UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

OR

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


For the transition period from ______________
to _______________


Commission file number: 1-32551

DEERFIELD TRIARC CAPITAL CORP.(Exact name of registrant as specified in its charter)

|                         |  |                                     
|------------------------ |  | ------------------------------------
|Maryland                 |  | 20-2008622                          
|(State of incorporation) |  | (I.R.S. Employer Identification No.)

6250 N. River Road, 8th Floor, Rosemont,
Illinois, 60018 
(773) 380-1600(Address, including zip code, and telephone number, 
including area code, of registrants principal executive offices)

8700 West Bryn Mawr Avenue, 12th Floor,
Chicago, Illinois, 60631(Former address, including zip code)

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 x    No o

Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definitions of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check One)

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

Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).YesoNox

There were
51,659,701 shares of the registrants Common Stock outstanding as of May 12,
2006.

---



DEERFIELD TRIARC CAPITAL CORP. INDEX

|         |  |                                                                                                          |      | 
|-------- |  | -------------------------------------------------------------------------------------------------------- | ---- | 
|         |  |                                                                                                          | Page
|Part I.  |  | Financial Information                                                                                    |      | 
|         |  |                                                                                                          |      | 
|Item 1.  |  | Financial Statements (Unaudited)                                                                         |      | 
|         |  | Condensed Consolidated Balance Sheets 
  March 31, 2006 and December 31, 2005                           | 3    | 
|         |  | Condensed Consolidated Statements of
  Operations  Three Months Ended March 31, 2006 and March 31, 2005 | 4    | 
|         |  | Condensed Consolidated Statement of
  Stockholders Equity  Three Months Ended March 31, 2006           | 5    | 
|         |  | Condensed Consolidated Statements of Cash
  Flows  Three Months Ended March 31, 2006 and March 31, 2005 | 6    | 
|         |  | Notes to Condensed Consolidated Financial
  Statements                                                   | 7    | 
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and
  Results of Operations                  | 18   | 
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                               | 38   | 
|Item 4.  |  | Controls and Procedures                                                                                  | 41   | 
|         |  |                                                                                                          |      | 
|Part II. |  | Other Information                                                                                        |      | 
|         |  |                                                                                                          |      | 
|Item 1A. |  | Risk Factors                                                                                             | 41   | 
|Item 6.  |  | Exhibits                                                                                                 | 42   | 
|         |  | Signatures                                                                                               | 42   | 

SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

The
statements in this Report on Form 10-Q that are not historical facts, including
most importantly information concerning possible or assumed future results of
operations of Deerfield Triarc Capital Corp. and statements preceded by,
followed by, or that include the words may, believes, plans, expects,
anticipates
or the negation thereof, or similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995 (the Reform
Act). All statements that address operating performance, events or
developments that are expected or anticipated to occur in the future, including
statements related to revenue growth, earnings per share growth or statements
expressing general optimism about future operating results, are forward-looking
statements under the Reform Act. These forward-looking statements are based on
our current expectations, speak only as of the date of this Report on Form 10-Q
and are susceptible to a number of risks, uncertainties and other factors. Our
actual results, performance and achievements may differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements.

For
those statements, we claim the protection of the safe harbor for forward-looking
statements in the Reform Act. Many important factors could affect our future
results and could cause them to differ materially from those expressed in the
forward-looking statements contained herein. Such factors include general
volatility of the securities markets in which we invest and the market price of
our common stock; changes in our industry, interest rates, the debt securities
markets or the general economy; increased prepayments of the mortgage and other
loans underlying our mortgage-backed or other asset-backed securities;
increased rates of default or decreased recovery rates on our investments;
changes in governmental regulations, tax rates and similar matters; our
expected financings and investments; availability of investment opportunities
in real estate-related and other securities; the degree and nature of our
competition; and other risks and uncertainties disclosed from time to time in
the companys filings with the Securities and Exchange Commission, all of which
are difficult or impossible to predict accurately and many of which are beyond
the companys control.

All
future written and oral forward-looking statements attributable to us or any
person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referenced above. New risks and
uncertainties arise from time to time, and it is impossible for us to predict
these events or how they may affect us. We assume no obligation to update any
forward-looking statements after the date of filing of this Report on Form 10-Q
as a result of new information, future events or developments, except as
required by federal securities laws. In addition, it is our policy generally
not to make any specific projections as to future earnings, and we do not
endorse any projections regarding future performance that may be made by third
parties. You should carefully consider the factors referenced in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March
17, 2006, including those set forth under the sections captioned Part I  Item 1A. Risk Factors and
Part II - Item 7. Managements Discussion and
Analysis of Financial Conditions and Results of Operations as such
factors that, among others, could cause actual results to vary from our
forward-looking statements.

2

---



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DEERFIELD TRIARC CAPITAL CORP. AND ITS
SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(In thousands, except share and per share amounts)

|                                                                                                                |  |           |           |              |   |           |  
|--------------------------------------------------------------------------------------------------------------- |  | --------- | --------- | ------------ | - | --------- | -
|                                                                                                                |  | March 31, |           | December 31, |  
|                                                                                                                |  | 2006      |           | 2005         |  
|                                                                                                                |  |           |           |              |  
|ASSETS                                                                                                          |  |           |           |              |   |           |  
|Cash and cash equivalents                                                                                       |  | $         | 19,446    |              | $ | 35,542    |  
|Due from broker                                                                                                 |  |           | 27,912    |              |   | 191,845   |  
|Restricted cash and cash equivalents                                                                            |  |           | 22,953    |              |   | 85,311    |  
|Available-for-sale securities, including
$7,162,661 and $6,847,723
  pledgedat fair value                      |  |           | 8,439,150 |              |   | 7,285,052 |  
|Trading securitiesat fair value                                                                                |  |           | 2,470     |              |   | 4,738     |  
|Other investments                                                                                               |  |           | 12,321    |              |   | 12,303    |  
|Derivative assets                                                                                               |  |           | 114,947   |              |   | 69,406    |  
|Loans held for sale                                                                                             |  |           | 289,291   |              |   | 294,063   |  
|Loans                                                                                                           |  |           | 178,923   |              |   | 158,111   |  
|Interest receivable                                                                                             |  |           | 46,881    |              |   | 40,648    |  
|Other receivable                                                                                                |  |           | 13,883    |              |   | 16,976    |  
|Prepaid and other assets                                                                                        |  |           | 11,340    |              |   | 9,817     |  
|                                                                                                                |  |           |           |              |   |           |  
|                                                                                                               
|TOTAL ASSETS                                                                                                    |  | $         | 9,179,517 |              | $ | 8,203,812 |  
|                                                                                                                |  |           |           |              |   |           |  
|LIABILITIES                                                                                                     |  |           |           |              |   |           |  
|Repurchase agreements, including $30,565 and
$26,788 of accrued
  interest                                      |  | $         | 7,116,051 |              | $ | 6,768,396 |  
|Due to broker                                                                                                   |  |           | 713,595   |              |   | 77,327    |  
|Dividends payable                                                                                               |  |           |          |              |   | 18,081    |  
|Derivative liabilities                                                                                          |  |           | 3,892     |              |   | 6,053     |  
|Interest payable                                                                                                |  |           | 19,909    |              |   | 18,262    |  
|Long term debt                                                                                                  |  |           | 615,550   |              |   | 615,550   |  
|Management and incentive fee payable                                                                            |  |           | 2,500     |              |   | 2,453     |  
|Other payables                                                                                                  |  |           | 635       |              |   | 487       |  
|                                                                                                                |  |           |           |              |   |           |  
|                                                                                                                |  |           |           |              |   |           |  
|TOTAL LIABILITIES                                                                                               |  |           | 8,472,132 |              |   | 7,506,609 |  
|                                                                                                                |  |           |           |              |   |           |  
|STOCKHOLDERS EQUITY                                                                                            |  |           |           |              |   |           |  
|Preferred stock, par value $0.001:                                                                              |  |           |           |              |   |           |  
|100,000,000 shares authorized; none issued and
outstanding                                                      |  |           |          |              |   |          |  
|Common stock, par value $0.001:                                                                                 |  |           |           |              |   |           |  
|500,000,000 shares authorized; 51,659,701 shares
issued and outstanding
  (including 269,232 restricted shares) |  |           | 51        |              |   | 51        |  
|Additional paid-in capital                                                                                      |  |           | 746,038   |              |   | 747,919   |  
|Deferred equity compensation                                                                                    |  |           |          |              |   | (2,397    | )
|Accumulated other comprehensive loss                                                                            |  |           | (54,200   | )            |   | (44,703   | )
|Retained earnings (deficit)                                                                                     |  |           | 15,496    |              |   | (3,667    | )
|                                                                                                                |  |           |           |              |   |           |  
|                                                                                                               
|TOTAL STOCKHOLDERS EQUITY                                                                                      |  |           | 707,385   |              |   | 697,203   |  
|                                                                                                                |  |           |           |              |   |           |  
|                                                                                                               
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                      |  | $         | 9,179,517 |              | $ | 8,203,812 |  
|                                                                                                                |  |           |           |              |   |           |  

See notes to
condensed consolidated financial statements

3

---



DEERFIELD TRIARC CAPITAL CORP. AND ITS
SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(In thousands, except share and per share amounts)

|                                                        |  | Three months ended March 31, |           
|------------------------------------------------------- |  | ---------------------------- | ----------
|                                                        |  |                              |           
|                                                        |  | 2006                         |           
|                                                        |  |                              |           
|REVENUES                                                |  |                              |           
|Net interest income:                                    |  |                              |           
|Interest income                                         |  | $                            | 102,028   
|Interest expense                                        |  |                              | 79,105    
|                                                        |  |                              |           
|                                                        |  |                              |           
|Net interest income                                     |  |                              | 22,923    
|                                                        |  |                              |           
|                                                        |  |                              |           
|EXPENSES                                                |  |                              |           
|Management and incentive fee expense to related
party   |  |                              | 4,875     
|Professional services                                   |  |                              | 478       
|Insurance expense                                       |  |                              | 181       
|Other general and administrative
expenses               |  |                              | 581       
|                                                        |  |                              |           
|                                                        |  |                              |           
|Total expenses                                          |  |                              | 6,115     
|                                                        |  |                              |           
|                                                        |  |                              |           
|OTHER INCOME AND GAIN (LOSS)                            |  |                              |           
|Net gain on available-for-sale
securities               |  |                              | 2,092     
|Net loss on trading securities                          |  |                              | (1,813    
|Net gain (loss) on loans                                |  |                              | 532       
|Net gain on derivatives                                 |  |                              | 1,443     
|Dividend income                                         |  |                              | 101       
|                                                        |  |                              |           
|                                                        |  |                              |           
|Net other income and gain (loss)                        |  |                              | 2,355     
|                                                        |  |                              |           
|                                                        |  |                              |           
|NET INCOME                                              |  | $                            | 19,163    
|                                                        |  |                              |           
|                                                        |  |                              |           
|NET INCOME PER SHAREBasic                              |  | $                            | 0.37      
|                                                        |  |                              |           
|NET INCOME PER SHAREDiluted                            |  | $                            | 0.37      
|                                                        |  |                              |           
|WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING - Basic   |  |                              | 51,390,470
|                                                        |  |                              |           
|WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING - Diluted |  |                              | 51,515,588

See notes to
condensed consolidated financial statements

4

---



DEERFIELD TRIARC CAPITAL CORP. AND ITS
SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (UNAUDITED)(In thousands)

|                                                                                            |  |              |        |            |   |          |  |              |         |               |   |           |   |   |         |               |        |        |   |  |   |         |   |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---------- | - | -------- |  | ------------ | ------- | ------------- | - | --------- | - | - | ------- | ------------- | ------ | ------ | - |  | - | ------- | - | - | ------- | -
|                                                                                            |  | Common Stock |        |            |   |          |  | Accumulated  |         |               |   |           |   |   |         |               |       
|                                                                                            |  |              |        | Additional |   | Deferred |  | Other        |         | Retained      |   |           |   |   |         | Comprehensive |       
|                                                                                            |  |              |        | Par        |   | Paid-in  |  | Equity       |         | Comprehensive |   | Earnings  |   |   |         |               |        | Income |  
|                                                                                            |  | Shares       |        | Value      |   | Capital  |  | Compensation |         | Loss          |   | (Deficit) |   |   | Total   |               | (Loss) |       
|                                                                                            |  |              |        |            |   |          |  |              |         |               |   |           |   |   |         |               |        |       
|Balance - January 1, 2006                                                                   |  |              | 51,660 |            | $ | 51       |  | $            | 747,919 |               | $ | (2,397    | ) | $ | (44,703 | )             | $      | (3,667 | ) |  | $ | 697,203 |   |   |         |  
|                                                                                            |  |              |        |            |   |          |  |              |         |               |   |           |   |   |         |               |        |        |   |  |   |         |   |   |         |  
|Net income                                                                                  |  |              |        |            |   |          |  |              |         |               |   |           |   |   |         |               |        | 19,163 |   |  |   | 19,163  |   | $ | 19,163  |  
|Available-for-sale securities - fair value adjustment net of
  reclassification adjustments |  |              |        |            |   |          |  |              |         |               |   |           |   |   | (56,362 | )             |        |        |   |  |   | (56,362 | ) |   | (56,362 | )
|Designated derivatives - fair
  value adjustment net of reclassification adjustments        |  |              |        |            |   |          |  |              |         |               |   |           |   |   | 46,865  |               |        |        |   |  |   | 46,865  |   |   | 46,865  |  
|                                                                                            |  |              |        |            |   |          |  |              |         |               |   |           |   |   |         |               |        |        |   |  |   |         |   |   |         |  
|Comprehensive income                                                                        |  |              |        |            |   |          |  |              |         |               |   |           |   |   |         |               |        |        |   |  |   |         |   | $ | 9,666   |  
|                                                                                            |  |              |        |            |   |          |  |              |         |               |   |           |   |   |         |               |        |        |   |  |   |         |   |   |         |  
|Reclassification of deferred equity to additional paid-in
capital                           |  |              |        |            |   |          |  |              | (2,397  | )             |   | 2,397     |   |   |         |               |        |        |   |  |   |        |   |   |         |  
|Share-based compensation granted to board of directors                                      |  |              |        |            |   |          |  |              | 130     |               |   |           |   |   |         |               |        |        |   |  |   | 130     |   |   |         |  
|Amortization
        of share-based compensation                                            |  |              |        |            |   |          |  |              | 386     |               |   |           |   |   |         |               |        |        |   |  |   | 386     |   |   |         |  
|                                                                                            |  |              |        |            |   |          |  |              |         |               |   |           |   |   |         |               |        |        |   |  |   |         |   |   |         |  
|Balance - March 31, 2006                                                                    |  |              | 51,660 |            | $ | 51       |  | $            | 746,038 |               | $ |          |   | $ | (54,200 | )             | $      | 15,496 |   |  | $ | 707,385 |   |   |         |  
|                                                                                            |  |              |        |            |   |          |  |              |         |               |   |           |   |   |         |               |        |        |   |  |   |         |   |   |         |  

See notes to
condensed consolidated financial statements

5

---



DEERFIELD TRIARC CAPITAL CORP. AND ITS SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(In
thousands)

|                                                                                                    |  |                                      |            |      |   |            |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ---------- | ---- | - | ---------- | -
|                                                                                                    |  | Three months
        ended March 31, |           
|                                                                                                    |  |                                      |           
|                                                                                                    |  | 2006                                 |            | 2005 |  
|                                                                                                    |  |                                      |            |      |  
|CASH FLOWS FROM OPERATING
        ACTIVITIES:                                                       |  |                                      |            |      |   |            |  
|Net
        income                                                                                  |  | $                                    | 19,163     |      | $ | 5,897      |  
|Adjustments
        to reconcile net income to net cash provided by (used in) operating activities: |  |                                      |            |      |   |            |  
|Net
        amortization on investments, loans, and debt issuance                                   |  |                                      | 5,786      |      |   | 1,208      |  
|Accretion
        of discount on held to maturity securities                                        |  |                                      |           |      |   | (145       | )
|Share-based
        compensation                                                                    |  |                                      | 516        |      |   | 953        |  
|Gain
        on undesignated derivatives                                                            |  |                                      | (1,895     | )    |   | (124       | )
|Hedge
        ineffectiveness                                                                       |  |                                      | (589       | )    |   | (285       | )
|Purchase
        of trading securities                                                              |  |                                      |           |      |   | (4,627     | )
|Unrealized
        loss from trading securities                                                     |  |                                      | 1,813      |      |   | 73         |  
|Other-than-temporary
        impairment on securities available-for-sale                            |  |                                      | 1,837      |      |   |           |  
|Purchase
        of loans held for sale                                                             |  |                                      | (85,511    | )    |   | (29,276    | )
|Principal
        payments received on loans held for sale                                          |  |                                      | 20,595     |      |   |           |  
|Proceeds
        from the sale of loans held for sale                                               |  |                                      | 71,731     |      |   | 1,663      |  
|Net
        (gain) loss on loans held for sale                                                      |  |                                      | (442       | )    |   | 291        |  
|Net
        realized gain on securities available-for-sale                                          |  |                                      | (3,929     | )    |   |           |  
|Net
        realized gain on loans held for sale                                                    |  |                                      |           |      |   | (157       | )
|Net
        realized loss on terminated derivatives                                                 |  |                                      | 41         |      |   |           |  
|Net
        payments received on designated terminated derivatives                                  |  |                                      | 1,040      |      |   |           |  
|Changes
        in operating assets and liabilities:                                                |  |                                      |            |      |   |            |  
|Due
        from broker                                                                             |  |                                      | (11,667    | )    |   |           |  
|Interest
        receivable                                                                         |  |                                      | (6,251     | )    |   | (12,932    | )
|Other
        receivable                                                                            |  |                                      | 5          |      |   | (6,624     | )
|Prepaid
        and other assets                                                                    |  |                                      | (520       | )    |   | (484       | )
|Accrued
        interest on repurchase agreements                                                   |  |                                      | 3,777      |      |   | 6,897      |  
|Due
        to broker                                                                               |  |                                      | 5,018      |      |   | 24,242     |  
|Interest
        payable                                                                            |  |                                      | 2,214      |      |   | 3,392      |  
|Management
        and incentive fee payable                                                        |  |                                      | 47         |      |   | 403        |  
|Other
        payables                                                                              |  |                                      | 148        |      |   | (119       | )
|                                                                                                    |  |                                      |            |      |   |            |  
|Net
        cash provided by (used in) operating activities                                         |  |                                      | 22,927     |      |   | (9,754     | )
|                                                                                                    |  |                                      |            |      |   |            |  
|                                                                                                    |  |                                      |            |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |  |                                      |            |      |   |            |  
|Change
        in restricted cash and cash equivalents                                              |  |                                      | 62,358     |      |   |           |  
|Purchase
        of available-for-sale securities                                                   |  |                                      | (1,117,429 | )    |   | (2,710,767 | )
|Proceeds
        from the sale of available-for-sale securities                                     |  |                                      | 397,849    |      |   |           |  
|Purchase
        of held-to-maturity securities                                                     |  |                                      |           |      |   | (34,719    | )
|Principal
        payments received on available-for-sale securities                                |  |                                      | 326,410    |      |   | 62,297     |  
|Proceeds
        from the maturity of held-to-maturity securities                                   |  |                                      |           |      |   | 134,990    |  
|Purchase
        of loans                                                                           |  |                                      | (35,660    | )    |   |           |  
|Principal
        payments received on loans                                                        |  |                                      | 15,000     |      |   |           |  
|                                                                                                    |  |                                      |            |      |   |            |  
|Net
        cash used in investing activities                                                       |  |                                      | (351,472   | )    |   | (2,548,199 | )
|                                                                                                    |  |                                      |            |      |   |            |  
|                                                                                                    |  |                                      |            |      |   |            |  
|CASH FLOWS FROM FINANCING
        ACTIVITIES:                                                       |  |                                      |            |      |   |            |  
|Net
        borrowings under repurchase agreements                                                  |  |                                      | 331,711    |      |   | 2,360,869  |  
|Payment
        of debt issuance costs                                                              |  |                                      | (1,181     | )    |   |           |  
|Dividends
        paid                                                                              |  |                                      | (18,081    | )    |   |           |  
|Payment
        of offering costs                                                                   |  |                                      |           |      |   | (857       | )
|                                                                                                    |  |                                      |            |      |   |            |  
|Net
        cash provided by financing activities                                                   |  |                                      | 312,449    |      |   | 2,360,012  |  
|                                                                                                    |  |                                      |            |      |   |            |  
|                                                                                                    |  |                                      |            |      |   |            |  
|Net decrease in cash
        and cash equivalents                                                   |  |                                      | (16,096    | )    |   | (197,941   | )
|Cash and cash equivalents at beginning
        of period                                            |  |                                      | 35,542     |      |   | 268,686    |  
|                                                                                                    |  |                                      |            |      |   |            |  
|Cash and cash equivalents
        at end of period                                                  |  | $                                    | 19,446     |      | $ | 70,745     |  
|                                                                                                    |  |                                      |            |      |   |            |  
|                                                                                                    |  |                                      |            |      |   |            |  
|SUPPLEMENTAL DISCLOSURE:                                                                            |  |                                      |            |      |   |            |  
|Cash
        paid for interest                                                                      |  | $                                    | 74,605     |      | $ | 6,166      |  
|Net
        change in unrealized loss on available-for-sale securities                              |  | $                                    | 58,195     |      | $ | 36,964     |  
|Net
        change in unrealized gain on derivatives                                                |  | $                                    | 47,413     |      | $ | 17,744     |  
|Unsettled
        available-for-sale securities purchases - due to broker                           |  | $                                    | 672,979    |      | $ | 117,689    |  
|Unsettled
        available-for-sale securities sales - due from broker                             |  | $                                    | 12,328     |      | $ |           |  
|Warehouse
        participation liability                                                           |  | $                                    |           |      | $ | 174,210    |  
|Settlement
        of interest expense from terminated derivatives                                  |  | $                                    | 565        |      | $ |           |  
|Principal
        payments receivable on available-for-sale securities                              |  | $                                    | 13,813     |      | $ |           |  

See notes to condensed
consolidated financial statements

6

---



|                                                                                                                     
|---------------------------------------------------------------------------------------------------------------------
|DEERFIELD TRIARC CAPITAL CORP. AND ITS SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (UNAUDITED)
|                                                                                                                     

1.
ORGANIZATION AND BASIS OF PRESENTATION

Deerfield
Triarc Capital Corp. and its subsidiaries (the Company) is a diversified
financial company that invests in real estate-related securities and various
other asset classes. The Company was incorporated in Maryland on November 22,
2004. On December 23, 2004, the Company commenced its operations of investing
in real estate related investments, primarily mortgage-backed securities, as
well as other assets.

