---

---

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

FORM 10-Q

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

For the quarterly period ended September 30,
2007

OR

oTRANSITION 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         
|                         |  | (I.R.S. Employer   
|(State of incorporation) |  | Identification No.)

6250 North 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) 
Securities registered pursuant to Section 12(b) of the Act:

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 x | Non-accelerated
 filer o

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

Yes o No x

There were 51,752,720 shares
of the registrants Common Stock outstanding as of November 7th,
2007.

---

---



DEERFIELD TRIARC CAPITAL CORP.2007 QUARTERLY REPORT ON FORM 10-QFOR THE QUARTER ENDED SEPTEMBER 30, 2007INDEX

|           |  |                                                                                                            |    |     
|---------- |  | ---------------------------------------------------------------------------------------------------------- | -- | ----
|           |  |                                                                                                            |    | Page
|Part I.    |  | Financial
 Information                                                                                     |    |     
|           |  |                                                                                                            |    |     
|Item 1.    |  | Condensed Consolidated Financial Statements and Notes
 (Unaudited)                                         |    |     
|           |  | Condensed Consolidated Balance
Sheets  September 30,
 2007 and December 31, 2006                          |    | 4   
|           |  | Condensed Consolidated Statements of
Operations 
 Three and Nine Months Ended September 30, 2007 and 2006 |    | 5   
|           |  | Condensed Consolidated Statement of
Stockholders
 Equity  Nine Months Ended September 30, 2007           |    | 6   
|           |  | Condensed Consolidated Statements of
Cash Flows 
 Nine Months Ended September 30, 2007 and 2006           |    | 7   
|           |  | Notes to Condensed Consolidated
Financial Statements                                                       |    | 8   
|Item 2.    |  | Managements Discussion and Analysis of Financial
 Condition and Results of Operations                     |    | 26  
|Item 3.    |  | Quantitative
 and Qualitative Disclosures About Market Risk                                                |    | 60  
|Item 4.    |  | Controls
 and Procedures                                                                                   |    | 64  
|           |  |                                                                                                            |    |     
|Part II.   |  | Other
 Information                                                                                         |    |     
|           |  |                                                                                                            |    |     
|Item 1A.   |  | Risk
 Factors                                                                                              |    | 64  
|Item 4.    |  | Submission
 of Matters to a Vote of Security Holders                                                       |    | 66  
|Item 6.    |  | Exhibits                                                                                                   |    | 66  
|           |  |                                                                                                            |    |     
|Signatures |  |                                                                                                            | 66

2

---



SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

The
statements in this Quarterly Report on Form 10-Q that are not historical facts,
including information concerning possible or assumed future results of
operations of the Company and statements preceded by, followed by, or that
include the words may, believes, plans, expects, anticipates,
estimates, intends, projects, will 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 Quarterly 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 the recent dislocations in the sub-prime mortgage sector and weakness
in the broader mortgage market, and their potential effect on our ability to
obtain financing, our financing costs, the marketability and value of our
portfolio securities, our book value, our compliance with real estate
investment trust (REIT) qualification requirements, and other aspects of our
business; higher than expected prepayment rates on the mortgages underlying our
mortgage securities holdings; our inability to obtain favorable interest rates
or margin terms on the financing that we need to leverage our mortgage
securities and other positions; increased rates of default on our loan
portfolio (which risk rises as the portfolio seasons), and decreased recovery
rates on defaulted loans; flattening or inversion of the yield curve (short
term interest rates increasing at greater rate than longer term rates),
reducing our net interest income on our financed mortgage securities positions;
our inability to adequately hedge our holdings sensitive to changes in interest
rates; narrowing of credit spreads, thus decreasing our net interest income on
future credit investments (such as bank loans); changes in REIT qualification
requirements, making it difficult for us to conduct our investment strategy;
lack of availability of qualifying real estate-related investments; disruption
in the services we receive from Deerfield Capital Management LLC, our
Manager, such as loss of key portfolio management personnel; our inability to
continue to issue collateralized debt obligation vehicles (which can provide us
with attractive financing for debt securities investments) on favorable terms
or at all; adverse changes in accounting principles, tax law, or
legal/regulatory requirements; competition with other REITs for investments
with limited supply; changes in the general economy or debt markets in which we
invest; failure to comply with laws and regulations; limitations and restrictions
contained in instruments and agreements governing indebtedness and preferred
stock; ability to raise capital and secure additional financing; liability
resulting from actual or potential future litigation; competition and the
impact of competition; actions of foreign governments; and other risks and
uncertainties disclosed from time to time in our filings with the Securities
and Exchange Commission, all of which are difficult or impossible to predict
accurately and many of which are beyond our 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 Quarterly 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 this Quarterly
Report on Form 10-Q, including those set forth under the sections captioned
Part I  Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations and Part II  Item 1A. Risk Factors as well as the
Annual Report on Form 10-K, 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.

3

---



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)

|                                                                                                                               |  |                      |           |                     |   |           |  
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------------- | --------- | ------------------- | - | --------- | -
|                                                                                                                               |  | September 30,
  2007 |           | December 31,
  2006 |  
|                                                                                                                               |  |                      |           |                     |  
|ASSETS                                                                                                                         |  |                      |           |                     |   |           |  
|Cash and cash equivalents                                                                                                      |  | $                    | 125,850   |                     | $ | 72,523    |  
|Due from broker, including $93,546 and $176,650 of securities
  pledgedat fair value                                          |  |                      | 102,112   |                     |   | 257,818   |  
|Restricted cash and cash equivalents                                                                                           |  |                      | 45,045    |                     |   | 27,243    |  
|Available-for-sale securities, including $6,530,412 and $7,336,770
  pledgedat fair value                                     |  |                      | 6,813,374 |                     |   | 7,941,091 |  
|Trading securities, including $541,859 and $89,108 pledgedat fair
  value                                                     |  |                      | 816,278   |                     |   | 94,019    |  
|Other investments                                                                                                              |  |                      | 6,483     |                     |   | 6,382     |  
|Derivative assets                                                                                                              |  |                      | 16,689    |                     |   | 55,624    |  
|Loans held for sale                                                                                                            |  |                      | 271,248   |                     |   | 282,768   |  
|                                                                                                                               |  |                      |           |                     |   |           |  
|Loans                                                                                                                          |  |                      | 475,311   |                     |   | 432,335   |  
|Allowance for loan losses                                                                                                      |  |                      | (8,933    | )                   |   | (2,000    | )
|                                                                                                                               |  |                      |           |                     |   |           |  
|Loans, net of allowance for loan losses                                                                                        |  |                      | 466,378   |                     |   | 430,335   |  
|                                                                                                                               |  |                      |           |                     |   |           |  
|Interest receivable                                                                                                            |  |                      | 46,304    |                     |   | 51,627    |  
|Other receivable                                                                                                               |  |                      | 17,772    |                     |   | 18,362    |  
|Prepaid and other assets                                                                                                       |  |                      | 17,897    |                     |   | 12,199    |  
|                                                                                                                               |  |                      |           |                     |   |           |  
|                                                                                                                               |  |                      |           |                     |   |           |  
|TOTAL ASSETS                                                                                                                   |  | $                    | 8,745,430 |                     | $ | 9,249,991 |  
|                                                                                                                               |  |                      |           |                     |   |           |  
|LIABILITIES                                                                                                                    |  |                      |           |                     |   |           |  
|Repurchase agreements, including $36,189 and $46,858 of accrued
  interest                                                     |  | $                    | 6,811,182 |                     | $ | 7,372,035 |  
|Due to broker                                                                                                                  |  |                      | 275,074   |                     |   | 158,997   |  
|Dividends payable                                                                                                              |  |                      |          |                     |   | 21,723    |  
|Derivative liabilities                                                                                                         |  |                      | 74,333    |                     |   | 21,456    |  
|Interest payable                                                                                                               |  |                      | 35,733    |                     |   | 33,646    |  
|Long term debt                                                                                                                 |  |                      | 995,118   |                     |   | 948,492   |  
|Management and incentive fee payable to related party                                                                          |  |                      | 1,048     |                     |   | 1,092     |  
|Other payables                                                                                                                 |  |                      | 2,252     |                     |   | 3,597     |  
|                                                                                                                               |  |                      |           |                     |   |           |  
|                                                                                                                               |  |                      |           |                     |   |           |  
|TOTAL LIABILITIES                                                                                                              |  |                      | 8,194,740 |                     |   | 8,561,038 |  
|                                                                                                                               |  |                      |           |                     |   |           |  
|                                                                                                                               |  |                      |           |                     |   |           |  
|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; 51,752,720 and 51,721,903 shares
  issued and outstanding (including 134,616 restricted shares) |  |                      | 51        |                     |   | 51        |  
|Additional paid-in capital                                                                                                     |  |                      | 749,020   |                     |   | 748,803   |  
|Accumulated other comprehensive loss                                                                                           |  |                      | (155,966  | )                   |   | (47,159   | )
|Accumulated deficit                                                                                                            |  |                      | (42,415   | )                   |   | (12,742   | )
|                                                                                                                               |  |                      |           |                     |   |           |  
|                                                                                                                               |  |                      |           |                     |   |           |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                     |  |                      | 550,690   |                     |   | 688,953   |  
|                                                                                                                               |  |                      |           |                     |   |           |  
|                                                                                                                               |  |                      |           |                     |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                     |  | $                    | 8,745,430 |                     | $ | 9,249,991 |  
|                                                                                                                               |  |                      |           |                     |   |           |  

See notes to condensed consolidated
financial statements.

4

---



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

|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|------------------------------------------------------- |  | -------------------------------- | ---------- | ------------------------------- | - | ---------- |  | ---- | ---------- | - | - | ---------- | 
|                                                        |  | Three months ended September 30, |            | Nine months ended September 30, |  
|                                                        |  |                                  |            |                                 |  
|                                                        |  | 2007                             |            | 2006                            |   | 2007       |  | 2006 |           
|                                                        |  |                                  |            |                                 |   |            |  |      |           
|Revenues                                                |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|Net interest income:                                    |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|Interest income                                         |  | $                                | 125,765    |                                 | $ | 117,548    |  | $    | 378,176    |   | $ | 337,012    | 
|Interest expense                                        |  |                                  | 98,948     |                                 |   | 97,839     |  |      | 300,346    |   |   | 273,241    | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|Net interest income                                     |  |                                  | 26,817     |                                 |   | 19,709     |  |      | 77,830     |   |   | 63,771     | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|Provision for loan losses                               |  |                                  |           |                                 |   |           |  |      | 6,933      |   |   |           | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|Net interest income after provision for loan losses     |  |                                  | 26,817     |                                 |   | 19,709     |  |      | 70,897     |   |   | 63,771     | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|Expenses                                                |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|Management fee expense to related party                 |  |                                  | 2,710      |                                 |   | 3,715      |  |      | 9,470      |   |   | 11,020     | 
|Incentive fee expense to related party                  |  |                                  |           |                                 |   | 1,316      |  |      | 2,185      |   |   | 3,319      | 
|Professional services                                   |  |                                  | 1,418      |                                 |   | 588        |  |      | 2,835      |   |   | 1,514      | 
|Insurance expense                                       |  |                                  | 207        |                                 |   | 186        |  |      | 548        |   |   | 551        | 
|Other general and administrative expenses               |  |                                  | 721        |                                 |   | 378        |  |      | 1,881      |   |   | 1,326      | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|Total expenses                                          |  |                                  | 5,056      |                                 |   | 6,183      |  |      | 16,919     |   |   | 17,730     | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|Other Income and Gain (Loss)                            |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|Net gain (loss) on available-for-sale securities        |  |                                  | (23,176    | )                               |   | 1,780      |  |      | (20,870    | ) |   | 5,087      | 
|Net gain on trading securities                          |  |                                  | 5,645      |                                 |   | 3,042      |  |      | 2,597      |   |   | 1,283      | 
|Net gain (loss) on loans                                |  |                                  | (7,451     | )                               |   | 495        |  |      | (6,981     | ) |   | 855        | 
|Net gain (loss) on derivatives                          |  |                                  | (20,216    | )                               |   | 392        |  |      | (14,843    | ) |   | 3,224      | 
|Dividend income and other net gain (loss)               |  |                                  | (118       | )                               |   | 610        |  |      | (215       | ) |   | 804        | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|Net other income and gain (loss)                        |  |                                  | (45,316    | )                               |   | 6,319      |  |      | (40,312    | ) |   | 11,253     | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|Income (loss) before income tax expense                 |  |                                  | (23,555    | )                               |   | 19,845     |  |      | 13,666     |   |   | 57,294     | 
|Income tax expense (benefit)                            |  |                                  | (320       | )                               |   | 282        |  |      | (120       | ) |   | 404        | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|NET INCOME (LOSS)                                       |  | $                                | (23,235    | )                               | $ | 19,563     |  | $    | 13,786     |   | $ | 56,890     | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|NET INCOME (LOSS) PER SHARE - BASIC                     |  | $                                | (0.45      | )                               | $ | 0.38       |  | $    | 0.27       |   | $ | 1.11       | 
|NET INCOME (LOSS) PER SHARE - DILUTED                   |  | $                                | (0.45      | )                               | $ | 0.38       |  | $    | 0.27       |   | $ | 1.10       | 
|                                                        |  |                                  |            |                                 |   |            |  |      |            |   |   |            | 
|WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING - Basic   |  |                                  | 51,618,105 |                                 |   | 51,430,136 |  |      | 51,600,888 |   |   | 51,406,276 | 
|                                                       
|WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING - Diluted |  |                                  | 51,618,105 |                                 |   | 51,615,604 |  |      | 51,705,572 |   |   | 51,560,210 | 

See notes to condensed
consolidated financial statements.

5

---



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

|                                                                                           |  |              |        |                              |   |                                         |  |                      |         |       |   |                               |   |   |         |   |   |         |   |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------ | ------ | ---------------------------- | - | --------------------------------------- |  | -------------------- | ------- | ----- | - | ----------------------------- | - | - | ------- | - | - | ------- | - | - | ------- | -
|                                                                                           |  | Common Stock |        | Additional
 Paid-in
 Capital |   | Accumulated
 Other
 Comprehensive
 Loss |  | Accumulated
 Deficit |         | Total |   | Comprehensive
 Income
 (Loss) |  
|                                                                                           |  |              |        |                              |   |                                         |  |                     
|                                                                                           |  | Shares       |        | Par
 Value                   |   |                                         |  |                      |         |      
|                                                                                           |  |              |        |                              |   |                                         |  |                      |         |       |   |                               |   |   |        
|                                                                                          
|Balance - December 31, 2006                                                                |  |              | 51,722 |                              | $ | 51                                      |  | $                    | 748,803 |       | $ | (47,159                       | ) | $ | (12,742 | ) | $ | 688,953 |   |   |         |  
|                                                                                           |  |              |        |                              |   |                                         |  |                      |         |       |   |                               |   |   |         |   |   |         |   |   |         |  
|Net income                                                                                 |  |              |        |                              |   |                                         |  |                      |         |       |   |                               |   |   | 13,786  |   |   | 13,786  |   | $ | 13,786  |  
|Available-for-sale securities - fair value adjustment net of
 reclassification adjustments |  |              |       |                              |   |                                        |  |                      |        |       |   | (24,825                       | ) |   |        |   |   | (24,825 | ) |   | (24,825 | )
|Designated derivatives - fair value adjustment net of
 reclassification adjustments        |  |              |       |                              |   |                                        |  |                      |        |       |   | (83,982                       | ) |   |        |   |   | (83,982 | ) |   | (83,982 | )
|                                                                                           |  |              |        |                              |   |                                         |  |                      |         |       |   |                               |   |   |         |   |   |         |   |   |         |  
|                                                                                           |  |              |        |                              |   |                                         |  |                      |         |       |   |                               |   |   |         |   |   |         |   |   |         |  
|Comprehensive income (loss)                                                                |  |              |        |                              |   |                                         |  |                      |         |       |   |                               |   |   |         |   |   |         |   | $ | (95,021 | )
|                                                                                           |  |              |        |                              |   |                                         |  |                      |         |       |   |                               |   |   |         |   |   |         |   |   |         |  
|                                                                                           |  |              |        |                              |   |                                         |  |                      |         |       |   |                               |   |   |         |   |   |         |   |   |         |  
|Dividends declared                                                                         |  |              |       |                              |   |                                        |  |                      |        |       |   |                              |   |   | (43,459 | ) |   | (43,459 | ) |   |         |  
|Share-based compensation                                                                   |  |              | 31     |                              |   |                                        |  |                      | 217     |       |   |                              |   |   |        |   |   | 217     |   |   |         |  
|                                                                                           |  |              |        |                              |   |                                         |  |                      |         |       |   |                               |   |   |         |   |   |         |   |   |         |  
|Balance - September 30, 2007                                                               |  |              | 51,753 |                              | $ | 51                                      |  | $                    | 749,020 |       | $ | (155,966                      | ) | $ | (42,415 | ) | $ | 550,690 |   |   |         |  
|                                                                                           |  |              |        |                              |   |                                         |  |                      |         |       |   |                               |   |   |         |   |   |         |   |   |         |  

See notes to condensed
consolidated financial statements.

6

---



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

|                                                                                             |  |                                 |            |      |   |            |  
|-------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | ---- | - | ---------- | -
|                                                                                             |  | Nine months ended September 30, |           
|                                                                                             |  |                                 |           
|                                                                                             |  | 2007                            |            | 2006 |  
|                                                                                             |  |                                 |            |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |  |                                 |            |      |   |            |  
|Net income                                                                                   |  | $                               | 13,786     |      | $ | 56,890     |  
|Adjustments to reconcile net income to net cash
 provided by (used in) operating activities: |  |                                 |            |      |   |            |  
|Net premium and discount amortization on
investments, loans and debt
 issuance               |  |                                 | 19,159     |      |   | 20,171     |  
|Share-based compensation                                                                     |  |                                 | 214        |      |   | 1,467      |  
|Hedge ineffectiveness                                                                        |  |                                 | 1,088      |      |   | 742        |  
|Net purchase of trading securities                                                           |  |                                 | (721,301   | )    |   | (19,235    | )
|Net gain from trading securities                                                             |  |                                 | (2,597     | )    |   | (1,283     | )
|Other-than-temporary impairment on
available-for-sale securities                             |  |                                 | 16,567     |      |   | 2,034      |  
|Equity method loss on other investments                                                      |  |                                 | 449        |      |   | 361        |  
|Net proceeds (purchases) on loans held for
sale                                              |  |                                 | 13,965     |      |   | (6,077     | )
|Net (gain) loss on loans                                                                     |  |                                 | 7,061      |      |   | (197       | )
|Provision for loan losses                                                                    |  |                                 | 6,933      |      |   |           |  
|Net realized (gain) loss on available-for-sale
securities                                    |  |                                 | 4,303      |      |   | (7,121     | )
|Net changes in undesignated derivatives                                                      |  |                                 | 19,753     |      |   | 5,909      |  
|Net realized gain on designated
derivatives                                                  |  |                                 | (15,756    | )    |   | (4,266     | )
|Net cash paid on terminated designated
derivatives                                           |  |                                 | (7,554     | )    |   | (2,147     | )
|Changes in operating assets and
liabilities:                                                 |  |                                 |            |      |   |            |  
|Due from broker                                                                              |  |                                 | 16,706     |      |   |           |  
|Interest receivable                                                                          |  |                                 | (230       | )    |   | (17,065    | )
|Other receivable                                                                             |  |                                 | 607        |      |   | (1,982     | )
|Prepaid and other assets                                                                     |  |                                 | (6,887     | )    |   | (1,007     | )
|Accrued interest on repurchase agreements                                                    |  |                                 | (10,669    | )    |   | 13,526     |  
|Due to broker                                                                                |  |                                 | (21,685    | )    |   | 5,473      |  
|Interest payable                                                                             |  |                                 | 12,822     |      |   | 10,350     |  
|Management and incentive fee payable to related
party                                        |  |                                 | (41        | )    |   | 1,280      |  
|Other payables                                                                               |  |                                 | (1,038     | )    |   | 588        |  
|                                                                                             |  |                                 |            |      |   |            |  
|Net cash provided by (used in) operating
activities                                          |  |                                 | (654,345   | )    |   | 58,411     |  
|                                                                                             |  |                                 |            |      |   |            |  
|                                                                                             |  |                                 |            |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |  |                                 |            |      |   |            |  
|Change in restricted cash and cash
equivalents                                               |  |                                 | (17,587    | )    |   | 58,642     |  
|Purchase of available-for-sale securities                                                    |  |                                 | (1,665,665 | )    |   | (2,611,908 | )
|Proceeds from the sale of available-for-sale
securities                                      |  |                                 | 1,948,759  |      |   | 832,494    |  
|Principal payments on available-for-sale
securities                                          |  |                                 | 1,060,848  |      |   | 1,130,808  |  
|Origination and purchase of loans                                                            |  |                                 | (249,237   | )    |   | (254,349   | )
|Principal payments on loans                                                                  |  |                                 | 152,267    |      |   | 44,841     |  
|Proceeds from the sale of loans                                                              |  |                                 | 50,478     |      |   | 33,125     |  
|Purchase of other investments                                                                |  |                                 | (550       | )    |   | (1,482     | )
|                                                                                             |  |                                 |            |      |   |            |  
|Net cash provided by (used in) investing
activities                                          |  |                                 | 1,279,313  |      |   | (767,829   | )
|                                                                                             |  |                                 |            |      |   |            |  
|                                                                                             |  |                                 |            |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |  |                                 |            |      |   |            |  
|Net borrowings (payments) under repurchase
agreements                                        |  |                                 | (550,184   | )    |   | 580,290    |  
|Proceeds from issuance of long-term debt                                                     |  |                                 | 231,000    |      |   | 25,774     |  
|Payments made on long-term debt securities                                                   |  |                                 | (359       | )    |   | (95        | )
|Proceeds from warehouse funding agreement                                                    |  |                                 | 78,200     |      |   | 222,050    |  
|Payments made on warehouse funding
agreement                                                 |  |                                 | (262,215   | )    |   |           |  
|Payment of debt issuance costs                                                               |  |                                 | (2,685     | )    |   | (1,698     | )
|Proceeds (payment) on designated derivative
containing a financing
 element                  |  |                                 | (216       | )    |   | 544        |  
|Dividends paid                                                                               |  |                                 | (65,182    | )    |   | (56,324    | )
|                                                                                             |  |                                 |            |      |   |            |  
|Net cash provided by (used in) financing
activities                                          |  |                                 | (571,641   | )    |   | 770,541    |  
|                                                                                             |  |                                 |            |      |   |            |  
|                                                                                             |  |                                 |            |      |   |            |  
|Net increase in cash and cash equivalents                                                    |  |                                 | 53,327     |      |   | 61,123     |  
|Cash and cash equivalents at beginning of period                                             |  |                                 | 72,523     |      |   | 35,542     |  
|                                                                                             |  |                                 |            |      |   |            |  
|Cash and cash equivalents at end of period                                                   |  | $                               | 125,850    |      | $ | 96,665     |  
|                                                                                             |  |                                 |            |      |   |            |  
|                                                                                             |  |                                 |            |      |   |            |  
|SUPPLEMENTAL DISCLOSURE:                                                                     |  |                                 |            |      |   |            |  
|Cash paid for interest                                                                       |  | $                               | 227,311    |      | $ | 311,582    |  
|Cash paid for income taxes                                                                   |  | $                               |           |      | $ | 162        |  
|                                                                                             |  |                                 |            |      |   |            |  
|NONCASH INVESTING AND FINANCING ACTIVITIES:                                                  |  |                                 |            |      |   |            |  
|Net change in unrealized gain (loss) on
available-for-sale securities                        |  | $                               | 41,392     |      | $ | (1,872     | )
|Net change in unrealized gain (loss) on designated
derivatives                               |  | $                               | (70,922    | )    | $ | 8,356      |  
|Unsettled trading purchases - due to
broker                                                  |  | $                               | 269,752    |      | $ |           |  
|Unsettled available-for-sale securities purchases -
due to broker                            |  | $                               | 1,972      |      | $ | 366,486    |  
|Unsettled held for sale loan purchases - due to
broker                                       |  | $                               | 2,028      |      | $ |           |  
|Unsettled available-for-sale securities sales - due
from broker                              |  | $                               | 93,547     |      | $ |           |  
|Non-cash settlement of interest expense from
derivatives                                     |  | $                               | 5,880      |      | $ | 5,143      |  
|Non-cash settlement of interest income added to
principal balance of
 bank loans             |  | $                               | 5,549      |      | $ | 2,706      |  
|Principal payments receivable from
available-for-sale securities                             |  | $                               | 17,144     |      | $ | 18,733     |  
|Principal payments receivable from bank loans held
for investment                            |  | $                               | 225        |      | $ |           |  
|Issuance of stock for payment of prior year
incentive fee                                    |  | $                               | 3          |      | $ | 201        |  
|Unpaid offering costs                                                                        |  | $                               |           |      | $ | (48        | )
|Receipt of stock warrants                                                                    |  | $                               | 214        |      | $ |           |  
|Dedesignation of hedging swaps                                                               |  | $                               | 5,714      |      | $ |           |  

See notes to condensed
consolidated financial statements.

