815-10-05-4
(previously SFAS 133). FASB ASC 815-10-05-4 requires us to recognize all derivative instruments at their fair value as either assets or liabilities on our
balance sheet. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether we have designated it, and
whether it qualifies, as part of a hedging relationship and on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must
designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. We have no fair value hedges or
hedges of a net investment in foreign operations as of December 31, 2009 or 2008.

FASB
ASC 815-10-65-1 (previously SFAS 161), amends and expands the disclosure requirements with the intent to provide users of financial
statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB
ASC 815-10-65-1 and its related interpretations and (c) how derivative

F-14

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

instruments
and related hedged items affect an entity's financial position, financial performance, and cash flows. FASB ASC 815-10-65-1 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative instruments.

As
required by FASB ASC 815-10-05-4, we record all derivatives on our balance sheet at fair value. Accounting for changes in the fair value of
derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship
has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash
flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives also may be designated as hedges of foreign currency exposure of a net investment in a foreign operation.
Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that
are intended to economically hedge certain of our risk, even though hedge accounting does not apply or we elect not to apply hedge accounting under FASB ASC
815-10-05-4.

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 are attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings
(i.e., in "interest expense" when the hedged transactions are interest cash flows associated with floating-rate debt). The remaining gain or
loss on the derivative instrument in excess of the cumulative changes in the present value of future cash flows of the hedged item, if any, is recognized in the realized and unrealized gain (loss) on
derivatives in current earnings during the period of change. For derivative instruments not designated as hedging instruments, such as credit default swaps, the gain or loss is recognized in realized
and unrealized gain (loss) on derivatives in the current earnings during the period of change. Income and/or expense from interest rate swaps are recognized as an adjustment to realized and unrealized
gain (loss) on derivatives. We account for income and expense from interest rate swaps on an accrual basis over the period to which the payments and/or receipts relate.

Dividends to Stockholders

We record dividends to stockholders on the declaration date. The actual dividend and its timing are at the discretion of our board of
directors. We intend to pay sufficient dividends to avoid incurring any income or excise tax. During the year ended December 31, 2009, we declared dividends in the amount of $7,564, or $0.30
per share, of which $2,491 was distributed on April 30, 2009 to our stockholders of record as of March 31, 2009, $2,491 was distributed on July 31, 2009 to our stockholders of
record as of June 30, 2009, $2,491 was distributed on October 30, 2009 to our

F-15

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

stockholders
of record as of September 30, 2009 and $91 related to dividends on deferred stock units. All of the $0.30 per share dividend declared in 2009 represented a return of capital.
During the year ended December 31, 2008, we declared dividends in the amount of $29,297, or $1.18 per share, of which $16,799 was distributed on April 29, 2008 to our stockholders of
record as of March 31, 2008, $7,433 was distributed on July 28, 2008 to our stockholders of record as of June 30, 2008, $2,488 was distributed on October 28, 2008 to our
stockholders of record as of September 30, 2008, $2,491 was distributed on January 30, 2009 to our stockholders of record as of December 31, 2008 and $86 related to dividends on
deferred stock units. All of the $1.18 per share dividend declared in 2008 represented distributions of taxable earnings and profits.

In
the fourth quarter of 2009, our board of directors elected to suspend the quarterly dividend to holders of shares of our common stock to preserve liquidity.

Trust Preferred Securities

Trusts that were formed for the sole purpose of issuing trust preferred securities are not consolidated in our financial statements in
accordance with FASB ASC 810-10-25-50 (previously FIN 46R) as we have determined that we are not the primary beneficiary of such trusts. Our investment in
the common securities of such trusts is carried at cost and is included in other investments in our consolidated financial statements.

Revenue Recognition

Interest income for our investment securities and real estate loans is recognized over the life of the investment using the effective
interest method and recorded on the accrual basis. Interest income on mortgage-backed securities ("MBS") is recognized using the effective interest method as required by FASB ASC
325-40-35-1 (previously EITF 99-20). Real estate loans generally are originated or purchased at or near par value, and interest income is
recognized based on the effective yield method based on the terms of the loan instrument. Any loan fees or acquisition costs on originated loans or securities are capitalized and recognized as a
component of interest income over the life of the investment utilizing the straight-line method, which approximates the effective interest method. None of the interest income for the years
ended December 31, 2009, 2008 or 2007 included prepayment fees. We do not accrue interest on real estate loans that are placed on non-accrual status when collection of principal or
interest is in doubt. As of January 1, 2008, a real estate construction loan was placed on non-accrual status and we recorded an additional provision for loan loss of $400 and
$9,735 related to this loan during the years ended December 31, 2009 and 2008, respectively, as we believe that it is probable that we will not recover the entire loan balance, including the
capitalized interest thereon. As of March 31, 2009, a mezzanine loan was placed on non-accrual status and we recorded a loan loss allowance of $6,358 related to this loan during the
year ended December 31, 2009, as we believe that it is probable that we will not recover the entire loan balance, including the capitalized interest thereon.

Under
FASB ASC 325-40-30-3, at the time of purchase, our management estimates the future expected cash flows and determines the effective interest
rate based on these estimated cash flows and the purchase price. As needed, we update these estimated cash flows and compute a revised yield

F-16

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

based
on the current amortized cost of the investment. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties and contingencies, including the rate and
timing of principal payments (including prepayments, repurchases, defaults and liquidations), the
pass-through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans and the timing and the magnitude
of credit losses on the mortgage loans underlying the securities have to be judgmentally estimated. These uncertainties and contingencies are difficult to predict and are subject to future events that
may impact our management's estimates and our interest income.

We
record security transactions, other than repurchases of our own stock, on the trade date. Realized gains and losses from security transactions are determined based upon the specific
identification method and recorded as gain (loss) on sale of investment securities in the statements of operations.

We
account for accretion of discounts or premiums on investment securities and real estate loans using the effective interest yield method. Such amounts have been included as a component
of interest income in the statements of operations.

We
may sell all or a portion of our real estate investments to a third party. To the extent the fair value received for an investment differs from the amortized cost of that investment
and control of the asset that is sold is surrendered making it a "true sale," as defined under FASB ASC 860-20-50-8 (previously SFAS 140), a gain or
loss on the sale will be recorded in the statements of operations as realized net gain (loss) on sale of investment securities, real estate loans and other investments. To the extent a real estate
investment is sold that has any fees that were capitalized at the time the investment was made and were being recognized over the term of the investment, the unamortized fees are recognized at the
time of sale and included in any gain or loss on sale of real estate investments.

We
have retained substantially all of the risks and benefits of ownership of our rental properties and therefore, we account for leases with our tenants as operating leases. The total
amount of contractual rent that we receive from operating leases is recognized on a straight-line basis over the term of the lease; and a straight-line or free rent receivable,
as applicable, is recorded for the difference between the rental revenue recorded and the contractual amount received. In addition to base rent, the tenants in our commercial real estate properties
also pay substantially all operating costs.

Expense
reimbursement income arising from tenant leases that provide for the recovery of all or a portion of the operating expenses and real estate expenses of the respective property is
accrued in the same period as the related expenses are incurred. These recoverable expenses are included in expenses as commercial real estate expenses.

Income
arising from the operation of our parking garages is recognized when the parking spaces are occupied. Expenses related to the operation of the parking garage are included in
expenses as commercial real estate expenses.

Dividend
income on preferred stock is recorded on the dividend declaration date.

F-17

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Interest in Equity Investment

We accounted for our investment in BREF One, LLC, a real estate finance fund, under the equity method of accounting since we
owned more than a minor interest in the fund, but did not unilaterally control the fund and were not considered to be the primary beneficiary under FASB
ASC 810-10-50-12 (previously FIN 46R). The investment was recorded initially at cost, and subsequently adjusted for equity in net income (loss) and
cash contributions and distributions to reflect the investment at its book value assuming hypothetical liquidation. In March 2008, we sold our investment in BREF One, LLC to an affiliate of our
Manager, as more fully explained in Note 7.

Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code and the corresponding provisions of state law. To qualify as a
REIT, we must distribute at least 90% of our annual REIT taxable income to stockholders within the statutory timeframe. Accordingly, we generally will not be subject to federal or state income tax to
the extent that we make qualifying distributions to our stockholders and provided we satisfy the REIT requirements, including certain asset, income, distribution and stock ownership tests. If we were
to fail to meet these requirements, we would be subject to federal, state and local income taxes, which could have a material adverse impact on our results of operations and amounts available for
distribution to our stockholders.

The
dividends paid deduction of a REIT for qualifying dividends to our stockholders is computed using our taxable income as opposed to using our financial statement net income. Some of
the significant differences between financial statement net income and taxable income include the timing of recording unrealized gains/realized gains associated with certain assets, excess inclusion
income, the book/tax basis of assets, interest income, impairment, straight-line amortization of rental leases, credit loss recognition related to certain assets (asset-backed mortgages),
accounting for derivative instruments, stock compensation, amortization of various costs (including start up costs) and accounting for lease income on net leased real estate assets. The differences
between GAAP net income and taxable income are generally attributable to differing treatment, including timing related thereto, of
unrealized/realized gains and losses associated with certain assets, the bases, income, impairment, and/or credit loss recognition related to certain assets, primarily CMBS, accounting for derivative
instruments, accounting for lease income on net leased real estate assets, and amortization or various costs. The distinction between GAAP net income and taxable income is important to our
stockholders because dividends or distributions, if any, are declared and paid on the basis of annual estimates of taxable income or loss. We do not pay Federal income taxes on income that we
distribute on a current basis, provided that we satisfy the requirements for qualification as a REIT under the Internal Revenue Code. We calculate our taxable income or loss as if we were a regular
domestic corporation. This taxable income or loss level determines the amount of dividends, if any, that we are required to distribute over time to reduce or eliminate our tax liability pursuant to
REIT requirements.

Income
on CMBS investments is computed for GAAP purposes based upon a yield, which assumes credit losses will occur (See "Revenue Recognition" for further discussion). The yield to
compute our taxable income does not assume there would be credit losses, as a loss can only be deducted for tax

F-18

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

purposes
when it has occurred. Furthermore, due diligence expense incurred related to the acquisition of CMBS and loan investments not originated are required to be expensed as incurred for GAAP
purposes but are included as a component of the cost basis of the asset and amortized for tax purposes. In addition, straight line rental income recognized for GAAP purposes is not recognized for tax
purposes as taxable income is generally based on contractual rental income.

FASB
ASC 740-10-05-1 (previously SFAS 109), establishes financial accounting and reporting standards for the effect of income taxes that
result from an organization's activities during the current and preceding years. FASB ASC 740-10-05-05 requires that income taxes reflect the expected future
tax consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. A deferred tax asset or liability for each temporary difference is
determined based upon the tax rates that the organization expects to be in effect when the underlying items of income and expense are realized. A deferred tax valuation allowance is established if it
is more likely than not that all or a portion of the deferred tax assets will not be realized.

In
addition, FASB ASC 740-10-05-6 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FASB
ASC 740-10-05-6 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
This interpretation was effective January 1, 2007. The adoption of FASB ASC 740-10-05-6 did not materially affect our consolidated financial
statements.

We
have a wholly-owned domestic taxable REIT subsidiary that has made a joint election with us to be treated as our TRS. Our TRS is a separate entity subject to federal income tax under
the Internal Revenue Code. For the years ended December 31, 2009, 2008 and 2007, we did not record any current income tax expense. As of December 31, 2009, we had recorded a $16,040
valuation allowance on deferred tax assets of $16,040 attributable to income tax net operating loss carryforwards relating to our TRS. As of December 31, 2008, we recorded a $16,160 valuation
allowance on deferred tax assets of $16,160 attributable to income tax net operating loss carryforward relating to our TRS. The valuation allowances are based on management's estimate that our TRS is
not expected to generate sufficient taxable income to recover the deferred tax assets. As of December 31, 2009, we did not have a deferred tax liability. As of December 31, 2009, we had
net operating loss carryforwards of $35,253. Almost all of the net operating loss carryforward expires in 2027.

Our
policy for interest and penalties on material uncertain tax positions recognized in our consolidated financial statements is to classify these as interest expense and operating
expense, respectively. However, in accordance with FASB ASC 740-10-05-6, we assessed our tax positions for all open tax years (Federal, years 2005 through
2009 and State, years 2005 through 2009) as of December 31, 2009, and concluded that we have no material FASB ASC 740-10-50-15 liabilities to be
recognized at this time.

F-19

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Deferred Financing Costs

Deferred financing costs represent commitment fees, legal fees and other third party costs associated with obtaining commitments for
financing that result in a closing of such financing. These costs are amortized over the terms of the respective agreements using the effective interest method or a method that approximates the
effective interest method and the amortization is reflected in interest expense. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity.
Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined that the financing will not close.

Earnings per Share

We compute basic and diluted earnings per share in accordance with FASB ASC 260-10-50-1
(previously SFAS 128). Basic
earnings per share ("EPS") is computed based on net income divided by the weighted average number of shares of common stock and other participating securities outstanding during the period. Diluted
EPS is based on net income divided by the weighted average number of shares of common stock plus any additional shares of common stock attributable to stock options, provided that the options have a
dilutive effect. At each of December 31, 2009 and December 31, 2008, options to purchase a total of 130,000 shares of common stock have been excluded from the computation of diluted EPS
as they were determined to be antidilutive.

Variable Interest Entities

FASB ASC 810-10-50-8 (previously FIN 46) provides guidance on identifying entities
for which control is achieved through means other than through voting rights and on determining when and which business enterprise should consolidate a variable interest entity ("VIE"). FASB
ASC 810-10-50-8 states that a VIE is subject to consolidation if the investors in the entity being evaluated under FASB
ASC 810-10-50-8 either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are
unable to direct the entity's activities, or are not exposed to the entity's losses or entitled to its residual returns. VIEs within the scope of FASB
ASC 810-10-50-8 are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is determined to be the party that absorbs a
majority of the VIE's expected losses, receives the majority of the VIE's expected returns, or both.

Our
ownership of the subordinated classes of CMBS and RMBS from a single issuer may provide us with the right to appoint the special servicer for the applicable trust (that special
servicer will control the foreclosure/workout process on the underlying loans), which we refer to as the Controlling Class CMBS and RMBS. Currently, there are certain exceptions to the scope of FASB
ASC 810-10-50-9, one of which provides that an investor that holds a variable interest in a qualifying special-purpose entity ("QSPE") is not required to
consolidate that entity unless the investor has the unilateral ability to cause the entity to liquidate. FASB ASC 860-10-05-4 (previously SFAS 140)
sets forth the requirements for an entity to qualify as a QSPE. To maintain the QSPE exception, the special-purpose entity ("SPE") must initially meet the QSPE criteria and must continue to satisfy
such criteria in subsequent periods. An SPE's QSPE status can be impacted in future periods by activities undertaken by its

F-20

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

transferor(s)
or other involved parties, including the manner in which certain servicing activities are performed. To the extent that our CMBS or RMBS investments were issued by an SPE that meets the
QSPE requirements, we record those investments at the purchase price paid. To the extent the underlying SPEs do not satisfy the QSPE requirements, we follow the guidance set forth in FASB
ASC 810-10-50-8 as the SPEs would be determined to be VIEs.

We
have analyzed the pooling and servicing agreements governing each of our Controlling Class CMBS and RMBS investments for which we own a greater than 50% interest in the subordinated
class and we believe that the terms of those agreements are industry standard and are consistent with the QSPE criteria. We also have evaluated each of our Controlling Class CMBS and RMBS investments
as if the SPEs that issued such securities are not QSPEs. Using the fair value approach to calculate expected losses or residual returns, we have concluded that we would not be the primary beneficiary
of any of the underlying SPEs. To the extent that there are subsequent changes in the structure of these SPEs (which we believe occur infrequently), we would have to reconsider whether we are the
primary beneficiary. If we are deemed to be the primary beneficiary, we would have to consolidate the assets, liabilities and operations of the respective securitization trust.

F-21

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The
following table details the purchase date, face amount of our investment, face amount of the respective issuance and our amortized cost in our CMBS and RMBS investments in which we
are not the primary beneficiary and in which we own a greater than 50% interest in the most subordinate class as of December 31:

Security Trust Description

Purchase Date

Original
Face
Amount
Purchased

Total
Face
Amount of
Issuance

2009
Amortized
Cost

2008
Amortized
CostCMBS:WBCMT 2005-C18

May 2005

$
39,196

$
1,405,372

$
329

$
2,380GMACC 2005-C1

June 2005


53,928


1,597,857





2,792BSCMS 2005-PWR9

September 2005


83,001


2,152,389





6,743CSMC 2006-C1

March 2006


82,833


3,005,432


2,736


4,991COMM 2005-C6

August 2008


59,175


2,727,503


137


4,139Total CMBS




318,133


10,888,553


3,202


21,045RMBS:CWHL 2004-J8

March 2005


611


244,517


8


53GSR MTG 2005-1F

March 2005


2,767


691,667


14


83HVMLT 2005-2

March 2005


39,422


1,944,860


21


189JPMMT 2003-A1

March 2005


809


269,635


37


56WFMBS 2003-17

March 2005


3,002


1,000,331


263


628WFMBS 2005-2

March 2005


1,953


950,946


21


21FHASI 2005-AR2

April 2005


2,254


281,707


3


53WAMU 2005-AR6

April 2005


27,704


3,167,184


24


478FFML 2005-FF3

May 2005


5,080


770,271





52WFMBS 2005-AR5

May 2005


2,754


500,446


9


94FHASI 2005-AR3

June 2005


2,522


315,111


29


75JPMMT 2005-A3

June 2005


8,696


1,895,799


95


571WFMBS 2004-Z

July 2005


4,552


1,300,298


1


252BOAMS 2005-H

August 2005


3,888


706,792


8


67FHAMS 2005-AA6

August 2005


6,476


575,025





51JPMMT 2005-A5

August 2005


4,726


1,195,013


107


308FHASI 2005-AR4

September 2005


2,129


425,565





26RFMSI 2005-SA4

September 2005


1,681


850,478





18FHASI 2005-AR5

October 2005


1,082


216,253





14WFMBS 2004-DD

March 2005


2,101


600,085





4Total RMBS




124,209


17,901,983


640


3,093Total



$
442,342

$
28,790,536

$
3,842

$
24,138


Our
maximum exposure to loss as a result of our investment in these QSPEs totaled $3,842 and $24,138 as of December 31, 2009 and December 31, 2008,
respectively.