Deerfield
Capital Management LLC (the Manager), pursuant to a management agreement (the
Management Agreement), manages the Company and its investment portfolio.

The
Company has elected to be taxed, and intends to continue to qualify, as a real
estate investment trust (REIT) under the Internal Revenue Code of 1986, as
amended (the Code).

Initial
Private Placement

On
December 23, 2004, the Company completed an initial private offering of
26,923,139 shares (excluding 403,847 restricted shares) of common stock, $0.001
par value at an offering price of $15.00 per share, including 256,472 shares of
common stock purchased or placed by the initial purchasers/placement agents
pursuant to their over-allotment option. The Company received proceeds from
these transactions of $379.7 million, net of underwriting discounts and
commissions, placement agent fees, and incurred $0.9 million of costs
associated with the offering, primarily printing and legal services.

Initial
Public Offering

On
July 5, 2005, the Company completed its initial public offering (the IPO) of
25,000,000 shares of common stock, $0.001 par value, at an offering price of
$16.00 per share, including the sale of 679,285 shares by selling shareholders
(for which the Company received no proceeds). The Company received proceeds
from this transaction of $365.8 million, net of underwriting discounts, commissions
and placement agent fees, and incurred $2.7 million of costs associated with
the offering, primarily for printing and legal services. The Companys stock is
listed on the New York Stock Exchange under the symbol DFR and began trading
on June 29, 2005.

Basis
of Presentation

The
accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America (GAAP) for interim financial
information and are in the form prescribed by the Securities and Exchange
Commissions (SEC) Regulation S-X and instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes for complete financial
statements as required by GAAP. The interim unaudited financial statements
should be read in conjunction with the Companys audited financial statements
as of and for the year ended December 31, 2005, included in the Companys
Annual Report on Form 10-K filed with the SEC on March 17, 2006. In the opinion
of the Companys management, all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the Companys
financial position, results of operations and cash flows have been included.
The nature of the Companys business is such that the results of any interim
period are not necessarily indicative of results for a full year.

The
accompanying condensed consolidated financial statements include the accounts
of the Company and its subsidiaries, which consist of the following:

|  |                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Deerfield Triarc Capital LLC (DTC
        LLC) a wholly owned subsidiary of the Company.                                                            
|  |                                                                                                                                                       
|  | o                                                                                                                                                      | Market Square CLO Ltd. (Market Square),
        a Cayman Islands limited liability company, in which DTC LLC owns substantially
        all of the equity in the form of preference shares. Market Square is consolidated
        as a variable interest entity (VIE) and is a taxable REIT
        subsidiary (TRS) for tax purposes.
|  |                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                             
|  | o                                                                                                                                                      | Pinetree CDO Ltd. (Pinetree),
        a Cayman Islands limited liability company, in which DTC LLC owns 100%
        of the ordinary and preference shares. Pinetree is consolidated as a VIE
        and is a qualified REIT subsidiary (QRS).                                                                                         
|  |                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                             
|  | o                                                                                                                                                      | DWFC, LLC, a Delaware limited liability company,
        a wholly owned subsidiary of DTC LLC and a QRS.                                                                                                                                                                                                                                    
|  |                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                             
| | Deerfield Triarc TRS Holdings,
        Inc. (TRS Holdings) a wholly owned subsidiary of the Company
        and a TRS.                              
|  |                                                                                                                                                       
|  | o                                                                                                                                                      | TRS Holdings is the single member parent of
        Deerfield Triarc TRS Holdings, LLC (TRS Holdings LLC), a disregarded
        entity for tax purposes.                                                                                                                                                                                 
|  |                                                                                                                                                       
| | Deerfield Triarc TRS (Bahamas) Ltd., a Bahamian
        international business company, is a wholly owned subsidiary of the Company
        and a TRS.

7

---



On
September 29, 2005, the Company formed Deerfield Triarc Capital Trust I (the
Trust), an unconsolidated VIE that was formed in connection with a trust
preferred securities transaction.

Intercompany
accounts and transactions have been eliminated in consolidation.

Variable
Interest Entities

In
December 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (revised 2004), Consolidation
of Variable Interest Entities (FIN 46R). FIN 46R addresses the
application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to a VIE and generally
would require that the assets, liabilities and results of operations of a VIE
be consolidated into the financial statements of the enterprise that is the
primary beneficiary of the VIE. The Company consolidates two such entities,
Market Square and Pinetree, as discussed below.

In
March 2005, the Company entered into warehouse and master participation
agreements (agreements) with an affiliate of UBS Securities LLC (UBS)
providing that UBS will fund the purchase of bank loans by Market Square during
the warehouse period. Upon review of the transaction, the Company determined
that Market Square was a VIE under FIN 46R and that the Company was the primary
beneficiary. On May 10, 2005, the agreements were terminated and the warehouse
funding was replaced with the issuance of long-term debt and equity securities
by Market Square. See Note 8 for a discussion of the long-term debt. The
Company owns substantially all of the equity securities, $24.0 million of
preference shares, issued by Market Square and is deemed to be the primary
beneficiary.

In
May 2005, the Company entered into warehouse, master repurchase and pledge
agreements (UBS agreements) with an affiliate of UBS providing that UBS will
fund the purchase of asset-backed securities (ABS) by Pinetree during the
warehouse period. Upon review of the transaction, the Company determined that
Pinetree was a VIE under FIN 46R and that the Company was the primary
beneficiary. On November 30, 2005, the UBS agreements were terminated and the
warehouse funding was replaced with the issuance of long-term debt and equity
securities by Pinetree. See Note 8 for a discussion of the long-term debt. The
Company owns 100% of the equity securities, ordinary shares and $12.0 million
of preference shares, issued by Pinetree and is deemed to be the primary
beneficiary.

Trust
Preferred Securities

In
September 2005, the Company formed the Trust for the sole purpose of issuing
and selling trust preferred securities. In accordance with FIN 46R, the Trust
is not consolidated into the Companys condensed consolidated financial
statements because the Company is not deemed to be the primary beneficiary of
the Trust. Through DTC LLC, the Company owns 100% of the common shares of the
Trust, which also issued $50.0 million of preferred shares to unaffiliated
investors. The rights of holders of common shares of the Trust are subordinate
to the rights of the holders of preferred shares only in the event of a
default; otherwise the common shareholders economic and voting rights are pari
passu with the preferred shareholders. The Company records its investment in
the Trusts common shares of $1.6 million as other investments at cost and
records dividend income upon declaration by the Trust. The Companys loans to
and investments in the Trust total $51.6 million, representing the Companys
maximum exposure to loss.

In
connection with the issuance and sale of the trust preferred securities, DTC
LLC issued junior subordinated debt securities to the Trust of $51.6 million,
which are guaranteed by the Company. The junior subordinated debt securities
are recorded as long-term debt and debt issuance costs are deferred in prepaid
and other assets in the condensed consolidated balance sheet. Interest expense
on the debt securities and amortization of debt issuance costs are recorded in
the condensed consolidated statements of operations.

See
Note 8 for further discussion of the trust preferred securities and junior
subordinated debt securities.

Reclassifications

Certain
amounts in the condensed consolidated financial statements and notes as of
December 31, 2005 and for the three months ended March 31, 2005 have been reclassified
to conform to the presentation as of and for the three months ended March 31,
2006.

8

---



2. SIGNIFICANT
ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Significant
Accounting Policies

The
Companys significant accounting policies are included in the Notes to the
Consolidated Financial Statements included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2005.

Recent
Accounting Pronouncements

In
accordance with the adoption of SFAS 123 (revised 2004), the Company eliminated
the deferred equity compensation balance of $2.4 million at January 1, 2006
through an off setting reduction to additional paid-in capital. This
reclassification had no impact on the Companys total stockholders equity.

The
FASB issued Statement of Financial Accounting Standards (SFAS) No. 155, Accounting for Certain Hybrid Financial
Instruments
in February 2006. SFAS No. 155 amends SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities,
and SFAS No. 140 Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities
and addresses the application of SFAS No. 133 to beneficial interests in
securitized financial assets. SFAS No. 155 establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation. Additionally, SFAS No. 155
permits fair value measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation. SFAS
No. 155 is effective for financial instruments acquired or issued after January
1, 2007. The Company is currently assessing the impact SFAS No. 155 will have
on its consolidated financial statements.

3.
AVAILABLE-FOR-SALE SECURITIES

The
following table summarizes the Companys investment securities classified as
available-for-sale as of March 31, 2006, which are carried at fair value:

|                                       |  |                  |           |                    |   |                     |  |                        |          |   |   |          
|-------------------------------------- |  | ---------------- | --------- | ------------------ | - | ------------------- |  | ---------------------- | -------- | - | - | ---------
|Security Description                   |  | Amortized
  Cost |           | Unrealized
  Gains |   | Unrealized
  Losses |  | Estimated
  Fair Value
|                                       |  |                  |           |                    |   |                     |  |                       
|                                       |  | (In thousands)  
|                                       |  |                 
|                                       |  |                 
|Residential mortgage-backed securities |  | $                | 8,270,906 |                    | $ | 4,647               |  | $                      | (176,087 | ) | $ | 8,099,466
|Asset-backed securities                |  |                  | 297,421   |                    |   | 2,482               |  |                        | (2,667   | ) |   | 297,236  
|High-yield corporate bonds             |  |                  | 23,461    |                    |   | 435                 |  |                        | (261     | ) |   | 23,635   
|Common and preferred equities          |  |                  | 15,690    |                    |   | 156                 |  |                        |         |   |   | 15,846   
|Other investments                      |  |                  | 2,940     |                    |   | 27                  |  |                        |         |   |   | 2,967    
|                                       |  |                  |           |                    |   |                     |  |                        |          |   |   |          
|Total                                  |  | $                | 8,610,418 |                    | $ | 7,747               |  | $                      | (179,015 | ) | $ | 8,439,150
|                                       |  |                  |           |                    |   |                     |  |                        |          |   |   |          

The
following table summarizes the Companys securities classified as
available-for-sale as of March 31, 2006, according to their weighted average
life:

|                                                |  |                  |           |                        |   |                          |  |  |      |  
|----------------------------------------------- |  | ---------------- | --------- | ---------------------- | - | ------------------------ |  |  | ---- | -
|Weighted Average Life                           |  | Amortized
  Cost |           | Estimated
  Fair Value |   | WeightedAverage
  Coupon | 
|                                                |  |                  |           |                        |   |                          | 
|                                                |  | (In thousands)   |           |                        |  
|                                                |  |                  |           |                        |  
|Less than one year                              |  | $                | 3,882     |                        | $ | 3,851                    |  |  | 6.98 | %
|Greater than one year and less than five years  |  |                  | 6,096,311 |                        |   | 5,964,303                |  |  | 4.89 | %
|Greater than five years and less than ten years |  |                  | 2,186,120 |                        |   | 2,162,547                |  |  | 5.60 | %
|Greater than ten years                          |  |                  | 324,105   |                        |   | 308,449                  |  |  | 5.85 | %
|                                                |  |                  |           |                        |   |                          |  |  |      |  
|Total                                           |  | $                | 8,610,418 |                        | $ | 8,439,150                |  |  | 5.11 | %
|                                                |  |                  |           |                        |   |                          |  |  |      |  

The
  weighted average lives of available-for-sale securities at March 31, 2006 in
  the tables above are based upon contractual maturity for the high-yield corporate
  bonds, common and preferred equities, and other investments; and are estimated
  based on data provided through subscription-based financial information services
  for the residential mortgage-backed securities and asset-backed securities.
  The weighted average life for residential mortgage-backed securities and asset-backed
  securities is based on a prepayment model that considers current yield, forward
  yield, slope of the yield curve, mortgage rates, contractual rate of the outstanding
  loans, loan age, margin and volatility. For purposes of this disclosure, weighted
  average life represents the average number of years for which each dollar of
  unpaid principal remains outstanding. Weighted average life is an estimate of
  how many years it will take to pay half of the outstanding principal.

9

---



Lives
  of mortgage-backed securities are generally shorter than stated contractual
  maturities. Actual lives of the Companys mortgage-backed securities are
  affected by the contractual maturities of the underlying mortgages, periodic
  payments of principal, and prepayments of principal.

At
March 31, 2006, available-for-sale securities include unsettled security
purchases totaling $673.0 million and exclude unsettled security sales of $12.3
million. These purchases and sales settled in the following month.

The
following table shows the fair value and gross unrealized losses of
available-for-sale securities in which amortized cost exceeds fair value,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at March 31, 2006:

|                                         |  |                          |     |                          |   |                             |  |                          |          |                          |  |                             |  |                          |           |                          |   |                             |   |  |     |  |   |           |  |   |          |  
|---------------------------------------- |  | ------------------------ | --- | ------------------------ | - | --------------------------- |  | ------------------------ | -------- | ------------------------ |  | --------------------------- |  | ------------------------ | --------- | ------------------------ | - | --------------------------- | - |  | --- |  | - | --------- |  | - | -------- | -
|                                         |  | Less than 12 Months      |     | More than 12 Months      |   | Total                       | 
|                                         |  |                          |     |                          |   |                             | 
|                                         |  | Number
  of
  Securities |     | Estimated
  Fair
  Value |   | Gross
  Unrealized
  Losses |  | Number
  of
  Securities |          | Estimated
  Fair
  Value |  | Gross
  Unrealized
  Losses |  | Number
  of
  Securities |           | Estimated
  Fair
  Value |   | Gross
  Unrealized
  Losses |  
|                                         |  |                          |     |                          |   |                             |  |                          |          |                          |  |                             |  |                          |           |                          |   |                             |  
|                                         |  | (Dollars in thousands)   |    
|                                         |  |                          |    
|Residential mortgage-backed
  securities |  |                          | 242 |                          | $ | 6,237,894                   |  | $                        | (127,696 | )                        |  | 77                          |  | $                        | 1,796,359 |                          | $ | (48,391                     | ) |  | 319 |  | $ | 8,034,253 |  | $ | (176,087 | )
|Asset-backed securities                  |  |                          | 74  |                          |   | 137,309                     |  |                          | (2,667   | )                        |  |                            |  |                          |          |                          |   |                            |   |  | 74  |  |   | 137,309   |  |   | (2,667   | )
|High-yield corporate bonds               |  |                          | 1   |                          |   | 2,287                       |  |                          | (249     | )                        |  | 1                           |  |                          | 2,388     |                          |   | (12                         | ) |  | 2   |  |   | 4,675     |  |   | (261     | )
|                                         |  |                          |     |                          |   |                             |  |                          |          |                          |  |                             |  |                          |           |                          |   |                             |   |  |     |  |   |           |  |   |          |  
|Total temporarily impaired
  securities  |  |                          | 317 |                          | $ | 6,377,490                   |  | $                        | (130,612 | )                        |  | 78                          |  | $                        | 1,798,747 |                          | $ | (48,403                     | ) |  | 395 |  | $ | 8,176,237 |  | $ | (179,015 | )
|                                         |  |                          |     |                          |   |                             |  |                          |          |                          |  |                             |  |                          |           |                          |   |                             |   |  |     |  |   |           |  |   |          |  

Temporary
impairment of available-for-sale securities results from the fair value of
securities falling below the amortized cost basis primarily due to changes in
the interest rate environment. When the fair value of an available-for-sale
security is less than its amortized cost for an extended period, the Company
considers whether there is an other-than-temporary impairment in the value of
the security. If, in the Companys judgment, an other-than-temporary impairment
exists, the cost basis of the security is written down to the then-current fair
value, and the unrealized loss is transferred from accumulated other
comprehensive income (loss) as an immediate reduction of current earnings (as
if the loss had been recognized in the period of other-than-temporary
impairment). The cost basis adjustment is recoverable only upon sale or
maturity of the security. The determination of other-than-temporary impairment
is a subjective process, and different judgments and assumptions could affect
the timing of loss realization. The determination of other-than-temporary
impairment is made at least quarterly.

The
Company considers the following factors when determining an
other-than-temporary impairment for a security or investment:

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | the
  length of time and the extent to which the market value has been less than
  the amortized cost,                                         
| |   |                                                                                                                                                
| |  | whether the security has been downgraded by a rating agency, and                                                                               
| |   |                                                                                                                                                
| |  | the
  Companys intent and ability to hold the security for a period of time
  sufficient to allow for any anticipated recovery in market value

At
March 31, 2006, the Company recognized a $1.8 million other-than-temporary
impairment related to two inverse interest-only securities. These inverse
interest-only securities cash flows decrease as the London interbank offered
rate (LIBOR) increases. The Company used updated cash flow projections from a
third party to determine the amount of the impairment. As a result of the
impairment charge, the cost basis of these securities was written down to the
current fair value, and the unrealized loss transferred from accumulated other
comprehensive income (loss) as an immediate reduction of earnings recognized as
a reduction to net gain on available-for-sale securities in the condensed
consolidated statement of operations. Since these securities have been adjusted
to estimated fair value at March 31, 2006, they are not included in unrealized
loss in the table above.

The
Companys available-for-sale securities primarily consist of RMBS, which are
all agency or AAA-rated in quality with the exception of $63.4 million of
interest-only or principal-only securities. In addition, at March 31, 2006,
none of the available-for-sale securities held had been downgraded by the two
major credit rating agencies since their purchase. The securities are of high
credit rating and the Company intends to hold these securities until the fair
value of the securities is recovered, which may be maturity, if necessary. As
such, the Company does not believe any securities held, other than the two securities
discussed above, were other-than-temporarily impaired at March 31, 2006.

4. TRADING
SECURITIES

The
Company holds trading securities as of March 31, 2006, carried at fair value of
$2.5 million. Net losses of $1.8 million and $0.1 million on trading securities
were recognized in the condensed consolidated statements of operations for
three months ended March 31, 2006 and 2005, respectively, due to declines in
fair values of these securities.

10

---



5. OTHER INVESTMENTS

The
Company holds other investments as of March 31, 2006, carried at cost of $12.3
million. These investments consist of equity investments in the Trust (see Note
8), Hometown Commercial Capital LLC (HCC) (see Note 6) and common and
preferred equities that are not traded in an active market in the amounts of
$1.6 million, $3.0 million and $7.7 million, respectively.

6. LOANS AND LOANS HELD FOR SALE

The
following summarizes the Companys loans and loans held for sale as of March
31, 2006:

|                                  |  |                |         |                         |   |         |  |   |         | 
|--------------------------------- |  | -------------- | ------- | ----------------------- | - | ------- |  | - | ------- | 
|                                  |  | Carrying Value |        
|                                  |  |                |        
|Type of Loan                      |  | Loans          |         | Loans
  Held
  for Sale |   | Total   | 
|                                  |  |                |         |                         |   |         | 
|                                  |  | (In thousands) |        
|                                  |  |                |        
|Loans held in
  CDO               |  | $              |        |                         | $ | 277,887 |  | $ | 277,887 | 
|Structured and
  syndicated loans |  |                | 178,923 |                         |   | 6,038   |  |   | 184,961 | 
|Commercial
  mortgages            |  |                |        |                         |   | 5,366   |  |   | 5,366   | 
|                                  |  |                |         |                         |   |         |  |   |         | 
|                                  |  | $              | 178,923 |                         | $ | 289,291 |  | $ | 468,214 | 
|                                  |  |                |         |                         |   |         |  |   |         | 

At
March 31, 2006, the Company held loans totaling $468.2 million. Loans
classified as held for sale and carried at the lower of cost or fair value
totaled $289.3 million, net of a valuation allowance of $0.6 million. Loans
classified as held for investment and carried at amortized cost totaled $178.9
million. The Company identified no impaired held for investment loans at March 31,
2006, and thus has established no allowance for loan losses. At March 31, 2006,
there were $3.0 million and $6.4 million of unsettled loan purchases and loan
sales, respectively, related to loans held for sale.

On
  November 29, 2005, the Company entered into a master participation agreement
  with HCC, a commercial mortgage loan originator. HCC originates commercial mortgages
  with a targeted principal range of $1.0 million to $15.0 million. Under the
  master participation agreement, the Company will purchase a junior participating
  beneficial ownership interest of 10.0% of the principal balance of each approved
  commercial mortgage. Interest accrues on the Companys outstanding principal
  balance at a rate of 15.0% annually. HCC retains legal title and control of
  the loans and has custody of the original loan documents. The Company retains
  approval rights for loans included in the participation portfolio. Additionally,
  the Company has agreed to buy 50.0% of the lowest-rated non-investment grade
  tranche of the commercial mortgages upon securitization.

At
March 31, 2006, the Company held junior participation interests in 18
commercial mortgage loans originated by HCC of $5.4 million. These interests
are classified as loans held for sale and carried at the lower of cost or fair
value.