7

---



DEERFIELD TRIARC CAPITAL CORP. AND ITS SUBSIDIARIES NOTES 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 assets, primarily
mortgage-backed securities, as well as other alternative corporate investments.
Deerfield Triarc Capital Corp. was incorporated in Maryland on November 22,
2004. The Company commenced operations on December 23, 2004.

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 REIT
under the Internal Revenue Code of 1986, as amended (the Code).

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,
the Company did 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, 2006, included in the Companys
Annual Report on Form 10-K filed with the SEC on March 14, 2007. 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 following are new
entities and subsidiaries that were added during the nine months ended
September 30, 2007:

| |   |                                                                                                                                                                                           |   |                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | DFR Middle Market Holdings
 Ltd. (MMH) a Cayman Islands limited liability company, in which DWFC, LLC
 owns 100% of the ordinary shares. MMH is a disregarded entity for tax
 purposes.
| |   |                                                                                                                                                                                          
| |   |                                                                                                                                                                                           |  | DFR Middle Market CLO Ltd.
 (DFR MM CLO) a Cayman Islands exempted limited liability company, in which
 MMH owns 100% of the ordinary shares. DFR MM CLO is a taxable REIT subsidiary
 (TRS) for tax purposes.
| |   |                                                                                                                                                                                           |   |                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                           |  | DFR Middle Market CLO
 Corp. a Delaware Corporation, in which MMH owns 100% of the shares and is a
 qualified REIT subsidiary (QRS) for tax purposes.                                                           

Current Environment

Recent developments in the market for many types of mortgage products (including mortgage-backed securities) have resulted in reduced liquidity for these assets. Although this reduction in liquidity has been most acute with regard to nonprime assets, there has been an overall reduction in liquidity across the credit spectrum of mortgage products.

The
    Companys
    short-term (one year or less) liquidity needs are met primarily with proceeds
    from unrestricted cash and cash equivalents and repurchase agreement borrowings.
    Unencumbered RMBS and unrestricted cash and cash equivalents as of September
    30, 2007 totaled $49.2 and $125.9 million, respectively. RMBS monthly paydowns,
    net interest from invested assets and dividends from subsidiaries are also
    significant sources of cash used in the liquidity management process. The
    Company has established 18 repurchase agreement borrowing relationships with
    various financial institutions and other lenders. The Company currently has
    balances outstanding with 15 of those counterparties. The majority of the
    Companys
    remaining sources of borrowings are term financing and trust preferred securities,
    which are not subject to margin calls.

While the Company believes current financing sources and cash flows from operations
 are adequate to meet ongoing liquidity needs for the short-term, the Companys investment strategy has been refocused to that of preserving liquidity until the current market conditions subside.

Reclassifications

Certain
amounts in the condensed consolidated financial statements and notes as of
December 31, 2006 and for the three and nine months ended September 30, 2006,
have been reclassified to conform to the presentation as of and for the three
and nine months ended September 30, 2007.

8

---



2. 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, 2006. There were no significant
changes to these policies during the nine months ended September 30, 2007.

Recent
Accounting Pronouncements

In
June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48,Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in a companys financial statements and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The
adoption of FIN 48, effective January 1, 2007, did not have a material impact
on the Companys condensed consolidated financial statements.

In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS), No. 157,Fair Value Measurements.
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. SFAS No. 157 is
effective for the Company as of January 1, 2008. The Company is currently
evaluating the potential impact of adopting this standard.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities.
SFAS No. 159 permits entities to choose to measure financial instruments and
certain other items at fair value that are not currently required to be
measured at fair value. SFAS No. 159 is effective for the Company as of January
1, 2008. The Company is currently evaluating the potential impact of adopting
this standard.

In
June 2007, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position, (SOP) 07-1, Clarification
of the Scope of the Audit and Accounting GuideInvestment Companies and Accounting for Parent Companies and Equity Method
Investors for Investments in Investment Companies. This SOP provides
guidance for determining whether an entity is within the scope of the AICPA
Audit and Accounting Guide Investment
Companies, (the Guide). Entities that are within the scope of the
Guide are required, among other things, to carry their investments at fair
value, with changes in fair value included in earnings. The provisions of this
SOP are effective for the fiscal years beginning after November 15, 2007.
However, in October 2007 the FASB agreed to issue an exposure draft that would
indefinitely delay the effective date of SOP 07-1 until the FASB can reassess
its provisions. The Company is currently evaluating this new guidance and has
not determined whether it will be required to apply the provisions of the SOP
in presenting its consolidated financial statements.

3. POTENTIAL ACQUISITION

On
April 20, 2007, the Company announced that it had entered into a definitive
agreement to acquire Deerfield & Company LLC (Deerfield), the parent of
the Manager, from Triarc Companies, Inc. (Triarc), which owns a controlling
interest in Deerfield, and Deerfields other members. On August 16, 2007, the Company announced that it had not yet been able
to complete on acceptable terms the financing necessary for the Company to
consummate the acquisition of Deerfield, due to, among other things,
instability in the credit markets. The Companys obligation to complete the
acquisition was subject to the receipt by the Company of financing for the cash
portion of the purchase price and related transaction costs. Under the definitive
agreement, each party had the right to terminate the agreement beginning
October 19, 2007. The parties mutually terminated the agreement on October 19,
2007. On October 22, 2007, the Company announced that it was continuing to
explore with Triarc revised terms and conditions of the

9

---



Deerfield acquisition and
that there was no assurance that the Company and Triarc will reach agreement on
revised terms and conditions for the acquisition of Deerfield and that even if
reached, such terms and conditions would likely differ materially from those
set forth in the terminated agreement. The Companys Special Committee of its
Board of Directors has not approved any revised terms or conditions.

As
of September 30, 2007 the Company has capitalized $2.7 million of acquisition
and equity issuance costs that will be taken as an immediate reduction of
current earnings if the acquisition is not consummated. For the three months
ended September 30, 2007, the Company expensed merger related debt issuance
costs totaling $0.4 million.

4. AVAILABLE-FOR-SALE
SECURITIES

The
following table summarizes the Companys investment securities classified as
available-for-sale as of September 30, 2007, which are carried at fair value:

|                                                 |  |                 |           |                    |   |                     |  |               |         |                 |   |                  |  |                     |       |  |   |          |   |   |           | 
|------------------------------------------------ |  | --------------- | --------- | ------------------ | - | ------------------- |  | ------------- | ------- | --------------- | - | ---------------- |  | ------------------- | ----- |  | - | -------- | - | - | --------- | 
|Security
 Description                            |  | CurrentFace     |           | UnamortizedPremium |   | UnamortizedDiscount |  | AmortizedCost |         | UnrealizedGains |   | UnrealizedLosses |  | EstimatedFair Value |      
|                                                 |  |                 |           |                    |   |                     |  |               |         |                 |   |                  |  |                     |      
|                                                 |  | (In
 thousands) |          
|                                                 |  |                 |          
|                                                
|Residential mortgage-backed securities:          |  |                 |           |                    |   |                     |  |               |         |                 |   |                  |  |                     |       |  |   |          |   |   |           | 
|Hybrid adjustable and fixed rate securities
(1)  |  | $               | 6,598,628 |                    | $ | 51,689              |  | $             | (16,191 | )               | $ | 6,634,126        |  | $                   | 9,798 |  | $ | (69,818  | ) | $ | 6,574,106 | 
|Interest-only securities (2)                     |  |                 |          |                    |   | 190                 |  |               |        |                 |   | 190              |  |                     |      |  |   |         |   |   | 190       | 
|                                                
|Asset-backed securities held in Pinetree CDO (3) |  |                 | 296,904   |                    |   | 276                 |  |               | (2,238  | )               |   | 294,942          |  |                     | 27    |  |   | (69,928  | ) |   | 225,041   | 
|High-yield corporate bonds                       |  |                 | 6,800     |                    |   | 26                  |  |               | (71     | )               |   | 6,755            |  |                     | 83    |  |   | (8       | ) |   | 6,830     | 
|Commercial mortgage-backed securities            |  |                 | 7,512     |                    |   | 6                   |  |               | (2,716  | )               |   | 4,802            |  |                     |      |  |   | (502     | ) |   | 4,300     | 
|Other investments                                |  |                 | 3,000     |                    |   |                    |  |               | (37     | )               |   | 2,963            |  |                     |      |  |   | (56      | ) |   | 2,907     | 
|                                                 |  |                 |           |                    |   |                     |  |               |         |                 |   |                  |  |                     |       |  |   |          |   |   |           | 
|Total                                            |  | $               | 6,912,844 |                    | $ | 52,187              |  | $             | (21,253 | )               | $ | 6,943,778        |  | $                   | 9,908 |  | $ | (140,312 | ) | $ | 6,813,374 | 
|                                                 |  |                 |           |                    |   |                     |  |               |         |                 |   |                  |  |                     |       |  |   |          |   |   |           | 

---

(1) Unamortized discount includes a reduction
of $12.3 million related to other-than-temporary impairment of certain
securities recognized for the three months ended September 30, 2007.


(2) Unamortized premium includes a reduction of
$0.2 million related to other-than-temporary impairment of certain securities
recognized for the three months ended September 30, 2007.

(3) Pinetree CDO Ltd. (Pinetree CDO). Current
face includes a reduction of $3.9 million related to other-than-temporary
impairment of certain securities for the three months ended September 30, 2007

The
following table summarizes the Companys debt securities classified as
available-for-sale as of September 30, 2007, according to weighted average
life:

|                                                 |  |                |           |                     |   |                         |  |  |      |  
|------------------------------------------------ |  | -------------- | --------- | ------------------- | - | ----------------------- |  |  | ---- | -
|Weighted Average Life                            |  | AmortizedCost  |           | EstimatedFair Value |   | Weighted
 AverageCoupon | 
|                                                 |  |                |           |                     |   |                         | 
|                                                 |  | (In thousands) |           |                     |   |                        
|                                                 |  |                |           |                     |   |                        
|                                                
|Less than one year                               |  | $              | 64,872    |                     | $ | 56,718                  |  |  | 7.08 | %
|Greater than one year and
 less than five years  |  |                | 4,875,404 |                     |   | 4,794,329               |  |  | 5.18 | %
|Greater than five years
 and less than ten years |  |                | 1,625,460 |                     |   | 1,601,583               |  |  | 5.26 | %
|Greater than ten years                           |  |                | 378,042   |                     |   | 360,744                 |  |  | 5.68 | %
|                                                 |  |                |           |                     |   |                         |  |  |      |  
|Total                                            |  | $              | 6,943,778 |                     | $ | 6,813,374               |  |  | 5.24 | %
|                                                 |  |                |           |                     |   |                         |  |  |      |  

The
weighted average lives of available-for-sale debt securities as of September
30, 2007 in the table above are based upon contractual maturity for the
high-yield corporate bonds and other investments, while the weighted average
lives for mortgage-backed securities and asset-backed securities are estimated
based on data provided through subscription-based financial information
services. The weighted average lives for residential mortgage-backed
securities (RMBS), commercial mortgage-backed securities and asset-backed securities
are primarily 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. Weighted average life
estimates how many years it will take to receive half of the outstanding
principal, which for the high-yield corporate bonds and other investments is
contractual maturity.

10

---



Actual
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.

As
of September 30, 2007, available-for-sale securities include unsettled security
purchases totaling $2.0 million. These purchases 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 as of September 30, 2007:

|                                             |  |                        |  |                     |         |                       |   |                    |   |                    |  |                       |           |                    |   |                    |   |                       |  |   |           |  |   |          |  
|-------------------------------------------- |  | ---------------------- |  | ------------------- | ------- | --------------------- | - | ------------------ | - | ------------------ |  | --------------------- | --------- | ------------------ | - | ------------------ | - | --------------------- |  | - | --------- |  | - | -------- | -
|                                             |  | Less than 12 Months    |  | More than 12 Months |         | Total                 |  
|                                             |  |                        |  |                     |         |                       |  
|                                             |  | NumberofSecurities     |  | EstimatedFairValue  |         | GrossUnrealizedLosses |   | NumberofSecurities |   | EstimatedFairValue |  | GrossUnrealizedLosses |           | NumberofSecurities |   | EstimatedFairValue |   | GrossUnrealizedLosses | 
|                                             |  |                        |  |                     |         |                       |   |                    |   |                    |  |                       |          
|                                             |  | (Dollars in thousands) | 
|                                             |  |                        | 
|Residential mortgage-backed securities       |  | 20                     |  | $                   | 622,541 |                       | $ | (8,953             | ) | 154                |  | $                     | 3,716,960 |                    | $ | (60,865            | ) | 174                   |  | $ | 4,339,501 |  | $ | (69,818  | )
|Asset-backed securities held in Pinetree CDO |  | 130                    |  |                     | 152,957 |                       |   | (49,024            | ) | 46                 |  |                       | 57,818    |                    |   | (20,904            | ) | 176                   |  |   | 210,775   |  |   | (69,928  | )
|High-yield corporate bonds                   |  | 1                      |  |                     | 3,018   |                       |   | (8                 | ) |                   |  |                       |          |                    |   |                   |   | 1                     |  |   | 3,018     |  |   | (8       | )
|Commercial mortgage-backed securities        |  | 14                     |  |                     | 4,300   |                       |   | (502               | ) |                   |  |                       |          |                    |   |                   |   | 14                    |  |   | 4,300     |  |   | (502     | )
|Other investments                            |  | 1                      |  |                     | 2,907   |                       |   | (56                | ) |                   |  |                       |          |                    |   |                   |   | 1                     |  |   | 2,907     |  |   | (56      | )
|                                             |  |                        |  |                     |         |                       |   |                    |   |                    |  |                       |           |                    |   |                    |   |                       |  |   |           |  |   |          |  
|Total temporarily impaired securities        |  | 166                    |  | $                   | 785,723 |                       | $ | (58,543            | ) | 200                |  | $                     | 3,774,778 |                    | $ | (81,769            | ) | 366                   |  | $ | 4,560,501 |  | $ | (140,312 | )
|                                             |  |                        |  |                     |         |                       |   |                    |   |                    |  |                       |           |                    |   |                    |   |                       |  |   |           |  |   |          |  

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 and in credit spreads. 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 loss as an immediate reduction
of current earnings (as if the loss had been realized 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 and amount 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:

| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | severity of the
  impairment;                                                                                                                   
|
| |  | 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;                                                                                  
|
| |  | the financial condition of
  the investee and the prospect for future recovery; 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.

Additionally,
for securities within the scope of Emerging Issues Task Force (EITF) No.
99-20, Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets, when adverse changes in estimated cash flows occur
as a result of prepayments or credit loss experience, an other-than-temporary
impairment is deemed to have occurred. Accordingly, the security is written
down to fair value, and the unrealized loss is transferred from accumulated
other comprehensive loss as an immediate reduction of current earnings. The
cost basis adjustment for other-than-temporary impairment is recoverable only
upon sale or maturity of the security.

11

---



The
following table presents the net gain (loss) on available-for-sale securities
as reported in our condensed consolidated statements of operations:

|                                |  |                                  |         |                                 |   |       |   |      |         |   |   |        |  
|------------------------------- |  | -------------------------------- | ------- | ------------------------------- | - | ----- | - | ---- | ------- | - | - | ------ | -
|                                |  | Three months ended September 30, |         | Nine months ended September 30, |  
|                                |  |                                  |         |                                 |  
|                                |  | 2007                             |         | 2006                            |   | 2007  |   | 2006 |        
|                                |  |                                  |         |                                 |   |       |   |      |        
|                                |  | (In thousands)                   |        
|                                |  |                                  |        
|Gross realized gains            |  | $                                | 4,274   |                                 | $ | 1,817 |   | $    | 8,953   |   | $ | 7,184  |  
|Gross realized losses           |  |                                  | (11,085 | )                               |   | (37   | ) |      | (13,256 | ) |   | (60    | )
|                                |  |                                  |         |                                 |   |       |   |      |         |   |   |        |  
|Net realized gains (losses)     |  |                                  | (6,811  | )                               |   | 1,780 |   |      | (4,303  | ) |   | 7,124  |  
|Other-than-temporary impairment |  |                                  | (16,365 | )                               |   |      |   |      | (16,567 | ) |   | (2,037 | )
|                                |  |                                  |         |                                 |   |       |   |      |         |   |   |        |  
|Net gain (loss)                 |  | $                                | (23,176 | )                               | $ | 1,780 |   | $    | (20,870 | ) | $ | 5,087  |  
|                                |  |                                  |         |                                 |   |       |   |      |         |   |   |        |  

During
the three and nine months ended September 30, 2007 and 2006 the Company
recognized $16.4 million and $16.6 million and zero and $2.0 million of
other-than-temporary impairment, respectively.

During
the three months ended September 30, 2007, the Company recognized $12.3 million
of other-than-temporary impairment related to certain hybrid adjustable and fixed
    rate residential mortgage-backed securities. This represented 50 securities
    with an estimated fair value of $865.7 million. The Company determined that
    it no longer had the intent to hold these securities for a period of time
    sufficient to allow for recovery in market value. As a result of the impairment
    charge the unrealized loss transferred from accumulated other comprehensive
    loss to an immediate reduction of earnings classified in net gain (loss)
    on available-for-sale securities in the condensed consolidated statements
of operations.

The
RMBS are primarily agency issued or AAA-rated in credit quality. With the
exception of the securities noted above, the Company intends and believes it
has the ability to hold these securities until the fair value of the securities
is recovered, which may be maturity if necessary. Given the unfavorable events
in the credit environment during the past several months and the turmoil in the
repurchase agreement funding market, the Company has taken actions that secure
financing sources for its RMBS portfolio. As such, the Company believes that it
has both the intent and the ability to retain the RMBS portfolio for a period
of time to allow for any anticipated recovery in value. The Company expects to
collect all contractual amounts due and does not believe any other RMBS
securities held were other-than-temporarily impaired as of September 30, 2007.

For
the three and nine months ended September 30, 2007 and 2006, the Company
recognized $0.2 and $0.4 million and zero and $2.0 million of
other-than-temporary impairment related to certain interest-only securities,
respectively. The expected future cash flows for all of these securities are
primarily dependent upon contingent attributes such as interest rates and prepayments
that depend on a variety of market factors. The Company used updated cash flow
projections generated from third party software as part of its analysis to
determine the amount of the impairment. As a result of the impairment charge
the unrealized loss transferred from accumulated other comprehensive loss to an
immediate reduction of earnings in net gain (loss) on available-for-sale
securities in the condensed consolidated statements of operations.

As
of September 30, 2007, 30 of the 185 asset-backed securities held in the
Pinetree CDO had been downgraded by a major credit rating agency since purchase
(face value of $41.1 million at September 30, 2007), however, an analysis of
cash flows on these and 44 additional asset-backed securities (face value of
    $71.8 million) that met other criteria for other-than-temporary impairment
    analysis held in the Pinetree CDO, in accordance with the Company's policy,
    indicated that an other-than-temporary impairment had occurred on five securities
    with an estimated market value of $5.2 million. For the three and nine months
    ended September 30, 2007 the Company recognized $3.9 million of other-than-temporary
    impairment related to these five asset-backed securities held in the Pinetree
    CDO. An analysis of estimated cash flows on the remaining 69 asset-backed
    securities held in the Pinetree CDO indicated that an other-than-temporary
    impairment had not occurred. All other asset-backed securities held in the
    Pinetree CDO are investment grade and the Company does not believe they are
    other-than-temporarily impaired as of September 30, 2007 as the Company has
    the intent and ability to hold such securities to recovery, which may be
maturity if necessary. As of September 30, 2007, the Company has an

12

---



accumulated net $69.9
million of unrealized loss related to asset-backed securities held in the
Pinetree CDO reflected as an increase to other comprehensive loss in
stockholders equity while the Companys remaining economic risk is $8.1
million, which represents the Companys initial equity investment in the
Pinetree CDO of $12.0 million less its estimate of other-than-temporary
impairment of $3.9 million. Any realized losses in excess of our equity investment
would be borne by the debt holders.

5.
TRADING SECURITIES

The
Company holds trading securities as of September 30, 2007, carried at fair
value of $816.3 million. As of September 30, 2007, trading securities include
unsettled security purchases totaling $269.8 million. These purchases settled
in the following month.

Net
gains of $5.6 million and $2.6 million on trading securities were recognized in
the condensed consolidated statements of operations for the three and nine
months ended September 30, 2007, respectively. Net gains of $3.0 million and
$1.3 million were recognized for the three and nine months ended September 30,
2006, respectively.

6. OTHER INVESTMENTS

Cost
Method Investments

The
Company holds certain other investments as of September 30, 2007, carried at
cost of $5.5 million. These positions consist of $3.7 million of equity
securities in the entities established in connection with the issuance of the
trust preferred securities and $1.8 million in other common and preferred
equities that are not traded in an active market.

Equity
Method Investments

The
Company holds one equity method investment as of September 30, 2007, initially
recorded at cost of $3.0 million and adjusted to a current carrying value of
$1.0 million. Losses of $0.2 million and $0.4 million were recorded for the
three and nine months ended September 30, 2007, respectively, to recognize the
Companys 13% share of losses of the investee, Hometown Commercial Capital LLC
(HCC). The Company expects to receive financial information on HCC quarterly,
and includes the Companys share of these results on a one-quarter-lag basis.
The adjustment to the Companys carrying value is recorded in the condensed consolidated
statements of operations as dividend income and other net gain (loss). See Note
7 for further investments related to HCC.