F-22

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

We
have re-evaluated our relationships as well as our involvement with VIEs in accordance with FASB ASC 810-10-65-2 (previously
SFAS 167) and we believe that the presentation of our consolidated financial statements will significantly change prospectively upon adoption of FASB
ASC 810-10-65-2. Specifically, certain VIEs will be consolidated by us due to the change from a quantitative analysis to a qualitative analysis, as well as
the removal of the consolidation exception for qualified special purpose entities. As of December 31, 2009, the outstanding face amount of the assets of these VIEs totaled approximately
$12,782,281 and the outstanding face amount of the liabilities issued by these VIEs totaled approximately $12,782,281, of which approximately $331,788 was owned by us.

The
following items were considered in our evaluation as to the primary beneficiary of VIE's we are involved with:



In
performing our evaluation we made the following assumptions relating to the factors that indicate control or the power to direct the activities that most significantly impact the
entities' economic performance.



The
financing structures that we offer to the borrowers on certain of our real estate loans involve the creation of entities that could be deemed VIEs and therefore, could be subject to
FASB

F-23

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

ASC 810-10-25-50.
Our management has evaluated our real estate loans and has concluded that none of the real estate loans are VIEs that are subject to the
consolidation rules of FASB ASC 810-10-05-8. See Note 5.



In November 2005, we issued collateralized debt obligations through two newly-formed financing subsidiaries, Crystal River CDO
2005-1, Ltd. and Crystal River CDO 2005-1 LLC (collectively referred to as "CDO I"). In January 2007, we issued collateralized debt obligations through two
newly-formed financing subsidiaries, Crystal River Capital Resecuritization 2006-1 Ltd. and Crystal River Capital Resecuritization 2006-1 LLC (collectively
referred to as "CDO II"). CDO I and CDO II represent VIEs with respect to which we have determined we are the primary beneficiary and accordingly, we have consolidated them in our
consolidated financial statements. We determined that we are the primary beneficiary of both CDO I and CDO II as we have the highest level of variability of return due to the credit risk
of the underlying assets. For additional information relating to the consolidated assets and liabilities of CDO I and CDO II, see Note 9.

We
have invested in CMBS and RMBS that were issued by special purpose securitization entities. Prior to FASB ASC 810-10-05-8, we measured
variability by using both interest rate and credit risk to determine whether we are the primary beneficiary of such securitization entities. After the effective date of FASB
ASC 810-10-05-8, credit risk now serves as the primary measurement of variability of return.

In
March 2007, we formed Crystal River Preferred Trust I (the "Trust") for the purpose of issuing trust preferred securities ("TruPS"). We do not consolidate the Trust because we have
determined that we are not the primary beneficiary as we have no equity at risk.

From
the initial date of our involvement with the VIEs discussed in the preceding three paragraphs, we have had no reconsideration events with respect to our CDOs, CMBS, RMBS and TruPS.
We have made no additional contributions to these VIEs since inception/purchase nor have the VIEs' governing instruments or contractual arrangements changed in a manner that changes the
characteristics or adequacy of the equity investment that we have at risk in those VIEs. Our CMBS and RMBS assets and CDO and TruPS liabilities were financed at inception through our issuance of debt
or equity and we have not incurred any subsequent financing in relation thereto. We have not provided financial or other support to any of these VIE entities during the year ended December 31,
2009.

F-24

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2009
(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The following table summarizes our involvement with these variable interest entities:

Variable Interest EntitiesFor the Year Ended
December 31, 2009As of
December 31, 2009

Current Face
Amount of
Assets held
by the
Company

Current Face
Amount of
Assets
within
the VIE

Current Face
Amount of
Liabilities
issued by
the Company

Current Face
Amount of
Liabilities
issued by
the VIEInterest
Income(1)

Interest
Expense(1)Assets

LiabilitiesConsolidated VIEsCDO ICMBS

$
3,813

$


$
2,599

$


$
119,807

$
15,957,521

$


$
15,957,521Non-Agency RMBS


2,622





3,193





89,154


8,466,810





8,466,810CDOs





5,723





2,829





132,260


132,260


283,539CDO IICMBS


29,101





12,529





388,465


96,063,835





96,063,835CDOs





27,894





2,905





323,002


323,002


388,384Total

$
35,536

$
33,617

$
18,321

$
5,734

$
597,426

$
120,943,428

$
455,262

$
121,160,089Unconsolidated VIEsCMBS

$
5,199

$


$
7,158

$


$
270,494

$
56,241,624

$


$
56,241,624Non-Agency RMBS


2,091





2,369





49,174


5,597,342





5,597,342TruPS





51,550





3,959


1,550


51,550


51,550


51,550Total

$
7,290

$
51,550

$
9,527

$
3,959

$
321,218

$
61,890,516

$
51,550

$
61,890,516


(1)The
net cash flow to the Company from these VIEs was $33,272 for the year ended December 31, 2009.


Our maximum exposure to loss with respect to these VIEs as of December 31, 2009 was $42,826.

Stock Based Compensation

We account for stock-based compensation in accordance with the provisions of FASB
ASC 718-10-10-2 (previously SFAS 123R), which establishes accounting and disclosure
requirements using fair value based methods of accounting for stock-based compensation plans. Compensation expense related to grants of stock and stock options are recognized ratably over the vesting
period of such grants based on the estimated fair value on the grant date.

Stock
compensation awards granted to the Manager and certain employees of the Manager's affiliates are accounted for in accordance with FASB
ASC 505-50-30-11 (previously EITF 96-18), which requires us to measure the fair value of the equity instrument using the stock prices and
other measurement assumptions as of the earlier of either the date at which a performance commitment by the counterparty is reached or the date at which the counterparty's performance is complete.

F-25

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentration of Credit Risk and Other Risks and Uncertainties

A significant portion of our investments are concentrated in MBS that pass through collections of principal and interest from the
underlying mortgages and there is a risk that some borrowers on the underlying mortgages will default. Therefore, MBS bear exposure to credit losses. Our maximum exposure to loss due to credit risk if
all parties to our investment securities failed completely to perform according to the terms of the contracts as of December 31, 2009 and December 31, 2008 is $42,826 and $72,916,
respectively. Our real estate loans and other investments also bear exposure to credit losses. Our maximum exposure to loss due to credit risk if parties to our real estate loans, including real
estate loans held for sale, and other investments failed completely to perform according to the terms of the loans and other agreements as of December 31, 2009 and December 31, 2008 is
$7,453 and $15,642, respectively.

We
bear certain other risks typical in investing in a portfolio of MBS. Principal risks potentially affecting our financial position, income and cash flows include the risk that
(i) interest rate changes can negatively affect the market values of our MBS, (ii) interest rate changes can influence decisions made by borrowers in the mortgages underlying the
securities to prepay those mortgages, which can negatively affect both the cash flows from, and the market value of, our MBS and (iii) adverse changes in the market value of our MBS and/or our
inability to renew short term borrowings would result in the need to sell securities at inopportune times and cause us to realize losses.

Other
financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and real estate loans. We place our cash and cash
equivalents in excess of insured amounts with high quality financial institutions. The collateral securing our real estate loans and other investments are located in the United States.

Credit
risk also arises from the possibility that tenants may be unable to fulfill their lease commitments. We have a significant concentration of rental revenue from our commercial
properties given that JPMorgan Chase is the sole tenant of all three properties. Therefore, we are subject to concentration of credit risk, and the inability of this tenant to make its lease payments
could have an adverse effect on us. Our exposure to this credit risk is mitigated since we have long-term leases in place for all three properties with a tenant that has an investment
grade credit rating.

Other Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Our other comprehensive income (loss)
is comprised primarily of unrealized gains and losses on available-for-sale securities and net unrealized and deferred gains and losses on certain derivative investments
accounted for as cash flow hedges.

Repurchase Agreements

In repurchase agreements, we transfer securities to a counterparty under an agreement to repurchase the same securities at a fixed
price in the future. These agreements are accounted for as secured financing transactions as we maintain effective control over the transferred securities and the

F-26

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

transfer
meets the other criteria for such accounting. The transferred securities are pledged by us as collateral to the counterparty.

FASB
ASC 860-10-55-54 (previously FSP FAS 140-3) relates to repurchase financings for financial assets previously
transferred between the same counterparties, that is entered into contemporaneously with, or in contemplation of, the initial transfer. FASB ASC 860-10-55-54
establishes criteria to determine the accounting treatment of transactions involving the transfer, and subsequent repurchase financing, of financial assets with the same counterparty. Transactions
that do not meet the criteria of FASB ASC 860-10-55-54 do not qualify for QSPE accounting treatment under FASB
ASC 860-10-15-3 and will be treated as a derivative, requiring further evaluation under FASB ASC 815-10-05-2
(previously SFAS 133). We did not enter into any repurchase financing transactions during the year ended December 31, 2009.

Foreign Currency Transactions

We conform to the requirements of FASB ASC 830-20-05-01 (previously SFAS 52). FASB
ASC 830-20-35-01 requires us to record realized and unrealized gains and losses from transactions denominated in a currency other than our functional
currency (U.S. dollar) in determining net income. We did not have any foreign currency transactions during the year ended December 31, 2009.

Segment Reporting

FASB ASC 280-10-50-20 (previously SFAS 131), establishes standards on reporting
operating segments in interim and annual financial reports. FASB ASC 280-10-50-20 defines an operating segment as a component of an enterprise for which
discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision making group, to evaluate performance and make operating decisions. We have
identified our chief operating decision-maker as our chief executive officer. We have determined that we operate in two reportable segments: a Securities, Loans and Other Investments segment and a
Commercial Real Estate segment. The reportable segments were determined based on the allocation of our investment portfolio between investment activity and commercial real estate operations in which
separate performance data is produced and analyzed by management and the chief operating decision-maker.

Recently Adopted Accounting Pronouncements

FASB ASC 810-10-65-1 (previously SFAS 160, which the FASB issued in December 2007)
clarifies the classification of non-controlling interests in consolidated statements of financial position and the accounting for and reporting of transactions between a company and
holders of such non-controlling interests. Under FASB ASC 810-10-65-1, non-controlling interests are considered equity and should be
reported as an element of consolidated equity. The current practice of classifying minority interests within a mezzanine section of the statement of financial position will be eliminated. Under FASB
ASC 810-10-65-1, net income will encompass the total income of all consolidated subsidiaries and will require separate disclosure on the face of the
statements of operations of income (loss) attributable to the controlling and non-controlling interests. Increases and decreases in the non-controlling ownership

F-27

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

interest
amount will be accounted for as equity transactions. When a subsidiary is deconsolidated, any retained, non-controlling equity investment in the former subsidiary and the gain or
loss on the deconsolidation of the subsidiary must be measured at fair value. FASB ASC 810-10-65-1 is effective for fiscal years beginning after
December 15, 2008 and earlier application is prohibited. The adoption of FASB ASC 810-10-65-1 did not have a material impact on our consolidated
financial statements.

FASB
ASC 860-10-55-54 (previously FSP FAS 140-3, which the FASB issued in February 2008) relates to repurchase financings
for financial assets previously transferred between the same counterparties that are entered into contemporaneously with, or in contemplation of, the initial transfer. FASB
ASC 860-10-55-54 establishes criteria to determine the accounting treatment of transactions involving the transfer, and subsequent repurchase financing, of
financial assets with the same counterparty. Transactions that do not meet the criteria of FASB ASC 860-10-55-54 do not qualify for QSPE accounting treatment
under FASB ASC 860-10-15-3 and will be treated as derivatives requiring further evaluation under FASB
ASC 860-10-55-54 (previously SFAS 133). FASB ASC 860-10-55-54 is effective for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. Earlier application is not permitted. The adoption of FASB ASC 860-10-55-54 did not
have a material impact on our consolidated financial statements.

FASB
ASC 815-10-65-1 (previously SFAS 161, which the FASB issued in March 2008) amended and expanded the disclosure requirements for
derivative
instruments and hedging activities. FASB ASC 815-10-65-1 requires qualitative disclosure about objectives and strategies for using derivative and hedging
instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative
agreements. FASB ASC 815-10-65-1 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008
with early application encouraged. We adopted FASB ASC 815-10-65-1 at the beginning of the first quarter of 2009, and we have included the expanded
disclosures required by that statement.

FASB
ASC 260-10-45-60 (previously FSP EITF 03-6-1, which the FASB issued in June 2008) addresses whether
instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share
("EPS") under the two-class method in accordance with FASB ASC 260-10-50-1 (previously SFAS 128). These provisions of FASB
ASC 260-10-45-60 are effective for fiscal years beginning after November 15, 2008 and earlier application is prohibited. The adoption of FASB
ASC 260 did not have a material impact on our consolidated financial statements.

FASB
ASC 815-10-65-1 (previously FSP FAS 133-1 and FIN 45-4, each of which the FASB issued in September
2008), which requires additional disclosures for sellers of credit derivative instruments and certain guarantees. FASB ASC 815-10-50-4A requires the
disclosure of the maximum potential amount of future payments, the related fair value and the current status of the payment/performance risk for certain guarantees and credit derivatives sold. FASB
ASC 815-10-65-1 is effective for the first reporting period (interim or annual) ending after November 15, 2008. The adoption of these provisions of
FASB ASC 815-10-65-1 did not have a material impact on our consolidated financial statements.

F-28

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

FASB
ASC 860-10-50-3 (previously FSP FAS 140-4 and FIN 46(R)-8, which the FASB issued in December 2008)
requires public entities to provide additional disclosures regarding transfers of financial assets and amends FASB ASC 810-10-25-50 (previously
FIN 46R) to require public enterprises, including sponsors that have a variable interest in a VIE, to provide additional disclosures about their involvement with VIEs. FASB
ASC 860-10-50-3 is effective for the first reporting period (interim or annual) ending after December 15, 2008. The adoption of these provisions of
FASB ASC 860-10-50-3 did not have a material impact on our consolidated financial statements.

FASB
ASC 325-40-65-1 (previously FSP EITF 99-20-1, which the FASB issued in January 2009, and
EITF 99-20) amends the impairment guidance to align it with the impairment guidance within FASB ASC 320-10-50-5 (previously
SFAS 115) by removing from FASB ASC 325-40-65-1 the requirement to place exclusive reliance on market participants' assumptions about future cash
flows when evaluating an asset for other-than-temporary impairment. The standard now requires that assumptions about future cash flows consider reasonable management judgment
about the probability that the holder of an asset will be unable to collect all amounts due. These provisions of FASB ASC 325-40-65-1 are effective for
interim and annual reporting periods ending after December 15, 2008. The adoption of these provisions of FASB ASC 325-40-65-1 did not have a material
impact on our consolidated financial statements.

FASB
ASC 805-10-05-2 (previously FSP FAS 141(R)-1, which the FASB issued in April 2009) addresses application issues raised
by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from
contingencies in a business combination. These provisions of FASB ASC 805-10-05-2 are effective for assets or liabilities arising from contingencies in
business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of these provisions
of FASB ASC 805-10-05-2 did not have a material impact on our consolidated financial statements.

In
April 2009, the FASB issued three ASCs, which included: (i) FASB ASC 320-10-65-1 (previously FSP FAS 115-2),
(ii) FASB ASC 820-10-65-4 (previously FSP FAS 157-4), and (iii) FASB
ASC 825-10-65-1 (previously FSP FAS 107-1). All three of these standards are effective for periods ending after June 15, 2009, with
earlier adoption permitted for periods ending after March 15, 2009. The adoption of FASB ASC 320-10-65-1,
820-10-50-2 and 825-10-65-1 is required to occur concurrently. Accordingly, we adopted all three of these standards as of
April 1, 2009. FASB ASC 320-10-65-1 (previously FSP FAS 115-2) provides additional guidance for
other-than-temporary impairments on debt securities. In addition to existing guidance, under FASB ASC 320-10-65-1, an
other-than-temporary impairment is deemed to exist if an entity does not expect to recover the entire amortized cost basis of a security. As discussed above, FASB
ASC 320-10-65-1 provides for the bifurcation of other-than-temporary impairments into (i) amounts related to credit losses
which are recognized through earnings, and (ii) amounts related to all other factors which are recognized as a component of other comprehensive income. The adoption of FASB
ASC 320-10-65-1 required a reassessment of the cost basis of all our available-for-sale securities for which
other-than-temporary impairments were recorded, and resulted in a cumulative effect adjustment of $72,126 that was reclassified from retained deficit to accumulated other
comprehensive loss on our consolidated balance sheet. In addition, we

F-29

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

reassessed
the cost basis of our held-for-trading securities under the guidance of FASB ASC 320-10-65-1 to reflect a consistent
approach to reporting interest income on such securities. As a result of this reassessment, we recorded an increase in the cost basis and a corresponding adjustment to unrealized gain (loss) in the
amount of $283,116 to our held-for-trading securities. Further, FASB ASC 320-10-65-1 requires certain disclosures for securities,
which are included in Note 4 to these consolidated financial statements.

FASB
ASC 820-10-65-4 (previously FSP FAS 157-4) provides additional guidance for fair value measures under FASB
ASC 820-10-65-4 in determining if the market for an asset or liability is inactive and, accordingly, if quoted market prices may not be indicative of fair
value. The adoption of FASB ASC 820-10-65-4 did not have a material impact on our consolidated financial statements.

FASB
ASC 825-10-65-1 (previously FSP FAS 107-1) extends the existing disclosure requirements related to the fair value of
financial instruments to interim periods in addition to annual financial statements. The adoption of FASB ASC 825-10-65-1 did not have a material impact on
our consolidated financial statements. The disclosure requirements under FASB ASC 825-10-65-1 are included in Note 16 to these consolidated financial
statements.

In
May 2009, the FASB issued FASB ASC 855-10-05-1 (previously SFAS 165). FASB ASC 855-10-05-1
establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were
issued or were available to be issued. FASB ASC 855-10-05-1 is effective for interim periods and fiscal years ended after June 15, 2009. In February
2010, the FASB issued ASU 2010-09 to amend FASB ASC 855-10-05-1. In accordance with the ASU, an entity is not required to disclose the
date through which management has evaluated subsequent events in the financial statements. In addition, an entity's considerations with respect to evaluating subsequent events will be consistent with
those before the issuance of the subsequent events accounting guidance. The adoption of ASU 2010-09 did not have a material effect on our consolidated financial statements.

In
June 2009, the FASB issued FASB ASC 105-10-05-1 (previously SFAS 168). FASB ASC 105-10-05-1 establishes
the ASC as the source of authoritative GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (SEC), which are sources of authoritative GAAP for SEC registrants.
FASB ASC 105-10-05-1 is effective for financial statements issued for interim and fiscals years ending after September 15, 2009. The adoption of the ASC was
not intended to change or alter existing GAAP and therefore did not have any impact on our financial statements. References to the relevant ASC section and the previously existing GAAP standard have
been provided for accounting standards adopted prior to the effective date of the ASC.