7. REPURCHASE AGREEMENTS

The
repurchase agreements are short-term borrowings from financial institutions
that bear interest rates that have historically moved in close relationship to
the one-month, two-month or three-month LIBOR. At March 31, 2006, the Company
had repurchase agreements outstanding in the amount of $7.1 billion, with a
weighted-average borrowing rate of 4.74%.

The
repurchase agreements had remaining weighted average maturities of 33 days at
March 31, 2006 and are summarized below:

|                                         |  |                                                   |           |                                      |   |                                      |  |  |      |  
|---------------------------------------- |  | ------------------------------------------------- | --------- | ------------------------------------ | - | ------------------------------------ |  |  | ---- | -
|Type of Investment Pledged               |  | Estimated
  Fair Value
  of Investments
  Pledged |           | Repurchase
  Agreement
  Liabilities |   | Weighted
  Average
  Interest
  Rate | 
|                                         |  |                                                   |           |                                      |   |                                      | 
|                                         |  | (In thousands)                                    |           |                                      |   |                                     
|                                         |  |                                                   |           |                                      |   |                                     
|Residential
  mortgage-backed securities |  | $                                                 | 7,193,325 |                                      | $ | 7,098,003                            |  |  | 4.74 | %
|High yield
  corporate bonds             |  |                                                   | 6,308     |                                      |   | 5,414                                |  |  | 5.10 | %
|Common and
  preferred equities          |  |                                                   | 15,761    |                                      |   | 9,674                                |  |  | 5.50 | %
|Other
  investments                      |  |                                                   | 8,197     |                                      |   | 2,960                                |  |  | 5.30 | %
|                                         |  |                                                   |           |                                      |   |                                      |  |  |      |  
|                                         |  | $                                                 | 7,223,591 |                                      | $ | 7,116,051                            |  |  | 4.74 | %
|                                         |  |                                                   |           |                                      |   |                                      |  |  |      |  

11

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The
fair value of the investments pledged at March 31, 2006 includes accrued
interest and dividends of $31.7 million consisting of $30.7 million, $0.7
million, $0.2 million and $0.1 million for the mortgage-backed securities,
preferred stock, high yield corporate bonds, and other investments,
respectively.

At
March 31, 2006, the Company had amounts at risk with the following repurchase
agreement counterparties:

|                                       |  |                        |         |                                         |  |    | 
|-------------------------------------- |  | ---------------------- | ------- | --------------------------------------- |  | -- | 
|                                       |  | Amount
  at
  Risk (1) |         | Weighted-Average
  Remaining
  Maturity | 
|                                       |  |                        |         |                                         | 
|                                       |  | (In thousands)         |         | (In days)                               | 
|                                       |  |                        |         |                                         | 
|                                       |  |                        |         |                                         |  |    | 
|Repurchase
  Agreement Counterparties: |  |                        |         |                                         |  |    | 
|Bear, Stearns
  & Co. Inc.             |  | $                      | (4,270  | )                                       |  | 25 | 
|Barclays Bank
  Plc.                   |  |                        | 1,755   |                                         |  | 41 | 
|Citigroup, Inc.                        |  |                        | 2,184   |                                         |  | 38 | 
|Countrywide
  Securities Corp.         |  |                        | 18,118  |                                         |  | 38 | 
|Credit Suisse
  First Boston LLC       |  |                        | 25,293  |                                         |  | 31 | 
|JPMorgan Chase
  and Co.               |  |                        | (587    | )                                       |  | 28 | 
|Lehman Brothers
  Inc.                 |  |                        | 8,592   |                                         |  | 34 | 
|Merrill Lynch
  & Co., Inc.            |  |                        | 32,280  |                                         |  | 27 | 
|Mitsubishi
  Securities (USA), Inc.    |  |                        | 8,374   |                                         |  | 16 | 
|Morgan Stanley
  & Co. Incorporated    |  |                        | (903    | )                                       |  | 18 | 
|Nomura
  Securities International      |  |                        | (2,575  | )                                       |  | 34 | 
|UBS Securities
  LLC                   |  |                        | 19,279  |                                         |  | 47 | 
|                                       |  |                        |         |                                         |  |    | 
|Total                                  |  | $                      | 107,540 |                                         |  |    | 
|                                       |  |                        |         |                                         |  |    | 

| |     |                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (1) | Equal to the fair value of securities pledged, and
  related accrued interest receivable, minus repurchase agreement liabilities,
  and related accrued interest payable.

8. LONG-TERM DEBT

The
following table summarizes the Companys long-term debt at March 31, 2006:

|                           |  |                  |         |                                                 |  |      |  
|-------------------------- |  | ---------------- | ------- | ----------------------------------------------- |  | ---- | -
|                           |  | Carrying
  Value |         | Weighted
  Average
  Rate
  at March 31,
  2006 | 
|                           |  |                  |         |                                                 | 
|                           |  | (In thousands)   |         |                                                 |  |     
|                           |  |                  |         |                                                 |  |     
|Market Square              |  | $                | 276,000 |                                                 |  | 5.09 | %
|Pinetree                   |  |                  | 288,000 |                                                 |  | 5.02 | %
|Trust Preferred Securities |  |                  | 51,550  |                                                 |  | 8.16 | %
|                           |  |                  |         |                                                 |  |      |  
|Total                      |  | $                | 615,550 |                                                 |  | 5.31 | %
|                           |  |                  |         |                                                 |  |      |  

Wachovia
Facility

On
March 10, 2006, the Company entered into a $300.0 million three year warehouse
funding agreement with Wachovia Capital Markets, LLC (the Facility).
Financing under the Facility will be secured by assets ranging from large
syndicated bank loans to subordinated notes and preferred stock. Advance rates
under the Facility vary by asset type. The Facility is available to two
bankruptcy remote special purpose vehicles (DWFC, LLC and Deerfield Triarc TRS
(Bahamas) Ltd as discussed in Note 1), which the Company consolidated pursuant
to the requirements of FIN 46R. The Company expects to pursue term funding of
these assets via securitization in a future CDO. At March 31, 2006 the Company
had no outstanding debt related to the Facility, however, the Company incurred
$1.0 million of debt issuance costs that are being amortized into interest
expense on a straight-line basis over the term of the Facility. The annual
interest rate for the Facility is based on short-term commercial paper rates as
defined in the warehouse funding agreement, plus 0.75% for large syndicated
loans or plus 0.90% for all other loans.

12

---



Market
Square

Market
Squares debt securities bear interest rates that reset quarterly based on
varying spreads to three-month LIBOR. The Companys long-term debt issued by
Market Square has a weighted average interest rate of 5.09%, using the last
reset dates as of March 31, 2006.

The
Market Square notes are callable, at par, by the Company on July 20, 2007 and
quarterly thereafter, subject to certain conditions. Market Square is a
bankruptcy remote subsidiary and the debt holders have recourse only to the
assets of Market Square, which were $316.3 million as of March 31, 2006.

Pinetree

Pinetrees
debt securities bear interest rates that reset quarterly based on varying
spreads to three-month LIBOR. The Companys long-term debt issued by Pinetree
has a weighted average interest rate of 5.02%, using the last reset date, at
March 31, 2006.

The
Pinetree notes are callable, at par, by the Company on January 5, 2010 and
quarterly thereafter, subject to certain conditions. Pinetree is a bankruptcy
remote subsidiary and the debt holders have recourse only to the assets of
Pinetree, which were $311.5 million at March 31, 2006.

Trust Preferred Securities

On
September 29, 2005, the Trust issued preferred securities to unaffiliated
investors for gross proceeds of $50.0 million and common securities to the
Company for $1.6 million. The combined proceeds were invested by the Trust in
$51.6 million of unsecured junior subordinated debt securities issued by DTC
LLC. The junior subordinated debt securities are the sole assets of the Trust
and mature on October 30, 2035 but are callable by DTC LLC on or after October
30, 2010. Interest is payable quarterly at a floating rate equal to three-month
LIBOR plus 3.50% per annum. This rate at March 31, 2006 was 8.16%.

The
holders of the preferred securities of the Trust are entitled to receive
distributions payable quarterly at a variable rate equal to three-month LIBOR
plus 3.50% per annum. The preferred and common securities of the Trust do not
have a stated maturity date; however, they are subject to mandatory redemption
upon the maturity or call of the junior subordinated debt securities.

Unamortized
deferred issuance costs associated with the junior subordinated debt securities
are $1.2 million at March 31, 2006 and are classified as part of prepaid and
other assets on the condensed consolidated balance sheet. These costs are being
amortized into interest expense using the effective yield method over the
period to the call date.

The
Company has issued a parent guarantee for the payment of any amounts to be paid
by DTC LLC under the terms of the junior subordinated debt securities
debenture. The obligations under the parent guarantee agreement constitute
unsecured obligations of the Company and rank subordinate and junior to all
other senior debt. The parent guarantee will terminate upon the full payment of
the redemption price for the trust preferred securities or full payment of the
junior subordinated debt securities upon liquidation of the Trust.

9. STOCKHOLDERS EQUITY

On
February 7, 2006, the Company approved a resolution to award 2,500 fully vested
shares of common stock to each of the four independent board members. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payments,
the Company determined that February 7, 2006 was the grant date and recognized
the entire fair market value of the grant on such date, as the shares have no
vesting period. The fair market value of the grant was determined as the
closing price on the grant date of $13.00 per share. The delivery of these
shares is expected to occur during the second quarter of 2006.

On
December 23, 2004, the Company granted 403,847 shares of restricted common
stock, par value $0.001, and restricted options to purchase 1,346,156 shares of
common stock at an exercise price of $15.00 per share, to the Manager. The
Companys restrictions lapse, and full rights of ownership vest in three equal
installments on the first, second and third anniversary from the grant date.
Vesting is predicated on the continuing involvement of the Manager in providing
services to the Company. One third of the shares of restricted stock and
restricted stock options vested on December 23, 2005. The Company recorded $0.4
million and $1.0 million of share-based compensation on the unvested shares,
included in management and incentive fee expense to a related party, for the
three months ended March 31, 2006 and March 31, 2005, respectively.

13

---



In
accordance with Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments that are Issued to
other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, the Company values the unvested restricted stock and stock
options at fair value and recognizes over the vesting period a contribution to
additional paid-in capital and an equal offsetting amount to expense. The total
unamortized fair value of the restricted stock and stock options as of March
31, 2006 was $1.9 million.

The
fair value of options granted to the Manager is estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions as of March 31, 2006:

|                         |  |                              |       |   |  |       |  
|------------------------ |  | ---------------------------- | ----- | - |  | ----- | -
|                         |  | Three months ended March 31, |      
|                         |  |                              |      
|                         |  |                              | 2006  |   |  | 2005  |  
|                         |  |                              |       |   |  |       |  
|Dividend yield           |  |                              | 10.01 | % |  | 13.80 | %
|Expected volatility      |  |                              | 22.02 | % |  | 22.83 | %
|Risk-free interest rate  |  |                              | 4.85  | % |  | 4.25  | %
|Expected life (in years) |  |                              | 8.8   |   |  | 10.0  |  

10. COMPUTATION OF EARNINGS PER SHARE

The
following table presents a reconciliation of basic and diluted earnings per
share:

|                                                    |  |                                       |        |      |   |        | 
|--------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ | 
|                                                    |  | Three months ended March 31,          |       
|                                                    |  |                                       |       
|                                                    |  | 2006                                  |        | 2005 |  
|                                                    |  |                                       |        |      |  
|                                                    |  | (In thousands, except per share data) |       
|                                                    |  |                                       |        |      |   |        | 
|Net income                                          |  | $                                     | 19,163 |      | $ | 5,897  | 
|                                                    |  |                                       |        |      |   |        | 
|                                                    |  |                                       |        |      |   |        | 
|Weighted average shares used in basic computation   |  |                                       | 51,390 |      |   | 26,923 | 
|                                                   
|Dilutive effect of:                                 |  |                                       |        |      |   |        | 
|Unvested restricted stock                           |  |                                       | 126    |      |   | 37     | 
|                                                    |  |                                       |        |      |   |        | 
|Weighted average shares used in diluted computation |  |                                       | 51,516 |      |   | 26,960 | 
|                                                    |  |                                       |        |      |   |        | 
|                                                    |  |                                       |        |      |   |        | 
|Net income per share - Basic                        |  | $                                     | 0.37   |      | $ | 0.22   | 
|                                                    |  |                                       |        |      |   |        | 
|                                                    |  |                                       |        |      |   |        | 
|Net income per share - Diluted                      |  | $                                     | 0.37   |      | $ | 0.22   | 
|                                                    |  |                                       |        |      |   |        | 

Potentially
dilutive shares relating to a stock option to purchase 1,346,156 shares of
common stock for the three months ended March 31, 2006 and March 31, 2005, are
not included in the calculation of diluted net income per share because the
effect is anti-dilutive.

11. RELATED-PARTY
TRANSACTIONS

The
Companys base management fee expense for the three months ended March 31, 2006
and March 31, 2005 was $3.3 million and $1.7 million, respectively. In addition
to the base management fee, amortization for the three months ended March 31,
2006 and March 31, 2005 was $0.4 million and $1.0 million, respectively,
related to the restricted stock and stock options granted to the Manager, and
was included in management and incentive fee expense to related party in the
condensed consolidated statements of operations. See Note 9 for additional
information regarding the grant to the Manager. The Manager earned an incentive
fee for the three months ended March 31, 2006 of $1.2 million. There was no
incentive fee for the three months ended March 31, 2005. The Company recorded
expenses related to reimbursable out-of-pocket and certain other costs incurred
by the Manager totaling $0.1 million for both the three months ended March 31,
2006 and 2005, respectively. At March 31, 2006, the Company had outstanding
payables related to its agreement with the Manager in the amount of $2.5
million, which is included in management and incentive fee payable in the
condensed consolidated balance sheet.

14

---



12. FAIR VALUE OF FINANCIAL
INSTRUMENTS

SFAS
No. 107, Disclosure About Fair Value of
Financial Instruments, requires disclosure of the fair value of
financial instruments for which it is practicable to estimate that value. The
fair value of financial instruments is the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Quoted market prices if available are utilized as
estimates of the fair values of financial instruments. Since no quoted market
price exists for certain of the Companys financial instruments, the fair
values of such instruments have been derived based on managements assumptions,
the estimated amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimates. The
carrying amounts and estimated fair values of the Companys financial
instruments at March 31, 2006, for which the disclosure of fair values is required
were as follows:

|                                           |  |                  |           |                           |   |           | 
|------------------------------------------ |  | ---------------- | --------- | ------------------------- | - | --------- | 
|                                           |  | Carrying
  Value |           | Estimated 
  Fair
  Value |  
|                                           |  |                  |           |                           |  
|                                           |  | (In thousands)   |          
|                                           |  |                  |          
|Financial
  assets:                        |  |                  |           |                           |   |           | 
|Cash and cash
  equivalents (a)            |  | $                | 19,446    |                           | $ | 19,446    | 
|Restricted cash
  and cash equivalents (a) |  |                  | 22,953    |                           |   | 22,953    | 
|Available-for
  sale securities (b)        |  |                  | 8,439,150 |                           |   | 8,439,150 | 
|Trading
  securities (b)                   |  |                  | 2,470     |                           |   | 2,470     | 
|Other
  investments (c)                    |  |                  | 12,321    |                           |   | 12,321    | 
|Derivative
  assets (d)                    |  |                  | 114,947   |                           |   | 114,947   | 
|Loans held for
  sale (e)                  |  |                  | 289,291   |                           |   | 291,910   | 
|Loans (e)                                  |  |                  | 178,923   |                           |   | 178,923   | 
|                                           |  |                  |           |                           |   |           | 
|Financial
  liabilities:                   |  |                  |           |                           |   |           | 
|Repurchase
  agreements (a)                |  |                  | 7,116,051 |                           |   | 7,116,051 | 
|Derivative
  liabilities (d)               |  |                  | 3,892     |                           |   | 3,892     | 
|Long-term debt:                            |  |                  |           |                           |   |           | 
|Market Square (f)                          |  |                  | 276,000   |                           |   | 276,000   | 
|Pinetree (f)                               |  |                  | 288,000   |                           |   | 288,000   | 
|Trust preferred (f)                        |  |                  | 51,550    |                           |   | 51,550    | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (a) | The carrying amounts
  approximated the fair value due to the short-term nature of these
  instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (b) | The estimated fair values
  were determined through references to price estimates provided by independent
  pricing services and/or dealers in the securities.                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (c) | It was not practicable to
  estimate the fair value of these investments because the investments are not
  traded in an active market.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (d) | All derivatives are
  recognized on the condensed consolidated balance sheets at fair value and
  take into consideration the effects of legally enforceable master netting
  arrangements that allow the Company to settle positive and negative positions
  with the same counterparty on a net basis. Determination of fair values is
  based on internally developed and tested market-standard pricing models.                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (e) | The estimated fair values
  are determined primarily by using price estimates provided by an independent
  pricing service. If the independent pricing service cannot provide estimates
  for a given loan, the Company determines estimated fair value based on some
  or all of the following: (a) current financial information of the
  borrowing company and performance against its operating plan;
  (b) changing value of collateral supporting the loan; (c) changes
  to the market for the borrowing companys service or product and (d) present value of projected future cash
  flows.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (f) | The carrying amount approximated fair value as the
  interest rate on all of the Companys long-term debt resets quarterly to
  three-month LIBOR rates plus a fixed credit spread.                                                                                                                                                                                                                                                                                                                                                                                                                 

15

---



13.
ACCUMULATED OTHER COMPREHENSIVE LOSS

The
following is a summary of the components of accumulated other comprehensive
loss:

|                                              |  |                                           |          |           |   |         |   |   |         |  
|--------------------------------------------- |  | ----------------------------------------- | -------- | --------- | - | ------- | - | - | ------- | -
|                                              |  | For the three months ended March 31, 2006 |         
|                                              |  |                                           |         
|                                              |  | Available-for-                            |          | Cash Flow |   |         |   |  
|                                              |  | Sale Securities                           |          | Hedges    |   | Total   |  
|                                              |  |                                           |          |           |   |         |  
|                                              |  | (In thousands)                            |         
|                                              |  |                                           |         
|Beginning balance                             |  | $                                         | (114,906 | )         | $ | 70,203  |   |   | (44,703 | )
|Unrealized net gain (loss) for the
period     |  |                                           | (54,270  | )         |   | 51,858  |   |   | (2,412  | )
|Reclassification adjustments:                 |  |                                           |          |           |   |         |   |   |         |  
|Securities sold                               |  |                                           | (3,929   | )         |   |        |   |   | (3,929  | )
|Other-than-temporary impairment of
securities |  |                                           | 1,837    |           |   |        |   |   | 1,837   |  
|Hedging net gain recognized in
earnings       |  |                                           |         |           |   | (4,993  | ) |   | (4,993  | )
|                                              |  |                                           |          |           |   |         |   |   |         |  
|Ending balance                                |  | $                                         | (171,268 | )         | $ | 117,068 |   | $ | (54,200 | )
|                                              |  |                                           |          |           |   |         |   |   |         |  

14. DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES

The
Company seeks to manage its interest rate risk exposure to the effects of
interest rate changes. Such interest rate risk may arise from the issuance and
forecasted rollover of short-term liabilities or from liabilities with a
contractual variable rate based on LIBOR. The Company may use interest rate
swaps and interest rate swap forwards designated as hedges to manage this
interest rate risk. Derivative instruments are carried at fair value.

The
following table is a summary of derivative instruments held as of March 31,
2006:

|                                         |  |                  |           |            |   |            |  |            |        |   |   |         | 
|---------------------------------------- |  | ---------------- | --------- | ---------- | - | ---------- |  | ---------- | ------ | - | - | ------- | 
|                                         |  | Notional         |           | Unrealized |   | Unrealized |  | Estimated  |       
|                                         |  | Amount           |           | Gains      |   | Losses     |  | Fair Value |       
|                                         |  |                  |           |            |   |            |  |            |       
|                                         |  | (In
  thousands) |          
|                                         |  |                  |          
|Interest rate swaps - designated         |  | $                | 5,324,450 |            | $ | 113,094    |  | $          | (3,807 | ) | $ | 109,287 | 
|Interest rate swap forwards - designated |  |                  | 150,000   |            |   | 7          |  |            | (6     | ) |   | 1       | 
|Interest rate swaps - undesignated       |  |                  | 103,250   |            |   | 1,253      |  |            |       |   |   | 1,253   | 
|Credit default swaps - undesignated      |  |                  | 78,000    |            |   | 593        |  |            | (79    | ) |   | 514     | 
|                                         |  |                  |           |            |   |            |  |            |        |   |   |         | 
|                                         |  | $                | 5,655,700 |            | $ | 114,947    |  | $          | (3,892 | ) | $ | 111,055 | 
|                                         |  |                  |           |            |   |            |  |            |        |   |   |         | 

Cash
Flow Hedging Strategies

Hedging
instruments are designated, as appropriate, as cash flow hedges based upon the
specifically identified exposure, which may be an individual item or a group of
similar items. Hedged exposure is primarily interest expense on forecasted
rollover/reissuance of repurchase agreements for a specified future time period
and the hedged risk is the variability in those payments due to changes in the
benchmark rate. Hedging transactions are structured at inception so that the
notional amounts of the hedges are matched with an equal amount of repurchase
agreements forecasted to be outstanding in that specified period for which the
borrowing rate is not yet fixed. Cash flow hedging strategies include the
utilization of interest rate swaps and interest rate swap forwards. Any
ineffectiveness in the hedging relationship is recognized in interest expense
during the period in which it arises. Prior to the end of the specified hedge
period, the effective portion of all contract gains and losses is recorded in
other comprehensive income or loss. Realized gains and losses due to net
settlements on the hedging instruments are reclassified into earnings as an
adjustment to interest expense during the specified hedge time period. Hedging
instruments under these strategies are deemed to be designated to the
outstanding repurchase portfolio and the forecasted rollover thereof. At March
31, 2006, the maximum length of time over which the Company is hedging its
exposure to the variability of future cash flows for forecasted transactions is
approximately 9.5 years.