13

---



7. LOANS AND LOANS HELD FOR
SALE

The
following summarizes the Companys loans and loans held for sale as of
September 30, 2007:

|                                      |  |                           |         |       |   |         |   |   |         |  
|------------------------------------- |  | ------------------------- | ------- | ----- | - | ------- | - | - | ------- | -
|                                      |  | Carrying Value            |        
|                                      |  |                           |        
|Type of
  Loan                        |  | Loans Held
  for Sale (1) |         | Loans |   | Total   |  
|                                      |  |                           |         |       |   |         |  
|                                      |  | (In
  thousands)          |        
|                                      |  |                           |        
|Loans held in Market
  Square CLO (2) |  | $                         | 263,096 |       | $ |        |   | $ | 263,096 |  
|Loans held in DFR MM CLO              |  |                           |        |       |   | 298,234 |   |   | 298,234 |  
|Corporate leveraged loans             |  |                           | 2,627   |       |   | 152,926 |   |   | 155,553 |  
|Commercial real estate
  loans (3)    |  |                           | 5,525   |       |   | 24,151  |   |   | 29,676  |  
|                                      |  |                           |         |       |   |         |   |   |         |  
|                                      |  | $                         | 271,248 |       |   | 475,311 |   |   | 746,559 |  
|                                      |  |                           |         |       |   |         |   |   |         |  
|Allowance for loan losses             |  |                           |         |       |   | (8,933  | ) |   | (8,933  | )
|                                      |  |                           |         |       |   |         |   |   |         |  
|                                      |  |                           |         |       | $ | 466,378 |   | $ | 737,626 |  
|                                      |  |                           |         |       |   |         |   |   |         |  

|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|   
|(1) | Carrying value of loans
  held for sale is lower of cost or fair value.                    
|    |                                                                                            
|(2) | Market Square CLO Ltd.
  (Market Square CLO)                                             
|    |                                                                                            
|(3) | Commercial real estate
  loans include participating interests in commercial mortgage loans

As
of September 30, 2007, the Company held loans totaling $746.6 million. Loans
classified as held for sale and carried at the lower of cost or fair value
totaled $271.2 million, net of a valuation allowance of $8.6 million. Loans
classified as held for investment and carried at amortized cost totaled $466.4
million. As of September 30, 2007,
    there were $2.0 million unsettled loan purchases of loans held for sale.
    As of September 30, 2007, the Company held loans that settle interest accruals
    by increasing the principal balance of the loan outstanding. For the three
    and nine months ended September 30, 2007, the Company settled interest receivable
    through an increase to the loans outstanding principal balance in the amounts
of $2.5 million and $5.5 million, respectively.

Loans
held in Market Square CLO consist of syndicated bank loans for which there is a
ready market. Accordingly, this portfolio is classified as held for sale as it
is managed within the parameters specified in the governing indenture. Loans
held in DFR MM CLO consist of loans originated in the middle market which are
not broadly syndicated and therefore less liquid. Accordingly, these loans are
considered to be held for investment and are reported at amortized cost with an
allowance for loan losses, if necessary.

The
Company identified two impaired loans held for investment as of September 30,
2007. The Company determined that an allowance for loan losses in the amount of
$8.9 million was required for these loans. The following summarizes the 2007
activity within the allowance for loan losses:

|                             |  |                             |       | 
|---------------------------- |  | --------------------------- | ----- | 
|                             |  | Allowance for
  Loan Losses |      
|                             |  |                             |      
|                             |  | (In
  thousands)            |      
|                             |  |                             |      
|Balance - December 31, 2006  |  | $                           | 2,000 | 
|Provision for loan losses    |  |                             | 1,800 | 
|                             |  |                             |       | 
|Balance - March 31, 2007     |  |                             | 3,800 | 
|Provision for loan losses    |  |                             | 5,133 | 
|                             |  |                             |       | 
|Balance - June 30, 2007      |  |                             | 8,933 | 
|Provision for loan losses    |  |                             |      | 
|                             |  |                             |       | 
|Balance - September 30, 2007 |  | $                           | 8,933 | 
|                             |  |                             |       | 

14

---



The
allowance consists of the $5.1 million outstanding principal balance of a
mortgage lending company that filed Chapter 7 bankruptcy shortly after June 30,
2007 and $3.8 million which represents the excess of amortized cost over the
discounted expected future cash flows of an identified impaired loan of a
manufacturing company. As of September 30, 2007 the outstanding principal
balance on this loan was $8.0 million and the net carrying value of this loan
was $4.2 million. The Company did not recognize $0.5 million and $1.1 million of
interest income on these loans for the three and nine months ended September
30, 2007, respectively. The Company did not record any recoveries or write-offs
of loans for the nine months ended September 30, 2007.

As
of September 30, 2007, the Companys commercial real estate loans consisted of
junior participation interests in 24 commercial mortgage loans originated by
HCC and classified as held for sale totaling $5.5 million and nine commercial
real estate loans classified as held for investment totaling $24.2 million.

8. REPURCHASE AGREEMENTS

Repurchase
agreements are short-term borrowings from financial institutions that bear
interest rates that have historically moved in close relationship to the London
Interbank Offered Rate (LIBOR). As of September 30, 2007, the Company had
repurchase agreements outstanding in the amount of $6.8 billion (including
$36.2 million of accrued interest) with a weighted-average borrowing rate of
5.23%.

As
of September 30, 2007, the repurchase agreements outstanding associated with
the Companys investments had remaining maturities as summarized below:

|                                                                    |  |                             |           |                           |   |                            |   |                    |           |       |   |   |  |   |           |  
|------------------------------------------------------------------- |  | --------------------------- | --------- | ------------------------- | - | -------------------------- | - | ------------------ | --------- | ----- | - | - |  | - | --------- | -
|                                                                    |  | Overnight
  1 Day or
  Less |           | Between
  2 and 30
  Days |   | Between
  31 and 90
  Days |   | 91 Days
  and Over |           | Total |  
|                                                                    |  |                             |           |                           |   |                            |   |                    |           |       |  
|                                                                    |  | (In thousands)              |          
|                                                                    |  |                             |          
|Residential mortgage-backed securities:                             |  |                             |           |                           |   |                            |   |                    |           |       |   |   |  |   |           |  
|Estimated fair value of securities sold, including
accrued interest |  | $                           | 1,068,968 |                           | $ | 4,936,103                  |   | $                  | 1,009,303 |       | $ |  |  | $ | 7,014,374 |  
|Repurchase agreement liabilities associated with
these securities   |  |                             | 1,026,019 |                           |   | 4,812,110                  |   |                    | 970,602   |       |   |  |  |   | 6,808,731 |  
|Weighted average interest rate of repurchase
agreement liabilities  |  |                             | 5.15      | %                         |   | 5.24                       | % |                    | 5.27      | %     |   |  |  |   | 5.23      | %
|Other investments:                                                  |  |                             |           |                           |   |                            |   |                    |           |       |   |   |  |   |           |  
|Estimated fair value of securities sold, including
accrued interest |  | $                           |          |                           | $ | 2,914                      |   | $                  |          |       | $ |  |  | $ | 2,914     |  
|Repurchase agreement liabilities associated with
these securities   |  |                             |          |                           |   | 2,451                      |   |                    |          |       |   |  |  |   | 2,451     |  
|Weighted average interest rate of repurchase
agreement liabilities  |  |                             |          |                           |   | 6.25                       | % |                    |          |       |   |  |  |   | 6.25      | %
|Total:                                                              |  |                             |           |                           |   |                            |   |                    |           |       |   |   |  |   |           |  
|Estimated fair value of securities sold, including
accrued interest |  | $                           | 1,068,968 |                           | $ | 4,939,017                  |   | $                  | 1,009,303 |       | $ |  |  | $ | 7,017,288 |  
|Repurchase agreement liabilities associated with
these securities   |  |                             | 1,026,019 |                           |   | 4,814,561                  |   |                    | 970,602   |       |   |  |  |   | 6,811,182 |  
|Weighted average interest rate of repurchase
agreement liabilities  |  |                             | 5.15      | %                         |   | 5.24                       | % |                    | 5.27      | %     |   |  |  |   | 5.23      | %

15

---



As
of September 30, 2007, the fair value of the investments pledged and repurchase
agreement liabilities includes accrued interest as follows:

|                                        |  |                                                                   |        |                                                          |   |        | 
|--------------------------------------- |  | ----------------------------------------------------------------- | ------ | -------------------------------------------------------- | - | ------ | 
|Type of
 Investment Pledged             |  | Accrued InterestIncluded in EstimatedFair Value ofSecurities Sold |        | Accrued InterestIncluded inRepurchase AgreementLiability |  
|                                        |  |                                                                   |        |                                                          |  
|                                        |  | (In
 thousands)                                                   |       
|                                        |  |                                                                   |       
|                                        |  |                                                                   |       
|Residential
 mortgage-backed securities |  | $                                                                 | 31,006 |                                                          | $ | 36,183 | 
|Other investments                       |  |                                                                   | 7      |                                                          |   | 6      | 
|                                        |  |                                                                   |        |                                                          |   |        | 
|                                        |  | $                                                                 | 31,013 |                                                          | $ | 36,189 | 
|                                        |  |                                                                   |        |                                                          |   |        | 

As
of September 30, 2007, the Company had amounts at risk with the following
repurchase agreement counterparties:

|                                       |  |                    |         |                                                      |  |    | 
|-------------------------------------- |  | ------------------ | ------- | ---------------------------------------------------- |  | -- | 
|                                       |  | Amount at Risk (1) |         | Weighted-Average
 Maturity of Repurchase
 Agreements | 
|                                       |  |                    |         |                                                      | 
|Repurchase
 Agreement Counterparties:  |  | (In
 thousands)    |         | (In
 days)                                           | 
|                                       |  |                    |         |                                                      | 
|                                      
|Bear,
 Stearns & Co. Inc.              |  | $                  | 9,036   |                                                      |  | 2  | 
|BNP Paribas Securities
 Corp.          |  |                    | 24,936  |                                                      |  | 20 | 
|Barclays Capital Inc.                  |  |                    | 26,925  |                                                      |  | 12 | 
|Citigroup Global Markets,
 Inc.        |  |                    | 4,976   |                                                      |  | 1  | 
|Credit Suisse Securities
 (USA) LLC    |  |                    | 52,231  |                                                      |  | 28 | 
|Countrywide Securities
 Corporation    |  |                    | 10,286  |                                                      |  | 18 | 
|Fortis Securities LLC                  |  |                    | (252    | )                                                    |  | 8  | 
|Greenwich Capital Markets,
 Inc.       |  |                    | 1,241   |                                                      |  | 4  | 
|HSBC Securities (USA) Inc.             |  |                    | 9,989   |                                                      |  | 1  | 
|ING Financial Markets LLC              |  |                    | 62,587  |                                                      |  | 21 | 
|J.P. Morgan Securities
 Inc.           |  |                    | 11,130  |                                                      |  | 24 | 
|Lehman Brothers Inc.                   |  |                    | 463     |                                                      |  | 17 | 
|Morgan Stanley & Co.
 Incorporated     |  |                    | 5,247   |                                                      |  | 9  | 
|Nomura Securities
 International, Inc. |  |                    | 46,120  |                                                      |  | 18 | 
|UBS Securities LLC                     |  |                    | 36,187  |                                                      |  | 19 | 
|                                       |  |                    |         |                                                      |  |    | 
|Total                                  |  | $                  | 301,102 |                                                      |  | 18 | 
|                                       |  |                    |         |                                                      |  |    | 



---

|    |                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Equal to the fair value of
 securities pledged (including net additional repurchase agreement collateral
 pledged of $95.0 million, which includes $0.4 million of accrued interest
 receivable), and related accrued interest receivable, minus repurchase
 agreement liabilities, and related accrued interest payable.

The
three largest providers of repurchase agreement financing represented 22.9%,
17.5% and 12.6% of the $6.8 billion total amount of repurchase agreement
liabilities. See Note 9 for additional discussion concerning securities received
and pledged as collateral.

9. SECURITIES
RECEIVED AND PLEDGED AS COLLATERAL

We
receive collateral in connection with derivative transactions. We are generally
permitted to sell or repledge these securities held as collateral. At September
30, 2007 and December 31, 2006, the fair value of securities received as
collateral that we were permitted to sell or repledge was $4.2 million and
$14.1 million, respectively. The fair value of securities received as
collateral that we repledged was $0.3 million and $2.0 million at September 30,
2007 and December 31, 2006, respectively.

16

---



We
also pledge our own assets, primarily to collateralize our repurchase
agreements and in connection with derivative transactions. These securities
owned and pledged, where the counterparty has the right by contract or custom
to sell or repledge the financial instruments were approximately $7.2 billion
and $7.6 billion at September 30, 2007 and December 31, 2006, respectively. As
of September 30, 2007, owned securities pledged consisted of $7.0 billion of
securities sold in conjunction with repurchase agreements, $98.8 million
pledged as additional collateral on repurchase agreements, and $80.7 million
pledged as collateral on derivative agreements. As of December 31, 2006, owned
securities pledged consisted of $7.4 billion of securities sold in conjunction
with repurchase agreements, $153.2 million pledged as additional collateral on
repurchase agreements, and $26.8 million pledged as collateral on derivative
agreements.

10. LONG-TERM
DEBT

The
following table summarizes the Companys long-term debt as of September 30,
2007:

|                                      |  |                |         |                     |  |                              |                |   |        | 
|------------------------------------- |  | -------------- | ------- | ------------------- |  | ---------------------------- | -------------- | - | ------ | 
|                                      |  | CarryingValue  |         | WeightedAverageRate |  | UnamortizedDebt IssuanceCost |               
|                                      |  |                |         |                     |  |                              |               
|                                      |  | (In thousands) |         |                     |  |                              | (In thousands) |  
|Revolving warehouse
 funding facility |  | $              | 76,935  |                     |  | 6.54                         | %              | $ | 620    | 
|Market Square CLO                     |  |                | 276,000 |                     |  | 5.85                         | %              |   | 3,391  | 
|DFR MM CLO (1)                        |  |                | 231,000 |                     |  | 5.97                         | %              |   | 3,691  | 
|Pinetree CDO                          |  |                | 287,466 |                     |  | 5.90                         | %              |   | 4,445  | 
|Trust preferred securities            |  |                | 123,717 |                     |  | 8.13                         | %              |   | 2,558  | 
|                                      |  |                |         |                     |  |                              |                |   |        | 
|Total                                 |  | $              | 995,118 |                     |  | 6.23                         | %              | $ | 14,705 | 
|                                      |  |                |         |                     |  |                              |                |   |        | 



---

|    |                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes $19.0 million of
 DFR MM CLO debt that is owned by the Company and eliminated upon
 consolidation. Had this debt been included the weighted-average borrowing
 rate would be 6.33% for DFR MM CLO and 6.31% in total.

Revolving
Warehouse Funding Facility

On
March 10, 2006, the Company entered into an up to $300.0 million (amended to
$375.0 million in February 2007) three-year revolving warehouse funding
agreement with Wachovia Capital Markets, LLC (the Facility), subject to
annual renewal. Financing under the Facility is secured by assets ranging from
large syndicated bank loans to subordinated notes and preferred stock. Advance
rates under the Facility vary by asset type and are subject to certain
compliance criteria. The Facility is available to two consolidated bankruptcy
remote special purpose vehicles (DWFC, LLC and Deerfield Triarc TRS (Bahamas)
Ltd.) and the debt holder has recourse only to the collateral of these
entities, which totaled $138.0 million as of September 30, 2007. The Company
expects to pursue term funding of these assets via securitization in a future
collateralized loan obligation (CLO). As of September 30, 2007, $2.5 million
of the cash owned by these entities is considered restricted.

On
July 17, 2007, the Company closed the DFR MM CLO transaction. As a result of
this securitization, $213.2 million of debt was paid down on the Facility. As
of September 30, 2007, the Company had $76.9 million of debt outstanding
related to the Facility. As of September 30, 2007, unamortized deferred
issuance costs associated with the Facility totaled $0.6 million and are
classified as part of prepaid and other assets on the condensed consolidated
balance sheet. The annual interest rate for the Facility is based on short-term
commercial paper rates as defined in the Facility, plus 0.75% for large
syndicated loans or plus 0.90% for all other loans. Including $0.3 million of
commitment fees and $72,000 of unused line fees, the weighted average interest
rate was 6.54% as of September 30, 2007.

On
February 7, 2007, the Company amended the Facility to increase its size under
this agreement from $300.0 million to $375.0 million. The Company paid a
one-time fee of $75,000 to Wachovia in

17

---



connection
with this facility expansion. On April 6, 2007, the Company amended the term of
the Facility to change the annual renewal date to April 8, 2008.

The
Facility is subject to several non-financial covenants, including those which
relate to compliance with laws, maintenance of service agreements, protection
of collateral and various notification requirements. Failure to meet these requirements
could result in reductions of advances from the Facility or more severe default
remedies, including acceleration of the outstanding indebtedness. Effective
August 3, 2007, we received a waiver for a technical default that occurred in
July 2007 related to a historical charge-off ratio within the Facility. The
waiver provides for a six month forbearance on the technical default that
occurred such that we are currently in compliance with the debt covenants. The
forbearance period of six months effectively remedies the situation as the
current technical default will not continue beyond that period.

Market
SquareCLO

Market
Square CLO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 CLO has a weighted average interest rate of 5.85%, using the last
reset date as of September 30, 2007.

The
Market Square CLO notes are due in 2017, but were callable, at par, by the
Company on July 20, 2007 and are callable quarterly thereafter, subject to
certain conditions. Market Square CLO is a consolidated bankruptcy remote
subsidiary and the debt holders have recourse only to the collateral of Market
Square CLO, which had assets with a carrying value of $294.9 million as of
September 30, 2007.

DFR
MM CLO

DFR
MM CLO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
DFR MM CLO has a weighted average interest rate of 5.97% (6.33% including the
$19.0 million of DFR MM CLO debt owned by the Company and eliminated upon
consolidation), using the last reset date as of September 30, 2007.

The
DFR MM CLO notes are due in 2019, but are callable, at par, by the Company on
Oct 20, 2010 and quarterly thereafter, subject to certain conditions. DFR MM
CLO is a consolidated bankruptcy remote subsidiary, which had assets with a
carrying value of $306.6 million as of September 30, 2007.

Pinetree
CDO

Pinetree
Pinetree CDO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 CDO has a weighted average interest rate of 5.90% using the last reset
date as of September 30, 2007.

The
Pinetree CDO notes are due in 2045, but are callable, at par, by the Company on
January 5, 2010 and quarterly thereafter, subject to certain conditions.
Pinetree CDO is a consolidated bankruptcy remote subsidiary and the debt
holders have recourse only to the collateral of Pinetree CDO, which had assets
with a carrying value of $234.4 million as of September 30, 2007.

Trust
Preferred Securities

Trust
preferred securities bear interest rates that reset quarterly. The interest
rates on the trust preferred securities are equal to three-month LIBOR plus
3.50% per annum and plus 2.25% per annum for $51.6 million and $72.1 million,
respectively, of principal outstanding. The rate as of September 30, 2007 was
8.86% and 7.61%, for the $51.6 million and $72.1 million outstanding,
respectively, with a total weighted-average interest rate of 8.13% for all
trust preferred securities.

18

---



Unamortized
deferred issuance costs associated with the junior subordinated debt securities
totaled $2.6 million as of September 30, 2007 and are classified as part of
prepaid and other assets on the condensed consolidated balance sheet. These
costs are amortized into interest expense using the effective yield method from
issuance date to the respective junior subordinated debt securities call date.

11.
STOCKHOLDERS EQUITY

The
Companys dividends are recorded on the declaration date. On July 24, 2007, the
Company declared a cash dividend of $0.42 per share on its common stock for the
second quarter of 2007. The record date for the cash dividend was August 7,
2007, and the payment date was August 28, 2007. The total amount of the
dividend paid was $21.7 million.

Effective
December 17, 2004 the Company adopted the 2004 Stock Incentive Plan (2004
Plan) that provides for the granting of stock options, common stock and stock
appreciation rights (if applicable) to employees and services providers to
purchase up to 6,136,725 shares of the Companys common stock (increased from
initial plan of 2,692,313 shares via approval by the stockholders at the Annual
Meeting of Stockholders on August 9, 2007). The 2004 plan was established to
assist the Company and its Manager in recruiting and retaining individuals with
ability and initiative by enabling such persons or entities to participate in
future success of the Company and to align their interests with those of the
Company and its stockholders.

The
Company issues shares of common stock pursuant to the Management Agreement
which requires the manager to receive at least 15% of the each incentive fee in
the form of stock rather than cash. These share issuances represented the 15%
portion of the incentive fee. The following summarizes the issuances of stock
grants as payment of the incentive fee to the Manager since commencement:

|           |  |                           |        |                        |                 |     | 
|---------- |  | ------------------------- | ------ | ---------------------- | --------------- | --- | 
|Issue Date |  | Number of 
 Shares Issued |        | Amount Paid in 
 Stock |                
|           |  |                           |        |                        |                
|           |  |                           |        |                        | (In
 thousands) |    
|          
|06/11/07   |  |                           | 20,654 |                        | $               | 328 | 
|03/28/07   |  |                           | 163    |                        | $               | 2   | 
|11/15/06   |  |                           | 13,722 |                        | $               | 197 | 
|09/25/06   |  |                           | 9,321  |                        | $               | 123 | 
|06/13/06   |  |                           | 29,159 |                        | $               | 378 | 

The
Company has annually granted fully vested shares of common stock to the four
independent board members, each receiving an equal amount of shares in each
grant. In accordance with SFAS No. 123(R) the Company recognized the entire
fair market value of the grant on such dates as the shares had no vesting
period. The following summarizes the board grants issued since commencement:

|           |  |                    |        |                               |   |                              |     |                 |     | 
|---------- |  | ------------------ | ------ | ----------------------------- | - | ---------------------------- | --- | --------------- | --- | 
|Grant Date |  | Number 
 of Shares |        | Fair Market 
 Value Per Share |   | Fair Market 
 Value of Grant |    
|           |  |                    |        |                               |   |                              |    
|           |  |                    |        |                               |   |                              |     | (In
 thousands) |    
|           |  |                    |        |                               |   |                              |     |                 |    
|01/31/07   |  |                    | 10,000 |                               | $ | 16.50                        | (1) | $               | 165 | 
|02/07/06   |  |                    | 10,000 |                               | $ | 13.00                        | (1) | $               | 130 | 
|03/24/05   |  |                    | 12,000 |                               | $ | 15.00                        | (2) | $               | 180 | 



---

|    |                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Fair market value per share
 represents the closing price on the date of the grant                                                                              
|   
|(2) | Due to no publicly
 available price, fair market value per share represents the price the Company
 sold shares in the December 23, 2004 initial private offering

19

---



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
share restrictions lapse, and full rights of ownership vest in three equal
installments on the first, second and third anniversary of the grant date.
Vesting is predicated on the continuing involvement of the Manager in providing
services to the Company. Two-thirds, or 269,231 shares of restricted stock and
stock options to purchase 897,437 shares of common stock, are fully vested as
of September 30, 2007, as one third vested each on December 23, 2005 and 2006.
The fair value of the restricted common stock and restricted options on the
grant date of December 23, 2004 totaled $6.1 million and $0.3 million,
respectively. There have been no other grants of restricted common stock or
restricted options.