F-30

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2009, the FASB issued FASB ASC 860-10-65-3 (previously SFAS 166). FASB ASC
860-10-65-3 removed the concept of a QSPE and the exemptions from consolidation for QSPEs; it also requires a transferor to evaluate all existing QSPEs to determine
whether those QSPEs must be consolidated in accordance with SFAS 167, as defined below. FASB ASC 860-10-65-3 revises and clarifies the derecognition
requirements for transfers of financial assets and the initial measurement of beneficial interests that are received as proceeds by a transferor in connection with transfers of financial assets. In
addition, FASB ASC 860-10-65-3 requires additional disclosure about transfers of financial assets and a transferor's continuing involvement with such transferred
financial assets. FASB ASC 860-10-65-3 is effective for financial asset transfers occurring after an entity's first fiscal year beginning after November 15,
2009. We are currently evaluating the impact of FASB ASC 860-10-65-3 and do not expect FASB ASC 860-10-65-3 to have a
significant impact on our consolidated financial position, results of operations and cash flows.

In
June 2009, the FASB issued FASB ASC 810-10-65-2 (previously SFAS 167), which amends the consolidation guidance applicable to VIEs. The
amendments to the consolidation guidance affect all entities currently within the scope of FASB ASC 810-10-05-8 (previously FIN 46(R)), as well as QSPEs that
currently are excluded from the scope of FASB ASC 810-10-05-8 (previously FIN 46(R)). FASB ASC 810-10-65-2 is effective
for fiscal years beginning after November 15, 2009. FASB ASC 810-10-65-2 significantly changes the criteria by which an enterprise determines whether it must
consolidate a VIE. Currently, a VIE is consolidated by the enterprise that will absorb a majority of the expected losses or expected residual returns created by the assets of the VIE. FASB ASC
810-10-65 requires that a VIE be consolidated by the enterprise that has both the power to direct the activities that most significantly impact the VIE's economic performance
and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. FASB ASC 810-10-65 also requires that an enterprise
continually reassess, based on current facts and circumstances, whether it should consolidate the VIEs with which it is involved. We are currently evaluating the impact of FASB ASC
810-10-65-2 on our consolidated financial position, results of operations and cash flows and we may be required to consolidate certain VIEs.

Presentation

Certain reclassifications have been made in the presentation of the prior periods consolidated financial statements to conform to the
2009 presentation.

F-31

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

3. FAIR VALUE HIERARCHY

Fair Value on a Recurring Basis

The following tables set forth by level within the fair value hierarchy our assets and liabilities accounted for at fair value on a
recurring basis under FASB ASC 815-15-25-4 (previously SFAS 155) and FASB ASC 825-10-50-8 (previously SFAS 159) as
of December 31, 2009 and December 31, 2008. As required by FASB ASC 820-10-50-1 (previously SFAS 157), assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to the fair value measurement.

Fair Value Measurements
as of December 31, 2009Level 1

Level 2

Level 3

TotalAssets accounted for at fair value:Investment securities

$


$


$
42,826

$
42,826Derivative assets











Total assets at fair value

$


$


$
42,826

$
42,826Liabilities accounted for at fair value:Collateralized debt obligations

$


$


$
33,617

$
33,617Derivative liabilities








34,937


34,937Total liabilities at fair value

$


$


$
68,554

$
68,554




Fair Value Measurements
as of December 31, 2008Level 1

Level 2

Level 3

TotalAssets accounted for at fair value:Investment securities

$


$


$
72,916

$
72,916Derivative assets











Total assets at fair value

$


$


$
72,916

$
72,916Liabilities accounted for at fair value:Collateralized debt obligations

$


$


$
45,429

$
45,429Derivative liabilities








57,280


57,280Total liabilities at fair value

$


$


$
102,709

$
102,709


F-32

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

3. FAIR VALUE HIERARCHY (Continued)

The
following is a summary of our investment securities based on the lowest level input that is significant to each security's fair value measurement in its entirety as of
December 31, 2009 and December 31, 2008.

Investment Securities at Fair
Value as of December 31, 2009Security Description

Level 1

Level 2

Level 3

TotalCMBS

$


$


$
38,113

$
38,113Non-Agency RMBS








4,713


4,713Total investment securities at fair value

$


$


$
42,826

$
42,826Level 3 assets for which we do not bear direct economic exposure(1)








35,536Level 3 assets for which we bear direct economic exposure







$
7,290




Investment Securities at Fair
Value as of December 31, 2008Security Description

Level 1

Level 2

Level 3

TotalCMBS

$


$


$
58,093

$
58,093Non-Agency RMBS








14,823


14,823Total investment securities at fair value

$


$


$
72,916

$
72,916Level 3 assets for which we do not bear direct economic exposure(1)








51,032Level 3 assets for which we bear direct economic exposure







$
21,884


(1)Consists
of Level 3 assets that are financed by our collateralized debt obligations. We own an interest in these securities through our investment in
the subordinate classes of notes issued by these CDOs.


F-33

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

3. FAIR VALUE HIERARCHY (Continued)




Level 3 Gains and Losses

The table below sets forth a summary of changes in the fair value of our assets with significant valuation inputs classified as
Level 3 for the year ended December 31, 2009.

Assets Measured at Fair Value on a
Recurring Basis Using Significant
Unobservable Inputs (Level 3)Investment
securities
available-for-
sale

Investment
securities
held-for-trading
at FVO

TotalBalance, December 31, 2008

$
21,615

$
51,301

$
72,916Total net gains or losses on assets still held at December 31, 2009:Included in earningsinterest income


(5,747
)

(9,325
)

(15,072
)Included in earningsimpairments


(75,606
)




(75,606
)Included in earningsmark to market on held-for-trading securities (FVO)





(4,171
)

(4,171
)Included in earningsother


(421
)

(1,099
)

(1,520
)Included in accumulated other comprehensive income (loss)


71,244





71,244Total net gains or losses on assets disposed/redeemed during the period:Included in earningsinterest income


74


(118
)

(44
)Included in earningsimpairments


(2,341
)




(2,341
)Included in earningsmark to market on held-for-trading securities (FVO)





40


40Included in earningsother


(3,309
)

(494
)

(3,803
)Included in accumulated other comprehensive income (loss)


2,241





2,241Net purchases, dispositions and settlements


(432
)

(626
)

(1,058
)Transfers in and/or out of Level 3








Balance, December 31, 2009

$
7,318

$
35,508

$
42,826


During
the year ended December 31, 2009, our assets measured at fair value on a recurring basis reflected as Level 3 decreased, largely as a result of principal repayments
and write-offs on CMBS and Non-Agency RMBS and decline in the projected cash flow on our CMBS and Non-Agency RMBS. A significant amount of our investment securities
are reflected as Level 3 as a result of the reduction of liquidity in the capital markets that has resulted in a decrease in the observability of the significant inputs used in determining fair
value.

F-34

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

3. FAIR VALUE HIERARCHY (Continued)

The
table below sets forth a summary of changes in the fair value of our assets with significant valuation inputs classified as Level 3 for the year ended December 31,
2008.

Assets Measured at Fair Value on a
Recurring Basis Using Significant
Unobservable Inputs (Level 3)Investment
securities
available-for-
sale

Investment
securities
held-for-trading
at FVO

TotalBalance, January 1, 2008

$
169,883

$
398,681

$
568,564Total net gains or losses on assets still held at December 31, 2008:Included in earningsinterest income


3,738


15,360


19,098Included in earningsimpairments


(141,110
)




(141,110
)Included in earningsmark to market on held-for-trading securities (FVO)





(356,713
)

(356,713
)Included in earningsother


(1,150
)

(142
)

(1,292
)Included in accumulated other comprehensive income (loss)


581





581Total net gains or losses on assets disposed/redeemed during the period:Included in earningsinterest income


(575
)

(4
)

(579
)Included in earningsrealized gain (loss) on sale


(1,894
)




(1,894
)Included in earningsimpairments


(1,806
)




(1,806
)Included in earningsmark to market on held-for-trading securities (FVO)





(1,019
)

(1,019
)Included in earningsother


(544
)




(544
)Included in accumulated other comprehensive income (loss)


(13
)




(13
)Net purchases, dispositions and settlements


(5,495
)

(4,862
)

(10,357
)Transfers in and/or out of Level 3








Balance, December 31, 2008

$
21,615

$
51,301

$
72,916


During
the year ended December 31, 2008, our assets measured at fair value on a recurring basis reflected as Level 3 decreased, largely as a result of the sale of CMBS
totaling $2,245, principal repayments on CMBS and Non-Agency RMBS totaling $8,592 and spread widening on our CMBS and Non-Agency RMBS. A significant amount of our investment
securities are reflected as Level 3 as a result of the reduction of liquidity in the capital markets that has resulted in a decrease in the observability of the significant inputs used in
determining fair value.

F-35

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

3. FAIR VALUE HIERARCHY (Continued)

The table below sets forth a summary of changes in the fair value of our liabilities with significant valuation inputs classified as Level 3 for the year ended December 31,
2009.

Liabilities Measured at Fair Value on a
Recurring Basis Using Significant
Unobservable Inputs (Level 3)Derivative
Liabilities

Collateralized
Debt
Obligations

TotalBalance, December 31, 2008

$
57,280

$
45,429

$
102,709Total net gains or losses (realized/unrealized) still held at December 31, 2009:Included in earningsmark to market on collateralized debt obligations





(46
)

(46
)Included in earningsrealized and unrealized loss on derivatives


(12,343
)




(12,343
)Net issuances, dispositions and settlements


(10,000
)

(11,766
)

(21,766
)Transfers in and/or out of Level 3








Balance, December 31, 2009

$
34,937

$
33,617

$
68,554


During
the year ended December 31, 2009, our liabilities measured at fair value on a recurring basis reflected as Level 3 decreased, due to the derivative liabilities that
we closed out during the year and the principal repayments on our CDO obligations. In addition, the decrease in valuation of our derivatives liabilities and our CDO obligations, which are based on
non-binding broker quotes, contributed to the decrease.

The
table below sets forth a summary of changes in the fair value of our liabilities with significant valuation inputs classified as Level 3 for the year ended December 31,
2008.

Liabilities Measured at Fair Value on a
Recurring Basis Using Significant
Unobservable Inputs (Level 3)Derivative
Liabilities

Collateralized
Debt
Obligations

TotalBalance, January 1, 2008

$
32,908

$
299,034

$
331,942Total net gains or losses (realized/unrealized) still held at December 31, 2008:Included in earningsmark to market on collateralized debt obligations





(234,024
)

(234,024
)Included in earningsrealized and unrealized loss on derivatives


32,985





32,985Net issuances, dispositions and settlements


(19,780
)

(19,581
)

(39,361
)Transfers in and/or out of Level 3


11,167





11,167Balance, December 31, 2008

$
57,280

$
45,429

$
102,709


F-36

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

3. FAIR VALUE HIERARCHY (Continued)

During
the year ended December 31, 2008, our liabilities measured at fair value on a recurring basis reflected as Level 3 decreased, largely due to the decrease in
valuation of our CDO obligations, which are based on non-binding broker quotes. In addition, we reclassified our credit default swaps, which we refer to as CDS, as Level 3
liabilities as a result of the reduction of liquidity in the capital markets that has resulted in a decrease in the observability of the significant inputs used in determining fair value, offset in
part by derivative liabilities that we closed out during the year ended December 31, 2008.

The
table below sets forth a summary of changes in the fair value of our investment securities with significant valuation inputs classified as Level 3 for the year ended
December 31, 2009.

Investment Securities Measured at Fair
Value on a Recurring Basis Using
Significant Unobservable Inputs (Level 3)CMBS

Non-Agency
RMBS

TotalBalance, December 31, 2008

$
58,093

$
14,823

$
72,916Total net gains/losses on securities still held at end of period:Included in earningsinterest income


(12,514
)

(2,558
)

(15,072
)Included in earningsimpairments


(61,312
)

(14,294
)

(75,606
)Included in earningsmark to market on held-for-trading securities (FVO)


(2,505
)

(1,666
)

(4,171
)Included in earningsother


(184
)

(1,336
)

(1,520
)Included in accumulated other comprehensive income (loss)


57,614


13,630


71,244Total net gains/losses on securities disposed/redeemed during period:Included in earningsinterest income


695


(739
)

(44
)Included in earningsimpairments


(1,260
)

(1,081
)

(2,341
)Included in earningsmark to market on held-for-trading securities (FVO)


(242
)

282


40Included in earningsother





(3,803
)

(3,803
)Included in accumulated other comprehensive income (loss)


(272
)

2,513


2,241Net purchases, dispositions and settlements





(1,058
)

(1,058
)Transfers in and/or out of Level 3








Balance, December 31, 2009

$
38,113

$
4,713

$
42,826


F-37

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

3. FAIR VALUE HIERARCHY (Continued)

The
table below sets forth a summary of changes in the fair value of our investment securities with significant valuation inputs classified as Level 3 for the year ended
December 31, 2008.

Investment Securities Measured at Fair
Value on a Recurring Basis Using
Significant Unobservable Inputs (Level 3)CMBS

Non-Agency RMBS

Preferred
Stock

TotalBalance, January 1, 2008

$
399,410

$
168,422

$
732

$
568,564Total net gains/losses on securities still held at end of period:Included in earningsinterest income


8,526


10,572





19,098Included in earningsimpairments


(79,087
)

(60,883
)

(1,140
)

(141,110
)Included in earningsmark to market on held-for-trading securities (FVO)


(266,783
)

(89,930
)




(356,713
)Included in earningsother


(514
)

(778
)




(1,292
)Included in accumulated other comprehensive income (loss)


480


(307
)

408


581Total net gains/losses on securities disposed/redeemed during period:Included in earningsinterest income


16


(595
)




(579
)Included in earningsrealized gain (loss) on sale


(1,894
)







(1,894
)Included in earningsimpairments





(1,806
)




(1,806
)Included in earningsmark to market on held-for-trading securities (FVO)





(1,019
)




(1,019
)Included in earningsother





(544
)




(544
)Included in accumulated other comprehensive income (loss)


1


(14
)




(13
)Net purchases, dispositions and settlements


(2,062
)

(8,295
)




(10,357
)Transfers in and/or out of Level 3











Balance, December 31, 2008

$
58,093

$
14,823

$


$
72,916


Valuation Techniques

In accordance with FASB ASC 820-10-50-1 (previously SFAS 157), valuation techniques used for
assets and liabilities accounted for at fair value are generally categorized into three types:



F-38

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

3. FAIR VALUE HIERARCHY (Continued)



The
three approaches described within FASB ASC 820-10-50-1 (previously SFAS 157) are consistent with generally accepted valuation
methodologies. While all three approaches are not applicable to all assets or liabilities accounted for at fair value, where appropriate and possible, one or more valuation techniques may be used. The
selection of the valuation method(s) to apply considers the definition of an exit price and the nature of the asset or liability being valued and significant expertise and judgment is required. For
assets and liabilities accounted for at fair value, excluding real estate held for sale, valuation techniques generally are a combination of the market and income approaches. Real estate held for sale
valuation techniques generally combine income and cost approaches. For the year ended December 31, 2009, the application of valuation techniques applied to similar assets and liabilities has
been consistent.

Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis and are not included in the tables above. These assets
include real estate loans and real estate loans held for sale that are reported at lower of cost or market and loans held for sale that initially were measured at cost and have been written down to
fair value as a result of being designated for sale. The following table shows the hierarchy for those assets measured at fair value on a non-recurring basis as of December 31,
2009.

Assets Measured at Fair Value on a
Non-Recurring Basis Using Significant
Unobservable Inputs (Level 3) as of
December 31, 2009Asset Description

Level 1

Level 2

Level 3

TotalReal estate loans

$


$


$


$
Real estate loans held for sale








5,903


5,903Total assets at fair value

$


$


$
5,903

$
5,903


F-39

---



Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

3. FAIR VALUE HIERARCHY (Continued)

Real estate loansWe had one real estate construction loan and one mezzanine loan that are held for investment where allowances for loan losses have
been calculated based upon the fair
value of the underlying collateral and by using a fundamental cash flow valuation analysis. The cash flow analysis includes cumulative loss assumptions derived from multiple inputs including current
housing prices, costs to complete the construction of the underlying collateral, expected recoveries from supporting collateral and other market data.

Real estate loans held for saleWe designated one mezzanine loan and one whole loan as being held for sale as of December 31, 2009 as we have
committed to sell them, or we have the intent and ability to sell them in the near future. The fair values of the mezzanine loan and the whole loan held for sale were based on management's discounted
cash flow analysis.

The
following table shows the hierarchy for those assets measured at fair value on a non-recurring basis as of December 31, 2008.

Assets Measured at Fair Value on a
Non-Recurring Basis Using Significant
Unobservable Inputs (Level 3) as of
December 31, 2008Asset Description

Level 1

Level 2

Level 3

TotalReal estate loans

$


$


$
400

$
400Real estate loans held for sale








5,058


5,058Total assets at fair value

$


$


$
5,458

$
5,458


Real estate loansWe had one real estate construction loan that is held for investment where an allowance for loan loss has been calculated based upon
the fair value of the underlying collateral and by using a fundamental cash flow valuation analysis. The cash flow analysis includes cumulative loss assumptions derived from multiple inputs including
current housing prices, expected recoveries from supporting collateral and other market data.

Real estate loans held for saleWe designated one mezzanine loan as being held for sale as of December 31, 2008 as we have committed to sell
it, or we have the intent and ability to sell it in the near future. The fair value of the mezzanine loan held for sale was based on management's discounted cash flow analysis that utilized spreads
supplied by dealers.

F-40

---



Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

3. FAIR VALUE HIERARCHY (Continued)

Fair Value Option

The following reflects the assets and liabilities accounted for under the fair value option and the change in fair value recorded in
our consolidated statement of operations:

Changes in Fair Values for the Year Ended
December 31, 2009, For Items Measured at Fair Value
Pursuant to the Election of the Fair Value OptionFair Value
Option
December 31,
2009

Interest
Income(1)

Net Mark to
Market
Adjustments on
Investment Securities
Held-for-Trading

Net Mark to
Market
Adjustments on
Collateralized
Debt
ObligationsAssets accounted for under the fair value option:Held-for-trading securities:CMBS

$
32,886

$
(8,107
)
$
(2,747
)
$
Non-Agency RMBS


2,622


(1,336
)

(1,384
)

$
35,508

$
(9,443
)
$
(4,131
)
$
Liabilities accounted for under the fair value option:Collateralized debt obligations

$
33,617

$


$


$
46


(1)Represents
accretion of net discount only.