For
the three months ended March 31, 2006 and March 31, 2005, the Company recognized
a reduction to interest expense of $0.6 million and $0.3 million, respectively,
due to ineffectiveness. As of March 31, 2006, the Company held 201 designated
interest rate swaps with a notional amount outstanding of $5.5 billion, $0.2
billion of which were interest rate swap forwards. In November 2005, the
Company entered into a designated swap that contained a financing element,
resulting in the receipt of a $3.7 million cash payment that is being repaid
through an above-market interest rate over the life of the swap. The weighted
average fixed rate payable on the cash flow hedges at March 31, 2006 is 4.25%.

16

---



Other
Interest Rate Derivatives

The
Company held three interest rate swaps with a total notional amount of $103.3
million as of March 31, 2006 that were not designated as hedges. Accordingly,
changes in fair value of these derivatives are recorded in net gain on
derivatives in the condensed consolidated statement of operations. As of March
31, 2006, these interest rate swaps had a total fair value of $1.3 million,
recorded in derivative assets in the condensed consolidated balance sheet.

Credit
Default Swaps

As
of March 31, 2006, the Company held 24 credit default swaps (CDS), as the
protection seller, with a notional amount of $78.0 million. A CDS 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 is generally paid quarterly in arrears, but may be paid in full up
front in the case of a CDS with a short maturity. Generally, if a pre-defined
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. As of March 31, 2006, these CDSs had a net fair value
recorded in derivative assets and derivative liabilities in the condensed
consolidated balance sheet in the amounts of $0.6 million and $0.1 million,
respectively.

15.
COMMITMENTS

The
timing and amount of additional funding on certain bank loans are at the
discretion of the borrower. The Company had unfunded commitments of $8.0
million at March 31, 2006.

16. SUBSEQUENT EVENTS

On
April 4, 2006, the Company approved pursuant to the management agreement,
15,353 shares of common stock relating to payment of 15% of the fourth quarter
2005 incentive fee to the Companys Manager to be deemed issued as of March 24,
2006. Therefore, any dividend declared will be paid in cash before the actual
issuance of shares to the Manager. Additionally, the one-year holding period,
as defined in the agreement with our Manager, was deemed to start on March 24,
2006. The Company also agreed that any future issuance of common stock for
partial payment of the incentive fee to the Companys Manager may be deemed
issued as of a specific date as approved by the Company in the case that the
actual shares are not issued.

On
April 24, 2006, the Company declared a cash dividend of $0.36 per share on the
Companys common stock for the first quarter of 2006. The record date for the
cash dividend is May 4, 2006, and the payment date is May 26, 2006. The total
amount of the dividend to be paid is $18.6 million.

17

---



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
statements in this discussion regarding the industry outlook, our expectations
regarding the future performance of our business, and the other non-historical
statements in this discussion are forward-looking statements. These
forward-looking statements are subject to numerous risks and uncertainties,
including, but not limited to, the risks and uncertainties described in our
Annual Report on Form 10-K filed March 17, 2006 in Part I - Item 1A. Risk Factors. You should read the
following discussion together with Part I -
Item 1A. - Risk Factorsof our Annual Report on Form 10-K and our
condensed consolidated financial statements and notes thereto included in Part I - Item 1. Financial
Statementson
this Form 10-Q.

Overview

Deerfield
Triarc Capital Corp. (together with its subsidiaries) is a diversified
financial company formed in November 2004 to invest in real estate-related
securities and various other asset classes. We commenced operations in December
2004. We have elected and intend to continue our qualification as a real estate
investment trust, or REIT, for federal income tax purposes. We invest in financial
assets and utilize leverage where we consider appropriate to seek to achieve
attractive risk-adjusted returns that is structured to comply with the various
federal income tax requirements for REIT status and to qualify for exclusion
from regulation under the Investment Company Act of 1940, as amended, or 1940
Act. We focus on the following asset classes:

| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Real
  estate-related securities, principally residential mortgage-backed
  securities, or RMBS, and commercial mortgage-backed securities or CMBS;                                        
| |   |                                                                                                                                                                                            
| |  | Other
  asset-backed securities, or ABS, including collateralized debt obligations,
  or CDO;                                                                                              
| |   |                                                                                                                                                                                            
| |  | Loans,
  including senior secured and unsecured loans, and related credit derivatives,
  including credit default swaps on senior secured loans; and                                       
| |   |                                                                                                                                                                                            
| |  | Leveraged
  finance instruments, including corporate mezzanine loans, high yield
  corporate bonds, distressed and stressed debt securities and private or
  registered equity investments.

The
following is a summary of our portfolio, in thousands, as of March 31, 2006:

|                                    |  |                  |           |            |      |   | 
|----------------------------------- |  | ---------------- | --------- | ---------- | ---- | - | 
|                                    |  | Carrying         |           | % of Total |     
|Principal
  Investments             |  | Value            |           | Portfolio  |     
|                                    |  |                  |          
|                                    |  | (In
  thousands) |           |            |      |  
|                                    |  |                  |           |            |      |  
|RMBS (1)                            |  | $                | 8,101,936 |            | 90.8 | % | 
|Loans:                              |  |                  |           |            |      |   | 
|Loans held in CDO                   |  |                  | 277,887   |            | 3.1  | % | 
|Structured and syndicated loans
(2) |  |                  | 184,961   |            | 2.1  | % | 
|Commercial mortgage loans           |  |                  | 5,366     |            | 0.1  | % | 
|ABS held in CDO (3)                 |  |                  | 297,236   |            | 3.3  | % | 
|Common and preferred equities       |  |                  | 28,167    |            | 0.3  | % | 
|High yield corporate bonds (4)      |  |                  | 23,635    |            | 0.3  | % | 
|Other investments                   |  |                  | 2,967     |            | 0.0  | % | 
|                                    |  |                  |           |            |      |   | 
|Total                               |  | $                | 8,922,155 |            |      |   | 
|                                    |  |                  |           |            |      |   | 

| |     |                                                                                                                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (1) | RMBS assets include both
  trading interest-only strip securities and available-for-sale interest- and
  principal- only strip securities with a fair value of $2.5 million and $63.4
  million with notional value of $436.6 million and $264.9 million,
  respectively.
| |     |                                                                                                                                                                                                                                                                          
| | (2) | Structured and syndicated
  loans exclude credit default swaps with a fair value of $0.5 million and a
  $78.0 million notional value.                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                          
| | (3) | ABS held in CDO include
  RMBS, CMBS and ABS.                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                          
| | (4) | High yield corporate bonds
  include $8.0 million of bonds held in a CDO.                                                                                                                                                                                                

We
completed an initial private offering of 26,923,139 shares (excluding 403,847
restricted shares) of our common stock in December 2004 in which we raised net
proceeds of approximately $378.9 million. We completed our initial public
offering of 25,000,000 shares of our common stock, including 24,320,715 newly
issued shares sold by us and 679,285 shares sold by selling stockholders, in
July 2005, in which we raised net proceeds of approximately $363.1 million. We
applied the proceeds that we received from our initial public offering to pay
down repurchase agreement obligations in order to create additional leveraging
capacity. We have re-leveraged our investment portfolio since applying the
proceeds of our initial public offering and have invested the proceeds of that
new leverage as well as the proceeds from our initial private offering of
common stock in a leveraged portfolio of RMBS and other investments with total
invested assets, as of March 31, 2006, of $8.9 billion. We are externally
managed by Deerfield Capital Management LLC, or Deerfield Capital, a fixed
income asset

18

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manager and a Securities and Exchange Commission, or
SEC, registered investment adviser. Deerfield Capital is a wholly-owned
subsidiary of Deerfield & Company LLC, or Deerfield.

We
earn income and generate cash through our investments. We use a substantial
amount of leverage to seek to enhance our returns. We finance each of our
investments with different degrees of leverage. The cost of borrowings to
finance our investments comprises a significant portion of our operating
expenses. Our net income will depend on our ability to effectively manage this
particular operating expense in relation to our revenues.

A
variety of industry and economic factors may impact our financial condition and
operating performance. These factors include:

| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | interest rate trends,                                                                
| |   |                                                                                      
| |  | rates of prepayment on
  mortgages underlying our mortgage-backed securities, or MBS,
| |   |                                                                                      
| |  | competition, and                                                                     
| |   |                                                                                      
| |  | other market developments.                                                           

In
addition, a variety of factors relating to our business may also impact our
financial condition and operating performance. These factors include:

| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | our leverage,                                                                             
| |   |                                                                                           
| |  | our access to funding and
  borrowing capacity,                                           
| |   |                                                                                           
| |  | our borrowing costs,                                                                      
| |   |                                                                                           
| |  | our hedging activities,                                                                   
| |   |                                                                                           
| |  | changes in the credit
  ratings of the loans, securities, and other assets we own,        
| |   |                                                                                           
| |  | the market value of our
  investments, and                                                
| |   |                                                                                           
| |  | requirements to maintain
  REIT status and to qualify for an exemption under the 1940 Act.

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

We
leverage our investments to seek to enhance our potential returns. Leverage can
enhance returns but also magnifies losses.

We
anticipate that, for any period during which our assets are not match-funded,
such assets will reprice more slowly than the corresponding liabilities.
Consequently, changes in interest rates, particularly short-term interest
rates, may significantly influence our net income. Increases in these rates
will tend to decrease our net income and the market value of our assets, and
could possibly result in operating losses for us or limit or eliminate our
ability to make distributions to our stockholders.

The
yield on our assets may be affected by a difference between the actual
prepayment rates and our projections. Prepayments on loans and securities may
be influenced by changes in market interest rates and a variety of economic,
geographic and other factors beyond our control, and consequently, such
prepayment rates cannot be predicted with certainty. To the extent we have
acquired assets at a premium or discount, a change in prepayment rates may
impact our anticipated yield. Under certain interest rate and prepayment
scenarios, we may fail to recoup fully our cost of acquisition of certain
assets.

In
periods of declining interest rates, prepayments on our investments, including
our RMBS, will likely increase. If we are unable to reinvest the proceeds of
such prepayments at comparable yields, our net interest income may suffer. In
periods of rising interest rates, prepayment rates on our investments,
including our RMBS, will likely slow, causing the expected lives of these
investments to increase. This may cause our net interest income to decrease, as
our borrowing and hedging costs rise while our interest income on our assets
remain relatively constant.

While
we use hedging to mitigate some of our interest rate risk, we do not hedge all
of our exposure to changes in interest rates and prepayment rates, as there are
practical limitations to our ability to insulate the portfolio from all of the
negative consequences associated with changes in short-term interest rates
while still seeking to provide an attractive net spread on our portfolio.

In
addition, our returns will be affected by the credit performance of our
non-agency investments. If credit losses on our investments, loans, or the
loans underlying our investments increase, it may have an adverse affect on our
performance.

19

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Deerfield
Capital is entitled to receive a base management fee that is derived from the
amount of our equity (as defined in the management agreement), which is not
significantly impacted by the performance of our portfolio. Accordingly, our
management fee is primarily a fixed cost and will not decrease significantly in
the event of a decline in our profitability.

Trends

The
following trends may also affect our business:

Rising interest rate environment. Interest
rates have recently increased and may continue to increase. With respect to our
existing MBS portfolio, which is heavily concentrated in hybrid adjustable rate
RMBS, such interest rate increases should result in decreases in our net
interest income, as there is a timing mismatch between the reset dates on our
MBS portfolio and the financing of these investments. We currently have
invested and intend to continue to invest in hybrid adjustable-rate RMBS which
are based on mortgages with interest rate caps. The financing of these RMBS is
short term in nature and does not include an interest rate cap. This mismatch
should result in a decrease in our net interest income if rates increase
sharply after the initial fixed rate period and our interest cost increases
more than the interest rate earned on our RMBS due to the cap. In a rising rate
environment, prepayment rates are generally expected to decline. If prepayment
rates are lower than expected, we could have less capital to reinvest into
higher rate mortgage securities, which should result in a decrease in our net
interest income. We have increasingly invested in 15 and 30 year fixed rate
securities, which are similarly exposed to prepayment rates and the mismatched
funding applicable to hybrid adjustable rate securities. With respect to our
existing and future floating rate investments such as loans, such interest rate
increases should result in increases in our net interest income because our
floating rate assets are greater in amount than the related floating rate
liabilities. Similarly, such an increase in interest rates should generally
result in an increase in our net interest income on future fixed rate
investments made by us because our fixed rate assets would be greater in amount
than our liabilities. However, we would expect that our fixed rate assets would
decline in value in a rising interest rate environment and our net interest
spreads on fixed rate assets could decline in a rising interest rate
environment to the extent they are financed with floating rate debt. We have
engaged in interest rate swaps and interest rate swap forwards to hedge a
significant portion of the risk associated with increases in interest rates.
However, because we do not hedge 100% of the amount of short-term financing
outstanding, increases in interest rates should result in a decline in the
value of our portfolio, net of hedges. Similarly, decreases in interest rates
should result in an increase in the value of our portfolio.

Steepening
yield curve. For much of 2005, the yield curve experienced
significant flattening as short term rates increased at a greater rate than
long term rates. For example, between December 31, 2004 and
December 31, 2005, the yield on the three-month U.S. Treasury bill
increased by 190 basis points, while the yield on the three-year U.S. Treasury
note increased by only 107 basis points. Between December 31, 2005 and March
31, 2006, however, this trend ceased, with the yield on the three-month U.S.
Treasury bill increasing by 49 basis points and the yield on the three-year
U.S. Treasury note increasing by 52 basis points. Given the current flatness
of the U.S. Treasury yield curve, the chance that the yield curve will steepen
is greater, in our estimation, than the chance of further flattening or
inversion. With respect to our RMBS portfolio, we believe that a steepening of
the yield curve should result in increases in our net interest income, as the
financing of our RMBS investments is usually shorter in term than the fixed
rate period of our RMBS portfolio, which is heavily weighted towards hybrid
adjustable rate RMBS. Similarly, we believe that a flattening of the yield
curve should result in decreases in our net interest income. A steepening of
the yield curve results in a larger gap between the rate we pay on the swaps
and the rate we receive. Furthermore, a steepening of the yield curve should
result in an increase in our hedging costs, since we pay a fixed rate and
receive a floating rate under the terms of our swap agreements. Similarly, a
flattening of the shape of the yield curve should result in a decrease in our
hedging costs. However, since we do not hedge 100% of our interest rate
exposure, the impact from the swaps will not fully offset the impact to net
interest income. Accordingly, if the yield curve continues to steepen, we would
generally expect our net interest income to increase.

Prepayment rates. Prepayment rates
generally increase when interest rates fall and decrease when interest rates
rise, but changes in prepayment rates are difficult to predict. 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 adjustable-rate and fixed-rate mortgage
loans. Because interest rates may continue to increase, RMBS prepayment rates
may fall. If interest rates begin to fall, triggering an increase in prepayment
rates, our current portfolio, which is heavily weighted towards hybrid
adjustable-rate mortgages, would cause decreases in our net interest income due
to reinvestment opportunities being in a lower rate environment.

Competition. We expect to face continued
competition for our targeted investments, which could cause further tightening
of credit spreads. However, we expect that the size and growth of the market
for these investments will continue to provide us with a variety of investment
opportunities. In addition, it is likely that bank lenders will continue their
historical lending practices, requiring low loan-to-value ratios and high debt
service coverages, which will provide opportunities to lenders like us to
provide corporate mezzanine financing.

Credit spreads. The credit markets have
experienced tight credit spreads due to the robust demand for lending
opportunities. With respect to our credit portfolio, which includes commercial
mortgage loans, asset-backed securities held in a

20

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CDO, bank loans, high yield corporate bonds, preferred
shares and other corporate securities, and which accounts for 9.2% of our total
portfolio as of March 31, 2006, a narrowing of credit spreads could result in
decreases in the net interest income on future credit-oriented investments.

Critical
Accounting Policies

Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP. These accounting
principles require us to make some complex and subjective decisions and assessments.
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
inherent in our financial statements were reasonable at the time made, based
upon information available to us at that time. We rely on Deerfield Capitals
experience and analysis of historical and current market data in order to
arrive at what we believe to be reasonable estimates. Under varying conditions,
we could report materially different amounts arising under these critical
accounting policies. We have identified our most critical accounting policies
to be the following:

Classifications of Investment Securities

Our
investments in RMBS and ABS are primarily classified as available-for-sale
securities and carried on the balance sheet at fair value. This classification
results in changes in fair value being recorded as balance sheet adjustments to
accumulated other comprehensive income (loss), which is a component of
stockholders equity.

Valuations of RMBS and ABS

Our
RMBS and ABS have fair values as determined with reference to price estimates
provided by independent pricing services and dealers in the securities.
Different judgments and assumptions used in pricing could result in different
presentations of value.

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. If, in our
judgment, an other-than-temporary impairment exists, the cost basis of the
security is written down to the then-current fair value, and the unrealized
loss is transferred from accumulated other comprehensive income (loss) as an
immediate reduction of current earnings (as if the loss had been recognized in
the period of other-than-temporary impairment). The cost basis adjustment is
recoverable only upon sale or maturity of the security. The determination of
other-than-temporary impairment is a subjective process, and different
judgments and assumptions could affect the timing of loss realization.

We
consider the following factors when determining an other-than-temporary impairment
for a security or investment:

| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | the length of time and the extent to which the
  market value has been less than the amortized cost,                                 
| |   |                                                                                                                                      
| |  | whether the security has been downgraded by a rating
  agency, and                                                                   
| |   |                                                                                                                                      
| |  | our intent and ability to hold the security for a
  period of time sufficient to allow for any anticipated recovery in market
  value

The
determination of other-than-temporary impairment is made at least quarterly. If
we determine an impairment to be other-than-temporary we will need to realize a
loss that would have an impact on future income. For the three months ended
March 31, 2006, we recognized a $1.8 million other-than-temporary impairment
related to two interest-only securities. We have gross unrealized holding
losses on available-for-sale securities of $171.3 million at March 31,
2006, which, if not recovered, may result in the recognition of future losses.
However, the securities are of high credit rating and we intend to hold these
securities until the fair value is recovered, which may be maturity, if necessary.

Interest Income Recognition

Interest
  income on our available-for-sale and held to maturity securities is accrued
  based on the actual coupon rate and the outstanding principal amount of the
  underlying instruments. Premiums and discounts are amortized or accreted into
  interest income over the lives of the securities using a method that approximates
  the effective yield method in accordance with Statement of Financial Accounting
  Standards, or SFAS, No. 91,Accounting for Nonrefundable Fees and Costs
  Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.

The
amount of premium amortization we recognize is dependent on prepayment rates on
underlying securities. Prepayment rates generally increase when interest rates
fall and decrease when interest rates rise, but changes in prepayment rates are
difficult to predict. Prepayment rates also may be affected by other factors,
including, without limitation, conditions in

21

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the housing and financial markets, general economic conditions
  and the relative interest rates on adjustable-rate and fixed-rate mortgage loans.
  We have estimated prepayment rates based on historical data and consideration
  of current market conditions. If our estimate of prepayments is incorrect, we
  may have to adjust the amortization or accretion of premiums and discounts,
  which would impact future income.

Loans

Our
investments in loans are classified either as held for sale and carried on the
condensed consolidated balance sheet at the lower of cost or fair market value
or as held for investment (referred to as Loans on the condensed consolidated
balance sheet) and carried at amortized cost, with any premium or discount
being amortized or accreted to income, and an allowance for loan losses, if
necessary. We determine fair value for our loans held for sale using price
estimates provided by an independent pricing service. If the independent
pricing service cannot provide estimates for a given loan, our valuation
committee determines estimated fair value based on some or all of the
following: (a) current financial information of the borrowing company and
performance against its operating plan; (b) changing value of collateral
supporting the loan; (c) changes to the market for the borrowing companys
service or product and (d) present value of projected future cash flows. If an
individual loans fair market value is below its cost, a valuation adjustment
is recognized in our statement of operations and the loans cost basis is
adjusted. This valuation allowance is recoverable in future periods. We accrue
interest income based on the outstanding principal amounts of the loans and
their contractual terms.

Allowance and Provision for Loan Losses

We
continually monitor loan quality in regular reviews by our valuation committee.
In accordance with SFAS No. 114, Accounting
by Creditors for Impairment of a Loan, we recognize an allowance for
loan losses on our loans held for investment at a level considered adequate
based on managements evaluation of all available and relevant information
related to the loan portfolio, including historical and industry loss
experience, economic conditions and trends, estimated fair values and quality
of collateral, estimated fair values of our loans and other relevant factors.

To
estimate the allowance for loan losses, we first identify impaired loans. We
consider a loan to be impaired when, based on current information and events,
management believes it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement. When a
loan is impaired, the allowance for loan losses is increased by the amount of
the excess of the amortized cost basis of the loan over its estimated fair
value. Estimated fair value may be determined based on (i) observable
market quotes, if available; (ii) the estimated sales price of the
collateral less estimated disposition costs, or (iii) the present value of
projected future cash flows. Increases in the allowance for loan losses are
recognized in the statements of operations as a provision for loan losses. If
the loan or a portion thereof is considered uncollectible and of such little
value that further pursuit of collection is not warranted, a charge-off or
write-down of a loan is recorded, and the allowance for loan losses is reduced.