The
following table summarizes our restricted stock activity for the nine months
ended September 30, 2007:

|                               |  |                   |         |                                            |   |       | 
|------------------------------ |  | ----------------- | ------- | ------------------------------------------ | - | ----- | 
|                               |  | Number of
 Shares |         | Weighted-average 
 Grant Date Fair 
 Value |  
|                               |  |                   |         |                                            |  
|Nonvested, December 31,
 2006  |  |                   | 134,616 |                                            | $ | 15.00 | 
|Granted                        |  |                   |        |                                            |   |      | 
|Vested                         |  |                   |        |                                            |   |      | 
|Forfeited                      |  |                   |        |                                            |   |      | 
|                               |  |                   |         |                                            |   |       | 
|Nonvested, September 30,
 2007 |  |                   | 134,616 |                                            | $ | 15.00 | 
|                               |  |                   |         |                                            |   |       | 

The
following table summarizes our stock option activity for the nine months ended
September 30, 2007:

|                                 |  |                   |           |                                    |   |                                                            |  |                             |     |  |   |   | 
|-------------------------------- |  | ----------------- | --------- | ---------------------------------- | - | ---------------------------------------------------------- |  | --------------------------- | --- |  | - | - | 
|                                 |  | Number of
 Shares |           | Weighted-
 average Exercise
 Price |   | Weighted-average 
 Remaining Contractual 
 Term (in years) |  | Aggregate 
 Intrinsic Value |    
|                                 |  |                   |           |                                    |   |                                                            |  |                             |    
|Outstanding, December 31,
 2006  |  |                   | 1,346,156 |                                    | $ | 15.00                                                      |  |                             |     |  |   |   | 
|Granted                          |  |                   |          |                                    |   |                                                           |  |                             |     |  |   |   | 
|Exercised                        |  |                   |          |                                    |   |                                                           |  |                             |     |  |   |   | 
|Forfeited                        |  |                   |          |                                    |   |                                                           |  |                             |     |  |   |   | 
|                                 |  |                   |           |                                    |   |                                                            |  |                             |     |  |   |   | 
|Outstanding, September 30,
 2007 |  |                   | 1,346,156 |                                    | $ | 15.00                                                      |  |                             | 7.3 |  | $ |  | 
|                                 |  |                   |           |                                    |   |                                                            |  |                             |     |  |   |   | 
|                                 |  |                   |           |                                    |   |                                                            |  |                             |     |  |   |   | 
|Exercisable, September 30,
 2007 |  |                   | 897,437   |                                    | $ | 15.00                                                      |  |                             | 7.3 |  | $ |  | 

In
accordance with 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, the Company revalues
unvested restricted stock and stock options at fair value each reporting
period. These changes in value are recognized ratably over the original vesting
period resulting in an adjustment in the statement of operations, and an equal
and offsetting amount to additional paid-in capital, of the amount attributable
to all prior periods, up to and including the current period end. The change in
value attributable to future periods is recognized in the same fashion but in
the appropriate future period. The total unamortized fair value of the unvested
restricted stock and stock options was $0.1 million and $23,000, respectively,
as of September 30, 2007 and $0.7 million and $0.1 million, respectively, as of
December 31, 2006.

20

---



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 September 30, |      
|                          |  |                     |      
|                          |  | 2007                |       | 2006 | 
|                          |  |                     |       |      | 
|Dividend
 yield           |  |                     | 11.73 | %    |  | 11.01 | %
|Expected
 volatility      |  |                     | 41.91 | %    |  | 21.41 | %
|Risk-free
 interest rate  |  |                     | 4.59  | %    |  | 4.63  | %
|Expected
 life (in years) |  |                     | 7.3   |      |  | 8.3   |  

12.
COMPUTATION OF EARNINGS PER SHARE

The
following table presents the calculation of basic and diluted earnings per
share:

|                                                     |  |                                        |         |                                 |   |        |  |      |        |  |   |        | 
|---------------------------------------------------- |  | -------------------------------------- | ------- | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------ | 
|                                                     |  | Three months ended September 30,       |         | Nine months ended September 30, |  
|                                                     |  |                                        |         |                                 |  
|                                                     |  | 2007                                   |         | 2006                            |   | 2007   |  | 2006 |       
|                                                     |  |                                        |         |                                 |   |        |  |      |       
|                                                     |  | (In
 thousands, except per share data) |        
|                                                     |  |                                        |        
|                                                     |  |                                        |         |                                 |   |        |  |      |        |  |   |        | 
|Net income
 (loss)                                   |  | $                                      | (23,235 | )                               | $ | 19,563 |  | $    | 13,786 |  | $ | 56,890 | 
|                                                     |  |                                        |         |                                 |   |        |  |      |        |  |   |        | 
|                                                    
|Weighted
 average shares used in basic computation   |  |                                        | 51,618  |                                 |   | 51,430 |  |      | 51,601 |  |   | 51,406 | 
|                                                     |  |                                        |         |                                 |   |        |  |      |        |  |   |        | 
|Dilutive
 effect of:                                 |  |                                        |         |                                 |   |        |  |      |        |  |   |        | 
|Unvested restricted stock                            |  |                                        |        |                                 |   | 186    |  |      | 105    |  |   | 154    | 
|                                                     |  |                                        |         |                                 |   |        |  |      |        |  |   |        | 
|Weighted average shares used in diluted
 computation |  |                                        | 51,618  |                                 |   | 51,616 |  |      | 51,706 |  |   | 51,560 | 
|                                                     |  |                                        |         |                                 |   |        |  |      |        |  |   |        | 
|                                                     |  |                                        |         |                                 |   |        |  |      |        |  |   |        | 
|Net income
 (loss) per share - Basic                 |  | $                                      | (0.45   | )                               | $ | 0.38   |  | $    | 0.27   |  | $ | 1.11   | 
|                                                     |  |                                        |         |                                 |   |        |  |      |        |  |   |        | 
|                                                     |  |                                        |         |                                 |   |        |  |      |        |  |   |        | 
|Net income
 (loss) per share - Diluted               |  | $                                      | (0.45   | )                               | $ | 0.38   |  | $    | 0.27   |  | $ | 1.10   | 
|                                                     |  |                                        |         |                                 |   |        |  |      |        |  |   |        | 

Potentially
dilutive shares relating to the option to purchase 1,346,156 shares of common
stock are not included in the calculation of diluted net income per share for
the three and nine months ended September 30, 2007 and 2006 because the effect
was anti-dilutive. Additionally, 114,600 shares of unvested restricted stock
are not included in the calculation of diluted net income per share for the
three months ended September 30, 2007 because the effect was anti-dilutive as a
result of the reporting of a net loss for the period.

13.
RELATED-PARTY TRANSACTIONS

The
Companys base management fee expense was $3.2 million and $9.8 million, and
$3.4 million and $10.0 million for the three and nine months ended September
30, 2007 and 2006, respectively. Also included in the management fee expense to
related party in the condensed consolidated statements of operations was
amortization income of $0.4 million and $0.3 million and amortization expense
of $0.3 million and $1.0 million for the three and nine months ended September
30, 2007, and 2006, respectively, related to the restricted stock and stock
options granted to the Manager. Additionally, the expense for the incentive fee
earned by the Manager was zero and $2.2 million, and $1.3 million and $3.3
million for the three and nine months ended September 30, 2007 and 2006,
respectively. At September 30, 2007, the Company had outstanding payables
related to its agreement with the Manager in the amount of $1.0 million, which
is included in management and incentive fee payable to related party in the
condensed consolidated balance sheet. The Company recorded expenses related to
reimbursable out-of-pocket and certain other costs incurred by the Manager
totaling $0.5 million and $0.8 million, and $0.1 million and $0.5 million for
the three and nine months ended September 30, 2007, and 2006 respectively.
Additionally, the Company had outstanding payables to the Manager for certain
other costs totaling $0.4 million which is

21

---



included in
other payables in the condensed consolidated balance sheet. See Note 3 for
further discussion of the Companys potential acquisition of the Manager.

14. 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. In absence of available
quoted market prices 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 September 30, 2007, 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)               |  | $               | 125,850   |                        | $ | 125,850   | 
|Restricted cash and cash equivalents
(a)    |  |                 | 45,045    |                        |   | 45,045    | 
|Available-for sale securities (b)           |  |                 | 6,813,374 |                        |   | 6,813,374 | 
|Trading securities (b)                      |  |                 | 816,278   |                        |   | 816,278   | 
|Other investments (c)                       |  |                 | 6,483     |                        |   | 6,483     | 
|Derivative assets (d)                       |  |                 | 16,689    |                        |   | 16,689    | 
|Loans held for sale (e)                     |  |                 | 271,248   |                        |   | 271,781   | 
|Loans, net of allowance for loan losses
(e) |  |                 | 466,378   |                        |   | 472,834   | 
|                                            |  |                 |           |                        |   |           | 
|                                           
|Financial
 liabilities:                     |  |                 |           |                        |   |           | 
|Repurchase agreements (a)                   |  |                 | 6,811,182 |                        |   | 6,811,182 | 
|Derivative liabilities (d)                  |  |                 | 74,333    |                        |   | 74,333    | 
|Long-term debt:                             |  |                 |           |                        |   |           | 
|Wachovia facility (f)                       |  |                 | 76,935    |                        |   | 76,935    | 
|Market Square CLO (f)                       |  |                 | 276,000   |                        |   | 276,000   | 
|DFR MM CLO (f)                              |  |                 | 231,000   |                        |   | 231,000   | 
|Pinetree CDO (f)                            |  |                 | 287,466   |                        |   | 287,466   | 
|Trust preferred (f)                         |  |                 | 123,717   |                        |   | 123,717   | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(a) | The carrying amounts
 approximate 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 certain investments because the investments are
 not traded in an active market and fair values are not readily obtainable,
 therefore, the Company has used the carrying value as an approximation of
 fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(d) | All derivatives are
 recognized on the condensed consolidated balance sheets at fair value.
 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 may determine 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 no additional information is available, then the
 carrying value is used as an approximation of fair value.
|   
|(f) | The carrying amount
 approximated fair value as the interest rate on all of the Companys
 long-term debt resets quarterly to short-term market rates plus a fixed
 credit spread.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

22

---



15.
ACCUMULATED OTHER COMPREHENSIVE LOSS

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

|                                               |  |                                 |          |                   |   |         |   |   |          |  
|---------------------------------------------- |  | ------------------------------- | -------- | ----------------- | - | ------- | - | - | -------- | -
|                                               |  | Available-for-
 Sale Securities |          | Cash Flow
 Hedges |   | Total   |  
|                                               |  |                                 |          |                   |   |         |  
|                                               |  | (In
 thousands)                 |         
|                                               |  |                                 |         
|Balance -
 December 31, 2006                   |  | $                               | (105,579 | )                 | $ | 58,420  |   | $ | (47,159  | )
|Unrealized net gain (loss for the
period)      |  |                                 | (45,694  | )                 |   | (39,723 | ) |   | (85,417  | )
|Reclassification adjustments:                  |  |                                 |          |                   |   |         |   |   |          |  
|Securities sold                                |  |                                 | 4,302    |                   |   |        |   |   | 4,302    |  
|Other-than-temporary impairment of
 securities |  |                                 | 16,567   |                   |   |        |   |   | 16,567   |  
|Hedging net gain recognized in earnings        |  |                                 |         |                   |   | (44,259 | ) |   | (44,259  | )
|                                               |  |                                 |          |                   |   |         |   |   |          |  
|Balance -
 September 30, 2007                  |  | $                               | (130,404 | )                 | $ | (25,562 | ) | $ | (155,966 | )
|                                               |  |                                 |          |                   |   |         |   |   |          |  

16. 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, and undesignated
derivatives, 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 September 30,
2007:

|                                         |  |       |     |                 |                |           |            |             |                         |  |   |         |   |   |         |  
|---------------------------------------- |  | ----- | --- | --------------- | -------------- | --------- | ---------- | ----------- | ----------------------- |  | - | ------- | - | - | ------- | -
|                                         |  |       |     |                 | NotionalAmount |           | Derivative |             | Estimated NetFair Value | 
|                                         |  |       |     |                 |                |           |            |            
|                                         |  |       |     |                 |                | Assets    |            | Liabilities |                         | 
|                                         |  |       |     |                 |                |           |            |             |                         |  |  
|                                         |  | Count |     | (In
 thousands) |               
|                                         |  |       |     |                 |               
|Interest
 rate swaps - designated        |  |       | 170 |                 | $              | 5,256,300 |            | $           | 14,354                  |  | $ | (45,729 | ) | $ | (31,375 | )
|Undesignated:                            |  |       |     |                 |                |           |            |             |                         |  |   |         |   |   |         |  
|Interest rate swaps                      |  |       | 47  |                 |                | 1,844,800 |            |             | 1,835                   |  |   | (20,100 | ) |   | (18,265 | )
|Interest rate floors                     |  |       | 6   |                 |                | 519,419   |            |             |                        |  |   | (6,383  | ) |   | (6,383  | )
|Interest rate cap                        |  |       | 1   |                 |                | 40,000    |            |             |                        |  |   | (114    | ) |   | (114    | )
|Credit default swaps - protection
seller |  |       | 16  |                 |                | 51,000    |            |             | 380                     |  |   | (97     | ) |   | 283     |  
|Credit default swaps - protection buyer  |  |       | 1   |                 |                | 3,000     |            |             |                        |  |   | (87     | ) |   | (87     | )
|Total return swaps                       |  |       | 2   |                 |                | 14,547    |            |             |                        |  |   | (1,823  | ) |   | (1,823  | )
|Warrants                                 |  |       | 1   |                 |                | n/a       |            |             | 120                     |  |   |        |   |   | 120     |  
|                                         |  |       |     |                 |                |           |            |             |                         |  |   |         |   |   |         |  
|                                         |  |       | 244 |                 | $              | 7,729,066 |            | $           | 16,689                  |  | $ | (74,333 | ) | $ | (57,644 | )
|                                         |  |       |     |                 |                |           |            |             |                         |  |   |         |   |   |         |  

|                    
|--------------------
|                    
|n/a - not applicable

Interest Rate Swaps - Designated

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 interest 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 excluding the
net interest accrual is recorded in other comprehensive income or loss.
Realized gains and losses on terminated contracts are maintained in other
comprehensive income until reclassified into earnings as an adjustment to
interest expense over the

23

---



contracts
original life. Hedging instruments under these strategies are deemed to be
designated to the outstanding repurchase agreements and the forecasted rollover
thereof. As of September 30, 2007, the maximum length of time over which the
Company was hedging its exposure to the variability of future cash flows for
forecasted transactions is approximately ten years.

For
the three and nine months ended September 30, 2007, the Company recognized a
net decrease to interest expense of $15.2 million and $44.3 million,
respectively, related to designated cash flow hedging. Included in these
amounts was the effect of ineffectiveness, which increased interest expense
$1.4 million and $1.1 million for the three and nine months ended September 30,
2007, respectively. For the three and nine months ended September 30, 2006, the
Company recognized a net decrease to interest expense of $16.1 million and
$31.0 million, respectively, related to cash flow hedging. Included in these
amounts was the effect of ineffectiveness, which resulted in an increase to
interest expense of $1.1 million and $0.7 million, respectively. The weighted
average fixed rate payable on the cash flow hedges as of September 30, 2007 and
2006 was 4.83% and 4.50%, respectively. As of September 30, 2007 and 2006, the
Company held 170 and 227 designated interest rate swaps with notional amounts
outstanding of $5.3 billion and $6.6 billion, respectively. Based on amounts
included in the accumulated other comprehensive loss as of September 30, 2007
from designated interest rate swaps, the Company expects to recognize a
decrease of $6.3 million in interest expense over the next twelve months.

During
the quarter the Company dedesignated $1.1 billion (notional) of interest rate
swaps previously designated as a hedge with a negative fair value of $11.1
    million at dedesignation that will be amortized into interest expense over
    the original life of the swaps. This dedesignation occurred as a result of
    changing risk exposure in repurchase agreement funding.

Undesignated
Interest Rate Swaps

As
of September 30, 2007, the Company held 47 undesignated interest rate swaps
with notional amounts outstanding of $1.8 billion. Accordingly, changes in fair
value of these derivatives are recorded in net gain (loss) on derivatives in
the condensed consolidated statements of operations. As of September 30, 2007,
the undesignated interest rate swaps had a gross positive and gross negative
fair value of $1.8 million and $20.1 million, respectively, recorded in
derivative assets and liabilities in the condensed consolidated balance sheet.
The weighted average fixed rate payable on the undesignated interest rate swaps
as of September 30, 2007 was 4.96%. For the three and nine months ended
September 30, 2007 and 2006, the Company recognized a net loss of $15.2 million
and $13.0 million, and a net loss of $0.1 million and a net gain of $1.6
million in net gain (loss) on derivatives, respectively, related to
undesignated interest rate swaps.

Undesignated
Interest Rate Floors

As
of September 30, 2007, the Company held six interest rate floors with notional
amounts in the aggregate of $519.4 million that were not designated as hedges.
As of September 30, 2007, the floors had a net negative fair value of $6.4
million recorded in derivative liabilities in the condensed consolidated
balance sheet. In connection with the six interest rate floors, the Company
received payments totaling $5.9 million at inception of the floors. There were
$1.5 million and $2.0 million in payments received during the three and nine
months ended September 30, 2007, respectively. In return for these payments the
Company will make payments based on the spread in rates, if a one-month LIBOR
rate decreases below a certain agreed upon contractual rate. The payments on
each individual floor would be paid based on the amortizing notional balance of
the respective floor. For the three and nine months ended September 30, 2007
and 2006, the Company recognized net losses of $2.3 million and $0.7 million,
and net losses of $0.5 million and $0.5 million recorded in net gain (loss) on
derivatives, respectively, related to the floors.

24

---



Undesignated
Interest Rate Cap

As
of September 30, 2007, the Company held one interest rate cap with notional
amount of $40.0 million that was not designated as a hedge. As of September 30,
2007, the cap had a negative fair value of $0.1 million recorded in derivative
liabilities in the condensed consolidated balance sheet. The Company will
receive payments based on the spread in rates, if the three-month LIBOR rate
increases above a certain agreed upon contractual rate and the Company will
make payments based on a nominal fixed interest rate. For the three and nine
months ended September 30, 2007, the Company recognized a loss of $0.1 million
related to the cap in net gain (loss) on derivatives.

Undesignated
Credit Default Swaps

As
of September 30, 2007, the Company held 17 credit default swaps (CDS), with
an aggregate notional amount of $54.0 million. The Company has sold protection
on 16 of the CDS with a notional of $51.0 million and bought protection on one
CDS with a notional of $3.0 million. As of September 30, 2007, the CDS where
the Company has sold protection had a gross positive and gross negative fair
value of $0.4 million and $0.1 million, respectively, recorded in derivative
assets and liabilities in the condensed consolidated balance sheet. The CDS
where the Company has bought protection had a negative fair value of $0.1
million, recorded in derivative liabilities in the condensed consolidated
balance sheet. For the three and nine months ended September 30, 2007 and 2006,
the Company recognized net loss of $0.3 million and a net gain of $0.7 million,
and net gains of $0.9 million and $2.0 million recorded in net gain (loss) on
derivatives, respectively, related to CDSs.

Undesignated
Total Return Swaps

As
of September 30, 2007, the Company held two total return swaps for which we
receive the total return and pay a specified interest rate, with a notional
amount of $14.5 million and a negative fair value of $1.8 million, recorded in
derivative liabilties in the condensed consolidated balance sheet. For the
three and nine months ended September 30, 2007 and 2006, the Company recognized
a net loss of $2.2 million and $1.6 million, and net gains of $0.1 million and
$0.2 million recorded in net gain (loss) on derivatives, respectively, related
to total return swaps.

Undesignated
Warrants

As
of September 30, 2007, the Company held warrants to purchase shares of a
company of which we are also mezzanine debt holders. These warrants were issued
in connection with a renegotiation of the terms of the original loan agreement.
As of September 30, 2007, these warrants had a fair value of $0.1 million,
recorded in derivative assets in the condensed consolidated balance sheet. The
Company is amortizing the value of the warrants as of the date they were
received into income over the remaining life of the loan. For the three and
nine months ended September 30, 2007 the Company recognized a net loss of $0.1
million recorded in net gain (loss) on derivatives related to the undesignated
warrants.

17.
COMMITMENTS

The
timing and amount of additional funding on certain bank loans are at the
discretion of the borrower. The Company had unfunded lending commitments of
$19.3 million as of September 30, 2007.

25

---



18. SUBSEQUENT
EVENTS

TERMINATION
OF MERGER AGREEMENT

On
October 19, 2007, the Company and other parties terminated the merger agreement
pursuant to which the Company would have acquired the Manager. See Note 3,
Potential Acquisition, for additional information.

DIVIDEND

On
October 23, 2007, the Company declared a cash dividend of $0.42 per share on
its common stock for the third quarter of 2007. The record date for the cash
dividend was November 6, 2007, and the payment date will be November 27, 2007.

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 this Quarterly report on
Form 10-Q on page 3 under the title Special Note Regarding Forward Looking
Statements, Part II  Item 1A. Risk Factors and our Annual Report on Form
10-K filed March 14, 2007 in Part I - Item
1A. Risk Factors.You should read the following discussion together
with our condensed consolidated financial statements and notes thereto included
in Part I - Item 1. Financial Statementon
this Form 10-Q.