Changes in Fair Values for the Year Ended
December 31, 2008, For Items Measured at Fair Value
Pursuant to the Election of the Fair Value OptionFair Value
Option
December 31,
2008

Interest
Income(1)

Net Mark to
Market
Adjustments on
Investment Securities
Held-for-Trading

Net Mark to
Market
Adjustments on
Collateralized
Debt
ObligationsAssets accounted for under the fair value option:Held-for-trading securities:CMBS

$
43,776

$
8,661

$
(266,783
)
$
Non-Agency RMBS


7,525


6,695


(90,949
)

$
51,301

$
15,356

$
(357,732
)
$
Liabilities accounted for under the fair value option:Collateralized debt obligations

$
45,429

$


$


$
234,024


(1)Represents
accretion of net discount only.


F-41

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

3. FAIR VALUE HIERARCHY (Continued)




Total
financial assets at fair value classified within Level 3 were $48,729 and $78,374 as of December 31, 2009 and December 31, 2008, respectively.
Such amounts represent 13% and 17% of "Total assets" on the consolidated balance sheet as of December 31, 2009 and December 31, 2008, respectively. Excluding assets for which we do not
bear direct economic exposure, Level 3 assets were 2% and 5% of "Total assets" as of December 31, 2009 and December 31, 2008, respectively.

Total
financial liabilities at fair value classified within Level 3 were $68,554 and $102,709 as of December 31, 2009 and December 31, 2008, respectively. Such
amounts represent 16% and 21% of "Total liabilities" on the consolidated balance sheets as of December 31, 2009 and December 31, 2008, respectively.

As
of December 31, 2009 and December 31, 2008, our CDO notes had a face value of $455,262 and $467,027, respectively, and fair value of $33,617 and $45,429, respectively.

Derivative Financial Instruments

Currently, we use interest rate swaps to manage our interest rate risk. The valuation of these instruments is determined using widely
accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the
period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard
methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on
an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

To
comply with the provisions of FASB ASC 820-10-50-9 (previously SFAS 157), we incorporate credit valuation adjustments to appropriately
reflect both our own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of
nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral posting, thresholds, mutual puts and guarantees. For the year ended
December 31, 2009, we recorded $8,905 into earnings as a loss, which is reflected in realized and unrealized gain (loss) on derivatives on our consolidated statement of operations, relating to
our nonperformance risk.

Although
we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties. As of
December 31, 2009, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit
valuation adjustments are significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 3 of
the fair value hierarchy.

F-42

---



Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

3. FAIR VALUE HIERARCHY (Continued)

In
addition, we have a credit default swap that is held as an investment. The valuation of this derivative is based on the expected creditworthiness of the underlying asset discounted
based on current market rates utilized by dealers. The determination of expected credit assumptions requires certain judgments which cannot be attributed to observable market inputs. As a result, we
have determined that our credit default swap is classified in Level 3 of the fair value hierarchy.

4. INVESTMENT SECURITIES

Our investment securities are classified into two categories, available-for-sale and trading, in which both are carried at their estimated fair values. The
amortized cost and estimated fair values of our investment securities as of December 31, 2009 and December 31, 2008 are summarized as follows:

UnrealizedAmortized
CostAvailable-for-sale Securities

Gains(1)

Losses(1)

Fair ValueDecember 31, 2009CMBS

$
3,144

$
2,083

$


$
5,227Non-Agency RMBS


2,091








2,091Total

$
5,235

$
2,083

$


$
7,318December 31, 2008CMBS

$
13,675

$
642

$


$
14,317Non-Agency RMBS


7,216


82





7,298Total

$
20,891

$
724

$


$
21,615


(1)Included
in accumulated other comprehensive income (loss).


UnrealizedAmortized
CostTrading Securities

Gains(1)

Losses(1)

Fair ValueDecember 31, 2009CMBS

$
23,049

$
9,837

$


$
32,886Non-Agency RMBS


2,617


5





2,622Total

$
25,666

$
9,842

$


$
35,508December 31, 2008CMBS

$
43,634

$
142

$


$
43,776Non-Agency RMBS


7,493


32





7,525Total

$
51,127

$
174

$


$
51,301


(1)Included
in consolidated statements of operations.


F-43

---



Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

4. INVESTMENT SECURITIES (Continued)

We pledge our investment securities to secure our collateralized debt obligations and borrowings under our secured revolving credit facility. The fair value of the investment securities
that we pledged as collateral as of December 31, 2009 and December 31, 2008 is summarized as follows:

December 31,Pledged as Collateral:

2009

2008For borrowings under collateralized debt obligations

$
35,536

$
51,032For borrowings under secured revolving credit facility, related party


6,450


4,234Total

$
41,986

$
55,266


The
aggregate estimated fair values by underlying credit rating of our investment securities as of December 31, 2009 and December 31, 2008 were as follows:

December 31, 2009

December 31, 2008Security Rating

Estimated
Fair Value

Percentage

Estimated
Fair Value

PercentageAAA

$




%
$




%AA











A











BBB


3,724


8.70


20,501


28.12BB


5,451


12.73


18,516


25.39B


15,506


36.20


13,211


18.12CCC


9,049


21.13


5,476


7.51CC











C


6,698


15.64


4,431


6.08Not rated


2,398


5.60


10,781


14.78Total

$
42,826


100.00
%
$
72,916


100.00
%


The
face amount and net unearned discount on our investment securities as of December 31, 2009 and December 31, 2008 were as follows:

December 31,Description:

2009

2008Face amount

$
921,994

$
1,150,667Net unearned discount


(891,093
)

(1,078,649
)Amortized cost

$
30,901

$
72,018


For
the years ended December 31, 2009, 2008 and 2007, net discount (premium) on investment securities accreted into interest income totaled $(15,116), $18,323 and $20,129,
respectively.

Commercial Mortgage Backed Securities ("CMBS")Our investments include CMBS, which are mortgage backed securities that are secured by, or evidence
ownership interests in, a single commercial

F-44

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

4. INVESTMENT SECURITIES (Continued)

mortgage
loan or a partial or entire pool of mortgage loans secured by commercial properties. The securities may be senior, subordinated, investment grade or non-investment grade.

The
following is a summary of our CMBS investments as of December 31, 2009 and December 31, 2008:

December 31, 2009Gross Unrealized

Weighted AverageSecurity Rating

Amortized
Cost

Gains

Losses

Estimated
Fair Value

Coupon

Book
Yield(1)

Market
Yield(2)

Term
(yrs)AAA

$


$


$


$




%


%


%

AA























A























BBB


3,724








3,724


5.20


9.74


44.67


5.93BB


4,895


556





5,451


5.34


7.77


44.11


6.59B


10,374


4,285





14,659


5.50


28.36


86.59


6.40CCC


4,833


3,460





8,293


5.19


37.80


614.49


7.78CC























C


2,078


1,790





3,868


5.09


95.23


487.22


6.64Not rated


289


1,829





2,118


5.11


256.44


2,157.59


9.19Total CMBS

$
26,193

$
11,920

$


$
38,113


5.21


31.43


347.01


6.86




December 31, 2008Gross Unrealized

Weighted AverageSecurity Rating

Amortized
Cost

Gains

Losses

Estimated
Fair Value

Coupon

Book
Yield(1)

Market
Yield(2)

Term
(yrs)AAA

$


$


$


$




%


%


%

AA























A























BBB


17,892








17,892


5.50


60.77


61.60


7.86BB


16,204








16,204


5.44


79.33


81.51


8.01B


10,409








10,409


4.84


84.67


92.16


7.99CCC


3,548


33





3,581


5.07


122.87


141.49


8.99CC























C























Not rated


9,256


751





10,007


5.05


128.22


147.77


9.53Total CMBS

$
57,309

$
784

$


$
58,093


5.19


85.10


92.40


8.28


(1)Book
yield as reflected above is the implied loss-adjusted yield based on our expectation of future cash flows
(i.e., taking into account assumed defaults) and the amortized cost of the security.(2)Market
yield as reflected above is the implied yield based on a zero-loss scenario (i.e., not
taking into account any assumed defaults) and the fair value of the security.


F-45

---



Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

4. INVESTMENT SECURITIES (Continued)




Residential Mortgage Backed Securities ("RMBS")Our investments include RMBS, which are securities that represent participations in, and are secured
by or payable from, mortgage loans secured by residential properties. Our RMBS investments include Non-Agency pass-through certificates that are rated classes in
senior/subordinated structures ("Non-Agency RMBS").

The
following is a summary of our Non-Agency RMBS investments as of December 31, 2009 and December 31, 2008:

December 31, 2009Gross Unrealized

Weighted AverageSecurity Rating

Amortized
Cost

Gains

Losses

Estimated
Fair Value

Coupon

Book
Yield(1)

Market
Yield(2)

Term
(yrs)AAA

$


$


$


$




%


%


%

AA























A























BBB























BB























B


847








847


1.73


9.77


59.24


5.65CCC


756








756


3.98


12.06


135.51


7.44CC























C


2,830








2,830


4.34


24.81


14,757.34


5.58Not rated


275


5





280


2.87


4,299.67


5,212.70


4.48Total Non-Agency RMBS

$
4,708

$
5

$


$
4,713


3.77


270.27


9,204.46


5.82




December 31, 2008Gross Unrealized

Weighted AverageSecurity Rating

Amortized
Cost

Gains

Losses

Estimated
Fair Value

Coupon

Book
Yield(1)

Market
Yield(2)

Term
(yrs)AAA

$


$


$


$




%


%


%

AA























A























BBB


2,609








2,609


2.80


284.86


1,139.67


4.45BB


2,281


31





2,312


4.41


115.66


1,227.68


7.86B


2,802








2,802


3.90


414.66


447.50


6.33CCC


1,895








1,895


4.28


209.01


10,604.96


5.63CC























C


4,430


1





4,431


3.46


748.21


27,958.06


4.62Not rated


692


82





774


3.61


9,013.01


9,236.65


6.82Total Non-Agency RMBS

$
14,709

$
114

$


$
14,823


3.70


824.21


10,671.87


5.66


(1)Book
yield as reflected above is the implied loss-adjusted yield based on our expectation of future cash flows
(i.e., taking into account assumed defaults) and the amortized cost of the security.(2)Market
yield as reflected above is the implied yield based on a zero-loss scenario (i.e., not
taking into account any assumed defaults) and the fair value of the security.


F-46

---



Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

4. INVESTMENT SECURITIES (Continued)




Other SecuritiesWe invested in the preferred stock of Millerton I CDO with an estimated fair value of $0 as of each of December 31, 2009 and
December 31, 2008 and the preferred stock of Millerton II CDO with an estimated fair value of $0 as of each of December 31, 2009 and December 31, 2008. The preferred stock of
Millerton I CDO was rated C and the preferred stock of Millerton II CDO was not rated at December 31, 2009.

Unrealized LossesWe did not own any available-for-sale securities with unrealized losses as of December 31, 2009 or
2008. Since substantial doubt exists about our ability to continue as a going concern, we have determined that it is more likely than not that our investment securities will be required to be sold
before we recover our amortized cost basis and accordingly, all unrealized losses on our investment securities have been recognized in earnings.

Other-Than-Temporary ImpairmentsFor the year ended December 31, 2009, we recorded
other-than-temporary impairments totaling $77,947. Impairments on RMBS and CMBS totaled $15,375 and $62,572, respectively. $5,784 of the $77,947 total impairment was recorded
during the first quarter of 2009 in accordance with FASB ASC 325-40-65-1 (previously FSP EITF 99-20-1). The remaining $72,163
impairment was recorded in accordance with FASB ASC 320-10-65-1 (previously FSP FAS 115-2) upon the adoption of the standard on
April 1, 2009. The impairments were attributed to both credit and non-credit losses. To determine the component of the gross other-than-temporary impairment
related to credit losses, we compared the amortized cost basis of each other-than-temporarily impaired security to the present value of its revised expected cash flows,
discounted using its pre-impairment yield. Significant judgment of management is required in this analysis that includes, but is not limited to, assumptions regarding the rate and timing
of principal payments (including prepayments, repurchases, defaults and liquidations), the pass-through or coupon rate and interest rate fluctuations. Other factors considered in
determining the component of other-than-temporary impairments related to credit losses include current subordination levels, interest payment shortfalls, credit ratings and
delinquency rates. Other-than-temporary impairment related to non-credit losses was determined based on our assessment that it is more likely than not that our
securities will be required to be sold before we recover their amortized cost basis, and therefore this impairment was recognized in earnings. The following table summarizes the amount of

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

4. INVESTMENT SECURITIES (Continued)

other-than-temporary
impairments related to credit and non-credit losses since the adoption of FASB ASC 320-10-65-1
through December 31, 2009:

Gross Other-
Than-
Temporary
Impairments

Other-Than-
Temporary
Impairments
Included (Offset)
in Other
Comprehensive
Income(1)

Net Other-
Than-
Temporary
Impairments
Included in
EarningsApril 1, 2009

$
72,126

$


$
72,126Impact of change in accounting principle(2)





72,126


(72,126
)Additions due to change in expected cash flows


4,365


809


3,556Additional increases related to credit loss for OTTI previously recognized in OCI





(60,500
)

60,500Reductions due to requirement to sell


711


(7,396
)

8,107December 31, 2009

$
77,202

$
5,039

$
72,163


(1)The
balance as of December 31, 2009 represents the remaining OTTI in OCI of certain securities that are in a net gain position after including
accumulated unrealized gains. The net unrealized gain in OCI as of December 31, 2009 was $2,083.(2)Represents
a reclassification to other comprehensive income of other-than-temporary impairments on securities which were previously
recorded in earnings. As discussed in Note 2, upon adoption of FASB ASC 320-10-65-1 these impairments were reassessed and determined to be related to
factors other than credit losses.


For
the year ended December 31, 2008, we recorded impairment charges totaling $142,916, which was reclassified out of other comprehensive income. Impairments on RMBS, CMBS and two
preferred stock investments during the period totaled $62,689, $79,087 and $1,140, respectively. The impairments were attributed to the decline in the projected yields related to changes in the cash
flow assumptions, such as timing and prepayments, on the underlying assets, and other than temporary declines in market values, which was primarily a consequence of wider spreads affecting market
values of the securities.

For
the year ended December 31, 2007, we recorded impairment charges totaling $317,931, which was reclassified out of other comprehensive income. Impairments on RMBS, Agency MBS,
CMBS and two preferred stock investments during the period totaled $128,745, $10,556, $174,918 and $3,712, respectively The impairments were attributed to the decline in the projected yields related
to changes in the cash flow assumptions, such as timing and prepayments, on the underlying assets, and other than temporary declines in market values, which was primarily a consequence of wider
spreads affecting market values of the securities. In addition, the impairments were attributed to our intent not to hold certain securities to recovery where cost exceeds market value.

Sale of Investment SecuritiesDuring the year ended December 31, 2009, we did not sell any securities. During the year ended
December 31, 2008, we sold 40 available-for-sale securities for proceeds of $475,888 and realized a gain of $2,477 and we sold 33
available-for-sale securities for

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

4. INVESTMENT SECURITIES (Continued)

proceeds
of $702,469 and realized a loss of $6,291. During the year ended December 31, 2007, we sold 36 available-for-sale securities for proceeds of $828,670 and
realized a gain of $2,881 and we sold 40 available-for-sale securities for proceeds of $814,460 and realized a loss of $4,426.

Average
maturity of our investment securities at December 31, 2009 was as follows:

Weighted Average LifeCMBS


3.93Non-Agency RMBS


3.09


5. REAL ESTATE LOANS AND REAL ESTATE LOANS HELD FOR SALE

Real Estate Loans

We invest in mezzanine loans, B Notes, construction loans and whole loans. A mezzanine loan is a loan that is subordinated to a first
mortgage loan on a property and is senior to the borrower's equity in the property. Mezzanine loans are made to the property's owner and are secured by pledges of ownership interests in the property
and/or the property owner. The mezzanine lender can foreclose on the pledged interests and thereby succeed to ownership of the property subject to the lien of the first mortgage.

A
subordinated commercial real estate loan, which we refer to as a B Note, may be rated by at least one nationally recognized rating agency. A B Note typically is a privately negotiated
loan that is secured by a first mortgage on a single large commercial property or group of related properties, and is subordinated to an A Note secured by the same first mortgage on the same property.

A
construction loan represents a participation in a construction or rehabilitation loan on a commercial property that generally provides 85% to 90% of total project costs and is secured
by a first lien mortgage on the property. Alternatively, mezzanine loans can be used to finance construction or
rehabilitation where the security is subordinate to the first mortgage lien. Construction loans and mezzanine loans used to finance construction or rehabilitation generally would provide fees and
interest income at risk-adjusted rates.

A
whole mortgage loan is a loan secured by a first lien mortgage that provides mortgage financing to commercial and residential property owners and developers. Generally, mortgage loans
have maturities that range from three to 10 years for commercial properties and up to 30 years for residential properties.

F-49

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

5. REAL ESTATE LOANS AND REAL ESTATE LOANS HELD FOR SALE (Continued)

The
following is a summary of our real estate loans as of December 31, 2009 and December 31, 2008:

Loan Type

Number
of Loans

Face Value

Carrying
Value

Weighted
Average
Interest Rate

Maturity
Date/Range

Weighted
Average
Years to
MaturityDecember 31, 2009Construction loans


1


14,602






(1)

11/2008(2)


Mezzanine loans


1


6,358






(3)

5/2009(4)


2

$
20,960

$
December 31, 2008Whole loans


1

$
2,522

$
2,511


3.73
%

11/2009


0.9Construction loans


1


14,602


400



(1)

11/2008(2)


Mezzanine loans


1


6,123


6,123


15.00


5/2009


0.43

$
23,247

$
9,034


11.71
(1)

5/200911/2009


0.5


(1)This
construction loan bears interest at 16.00%, but we have placed it on non-accrual status and accordingly, do not include it in the
calculation of the weighted average interest rate.(2)The
construction loan was due in November 2008 and currently is in default.(3)This
mezzanine loan bears interest at 15.00%, but we have placed it on non-accrual status effective March 31, 2009 and accordingly, do
not include it in the calculation of the weighted average interest rate.(4)The
mezzanine loan was due in May 2009 and currently is in default.


There
were no unamortized underwriting fees as of December 31, 2009 and December 31, 2008.

In
2005, we originated a mezzanine construction loan to develop luxury residential condominiums in Portland, Oregon. The loan was in technical default as of January 1, 2008 and
was placed on non-accrual status at such date, and we have received no principal or interest payments during the year ended December 31, 2009 and 2008 on the loan. We have not made
any additional advances on this loan during the year ended December 31, 2009 and have no funding obligations under this loan. In January 2009, the senior lender notified the borrower that the
senior construction loan was in default, triggering a blockage period of 120 days with respect to our mezzanine construction loan during which period we were precluded from exercising our
rights under the mezzanine construction loan. We currently account for this loan as a troubled debt restructuring under FASB ASC 310-40-15-3 (previously
SFAS 15), and FASB ASC 310-10-35-13 (previously SFAS 114). As of December 31, 2009, we have recorded a loan loss allowance for the
entire outstanding face amount of the loan. As of December 31, 2009 and December 31, 2008, the carrying value of the loan totaled $0 and $400 (inclusive of loan loss provisions of
$14,602 and $14,202, respectively).