An
impaired loan may be left on accrual status during the period we are pursuing
repayment of the loan; however, the loan is placed on non-accrual status at the
earliest of such time as: (i) we believe that scheduled debt service
payments will not be met within the coming 12 months; (ii) the loan
becomes 90 days delinquent; or (iii) we determine the borrower is
incapable of, or has ceased efforts toward, curing the cause of the impairment.
While on non-accrual status, interest income is recognized only upon actual
receipt.

We
identified no impaired loans in our portfolio at March 31, 2006 and have not
provided an allowance for loan losses at this time.

Accounting For Derivative Financial Instruments and Hedging
Activities

Our
policies permit us to enter into derivative contracts, including interest rate
swaps and interest rate swap forwards, as a means of mitigating our interest
rate risk on forecasted rollover/reissuance of repurchase agreements, or hedged
items, for a specified future time period. The designated risk being hedged is
changes in the benchmark interest rate, London interbank offered rate, or
LIBOR. We primarily use interest rate derivative instruments to mitigate
interest rate risk rather than to enhance returns.

These
contracts, or hedge instruments, have been designated as cash flow hedges and
are evaluated at inception and on an ongoing basis in order to determine
whether they qualify for hedge accounting under SFAS No. 133,Accounting for Derivative Instruments and Hedging
Activities, as amended and interpreted. We formally document all
relevant relationships between hedging instruments and hedged items at inception,
as well as our risk-management objective and strategy for undertaking each
hedge transaction. The hedge instrument must be highly effective in achieving
changes in cash flow, which offset changes in the hedged item attributable to
the risk being hedged in order to qualify for hedge accounting. We use
regression analysis to assess the effectiveness of our hedging strategies. The
derivative contracts are carried on the balance sheet at fair value. Any
ineffectiveness that arises during the hedging relationship is recognized in
interest expense during the period in which it occurs. Prior to the end of the
specified hedge time period the effective portion of all unrealized contract

22

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gains and losses are recorded in other comprehensive
income or loss. Realized gains and losses are generally reclassified into
earnings as an adjustment to interest expense during the originally specified
hedge time period. We value both our actual interest rate swaps and
hypothetical interest rate swaps (for purposes of measuring ineffectiveness) by
determining the net present value of all projected interest payments between
the counterparties which are calculated based on internally developed and
tested market-standard models that utilize data inputs obtained from external
market sources.

We
are not required to account for the derivative contracts using hedge
accounting, as described above. If we decide not to designate the derivative
contracts as hedges and monitor their effectiveness as hedges, or if we enter
into other types of financial instruments that do not meet the criteria to be
designated as hedges, changes in the fair values of these instruments are
recorded in current earnings. One such derivative is credit default swaps, or
CDS, in which we act as the protection seller and receive a premium for taking
the risk, only in the event of a credit event as defined in the CDS, of paying
the protection buyer for the notional amount of the contract and taking title
to the referenced entitys obligation. The fair value of the CDS depends on a
number of factors, primarily premium levels that are dependent on interest rate
spreads. The CDS contracts are valued using internally developed and tested
market-standard pricing models which calculate the net present value of
differences between future premiums on currently quoted market CDS and the
contractual future premiums on our CDS contracts. Our model uses quoted market
premium data obtained from prominent broker dealers in the CDS market.

Management and Incentive Fee Expense

The
management agreement provides for the payment of incentive fees to Deerfield
Capital if our financial performance exceeds certain benchmarks. Incentive fees
are calculated on a quarterly basis and paid in arrears. Subsequent to each quarter
of the fiscal year, we will calculate whether an incentive fee is payable and,
if necessary, record the expense accrual in the appropriate quarter. The
management agreement provides that 15.0% of Deerfield Capitals incentive fee
is to be paid in shares of our common stock (provided that under our management
agreement, Deerfield Capital may not receive payment of its incentive fee in
shares of our common stock if such payment would result in Deerfield Capital
owning directly or indirectly through one or more subsidiaries more than 9.8%
of our common stock) and the balance in cash. Deerfield Capital may, in its
sole discretion, elect to receive a greater percentage of its incentive fee in
the form of our common stock. The number of shares to be received by Deerfield
Capital will be based on the average of the closing prices of our common stock
during the thirty-day period ending three days prior to issuance of these
shares. Shares of our common stock delivered as payment of the incentive fee
will be immediately vested or exercisable, provided that Deerfield Capital has
agreed not to sell the shares prior to one year after the date they are paid.

Equity Compensation

We
account for the restricted stock and restricted stock options granted to
Deerfield Capital in accordance with the consensus in Issue 1 of Emerging
Issues Task Force, or EITF, No. 96-18,Accounting for Equity Instruments that are issued to other than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, or
EITF 96-18. Pursuant to EITF 96-18, the stock and options granted prior to
January 1, 2006, were originally recorded at fair value in stockholders
equity, with an offsetting entry to deferred equity compensation (a
contra-equity account). In accordance with the requirements of SFAS No. 123
(revised 2004), Share-Based Payments,
we eliminated the deferred compensation equity balance through an offsetting
reduction of additional paid-in capital. This reclassification had no impact on
our total stockholders equity. The expense relating to share-based
compensation is amortized using the graded vesting attribution method over the
vesting period, or recognized immediately if fully vested upon grant. In
addition to recognizing share-based compensation an equivalent contribution to
additional paid-in capital is recognized. The fair value of stock and options
is adjusted quarterly for unvested shares. Changes in such fair value are
reflected in the amortization expense recognized in that quarter and in future
quarters until the stock and options are fully vested. As a result, changes in
our stock price will cause volatility in our financial results as reported
under GAAP.

Variable Interest Entities

In
accordance with Financial Accounting Standards Board, or FASB, Interpretation
46R,Consolidation of Variable Interest
Entities, or FIN 46R, we identify any potential variable
interest entities, or VIE, and determine when the assets, liabilities,
noncontrolling interests, and results of operations of a VIE need to be included
in a companys consolidated financial statements. A company that holds variable
interests in an entity will need to consolidate that entity if the companys
interest in the VIE is such that the company will absorb a majority of the
VIEs anticipated losses and/or receive a majority of the VIEs expected
residual returns. This analysis may involve significant judgments about
projected cash flows of the VIE.

Trust Preferred Securities

In
September 2005, we formed Deerfield Triarc Capital Trust I, or the Trust,
for the sole purpose of issuing and selling trust preferred securities. In
accordance with FIN 46R, the Trust is not consolidated into our condensed
consolidated

23

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financial
statements because management has determined that we are not deemed to be the
primary beneficiary of the Trust. Through Deerfield Triarc Capital LLC, or DTC
LLC, we own 100% of the common shares of the Trust, which also issued $50.0
million of preferred shares to unaffiliated investors. The rights of holders of
common shares of the Trust are subordinate to the rights of holders of
preferred shares only in the event of a default, otherwise common shareholders
economic and voting rights are pari passu with the preferred shareholders. We
recorded our investment in the Trusts common shares as other investments at
cost and record dividend income upon declaration of dividends by the Trust.

In
connection with the issuance and sale of the trust preferred securities, DTC
LLC issued junior subordinated debt securities to the Trust, which are
guaranteed by us. The junior subordinated debt securities are recorded as
long-term debt and debt issuance costs are deferred in prepaid and other assets
in the condensed consolidated balance sheets. Interest on the debt and
amortization of debt issuance costs are recorded in the consolidated condensed
statements of operations in interest expense.

Income Taxes

We
have elected to be taxed, and intend to continue to qualify, 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 and
state income tax, which could have a material adverse impact on our results of
operations and amounts available for distributions to our stockholders.
However, Deerfield Triarc TRS Holdings, Inc., one of our taxable REIT
subsidiaries, or TRS, is subject to corporate-level income taxes.

Recent Accounting Pronouncements

The
FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments in February 2006.
SFAS No. 155 amends SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities, and SFAS
No. 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
and addresses the application of SFAS No. 133 to beneficial interests in
securitized financial assets. SFAS No. 155 establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation. Additionally, SFAS
No. 155 permits fair value measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation.
SFAS No. 155 is effective for financial instruments acquired or issued
after January 1, 2007. We are currently assessing the impact SFAS No. 155
will have on our consolidated financial statements.

Financial Condition

All
of our assets at March 31, 2006 were acquired through the use of proceeds from
our December 2004 initial private placement and June 2005 initial public
offering, operating cash flows and our use of leverage. We used the proceeds
from our June 2005 initial public offering of common stock to create additional
leveraging capacity by paying down repurchase agreement obligations.

The
following table summarizes the carrying value of our investment portfolio,
excluding credit default swaps, and the respective balance sheet classification
at March 31, 2006:

|                                         |  |                               |           |                   |   |                  |  |                    |        |       |   |         |  |   |         |  |   |           | 
|---------------------------------------- |  | ----------------------------- | --------- | ----------------- | - | ---------------- |  | ------------------ | ------ | ----- | - | ------- |  | - | ------- |  | - | --------- | 
|                                         |  | Carrying Value               
|                                         |  |                               |           |                   |   |                  |  |                    |        |       |   |         |  |   |         |  |   |           | 
|Security Description                     |  | Available-for-Sale Securities |           | TradingSecurities |   | OtherInvestments |  | Loans HeldFor Sale |        | Loans |   | Total   | 
|                                         |  |                               |           |                   |   |                  |  |                    |        |       |   |         | 
|                                         |  | (In thousands)               
|                                         |  |                               |           |                   |   |                  |  |                    |        |       |   |         |  |   |         |  |   |           | 
|RMBS                                     |  | $                             | 8,099,466 |                   | $ | 2,470            |  | $                  |       |       | $ |        |  | $ |        |  | $ | 8,101,936 | 
|                                         |  |                               |           |                   |   |                  |  |                    |        |       |   |         |  |   |         |  |   |           | 
|Asset-backed
  securities held in CDO(1) |  |                               | 297,236   |                   |   |                 |  |                    |       |       |   |        |  |   |        |  |   | 297,236   | 
|Loans(2)                                 |  |                               |          |                   |   |                 |  |                    |       |       |   | 283,925 |  |   | 178,923 |  |   | 462,848   | 
|Commercial mortgage loans                |  |                               |          |                   |   |                 |  |                    |       |       |   | 5,366   |  |   |        |  |   | 5,366     | 
|Common and preferred
  equities          |  |                               | 15,846    |                   |   |                 |  |                    | 12,321 |       |   |        |  |   |        |  |   | 28,167    | 
|High yield corporate
  bonds(3)          |  |                               | 23,635    |                   |   |                 |  |                    |       |       |   |        |  |   |        |  |   | 23,635    | 
|Other investments                        |  |                               | 2,967     |                   |   |                 |  |                    |       |       |   |        |  |   |        |  |   | 2,967     | 
|                                         |  |                               |           |                   |   |                  |  |                    |        |       |   |         |  |   |         |  |   |           | 
|Total alternative assets                 |  |                               | 339,684   |                   |   |                 |  |                    | 12,321 |       |   | 289,291 |  |   | 178,923 |  |   | 820,219   | 
|                                         |  |                               |           |                   |   |                  |  |                    |        |       |   |         |  |   |         |  |   |           | 
|Total invested assets                    |  | $                             | 8,439,150 |                   | $ | 2,470            |  | $                  | 12,321 |       | $ | 289,291 |  | $ | 178,923 |  | $ | 8,922,155 | 
|                                         |  |                               |           |                   |   |                  |  |                    |        |       |   |         |  |   |         |  |   |           | 

| |     |                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------
| |    
| | (1) | Asset-backed
  securities held in CDO includes RMBS, CMBS and ABS.                                                     
| |     |                                                                                                                        
| | (2) | Loans
  excludes credit default swaps with a fair value of approximately $514,000 and
  a $78.0 million notional value.
| |     |                                                                                                                        
| | (3) | High yield
  corporate bonds include $8.0 million of bonds held in a CDO.                                              

24

---



Mortgage-Backed
Securities

The
table below summarizes the valuation adjustments on our available-for-sale RMBS
investments:

| |                                           |                  |           |  
| | ----------------------------------------- | ---------------- | --------- | -
| |                                           | March 31,
  2006
| |                                          
| |                                           |                 
| |                                           | (In thousands)  
| | Par amount                                | $                | 8,426,969 |  
| | Interest- and principal-
  only strips(1) |                  | (203,121  | )
| | Unamortized premium                       |                  | 65,099    |  
| | Unamortized discount                      |                  | (16,203   | )
| | Impairment of
  interest-only strips      |                  | (1,838    | )
| |                                           |                  |           |  
| | Amortized cost                            |                  | 8,270,906 |  
| | Unrealized gains                          |                  | 4,647     |  
| | Unrealized losses                         |                  | (176,087  | )
| |                                           |                  |           |  
| | Fair value                                | $                | 8,099,466 |  
| |                                           |                  |           |  

| |     |                                                                                                                                             
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (1) | Equals the
  excess of par amount of underlying reference securities over amortized cost
  of interest- and principal- only strip securities

The
Companys RMBS are agency or AAA-rated in quality, with the exception of $65.9
million, in estimated fair value, of interest-only or principal-only
securities. At March 31, 2006, we held 319 RMBS securities with a fair value of
$8.0 billion, valued below cost, of which 77 securities with a fair value of
$1.8 billion were valued below cost for greater than twelve months. At March
31, 2006, we recognized a $1.8 million other-than-temporary impairment related
to two inverse interest-only securities. These inverse interest-only
securities cash flows decrease as LIBOR increases. We used updated cash flow
projections from a third party to determine the amount of the impairment. As a
result of the impairment charge, these two securities were written down to the
then-current fair value, and the unrealized loss transferred from accumulated
other comprehensive income (loss) as an immediate reduction of earnings
recognized as a reduction to the net gain on available-for-sale securities in
the condensed consolidated statements of operations. We do not believe any
other securities are other-than-temporarily impaired at March 31, 2006 and we
have the intent and ability to hold these securities until the value is
recovered, which may be to maturity.

At
March 31, 2006, the RMBS in our portfolio were purchased at a net premium
to their par value as our portfolio had an amortized cost of 100.6% of the face
amount. The RMBS (excluding the interest-only strips) are valued below par at
March 31, 2006 because the weighted-average yield is lower than prevailing
market rates. Premium bonds tend to have shorter durations than discount or par
bonds and their values are thus less sensitive to interest rate movement. As of
March 31, 2006, the relative fair value of our RMBS portfolio versus its
amortized cost declined from December 31, 2005 due to an increase in
prevailing market interest rates. Our total RMBS premium amortization expense
for the three months ended March 31, 2006 and March 31, 2005 was $5.7 million
and $1.2 million, respectively. As of March 31, 2006, we had $48.9 million of
unamortized net premium included in the cost basis of our available-for-sale
RMBS securities. Our current weighted average life of the portfolio is 4.3
years.

Our
net portfolio duration, which is the difference between the duration of the
RMBS portfolio and the duration of our repurchase agreements, adjusted for the
effects of our interest rate swap portfolio, is 0.54 years at March 31, 2006.

25

---



The following table details our RMBS
holdings as of March 31, 2006, of which $8.1 billion and $2.5 million are
classified as available-for-sale securities and trading securities,
respectively (dollars in thousands):

|                                           |  |                |           |                     |   |                |  |                            |       |        |  |                    |   |                  |   |                     |  |                         |  |                  |   |  |  |          |  |  |      |  |  |       | 
|------------------------------------------ |  | -------------- | --------- | ------------------- | - | -------------- |  | -------------------------- | ----- | ------ |  | ------------------ | - | ---------------- | - | ------------------- |  | ----------------------- |  | ---------------- | - |  |  | -------- |  |  | ---- |  |  | ----- | 
|                                           |  |                |           |                     |   |                |  |                            |       |        |  |                    |   | Weighted Average |  
|                                           |  |                |           |                     |   |                |  |                            |       |        |  |                    |   |                  |  
|Security
  Description (1)                 |  | Par Amount     |           | EstimatedFair Value |   | Percent ofRMBS |  | Percent ofTotalInvestments |       | Coupon |  | Months toReset (2) |   | Yield toMaturity |   | ContractualMaturity |  | ConstantPre-paymentRate |  | Durationin Years |  
|                                           |  |                |           |                     |   |                |  |                            |       |        |  |                    |   |                  |   |                     |  |                         |  |                  |  
|                                           |  | (In thousands) |           |                     |   |                |  |                            |       |        |  |                    |   |                  |   |                     |  |                         |  |                  |   |  |  |          |  |  |     
|                                           |  |                |           |                     |   |                |  |                            |       |        |  |                    |   |                  |   |                     |  |                         |  |                  |   |  |  |          |  |  |     
|Agency RMBS:                               |  |                |           |                     |   |                |  |                            |       |        |  |                    |   |                  |   |                     |  |                         |  |                  |   |  |  |          |  |  |      |  |  |       | 
|3-1 hybrid adjustable rate                 |  | $              | 780,823   |                     | $ | 771,641        |  |                            | 9.5   | %      |  | 8.7                | % | 4.40             | % |                     |  | 20                      |  | 5.54             | % |  |  | 11/30/34 |  |  | 21.9 |  |  | 1.5   | 
|5-1 hybrid adjustable rate                 |  |                | 3,660,478 |                     |   | 3,611,765      |  |                            | 44.5  | %      |  | 40.5               | % | 4.90             | % |                     |  | 49                      |  | 5.61             | % |  |  | 04/23/35 |  |  | 16.3 |  |  | 2.0   | 
|7-1 hybrid adjustable rate                 |  |                | 170,913   |                     |   | 167,758        |  |                            | 2.1   | %      |  | 1.9                | % | 4.96             | % |                     |  | 71                      |  | 5.74             | % |  |  | 03/19/35 |  |  | 8.9  |  |  | 2.5   | 
|10-1 hybrid adjustable rate                |  |                | 444,675   |                     |   | 433,470        |  |                            | 5.4   | %      |  | 4.9                | % | 5.23             | % |                     |  | 113                     |  | 5.90             | % |  |  | 07/21/35 |  |  | 8.2  |  |  | 3.3   | 
|15 year fixed rate                         |  |                | 131,571   |                     |   | 130,783        |  |                            | 1.6   | %      |  | 1.5                | % | 5.50             | % |                     |  | NA                      |  | 5.64             | % |  |  | 10/23/20 |  |  | 9.4  |  |  | 3.5   | 
|30 year fixed rate                         |  |                | 1,362,795 |                     |   | 1,339,714      |  |                            | 16.5  | %      |  | 15.0               | % | 5.66             | % |                     |  | NA                      |  | 5.94             | % |  |  | 10/04/35 |  |  | 9.8  |  |  | 4.2   | 
|                                           |  |                |           |                     |   |                |  |                            |       |        |  |                    |   |                  |   |                     |  |                         |  |                  |   |  |  |          |  |  |      |  |  |       | 
|Non-Agency AAA-Rated RMBS:                 |  |                |           |                     |   |                |  |                            |       |        |  |                    |   |                  |   |                     |  |                         |  |                  |   |  |  |          |  |  |      |  |  |       | 
|Hybrid adjustable rate                     |  |                | 902,347   |                     |   | 895,715        |  |                            | 11.1  | %      |  | 10.0               | % | 5.36             | % |                     |  | NA                      |  | 5.90             | % |  |  | 05/09/35 |  |  | 16.6 |  |  | 1.8   | 
|Fixed rate                                 |  |                | 708,425   |                     |   | 685,224        |  |                            | 8.5   | %      |  | 7.7                | % | 5.54             | % |                     |  | NA                      |  | 6.09             | % |  |  | 08/21/34 |  |  | 5.6  |  |  | 5.1   | 
|                                           |  |                |           |                     |   |                |  |                            |       |        |  |                    |   |                  |   |                     |  |                         |  |                  |   |  |  |          |  |  |      |  |  |       | 
|Other:                                     |  |                |           |                     |   |                |  |                            |       |        |  |                    |   |                  |   |                     |  |                         |  |                  |   |  |  |          |  |  |      |  |  |       | 
|Interest-only strips (3)                   |  |                | 183,846   |                     |   | 23,359         |  |                            | 0.3   | %      |  | 0.3                | % | 5.53             | % |                     |  | NA                      |  | 15.47            | % |  |  | 04/02/37 |  |  | 13.2 |  |  | -17.1 | 
|Interest-only strips - trading (3)         |  |                | 436,574   |                     |   | 2,470          |  |                            | 0.0   | %      |  | 0.0                | % | 1.00             | % |                     |  | NA                      |  | 15.17            | % |  |  | 05/08/35 |  |  | 18.1 |  |  | 0.6   | 
|Interest-only and principal only strip
(3) |  |                | 81,096    |                     |   | 40,037         |  |                            | 0.5   | %      |  | 0.4                | % | 1.42             | % |                     |  | NA                      |  | 6.30             | % |  |  | 04/12/35 |  |  | 16.6 |  |  | 4.4   | 
|                                           |  |                |           |                     |   |                |  |                            |       |        |  |                    |   |                  |   |                     |  |                         |  |                  |   |  |  |          |  |  |      |  |  |       | 
|Total RMBS                                 |  | $              | 8,863,543 |                     | $ | 8,101,936      |  |                            | 100.0 | %      |  | 90.9               | % |                  |   |                     |  |                         |  |                  |   |  |  |          |  |  |      |  |  |       | 
|                                           |  |                |           |                     |   |                |  |                            |       |        |  |                    |   |                  |   |                     |  |                         |  |                  |   |  |  |          |  |  |      |  |  |       | 

| |     |                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (1) | Includes
  securities classified as both available-for-sale and trading.                                                                                                                   
| |     |                                                                                                                                                                                            
| | (2) | Represents
  number of months before conversion to floating rate.                                                                                                                          
| |     |                                                                                                                                                                                            
| | (3) | Interest-
  and principal-strips represent solely the interest or principal portion of a
  security. Therefore the par amount reflected should not be used as a
  comparison to fair value.