Overview

Deerfield
Triarc Capital Corp. and its subsidiaries (the Company) is a diversified
financial company formed in November 2004 to invest in real estate-related
assets, primarily mortgage-backed securities as well as alternative corporate
investments. 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 are 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 investments:

|                                                 |  |                                         
|------------------------------------------------ |  | ----------------------------------------
|Real
 Estate Investments:                        |  | Corporate
 Investments:                 
|                                                 |  |                                         
|Residential
 mortgage-backed securities, or RMBS |  | Senior
 secured and unsecured loans     
|Commercial
 mortgage-backed securities, or CMBS  |  | Mezzanine
 loans                        
|Commercial
 real estate loans                    |  | High yield
 corporate bonds             
|                                                 |  | Distressed
 and stressed debt securities
|                                                 |  | Equity
 securities                      
|                                                 |  | Credit
 default swaps                   
|                                                 |  | Other
 investments                      

26

---



The
following is a summary of our portfolio:

|                                                  |  |                    |           |   |                         |       |  
|------------------------------------------------- |  | ------------------ | --------- | - | ----------------------- | ----- | -
|                                                  |  | September 30, 2007 |          
|                                                  |  |                    |          
|Principal Investments                             |  | Carrying
 Value    |           |   | % of Total
 Investments |      
|                                                  |  |                    |           |   |                         |      
|                                                  |  | (In thousands)     |           |   |                         |      
|                                                  |  |                    |           |   |                         |      
|Real Estate Investments:                          |  |                    |           |   |                         |       |  
|Residential
 mortgage-backed securities (1)       |  | $                  | 7,390,574 |   |                         | 88.2  | %
|Commercial
 real estate loans and securities (2)  |  |                    | 33,976    |   |                         | 0.4   | %
|Asset-backed
 securities held in Pinetree CDO (3) |  |                    | 225,041   |   |                         | 2.7   | %
|                                                  |  |                    |           |   |                         |       |  
|                                                  |  |                    | 7,649,591 |   |                         | 91.3  | %
|                                                  |  |                    |           |   |                         |       |  
|Corporate Investments:                            |  |                    |           |   |                         |       |  
|Corporate
 leveraged loans (4)                    |  |                    | 155,553   |   |                         | 1.9   | %
|Assets held
 in Market Square CLO (5)             |  |                    | 269,926   |   |                         | 3.2   | %
|Assets held
 in DFR MM CLO                        |  |                    | 298,234   |   |                         | 3.5   | %
|Equity
 securities                                |  |                    | 6,483     |   |                         | 0.1   | %
|Other
 investments                                |  |                    | 2,907     |   |                         | 0.0   | %
|                                                  |  |                    |           |   |                         |       |  
|                                                  |  |                    | 733,103   |   |                         | 8.7   | %
|                                                  |  |                    |           |   |                         |       |  
|                                                 
|Total invested assets                             |  |                    | 8,382,694 |   |                         | 100.0 | %
|                                                  |  |                    |           |   |                         |       |  
|Allowance
 for loan losses                        |  |                    | (8,933    | ) |                         |       |  
|                                                  |  |                    |           |   |                         |       |  
|                                                  |  | $                  | 8,373,761 |   |                         |       |  
|                                                  |  |                    |           |   |                         |       |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Residential mortgage-backed
 securities are agency or AAA rated and includes both trading and available-for-sale
 interest-only strip securities with a fair value of $1.0 million and $0.2
 million, respectively.                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(2) | Commercial real estate loans
 and securities include $5.5 million of participating interests in commercial
 mortgage loans.                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(3) | Asset-backed securities held
 in Pinetree CDO (Pinetree CDO Ltd,) include RMBS (non-agency), CMBS and other
 asset-backed securities, or ABS, in the amount of $180.4 million, $33.9
 million, and $10.7 million, respectively. The real-estate assets (RMBS &
 CMBS) represented 95.2% of the ABS held in Pinetree CDO. For a further
 discussion of these investments see Financial
 Condition  Asset-backed Securities Held in CDOdiscussed later
 in this section.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(4) | Corporate leveraged loans
 exclude credit default swaps with an estimated net fair value of $0.2 million
 and a $54.0 million gross notional value, total return swaps with an
 estimated net fair value of negative $1.8 million and a $14.5 million
 notional value. This amount is also reported gross of the $8.9 million of
 allowance for loan losses.                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(5) | Assets held in Market Square
 CLO include syndicated bank loans of $263.1 million and high yield corporate
 bonds of $6.8 million.                                                                                                                                                                                                                                                                                                                                       

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 since re-leveraged our investment portfolio and have invested
the proceeds of that new leverage as well as the proceeds from our initial
private offering of common stock in a portfolio of RMBS and alternative
corporate investments with total invested assets, as of September 30, 2007, of
$8.4 billion.

We
are externally managed by Deerfield Capital Management LLC, or the Manager, a
fixed income asset manager and a Securities and Exchange Commission, or SEC,
registered investment adviser. The Manager is a wholly-owned subsidiary of
Deerfield & Company LLC, or Deerfield. On April 20, 2007, we announced that
we had entered into a definitive agreement to acquire Deerfield, the parent of
our Manager, from Triarc Companies, Inc. (Triarc), which owns a controlling
interest in Deerfield, and Deerfields other members. On August 16, 2007, we
announced that we had not yet been able to complete on acceptable terms the
financing necessary for us to consummate the acquisition of Deerfield, due to,
among other things, instability in the credit markets. Our obligation to
complete the acquisition was subject to our

27

---



receipt of
financing for the cash portion of the purchase price and related transaction
costs. Under the existing agreement, each party had the right to terminate the
agreement beginning October 19, 2007. The parties mutually terminated their
agreement on October 19, 2007. On October 22, 2007 we announced that we were
continuing to explore with Triarc revised terms and conditions of the Deerfield
acquisition and that there was no assurance that the parties will reach
agreement on revised terms and conditions for the acquisition of Deerfield and
that even if reached, such terms and conditions would likely differ materially
from those set forth in the terminated agreement. The Companys Special
Committee of its Board of Directors has not approved any revised terms or
conditions.

We
earn income and generate cash from 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 largely depend on our ability to effectively manage this particular
operating expense in relation to our interest income.

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              
|                                                                                                                                                       |   |                                                                                          
|                                                                                                                                                       |  | 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 in an effort to enhance our potential returns.
Leverage can enhance returns but also magnifies losses.

28

---



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 impact 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. Likewise, decreases in short term
interest rates will tend to increase our net income. 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 in our ability to insulate the portfolio from all of the negative
consequences associated with changes in short-term interest rates while
providing an attractive net spread on our portfolio.

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 fully recoup 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 the interest income on our assets
remain relatively constant.

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 effect on our
performance.

Trends

The
following trends may also affect our business:

Interest
rate environment. During the third quarter of 2007,
credit markets experienced significant volatility. Prior to the quarter, LIBOR
short-term borrowing rates had remained fairly constant, due in part to a
static Federal Funds target rate as well as relatively benign credit market
conditions. During the quarter, however, the turbulent financial markets caused
a sharp upward spike in short-term borrowing rates. This development, as well
as other observable economic conditions, led the Federal Open Market Committee
to ease the Fed Funds target rate from 5.25% to 4.75% causing a subsequent drop
in LIBOR rates. With respect to our existing RMBS portfolio, short-term
borrowing costs fluctuated in step with the variations in LIBOR. However, due
to our interest rate swaps hedging program, the changes in LIBOR were largely
offset by our hedges, thus our effective cost of funding remained relatively
stable. Additionally, the fair market value changes in the RMBS portfolio
associated with shifts in term interest rates are generally offset by our
portfolio of swap hedges of varying maturities. Because we own hybrid
adjustable mortgages which contain caps on the interest rate, a significant
rise in rates after the initial fixed rate period would also result in a
decrease in net interest income if the financing rate is higher than the capped
rate.

With
respect to our existing and future floating rate investments such as loans,
interest rate decreases should result in decreases in our net interest income
because our floating rate assets are greater in amount than the related
floating rate liabilities. Similarly, such a decrease in interest rates should
generally result in a decrease 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
increase in value in a declining interest rate environment and our net interest
spreads on fixed rate

29

---



assets could
increase to the extent they are financed with floating rate debt. We have
engaged in interest rate swaps to hedge a significant portion of the risk
associated with changes in interest rates. However, because we do not hedge
100% of the amount of short-term financing outstanding, decreases in interest
rates will likely result in an increase in the net interest income of our
portfolio, net of hedges. Similarly, increases in interest rates will likely
result in a decline in our net interest income.

Shape
of the yield curve. During 2005 and 2006, the yield
curve experienced significant flattening as short term rates increased at a
greater rate than long term rates. For example, between December 31, 2005 and
December 31, 2006, the yield curve became inverted, with the yield on the three-month
U.S. Treasury bill increasing by 92 basis points and the yield on the
three-year U.S. Treasury note increasing by 41 basis points. Between December
31, 2006 and September 30, 2007, however, the yield curve steepened, with the
yield on the three-month U.S. Treasury bill decreasing by 114 basis points and
the yield on the three-year U.S. Treasury note increasing by 70 basis points.
As of September 30, 2007, the yield on the three-month U.S. Treasury bill was
3.90% versus a yield of 4.02% on the three-year U.S. Treasury note, suggesting
a flat yield curve. Given the economic environment and the current flatness
of the U.S. Treasury curve, it is difficult to predict if the yield curve will
continue to remain flat or if a further steepening will occur in the future.
With respect to our RMBS portfolio, should there be a steepening of the yield
curve, we would likely experience 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, should inversion of the curve occur, we would
likely experience decreases in our net interest income. Our hedging program
will offset some of the impact of changes in the shape of the yield curve.
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.

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, conditions in the mortgage origination industry,
general economic conditions and the relative interest rates on adjustable-rate
and fixed-rate mortgage loans. Because interest rates may continue to decline,
RMBS prepayment rates may increase. If this were to occur, our current
portfolio, which is heavily weighted towards hybrid adjustable-rate mortgages,
would experience decreases in its net interest income due to reinvestment
opportunities being in a lower rate environment. However, because our RMBS portfolio is primarily trading at a
discount to par, an increase in prepayment rates should result in an increase
in the book value of our equity.

Credit
spreads.Over the past several years, the credit
markets experienced tightening credit spreads due to the robust demand for
lending opportunities. Over the last several months, however, there has been
significant widening of spreads across all of the credit markets. With respect
to our credit portfolio, which includes commercial mortgage loans, asset-backed
securities held in a CDO, bank loans, high yield corporate bonds and other
corporate securities, and which accounts for 11.8% of our total portfolio as of
September 30, 2007, a narrowing or widening of credit spreads could result in a
decrease or increase, respectively, in the net interest income on future
credit-oriented investments.

Competition.
Over the past several years, there has been increased competition for our
targeted investments, which caused further tightening of credit spreads. The
recent spread widening and reduced liquidity has reduced the competition for
our targeted investments and should provide us with a variety of investment
opportunities. In addition, we believe it is likely that bank lenders will
return to more historical lending practices, requiring more conservative
loan-to-value ratios and higher debt service coverages than required by the
market over the past few years, which will provide opportunities to lenders
like us to provide corporate mezzanine financing.

Subprime
mortgages. Recently, the subprime mortgage-banking
environment has been experiencing considerable strain from rising delinquencies
and liquidity pressures and several subprime mortgage lenders have failed.
Certain subprime lenders have been unable to obtain further financing and may
not be able to satisfy outstanding debt obligations. Higher default rates in
the subprime mortgage market have

30

---



increased the
risk of losses and volatility of interest rate spreads in that market sector,
which has negatively impacted the market value of our available-for-sale
securities collateralized by subprime mortgages and therefore our book value.
As of September 30, 2007, the carrying value of our total holdings of subprime
mortgages was $180.8 million (par amount) held in Pinetree CDO. Although we
consolidate these assets under GAAP, our remaining economic risk of loss is
limited to $8.1 million, which represents our total initial investment in
Pinetree CDO of $12.0 million less our estimate of other-than- temporary
impairment of $3.9 million. If our Pinetree CDO portfolio experiences
significant credit deterioration, we may be forced to realize additional
losses, which will have the effect of reducing our net income. Similarly, if
the mortgages underlying these investments begin to perform below our
expectations, we could experience reduced net interest income from Pinetree
CDO. As of September 30, 2007, we have accumulated a net $69.9 million of
unrealized loss related to asset-backed securities held in Pinetree CDO
reflected as an increase of other comprehensive loss in stockholders equity
while our economic risk is the remaining $8.1 million. Any realized losses in
excess of our equity investment would be borne by the debt holders, however, under
current GAAP, there may be a timing difference between the recognition of
realized losses on the assets and the offsetting gain from reduction of the
debt balance.

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, based upon information
available to us. We rely on the Manager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 classified as either trading or
available-for-sale securities and carried on the balance sheet at fair value.
The classification as trading securities results in changes in fair value being
recorded in net gain on trading securities in the condensed consolidated
statements of operations. The classification as available-for-sale securities
results in changes in fair value being recorded as balance sheet adjustments to
accumulated other comprehensive 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, dealers in the securities and dealer
supplied pricing models that use market based data inputs. 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
generally written down to the then-current fair value, and the unrealized loss
is transferred from accumulated other comprehensive loss as an immediate
reduction of current earnings (as if the loss had been realized 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 recognition.

31

---



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

| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | severity of
 impairment;                                                                                                            
| |   |                                                                                                                                     
| |  | 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;                                                                       
| |   |                                                                                                                                     
| |  | the
 financial condition of the investee and the prospect for future recovery; and                                                  
| |   |                                                                                                                                     
| |  | our intent
 and ability to hold the security for a period of time sufficient to allow for
 any anticipated recovery in market value.

Additionally,
for securities within the scope of Emerging Issues Task Force, or EITF, 99-20, Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securities Financial Assets,
when adverse changes in estimated cash flows occur as a result of declining net
spread, prepayment or credit loss experience, an other-than-temporary
impairment is deemed to have occurred. Accordingly, the security is written
down to fair value, and the unrealized loss is transferred from accumulated
other comprehensive loss as an immediate reduction of current earnings. The
cost basis adjustment is recoverable only upon sale or maturity of the
security.

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 and discount 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 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.

As
of September 30, 2007, our available-for sale RMBS portfolio had an unamortized
net premium of $35.7 million, $35.5 million excluding the stripped securities,
included in the cost basis of our available-for-sale RMBS securities. The
current weighted average life of the portfolio was 4.8 years, which represents
the average number of years for which each dollar of unpaid principal remains
outstanding, and we currently estimate approximately 50% of the net premium
amortization will be realized over this period.

Loans

Our
investments in loans are classified either as loans 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, net of an allowance
for loan losses, if necessary, with any premium or discount being amortized or
accreted to income. We determine fair value for our loans held for sale using
price estimates provided by an independent pricing service or dealer quotes
which are reviewed by us for reasonableness. If we are unable to obtain
estimates

32

---



from these
primary sources, our valuation committee determines estimated fair value based
on some or all of the following: (i) current financial information of the
borrowing company and performance against its operating plan; (ii) changing
value of collateral supporting the loan; (iii) changes to the market for the
borrowing companys service or product and (iv) 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 net gain (loss) on loans in our
statement of operations and the loans carrying value 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 the quality of our portfolio 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 the present value of
projected future cash flows except that if practical, the loans observable
market price or the fair value of the collateral may also be used. 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-off 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 we believe that scheduled debt service payments will
not be met within the coming 12 months and/or the loan becomes 90 days
delinquent. While on non-accrual status, interest income is recognized only
upon actual receipt.

We
have two impaired loans in our portfolio as of September 30, 2007. One was
placed on non-accrual status in 2006, and we determined that an allowance for
loan losses was required for the excess of the amortized cost basis of the loan
over the discounted expected future cash flows. The second loan was placed on
non-accrual status in 2007 and an allowance for loan losses was established for
the full carrying value of the loan as, among other factors, the company has
filed for bankruptcy and we do not expect to recover the principal amount due
under the loan agreement.

Accounting For
Derivative Financial Instruments and Hedging Activities

Our
policies permit us to enter into derivative contracts, including, but not
limited to, 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.

33

---



The hedge
instrument must be highly effective in achieving changes in cash flow, which
offset changes in cash flow of 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 gains and losses are recorded
in other comprehensive loss. Realized gains and losses from terminated or
dedesignated swaps 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 derivative 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 instrument is
a credit default swap, or CDS, in which we generally act as the protection seller
and receive a premium for taking the risk of paying the protection buyer for
the notional amount of the contract and taking title to the referenced entitys
obligation upon the occurrence of a credit event, as defined in the CDS. The
fair value of the CDS depends on a number of factors, primarily premium levels
that are dependent on credit spreads. The CDS contracts are valued using market
quotes provided from prominent broker dealers in the CDS market.

Equity Compensation

We
account for the restricted stock and stock options granted to the Manager in
accordance with the consensus in Issue 1 of 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. Pursuant to EITF No. 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 Payment,
effective January 1, 2006, 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. In addition to recognizing
share-based compensation expense, an equivalent contribution to additional
paid-in capital is recognized. The fair value of stock and options is
re-measured and adjusted quarterly for unvested shares and options. Changes in
such fair value are reflected in the amortization expense recognized in that
quarter on a retrospective basis and in future quarters until the stock and
options are fully vested. As a result, changes in our stock price can cause
volatility in our financial results as reported under GAAP.

Variable Interest
Entities

In
accordance with Financial Accounting Standard Board (FASB) Interpretation
46R,Consolidation of Variable Interest
Entities (FIN 46R), we identify any potential variable interest
entities, (VIEs), and determine if the assets, liabilities, noncontrolling
interests, and results of operations of a VIE need to be included in our
condensed consolidated financial statements. A company that holds variable
interests in a VIE 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 and therefore be deemed the primary beneficiary. This analysis
may involve significant judgments about projected cash flows of the VIE. We
consolidate three VIEs, Market Square CLO Ltd. (Market Square CLO), DFR
Middle Market CLO, Ltd. (DFR MM CLO), and Pinetree CDO Ltd (Pinetree CDO),
in our condensed consolidated financial statements.

34

---



Income Taxes

We
have elected to be taxed, and intend to continue to qualify, as a REIT. 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 failed to meet each of these requirements and did 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,
we operate taxable REIT subsidiaries, or TRSs, which may be subject to
corporate-level income taxes.

Recent Accounting Pronouncements

In
June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements and
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The adoption of FIN 48, effective January 1, 2007,
did not have a material impact on our condensed consolidated financial
statements.

In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157 is effective for us as of January 1,
2008. We are currently evaluating the potential impact of adopting this
standard.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities.
SFAS No. 159 permits entities to choose to measure financial instruments and
certain other items at fair value that are not currently required to be
measured at fair value. SFAS No. 159 is effective for us as of January 1, 2008.
We are currently evaluating the potential impact of adopting this standard.

In
June 2007, the AICPA issued Statement of Position,(SOP) 07-1, Clarification of the Scope of the Audit and Accounting
GuideInvestment Companiesand
Accounting for Parent Companies and Equity Method Investors for Investments in
Investment Companies. This SOP provides guidance for determining
whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies, (the Guide).
Entities that are within the scope of the Guide are required, among other
things, to carry their investments at fair value, with changes in fair value
included in earnings. The provisions of this SOP are effective for fiscal years
beginning after November 15, 2007. However, in October 2007, the FASB agreed to
issue an exposure draft that would indefinitely delay the effective date of SOP
07-1 until the FASB can reassess its provisions. We are currently evaluating this
new guidance and have not determined whether we will be required to apply the
provisions of the SOP in presenting our financial statements.

Financial
Condition

All
of our assets were acquired through the use of proceeds from our December 2004
initial private placement and June 2005 initial public offering, operating cash
flows, and the 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.

35

---



The
following table summarizes the carrying value of our investment portfolio by
balance sheet classification, excluding credit default swaps and total return
swaps, at September 30, 2007:

|                                                   |  |                                  |           |                      |   |                     |  |                       |       |       |   |         |  |   |         |   |   |           |  
|-------------------------------------------------- |  | -------------------------------- | --------- | -------------------- | - | ------------------- |  | --------------------- | ----- | ----- | - | ------- |  | - | ------- | - | - | --------- | -
|                                                   |  | Carrying
  Value                 |          
|                                                   |  |                                  |          
|Security
  Description                             |  | Available-for-Sale 
  Securities |           | Trading
  Securities |   | Other
  Investments |  | Loans Held
  For Sale |       | Loans |   | Total   | 
|                                                   |  |                                  |           |                      |   |                     |  |                       |       |       |   |         | 
|                                                   |  | (In thousands)                   |          
|                                                   |  |                                  |          
|                                                  
|RMBS (agency/AAA)                                  |  | $                                | 6,574,296 |                      | $ | 816,278             |  | $                     |      |       | $ |        |  | $ |        |   | $ | 7,390,574 |  
|                                                   |  |                                  |           |                      |   |                     |  |                       |       |       |   |         |  |   |         |   |   |           |  
|Assets held in DFR MM CLO                          |  |                                  |          |                      |   |                    |  |                       |      |       |   |        |  |   | 298,234 |   |   | 298,234   |  
|Corporate leveraged loans (1)                      |  |                                  |          |                      |   |                    |  |                       |      |       |   |        |  |   | 152,926 |   |   | 152,926   |  
|Commercial mortgage-backed assets (2)              |  |                                  | 4,300     |                      |   |                    |  |                       |      |       |   | 5,525   |  |   | 24,151  |   |   | 33,976    |  
|Equity securities                                  |  |                                  |          |                      |   |                    |  |                       | 6,483 |       |   |        |  |   |        |   |   | 6,483     |  
|                                                   |  |                                  |           |                      |   |                     |  |                       |       |       |   |         |  |   |         |   |   |           |  
|Total structured and syndicated assets             |  |                                  | 4,300     |                      |   |                    |  |                       | 6,483 |       |   | 5,525   |  |   | 475,311 |   |   | 491,619   |  
|Assets held in Market Square CLO (3)               |  |                                  | 6,830     |                      |   |                    |  |                       |      |       |   | 263,096 |  |   |        |   |   | 269,926   |  
|Asset-backed securities held in Pinetree
  CDO (4) |  |                                  | 225,041   |                      |   |                    |  |                       |      |       |   |        |  |   |        |   |   | 225,041   |  
|Other investments and loans (5)                    |  |                                  | 2,907     |                      |   |                    |  |                       |      |       |   | 2,627   |  |   |        |   |   | 5,534     |  
|                                                   |  |                                  |           |                      |   |                     |  |                       |       |       |   |         |  |   |         |   |   |           |  
|Total alternative assets                           |  |                                  | 239,078   |                      |   |                    |  |                       | 6,483 |       |   | 271,248 |  |   | 475,311 |   |   | 992,120   |  
|                                                   |  |                                  |           |                      |   |                     |  |                       |       |       |   |         |  |   |         |   |   |           |  
|Total invested assets                              |  | $                                | 6,813,374 |                      | $ | 816,278             |  | $                     | 6,483 |       | $ | 271,248 |  |   | 475,311 |   |   | 8,382,694 |  
|                                                   |  |                                  |           |                      |   |                     |  |                       |       |       |   |         |  |   |         |   |   |           |  
|Allowance for loan losses                          |  |                                  |           |                      |   |                     |  |                       |       |       |   |         |  |   | (8,933  | ) |   | (8,933    | )
|                                                   |  |                                  |           |                      |   |                     |  |                       |       |       |   |         |  |   |         |   |   |           |  
|                                                   |  |                                  |           |                      |   |                     |  |                       |       |       |   |         |  | $ | 466,378 |   | $ | 8,373,761 |  
|                                                   |  |                                  |           |                      |   |                     |  |                       |       |       |   |         |  |   |         |   |   |           |  

|    |                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Corporate leveraged loans
  exclude credit default swaps with an estimated net fair value of $0.2 million
  and a $54.0 million gross notional value, total return swaps with an
  estimated net negative fair value of $1.8 million and a $14.5 million
  notional value and this amount is reported gross of the $8.9 million
  allowance for loan losses.
|    |                                                                                                                                                                                                                                                                                                                                                             
|(2) | Commercial mortgage-backed
  assets include $5.5 million of participating interests in commercial mortgage
  loans.                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                             
|(3) | Assets held in Market Square
  CLO include high yield corporate bonds of $6.8 million.                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                             
|(4) | Asset-backed securities held
  in Pinetree CDO include RMBS (non-agency), CMBS and ABS in the amount of
  $180.4 million, $33.9 million, and $10.7 million, respectively. The
  real-estate assets (RMBS and CMBS) represented 95.2% of the Asset-backed
  securities held in CDO.                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                             
|(5) | Other investments and loans
  include $2.6 million of corporate leveraged loans.                                                                                                                                                                                                                                                                            

Mortgage-Backed
Securities

The
table below summarizes the valuation adjustments on our available-for-sale
agency issued and AAA-rated RMBS investments:

|                           |  |                    |           |                            |   |       |  |   |           |  
|-------------------------- |  | ------------------ | --------- | -------------------------- | - | ----- |  | - | --------- | -
|                           |  | September 30, 2007 |          
|                           |  |                    |          
|                           |  | RMBS               |           | Interest-only
  Securities |   | Total | 
|                           |  |                    |           |                            |   |       | 
|                           |  | (In
thousands)     |          
|                           |  |                    |          
|Par amount
  (1)           |  | $                  | 6,598,628 |                            | $ |      |  | $ | 6,598,628 |  
|Unamortized
  premium (2)  |  |                    | 51,689    |                            |   | 190   |  |   | 51,879    |  
|Unamortized
  discount (3) |  |                    | (16,191   | )                          |   |      |  |   | (16,191   | )
|                           |  |                    |           |                            |   |       |  |   |           |  
|Amortized
  cost           |  |                    | 6,634,126 |                            |   | 190   |  |   | 6,634,316 |  
|Unrealized
  gains         |  |                    | 9,798     |                            |   |      |  |   | 9,798     |  
|Unrealized
  losses        |  |                    | (69,818   | )                          |   |      |  |   | (69,818   | )
|                           |  |                    |           |                            |   |       |  |   |           |  
|Fair value                 |  | $                  | 6,574,106 |                            | $ | 190   |  | $ | 6,574,296 |  
|                           |  |                    |           |                            |   |       |  |   |           |  

|    |                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | The par amounts for
  interest-only securities have been reduced $0.4 million of
  other-thantemporary impairment for the three months ended September 30,
  2007.                    
|    |                                                                                                                                                                                        
|(2) | Unamortized premium includes
  a reduction of $0.2 million related to other-than-temporary impairment of
  certain securities recognized for the three months ended September 30, 2007.
|    |                                                                                                                                                                                        
|(3) | The unamortized discount for
  RMBS securities includes $12.3 million of other-than-temporary impairment for
  the three months ended September 30, 2007.                              