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

5. REAL ESTATE LOANS AND REAL ESTATE LOANS HELD FOR SALE (Continued)

In November 2006, we purchased a senior participation interest in a mezzanine loan to develop luxury residential condominiums in New York, New York. The loan was in technical default as
of April 2009 and was placed on non-accrual status as of March 31, 2009. We have not made any advances on this loan during the year ended December 31, 2009 and have no
funding obligations under this loan. As of December 31, 2009, we have recorded a loan loss allowance for the entire outstanding face amount of the loan (including capitalized interest). As of
December 31, 2009 and December 31, 2008, the carrying value of the loan totaled $0 and $6,123 (inclusive of loan loss provisions of $6,358 and $0, respectively).

The
components of our impaired real estate loans as of December 31, 2009 are as follows:

Mezzanine
Construction
Loan

Mezzanine
Loan(1)

TotalCarrying valueDecember 31, 2008

$
400

$
6,123

$
6,523Funding of mezzanine construction loan








Capitalized interest(2)





235


235Provision for loan losses


(400
)

(6,358
)

(6,758
)Carrying valueDecember 31, 2009

$


$


$



(1)Carried
at amortized cost as of December 31, 2008 and subsequently carried at market.(2)The
mezzanine construction loan was placed on non-accrual status as of January 1, 2008 and the mezzanine loan was placed on
non-accrual status as of March 31, 2009. No interest income was recorded on the mezzanine construction loan and $235 of interest was capitalized on the mezzanine loan for the year
ended December 31, 2009.


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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

5. REAL ESTATE LOANS AND REAL ESTATE LOANS HELD FOR SALE (Continued)




The
components of our total provision for loan losses on our impaired real estate loans for the years ended December 31, 2007, 2008 and 2009 are as follows:

Reconciliation of Provision for Loan LossesBalance, December 31, 2006

$
Additions (subtractions) during period:Provision for loan losses


4,500Direct charge offs against the allowance


Recoveries of previous charge offs


Balance, December 31, 2007


4,500Additions (subtractions) during period:Provision for loan losses


9,735Direct charge offs against the allowance


Recoveries of previous charge offs


Balance, December 31, 2008


14,235Additions (subtractions) during period:Provision for loan losses


6,758Direct charge offs against the allowance


Recoveries of previous charge offs


Balance, December 31, 2009

$
20,993


The
components of our impaired mezzanine construction loan as of December 31, 2009 and December 31, 2008 are as follows:

December 31,2009

2008Carrying valuebeginning of period

$
400

$
9,270Funding of mezzanine construction loan





865Capitalized interest(1)





Provision for loan losses


(400
)

(9,735
)Carrying valueend of period

$


$
400


(1)The
loan was placed on non-accrual status as of January 1, 2008 and no interest income was recorded for 2008.


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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

5. REAL ESTATE LOANS AND REAL ESTATE LOANS HELD FOR SALE (Continued)




Real Estate Loans Held for Sale

As of December 31, 2009, we have the intent and ability to sell in the near future two of our real estate loans and therefore,
we have classified them as held for sale. The following is a summary of our real estate loans held for sale as of December 31, 2008 and 2009:

Loan Type

Number
of Loans

Face Value

Carrying
Value

Weighted
Average
Interest Rate

Maturity Date

Weighted
Average
Years to
MaturityDecember 31, 2009Mezzanine loans


1

$
11,063

$
4,658


7.32
%
2/2016


6.2Whole loans


1


1,658


1,245


3.48

11/2011


1.92


12,721


5,903


6.82

11/2011-2/2016


5.6December 31, 2008Mezzanine loans


1

$
11,063

$
5,058


7.32
%
2/2016


7.2


For
the year ended December 31, 2009, we recorded valuation allowances of $813 on our consolidated statement of operations relating to real estate loans that are held for sale as
of December 31, 2009.

During
the year ended December 31, 2008, we sold 13 whole loans that previously had been designated for sale for proceeds of $105,362 and realized a loss of $1,087 and we sold one
mezzanine loan that previously had been designated for sale for proceeds of $11,385 and realized a loss of $265. We recorded a valuation allowance of $11,271 in connection with these loans which were
sold in 2008.

Other Information Relating to Our Real Estate Loans and Real Estate Loans Held for Sale

The maturities of our real estate loans, including those held for sale, as of December 31, 2009 are as follows: $1,742 in 2011,
$98 in 2012 and $10,881 thereafter.

We
pledge our real estate loans and real estate loans held for sale to secure our secured revolving credit facility. The fair value of the real estate loans, including those held for
sale, that we pledged as collateral as of December 31, 2009 and December 31, 2008 is summarized as follows:

December 31,Pledged as Collateral:

2009

2008For borrowings under secured revolving credit facility, related party

$
5,903

$
13,178Total

$
5,903

$
13,178


As
of December 31, 2009 and December 31, 2008, our real estate loans did not include any non-U.S. dollar denominated assets.

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

6. COMMERCIAL REAL ESTATE

The components of commercial real estate as of December 31, 2009 and December 31, 2008 are as follows:

December 31,2009

2008Land

$
17,428

$
17,428Buildings and improvements


222,045


222,045Commercial properties


239,473


239,473Less: Accumulated depreciation


(17,719
)

(11,214
)Total

$
221,754

$
228,259


The
depreciation expense related to commercial real estate included in the operating results for the years ended December 31, 2009, December 31, 2008 and
December 31, 2007 was $6,505, $6,504 and $4,710, respectively.

The
following is a schedule of future minimum rent payments to be received under the leases at the three properties owned:

Rent Payments2010

$
11,5752011


11,8072012


12,0432013


12,2832014


12,529Thereafter


101,206


7. OTHER INVESTMENTS

The components of other investments as of December 31, 2009 and December 31, 2008 are as follows:

December 31,2009

2008Investment in trust preferred securities

$
1,550

$
1,550Total other investments

$
1,550

$
1,550


In
March 2008, we sold our investment in a private equity fund that invests in real estate investments (that is managed by an affiliate of our Manager) to an affiliate of our Manager and
incurred no gain or loss. The sale was approved by the independent members of our board of directors. As of December 31, 2009 and December 31, 2008, we had no further capital commitment
to the private equity fund. Distributions from the fund totaled $0 and $426 for the years ended December 31, 2009

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

7. OTHER INVESTMENTS (Continued)

and
2008, respectively. Income (loss) from the interest in equity investment for the years ended December 31, 2009 and 2008 can be broken down in the following components:

Year Ended December 31,2009

2008Income from equity investment before management and promote fees

$


$
123Management fee





(30
)Promote fee





(133
)Income (loss) from equity investment

$


$
(40
)


8. INTANGIBLE ASSETS AND INTANGIBLE LIABILITIES

The intangible assets and liabilities arose on the acquisition of the commercial real estate properties in March 2007 and September 2007. As of December 31, 2009 and
December 31, 2008, the components of intangible assets are as follows:

December 31, 2009

Weighted Average Life (Years)

December 31, 2008

Weighted Average Life (Years)Lease origination costs

$
82,228


12.1

$
82,228


13.1Below-market ground lease


2,919


56.3


2,919


57.3Mineral rights


303





303Total


85,450





85,450Less: Accumulated amortization


(15,542
)




(9,909
)Intangible assets

$
69,908




$
75,541


The
amortization of lease origination costs for the years ended December 31, 2009, 2008 and 2007 was $5,584, $5,584 and $4,237, respectively, and is included in depreciation and
amortization expense. The amortization of a below-market ground lease, which is included in commercial real estate expenses, for the years ended December 31, 2009, 2008 and 2007 was $49, $49
and $39, respectively. The estimated amortization of these intangible assets is $5,633 per year for each of the next five years.

Below
market leases, net of amortization, which are classified as intangible liabilities, are $66,785 as of December 31, 2009 and $72,265 as of December 31, 2008. The
amortization of intangible liabilities included in rental income for the years ended December 31, 2009, 2008 and 2007 was $5,480, $5,480 and $4,057, respectively. The estimated amortization is
$5,480 per year for each of the next five years.

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

9. DEBT AND OTHER FINANCING ARRANGEMENTS

The following is a summary of our debt as of December 31, 2009 and December 31, 2008:

Type of Debt:

December 31,
2009

December 31,
2008Collateralized debt obligations, at fair value

$
33,617

$
45,429Junior subordinated notes held by trust that issued trust preferred securities


51,550


51,550Mortgages payable


219,380


219,380Secured revolving credit facility, related party


28,920


32,920Total Debt

$
333,467

$
349,279


Collateralized Debt ObligationsIn November 2005, we issued approximately $377,904 of CDOs ("CDO I") through two newly-formed subsidiaries, Crystal
River CDO 2005-1, Ltd. (the "2005 Issuer") and Crystal River CDO 2005-1 LLC (the "2005 Co-Issuer"). CDO I consists of $227,500 of investment grade
notes and $67,750 of non-investment grade notes, each with a final contractual maturity date of March 2046, which were co-issued by the 2005 Issuer and the 2005
Co-Issuer, and $82,654 of preference shares, which were issued by the 2005 Issuer. We retained all of the non-investment grade securities, the preference shares and the common
shares in the 2005 Issuer. The 2005 Issuer holds assets, currently consisting of CMBS and RMBS, which serve as collateral for CDO I. Investment grade notes in the aggregate principal amount of
$217,500 were issued with floating coupons with a combined weighted average interest rate of three-month LIBOR plus 0.58% and these notes were hedged at an annual rate of 5.068% to protect CDO I from
increases in short-term interest rates. In addition, $10,000 of investment grade notes were issued with a fixed coupon rate of 6.02%. CDO I may be replenished, pursuant to certain rating
agency guidelines relating to credit quality and diversification, with substitute collateral for loans that are repaid during the first five years of CDO I. Thereafter, CDO I's securities will be
retired in sequential order from the senior-most to junior-most as loans are repaid. We incurred approximately $5,906 of issuance costs, which is amortized over the average
life of CDO I. The 2005 Issuer and 2005 Co-Issuer are consolidated in our financial statements. The investment grade notes are treated as a secured financing, and are non recourse to us.
Proceeds from the sale of the investment grade notes issued were used to repay outstanding debt under our repurchase agreements. As of December 31, 2009 and December 31, 2008, CDO I was
collateralized by investment securities with fair values of $6,435 and $17,550, respectively. As of January 1, 2008, we elected the fair value option under FASB ASC
825-10-45-1 (previously SFAS 159) for our collateralized debt obligations, and the fair value of the investment grade notes that CDO I issued that are held
by third parties as of December 31, 2009 and December 31, 2008 was $5,723 and $16,192, respectively ($132,260 and $142,183 par amount, respectively). Beginning in June 2008, CDO I began
to fail certain over-collateralization triggers. During this period of failure, all notes subordinate to the most senior class with a relevant trigger failure will not receive their
quarterly interest payments. The money that otherwise would be paid to those classes is used instead to pay down the principal balance of the senior-most outstanding notes. During the
years ended December 31, 2009 and 2008, $518 and $0, respectively, was diverted from the affected classes to amortize senior notes issued by CDO I, and $9,406 and $0, respectively, of senior
notes was otherwise repaid as provided in the indenture governing the CDO I notes. On September 2, 2009, the trustee of CDO 1 issued a "Notice of Event of Default"

F-56

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

9. DEBT AND OTHER FINANCING ARRANGEMENTS (Continued)

to
the collateral manager for CDO I because of a failure by CDO I to pay interest on the Class D notes. This event of default entitles noteholders of the senior class of notes, the
Class A notes, to direct the trustee to take particular actions with respect to the collateral owned by CDO I and the CDO notes issued by CDO I. The event of default did not trigger a
reconsideration event under FASB ASC 810-10-25-39 through 25-41 (previously FIN 46R) and has no impact on our consolidated financial statements
during the third quarter.

In
January 2007, we issued approximately $390,338 of CDOs ("CDO II") through two newly-formed subsidiaries, Crystal River Capital Resecuritization 2006-1 Ltd. (the
"2006 Issuer") and Crystal River Capital Resecuritization 2006-1 LLC (the "2006 Co-Issuer").
CDO II consists of $324,956 of investment grade notes and $14,638 of non-investment grade notes, each with a final maturity date of September 2047, which were co-issued by the
2006 Issuer and the 2006 Co-Issuer, and $19,517 of non-investment grade notes and $31,227 of preference shares, which were issued by the 2006 Issuer. The 2006 Issuer initially
held cash totaling $58,600 that was designated for the future funding of additional investments, all of which was invested during 2007. We retained all of the non-investment grade
securities, the preference shares and the common shares in the 2006 Issuer. The 2006 Issuer holds assets, consisting of CMBS, which serve as collateral for CDO II. Investment grade notes in the
aggregate principal amount of $324,956 were issued with floating coupons with a combined weighted average interest rate of one-month LIBOR plus 0.57% and these notes were hedged at an
annual rate of 4.955% to protect CDO II from increase in short-term interest rates. We incurred approximately $6,006 of issuance costs, which is being amortized over the average life of
CDO II. The 2006 Issuer and the 2006 Co-Issuer are consolidated in our financial statements. The investment grade notes are treated as a secured financing, and are non recourse to us.
Proceeds from the sale of the investment grade notes issued were used to repay outstanding debt under our repurchase agreements. As of December 31, 2009 and December 31, 2008, CDO II was
collateralized by investment securities with a fair value of $29,101 and $33,482, respectively. As of January 1, 2008, we elected the fair value option under FASB ASC
825-10-45-1 (previously SFAS 159) for our collateralized debt obligations, and the fair value of the investment grade notes that CDO II issued that are held
by third parties as of December 31, 2009 and December 31, 2008 was $27,894 and $29,237, respectively ($323,002 and $324,844 par amount, respectively). During the years ended
December 31, 2009 and 2008, $1,842 and $112, respectively, of cash flows from "distressed securities" owned by CDO II was diverted from the equity class to amortize senior notes issued by CDO
II.

Senior Mortgage-Backed Notes, Related PartyIn April 2007, we issued $115,000 of senior mortgage-backed notes through a newly-formed subsidiary, CRZ
ABCP Financing LLC. We retained $9,250 of senior subordinated mortgage-backed notes and $4,250 of subordinated mortgage-backed notes. CRZ ABCP Financing LLC holds assets, consisting of
commercial whole mortgage loans, which serve as collateral for the mortgage-backed notes. Senior mortgage-backed notes in the aggregate principal amount of $101,500 were issued to an affiliate of our
Manager with floating coupons with an interest rate of three-month LIBOR plus 0.35%. The holder of the senior mortgage-backed notes had the ability to charge us to the extent that its cost of funding
exceeds the interest rate paid on the senior mortgage-backed notes. Interest on the senior mortgage-backed notes was payable monthly. The senior mortgage-backed notes had a maturity of April 2017 and
the outstanding principal was due at maturity.

F-57

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

9. DEBT AND OTHER FINANCING ARRANGEMENTS (Continued)

Early
repayments or sales of the underlying mortgage loans required repayment of a portion of the senior mortgage-backed notes. The senior mortgage-backed notes were treated as a secured financing,
and were non recourse to us. We incurred financing costs of $611, which were deferred and were being amortized over the term of the senior mortgage-backed notes. During the year ended
December 31, 2008, we expensed $543 of deferred financing costs in connection with our redemption of the senior mortgage-backed notes (see below), which was recorded in other expenses on our
statements of operations.

During
the year ended December 31, 2008, CRZ ABCP Financing LLC sold the 13 commercial whole mortgage loans that previously had been designated for sale, for proceeds
totaling $105,362 (see Note 5). In connection with the sale of 11 of the 13 loans, we entered into a yield maintenance agreement that required that $4,096 of sale proceeds serve as collateral
to protect the buyer against potential prepayments of those 11 real estate loans. The agreement provides that a proportionate share of the collateral will be released quarterly to either the buyer or
us contingent on whether any prepayments are made by the respective borrowers of those 11 real estate loans. Proceeds totaling $105,568 (including accrued interest of $206) from the sale of the 13
real estate loans were used to redeem $95,397 of outstanding principal of Class A senior mortgage-backed notes held by an affiliate of our Manager, establish a yield maintenance account in the
amount of $4,096 (see Note 10), terminate $107,920 notional amount of interest rate swaps within CRZ ABCP Financing LLC at a cost of $4,126 and pay closing costs of $169. In addition,
during June 2008, we made an additional capital contribution of $3,000 to CRZ ABCP Financing LLC, which was used to further reduce the balance of the Class A senior mortgage-backed
notes.

Junior Subordinated Notes Held by Trust that Issued Trust Preferred SecuritiesIn March 2007, we formed Crystal River Preferred Trust I ("Trust I")
for the purpose of issuing trust preferred securities. In March 2007, Trust I issued $50,000 of trust preferred securities to an unaffiliated investor and $1,550 of trust common securities to us for
$1,550. The combined proceeds were invested by Trust I in $51,550 of junior subordinated notes issued by us. The junior subordinated notes are the sole assets of Trust I and mature in April 2037, but
are callable by us at par on or after April 2012. Interest is payable quarterly at a fixed rate of 7.68% (ten-year LIBOR plus 2.75%) through April 2012 and thereafter at a floating rate
equal to three-month LIBOR plus 2.75%. We incurred financing costs of $1,356, which have been deferred and are being amortized over the term of the junior subordinated notes.

Mortgages PayableIn March 2007, we financed a portion of our purchase of two office buildings located in Houston, Texas and Phoenix, Arizona, with a
$198,500 mortgage loan that bears interest at an annual rate of 5.509% and matures on April 1, 2017. The mortgage provides for payments of interest only throughout the term of the loan and the
entire principal is due at maturity. We have pledged our interest in the two office buildings, the related leases and the related rent enhancement receivables, related party, as collateral for this
mortgage loan. We incurred financing costs of $209, which have been deferred and are being amortized over the term of the loan. In September 2007, we financed a portion of our purchase of one office
building located in Arlington, Texas with a $20,880 mortgage loan that bears interest at an annual rate of 6.29% and matures on October 1, 2017. The mortgage provides for payments of interest
only until October 1, 2010, after which we will be required to make monthly payments of $129 in respect of principal and interest. We will be required to pay the

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

9. DEBT AND OTHER FINANCING ARRANGEMENTS (Continued)

remaining
principal and accrued interest at maturity. We have pledged our interest in the Arlington office building, the related lease and the related rent enhancement receivables, related party, as
collateral for this mortgage loan. We incurred financing costs of $98, which have been deferred and are being amortized over the term of the loan.