Actual
maturities of RMBS 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
RMBS ranges up to 30 years from date of issuance, but the expected
maturity is subject to change based on the prepayments of the underlying loans.

The
constant prepayment rate, or CPR, attempts to predict the percentage of
principal that will prepay over the next 12 months based on historical
principal paydowns and the current rate environment. 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.

As
of March 31, 2006, the mortgages underlying our hybrid adjustable rate RMBS had
fixed interest rates for a weighted average period of approximately 51 months,
after which time the interest rates reset and become adjustable. The average
length of time until contractual maturity of those mortgages was 30 years
from date of issuance.

After
the reset date, interest rates on our hybrid adjustable rate RMBS float based
on spreads over various LIBOR, indices. These interest rates are subject to
caps that limit the amount the applicable interest rate can increase during any
year, known as an annual cap, and through the maturity of the applicable
security, known as a lifetime cap. At March 31, 2006, the weighted average
lifetime cap for the portfolio is an increase of 10.2% over the fixed rate, the
weighted average maximum increase in the first year that the rates are
adjustable is 4.7% and the weighted average maximum annual increase for years
subsequent to the first year is 2.0%.

Interest-only
strips are purchased primarily as duration management tools or to enhance
overall yields. These positions are classified in trading if the securities are
held principally for the purpose of selling them in the near term. All other
interest-only strips are classified as available-for-sale.

The
following table, in thousands, summarizes our available-for sale RMBS,
according to their weighted average life:

|                                                  |  |                          |           |                  |   |           | 
|------------------------------------------------- |  | ------------------------ | --------- | ---------------- | - | --------- | 
|                                                  |  | March 31, 2006           |          
|                                                  |  |                          |          
|Weighted Average Life                             |  | Estimated
  Fair
  Value |           | Amortized
  Cost |  
|                                                  |  |                          |           |                  |  
|Greater than one year and
  less than five years  |  | $                        | 5,709,924 |                  | $ | 5,842,559 | 
|Greater than five years
  and less than ten years |  |                          | 2,081,093 |                  |   | 2,104,242 | 
|Greater than ten years                            |  |                          | 308,449   |                  |   | 324,105   | 
|                                                  |  |                          |           |                  |   |           | 
|Total                                             |  | $                        | 8,099,466 |                  | $ | 8,270,906 | 
|                                                  |  |                          |           |                  |   |           | 

The
weighted average lives of the RMBS in the tables above are based upon
prepayment models obtained through subscription-based financial information
service providers. The prepayment model considers current yield, forward yield,
slope of the yield curve, mortgage rates, the contractual rate of the
outstanding loan, loan age, margin and volatility. For purposes of

26

---



this disclosure, weighted average life represents the average
  number of years for which each dollar of unpaid principal remains outstanding.
  Weighted average life is an estimate of how many years it will take to pay half
  of the outstanding principal.

The
actual weighted average lives of the RMBS 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
the sensitivity to changes in both prepayment rates and interest rates. Our
RMBS are recorded in available-for-sale securities in our condensed
consolidated balance sheet as of March 31, 2006 and include our inverse
interest-only strip securities, with the exception of two inverse interest-only
strip securities, with a fair value of $2.5 million, classified as trading
securities.

Asset-Backed
Securities Held in CDO

In
May 2005, we entered into warehouse, master repurchase and pledge agreements to
fund the purchase of up to $300.0 million of ABS by Pinetree CDO Ltd., or
Pinetree, one of our qualified REIT subsidiaries, during the warehouse period.
Upon review of the warehouse transaction, we determined that Pinetree was a VIE
under FIN 46R and we were the primary beneficiary of the VIE. On November 30,
2005, we terminated the warehouse borrowing and replaced it with the issuance
of long-term debt and equity securities by Pinetree. We purchased all of the
equity interest in Pinetree, which were issued to us as preference shares and
ordinary shares for an aggregate purchase price of $12.0 million. We have
consolidated Pinetree since the inception of the warehouse period in May 2005,
as it was determined that we were the primary beneficiary of the VIE. The ABS
held in Pinetree are included in available-for-sale securities. We accrue
interest income on ABS and interest expense on the long-term debt in the
condensed consolidated statements of operations.

The
following table summarizes the Pinetree investments by asset class at March 31,
2006:

|                                   |  |                |         |                     |   |                        |  |  |      | 
|---------------------------------- |  | -------------- | ------- | ------------------- | - | ---------------------- |  |  | ---- | 
|Asset
  Class                      |  | CurrentFace    |         | Current
  FairValue |   | Weighted
  AverageLife | 
|                                   |  |                |         |                     |   |                        | 
|                                   |  | (In thousands) |         | (In years)          |  
|                                   |  |                |         |                     |  
|Residential B/C mortgage           |  | $              | 174,834 |                     | $ | 180,610                |  |  | 3.46 | 
|Residential A mortgage             |  |                | 29,706  |                     |   | 21,762                 |  |  | 4.30 | 
|Home equity loan                   |  |                | 40,331  |                     |   | 39,511                 |  |  | 3.05 | 
|CMBS conduit                       |  |                | 30,443  |                     |   | 27,826                 |  |  | 6.55 | 
|CMBS large loan                    |  |                | 7,384   |                     |   | 10,573                 |  |  | 2.60 | 
|ABS collateralized bond obligation |  |                | 8,468   |                     |   | 6,232                  |  |  | 6.00 | 
|Credit card                        |  |                | 3,000   |                     |   | 2,959                  |  |  | 2.09 | 
|Student loan                       |  |                | 1,357   |                     |   | 2,108                  |  |  | 8.72 | 
|Automobile loan                    |  |                | 2,000   |                     |   | 2,527                  |  |  | 2.61 | 
|Small business loan                |  |                | 1,610   |                     |   | 3,128                  |  |  | 4.40 | 
|                                   |  |                |         |                     |   |                        |  |  |      | 
|Total                              |  | $              | 299,133 |                     | $ | 297,236                |  |  | 3.86 | 
|                                   |  |                |         |                     |   |                        |  |  |      | 

At
  March 31, 2006, Pinetree held $297.2 million of ABS classified as available-for-sale
  securities and $8.1 million of restricted cash and cash equivalents, which are
  generally being utilized to purchase additional ABS. The ABS are backed primarily
  by residential mortgages, home equity loans and some commercial mortgages. The
  portfolio is composed of both fixed and floating rate securities, comprising
  23.4% and 76.6% of the portfolio, respectively. The fixed portfolio has a weighted
  average rate of 5.66% while the variable portfolio has a weighted average spread
  of 2.03% over LIBOR.

27

---



The
table below summarizes the Pinetree portfolio by Moodys rating at March 31,
2006:

|               |  |            |        |   | 
|-------------- |  | ---------- | ------ | - | 
|Moodys Rating |  | % of Total |       
|               |  |            |       
|Aaa            |  |            | 3.63   | % | 
|Aa1            |  |            | 0.34   | % | 
|Aa2            |  |            | 0.67   | % | 
|Aa3            |  |            | 1.34   | % | 
|A1             |  |            | 1.05   | % | 
|A2             |  |            | 4.32   | % | 
|A3             |  |            | 4.63   | % | 
|Baa1           |  |            | 12.76  | % | 
|Baa2           |  |            | 35.30  | % | 
|Baa3           |  |            | 35.96  | % | 
|               |  |            |        |   | 
|               |  |            | 100.00 | % | 
|               |  |            |        |   | 

The
Moodys weighted average rating factor, or WARF, for the Pinetree portfolio as
of March 31, 2006 is 395, which translates to a weighted average Moodys rating
of between Baa2 and Baa3.

Loans and Credit
Derivatives

At
March 31, 2006, we held loans totaling $468.2 million, or 5.3% of our
portfolio. We held $190.3 million funded directly and $277.9 million via a CDO
transaction in one of our taxable REIT subsidiary entities, Market Square CLO
Ltd, or Market Square, which is directly owned by Deerfield Triarc Capital LLC.
The Market Square bank loans and $11.4 million of directly funded loans are
classified in held for sale and carried at the lower of cost or fair value. We
also own $178.9 million of bank loans classified as held for investment. These
loans are carried at amortized cost with any discount or premium accreted or
amortized in interest income. We assess loans held for investment for
impairment and record an allowance for loan losses if necessary. We identified
no estimated probable credit losses in our portfolio as of March 31, 2006 and
thus have not provided an allowance for loan losses.

The
following summarizes our loan portfolio, excluding credit default swaps, by
loan classification at March 31, 2006:

|                                  |  |                |         |          |   |         |  |   |         | 
|--------------------------------- |  | -------------- | ------- | -------- | - | ------- |  | - | ------- | 
|                                  |  | Carrying Value |        
|                                  |  |                |        
|                                  |  | Loans Held     |        
|Type of
  Loan                    |  | Loans          |         | for Sale |   | Total   | 
|                                  |  |                |         |          |   |         | 
|                                  |  | (In thousands) |        
|                                  |  |                |        
|Loans held in CDO                 |  | $              |        |          | $ | 277,887 |  | $ | 277,887 | 
|Structured and syndicated
  loans |  |                | 178,923 |          |   | 6,038   |  |   | 184,961 | 
|Commercial mortgages              |  |                |        |          |   | 5,366   |  |   | 5,366   | 
|                                  |  |                |         |          |   |         |  |   |         | 
|                                  |  | $              | 178,923 |          | $ | 289,291 |  | $ | 468,214 | 
|                                  |  |                |         |          |   |         |  |   |         | 

Loans
Held in CDO

In
March 2005, we entered into an agreement to finance the purchase of up to
$300.0 million of syndicated bank loans by Market Square during the warehouse
period. In May 2005, Market Square repaid the warehouse borrowing and issued
preference shares of $24.0 million and several classes of notes aggregating
$276.0 million. We purchased 100% of the preference shares representing
substantially all of the equity interest in Market Square. Upon review of the
transaction and subsequent securitization, we determined that Market Square was
a VIE under FIN 46R and we were the primary beneficiary of the VIE, causing us
to consolidate Market Square. The notes have a weighted average interest rate
of LIBOR plus 0.49% and are secured by the loan portfolio. The $277.9 million
of loans outstanding are included in loans held for sale, and $276.0 million of
notes payable are included in long-term debt. The weighted average coupon
spread over LIBOR on the loan portfolio was 2.66% and the weighted average
contractual maturity was 5.3 years.

28

---



The
following table summarizes the Market Square loan portfolio by Moodys rating
as of March 31, 2006:

| |                |  |                |         |  |                       |         |                        |  |       |  |  |          | 
| | -------------- |  | -------------- | ------- |  | --------------------- | ------- | ---------------------- |  | ----- |  |  | -------- | 
| |                |  |                |         |  |                       |         | Weighted Average       | 
| |                |  |                |         |  | EstimatedFair
  Value |         |                        | 
| | Moodys Rating |  | Par
  Value    |         |  | Spread                |         | Contractual
  Maturity | 
| |                |  |                |         |  |                       |         |                        |  |      
| |                |  | (In thousands) |         |  |                       |         |                        |  |      
| |                |  |                |         |  |                       |         |                        |  |      
| | Baa2           |  | $              | 3,004   |  | $                     | 3,014   |                        |  | 2.04% |  |  | 12/09/06 | 
| | Ba1            |  |                | 11,649  |  |                       | 11,675  |                        |  | 1.90% |  |  | 09/02/10 | 
| | Ba2            |  |                | 18,383  |  |                       | 18,432  |                        |  | 1.80% |  |  | 06/29/11 | 
| | Ba3            |  |                | 53,708  |  |                       | 53,820  |                        |  | 2.16% |  |  | 06/28/11 | 
| | B1             |  |                | 69,931  |  |                       | 69,894  |                        |  | 2.30% |  |  | 10/31/11 | 
| | B2             |  |                | 101,293 |  |                       | 101,462 |                        |  | 3.27% |  |  | 10/04/11 | 
| | B3             |  |                | 18,644  |  |                       | 18,594  |                        |  | 3.44% |  |  | 03/29/11 | 
| | Caa1           |  |                | 1,000   |  |                       | 996     |                        |  | 3.00% |  |  | 04/27/10 | 
| |                |  |                |         |  |                       |         |                        |  |       |  |  |          | 
| |                |  | $              | 277,612 |  | $                     | 277,887 |                        |  | 2.66% |  |  | 07/27/11 | 
| |                |  |                |         |  |                       |         |                        |  |       |  |  |          | 

The
Market Square bank loan portfolio is diversified across 29 Moodys industries
as of March 31, 2006. The Market Square portfolio as of March 31, 2006 has a
WARF of 2303, which translates to a weighted average Moodys rating of between
B1 and B2.

Structured
and Syndicated Loans

The
following table summarizes our structured and syndicated loans as of March 31,
2006:

|                                      |  |                |         |                          |  |        | 
|------------------------------------- |  | -------------- | ------- | ------------------------ |  | ------ | 
|Type of
  Loan                        |  | CarryingValue  |         | Weighted
  AverageCoupon | 
|                                      |  |                |         |                          | 
|                                      |  | (In thousands) |         |                          |  |       
|                                      |  |                |         |                          |  |       
|First and
  second lien secured loans |  | $              | 126,871 |                          |  | 12.68% | 
|Mezzanine
  and other                 |  |                | 58,090  |                          |  | 13.91% | 
|                                      |  |                |         |                          |  |        | 
|                                      |  | $              | 184,961 |                          |  | 13.07% | 
|                                      |  |                |         |                          |  |        | 

At
March 31, 2006, we had structured and syndicated loans totaling $185.0 million,
$179.0 million classified as loans held for investment and $6.0 million of
loans held for sale. The mezzanine and other loans are often unsecured.

Commercial
Mortgage Loans

At
March 31, 2006, we had invested in junior participation interests in commercial
mortgages originated by Hometown Commercial Capital, LLC with a total carrying
value of $5.4 million. These amounts are included in loans held for sale on our
condensed consolidated balance sheet.

Credit Default Swaps

At
March 31, 2006, we held 24 credit default swaps, as the protection seller, with
a notional amount of $78.0 million. As of March 31, 2006, these CDS had a net
fair value of $0.5 million, recorded in derivative assets and derivative
liabilities in the condensed consolidated balance sheet in the amounts of $0.6
million and $0.1 million, respectively.

Common and Preferred
Equities

At
March 31, 2006, our common and preferred equities investments had a total
carrying value of $28.1 million. As of March 31, 2006, $15.8 million of these
investments 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; and $12.3 million are classified as other
investments and carried at cost, as the fair value is not readily determinable.

29

---



Interest Receivable

At
March 31, 2006, our interest receivable of $46.9 million related to the
following:

| |  |   |                                           
| |  | - | ------------------------------------------
| |  |  | RMBS - $36.4
  million                    
| |  |   |                                           
| |  |  | Loans - $7.3
  million                    
| |  |   |                                           
| |  |  | Various
  other investments - $2.4 million
| |  |   |                                           
| |  |  | Derivatives
  - $0.8 million              

Hedging Instruments

There
can be no assurance that our hedging activities will have the desired
beneficial impact on our results of operations, financial condition or net cash
flows. 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 Deerfield Capital
determines is in the best interest of our stockholders, after considering among
other things 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.

For
each of the three months ended March 31, 2006 and 2005, we entered into
interest rate swaps and interest rate swap forwards as a means of mitigating
our interest rate risk on forecasted interest expense associated with
repurchase agreements for a specified future time period, represented by the
term of the interest rate swap contract. 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 a portion of our short-term debt by entering into
fixed-floating interest rate swap agreements whereby we receive the floating
rate of interest and pay a fixed rate of interest. An interest rate swap
forward is an interest rate swap based on a floating interest rate to be set at
an agreed future date at which time the swap becomes effective.

At
March 31, 2006, we had a portfolio of 201 designated interest rate swaps
with maturities ranging from July 2006 to November 2015 and a total notional
amount of $5.5 billion and a net fair value of $109.3 million. Under the
interest rate swap and interest rate swap forward agreements we have in place,
we receive interest at rates that reset periodically, generally every one or
three months, and usually pay a rate fixed at the initiation of and for the
life of the swap agreements. The current market value of interest rate swaps is
heavily dependent on the current market fixed rate, the corresponding term
structure of floating rates as well as the expectation of changes in future
floating rates (yield curve). As expectations of future floating rates change,
the market value of interest rate swaps changes. Based on the daily market
value of those interest rate swaps and interest rate swap forward contracts,
our counterparties may request additional margin collateral or we may request
additional collateral from our counterparties to ensure that an appropriate
margin account balance is maintained at all times through the maturity of the
contracts. At March 31, 2006, the unrecognized gain on interest rate swap
transactions in accumulated other comprehensive income of $117.1 million
includes cumulative deferred gains on terminated swaps of $4.4 million that
will be amortized over the original hedging period.

At
March 31, 2006, we held three interest rate swaps with a total notional amount
of $103.3 million that were not designated as hedges. At March 31, 2006, these
interest rate swaps had a total fair value of $1.3 million, recorded in
derivative assets in the condensed consolidated balance sheet.

Liabilities

We
have entered into repurchase agreements to finance many of our purchases of
RMBS. These agreements are secured by RMBS and bear interest rates that have
historically moved in close relationship to LIBOR. As of March 31, 2006,
we established 17 borrowing relationships, respectively, with various
investment banking firms and other lenders. As of March 31, 2006, we had
utilized 13 of those relationships.

At
March 31, 2006, we had outstanding repurchase agreement liabilities of $7.1
billion, including accrued interest, with a weighted-average current borrowing
rate of 4.74%. We intend to renew these repurchase agreements as they mature
under the then-applicable borrowing terms of the counterparties to the
repurchase agreements. At March 31, 2006, the repurchase agreements were
secured by RMBS and other investment securities with an estimated fair value of
$7.2 billion and had weighted-average remaining maturities of 33 days. The net
amount at risk, defined as fair value of securities sold, plus accrued interest
income, minus repurchase agreement liabilities, plus accrued interest expense,
with all counterparties was $107.5 million at March 31, 2006. See details of
the net amount at risk later in this section under the heading Liquidity and
Capital Resources.

30

---



We
terminated warehousing agreements and replaced those liabilities with the issuance
of long-term debt and equity securities by Pinetree and Market Square as of
November 30, 2005 and May 10, 2005, respectively. The Pinetree and Market
Square long-term debt issuances bear weighted average interest rates, that
reset quarterly, of LIBOR plus 0.547% and 0.493% and based on the last reset
date were 5.02% and 5.09%, respectively, as of March 31, 2006. As of March 31,
2006, we have $288.0 million and $276.0 million of long-term debt resulting
from the Pinetree and Market Square transactions, respectively.

On
September 29, 2005, we issued $51.6 million of unsecured junior subordinated
notes payable to the Trust. The notes mature on October 23, 2035, but are
callable by us on or after October 10, 2010. Interest is payable quarterly
at a floating rate equal to LIBOR plus 3.50%. This rate was 8.16% at March 31,
2006.

At
March 31, 2006, we had $713.6 million due to broker; all unsettled amounts are
expected to settle in the following quarter. The due to broker consisted of the
following:

| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | Unsettled mortgage securities purchases - $673.0
        million
| |   |                                                                 
| |  | Unsettled bank loan purchases - $14.9 million                   
| |   |                                                                 
| |  | Swap margin due to broker - $25.7 million                       

Interest
payable at March 31, 2006 of $19.9 million consists of:

| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | Net accrued
  interest payable on interest rate swaps - $11.5 million       
| |   |                                                                             
| |  | Market
  Square long-term debt interest payable - $2.8 million              
| |   |                                                                             
| |  | Pinetree
  long-term debt interest payable - $4.9 million                   
| |   |                                                                             
| |  | Unsecured
  junior subordinated interest payable to the Trust - $0.7 million

At
March 31, 2006, we had $2.5 million payable to our Manager for management and
incentive fees totaling $1.3 million and $1.2 million, respectively.

At
March 31, 2006, other payables consist primarily of liabilities for
audit-related and tax services of $0.2 million, compensation of board of
directors of $0.1 million and various other payables of $0.3 million.

Stockholders Equity

Stockholders
equity at March 31, 2006 was $707.4 million and primarily consisted of the
following 2006 activity:

| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net
  unrealized losses on available-for-sale securities - $56.3 million                                                                                                                        
| |   |                                                                                                                                                                                                 
| |  | Unrealized
  gains on cash flow hedges - $46.9 million (including $1.7 million of deferred
  gains on terminated  interest rate
  swaps that will be amortized over the original hedging period)
| |   |                                                                                                                                                                                                 
| |  | Contributions
  to additional paid-in capital related to compensation for restricted stock
  and option grants to our Manager - $0.4 million                                                    
| |   |                                                                                                                                                                                                 
| |  | Contributions
  to additional paid-in capital related to compensation paid to our independent
  directors in the form of fully vested shares of common stock - $0.1 million                     
| |   |                                                                                                                                                                                                 
| |  | Retained
  earnings - $19.2 million of net income                                                                                                                                               

Our
common stock was declared effective by the Securities and Exchange Commission
on June 28, 2005. Trading of our shares commenced on June 29, 2005 on the
New York Stock Exchange under the ticker symbol DFR.

Results of Operations

For the three months
ended March 31, 2006 compared to the three months ended March 31, 2005

Summary

Our
net income for the three months ended March 31, 2006 was $19.2 million or $0.37
per weighted-average basic and diluted share outstanding.