As
of September 30, 2007, we held 174 RMBS securities classified as
available-for-sale with a fair value of $4.3 billion, valued below cost, of
which 154 securities with a current fair value of $3.7 billion were valued
below cost for greater than twelve months. During the nine months ended
September 30, 2007,

36

---



we recognized
$12.3 million of other-than-temporary impairment related to certain hybrid adjustable
    and fixed rate residential mortgage-backed securities. This
    represented 50 securities with an estimated fair value of $865.7 million.
    We determined that we no longer had the intent to hold these securities for
    a period of time sufficient to allow for recovery in market value. As a result
    of the impairment charge the unrealized loss was transferred from accumulated
    other comprehensive loss to an immediate reduction of earnings and classified
    in net gain (loss) on available-for-sale securities in the condensed consolidated
    statements of operations.

The
RMBS are agency issued or AAA-rated in credit quality. With the exception of
the securities noted above, we intend and believe we have the ability to hold
these securities until the fair value of the securities is recovered, which may
be maturity if necessary. Given the unfavorable events in the credit
environment during the past several months and the turmoil in the repurchase
agreement funding market, we have taken actions to secure financing sources for
our RMBS portfolio. As such, we believe that we have both the intent and the
ability to retain the RMBS portfolio for a period of time to allow for any
anticipated recovery in value. We expect to collect all contractual amounts due
and do not believe any other RMBS securities held were other-than-temporarily
impaired as of September 30, 2007.

During
the three and nine months ended September 30, 2007, we recognized $0.2 million
and $0.4 million of other-than-temporary impairment related to our
interest-only securities, respectively. The expected future cash flows for all
of these securities are primarily dependent upon contingent attributes such as
interest rates and prepayments that are dependent on a variety of market
factors. We used updated estimated cash flow projections generated from third
party software to determine the amount of the impairment. As a result of the
impairment charge, certain of these securities were written down to the
then-current fair value, and the unrealized loss was transferred from
accumulated other comprehensive loss to an immediate reduction of earnings and
classified in net gain (loss) on available-for-sale securities in the condensed
consolidated statements of operations.

To
enhance liquidity, certain available-for-sale RMBS positions were sold during
the three months ended September 30, 2007 which resulted in net realized losses
of $6.8 million and a reduction of the par value of the available-for-sale RMBS
portfolio by $1.0 billion. A portion of the proceeds from those sales was
reinvested in trading RMBS securities. The trading RMBS securities portfolio
increased from a par value of $219.0 million as of June 30, 2007 to a par value
of $893.5 million as of September 30, 2007.

As
of September 30, 2007, excluding the interest-only strips, our
available-for-sale RMBS portfolio had a net amortized cost of 100.5% of the
face amount. The RMBS (excluding the stripped securities) are valued below par
as of September 30, 2007 because the weighted-average interest rate is lower
than prevailing market rates. Our total RMBS net premium amortization expense
for the three and nine months ended September 30, 2007 was $4.0 million, and
$16.0 million, respectively. As of September 30, 2007, we had unamortized net
premium of $35.7 million, $35.5 million excluding the stripped securities,
included in the cost basis of our available-for-sale RMBS securities. As of
September 30, 2007, the current weighted average life of the portfolio was 4.8
years, which represents the average number of years for which each dollar of
unpaid principal remains outstanding. We currently estimate approximately 50%
of the net premium amortization will be realized over this period.

Net
portfolio duration, which is the difference between the duration of the RMBS
portfolio and the duration of repurchase agreements, adjusted for the effects
of our interest rate swap portfolio, is 0.19 years as of September 30, 2007. In
order to fully assess the possible impact of a change in interest rates on the
RMBS portfolio, the reader should consider not only the duration, but also the
portfolios leverage. See our discussion of leverage later in this section
under the heading Leverage.

37

---



As
of September 30, 2007, our agency issued and AAA-rated RMBS totaled $5.6
billion and $1.8 billion, respectively. The following table details our RMBS
holdings as of September 30, 2007, of which $6.6 billion and $816.3 million are
classified as available-for-sale securities and trading securities,
respectively:

|                                   |  |                       |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 
|---------------------------------- |  | --------------------- | --------- | ------------------- | - | --------- |  | ------------------ | - | ---------------- |  | ------------------- |  | -------------------------- | - | -------------------- |  | -------- |  |  | ---- |  |  | ---- | 
|                                   |  |                       |           |                     |   |           |  | Weighted
  Average |  
|                                   |  |                       |           |                     |   |           |  |                    |  
|Security
  Description (1)         |  | Par andNotionalAmount |           | EstimatedFair Value |   | Coupon    |  | Months toReset (2) |   | Yield toMaturity |  | ContractualMaturity |  | ConstantPrepaymentRate (3) |   | ModifiedDuration (4) | 
|                                   |  |                       |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      | 
|                                   |  | (In
thousands)        |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |     
|                                   |  |                       |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |     
|Hybrid Adjustable Rate RMBS:       |  |                       |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 
|Rate reset in 1 year or less       |  | $                     | 348,164   |                     | $ | 354,794   |  | 4.47               | % |                  |  | 3                   |  | 5.08                       | % |                      |  | 04/07/35 |  |  | 31.2 |  |  | 0.6  | 
|Rate reset in 1 to 3 years         |  |                       | 3,004,687 |                     |   | 2,996,446 |  | 4.92               | % |                  |  | 30                  |  | 5.57                       | % |                      |  | 05/03/35 |  |  | 21.7 |  |  | 1.9  | 
|Rate reset in 3 to 5 years         |  |                       | 1,828,605 |                     |   | 1,845,356 |  | 5.74               | % |                  |  | 46                  |  | 5.62                       | % |                      |  | 08/07/36 |  |  | 20.5 |  |  | 1.9  | 
|Rate reset in 5 to 7 years         |  |                       | 200,160   |                     |   | 204,041   |  | 6.08               | % |                  |  | 67                  |  | 5.64                       | % |                      |  | 08/14/36 |  |  | 16.9 |  |  | 2.2  | 
|Rate reset in 7 to 10 years        |  |                       | 396,055   |                     |   | 392,569   |  | 5.25               | % |                  |  | 95                  |  | 5.60                       | % |                      |  | 08/04/35 |  |  | 10.9 |  |  | 3.6  | 
|                                   |  |                       |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 
|Fixed Rate RMBS:                   |  |                       |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 
|15 year                            |  |                       | 52,818    |                     |   | 51,556    |  | 5.50               | % |                  |  | n/a                 |  | 6.21                       | % |                      |  | 09/13/20 |  |  | 11.3 |  |  | 3.1  | 
|30 year                            |  |                       | 1,573,621 |                     |   | 1,544,620 |  | 5.80               | % |                  |  | n/a                 |  | 6.07                       | % |                      |  | 01/29/36 |  |  | 12.1 |  |  | 4.3  | 
|                                   |  |                       |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 
|Total hybrid and fixed rate RMBS   |  | $                     | 7,404,110 |                     |   | 7,389,382 |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 
|                                   |  |                       |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 
|Other:                             |  |                       |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 
|Interest-only strips (5)           |  | $                     | 96,058    |                     |   | 190       |  | n/m                |   |                  |  | n/a                 |  | n/m                        |   |                      |  | 05/13/35 |  |  | 10.1 |  |  | 79.0 | 
|Interest-only strips - trading (5) |  |                       | 1,071,094 |                     |   | 1,002     |  | n/m                |   |                  |  | n/a                 |  | n/m                        |   |                      |  | 06/13/35 |  |  | 9.4  |  |  | 57.2 | 
|                                   |  |                       |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 
|Total other RMBS                   |  | $                     | 1,167,152 |                     |   | 1,192     |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 
|                                   |  |                       |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 
|Total RMBS estimated fair value    |  |                       |           |                     | $ | 7,390,574 |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 
|                                   |  |                       |           |                     |   |           |  |                    |   |                  |  |                     |  |                            |   |                      |  |          |  |  |      |  |  |      | 



---

|    |                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes securities
  classified as both available-for-sale and trading.                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                       
|(2) | Represents number of months
  before conversion to floating rate.                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                       
|(3) | Constant prepayment rate
  refers to the expected average annualized percentage rate of principal
  prepayments over the remaining life of the security. The values represented
  in this table are estimates only and the results of a third party financial
  model.
|    |                                                                                                                                                                                                                                                                       
|(4) | Modified duration
  represents the approximate percentage change in market value per 100 basis
  point change in interest rates.                                                                                                                                      
|    |                                                                                                                                                                                                                                                                       
|(5) | Interest-only strips
  represent solely the interest or principal portion of a security. Therefore
  the notional amount reflected should not be used as a comparison to par or
  fair value.                                                                         
|    |                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                       

n/a - not applicable  n/m  not meaningful


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 actual and estimated 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 interest 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 September 30, 2007, the mortgages underlying our hybrid adjustable rate RMBS
had fixed interest rates for a weighted average period of approximately 39
months, after which time the interest rates reset and become adjustable. The
average length of time until contractual maturity of those mortgages was
approximately 28 years from date of issuance as of September 30, 2007.

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. As of September 30, 2007, the weighted
average lifetime rate cap for the portfolio was 10.5%, the weighted average
maximum increase in the first year, or initial cap, that the rates are
adjustable was 4.3%, and the weighted average maximum annual increase for years
subsequent to the first year was 1.9%.

Interest-only
strips are purchased primarily as duration management tools or to enhance
overall yields. Some of these positions are classified in trading securities as
they are held principally for the

38

---



purpose of
selling them in the near term, however, management may decide to hold these
securities for a longer period of time. All other interest-only strips are
classified as available-for-sale.

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

|                                                  |  |                        |           |                  |   |           | 
|------------------------------------------------- |  | ---------------------- | --------- | ---------------- | - | --------- | 
|                                                  |  | September 30, 2007     |          
|                                                  |  |                        |          
|Weighted Average Life                             |  | Estimated
  Fair Value |           | Amortized
  Cost |  
|                                                  |  |                        |           |                  |  
|Greater than
  one year and less than five years  |  | $                      | 5,347,279 |                  | $ | 5,373,473 | 
|Greater than
  five years and less than ten years |  |                        | 1,666,535 |                  |   | 1,681,882 | 
|Greater than
  ten years                          |  |                        | 376,760   |                  |   | 393,838   | 
|                                                  |  |                        |           |                  |   |           | 
|Total                                             |  | $                      | 7,390,574 |                  | $ | 7,449,193 | 
|                                                  |  |                        |           |                  |   |           | 

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, without limitation, 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
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. RMBS
are recorded in available-for-sale securities and trading securities in the
condensed consolidated balance sheet.

Asset-Backed Securities Held in Pinetree CDO

Pinetree
CDO, one of our qualified REIT subsidiaries, is a VIE under FIN 46R and we are
the primary beneficiary of the VIE. We own all of the equity interest in
Pinetree CDO, which were issued to us as preference shares and ordinary shares
for an aggregate purchase price of $12.0 million. The ABS held in Pinetree CDO
are included in available-for-sale securities. We accrue interest income on the
ABS and interest expense on the long-term debt in the condensed consolidated
statements of operations. Pinetree CDO is a bankruptcy remote entity and we
consolidate 100% of the assets and liabilities of Pinetree CDO. This has
resulted in an accumulated net unrealized loss of $69.9 million related to
asset-backed securities held in Pinetree CDO reflected as an increase of other
comprehensive loss in stockholders equity, while our remaining economic risk
is limited to $8.1 million, which represents our initial equity investment in
the Pinetree CDO of $12.0 million less our estimate of other-than-temporary
impairment of $3.9 million. Any realized losses in excess of our equity
investment would be borne by the debt holders, however, under current GAAP,
there may be a timing difference between the recognition of realized losses on
the assets and the offsetting gain from reduction of the debt balance.

39

---



The
following table summarizes the Pinetree CDO investments by asset class as of
September 30, 2007:

|                                    |  |                |         |                 |   |                        |  |                         |         |  |  |     | 
|----------------------------------- |  | -------------- | ------- | --------------- | - | ---------------------- |  | ----------------------- | ------- |  |  | --- | 
|Asset
 Class                        |  | Par
 Amount    |         | Amortized
 Cost |   | Estimated
 Fair
 Value |  | Weighted
 Average
 Life |        
|                                    |  |                |         |                 |   |                        |  |                         |        
|                                    |  | (In thousands) |         | (In years)      |  
|                                    |  |                |         |                 |  
|Residential
 B/C mortgage (1)       |  | $              | 180,348 |                 | $ | 179,234                |  | $                       | 126,046 |  |  | 2.5 | 
|CMBS conduit                        |  |                | 33,909  |                 |   | 33,582                 |  |                         | 30,014  |  |  | 6.8 | 
|Residential
 A mortgage             |  |                | 33,282  |                 |   | 32,931                 |  |                         | 28,813  |  |  | 5.7 | 
|Home equity
 loan (2)               |  |                | 29,882  |                 |   | 29,684                 |  |                         | 25,594  |  |  | 2.1 | 
|CMBS large
 loan                    |  |                | 4,000   |                 |   | 4,000                  |  |                         | 3,847   |  |  | 2.5 | 
|ABS
 collateralized bond obligation |  |                | 8,157   |                 |   | 8,094                  |  |                         | 3,609   |  |  | 4.7 | 
|Credit card                         |  |                | 3,000   |                 |   | 3,091                  |  |                         | 3,030   |  |  | 0.7 | 
|Automobile
 loan                    |  |                | 2,000   |                 |   | 2,000                  |  |                         | 1,994   |  |  | 3.7 | 
|Student loan                        |  |                | 1,357   |                 |   | 1,357                  |  |                         | 1,372   |  |  | 3.4 | 
|Small
 business loan                |  |                | 969     |                 |   | 969                    |  |                         | 722     |  |  | 2.1 | 
|                                    |  |                |         |                 |   |                        |  |                         |         |  |  |     | 
|Total                               |  | $              | 296,904 |                 | $ | 294,942                |  | $                       | 225,041 |  |  | 3.4 | 
|                                    |  |                |         |                 |   |                        |  |                         |         |  |  |     | 

|    |                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------
|   
|(1) | The par amount for
 residential B/C mortgage has been reduced by $0.4 million of other-than
 temporary impairment.
|    |                                                                                                                   
|(2) | The par amount for home
 equity loan has been reduced by $3.5 million of other-than temporary
 impairment.        

As
of September 30, 2007, Pinetree CDO held $225.0 million of ABS classified as
available-for-sale securities and $8.5 million of restricted cash and cash
equivalents, which are generally being utilized to purchase additional ABS and
pay distributions to debt and equity holders. The ABS are backed primarily by
residential mortgages, home equity loans and commercial mortgages. The
portfolio is composed of both fixed and floating rate securities, comprising
28.4% and 71.6% of the portfolio, respectively, as of September 30, 2007. The
fixed portfolio had a weighted average interest rate of 5.79% while the
variable portfolio has a weighted average spread of 1.95% over LIBOR as of
September 30, 2007.

The
table below summarizes the Pinetree CDO portfolio by Moodys rating as of
September 30, 2007:

|               |  |            |  
|-------------- |  | ---------- | -
|Moodys Rating |  | % of Total |  
|               |  |            |  
|Aaa            |  | 3.68       | %
|Aa1            |  | 0.70       | %
|Aa2            |  | 1.94       | %
|Aa3            |  | 1.59       | %
|A1             |  | 0.50       | %
|A2             |  | 3.08       | %
|A3             |  | 5.83       | %
|Baa1           |  | 16.03      | %
|Baa2           |  | 30.93      | %
|Baa3           |  | 29.84      | %
|Ba1            |  | 1.92       | %
|Ba2            |  | 2.00       | %
|Ba3            |  | 0.70       | %
|B1             |  | 0.74       | %
|B2             |  | 0.52       | %
|               |  |            |  
|               |  | 100.00     | %
|               |  |            |  

40

---



The
Moodys weighted average rating factor, or WARF, for the Pinetree CDO portfolio
as of September 30, 2007 is 464, which equates to a weighted average Moodys
rating of between Baa2 and Baa3. As of September 30, 2007, we held 176
asset-backed securities with a fair value of $210.8 million, valued below cost,
of which 46 securities with a current fair value of $57.8 million were valued
below cost for greater than twelve months. Pinetree CDO had 30 of the 185
asset-backed securities downgraded by a major credit rating agency since their
purchase (face value of $41.1 million at September 30, 2007) through September
30, 2007. We reviewed the estimated cash flows for these and 44 additional
asset-backed securities (face value of $71.8 million) that met other criteria
for other-than-temporary impairment analysis held in Pinetree in accordance with
our policy and determined that five of the asset-backed securities with an estimated
fair value of $5.2 million are other-than-temporarily impaired. For the three
and nine months ended September 30, 2007 we recognized $3.9 million of other-than-temporary
impairment related to these five asset-backed securities held in the Pinetree
CDO. An analysis of estimated cash flows on the remaining 69 asset-backed
securities held in the Pinetree CDO indicated than an other-than-temporary impairment
had not occurred. All other asset-backed securities held in the Pinetree CDO
are investment grade and we do not believe they are other-than-temporarily impaired
as of September 30, 2007 as we have the intent and ability to hold these securities
to recovery which may be maturity if necessary.

Between
September 30, 2007 and October 31, 2007 the major credit rating agencies issued
downgrades on a significant amount of asset-backed securities which included
    38 securities held in Pinetree CDO, with a face value of $62.4 million at
    October 31, 2007. All other asset-backed securities held in Pinetree CDO
    are investment grade. Management is monitoring the portfolio closely and
    due to the current uncertainty surrounding this asset class, there is a risk
    that portfolio attributes and performance could decline and some securities
    may become other-than-temporarily impaired in the future which could result
in recognition of future impairment charges.

Loans and Credit
Derivatives

The
following summarizes our loan portfolio, excluding credit default swaps and
total return swaps, by loan classification at September 30, 2007:

|                                  |  |                          |         |       |   |         |   |   |         |  
|--------------------------------- |  | ------------------------ | ------- | ----- | - | ------- | - | - | ------- | -
|                                  |  | Carrying Value           |        
|                                  |  |                          |        
|Type of Loan                      |  | Loans Held
 for Sale (1) |         | Loans |   | Total   |  
|                                  |  |                          |         |       |   |         |  
|                                  |  | (In thousands)           |        
|                                  |  |                          |        
|Loans held in Market Square
 CLO  |  | $                        | 263,096 |       | $ |        |   | $ | 263,096 |  
|Loans held in DFR MM CLO          |  |                          |        |       |   | 298,234 |   |   | 298,234 |  
|Corporate leveraged loans         |  |                          | 2,627   |       |   | 152,926 |   |   | 155,553 |  
|Commercial real estate
 loans (2) |  |                          | 5,525   |       |   | 24,151  |   |   | 29,676  |  
|                                  |  |                          |         |       |   |         |   |   |         |  
|                                  |  | $                        | 271,248 |       |   | 475,311 |   |   | 746,559 |  
|                                  |  |                          |         |       |   |         |   |   |         |  
|Allowance for loan losses         |  |                          |         |       |   | (8,933  | ) |   | (8,933  | )
|                                  |  |                          |         |       |   |         |   |   |         |  
|                                  |  |                          |         |       | $ | 466,378 |   | $ | 737,626 |  
|                                  |  |                          |         |       |   |         |   |   |         |  

|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|   
|(1) | Carrying value of loans held
 for sale is lower of cost or fair value.                     
|    |                                                                                            
|(2) | Commercial real estate loans
 include participating interests in commercial mortgage loans.

Loans Held in Market Square CLO

Market
Square CLO, one of our taxable REIT subsidiaries, is a VIE under FIN 46R and we
are the primary beneficiary of the VIE, causing us to consolidate Market Square
CLO. We own 100% of the preference shares, representing substantially all of
the equity interest in Market Square CLO, which we purchased for $24.0 million.
As of September 30, 2007, Market Square CLO had $272.2 million of loan
principal outstanding with a carrying value of $263.1 million, which is
included in loans held for sale, $22.7 million of restricted cash and cash
equivalents, which are generally utilized to purchase additional loans and pay
distributions to debt and equity holders, and $276.0 million of notes payable
included in long-term debt. Market Square CLO is a bankruptcy remote entity and
although we consolidate 100% of

41

---



the assets and
liabilities of Market Square CLO, it should be noted that our maximum exposure
to loss on our investment in Market Square CLO is limited to our initial
investment of $24.0 million. The weighted average coupon spread over LIBOR on
the loan portfolio was 2.59% and the weighted average contractual maturity was
5.2 years as of September 30, 2007.