Revolving Credit FacilityIn August 2007, we entered into a $100,000 unsecured 364-day credit facility with Brookfield US Corporation
(f/k/a Brascan (U.S.) Corp.), an affiliate of our Manager. Indebtedness outstanding under the unsecured credit facility bore interest at LIBOR + 4.00%. In November 2007, we and
Brookfield US Corporation amended the terms of the facility, effective as of September 30, 2007, to convert the facility to a secured revolving credit facility that provides for borrowings of
up to $100,000 in the aggregate and to reduce the interest rate to LIBOR + 2.50%. In March 2008, we and Brookfield US Corporation amended the terms of the facility, effective as of
December 31, 2007, to extend the term of the facility from November 2008 to May 2009, to revise the financial covenant relating to minimum net worth (as defined in the facility) and to
eliminate the financial covenants relating to minimum net income (as defined in the facility), compliance with a maximum leverage ratio and compliance with an interest rate sensitivity requirement. In
August 2008, we and Brookfield US Corporation amended the terms of the facility, effective as of June 30, 2008, to revise the financial covenant relating to minimum net worth. In February 2009,
we and Brookfield US Corporation amended the terms of the facility to extend the term of the facility from May 2009 to May 2010, to lower the borrowing capacity under the facility from $100,000 to
$50,000 and, effective as of December 31, 2008, to delete the financial covenant relating to minimum net worth. The secured facility bears interest at LIBOR + 2.50%. In February
2010, we and Brookfield US Corporation amended the terms of our secured revolving credit facility to extend the term of the facility from May 2010 to August 2010 unless sooner terminated as provided
in the credit agreement. The credit facility and the amendments were approved by the independent members of our board of directors. The credit agreement contains customary representations, warranties
and covenants, including covenants limiting dividends, liens, mergers, asset sales and other fundamental changes. In addition, if our current manager, Crystal River Capital Advisors, LLC, or
another wholly owned subsidiary of Brookfield Asset Management Inc. is not acting as our manager, then Brookfield US Corporation may accelerate all amounts due under our revolving credit
facility. We incurred financing costs of $8, which have been deferred and are being amortized over the term of the secured revolving credit facility.

Restrictive Covenants and MaturitiesCertain of our repurchase agreements (none of which were in use as of December 31, 2009 or
December 31, 2008) contain financial covenants, such as maintaining a specific net asset value or worth, and certain of such repurchase agreements and our revolving credit facility contain
covenants requiring us to maintain our REIT status. We were in compliance with respect to all our financial covenants under agreements for which we had outstanding borrowings as of December 31,
2009.

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

9. DEBT AND OTHER FINANCING ARRANGEMENTS (Continued)

Scheduled Debt MaturitiesScheduled maturities of our debt as of December 31, 2009 are as follows:

CDO(1)

Junior
Subordinated
Notes

Mortgages
Payable

Secured Revolving
Credit Facility,
Related Party

Totals2010

$


$


$
40

$
28,920

$
28,9602011








245





2452012








261





2612013








278





2782014








296





296Thereafter


455,262


51,550


218,260





725,072$
455,262

$
51,550

$
219,380

$
28,920

$
755,112


(1)Amount
is based on unpaid principal balance. As of December 31, 2009, the difference between fair value and unpaid principal balance is $421,645.


Interest ExpenseInterest expense is comprised of the following:

Year Ended December 31,2009

2008

2007Interest on repurchase agreements

$


$
12,661

$
115,422Interest expense (income) on interest rate swap agreements


1,369


2,049


(9,106
)Interest on CDO notes


5,735


17,721


29,670Interest on senior mortgage-backed notes, related party





1,687


4,030Interest on mortgages payable


12,419


12,453


9,075Interest on junior subordinated notes


3,959


3,959


3,079Interest on short-term debt








617Interest on secured revolving credit facility, related party


884


2,738


342Interest on margin borrowing








90Amortization of deferred financing costs


77


275


3,411Other








167Total interest expense

$
24,443

$
53,543

$
156,797


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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

9. DEBT AND OTHER FINANCING ARRANGEMENTS (Continued)

Interest
payable is comprised of the following:

December 31,2009

2008Interest on CDO notes

$
793

$
516Interest on mortgages payable


113


113Interest on junior subordinated notes


671


671Interest on secured revolving credit facility, related party


37


57Total interest payable

$
1,614

$
1,357


10. COMMITMENTS AND CONTINGENCIES

We invest in real estate construction loans. During the years ended December 31, 2009 and 2008, we made advances of $0 and $929, respectively, under these commitments. As of
December 31, 2009, we had no unfunded commitments to fund any real estate loans.

In
January 2007, we made a $28,462 investment in a private equity fund that invests in real estate investments. The fund is managed by an affiliate of our Manager and the investment was
approved by the independent members of our board of directors. In connection with that investment, we agreed to a future capital commitment of $10,392. Certain distributions from the private equity
fund may be recalled by the fund's manager for reinvestment purposes. During March 2008, we sold our investment in the private equity fund to an affiliate of our Manager and the purchaser of our
investment assumed our unfunded capital commitment. Accordingly, as of December 31, 2009, we had no further commitment with respect to this investment.

In
June 2008, we sold 11 whole loans to a third party (See Note 5). In connection with the sale, we entered into a yield maintenance agreement which serves to protect the buyer
against potential prepayments of those 11 whole loans. In accordance with the agreement, we deposited $4,096 into a restricted trust account to serve as collateral for the potential loss contingency.
The agreement provides for the release to be evaluated quarterly to either the buyer or us of a proportionate share of the collateral contingent on any prepayments of the 11 whole loans. During the
years ended December 31, 2009 and December 31, 2008, $532 and $153, respectively, was released to us from the restricted trust account. As of December 31, 2009, our maximum loss
contingency under this agreement totaled $3,213. The initial accrued loss contingency was recorded as additional realized loss on the sale of real estate loans in our statement of operations during
2008. As of December 31, 2009, we had an accrued loss contingency totaling $110 (compared to our maximum exposure to loss of $3,213 as of such date) based on assumptions developed by management
relating to the timing and value of expected prepayments on the 11 loans.

11. RISK MANAGEMENT TRANSACTIONS

We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks
through management of our core business activities. We manage economic risks, including interest rate,

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

11. RISK MANAGEMENT TRANSACTIONS (Continued)

liquidity,
and credit risk, primarily by managing the amount, sources and duration of our debt funding and the use of derivative financial instruments. Specifically, we have entered into derivative
financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by
interest rates. Our derivative financial instruments are used to manage differences in the amount, timing and duration of our known or expected cash receipts and our known or expected cash payments
principally related to our borrowings.

Our
objective in using interest rate derivatives is to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our
interest rate risk management strategy. Interest rate swaps involve the receipt of variable-rate amounts from counterparties in exchange for us making fixed-rate payments over
the life of the agreements without exchange of the underlying notional amount.

As
of December 31, 2009 and December 31, 2008, we did not have any foreign currency swaps in place.

The
fair value of our derivatives as of December 31, 2009 and December 31, 2008 consisted of the following:

December 31,2009

2008Derivative Assets:Interest rate swaps

$


$
Interest receivableswaps





Total derivative assets

$


$
Derivative Liabilities:Interest rate swaps

$
25,308

$
37,659Credit default swaps


9,628


19,140Interest payableswap


441


366Other


1


481Total derivative liabilities

$
35,378

$
57,646


The
notional amount of our open undesignated interest rate swap positions as of December 31, 2009 and December 31, 2008 were as follows:

December 31,2009

2008Interest rate swaps on CDO I notes

$
40,493

$
44,549Interest rate swaps on CDO II notes


240,467


240,467$
280,960

$
285,016


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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

11. RISK MANAGEMENT TRANSACTIONS (Continued)

As
of December 31, 2009 and December 31, 2008, we had unhedged liabilities under our secured revolving credit facility totaling $28,920 and $32,920, respectively.

During
the year ended December 31, 2009, the change in the valuation of the interest rate swaps in the amount of $12,353 was recorded in realized and unrealized loss on
derivatives on our statement of operations. The net unamortized deferred losses on settled and unsettled swaps as of December 31,
2009 and December 31, 2008 were $9,170 and $10,539, respectively, and are being amortized into earnings through interest expense.

Derivatives
not designated as hedges are not speculative and are used to manage our exposure to interest rate movements and other identified risks but do not meet the strict hedge
accounting requirements of FASB ASC 815-10-50-4(e) (previously SFAS 133). Changes in the fair value of derivatives not designated in hedging
relationships recorded directly in earnings for the years ended December 31, 2009, 2008 and 2007 totaled $12,353, $17,950 and $6,383, respectively.

As
a result of the sale of our Agency MBS portfolio and related repayment of our repurchase agreements in 2008, we determined that it was no longer probable that the future repurchase
agreements that certain of our interest rate swaps were hedging would occur. As a result, we reclassified $9,666 of realized and unrealized loss out of accumulated other comprehensive income (loss)
into realized and unrealized gain (loss) on derivatives in the consolidated statement of operations in the first quarter of 2008.

The
components of our accumulated derivative gain (loss) included in other comprehensive income (loss) are as follows:

Year Ended December 31,2009

2008

2007Net unrealized accumulated derivative gain (loss) on active and settled interest rate swaps and capsbeginning of year

$
(10,539
)
$
(25,219
)
$
9,651Net change in active and settled swaps





4,199


(32,643
)Net realized losses on settled swaps reclassified into earnings





8,982


Net realized (gains) losses on settled and active swaps amortized into earnings


1,369


1,499


(2,227
)Net unrealized accumulated derivative loss on active and settled interest rate swaps and capsend of year

$
(9,170
)
$
(10,539
)
$
(25,219
)


Amounts
reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate
debt. During 2009, an additional $1,369 was reclassified as an increase in interest expense. During the year ended December 31, 2009, we accelerated the reclassification of a $167 loss in other
comprehensive loss to earnings as a result of the hedged forecasted transactions becoming probable not to occur. No such acceleration occurred during the years ended December 31, 2008 or 2007.
We estimate that an additional $1,203 will be reclassified into earnings.

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

11. RISK MANAGEMENT TRANSACTIONS (Continued)

The
components of net realized and unrealized loss on derivatives are as follows:

Year Ended December 31,2009

2008

2007Realized/unrealized losses on credit default swaps ("CDS")

$
(488
)
$
(16,481
)
$
(76,141
)Realized/unrealized losses on foreign currency swaps ("FCS")








(5,149
)Unrealized losses on hedge ineffectiveness


(12,918
)

(10,789
)

(1,227
)Unrealized gains (losses) on economic hedges not designated for hedge accounting


12,353


(22,703
)

(3,105
)Net realized losses on settlement of interest rate swaps





(20,994
)

(1,089
)Premium earned on CDS


191


450


2,212Swap transaction expense


(29
)

(162
)

(452
)Other


479





Net realized and unrealized losses on derivatives

$
(412
)
$
(70,679
)
$
(84,951
)


As
of December 31, 2009 and December 31, 2008, we were not required to provide any collateral in respect of our interest rate swaps.

The
maturities of the notional amounts of our interest rate swaps outstanding as of December 31, 2009 are as follows: $40,493 in 2013 and $240,467 in 2018.

As
of December 31, 2009 and December 31, 2008, we held various credit default swaps, as the protection seller, with notional amounts (maximum exposure to loss) of $10,000
and $20,000, respectively. A credit default swap is a financial instrument used to transfer the credit risk of a reference entity from one party to another for a specified period of time. In a
standard CDS contract, one party, referred to as the protection buyer, purchases credit default protection from another party, referred to as the protection seller, for a specific notional amount of
obligations of a reference entity. In these transactions, the protection buyer pays a premium to the protection seller. The premium generally is paid monthly in arrears, but may be paid in full up
front in the case of a CDS with a short maturity. Generally, if a credit event occurs during the term of the CDS, the protection seller pays the protection buyer the notional amount and takes delivery
of the reference entity's obligation. CDS are generally unconditional, irrevocable and non-cancelable. During the year ended December 31, 2008, we closed out six CDS on single names
in an aggregate notional amount of $55,000, with a realized loss of approximately $30,249, of which $19,780 was accrued in 2007 as an unrealized loss. At December 31, 2009, the fair value of
our net liability relating to credit default swap contracts was $9,628, compared to a net liability of $19,140 at December 31, 2008, primarily as a result of the occurrence of a credit event on
the reference obligation underlying one of our CDS on which we sold protection, which required us to make payments on that CDS in the amount of $10,000 during the year ended December 31, 2009.
As of December 31, 2009, we had posted cash of $10,497 as collateral in connection with our single name CDS, which is included in restricted cash on the balance sheet.

F-64

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

11. RISK MANAGEMENT TRANSACTIONS (Continued)

The
components of our outstanding credit default swaps as of December 31, 2009 are as follows:

FHLT 2005-1 M8Notional amount

$
10,000Expiration date


6/25/2035Fair value

$
(9,628
)Exposure to loss

$
372


12. STOCKHOLDERS' EQUITY AND LONG-TERM INCENTIVE PLAN

In March 2005, we completed the Private Offering in which we sold 17,400,000 shares of common stock, $0.001 par value, at an offering price of $25 per share, including the purchase of
400,000 shares of common stock by the initial purchasers/placement agents pursuant to an over-allotment option. We received proceeds from these transactions in the amount of $405,613, net
of underwriting commissions, placement agent fees and other offering costs totaling $29,387. In August 2006, we completed the Public Offering in which we sold 7,500,000 shares of common stock at an
offering price of $23 per share. The proceeds received from the Public Offering
were $158,599, which was net of underwriting and other offering costs of $13,901. Each share of common stock entitles its holder to one vote per share.

In
March 2005, we adopted a Long-Term Incentive Plan (the "Plan") that provides for awards under the Plan in the form of stock options, stock appreciation rights, restricted
and unrestricted stock awards, restricted stock units, deferred stock units and other performance awards. Our Manager and our officers, employees, directors, advisors and consultants who provide
services to us are eligible to receive awards under the Plan. The Plan has a term of 10 years and, based on awards since adoption, limits awards through December 31, 2009 to a maximum of
2,502,180 shares of common stock. For subsequent periods, the maximum number of shares of common stock that may be subject to awards granted under the Plan can increase by 10% of the difference
between the number of shares of common stock outstanding at the end of the current calendar year and the prior calendar year. In no event will the total number of shares that can be issued under the
Plan exceed 10,000,000.

In
connection with the Plan, a total of 84,000 shares of restricted common stock and 126,000 stock options (exercise price of $25 per share) were granted to our Manager in March 2005.
The Manager subsequently transferred these shares and options to certain of its officers and employees, certain of our directors and other individuals associated with our Manager who provide services
to us. The restrictions on the restricted common stock lapse and full rights of ownership vest for one-third of the restricted shares and options on each of the first three anniversary
dates of issuance. Vesting is predicated on the continuing involvement of our Manager in providing services to us. In addition, 3,500 shares of unrestricted stock were granted to the independent
members of our board of directors in March 2005 in lieu of cash remuneration. The independent members of our board of directors fully vested in the shares on the date of grant.

During
the year ended December 31, 2009, we issued 4,000 shares of restricted common stock and 6,000 restricted stock units in the aggregate to the independent members of our
board of directors, all

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

12. STOCKHOLDERS' EQUITY AND LONG-TERM INCENTIVE PLAN (Continued)

of
which such shares of restricted common stock and restricted stock units will vest on the first anniversary of issuance. In addition, during the year ended December 31, 2009, we issued
249,975 deferred stock units to certain independent members of our board of directors. Of these amounts, 160,345 deferred stock units and restricted stock units and 4,000 shares of restricted stock
were issued in lieu of cash remunerations. These independent members of our board of directors fully vested in the deferred stock units at the date of grant.

During
the year ended December 31, 2008, we issued 2,000 shares of restricted common stock to an independent member of our board of directors. In addition, during the year ended
December 31, 2008, we also issued 158,168 deferred stock units and restricted stock units to certain independent members of our board of directors. Of these amounts, 128,330 deferred stock
units and restricted stock units and 2,000 shares of restricted common stock were issued in lieu of cash remunerations. These independent members of our board of directors fully vested in the deferred
stock units at the date of grant.

During
the year ended December 31, 2007, a former senior executive officer resigned and forfeited 20,000 shares of restricted common stock that were issued during the year ended
December 31, 2006 and had not vested as of the date of his resignation. During the year ended December 31, 2007, we issued 2,000 shares of restricted common stock to an independent
member of our board of directors. In addition, during the year ended December 31, 2007, we also issued 20,730 deferred stock units and restricted stock units to certain independent members of
our board of directors. Of these amounts, 16,637 deferred stock units and restricted stock units and 2,000 shares of restricted stock were issued in lieu of cash remunerations. These independent
members of our board of directors fully vested in the deferred stock units at the date of grant.

The
fair value of unvested shares of the restricted stock issued to our Manager, directors and employees of our Manager's affiliates as of December 31, 2009 and 2008 was $2 and
$1, respectively, and the fair value of unvested stock options granted as of each of December 31, 2009 and December 31, 2008 was $0 ($0 per share). For the years ended
December 31, 2009, 2008 and 2007, $9, $8 and $643, respectively, was expensed relating to the amortization of the restricted stock and the stock options. For the years ended December 31,
2009, 2008 and 2007, $167, $319 and $497, respectively, was expensed relating to the amortization of deferred stock units.

The
Binomial option pricing model was used for pricing our stock options with the following assumptions as of March 15, 2008:

March 15,
2008(1)Strike price

$
25.00Dividend yield


25.61
%Expected volatility


35.0
%Risk free interest rate


5.0
%Expected life of options


6 years


(1)March 15,
2008 represents the vesting date of all outstanding stock options.


F-66

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

12. STOCKHOLDERS' EQUITY AND LONG-TERM INCENTIVE PLAN (Continued)

Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Our stock options have characteristics that are significantly
different from those of traded options and changes in the subjective input assumptions could materially affect the fair value estimate.