We
have continued diversifying our investment portfolio during the first three
months of 2006. We increased our portfolio to $8.9 billion at March 31, 2006
from $7.8 billion at December 31, 2005, an increase of 15.1%. Although our RMBS
grew to $8.1 billion, or 90.8% of our portfolio at March 31, 2006 compared to
$7.0 billion, or 90.4% of our total portfolio at December 31, 2005 we increased
our overall alternative asset investments by $76.8 million, an increase of
10.3% for the three months ended March 31, 2006. We have also begun to make a
shift from investing in hybrid adjustable rate RMBS toward fixed 15-year and
30-year RMBS. We have made this shift with the expectation of providing a
higher coupon

31

---



and lower
priced RMBS, in the form of 15-year and 30-year fixed RMBS, which complement a
mortgage portfolio with lower interest rate and embedded option risk due to the
seasoning of our hybrid adjustable rate RMBS. Additionally, we are anticipating
the eventual decrease in hedging income due to expiration of interest rate
swaps that are currently providing a net interest income contribution. Over
time, we expect the mortgage portfolio to be able to generate adequate profit
margins to funding without the contribution of interest rate swaps as a larger
percentage of higher yielding mortgages replace the existing amortizing
portfolio. At March 31, 2005, our portfolio was significantly smaller totaling
$2.9 billion. The smaller portfolio in 2005 was a result of a smaller capital
base and the portfolio not being fully ramped due to our commencement of
operations on December 23, 2004 in connection with raising $378.9 million in
proceeds from our initial private placement. Subsequent to our initial private
placement we raised $363.1 million of net proceeds from our initial public
offering, which commenced on June 29, 2005 and closed on July 5, 2005.

In
an effort to increase our overall earnings and to continue the diversification
of our portfolio, we expect to increase our investment into alternative assets
during the remainder of 2006. As a result of closing a warehouse funding
agreement with Wachovia Capital Markets, LLC, or the Facility, in March 2006,
we expect to utilize the $300.0 million available to us under the Facility to
fund various existing and future alternative assets that were previously funded
with equity. We expect that this will allow us to redeploy this capital into
RMBS utilizing our eight to 12 times leverage, which should result in a
significant increase to our RMBS portfolio. At March 31, 2006, we had no
outstanding borrowings related to the Facility.

We
expect to continue our opportunistic investment selection and strategy of
limiting interest rate risk through active hedging risk management in an effort
to mitigate the impact of the rising interest rate environment. We also expect
continued focus on managing the volatility of the mortgage portfolio and
achievement of our targeted margins in a challenging interest rate environment.
Providing that market conditions and market opportunities are favorable we
expect to explore additional opportunities to raise additional capital and
fully deploy and leverage our equity.

Net Interest Income

The
following table summarizes our interest income components:

|                                                 |  |                                  |         |      |   |            |   |   |        |  
|------------------------------------------------ |  | -------------------------------- | ------- | ---- | - | ---------- | - | - | ------ | -
|                                                 |  | Three
  months ended
  March 31, |         |      |   |           
|                                                 |  |                                  |         |      |   |           
|                                                 |  | 2006                             |         | 2005 |   | Difference |  
|                                                 |  |                                  |         |      |   |            |  
|                                                 |  | (In
  thousands)                 |        
|                                                 |  |                                  |        
|RMBS                                             |  | $                                | 90,162  |      | $ | 24,496     |   | $ | 65,666 |  
|Amortization of purchase (premium) discount,
net |  |                                  | (5,717  | )    |   | (1,208     | ) |   | (4,509 | )
|                                                 |  |                                  |         |      |   |            |   |   |        |  
|Net RMBS                                         |  |                                  | 84,445  |      |   | 23,288     |   |   | 61,157 |  
|                                                 |  |                                  |         |      |   |            |   |   |        |  
|Loans                                            |  |                                  | 11,194  |      |   | 405        |   |   | 10,789 |  
|ABS held in CDO                                  |  |                                  | 4,768   |      |   |           |   |   | 4,768  |  
|All other asset classes                          |  |                                  | 1,113   |      |   | 146        |   |   | 967    |  
|Short-term investments                           |  |                                  | 508     |      |   | 1,401      |   |   | (893   | )
|                                                 |  |                                  |         |      |   |            |   |   |        |  
|Total interest income                            |  | $                                | 102,028 |      | $ | 25,240     |   | $ | 76,788 |  
|                                                 |  |                                  |         |      |   |            |   |   |        |  

The
increase in interest income by $76.8 million for the three months ended March
31, 2006 compared to the three month period ended March 31, 2005 is primarily
attributable to the significant increase in our investment portfolio. At March
31, 2006 our RMBS and loan portfolio was $8.1 billion and $468.2 million,
respectively, as compared to $2.9 billion and $201.7 million, respectively, at
March 31, 2005. For the three months ended March 31, 2006, we earned $4.8
million of interest income from ABS held in a CDO that closed in November 2005.
The decrease in interest income from short-term investments for the three
months ended March 31, 2006 compared to the prior year period is primarily
attributed to the ramping of the portfolio that was occurring during the prior
year period which resulted in more cash being deployed into short-term
instruments, rather than longer-term investments.

32

---



The
following table summarizes our interest expense:

|                                     |  |                                |        |      |   |            |  |   |        |  
|------------------------------------ |  | ------------------------------ | ------ | ---- | - | ---------- |  | - | ------ | -
|                                     |  | Three months ended
  March 31, |        |      |   |           
|                                     |  |                                |        |      |   |           
|                                     |  | 2006                           |        | 2005 |   | Difference | 
|                                     |  |                                |        |      |   |            | 
|                                     |  | (In thousands)                 |       
|                                     |  |                                |       
|Repurchase agreements                |  | $                              | 75,712 |      | $ | 13,753     |  | $ | 61,959 |  
|Designated
  hedging activity        |  |                                | (4,993 | )    |   | 2,629      |  |   | (7,622 | )
|Long-term debt                       |  |                                | 8,122  |      |   |           |  |   | 8,122  |  
|Amortization of
  debt issuance cost |  |                                | 180    |      |   |           |  |   | 180    |  
|Margin borrowing                     |  |                                | 84     |      |   |           |  |   | 84     |  
|                                     |  |                                |        |      |   |            |  |   |        |  
|Total interest
  expense             |  | $                              | 79,105 |      | $ | 16,382     |  | $ | 62,723 |  
|                                     |  |                                |        |      |   |            |  |   |        |  

The
increase in interest expense of $62.7 million for the three months ended March
31, 2006 was primarily a result of an increase in the outstanding repurchase
agreements as well as higher interest rates, which contributed $62.0 million to
the increase over the three months ended March 31, 2005. The increase in
outstanding repurchase agreements during this period was the result of having
additional capital and leveraging that capital to increase our investment
portfolio. Interest expense related to long-term debt for the three months
ended March 31, 2006 was $8.1 million compared to zero, as we did not have any
long-term debt for the three months ended March 31, 2006. Our repurchase
agreements balance was $7.1 billion and $2.8 billion at March 31, 2006 and
2005, respectively. Additionally, we had $615.6 million of long-term debt
outstanding in 2006 and zero for the prior year period. These increases in
interest expense were partially offset by our designated hedging, which reduced
interest expense by $5.0 million for the three months ended March 31, 2006
compared to a $2.6 million increase to interest expense in the prior year
period. We are currently in a net-receive position on substantially all of our
interest rate swaps due to the increase in variable interest rates, which is
the basis for our receipt of payments, above the fixed rate payments we are
making on these interest rate swaps. Although to a lesser extent, the increase
in short-term borrowing rates and overall rising interest rate environment,
partially offset by our hedging activity, also contributed to increased
interest expense since our funding sources are primarily tied to short-term
interest rates or reset on a relatively short-term basis.

Expenses

The
following table summarizes our expenses for the periods presented:

|                                                       |  |                                |       |      |   |            |  |   |       |  
|------------------------------------------------------ |  | ------------------------------ | ----- | ---- | - | ---------- |  | - | ----- | -
|                                                       |  | Three months ended
  March 31, |       |      |   |           
|                                                       |  |                                |       |      |   |           
|                                                       |  | 2006                           |       | 2005 |   | Difference | 
|                                                       |  |                                |       |      |   |            | 
|                                                       |  | (In thousands)                 |      
|                                                       |  |                                |      
|Base management
  fee                                  |  | $                              | 3,305 |      | $ | 1,674      |  | $ | 1,631 |  
|Amortization
  related to restricted stock and options |  |                                | 385   |      |   | 952        |  |   | (567  | )
|Incentive fee                                          |  |                                | 1,185 |      |   |           |  |   | 1,185 |  
|                                                       |  |                                |       |      |   |            |  |   |       |  
|Total management
  and incentive fees                  |  |                                | 4,875 |      |   | 2,626      |  |   | 2,249 |  
|                                                       |  |                                |       |      |   |            |  |   |       |  
|Audit and
  audit-related fees                         |  |                                | 193   |      |   | 26         |  |   | 167   |  
|Legal fees                                             |  |                                | 221   |      |   | 1          |  |   | 220   |  
|Other professional
  fees                              |  |                                | 64    |      |   |           |  |   | 64    |  
|                                                       |  |                                |       |      |   |            |  |   |       |  
|Total
  professional services                          |  |                                | 478   |      |   | 27         |  |   | 451   |  
|                                                       |  |                                |       |      |   |            |  |   |       |  
|Insurance
  premiums                                   |  |                                | 181   |      |   | 164        |  |   | 17    |  
|                                                       |  |                                |       |      |   |            |  |   |       |  
|Board of
  directors fees                              |  |                                | 232   |      |   | 30         |  |   | 202   |  
|Banking and
  other administrative fees                |  |                                | 107   |      |   | 28         |  |   | 79    |  
|Software and
  data feeds                              |  |                                | 86    |      |   |           |  |   | 86    |  
|Tax expense
  related to TRS entities                  |  |                                | 89    |      |   |           |  |   | 89    |  
|Other general
  and administrative fees                |  |                                | 67    |      |   | 3          |  |   | 64    |  
|                                                       |  |                                |       |      |   |            |  |   |       |  
|Total general
  and administrative fees                |  |                                | 581   |      |   | 61         |  |   | 520   |  
|                                                       |  |                                |       |      |   |            |  |   |       |  
|Total expenses                                         |  | $                              | 6,115 |      | $ | 2,878      |  | $ | 3,237 |  
|                                                       |  |                                |       |      |   |            |  |   |       |  

The
$3.2 million increase in expenses was primarily attributable to an increase of
$2.2 million for our total management and incentive fees and $1.0 million of
increases in all other expense line items. The increase in management and
incentive fees is primarily attributed to our increased equity and the impact
of the use of our leverage, which increased our invested assets and provided
increased net income, resulting in our Manager earning an incentive fee for the
three months ended March 31, 2006. The overall growth of our operations and
costs associated with becoming a publicly traded company were the primary
drivers for our increased expenses for the three months ended March 31, 2006.

33

---



Other
Income and Gain (Loss)

Other
income and gain (loss) is summarized below:

|                                                                   |  |                                |        |      |   |            |   |   |        |  
|------------------------------------------------------------------ |  | ------------------------------ | ------ | ---- | - | ---------- | - | - | ------ | -
|                                                                   |  | Three months ended
  March 31, |        |      |   |           
|                                                                   |  |                                |        |      |   |           
|                                                                   |  | 2006                           |        | 2005 |   | Difference |  
|                                                                   |  |                                |        |      |   |            |  
|                                                                   |  | (In thousands)                 |       
|                                                                   |  |                                |       
|Net realized
  gain on available-for-sale securities               |  | $                              | 3,929  |      | $ |           |   | $ | 3,929  |  
|Net realized
  gain on loans                                       |  |                                | 486    |      |   | 158        |   |   | 328    |  
|                                                                   |  |                                |        |      |   |            |   |   |        |  
|Total net
  realized gains                                         |  |                                | 4,415  |      |   | 158        |   |   | 4,257  |  
|                                                                   |  |                                |        |      |   |            |   |   |        |  
|Other-than-temporary
  impairment on available-for-sale securities |  |                                | (1,837 | )    |   |           |   |   | (1,837 | )
|Net unrealized
  loss on trading securities                        |  |                                | (1,813 | )    |   | (73        | ) |   | (1,740 | )
|Net unrealized
  gain (loss) on loans                              |  |                                | 46     |      |   | (292       | ) |   | 338    |  
|                                                                   |  |                                |        |      |   |            |   |   |        |  
|Total net
  unrealized loss                                        |  |                                | (3,604 | )    |   | (365       | ) |   | (3,239 | )
|                                                                   |  |                                |        |      |   |            |   |   |        |  
|Net gain on
  undesignated interest rate swaps                     |  |                                | 718    |      |   | 24         |   |   | 694    |  
|Net gain on
  credit default swaps                                 |  |                                | 725    |      |   | 100        |   |   | 625    |  
|Dividend income                                                    |  |                                | 101    |      |   |           |   |   | 101    |  
|                                                                   |  |                                |        |      |   |            |   |   |        |  
|Total other
  income and gain (loss)                               |  | $                              | 2,355  |      | $ | (83        | ) | $ | 2,438  |  
|                                                                   |  |                                |        |      |   |            |   |   |        |  

For
the three months ended March 31, 2006, our other income and gain (loss)
increased by $2.4 million as compared to the same period in 2005. For the three
months ended March 31, 2005, we had $(0.1) million of other income and gain
(loss) primarily due to the initial ramping of our portfolio. For the three
months ended March 31, 2006, we had $4.4 million of net realized gains
consisting of $3.9 million and $0.5 million from available-for sale securities
and loans, respectively. This increase was partially offset by $3.6 million of
unrealized losses consisting of $1.8 million of other-than-temporary impairment
identified on two inverse interest-only strip securities and a $1.8 million
decline in the fair value of our trading securities. Both the trading and
other-than-temporary impairment are on inverse interest-only securities, which
although are not accounted for as derivatives have been purchased for duration
management or yield enhancement to our RMBS portfolio, as the cash flows for
these inverse interest-only strip securities cash flows decrease as LIBOR
increases. We also earned $1.5 million related to our undesignated interest
swaps, credit default swap investments and dividend income.

Income
Tax Benefits

We
have elected and intend to continue our qualification as a REIT under the
Internal Revenue Code, or the Code. Accordingly, we are largely exempt from
federal or state income tax to the extent that we distribute all taxable income
to our stockholders and meet certain REIT asset, income and ownership tests
and record keeping requirements are fulfilled. We continue to make and hold
most of our investments and conduct most of our other operations through our
wholly owned limited liability company subsidiary. Even if we qualify for
exemption from federal taxation as a REIT, we may be subject to some amount of
federal, state and local taxes on our taxable income. Deerfield Triarc TRS
Holdings, Inc., our domestic taxable REIT subsidiary, is taxed as a regular
subchapter C corporation under the Code. Deerfield Triarc TRS Holdings, Inc.
was formed to make, from time to time, certain investments that would not be
REIT qualifying investments if made directly by us and to earn income that
would not be REIT qualifying income if earned directly by us. For the three
months ended March 31, 2006, Deerfield Triarc TRS Holdings, Inc. invested
primarily in short-term bank loan and bond trading positions, which contributed
to gross taxable income of $0.2 million less tax expense of $0.1 million. TRS
Holdings, Inc. reported no taxable income or tax expense for the three months
ended March 31, 2005.

Market
Square and Deerfield Triarc TRS (Bahamas) Ltd., or Deerfield Triarc Bahamas,
are foreign taxable REIT subsidiaries. Market Square was formed to complete a
securitization transaction structured as a secured financing and Deerfield
Triarc Bahamas was formed to complete a loan investment and, potentially,
similar investments in the future. Market Square is organized as an exempted
company incorporated with limited liability under the laws of the Cayman
Islands, and Deerfield Triarc Bahamas is organized as an international business
company under the laws of the Commonwealth of the Bahamas. Both companies are
generally exempt from federal and state income tax at the corporate entity
level because they restrict their activities in the United States to trading in
stock and securities for their own account. Therefore, despite their status as
taxable REIT subsidiaries, they generally will not be subject to corporate
income tax on their earnings; however, we will generally be required to include
their current taxable income in our calculation of REIT taxable income.

34

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Liquidity
and Capital Resources

We
held cash and cash equivalents of $19.4 million at March 31, 2006.

Our
operating activities provided cash of $22.9 million for the three months ended
March 31, 2006, primarily through net income of $19.2 million, reduced by net
premium and discount amortization of $5.8 million proceeds from principal
payments and sales of loans held for sale of $92.3 million, $1.8 million of
other-than-temporary impairment of available-for-sale securities, a $1.8
million loss on trading securities and $0.5 million of share-based
compensation. These net increases to cash were offset primarily by net purchase
of loans held for sale of $85.5 million, net change in operating assets and
liabilities of $7.2 million, net realized gains of $3.9 million and $0.4
million related to available-for-sale securities and loans held for sale,
respectively, and $1.5 million related to the net derivative impact on
operating activities.

Our
investing activities used cash of $351.5 million during the three months ended
March 31, 2006 primarily from purchase of available-for-sale securities, loans
held for investment, and other investments totaling $1.1 billion, offset
primarily by proceeds received on sale of available-for-sale securities of
$397.8 million, principal payments received on available-for-sale securities
and loans of $326.4 million and $15.0 million, respectively.

Our
financing activities provided cash of $312.4 million during the three months
ended March 31, 2006, primarily from net borrowings under repurchase agreements
of $331.7 million, offset by debt issuance costs of $1.2 million and dividend
payments of $18.1 million.

Sources of Funds

In
addition to our December 2004 initial private offering, and June 2005 initial
public offering, our primary source of funding has consisted of net proceeds
from repurchase agreements. Additionally, we have generated proceeds through
long-term debt and equity securities of Market Square and Pinetree, the
issuance of trust preferred debt securities, and more recently, closed a $300.0
million alternative asset warehouse funding facility with Wachovia Capital
Markets, LLC.

The
following is a summary of our borrowings at March 31, 2006:

|                                                      |  |                         |           |                                |   |                         |   |       |         |   |   |           |  
|----------------------------------------------------- |  | ----------------------- | --------- | ------------------------------ | - | ----------------------- | - | ----- | ------- | - | - | --------- | -
|                                                      |  | Repurchase
  Agreements |           | Trust
  Preferred
  Securities |   | Term
  Financing
  CDOs |   | Total |        
|                                                      |  |                         |           |                                |   |                         |   |       |        
|Outstanding balance                                   |  | $                       | 7,116,051 |                                | $ | 51,550                  |   | $     | 564,000 |   | $ | 7,731,601 |  
|Weighted average borrowing rate                       |  |                         | 4.74      | %                              |   | 8.16                    | % |       | 5.05    | % |   | 4.79      | %
|Weighted-average remaining maturity (in years)        |  |                         | 0.09      |                                |   | 29.60                   |   |       | 25.61   |   |   | 2.15      |  
|Fair value of collateral (including accrued interest) |  | $                       | 7,223,591 |                                |   | n/a                     |   | $     | 619,929 |   |   | n/m       |  

| |                     
| | --------------------
| |                     
| | n/m  not meaningful

For
the three months ended March 31, 2006, net proceeds from repurchase agreements
totaled $7.1 billion, with a weighted-average current borrowing rate of 4.74%,
were primarily used to finance the acquisition of mortgage-related assets. We
expect to continue to borrow funds in the form of repurchase agreements. As of
March 31, 2006, we had established 17 borrowing arrangements with various
investment banking firms and other lenders, 13 of which were in use on March
31, 2006. Increases in short-term interest rates could negatively impact the
valuation of our mortgage-related assets, which could limit our borrowing
ability or cause our lenders to initiate margin calls. Amounts due upon
maturity of our repurchase agreements will be funded primarily through the
rollover/reissuance of repurchase agreements and monthly principal and interest
payments received on our mortgage-backed securities.

On
March 10, 2006, we entered into a $300 million warehouse funding agreement with
Wachovia Capital Markets, LLC, or the Facility. Financing under the Facility
will be secured by assets ranging from large syndicated bank loans to
subordinated notes and preferred stock. Advance rates under the Facility will vary
by asset type. The Facility is available to two bankruptcy remote special
purpose vehicles (DWFC, LLC and Deerfield Triarc TRS (Bahamas) Ltd ), which are
consolidated pursuant to the requirements of FIN 46R. We expect to pursue term
funding of these assets via securitization in a CDO structure at some point in
the future. We expect that the Facility will allow us to utilize leverage for
our loan portfolio that was previously being funded with equity.

35

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The
following table presents certain information regarding the amount at risk
related to our repurchase agreements as of March 31, 2006:

|                                     |  |                        |         |                                         |  |    | 
|------------------------------------ |  | ---------------------- | ------- | --------------------------------------- |  | -- | 
|                                     |  | Amount
  at
  Risk (1) |         | Weighted-Average
  Remaining
  Maturity | 
|                                     |  |                        |         |                                         | 
|                                     |  | (In
  thousands)       |         | (In days)                               | 
|                                     |  |                        |         |                                         | 
|                                     |  |                        |         |                                         |  |    | 
|Repurchase Agreement Counterparties: |  |                        |         |                                         | 
|Bear, Stearns & Co. Inc.             |  | $                      | (4,270  | )                                       |  | 25 | 
|Barclays Bank Plc.                   |  |                        | 1,755   |                                         |  | 41 | 
|Citigroup, Inc.                      |  |                        | 2,184   |                                         |  | 38 | 
|Countrywide Securities Corp.         |  |                        | 18,118  |                                         |  | 38 | 
|Credit Suisse First Boston LLC       |  |                        | 25,293  |                                         |  | 31 | 
|JPMorgan Chase and Co.               |  |                        | (587    | )                                       |  | 28 | 
|Lehman Brothers Inc.                 |  |                        | 8,592   |                                         |  | 34 | 
|Merrill Lynch & Co., Inc.            |  |                        | 32,280  |                                         |  | 27 | 
|Mitsubishi Securities (USA), Inc.    |  |                        | 8,374   |                                         |  | 16 | 
|Morgan Stanley & Co. Incorporated    |  |                        | (903    | )                                       |  | 18 | 
|Nomura Securities International      |  |                        | (2,575  | )                                       |  | 34 | 
|UBS Securities LLC                   |  |                        | 19,279  |                                         |  | 47 | 
|                                     |  |                        |         |                                         |  |    | 
|Total                                |  | $                      | 107,540 |                                         |  |    | 
|                                     |  |                        |         |                                         |  |    | 

| |     |                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (1) | Equal to the fair value of securities pledged, and
  related accrued interest receivable, minus repurchase agreement liabilities,
  and related accrued interest payable.