The
following table summarizes the Market Square CLO loan portfolio as of September
30, 2007:

|                |  |                |         |                 |        |                        |                       |                  |         |  |  |      |   |  |          | 
|--------------- |  | -------------- | ------- | --------------- | ------ | ---------------------- | --------------------- | ---------------- | ------- |  |  | ---- | - |  | -------- | 
|                |  | Par
 Value     |         | Carrying
 Value |        | Estimated
 Fair
 Value |                       | Weighted Average |        
|                |  |                |         |                 |        |                       
|Moodys
 Rating |  |                |         |                 | Spread |                        | Contractual
 Maturity |                 
|                |  |                |         |                 |        |                        |                       |                  |         |  | 
|                |  | (In thousands) |         |                 |        |                        |                      
|                |  |                |         |                 |        |                        |                      
|Baa3            |  | $              | 6,039   |                 | $      | 6,020                  |                       | $                | 6,020   |  |  | 1.81 | % |  | 09/09/09 | 
|Ba1             |  |                | 13,178  |                 |        | 12,968                 |                       |                  | 12,968  |  |  | 1.63 | % |  | 06/11/11 | 
|Ba2             |  |                | 12,809  |                 |        | 12,494                 |                       |                  | 12,496  |  |  | 1.91 | % |  | 03/08/13 | 
|Ba3             |  |                | 39,202  |                 |        | 38,003                 |                       |                  | 38,038  |  |  | 2.16 | % |  | 03/13/13 | 
|B1              |  |                | 72,840  |                 |        | 70,250                 |                       |                  | 70,689  |  |  | 2.38 | % |  | 02/25/13 | 
|B2              |  |                | 89,038  |                 |        | 85,760                 |                       |                  | 85,796  |  |  | 2.85 | % |  | 01/15/13 | 
|B3              |  |                | 30,296  |                 |        | 29,568                 |                       |                  | 29,588  |  |  | 3.15 | % |  | 12/14/12 | 
|Caa1            |  |                | 7,871   |                 |        | 7,182                  |                       |                  | 7,182   |  |  | 4.67 | % |  | 09/28/12 | 
|Caa2            |  |                | 896     |                 |        | 851                    |                       |                  | 851     |  |  | 2.75 | % |  | 12/31/12 | 
|                |  |                |         |                 |        |                        |                       |                  |         |  |  |      |   |  |          | 
|                |  | $              | 272,169 |                 | $      | 263,096                |                       | $                | 263,628 |  |  | 2.59 | % |  |          | 
|                |  |                |         |                 |        |                        |                       |                  |         |  |  |      |   |  |          | 

The
Market Square CLO bank loan portfolio is diversified across 29 Moodys industry
classifications and has a WARF of 424, which equates to a weighted average
Moodys rating of between B1 and B2 as of September 30, 2007.

Loans
Held in DFR MM CLO

On
July 17, 2007 we purchased 100% of the equity interest, issued as preference
shares, of DFR MM CLO, a Cayman Islands limited liability company, for $50.0
million. In addition to issuing the preference shares, DFR MM CLO also issued
several classes of notes, aggregating $250.0 million, discussed later in this
section under the heading Liabilities. We also purchased all of the BBB/Baa2
rated and subordinated notes of DFR MM CLO, for $19.0 million leaving notes
outstanding to outside investors for DFR MM CLO of $231.0 million. DFR MM CLO,
is one of our taxable REIT subsidiaries and is a VIE under FIN 46R. We are the
primary beneficiary of the VIE, causing us to consolidate DFR MMCLO. DFR MM CLO
is a bankruptcy remote entity, and although we consolidate 100% of the assets
and liabilities of DFR MM CLO our maximum exposure to loss on our investment in
DFR MM CLO is limited to our initial investment of $69.0 million.

As
of September 30, 2007, DFR MM CLO had $299.5 million of loan principal outstanding
with a carrying value of $298.2 million, which is included in loans, $4.3
million of restricted cash and cash equivalents, which are generally utilized
to purchase additional loans and pay distribution to debt and equity holders,
and $231.0 million of notes payable to outside investors included in long-term
debt The weighted average coupon spread over LIBOR on the loan portfolio was
5.97% (6.33% including the $19.0 million of DFR MM CLO debt we own and
eliminate upon consolidation) and the weighted average contractual maturity was
11.8 years as of September 30, 2007.

42

---



The
following table summarizes the DFR MM CLO loan portfolio as of September 30,
2007:

|                     |  |                 |         |                           |  |       |  
|-------------------- |  | --------------- | ------- | ------------------------- |  | ----- | -
|Type of Loan         |  | Carrying
 Value |         | Weighted
 Average
 Coupon | 
|                     |  |                 |         |                           | 
|                     |  | (In thousands)  |         |                           | 
|                     |  |                 |         |                           | 
|First lien
 secured  |  | $               | 82,882  |                           |  | 10.89 | %
|Second lien
 secured |  |                 | 181,246 |                           |  | 11.93 | %
|Mezzanine            |  |                 | 34,106  |                           |  | 15.48 | %
|                     |  |                 |         |                           |  |       |  
|                     |  | $               | 298,234 |                           |  | 12.05 | %
|                     |  |                 |         |                           |  |       |  

Corporate
Leveraged Loans

The
following table summarizes our corporate leveraged loans as of September 30,
2007:

|                           |  |                 |         |                           |  |       |  
|-------------------------- |  | --------------- | ------- | ------------------------- |  | ----- | -
|Type of Loan               |  | Carrying
 Value |         | Weighted
 Average
 Coupon | 
|                           |  |                 |         |                           | 
|                           |  | (In thousands)  |         |                           | 
|                           |  |                 |         |                           | 
|First lien
 secured        |  | $               | 42,118  |                           |  | 11.19 | %
|Second lien
 secured       |  |                 | 77,498  |                           |  | 12.67 | %
|Mezzanine                  |  |                 | 13,997  |                           |  | 14.92 | %
|Hold Co.                   |  |                 | 21,940  |                           |  | 12.78 | %
|                           |  |                 |         |                           |  |       |  
|                           |  |                 | 155,553 |                           |  | 12.49 | %
|                           |  |                 |         |                           |  |       |  
|Allowance
 for loan losses |  |                 | (8,933  | )                         |  |       |  
|                           |  |                 |         |                           |  |       |  
|                           |  | $               | 146,620 |                           |  |       |  
|                           |  |                 |         |                           |  |       |  

As
of September 30, 2007, we had corporate leveraged loans totaling $155.6
million, classified as loans held for investment with the exception of $2.6
million classified as loans held for sale. The mezzanine and Hold Co. loans are
generally unsecured. As of September 30, 2007, we carried an allowance for loan
losses totaling $8.9 million. The loans reflected in the above table are at
their contractual outstanding amount by type and coupon, rather than net of the
$8.9 million allowance for loan losses as of September 30, 2007. The allowance
has been provided for one first lien secured loan in the amount of $5.1 million
and one mezzanine loan in the amount of $3.8 million. During the third quarter,
we closed the DFR MM CLO transaction which was a securitization of $300.0
million in loans previously categorized as corporate leveraged loans.

Commercial
Real Estate Loans (including participating interests)

As
of September 30, 2007, we had invested in junior participation interests in
commercial mortgages originated by Hometown Commercial Capital, LLC with a
total carrying value of $5.5 million. These loans are classified as held for
sale on our condensed consolidated balance sheet. As of September 30, 2007, we
held commercial mortgage loans with a carrying value of $24.2 million. These
loans are classified as held for investment on our condensed consolidated
balance sheet.

Credit
Default Swaps

As
of September 30, 2007, we held 17 CDSs with an aggregate notional amount of
$54.0 million. As of September 30, 2007, these CDSs had a net fair value of
$0.2 million, recorded in derivative assets and

43

---



derivative liabilities in the condensed consolidated balance sheet
in the amounts of $0.4 million and $0.2 million, respectively.

Total
Return Swaps

As
of September 30, 2007, we held two total return swaps with an aggregate
notional amount of $14.5 million and an aggregate negative fair value of $1.8
million recorded in derivative liabilities.

Equity Securities

As
of September 30, 2007, our equity securities had a total carrying value of $6.5
million classified as other investments.

Due From Broker

As
of September 30, 2007, we had $102.1 million due from broker; all amounts are
expected to settle in the following quarter. The due from broker consisted of
the following:

| |   |                                            
| | - | -------------------------------------------
| |  | Unsettled
 RMBS sales - $93.5 million      
| |   |                                            
| |  | Swap margin
 due from broker - $8.6 million

Interest Receivable

As
of September 30, 2007, our interest receivable of $46.3 million related to the
following:

| |   |                                          
| | - | -----------------------------------------
| |  | RMBS - $35.7
 million                    
| |   |                                          
| |  | Loans - $7.9
 million                    
| |   |                                          
| |  | Derivatives
 - $1.4 million              
| |   |                                          
| |  | Various
 other investments - $1.3 million

Other Receivables

As
of September 30, 2007, other receivables of $17.8 million consisted of:

| |   |                                                            
| | - | -----------------------------------------------------------
| |  | RMBS
 paydowns - $17.2 million                             
| |   |                                                            
| |  | Paydowns on
 loans held in Market Square CLO - $0.5 million
| |   |                                                            
| |  | Miscellaneous
 - $0.1 million                              

Prepaid and Other
Assets

As
of September 30, 2007, prepaid and other assets of $17.9 million consisted of:

| |   |                                  
| | - | ---------------------------------
| |  | Debt issue
 costs - $14.8 million
| |   |                                  
| |  | Prepaid
 assets - $3.1 million   

44

---



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 the Manager determines is
in the best interest of the Companys 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.

We
have 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 parties under which each
agrees to make periodic payments to the other for a specified 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 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.

As
of September 30, 2007, we had a portfolio of 170 designated interest rate swaps
with maturities ranging from February 2008 to August 2017 and a total notional
amount of $5.3 billion and a net negative fair value of $31.4 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. As of September 30, 2007, the unrecognized loss on
interest rate swap transactions in accumulated other comprehensive loss of
$25.6 million includes cumulative deferred losses on terminated swaps of $1.3
million that will be amortized over the original hedging period. During the
quarter ended September 30, 2007 we dedesignated $1.1 billion (notional) of interest
    rate swaps previously designated as a cash flow hedge with a negative fair
    value of $11.1 million at dedesignation that will be amortized into interest
    expense over the original life of the swaps. This dedesignation occurred
    as a result of changing risk exposure in repurchase agreement funding.

As
of September 30, 2007, we held 47 interest rate swaps, six interest rate floors
and one interest rate cap with notional amounts in the aggregate of $1.8
billion, $519.4 million and $40.0 million, respectively, which were not
designated as hedges. Accordingly, changes in fair value of these derivatives
are recorded in net gain (loss) on derivatives in the condensed consolidated
statement of operations. As of September 30, 2007, these interest rate swaps,
interest rate floors and interest rate cap had a net negative fair value of
$18.3 million, $6.4 million and $0.1 million, respectively, recorded in derivative
assets and derivative liabilities in the condensed consolidated balance sheet
in the amounts of $1.8 million and $26.6 million, respectively. In connection
with the interest rate floors, we received aggregate payments of $5.9 million
upon inception of the floors, $2.0 million during the nine months of 2007, and
in return will make payments based on the spread in LIBOR rates, if one-month
LIBOR decreases below certain agreed upon rates. The payments we may have to
make are based on the spread times the amortizing notional balance of the
respective floor.

45

---



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 September 30, 2007, we
established 18 borrowing relationships with various financial institutions and
other lenders. As of September 30, 2007, we had an outstanding repurchase
agreement balances with 15 of those counterparties.

As
of September 30, 2007, we had outstanding repurchase agreement liabilities of
$6.8 billion, including accrued interest, with a weighted-average current
borrowing rate of 5.23%. We intend to renew these repurchase agreements as they
mature under the then-applicable borrowing terms of the counterparties to the
repurchase agreements. As of September 30, 2007, the repurchase agreements were
secured by RMBS and other investment securities with an estimated fair value of
$7.0 billion and had weighted-average remaining maturities of 18 days. The net
amount at risk, defined as fair value of securities pledged, including net
additional repurchase agreement collateral pledged, including accrued interest
receivable, minus repurchase agreement liabilities, including accrued interest
payable, with all counterparties was $301.1 million as of September 30, 2007.
See details of the net amount at risk later in this section under the heading
Liquidity and Capital Resources.

On
March 10, 2006, we entered into an up to $300.0 million three-year revolving
warehouse funding agreement with Wachovia Capital Markets, LLC (the
Facility), subject to annual renewal approval. In February we increased the
Facility to $375.0 million. Financing under the Facility is secured by assets
ranging from large syndicated bank loans to subordinated notes and preferred
stock. Advance rates under the Facility vary by asset type and are subject to
certain compliance criteria. The Facility is available to two bankruptcy remote
special purpose vehicles (DWFC, LLC and Deerfield Triarc TRS (Bahamas) Ltd.)
and the debt holder has recourse only to the collateral of these entities,
which total $138.0 million as of September 30, 2007. We expect to pursue term
funding of these assets via securitization in a future CDO.

On
July 17, 2007, we closed DFR MM CLO. As a result of this securitization, $213.2
million of debt was paid down on the Facility. As of September 30, 2007, we had
$76.9 million of debt outstanding related to the Facility. Unamortized deferred
issuance costs associated with the Facility totaled $0.6 million as of
September 30, 2007. 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. The
weighted average rate as of September 30, 2007 was 6.54%. See further details
about the Facility later in this section under the heading Sources of Funds.

As
of September 30, 2007, the Pinetree CDO, Market Square CLO and DFR MM CLO
long-term debt issuances bear weighted average interest rates, that reset
quarterly, of LIBOR plus 0.55%, 0.49% and 0.69% and based on the last reset
date were 5.90%, 5.85% and 5.97%, respectively. As of September 30, 2007, we
have $287.5 million, $276.0 million and $231.0 million of outstanding long-term
debt resulting from the Pinetree CDO, Market Square CLO and DFR MM CLO
transactions, respectively.

Our
trust preferred securities interest is payable quarterly at a floating rate
equal to LIBOR plus 3.50% per annum and 2.25% per annum for $51.6 million and
$72.1 million, respectively, of principal outstanding. This rate was 8.86% and
7.61% for the $51.6 million and $72.1 million, respectively, of principal
outstanding as of September 30, 2007.

46

---



Due To Broker

Due
to broker as of September 30, 2007 of $275.1 million consisted of the following
(all amounts are expected to settle in the following quarter):

| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | Unsettled
 RMBS purchases - $269.8 million ($273.4 fair value)        
| |   |                                                                       
| |  | Unsettled
 purchases of loans held in Market Square CLO - $2.0 million
| |   |                                                                       
| |  | Unsettled
 purchases of ABS held in Pinetree CDO - $2.0 million       
| |   |                                                                       
| |  | Swap margin
 due to broker - $1.3 million                             

Interest Payable

Interest
payable as of September 30, 2007 of $35.7 million consisted of:

| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | Derivatives
 - $21.5 million                                                
| |   |                                                                             
| |  | Revolving
 warehouse facility long-term debt interest payable - $4.4 million
| |   |                                                                             
| |  | Pinetree CDO
 long-term debt interest payable - $4.1 million                
| |   |                                                                             
| |  | Market
 Square CLO long-term debt interest payable - $3.3 million           
| |   |                                                                             
| |  | Unsecured
 junior subordinated interest payable to Trusts - $1.7 million    
| |   |                                                                             
| |  | DFR MM CLO
 long-term debt interest payable- $0.7 million                   

Management and
Incentive Fee Payable to Related Party

As
of September 30, 2007, we had $1.0 million payable to our Manager for
management fees.

Other Payables

As
of September 30, 2007, other payables of $2.3 million consisted of:

| |   |                                               
| | - | ----------------------------------------------
| |  | Miscellaneous
 - $1.8 million                 
| |   |                                               
| |  | Audit and
 tax related services - $0.5 million

Stockholders Equity

Stockholders
equity as of September 30, 2007 was $550.7 million and primarily consisted of
the following 2007 activity:

| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net unrealized
 loss on available-for-sale securities - $24.8 million                                                                                         
| |   |                                                                                                                                                               
| |  | Net
 unrealized loss on cash flow hedges - $84.0 million                                                                                                      
| |   |                                                                                                                                                               
| |  | Contributions
 to additional paid-in capital related to compensation paid to our independent
 directors in the form of fully vested common stock- $0.1 million
| |   |                                                                                                                                                               
| |  | Contributions
 to additional paid-in capital related to compensation for restricted stock,
 common stock grants and option grants to our Manager - $52,000    
| |   |                                                                                                                                                               
| |  | Accumulated
 deficit - $13.8 million of net income less $43.5 million of declared
 dividends                                                                  

47

---



Results of Operations

The
following section provides a comparative discussion of our condensed
consolidated results of operations as of and for the three and nine months
ended September 30, 2007 and 2006.

Summary

The
following table summarizes selected historical consolidated financial
information:

|                                 |  |                                                  |         |                                                  |   |         |   |      |         |   |   |         |  
|-------------------------------- |  | ------------------------------------------------ | ------- | ------------------------------------------------ | - | ------- | - | ---- | ------- | - | - | ------- | -
|                                 |  | Three months ended September 30,                 |         | Nine months ended September 30,                  |  
|                                 |  |                                                  |         |                                                  |  
|                                 |  | 2007                                             |         | 2006                                             |   | 2007    |   | 2006 |        
|                                 |  |                                                  |         |                                                  |   |         |   |      |        
|                                 |  | (Dollars in millions, except for per share data) |         | (Dollars in millions, except for per share data) |  
|                                 |  |                                                  |         |                                                  |  
|Net income                       |  | $                                                | (23.2   | )                                                | $ | 19.6    |   | $    | 13.8    |   | $ | 56.9    |  
|Dividends
 (1)                   |  | $                                                | 21.7    |                                                  | $ | 20.7    |   | $    | 65.2    |   | $ | 58.9    |  
|Net income
 per share - diluted  |  | $                                                | (0.45   | )                                                | $ | 0.38    |   | $    | 0.27    |   | $ | 1.10    |  
|Dividends
 per share (1)         |  | $                                                | 0.42    |                                                  | $ | 0.40    |   | $    | 1.26    |   | $ | 1.14    |  
|Book value
 per share            |  | $                                                | 10.64   |                                                  | $ | 13.78   |   | $    | 10.64   |   | $ | 13.78   |  
|Total
 invested assets (2)       |  | $                                                | 8,373.7 |                                                  | $ | 9,106.0 |   | $    | 8,373.7 |   | $ | 9,106.0 |  
|Alternative
 asset portfolio (2) |  | $                                                | 983.2   |                                                  | $ | 980.6   |   | $    | 983.2   |   | $ | 980.6   |  
|Return on
 equity (3)            |  |                                                  | -12.5   | %                                                |   | 10.6    | % |      | 2.5     | % |   | 10.2    | %
|Leverage (4)                     |  |                                                  | 14.1    |                                                  |   | 11.5    |   |      | 14.1    |   |   | 11.5    |  



---

|    |                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Dividends shown are
 reflected in the period to which they relate, rather than the period
 declared.                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                         
|(2) | Total invested assets and
 alternative assets are reflected net of the $8.9 million of allowance for
 loan losses.                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                         
|(3) | Return on equity is
 calculated by dividing our net income by the weighted average net equity
 proceeds raised, which represents the proceeds from our initial private
 placement and initial public offerings, net of all underwriter and discounts
 and commissions as well as direct offering costs. The return has been
 annualized.
|    |                                                                                                                                                                                                                                                                                                                                         
|(4) | Leverage is calculated by
 dividing our total debt (principal outstanding on repurchase agreements and
 long-term debt) by total stockholders equity.                                                                                                                                                                                  

The
decrease in net income of $42.8 million for the three months ended September
30, 2007 compared to the same period 2006 was primarily attributable a $51.6
million decrease in net other income and gain (loss). This was offset by a $7.1
million increase in net interest income which was the result of our increased
diversification into alternative assets combined with a higher interest rate
environment and a $1.1 million reduction in expenses primarily attributable to
a decrease in incentive fees. The decrease in net income of $43.1 million for
the nine months ended September 30, 2007 compared to the same period 2006 was
primarily attributable to a $51.6 million decrease to net other income and gain
(loss) and an increase in the provision for loan losses of $6.9 million which
was offset by a $14.1 million increase in net interest income as a result of
the factors described above.

We
have also increased the overall leverage through net increased aggregate long
term borrowings of $131.8 million as of September 30, 2007 compared to the same
period in 2006, and a $161.8 million decrease in stockholders equity as of
September 30, 2007 compared to the same period in 2006. The increase in
borrowings is primarily the result of the securitization of DFR MM CLO and the
use of trust preferred debt securities, offset by the reduction of use of the
revolving warehouse funding facility. The decrease in stockholders equity is
primarily the result of an increase in accumulated other comprehensive loss due
to fair value adjustments on available-for-sale securities and designated
derivatives and an increase in the accumulated deficit due to dividend
distributions in excess of earnings which we distributed in order to maintain
our REIT status.

We
continue to diversify our overall portfolio mix by increasing our investments
into alternative assets, which we define as all invested assets other than
RMBS. As of September 30, 2007, we had $992.1 million of alternative assets, or
11.8% of our portfolio compared to $980.6 million of alternative assets, or
10.8% of our portfolio as of September 30, 2006. Corporate leveraged loans,
including those which have been securitized into DFR MM CLO, have been the
primary driver of the increase in our alternative portfolio. Corporate
leveraged loans and DFR MM CLO combine to total $451.2 million or 5.4% of our
total investments as of September 30, 2007 compared to $332.6 million or 3.7%
of our total investments as of September 30, 2006.

48

---



We
expect to continue our opportunistic investment selection and strategy of
limiting interest rate risk through active hedging risk management when
warranted in an effort to mitigate the impact of changes in interest rates. 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. If we determine that market conditions and market
opportunities are favorable, we expect to explore opportunities to raise
additional capital and fully deploy and leverage our equity.