Restricted
stock activity from inception is as follows:

Number of
Shares of
Restricted Stock

Weighted
Average
Fair ValueNon-vested stock awards, March 15, 2005





Granted


84,000

$
25.00Vested





Forfeited





Non-vested stock awards, December 31, 2005


84,000


25.00Granted


38,000


24.86Vested


(28,662
)

25.00Forfeited


(4,000
)

25.00Non-vested stock awards, December 31, 2006


89,338


24.94Granted


2,000


26.85Vested


(40,667
)

24.87Forfeited


(20,000
)

25.00Non-vested stock awards, December 31, 2007


30,671


25.12Granted


2,000


5.52Vested


(30,671
)

25.12Forfeited





Non-vested stock awards, December 31, 2008


2,000


5.52Granted


4,000


1.94Vested


(2,000
)

5.52Forfeited





Non-vested stock awards, December 31, 2009


4,000


1.94Price range of stock awards outstanding


$1.94  $26.85


F-67

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

12. STOCKHOLDERS' EQUITY AND LONG-TERM INCENTIVE PLAN (Continued)

Information
regarding the granted and outstanding options to purchase our common stock since inception is as follows:

Number of
Options

Weighted
Average Exercise
Price

Weighted
Average Fair
ValueOptions outstanding at March 15, 2005








Granted


126,000

$
25.00

$
2.19Exercised








Forfeited








Options outstanding at December 31, 2005


126,000

$
25.00

$
2.19Granted


4,000

$
25.00

$
2.49Exercised








Forfeited








Options, outstanding at December 31, 2006


130,000

$
25.00

$
2.63Granted








Exercised








Forfeited








Options, outstanding at December 31, 2007


130,000

$
25.00

$
0.21Granted








Exercised








Forfeited








Options, outstanding at December 31, 2008


130,000

$
25.00

$
0.21Granted








Exercised








Forfeited








Options, outstanding at December 31, 2009


130,000

$
25.00

$
0.00




December 31,2009

2008

2007Options exercisable at end of period


130,000


130,000


86,660Exercise price of options outstanding


$25.00


$25.00


$25.00Weighted-average remaining contractual life


5.21 years


6.21 years


7.21 years


The
intrinsic value of our exercisable and outstanding stock options as of December 31, 2009 was $0.

F-68

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

12. STOCKHOLDERS' EQUITY AND LONG-TERM INCENTIVE PLAN (Continued)

Information
regarding outstanding deferred stock units since inception is as follows:

Number of
Deferred
Stock Units

Weighted
Average
Fair ValueDeferred Stock Units outstanding at March 15, 2005





Granted





Exercised





Forfeited





Deferred Stock Units outstanding at December 31, 2005





Granted


21,690

$
23.73Exercised





Forfeited





Deferred Stock Units outstanding at December 31, 2006


21,690

$
23.73Granted


20,729

$
22.74Exercised





Forfeited





Deferred Stock Units outstanding at December 31, 2007


42,419

$
23.25Granted


158,168

$
2.15Exercised





Forfeited





Deferred Stock Units outstanding at December 31, 2008


200,587

$
6.61Granted


249,975

$
1.06Exercised





Forfeited





Deferred Stock Units outstanding at December 31, 2009


450,562

$
3.53


The
following table shows our stock repurchase activity during 2007; there was no stock repurchase activity during 2008 or 2009.

Period

Total
Number
of Shares
Purchased(1)

Average
Price Paid
Per Share(2)

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs(1)August 21  31, 2007


55,400

$
14.48


55,400


1,944,600September 1  30, 2007


119,600


15.28


175,000


1,825,000October 1  31, 2007


59,700


17.24


234,700


1,765,300November 1  30, 2007


64,600


13.39


299,300


1,700,700December 1  31, 2007








299,300


1,700,700


(1)On
August 7, 2007, our board of directors authorized and announced the repurchase of 2,000,000 shares of our common stock in open-market
or in privately negotiated transactions. The amount


F-69

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

12. STOCKHOLDERS' EQUITY AND LONG-TERM INCENTIVE PLAN (Continued)

and
timing of purchases will depend upon a number of factors, including the price and availability of our shares and general market conditions. This program has no expiration date but may be
terminated by our board of directors at any time. We purchased an aggregate of 299,300 shares during the periods indicated above under this program. There are 1,700,700 shares remaining for repurchase
under this program as of December 31, 2008. (2)Includes
brokerage commissions.


Accumulated
other comprehensive loss as of December 31, 2009 and December 31, 2008 was comprised of the following:

December 31,
2009

December 31,
2008Net unrealized gains on available-for-sale securities

$
2,083

$
724Net realized and unrealized losses on interest rate swap agreements accounted for as cash flow hedges


(9,170
)

(10,539
)Total accumulated other comprehensive loss

$
(7,087
)
$
(9,815
)


Total
comprehensive loss totaled $85,552, $299,756 and $374,571 for the years ended December 31, 2009, 2008 and 2007, respectively.

13. FINANCIAL RISKS

We are subject to various risks, including credit, interest rate and market risk. We are subject to interest rate risk to the extent that our interest-bearing liabilities mature or
re-price at different speeds, or different bases, than our interest-earning assets. Credit risk is the risk of default on our investments that results in a counterparty's failure to make
payments according to the terms of the contract.

Market
risk reflects changes in the value of the investment securities and real estate loans due to changes in interest rates or other market factors, including the rate of prepayments
of principal and the value of the collateral underlying our investment securities and real estate loans.

As
of December 31, 2009 and December 31, 2008, the mortgage loans in the underlying collateral pools for all securities we owned were secured by properties predominantly in
Arizona (12% in 2009, 10% in 2008), California (12% in 2009, 14% in 2008), Florida (6% in 2009, 5% in 2008), New York (10% in 2009, 13% in 2008) and Texas (15% in 2009, 12% in 2008). All other states
comprise individually less than 5% as of December 31, 2009 and December 31, 2008.

As
of December 31, 2009 and December 31, 2008, we had a concentration of tenant risk relating to our commercial real estate properties. Our commercial real estate
properties are leased on a triple net basis to JPMorgan Chase under leases that expire in 2021 for our Houston, Texas and Phoenix, Arizona properties and in 2027 for our Arlington, Texas property. In
addition, rental income from our commercial real estate segment represented 42.7% and 15.9% of our total revenue for the years ended December 31, 2009 and December 31, 2008,
respectively.

F-70

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

14. RELATED PARTY TRANSACTIONS

We have entered into a management agreement, as amended (the "Agreement"), with our Manager. The initial term of the Agreement expired in December 2008 and was renewed for a
one-year term. After the initial term, the Agreement will be automatically renewed for a one-year term each anniversary date thereafter unless we or our Manager terminate the
Agreement. The Agreement provides that our Manager will provide us with investment management services and certain administrative services and will perform our day-to-day
operations. The monthly base management fee for such services is equal to 1.5% of one-twelfth of our equity, as defined in the Agreement, payable in arrears. In future periods, to the
extent that our equity is negative, we expect that our base management fee would be zero. The current term of the Agreement will expire in December 2010.

In
addition, under the Agreement, our Manager earns a quarterly incentive fee equal to 25% of the amount by which the quarterly net income per share, as defined in the Agreement (which
principally excludes the effect of stock compensation and the unrealized change in derivatives), exceeds an amount equal to the product of the weighted average of the price per share of the common
stock we issued in the Private Offering and in the Public Offering and the price per share of common stock in any subsequent offerings by us, multiplied by the higher of (i) 2.4375% or
(ii) 25% of the then applicable 10 year Treasury note rate plus 0.50%, multiplied by the then weighted average number of outstanding shares for the quarter. The incentive fee is paid
quarterly. The Agreement provides that 10% of the incentive management fee is to be paid in shares of our common stock (providing that such payment does not result in our Manager owning directly or
indirectly more than 9.8% of our issued and outstanding common stock) and the balance is to be paid in cash. Our Manager may, at its sole discretion, elect to receive a greater percentage of its
incentive management fee in shares of our common stock. The incentive management fees included in our consolidated statements of operations that were incurred during the years ended
December 31, 2009, 2008 and 2007 were $0, $0 and $124, respectively. In accordance with the Agreement, we issued to our Manager shares of our common stock in respect of 10% of such incentive
management fees, which totaled 445 shares for the year ended December 31, 2007.

The
Agreement may be terminated upon the affirmative vote of at least two-thirds of the independent members of our board of directors after the expiration of the initial term
and by providing at least 180 days prior notice based upon either: (i) unsatisfactory performance by our Manager that is materially detrimental to us, or (ii) a determination by
the independent members of our board of directors that the management fees payable to our Manager are not fair (subject to our Manager's right to prevent a compensation termination by agreeing to a
mutually acceptable reduction of the management fees). If we terminate the Agreement, then we must pay our Manager a termination fee equal to twice the sum of the average annual base and incentive
fees earned by our Manager during the two twelve-month periods immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date
of termination.

We
issued to our Manager 84,000 shares of our restricted common stock and granted options to purchase 126,000 shares of our common stock for a 10 year period at a price of $25 per
share in March 2005. We issued to one of our executive officers 30,000 shares of restricted common stock in March 2006. 10,000 of such shares vested on March 15, 2007 and the remaining 20,000
shares were forfeited in April 2007 when the executive officer to whom such shares were issued resigned from his position with us. We issued to one of our directors 2,000 shares of restricted stock in
May 2007 which vested on the

F-71

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

14. RELATED PARTY TRANSACTIONS (Continued)

first
anniversary of their date of issuance, we issued to one of our directors 2,000 shares of restricted stock in June 2008 which vested on the first anniversary of their date of issuance, and we
issued to two of our directors an aggregate of 4,000 shares of restricted stock in June 2009, which will vest on the first anniversary of their date of issuance. For the years ended
December 31, 2009, 2008 and 2007, the base management expense was $0, $1,253 and $5,823, respectively. Included in the management fee expense for the years ended December 31, 2009, 2008
and 2007 is $0, $(27) and $555, respectively, of amortization of stock-based compensation related to restricted stock and options granted. For management fees earned during the year ended
December 31, 2008, we issued to our Manager 68,338 shares of common stock on May 2, 2008; 99,998 shares of common stock on August 6, 2008; 29,969 shares of common stock on
October 31, 2008.

The
Agreement provides that we are required to reimburse our Manager for certain expenses incurred by our Manager on our behalf provided that such costs and reimbursements are no greater
than that which would be paid to outside professionals or consultants on an arm's length basis. For the years ended December 31, 2009, 2008 and 2007, we were not charged any reimbursable costs
by our Manager.

In
January 2007, we purchased a $28,462 investment in BREF One, LLC (the "Fund"), a real estate finance fund sponsored by Brookfield Asset Management, and incurred a $10,392
unfunded capital commitment to the Fund. The acquisition was made from two subsidiaries of Brookfield Asset Management. During the year ended December 31, 2008, we sold our interest in the Fund
to an affiliate of our Manager and the purchaser assumed our unfunded capital commitment. In addition, income (loss) from the equity investment in the Fund for the years ended December 31, 2008
and 2007 was $(40) and $2,610.

In
February 2007, we entered into a sale and purchase agreement with BREOF BNK Fannin LP and BREOF BNK Phoenix LLC, two subsidiaries of a real estate opportunity fund
sponsored by Brookfield and managed by a Brookfield subsidiary, to acquire two commercial properties for a total purchase price of $234,710. We paid the purchase price for the properties with the
proceeds from a $198,500 mortgage loan from an external lender that bears interest at an annual rate of 5.509% and matures on April 1, 2017 and with available cash. In addition to the sale and
purchase agreement, we entered into rent enhancement agreements with BREOF BNK Fannin LP and BREOF BNK Phoenix LLC under which we will receive monthly rent enhancement payments through
2015 totaling $15,905.

In
April 2007, we issued $115,000 of senior mortgage-backed notes through a newly-formed subsidiary, CRZ ABCP Financing LLC. We retained $9,250 of senior subordinated
mortgage-backed notes and $4,250 of subordinated mortgage-backed notes. CRZ ABCP Financing LLC held assets, consisting of 13 commercial whole mortgage loans, which served as collateral for the
mortgage-backed notes. Senior mortgage-backed notes in the aggregate principal amount of $101,500 were issued to an affiliate of our Manager with floating coupons with an interest rate of three-month
LIBOR plus 0.35%. Interest on the senior mortgage-backed notes was payable monthly. The senior mortgage-backed notes had a maturity of April 2017 and the outstanding principal was due at maturity.
Early repayments of the underlying mortgage loans required repayment of a portion of the senior mortgage-backed notes. The senior mortgage-backed notes were treated as a secured financing, and were
non recourse to us.

F-72

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

14. RELATED PARTY TRANSACTIONS (Continued)

Proceeds
from the sale of the senior mortgage-backed notes issued were used to repay outstanding debt under our repurchase agreements. During the year ended December 31, 2008, CRZ ABCP
Financing LLC sold 13 commercial whole mortgage loans that previously had been designated for sale for proceeds of $105,362. The net proceeds of $101,334 were used to repay the senior
mortgage-backed notes that were held by an affiliate of our Manager. In addition, during June 2008, we made an additional capital contribution of $3,000 to CRZ ABCP Financing LLC, which was
used to further reduce the balance of the Class A senior mortgage-backed notes. As of December 31, 2008, we did not have any senior mortgage-backed notes outstanding.

In
August 2007, we entered into a $100,000 unsecured 364-day credit facility with Brookfield US Corporation (f/k/a Brascan (U.S.) Corp.), an affiliate of our Manager.
Indebtedness outstanding under the unsecured credit facility bore interest at LIBOR + 4.00%. In November 2007, we and Brookfield US Corporation amended the terms of the facility,
effective as of September 30, 2007, to convert the facility to a secured revolving credit facility that provides for borrowings of up to $100,000 in the aggregate and to reduce the interest
rate to LIBOR + 2.50%. In March 2008, we and Brookfield US Corporation amended the terms of the facility, effective as of December 31, 2007, to extend the term of the facility
from November 2008 to May 2009, to revise the financial covenant relating to minimum net worth (as defined in the facility) and to eliminate the financial covenants relating to minimum net income (as
defined in the facility), compliance with a maximum leverage ratio and compliance with an interest rate sensitivity requirement. In August 2008, we and Brookfield US Corporation amended the terms of
the facility, effective as of June 30, 2008, to revise the financial covenant relating to minimum net worth. In February 2009, we and Brookfield US Corporation amended the terms of the facility
to extend the term of the facility from May 2009 to May 2010, to lower the borrowing capacity under the facility from $100,000 to $50,000 and, effective as of December 31, 2008, to delete the
financial covenant relating to minimum net worth. The secured facility bears interest at LIBOR + 2.50%. The credit facility and the amendments were approved by the independent members of
our board of directors. The credit agreement contains customary representations, warranties and covenants, including covenants limiting dividends, liens, mergers, asset sales and other fundamental
changes. In addition, if our current manager, Crystal River Capital Advisors, LLC, or another wholly owned subsidiary of Brookfield Asset Management Inc. is not acting as our manager,
then Brookfield US Corporation may accelerate all amounts due under our revolving credit facility. We incurred financing costs of $8, which have been deferred and are being amortized over the term of
the secured revolving credit facility.

In
August 2007, we sold one whole loan to an affiliate of our Manager at its carrying value plus accrued interest receivable, for total proceeds of $45,369.

In
September 2007, we entered into a sale and purchase agreement with BREOF BNK2 Arlington LP, a subsidiary of a real estate opportunity fund sponsored by Brookfield and managed
by a Brookfield subsidiary, to acquire one commercial property for a total purchase price of $26,494. We paid the purchase price for the property with the proceeds from a $20,880 mortgage loan from an
external lender that bears interest at an annual rate of 6.29% and matures on October 1, 2017 and with available cash. In addition to the sale and purchase agreement, we entered into rent
enhancement agreements with BREOF BNK2 Arlington LP under which we will receive monthly rent enhancement payments through 2019 totaling $6,902.

F-73

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

14. RELATED PARTY TRANSACTIONS (Continued)

The following amounts from related party transactions are included in our consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007:

Year Ended December 31,2009

2008

2007Interest income from real estate loans to related parties

$


$


$
1,517Interest expense on indebtedness to related parties


(884
)

(4,425
)

(8,891
)Interest income from rent enhancement receivables from related parties


750


882


606Income (loss) from equity investment in private investment fund managed by related party





(40
)

2,610


The
following amounts from related party transactions are included in our consolidated balance sheets as of December 31, 2009 and December 31, 2008:

December 31,2009

2008Interest payable on indebtedness to related parties

$
37

$
57Rent enhancement receivable from related parties


11,439


13,828Secured revolving credit facility, related party


28,920


32,920


We
and our Manager have entered into sub-advisory agreements with other affiliated entities and the fees payable under such agreements will be paid from any management fees
earned by our Manager. In addition, certain of these affiliated sub-advisory entities introduced investments to us for purchase that we acquired for a total of $0, $0 and $289,009 during
the years ended December 31, 2009, 2008 and 2007, respectively. The purchase price of three commercial real estate properties that we purchased during the year ended December 31, 2007
from an affiliate of our Manager, at a total cost of $260,543, were determined as part of a competitive bid process, and the purchase price of our investment in a private equity fund managed by an
affiliate of our Manager, at a total initial cost of $28,462, was acquired at its book value assuming hypothetical liquidation. All such acquisitions were approved in advance by the independent
members of our board of directors.

F-74

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

15. EARNINGS PER SHARE

The following table sets forth the calculation of Basic and Diluted EPS for the years ended December 31, 2009, 2008 and 2007 (in thousands, except share and per share amounts):

Year Ended December 31, 2009

Year Ended December 31, 2008

Year Ended December 31, 2007Net Loss

Weighted
Average
Number
of Shares
Outstanding(1)

Per
Share
Amount

Net Loss

Weighted
Average
Number
of Shares
Outstanding(1)

Per
Share
Amount

Net Loss

Weighted
Average
Number
of Shares
Outstanding(1)

Per
Share
AmountBasic EPS:Net loss per share of common stock

$
(88,280
)

25,211,260

$
(3.50
)
$
(307,092
)

24,866,206

$
(12.35
)
$
(345,878
)

24,962,708

$
(13.86
)Effect of Dilutive Securities:Options outstanding for the purchase of common stock























Diluted EPS:Net loss per share of common stock and assumed conversions

$
(88,280
)

25,211,260

$
(3.50
)
$
(307,092
)

24,866,206

$
(12.35
)
$
(345,878
)

24,962,708

$
(13.86
)


(1)Including
other participating securities.


As of each of December 31, 2009, 2008 and 2007, options to purchase a total of 130,000 shares of common stock have been excluded from the
computation of diluted EPS as they were determined to be antidilutive.

16. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of our other financial instruments as of December 31, 2009 and December 31, 2008 were as follows:

December 31, 2009

December 31, 2008Carrying
Amount

Estimated
Fair Value

Carrying
Amount

Estimated
Fair ValueAssets:Investment securities

$
42,826

$
42,826

$
72,916

$
72,916Real estate loans








9,034


8,520Real estate loans held for sale


5,903


5,903


5,058


5,058Other investments


1,550


243


1,550


297Derivative assets











Liabilities:Collateralized debt obligations


33,617


33,617


45,429


45,429Junior subordinated notes


51,550


8,087


51,550


9,865Mortgages payable


219,380


147,873


219,380


128,235Secured revolving credit facility, related party


28,920


28,631


32,920


32,112Derivative liabilities


35,378


35,378


57,280


57,280


F-75

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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

Investment securitiesThe fair value of investment securities is estimated by obtaining broker quotations, where available, based upon reasonable
market order indications or a good faith
estimate thereof. For securities where market quotes are not readily obtainable, management also may estimate values, and considers factors including the credit characteristics and term of the
underlying security, market yields on securities with similar credit ratings, and sales of similar securities, where available.