Except
as noted below, the repurchase agreements for our repurchase facilities do not
include substantive provisions other than those contained in the standard
master repurchase agreement as published by the Bond Market Association. The
agreement for one repurchase facility includes provisions that (a) limit our
ability to resell or transfer bearer debt securities issued by a non-US entity
and securities that have not been registered under the Securities Act and (b)
establish an event of default upon our insolvency or our default under any
other agreement with the counterparty. Another repurchase facility includes
provisions that establish termination events if (a) we incur a net asset value
decline of 15% on a monthly basis, 25% on a quarterly basis and 35% on an
annual basis, except that net asset value reductions resulting from
distributions are excluded in measuring such declines, (b) we fail to maintain
a minimum net asset value of $188 million, (c) Deerfield Capital ceases to be
our manager, (d) we fail to qualify as a REIT or (e) we fail to deliver certain
documents, including monthly net asset value, prospectus, performance or other
reports delivered to our stockholders and an annual representation of our
president or chief financial officer. An event of default or termination event
under the standard master repurchase agreement or 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 to be payable immediately.

We
intend to make regular quarterly distributions of all or substantially all of
our REIT taxable income to holders of our common stock. We expect to declare
dividends on a quarterly basis and typically on a one-month lag, except for the
fourth quarter of the year, which we expect to declare in December in order to
avoid additional excise tax.  In order
to avoid corporate-level income tax on our income, we are required to
distribute 100% of our REIT taxable income and short-term capital gains on an
annual basis. This requirement can impact our liquidity and capital
resources.  On April 24, 2006 we
declared a dividend of $0.36 per share for the first quarter to holders of
record as of May 4, 2006 that will be paid on May 26, 2006.

For
our short-term (one year or less) and long-term liquidity, we also rely on the
cash flow from operations and our investments, primarily monthly principal and
interest payments to be received on our mortgage-backed securities, as well as
any primary securities offerings authorized by our board of directors and
through our match-funded CDO strategy. Our CDO strategy is dependent upon our
ability to place the match-funded debt we intend to create in the market at
spreads that provide a positive arbitrage. If spreads for CDO borrowings widen
or if demand for such borrowings ceases to exist, then our ability to execute
the CDO strategy will be restricted.

Based on
our current portfolio, leverage rate and available borrowing arrangements, we
believe that the net proceeds of our December 2004 private offering and June
2005 initial public offering combined with the cash flow from operations and
the utilization of borrowings, will be sufficient to enable us to meet
anticipated short-term (one year or less) liquidity requirements such as to
fund our investment activities, pay fees under our management agreement, fund
our distributions to stockholders and for general corporate expenses. However,
an increase in prepayment rates substantially above our expectations could
cause a temporary liquidity shortfall due to the timing of the necessary margin
calls on the financing

36

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arrangements
and the actual receipt of the cash related to principal paydowns. If our cash
resources are at any time insufficient to satisfy our liquidity requirements,
we may have to sell some of our investment securities. If required, the sale of
MBS at prices lower than their carrying value would result in losses and
reduced income. A sale of a portion of our MBS portfolio could also call into
question our intent and ability to hold the remaining securities until their
values recover, requiring us to recognize unrealized losses. As explained more
fully below, we have additional capacity to leverage our equity further should
the need for additional short term (one year or less) liquidity arise.

Our
ability to meet our long-term (greater than one year) liquidity and capital
resource requirements will be subject to renewing or replacing our debt
financing. We may increase our capital resources by consummating public
offerings of equity securities, possibly including classes of preferred stock,
common stock, commercial paper, medium-term notes, CDOs, collateralized
mortgage obligations and senior or subordinated notes. Such financing will
depend on market conditions for capital raises and for the investment of any
proceeds. If we are unable to renew, replace or expand our sources of financing
on substantially similar terms, it may have an adverse effect on our business
and results of operations. In the unlikely event of a liquidation, holders of
our debt securities and shares of preferred stock and lenders with respect to
other borrowings will receive a distribution of our available assets prior to
the holders of our common stock.

We
generally seek to borrow between eight and 12 times the amount of our equity.
At March 31, 2006, our total debt was $7.7 billion, which represented a
leverage ratio of approximately 10.9 times equity.

Estimated REIT
Taxable Income

Estimated
REIT taxable income, which is a non-GAAP financial measure, is calculated
according to the requirements of the Internal Revenue Code, rather than GAAP.
The following table reconciles GAAP net income to estimated REIT taxable income
for the three months ended March 31, 2006:

|                                                                              |  |                                       |        |  
|----------------------------------------------------------------------------- |  | ------------------------------------- | ------ | -
|                                                                              |  | Three months
  ended
  March 31, 2006 |       
|                                                                              |  |                                       |       
|                                                                              |  | (In thousands)                        |       
|                                                                              |  |                                       |        |  
|GAAP net income                                                               |  | $                                     | 19,163 |  
|                                                                              |  |                                       |        |  
|                                                                              |  |                                       |        |  
|Adjustments to GAAP net income:                                               |  |                                       |        |  
|Organization costs                                                            |  |                                       | (2     | )
|Impairment of available-for sale securities
  not recognized for tax purposes |  |                                       | 1,838  |  
|Amortization/accretion of security premium
  (discount)                       |  |                                       | 831    |  
|Security basis difference recognized upon
  sale                              |  |                                       | (478   | )
|Hedge ineffectiveness                                                         |  |                                       | (589   | )
|Stock and options grant                                                       |  |                                       | 385    |  
|Unrealized gain (loss)                                                        |  |                                       | (127   | )
|Amortization of terminated swaps                                              |  |                                       | 131    |  
|Amortization of financing element in
  Pinetree swap                          |  |                                       | (60    | )
|Gain on intercompany sale eliminated for
  GAAP                               |  |                                       | 243    |  
|Non-allowable deduction for meals and
  entertainment                         |  |                                       | 27     |  
|Exclusion of Deerfield Triarc TRS Holdings,
  LLC net income                  |  |                                       | (32    | )
|                                                                              |  |                                       |        |  
|Net adjustments to GAAP net income                                            |  |                                       | 2,167  |  
|                                                                              |  |                                       |        |  
|                                                                              |  |                                       |        |  
|Estimated REIT taxable income                                                 |  | $                                     | 21,330 |  
|                                                                              |  |                                       |        |  

The
Amortization/accretion of security premium (discount) line above includes a
difference for accretion of original issue discount, or OID on interest-only,
or IO, securities. The tax accretion calculations of OID on IO securities are
dependent on factors provided by administrators of the underlying mortgage
pools. These factors are influenced by actual versus planned prepayment
activity and net interest spread on the underlying mortgage pools, and as a
result, recognition of tax OID accretion income is subject to change. We
therefore believe that the OID contribution to our estimated taxable income as
of March 31, 2006 is not necessarily indicative of what our final taxable
income will be for the year. OID accretes to the tax basis of the IO
securities, thus upon sale of such a security, the tax cost basis will
typically be higher than the book basis resulting in a smaller tax gain.

37

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We
believe that the presentation of our estimated REIT taxable income is useful to
investors because it demonstrates to investors the estimated minimum amount of
distributions we must make in order to avoid corporate level income tax.
However, beyond our intent to distribute to our stockholders at least 90% of
our REIT taxable income on an annual basis in order to maintain our REIT
qualification, we cannot guarantee that the amount of distributions we make
will necessarily correlate to our estimated REIT taxable income. Rather, we
expect to also consider our cash flow and what we believe to be an appropriate
and competitive dividend yield relative to other specialty finance companies
and mortgage REITs. Estimated REIT taxable income will not necessarily bear any
close relation to cash flow. Accordingly, we do not consider estimated 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 estimated REIT taxable income
as a measure of our financial performance over any period, and our presentation
of estimated REIT taxable income may not be comparable to similarly titled
measures of other companies, who may use different calculations. As a result,
estimated REIT taxable income should not be considered as a substitute for our
GAAP net income as a measure of our financial performance.

Inflation

Virtually
all of our assets and liabilities are interest rate sensitive. As a result,
interest rates and other factors influence our performance more than inflation.
Changes in interest rates do not necessarily correlate with inflation rates or
changes in inflation rates. Our financial statements are prepared in accordance
with GAAP and our distributions are determined by our board of directors based
primarily on our net income as calculated for tax purposes and cash flow
considerations; in each case, our activities and balance sheet are measured
with reference to historical cost or fair value without considering inflation.

Item 3. Quantitative and Qualitative
Disclosures About Market Risk

As
of March 31, 2006, the primary component of our market risk was interest rate
risk, as described below. While we do not seek to avoid risk completely, we
believe that a significant portion of the risk can be quantified from
historical experience. We seek to actively manage interest rate risk, and
regularly assess whether earnings in the portfolio include appropriate
compensation for the inherent market risks to which it is exposed. In light of
these risks, we regularly consider our capital levels and believe that our
capital is sufficient.

Interest Rate Risk

We
are subject to interest rate risk primarily in connection with our investments
in hybrid adjustable-rate and fixed-rate RMBS and our related debt obligations,
which are generally repurchase agreements of short duration that periodically
reset at current market rates. We seek to manage this risk through utilization
of derivative contracts, primarily interest rate swap agreements.

Effect on Net
Interest Income

We
fund our investments in long-term, hybrid adjustable-rate and fixed-rate RMBS
with short-term borrowings under repurchase agreements. During periods of
rising interest rates, short-term borrowing costs tend to increase while the
income earned on hybrid adjustable-rate (during the fixed-rate component of
such securities) and fixed-rate RMBS may 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.

In
order to mitigate our interest rate exposure, we have entered into 201
designated interest rate swap hedging transactions as of March 31, 2006. The
following table, in thousands, summarizes the expiration dates of these
contracts and their notional amounts:

| |                 |  |                |           | 
| | --------------- |  | -------------- | --------- | 
| | Expiration Date |  | NotionalAmount |          
| |                 |  |                |          
| |                 |  | (In thousands) |          
| | 2006            |  | $              | 83,000    | 
| | 2007            |  |                | 575,400   | 
| | 2008            |  |                | 3,335,150 | 
| | 2009            |  |                | 263,000   | 
| | 2010            |  |                | 884,200   | 
| | 2011            |  |                | 95,000    | 
| | 2015            |  |                | 238,700   | 
| |                 |  |                |           | 
| | Total           |  | $              | 5,474,450 | 
| |                 |  |                |           | 

38

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Hedging
techniques are partly based on assumed levels of prepayments of our 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 instruments are highly complex and
may produce volatile returns.

Extension Risk

The
majority of our securities portfolio is hybrid adjustable-rate RMBS, which have
interest rates that are fixed for the first few years of the loan (typically in
three, five, seven or 10 years) and thereafter reset periodically on the same
basis as adjustable-rate RMBS. We compute the projected weighted-average life
of our hybrid adjustable-rate 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
funded by a short-term borrowing, we may, but are not required to, enter into
an interest rate swap agreement or other hedging instrument that effectively
fixes a portion of our borrowing costs for a period close to the anticipated
weighted-average life of the fixed-rate portion of the related RMBS. This
strategy is designed to protect a portion of our portfolio from increased
funding costs due to rising interest rates because the borrowing costs are not
fixed for the duration of the fixed-rate portion of the related residential
mortgage-backed security.

We
have structured our swaps to roll off or expire in conjunction with the
estimated weighted average life of the fixed period of the mortgage portfolio.
However, if prepayment rates decrease in a rising interest rate environment,
the weighted average life of the fixed-rate portion of the related 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 effectively fixed after the end of the hedging instrument
while the income earned on the remaining hybrid adjustable-rate RMBS would
remain fixed for a period of time. This situation may also cause the market
value of our hybrid adjustable-rate RMBS 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 RMBS Interest Rate Cap Risk

We
also invest in hybrid adjustable-rate RMBS which are based on mortgages that
are typically 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 our repurchase
agreements will not be 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 RMBS could be limited by caps. These factors could lower
our net interest income or cause a net loss during periods of rising interest
rates, which would harm our financial condition, cash flows and results of
operations.

Interest Rate
Mismatch Risk

We
intend to fund a substantial portion of our acquisitions of RMBS 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 the RMBS. Thus, we
anticipate that in most 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 hedging strategies discussed above.

Our
analysis of risks is based on managements experience, estimates, models and
assumptions. These analyses rely on models, which 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 reflected herein.

Prepayment Risk

Prepayments
are the full or partial repayment of principal prior to contractual due dates
of a mortgage loan and often occur due to refinancing activity. 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 spread between long-term and short-term
interest rates declines or becomes negative. Prepayments of RMBS could impact
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 residential mortgage-backed security would have held
such security while it was less profitable and lost the opportunity to receive
interest at the fully-

39

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indexed rate
over the expected life of the adjustable-rate residential mortgage-backed
security. Although we currently do not own any adjustable-rate RMBS with teaser
rates, we may obtain some in the future which would expose us to this
prepayment risk. Additionally, we currently own RMBS that were purchased at a
premium. The prepayment of such RMBS at a rate faster than anticipated would
result in a write-off of any remaining capitalized premium amount and a
consequent reduction of our net interest income by such amount. Finally, in the
event that we are unable to acquire new RMBS or are forced to acquire RMBS with
lower coupon rates due to prevailing market conditions to replace the prepaid
RMBS, our financial condition, cash flow and results of operations could be
negatively impacted.

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 third party financial models and
empirical data. Different models and methodologies can produce different duration
numbers for the same securities.

The
following sensitivity analysis table shows the estimated impact on the
estimated fair value of our RMBS interest rate-sensitive investments (including
available-for-sale investments of $8.1 billion and trading investments of $2.5
million), repurchase agreement liabilities, and interest rate swaps at March
31, 2006, 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 | 
|                                                  |  |                                          |           |           |   |                                          | 
|                                                  |  | (In
  Thousands)                         |          
|                                                  |  |                                          |          
|RMBS                                              |  |                                          |           |           |   |                                          |  |   |           |  
|Fair value(1)                                     |  | $                                        | 8,271,630 |           | $ | 8,101,936                                |  | $ | 7,872,435 |  
|Change in fair value                              |  | $                                        | 169,694   |           |   |                                          |  | $ | (229,501  | )
|Change as a percent of fair
  value               |  |                                          | 2.09      | %         |   |                                          |  |   | -2.83     | %
|Designated
  and Undesignated Interest Rate Swaps |  |                                          |           |           |   |                                          |  |   |           |  
|Fair value                                        |  | $                                        | (22,441   | )         | $ | 110,541                                  |  | $ | 238,626   |  
|Change in fair value                              |  | $                                        | (132,982  | )         |   |                                          |  | $ | 128,085   |  
|Change as a percent of fair
  value               |  |                                          | n/m       |           |   |                                          |  |   | n/m       |  
|Net
  Portfolio Impact                            |  | $                                        | 36,712    |           |   |                                          |  | $ | (101,416  | )

| |                      |                                                              
| | -------------------- | -------------------------------------------------------------
| |                     
| | (1)                  | Includes RMBS classified as
  available-for-sale and trading.
|
| | n/m  not meaningful

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
impact 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.

At
March 31, 2006, substantially all investments in our alternative investments
portfolio (non-MBS) are instruments with variable interest rates that are indexed
to LIBOR. Because the variable rates on these instruments are short term in
nature, we are not exposed to material changes in fair value as a result of
changes in interest rates.

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:

|  |                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | monitoring and adjusting, if necessary, the reset index and
  interest rate related to our MBS and our borrowings;                                      
|  |                                                                                                                                                         
| | attempting to structure our borrowing agreements to have a range
  of different maturities, terms, amortizations and interest rate adjustment
  periods;

40

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|  |                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | using derivatives, financial futures, swaps, options, caps,
  floors, mortgage derivatives and forward sales, to adjust the interest rate
  sensitivity of our RMBS and our borrowings; and                             
|  |                                                                                                                                                                                                                         
| | actively managing, on an aggregate basis,
  the interest rate indices, interest rate adjustment periods, and gross reset
  margins of our RMBS and the interest rate indices and adjustment periods of
  our borrowings.

We
seek to manage our credit risk exposure in repurchase agreements and derivative
transactions by transacting only with investment grade counterparties and
obtaining collateral where appropriate. We evaluate the creditworthiness of all
potential counterparties by reviewing such factors as credit rating, financial
position and reputation, and by setting limits on open positions with any
single counterparty. To the extent that we hold corporate bonds and other
credit sensitive securities, we are exposed to credit risk relating to whether
the issuer will meet its principal and interest obligations. We seek to manage
this exposure by performing investment due diligence on issuers and by seeking
to obtain returns on investment commensurate with their risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and
Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, the Company carried out an evaluation, with the
participation of the Companys management, including the Companys Chief Executive
Officer and Senior Vice President-Chief Financial Officer, of the effectiveness
of the Companys disclosure controls and procedures (as defined under Rule
13a-15(e) under the Exchange Act as of the end of the period covered by this
report. Based upon that evaluation, the Companys Chief Executive Officer and
Senior Vice President-Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by us in the reports that
we file or submit under the Exchange Act was recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.

Change in Internal Control Over Financial
Reporting

No
change in the Companys internal control over financial reporting was made
during the Companys most recent fiscal quarter that materially affected, or is
reasonably likely to materially affect, the Companys internal control over
financial reporting.

Inherent Limitations on Effectiveness of
Controls

There
are inherent limitations in the effectiveness of any control system, including
the potential for human error and the circumvention or overriding of the
controls and procedures. Additionally, judgments in decision-making can be
faulty and breakdowns can occur because of simple error or mistake. An
effective control system can provide only reasonable, not absolute, assurance
that the control objectives of the system are adequately met. Accordingly, the
Companys management, including the Companys Chief Executive Officer and
Senior Vice President-Chief Financial Officer does not expect that the
Companys control system can prevent or detect all error or fraud. Finally,
projections of any evaluation or assessment of effectiveness of a control
system to future periods are subject to the risks that, over time, controls may
become inadequate because of changes in an entitys operating environment or
deterioration in the degree of compliance with policies or procedures.

PART II. OTHER INFORMATION

ITEM 1A. Risk Factors

As
of March 31, 2006, there have been no material changes in the risk factors of
the Company as previously disclosed in the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2005.

41

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ITEM 6. Exhibits

(b) Documents filed as part of this Report:

| |      |   |                                                                                                                                                                                                                                          
| | ---- | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | No.  |   | Description                                                                                                                                                                                                                              
| | 3.1  |  | Articles of
  Amendment and Restatement of Deerfield Triarc Capital Corp.*                                                                                                                                                               
| | 3.2  |  | Bylaws of Deerfield
  Triarc Capital Corp.*                                                                                                                                                                                              
| | 4.1  |  | Form of
  Certificate for Common Stock for Deerfield Triarc Capital Corp.*                                                                                                                                                               
| | 4.2  |  | Junior
  Subordinated Indenture between Deerfield Triarc Capital LLC and JPMorgan
  Chase Bank, National Association, as trustee, dated September 29, 2005.**                                                                            
| | 4.3  |  | Amended and
  Restated Trust Agreement among Deerfield Triarc Capital LLC, JPMorgan Chase
  Bank, National Association, Chase Bank USA, National Association and the
  Administrative Trustees named therein, dated September 29, 2005.**
| | 4.4  |  | Junior
  Subordinated Note due 2035 in the principal amount of $51,550,000, dated
  September 29, 2005.***                                                                                                                               
| | 10.1 |  | Summary of
  2006 Independent Director Compensation                                                                                                                                                                                      
| | 31.1 |  | Certification
  of Principal Executive Officer Pursuant to Rule 13a-14(a) under the
  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
  Sarbanes-Oxley Act of 2002.                                           
| | 31.2 |  | Certification
  of Principal Financial Officer Pursuant to Rule 13a-14(a) under the
  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
  Sarbanes-Oxley Act of 2002.                                           
| | 32.1 |  | Certification
  of Principal Executive Officer and Principal Financial Officer pursuant to 18
  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
  Act of 2002.                                             

|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|*   | Incorporated
  by Reference to the Companys Registration Statement on Form S-11
  (Registration No. 333-123762), as amended.                                
|    |                                                                                                                                                              
|**  | Incorporated
  by reference to the Companys Current Report on Form 8-K, as filed with the
  SEC on October 4, 2005.                                         
|    |                                                                                                                                                              
|*** | Incorporated
  by reference to the Companys Report on Form 10-Q for the quarterly period
  ended September 30, 2005 filed with the SEC on November 11, 2005.

SIGNATURES

Pursuant
to the requirements of Section 13 or 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.

|                     |                                                                       | 
|-------------------- | --------------------------------------------------------------------- | 
|                     | DEERFIELD
  TRIARC CAPITAL CORP.                                     
|                     | (Registrant)                                                         
|                     |                                                                      
|Date: May
  15, 2006 | By: /S/
  JONATHAN W. TRUTTER                                         | 
|                     |                                                                       | 
|                     | Jonathan W.
  Trutter, Chief Executive Officer                       
|                     | (On behalf
  of the Company)                                         
|                     |                                                                      
|Date: May
  15, 2006 | By: /S/
  RICHARD G. SMITH                                            | 
|                     |                                                                       | 
|                     | Richard G.
  Smith, Senior Vice President and Chief Financial Officer
|                     | (Principal
  Financial and Accounting Officer)                       

42

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