Real estate loans and real estate loans held for saleThe fair value of our loan portfolio is estimated by using a discounted cash flow analysis,
utilizing scheduled cash flows and discount rates estimated by management to approximate those that a willing buyer and seller might use.

Other investmentsThe fair value of our interest in equity investments is estimated using the fair value of the assets exchanged for the cancellation
of the trust preferred securities (see Note 19).

Derivative assets and liabilitiesThe fair value of our derivative assets and liabilities is estimated using current market quotes and third-party
quotations, where available, and taking into consideration credit risk.

Collateralized debt obligationsThe fair value of collateralized debt obligations is estimated by obtaining multiple third-party valuations.

Junior subordinated notesThe fair value of our junior subordinated notes is estimated using the fair value of the assets exchanged for the
cancellation of the trust preferred securities (see Note 19).

Mortgages payableThe fair value of our mortgage notes is estimated using a discounted cash flow analysis, based on management's estimates of market
interest rates.

Secured revolving credit facility, related partyThe fair value of the secured revolving credit facility, related party, is estimated by using a
discounted cash flow analysis, utilizing discount rates estimated by management.

17. SEGMENT REPORTING

We determined that we operate in two reportable segments: a Securities, Loans and Other segment and a Commercial Real Estate segment. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies as discussed in Note 2. The reportable segments were determined based on the allocation of our investment portfolio between
investment activity and commercial real estate operations in which separate performance data is produced and analyzed by management and our chief operating decision-maker.

Our
Securities, Loans and Other segment includes all of our investment activities related to securities, real estate loans and equity investments. Our Commercial Real Estate segment
includes all of our activities related to the ownership and leasing of the three commercial real properties.

F-76

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

17. SEGMENT REPORTING (Continued)

The
following table summarizes our segment reporting for the years ended December 31, 2009, 2008 and 2007 and our total assets as of December 31, 2009 and
December 31, 2008:

Securities,
Loans and
Other

Commercial
Real Estate

TotalYear ended December 31, 2009Total revenues

$
29,124

$
21,671

$
50,795Interest expense


(11,994
)

(12,449
)

(24,443
)Depreciation and amortization expense





(12,088
)

(12,088
)Provision for loss on real estate loans


(7,571
)




(7,571
)Total expenses


(25,936
)

(26,201
)

(52,137
)Income (loss) before other revenues (expenses)


3,188


(4,530
)

(1,342
)Realized and unrealized gain (loss) on derivatives


(412
)




(412
)Total other-than-temporary impairments on available-for-sale securities


(10,860
)




(10,860
)Portion of other-than-temporary impairments recognized in other comprehensive income


(67,087
)




(67,087
)Net change in assets and liabilities valued under FVO


(4,085
)




(4,085
)Total other expenses


(86,938
)




(86,938
)Net loss


(83,750
)

(4,530
)

(88,280
)Year ended December 31, 2008Total revenues

$
117,216

$
22,225

$
139,441Interest expense


(41,060
)

(12,483
)

(53,543
)Depreciation and amortization expense





(12,088
)

(12,088
)Provision for loss on real estate loans


(27,073
)




(27,073
)Total expenses


(76,006
)

(26,212
)

(102,218
)Income (loss) before other revenues (expenses)


41,210


(3,987
)

37,223Realized and unrealized loss on derivatives


(70,679
)




(70,679
)Impairment of available-for-sale securities


(142,916
)




(142,916
)Net change in assets and liabilities valued under FVO


(123,708
)




(123,708
)Total other expenses


(344,315
)




(344,315
)Net loss


(303,105
)

(3,987
)

(307,092
)


F-77

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

17. SEGMENT REPORTING (Continued)

Securities,
Loans and
Other

Commercial
Real Estate

TotalYear ended December 31, 2007Total revenues

$
219,919

$
16,210

$
236,129Interest expense


(147,722
)

(9,075
)

(156,797
)Depreciation and amortization expense





(8,948
)

(8,948
)Provision for loss on real estate loans


(4,500
)




(4,500
)Total expenses


(165,381
)

(19,134
)

(184,515
)Income (loss) before other revenues (expenses)


54,538


(2,924
)

51,614Realized and unrealized loss on derivatives


(84,951
)




(84,951
)Impairment of available-for-sale securities


(317,931
)




(317,931
)Total other expenses


(397,492
)




(397,492
)Net income (loss)


(342,954
)

(2,924
)

(345,878
)December 31, 2009Total assets

$
73,101

$
308,852

$
381,953December 31, 2008Total assets

$
126,647

$
321,654

$
448,301


18. SELECTED QUARTERLY RESULTS OF OPERATIONS (Unaudited)

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2009 and 2008 (in thousands except per share data):

December 31,
2009

September 30,
2009(1)

June 30,
2009(1)

March 31,
2009Operating results:Total interest and dividend income

$
814

$
6,580

$
7,365

$
14,365Rental income, net


5,337


5,284


5,446


5,604Total revenues


6,151


11,864


12,811


19,969Interest expense


(5,796
)

(5,919
)

(6,195
)

(6,533
)Income before other revenues (expenses)


(6,107
)

615


2,033


2,117Net loss


(16,513
)

(55,296
)

(6,490
)

(9,981
)Per share data:Net lossbasic

$
(0.65
)
$
(2.19
)
$
(0.26
)
$
(0.40
)Net lossdiluted

$
(0.65
)
$
(2.19
)
$
(0.26
)
$
(0.40
)Regular dividends declared

$
0.00

$
0.10

$
0.10

$
0.10


F-78

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

18. SELECTED QUARTERLY RESULTS OF OPERATIONS (Unaudited) (Continued)



December 31,
2008

September 30,
2008

June 30,
2008

March 31,
2008Operating results:Total interest and dividend income

$
25,028

$
22,190

$
26,780

$
43,218Rental income, net


5,614


5,399


5,550


5,662Total revenues


30,642


27,589


32,330


48,880Interest expense


(9,241
)

(9,302
)

(10,732
)

(24,268
)Income before other revenues (expenses)


10,221


8,885


8,312


9,805Net loss


(37,123
)

(56,748
)

(75,535
)

(137,686
)Per share data:Net lossbasic

$
(1.48
)
$
(2.28
)
$
(3.04
)
$
(5.56
)Net lossdiluted

$
(1.48
)
$
(2.28
)
$
(3.04
)
$
(5.56
)Regular dividends declared

$
0.10

$
0.10

$
0.30

$
0.68


(1)Reclassification
between total other-than-temporary impairments on available-for-sale securities and portion
of other-than-temporary impairments recognized in other comprehensive income has been made for the quarters ended September 30 and June 30, 2009. There was no
impact on other revenues (expense) or on net loss.


Basic
and diluted earnings per share are computed independently for each of the periods. Accordingly, the sum of the quarterly earnings per share amounts may not agree to the total for
the year.

19. SUBSEQUENT EVENTS

On January 29, 2010, we entered into an Exchange Agreement, which we refer to as the Exchange Agreement, with Taberna Preferred Funding VIII, Ltd. and Taberna Preferred
Funding IX, Ltd., which we collectively refer to as Taberna, pursuant to which we exchanged certain of our assets described below for the outstanding $50,000 aggregate liquidation preference
trust preferred securities issued by Crystal River Preferred Trust I and backed by $51,550 aggregate principal amount of our junior subordinated notes due 2037. Immediately following the closing of
the transaction contemplated by the Exchange Agreement, the junior subordinated notes were cancelled, the indenture under which the notes were issued was discharged and Crystal River Preferred Trust I
was dissolved.

Pursuant
to the Exchange Agreement, we transferred and assigned to Taberna two real estate loans and a CMBS bond, which collectively had an aggregate carrying value for accounting
purposes on our balance sheet as of December 31, 2009 of $5,980, and we also paid to Taberna a $1,000 exchange fee. We also paid $500 to cover all costs and expenses that were incurred by the
collateral manager for Taberna, the indenture trustee and their respective advisors. This transaction resulted in a pretax gain on extinguishment of debt of approximately $39,900.

On
February 23, 2010, we and Brookfield and B Acquisition Sub Inc., a wholly-owned subsidiary of Brookfield, entered into an Agreement and Plan of Merger pursuant to which
Brookfield will acquire all the outstanding shares of our common stock that Brookfield and its subsidiaries do not already own for cash at a price of $0.60 per share. The transaction was unanimously
approved by the independent members of our Board of Directors, and by the Special Committee formed to oversee our strategic

F-79

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

December 31, 2009

(dollars in thousands, except per share data)

19. SUBSEQUENT EVENTS (Continued)

review
process. The transaction is subject to approval by our stockholders holding a majority of the shares entitled to vote at a special meeting of stockholders, as well as other customary closing
conditions. We will be obligated to reimburse Brookfield for all of its transaction expenses (subject to a cap in certain circumstances) if the merger agreement is terminated other than as result of a
breach by Brookfield.

On
February 23, 2010, we and Brookfield US Corporation amended the terms of our secured revolving credit facility to extend the term of the facility from May 2010 to
August 31, 2010 unless sooner terminated as provided in the credit agreement.

As
contemplated by the merger agreement relating to the Merger, on March 9, 2010, we entered into a binding letter of intent (the "Asset Sale LOI"), with Ranieri Partners
Management LLC or its affiliates (together, "Ranieri"). Pursuant to the Asset Sale LOI, Ranieri (either directly or through an affiliate) agreed to purchase certain mortgage
pass-through certificates (the "LOI CMBS Assets") from us. Further, pursuant to the Asset Sale LOI, we agreed to appoint Ranieri (or its designee) as the replacement manager of our CDO 1
and CDO2. Ranieri agreed to pay us a total purchase price of $8,000 for the sale of those assets to Ranieri, of which $2,500 (plus accrued and unpaid interest through the closing date of that portion
of the transaction) was paid upon the sale of the LOI CMBS Assets on March 15, 2010, $2,000 will be paid upon the transfer of the CDO2 rights referenced above, and $3,500 will be paid upon the
transfer of the CDO1 rights referenced above. The LOI CMBS Assets had a carrying value of approximately $926 as of December 31, 2009. We also agreed to grant to Ranieri a right of first refusal
to purchase all or any portion of our interest in two CMBS securitizations if we sell those securities in the future. The completion of the transfer of the CDO2 and CDO1 rights set forth in the Asset
Sale LOI is subject to various customary closing conditions as well as the execution of definitive agreements.

We
are aware of three lawsuits that have been filed by alleged Crystal River shareholders challenging our proposed merger with Brookfield and naming as defendants Crystal River, our
Board of Directors, and in some instances, Brookfield and B Merger Sub, Inc. Additional lawsuits pertaining to the Merger could be filed in the future. On or around March 2, 2010,
plaintiff Fazal Mahmood filed a complaint in the Circuit Court for Baltimore City, Maryland against Crystal River and our Board of Directors asserting claims on behalf of a putative class of Company
shareholders. On March 2, 2010, plaintiffs Milton P. Silva and Shaher Tadros filed a complaint in the Supreme Court of the State of New York, County of New York, against Crystal River, our
Board of Directors, Brookfield, and B Merger Sub, Inc. asserting claims on behalf of a putative class of Crystal River shareholders as well as derivative claims ostensibly on behalf of Crystal
River. On March 5, 2010, plaintiff Gary P. Klahr filed a complaint in the Circuit Court for Baltimore City, Maryland against Crystal River, our Board of Directors, Brookfield, and B Merger
Sub, Inc. asserting claims on behalf of a putative class of Crystal River shareholders. In
each of these lawsuits, the plaintiffs generally allege, among other things, that the members of our Board of Directors breached their fiduciary duties towards the plaintiffs and the other public
stockholders of Crystal River in connection with the proposed sale of Crystal River to Brookfield and Merger Sub. Plaintiffs in these lawsuits seek, among other relief, certification of the lawsuits
as class actions, an injunction preventing the Merger from closing, an award of unspecified damages to the plaintiffs and the class, and an award of attorneys' fees and expenses, along with such other
relief as the courts deem just and proper. We intend to vigorously defend these lawsuits.

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries  Schedule IIValuation and Qualifying Accounts and Reserves  For the Years Ended December 31, 2009, 2008 and 2007  (in thousands)

Additions

DecreasesDescription

Balance at
beginning of
period

Charged to
costs and
expenses

Charged to
other
accounts(1)

Accounts
written off(2)

Balance at
end of
periodAllowance for loan lossDeducted from Real Estate Loans, Net in the Consolidated Balance Sheet2009

$
14,235

$
6,758

$


$


$
20,9932008


4,500


9,735








14,2352007





4,500








4,500


(1)Includes
additions for acquisitions and reclassifications(2)Consists
of write-offs, net of recoveries and collection fees in each year


S-1

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Table of Contents

Crystal River Capital, Inc. and Subsidiaries  Schedule IIIReal Estate and Accumulated Depreciation  December 31, 2009  (dollars in thousands)

Useful life
on which
depreciation
in latest
income
statements
is
computed(4)Initial Cost

Cost Capitalized
Subsequent to
Acquisition

Gross Amount at Which Carried at
Close of PeriodDescription

Encumbrances

Land

Building and
Improvements

Land

Building and
Improvements

Land

Building and
Improvements

Total(1)(2)

Accumulated
depreciation(3)

Date of
construction

Date
acquiredOffice Building, N. Central Avenue, Phoenix, AZ

$
145,087

$
5,802

$
150,473

$


$


$
5,802

$
150,473

$
156,275

$
(11,743
)

1973


2007

40 yearsOffice Building, 1111 Fannin St., Houston, TX


53,413


5,240


52,320








5,240


52,320


57,560


(4,435
)

1971


2007

40 yearsOffice Building, JPM Chase Call Center, Arlington, TX


20,880


6,386


19,252








6,386


19,252


25,638


(1,541
)

2000


2007

40 yearsTOTAL

$
219,380

$
17,428

$
222,045

$


$


$
17,428

$
222,045

$
239,473

$
(17,719
)


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Table of Contents

Reconciliation of Gross Amount at Which Carried at Close of PeriodBalance, December 31, 2007

$
239,473Additions during period:Acquisitions through foreclosure


Other acquisitions


Improvements, etc.


Deductions during period:Cost of real estate sold


Balance, December 31, 2008

$
239,473Additions during period:Acquisitions through foreclosure


Other acquisitions


Improvements, etc.


Deductions during period:Cost of real estate sold


Balance, December 31, 2009

$
239,473


(2)The
initial cost includes the purchase price paid by the Company and acquisition fees and expenses. The total cost basis of the Company's properties at
December 31, 2009 for Federal income tax purposes was approximately $239.5 million.(3)A
reconciliation of changes to the Accumulated Depreciation on Real Estate owned during the period is as follows:


Reconciliation of Accumulated DepreciationBalance, December 31, 2007

$
4,710Additions during period:Depreciation and amortization expense


6,504Deductions during period:Accumulated depreciation and amortization on real estate sold


Balance, December 31, 2008


11,214Additions during period:Depreciation and amortization expense


6,505Deductions during period:Accumulated depreciation and amortization on real estate sold


Balance, December 31, 2009

$
17,719




S-3

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Table of Contents



Crystal River Capital, Inc. and Subsidiaries  Schedule IVSchedule of Mortgage Loans on Real Estate  December 31, 2009  (in thousands)

Loan Type

Interest
Rate

Final
Maturity
Date

Periodic Payment Terms

Prior
Liens(1)

Face
Amount of
Mortgages

Carrying
Amount of
Mortgages

Principal
Amount of
Loan
Subject to
Delinquent
Principal
or InterestConstruction Loans:Cambridge Condos, Portland, Oregon


16.00
%
November
2008(3)

Interest payable monthly with the principal due at maturity

$
10,086

$
14,602

$

(4)
$
14,602Total construction loans









10,086


14,602





14,602Mezzanine Loans:Walgreens,
Colorado4 properties
Ohio3 properties
Michigan3 properties
Texas3 properties
other13 properties


7.32

February 2016

Principal and interest are payable monthly based on amortization schedule over the life to maturity


112,175


11,063


4,658
(5)

Sheffield Building,
New York, New York


15.00

May 2009(2)

Interest is capitalized and due at maturity


n/a(3
)

6,358



(4)

6,358Total mezzanine loans









112,175


17,421


4,658


6,358Whole Loans:Forestville Plaza,
Forestville, Maryland


3.73

November
2010(6)

Interest payable monthly with the principal due at maturity


n/a


1,658


1,245
(5)

Total whole loans












1,658


1,245


Total loans








$
122,261

$
33,681

$
5,903

$
20,960


(1)Represents
estimated amount of mortgage liens collateralizing senior debt(2)Loan
did not pay off at maturity and currently is in default(3)Loan
has been foreclosed.(4)Loan
is in default and has been written down to expected recovery amount(5)Valuation
allowance was recorded because this loan is held for sale. We exchanged this note as part of the consideration for the repurchase and discharge of
our junior subordinated notes in January 2010.(6)The
borrower has one remaining 12-month extension option


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Table of Contents

Reconciliation of Mortgage Loans on Real EstateBalance, December 31, 2006

$
237,670Additions during period:New mortgage loans and advances


30,211Foreign currency translation gain


3,819Capitalized interest


1,105Amortization of discount


111Underwriting costs


61Subtractions during period:Mortgages sold


(55,257
)Principal redemption


(37,000
)Principal payments


(5,084
)Loan loss provision


(4,500
)Amortization of underwriting costs


(29
)Write-offs of underwriting costs


(20
)Amortization of premium


(307
)Balance, December 31, 2007

$
170,780Additions during period:New mortgage loans and advances


929Capitalized interest


263Amortization of discount


64Underwriting costs


Subtractions during period:Mortgages sold


(116,791
)Principal payments


(13,942
)Loan loss provision


(26,875
)Amortization of underwriting costs


(4
)Write-offs of underwriting costs


(198
)Amortization of premium


(134
)Balance, December 31, 2008

$
14,092Additions during period:New mortgage loans and advances


Capitalized interest


235Amortization of discount


Underwriting costs


Subtractions during period:Mortgages sold


Principal payments


(863
)Loan loss provision


(7,571
)Amortization of underwriting costs


10Write-offs of underwriting costs


Amortization of premium


Balance, December 31, 2009

$
5,903


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