Net Interest Income

The
following table summarizes our interest income:

|                                              |  |                                  |       |          |   |                            |  |                                  |      |   |  |       |   |  |      |  
|--------------------------------------------- |  | -------------------------------- | ----- | -------- | - | -------------------------- |  | -------------------------------- | ---- | - |  | ----- | - |  | ---- | -
|                                              |  | Three months ended September 30, |       |          |   | %of total
 interest income | 
|                                              |  |                                  |       | Variance |   |                            | 
|                                              |  | 2007                             |       | 2006     |   | 2007 vs. 2006              |  | Three months ended September 30, |     
|                                              |  |                                  |       |          |   |                            |  |                                  |     
|                                              |  | (In
 millions)                   |       | 2007     |   | 2006                       | 
|                                              |  |                                  |       |          |   |                            | 
|Real Estate Investments:                      |  |                                  |       |          |   |                            | 
|Residential
 mortgage-backed securities       |  | $                                | 96.6  |          | $ | 93.7                       |  | $                                | 2.9  |   |  | 76.8  | % |  | 79.7 | %
|Commercial
 real estate loans and securities  |  |                                  | 1.4   |          |   | 0.7                        |  |                                  | 0.7  |   |  | 1.1   | % |  | 0.6  | %
|Asset-backed securities held in Pinetree
 CDO |  |                                  | 5.5   |          |   | 5.3                        |  |                                  | 0.2  |   |  | 4.4   | % |  | 4.5  | %
|                                              |  |                                  |       |          |   |                            |  |                                  |      |   |  |       |   |  |      |  
|Total real estate investments                 |  |                                  | 103.5 |          |   | 99.7                       |  |                                  | 3.8  |   |  | 82.3  | % |  | 84.8 | %
|                                              |  |                                  |       |          |   |                            |  |                                  |      |   |  |       |   |  |      |  
|                                              |  |                                  |       |          |   |                            |  |                                  |      |   |  |       |   |  |      |  
|Corporate Investments:                        |  |                                  |       |          |   |                            |  |                                  |      |   |  |       |   |  |      |  
|Corporate
 loans and securities:              |  |                                  |       |          |   |                            |  |                                  |      |   |  |       |   |  |      |  
|Corporate leveraged loans                     |  |                                  | 7.5   |          |   | 10.2                       |  |                                  | (2.7 | ) |  | 5.9   | % |  | 8.7  | %
|High yield corporate bonds                    |  |                                  | 0.1   |          |   | 0.4                        |  |                                  | (0.3 | ) |  | 0.1   | % |  | 0.3  | %
|Assets held
 in Market Square CLO             |  |                                  | 6.0   |          |   | 6.4                        |  |                                  | (0.4 | ) |  | 4.8   | % |  | 0.0  | %
|Assets held
 in DFR MM CLO                    |  |                                  | 7.8   |          |   |                           |  |                                  | 7.8  |   |  | 6.2   | % |  | 5.4  | %
|Tresuries
 and short-term investments         |  |                                  | 0.8   |          |   | 0.5                        |  |                                  | 0.3  |   |  | 0.6   | % |  | 0.4  | %
|Equity
 securities                            |  |                                  |      |          |   | 0.2                        |  |                                  | (0.2 | ) |  | 0.0   | % |  | 0.2  | %
|Other
 investments                            |  |                                  | 0.1   |          |   | 0.1                        |  |                                  |     |   |  | 0.1   | % |  | 0.1  | %
|                                              |  |                                  |       |          |   |                            |  |                                  |      |   |  |       |   |  |      |  
|Total corporate investments                   |  |                                  | 22.3  |          |   | 17.8                       |  |                                  | 4.5  |   |  | 17.7  | % |  | 15.1 | %
|                                              |  |                                  |       |          |   |                            |  |                                  |      |   |  |       |   |  |      |  
|Total
 interest income                        |  | $                                | 125.8 |          | $ | 117.5                      |  | $                                | 8.3  |   |  | 100.0 | % |  | 99.9 | %
|                                              |  |                                  |       |          |   |                            |  |                                  |      |   |  |       |   |  |      |  

|                                              |  |                                 |       |          |   |                            |  |                                 |      |   |  |       |   |  |       |  
|--------------------------------------------- |  | ------------------------------- | ----- | -------- | - | -------------------------- |  | ------------------------------- | ---- | - |  | ----- | - |  | ----- | -
|                                              |  | Nine months ended September 30, |       |          |   | %of total
 interest income | 
|                                              |  |                                 |       | Variance |   |                            | 
|                                              |  | 2007                            |       | 2006     |   | 2007 vs. 2006              |  | Nine months ended September 30, |     
|                                              |  |                                 |       |          |   |                            |  |                                 |     
|                                              |  | (In millions)                   |       | 2007     |   | 2006                       | 
|                                              |  |                                 |       |          |   |                            | 
|Real
 Estate Investments:                     |  |                                 |       |          |   |                            | 
|Residential
 mortgage-backed securities       |  | $                               | 292.4 |          | $ | 275.8                      |  | $                               | 16.6 |   |  | 77.3  | % |  | 81.8  | %
|Commercial
 real estate loans and securities  |  |                                 | 4.4   |          |   | 1.9                        |  |                                 | 2.5  |   |  | 1.2   | % |  | 0.6   | %
|Asset-backed securities held in Pinetree
 CDO |  |                                 | 16.2  |          |   | 15.2                       |  |                                 | 1.0  |   |  | 4.3   | % |  | 4.5   | %
|                                              |  |                                 |       |          |   |                            |  |                                 |      |   |  |       |   |  |       |  
|Total real estate investments                 |  |                                 | 313.0 |          |   | 292.9                      |  |                                 | 20.1 |   |  | 82.8  | % |  | 86.9  | %
|                                              |  |                                 |       |          |   |                            |  |                                 |      |   |  |       |   |  |       |  
|Corporate Investments:                        |  |                                 |       |          |   |                            |  |                                 |      |   |  |       |   |  |       |  
|Corporate
 loans and securities:              |  |                                 |       |          |   |                            |  |                                 |      |   |  |       |   |  |       |  
|Corporate leveraged loans                     |  |                                 | 37.3  |          |   | 22.6                       |  |                                 | 14.7 |   |  | 9.9   | % |  | 6.7   | %
|High yield corporate bonds                    |  |                                 | 0.7   |          |   | 1.2                        |  |                                 | (0.5 | ) |  | 0.2   | % |  | 0.3   | %
|Assets held
 in Market Square CLO             |  |                                 | 17.4  |          |   | 17.4                       |  |                                 |     |   |  | 4.6   | % |  | 5.2   | %
|Assets held
 in DFR MM CLO                    |  |                                 | 7.8   |          |   |                           |  |                                 | 7.8  |   |  | 2.0   | % |  | 0.0   | %
|Tresuries
 and short-term investments         |  |                                 | 1.8   |          |   | 1.3                        |  |                                 | 0.5  |   |  | 0.5   | % |  | 0.4   | %
|Equity securities                             |  |                                 |      |          |   | 1.4                        |  |                                 | (1.4 | ) |  | 0.0   | % |  | 0.4   | %
|Other
 investments                            |  |                                 | 0.2   |          |   | 0.2                        |  |                                 |     |   |  | 0.0   | % |  | 0.1   | %
|                                              |  |                                 |       |          |   |                            |  |                                 |      |   |  |       |   |  |       |  
|Total corporate investments                   |  |                                 | 65.2  |          |   | 44.1                       |  |                                 | 21.1 |   |  | 17.2  | % |  | 13.1  | %
|                                              |  |                                 |       |          |   |                            |  |                                 |      |   |  |       |   |  |       |  
|Total
 interest income                        |  | $                               | 378.2 |          | $ | 337.0                      |  | $                               | 41.2 |   |  | 100.0 | % |  | 100.0 | %
|                                              |  |                                 |       |          |   |                            |  |                                 |      |   |  |       |   |  |       |  

The
increase in interest income of $8.3 million and $41.2 million for the three and
nine months ended September 30, 2007 compared to the three months and nine
months ended September 30, 2006, was attributable to the diversification of our
portfolio to higher yielding alternative assets and an increase in the interest
rate environment for the periods presented. As of September 30, 2007 our RMBS
portfolio represented 88.2% of our holdings as compared to 89.2% as of
September 30, 2006. RMBS contributed a $2.9 million and $16.6 million increase
to interest income for the three and nine months ended September 30, 2007,
respectively, primarily as the result of increases in the interest rate
environment which offset the decrease in the RMBS asset balances. In July of
2007 we completed the securitization of DFR MM CLO which resulted in the
transfer of $300.0 million of corporate leveraged loans into assets held in DFR
MM CLO and accounted for the comparative decrease in interest income on
corporate leveraged loans of $2.7 million and the increase in interest income
on assets held in DFR MM CLO of $7.8 million for the three months ended
September 30, 2007. Interest income on corporate leveraged loans increased by
$14.7

49

---



million and
interest income on assets held in DFR MM CLO increased by $7.8 million for the
nine months ended September 30, 2007. The combined asset balances for corporate
leveraged loans and assets held in DFR MM CLO as of September 30, 2007 totaled
$451.2 million as compared to $332.6 million of corporate leveraged loans as of
September 30, 2006.

The
following table summarizes our interest expense:

|                                   |  |                                  |       |               |   |                                 |   |          |      |      |   |               |   |   |       |   |   |       |  
|---------------------------------- |  | -------------------------------- | ----- | ------------- | - | ------------------------------- | - | -------- | ---- | ---- | - | ------------- | - | - | ----- | - | - | ----- | -
|                                   |  | Three months ended September 30, |       |               |   | Nine months ended September 30, |   |          |     
|                                   |  |                                  |       | Variance      |   |                                 |   | Variance |     
|                                   |  | 2007                             |       | 2006          |   | 2007 vs. 2006                   |   | 2007     |      | 2006 |   | 2007 vs. 2006 |  
|                                   |  |                                  |       |               |   |                                 |   |          |      |      |   |               |  
|                                   |  | (In millions)                    |       | (In millions) |  
|                                   |  |                                  |       |               |  
|Repurchase agreements              |  | $                                | 97.0  |               | $ | 99.7                            |   | $        | (2.7 | )    | $ | 295.0         |   | $ | 270.2 |   | $ | 24.8  |  
|Designated hedging activity        |  |                                  | (15.3 | )             |   | (16.1                           | ) |          | 0.8  |      |   | (44.3         | ) |   | (31.0 | ) |   | (13.3 | )
|Long-term debt                     |  |                                  | 16.1  |               |   | 12.9                            |   |          | 3.2  |      |   | 45.7          |   |   | 31.3  |   |   | 14.4  |  
|Amortization of debt issuance cost |  |                                  | 1.1   |               |   | 1.0                             |   |          | 0.1  |      |   | 3.6           |   |   | 2.0   |   |   | 1.6   |  
|Margin borrowing                   |  |                                  |      |               |   | 0.3                             |   |          | (0.3 | )    |   | 0.3           |   |   | 0.7   |   |   | (0.4  | )
|                                   |  |                                  |       |               |   |                                 |   |          |      |      |   |               |   |   |       |   |   |       |  
|Total interest expense             |  | $                                | 98.9  |               | $ | 97.8                            |   | $        | 1.1  |      | $ | 300.3         |   | $ | 273.2 |   | $ | 27.1  |  
|                                   |  |                                  |       |               |   |                                 |   |          |      |      |   |               |   |   |       |   |   |       |  

The
increase in interest expense of $1.1 million and $27.1 million for the three
and nine months ended September 30, 2007, compared to the three and nine months
ended September 30, 2006, was primarily a result of both an increase in our
debt outstanding as well as increases in the overall interest rate environment
during 2007 compared to 2006, although this trend was partially off-set during
the three months ended September 30, 2007 as our repurchase agreements
outstanding declined compared to the prior year period. Our funding sources are
primarily tied to short term interest rates or reset on a relatively short-term
basis. The higher interest rates were offset by a decrease in the repurchase
agreement balance for the three months ended September 30, 2007 which resulted
in a decrease of repurchase agreement interest expense of $2.7 million.
Repurchase agreements contributed a $24.8 million increase in interest expense
for the nine months ended September 30, 2007, offset by the $13.3 million
increased reduction of interest expense from our designated hedging for the
same periods.

Additionally,
the interest expense related to long-term debt increased by $3.2 million and
$14.4 million for the three and nine months ended September 30, 2007, compared
to the same periods in 2006. We increased our use of leverage through the
securitization of DFR MM CLO and additional trust preferred securities, which
had $231.0 million and $123.7 million, respectively, outstanding as of
September 30, 2007, and zero and $77.3 million, respectively, outstanding as of
September 30, 2006. These increases were partially offset by the decrease in
the outstanding balance in our warehouse funding facility from $222.1 million
as of September 30, 2006 to $76.9 million as of September 30, 2007 as a result
of the DFR MM CLO securitization.

The
market is currently experiencing a significant delevering event with liquidity
being scarce and credit spreads widening. As discussed further in our
discussion on liquidity, while management believes our current financing
sources and cash flows from operations are adequate to meet our liquidity
needs, our investment strategy has refocused to that of preserving liquidity
until the current market conditions subside, which may have a negative impact
on our future net interest margin during this period of market uncertainty.

Provision for Loan Losses

We
have identified two impaired loans held for investment as of September 30,
2007. We determined provisions for loan losses in the amount of zero and $6.9
million for the three and nine months ended September 30, 2007 were required for
these loans. $5.1 million of the increase during the nine months ended
September 30, 2007 represented the full outstanding principal balance of a loan
fully reserved for as, among other factors, the company declared bankruptcy and
we do not expect to collect the principal amount of the loan. The remaining
$1.8 million addition to the provision during the nine months ended September
30, 2007 represented the excess of the amortized cost basis over the discounted
expected future cash flows for another loan. We had not recognized a provision
for loan losses for the same periods during 2006.

50

---



Expenses

The
following table summarizes our expenses for the periods presented:

|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |   |   |      |  |   |      |  
|----------------------------------------------------- |  | -------------------------------- | ---- | ------------- | - | ------------------------------- |  | -------- | ---- | ---- | - | ------------- | - | - | ---- |  | - | ---- | -
|                                                      |  | Three months ended September 30, |      |               |   | Nine months ended September 30, |  |          |     
|                                                      |  |                                  |      | Variance      |   |                                 |  | Variance |     
|                                                      |  | 2007                             |      | 2006          |   | 2007 vs. 2006                   |  | 2007     |      | 2006 |   | 2007 vs. 2006 |  
|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |  
|                                                      |  | (In millions)                    |      | (In millions) |  
|                                                      |  |                                  |      |               |  
|Base management fee                                   |  | $                                | 3.2  |               | $ | 3.4                             |  | $        | (0.2 | )    | $ | 9.8           |   | $ | 10.0 |  | $ | (0.2 | )
|Amortization related to restricted stock
 and options |  |                                  | (0.4 | )             |   | 0.3                             |  |          | (0.7 | )    |   | (0.3          | ) |   | 1.0  |  |   | (1.3 | )
|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |   |   |      |  |   |      |  
|Total management fee expense to related
 party        |  |                                  | 2.8  |               |   | 3.7                             |  |          | (0.9 | )    |   | 9.5           |   |   | 11.0 |  |   | (1.5 | )
|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |   |   |      |  |   |      |  
|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |   |   |      |  |   |      |  
|Incentive fee expense to related party                |  |                                  |     |               |   | 1.3                             |  |          | (1.3 | )    |   | 2.2           |   |   | 3.3  |  |   | (1.1 | )
|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |   |   |      |  |   |      |  
|Audit and audit-related fees                          |  |                                  | 0.3  |               |   | 0.3                             |  |          |     |      |   | 0.9           |   |   | 0.7  |  |   | 0.2  |  
|Legal fees                                            |  |                                  | 0.4  |               |   | 0.1                             |  |          | 0.3  |      |   | 0.7           |   |   | 0.3  |  |   | 0.4  |  
|Other professional fees                               |  |                                  | 0.7  |               |   | 0.2                             |  |          | 0.5  |      |   | 1.2           |   |   | 0.5  |  |   | 0.7  |  
|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |   |   |      |  |   |      |  
|Total professional services                           |  |                                  | 1.4  |               |   | 0.6                             |  |          | 0.8  |      |   | 2.8           |   |   | 1.5  |  |   | 1.3  |  
|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |   |   |      |  |   |      |  
|Insurance expense                                     |  |                                  | 0.2  |               |   | 0.2                             |  |          |     |      |   | 0.5           |   |   | 0.6  |  |   | (0.1 | )
|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |   |   |      |  |   |      |  
|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |   |   |      |  |   |      |  
|Board of directors fees                               |  |                                  | 0.3  |               |   | 0.1                             |  |          | 0.2  |      |   | 0.9           |   |   | 0.4  |  |   | 0.5  |  
|Banking and other administrative fees                 |  |                                  | 0.2  |               |   | 0.1                             |  |          | 0.1  |      |   | 0.5           |   |   | 0.4  |  |   | 0.1  |  
|Software and data feeds                               |  |                                  | 0.2  |               |   | 0.1                             |  |          | 0.1  |      |   | 0.3           |   |   | 0.2  |  |   | 0.1  |  
|Other general and administrative expenses             |  |                                  |     |               |   | 0.1                             |  |          | (0.1 | )    |   | 0.2           |   |   | 0.3  |  |   | (0.1 | )
|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |   |   |      |  |   |      |  
|Total general and administrative expenses             |  |                                  | 0.7  |               |   | 0.4                             |  |          | 0.3  |      |   | 1.9           |   |   | 1.3  |  |   | 0.6  |  
|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |   |   |      |  |   |      |  
|Total expenses                                        |  | $                                | 5.1  |               | $ | 6.2                             |  | $        | (1.1 | )    | $ | 16.9          |   | $ | 17.7 |  | $ | (0.8 | )
|                                                      |  |                                  |      |               |   |                                 |  |          |      |      |   |               |   |   |      |  |   |      |  

For
the three months ended September 30, 2007, our expenses decreased by $1.1
million as compared to the same period in 2006. This decrease was primarily
attributable to a decrease in incentive fee expenses to related party of $1.3
million resulting from a decrease in our net income and a decrease in
amortization on restricted stock and options of $0.7 million. The decrease in
amortization is primarily because we have used the graded vesting attribution
method for expense amortization of the restricted stock and options, which has
resulted in a larger amount of the total expense being recognized in the
earlier periods of vesting. The amount of amortization also fluctuates with
changes in our stock price. These decreases in expenses were partially offset
by an increase in professional services expense of $0.8 million and an increase
in board of directors fees of $0.2 million primarily attributable to certain
legal expenses, an increase in audit fees and increased board compensation for
additional board meetings. For the three months ended September 30, 2007 we
expensed certain merger related expenses associated with our proposed
acquisition of Deerfield related specifically to debt issuance costs of $0.1
million and $0.3 million of legal fees and other professional fees,
respectively. As of September 30, 2007, we had $2.7 million remaining of
capitalized acquisition and equity issuances costs that will be taken as an
immediate reduction of current earnings if the acquisition is not consummated.

For
the nine months ended September 30, 2007, our expenses decreased by $0.8
million as compared to the same period in 2006. This decrease was primarily
attributable to a decrease in incentive fee expenses to related party of $1.1
million resulting from a decrease in our net income and a decrease in
amortization on restricted stock and options of $1.3 million. The decrease in
amortization is primarily because we have used the graded vesting attribution
method for expense amortization of the restricted stock and options, which has
resulted in a larger amount of the total expense being recognized in the
earlier periods of vesting in addition to a decline in the fair value of
unvested stock. This decrease was partially offset by increases in professional
services expense and board of directors fees of $1.3 million and $0.5 million,
respectively.

51

---



Other Income and Gain (Loss)

The
following table summarizes our other income and gain (loss) for the periods
presented:

|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|----------------------------------------------------------------- |  | -------------------------------- | ----- | ------------- | - | ------------------------------- | - | -------- | ----- | ---- | - | ------------- | - | - | ---- | - | - | ----- | -
|                                                                  |  | Three months ended September 30, |       |               |   | Nine months ended September 30, |   |          |      
|                                                                  |  |                                  |       | Variance      |   |                                 |   | Variance |      
|                                                                  |  | 2007                             |       | 2006          |   | 2007 vs. 2006                   |   | 2007     |       | 2006 |   | 2007 vs. 2006 |  
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |  
|                                                                  |  | (In millions)                    |       | (In millions) |  
|                                                                  |  |                                  |       |               |  
|Net realized gain (loss) on
 available-for-sale securities        |  | $                                | (6.8  | )             | $ | 1.8                             |   | $        | (8.6  | )    | $ | (4.3          | ) | $ | 7.1  |   | $ | (11.4 | )
|Other-than-temporary impairment on
 available-for-sale securities |  |                                  | (16.4 | )             |   |                                |   |          | (16.4 | )    |   | (16.6         | ) |   | (2.0 | ) |   | (14.6 | )
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|Net gain (loss) on available-for-sale
 securities                 |  |                                  | (23.2 | )             |   | 1.8                             |   |          | (25.0 | )    |   | (20.9         | ) |   | 5.1  |   |   | (26.0 | )
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|Net realized gain (loss) on trading
 securities                   |  |                                  | (2.5  | )             |   | 0.4                             |   |          | (2.9  | )    |   | (2.1          | ) |   | 0.5  |   |   | (2.6  | )
|Net unrealized gain on trading securities                         |  |                                  | 8.1   |               |   | 2.6                             |   |          | 5.5   |      |   | 4.7           |   |   | 0.8  |   |   | 3.9   |  
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|Net gain on trading securities                                    |  |                                  | 5.6   |               |   | 3.0                             |   |          | 2.6   |      |   | 2.6           |   |   | 1.3  |   |   | 1.3   |  
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|Net realized gain on loans                                        |  |                                  | 0.4   |               |   | 0.7                             |   |          | (0.3  | )    |   | 0.5           |   |   | 1.4  |   |   | (0.9  | )
|Net unrealized loss on loans                                      |  |                                  | (7.8  | )             |   | (0.2                            | ) |          | (7.6  | )    |   | (7.5          | ) |   | (0.6 | ) |   | (6.9  | )
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|Net gain (loss) on loans                                          |  |                                  | (7.4  | )             |   | 0.5                             |   |          | (7.9  | )    |   | (7.0          | ) |   | 0.8  |   |   | (7.8  | )
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|Net realized gain (loss) on interest rate
 swaps                  |  |                                  | (3.2  | )             |   | 0.4                             |   |          | (3.6  | )    |   | 0.3           |   |   | 1.5  |   |   | (1.2  | )
|Net realized gain on credit default swaps                         |  |                                  | 0.3   |               |   | 0.6                             |   |          | (0.3  | )    |   | 1.5           |   |   | 1.5  |   |   |      |  
|Net realized gain on total return swaps                           |  |                                  | 0.8   |               |   |                                |   |          | 0.8   |      |   | 1.0           |   |   |     |   |   | 1.0   |  
|Net realized gain on interest rate floors
 and caps               |  |                                  | 1.5   |               |   |                                |   |          | 1.5   |      |   | 1.5           |   |   |     |   |   | 1.5   |  
|Net unrealized gain (loss) on interest rate
 swaps                |  |                                  | (12.0 | )             |   | (0.5                            | ) |          | (11.5 | )    |   | (13.3         | ) |   | 0.1  |   |   | (13.4 | )
|Net unrealized gain (loss) on credit
 default swaps               |  |                                  | (0.6  | )             |   | 0.3                             |   |          | (0.9  | )    |   | (0.8          | ) |   | 0.5  |   |   | (1.3  | )
|Net unrealized gain (loss) on total return
 swaps                 |  |                                  | (3.0  | )             |   | 0.1                             |   |          | (3.1  | )    |   | (2.6          | ) |   | 0.2  |   |   | (2.8  | )
|Net unrealized loss on interest rate floors
 and caps             |  |                                  | (3.9  | )             |   | (0.5                            | ) |          | (3.4  | )    |   | (2.3          | ) |   | (0.5 | ) |   | (1.8  | )
|Net unrealized loss on warrants                                   |  |                                  | (0.1  | )             |   |                                |   |          | (0.1  | )    |   | (0.1          | ) |   |     |   |   | (0.1  | )
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|Net gain (loss) on derivatives                                    |  |                                  | (20.2 | )             |   | 0.4                             |   |          | (20.6 | )    |   | (14.8         | ) |   | 3.3  |   |   | (18.1 | )
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|Dividend income                                                   |  |                                  | 0.1   |               |   | 1.0                             |   |          | (0.9  | )    |   | 0.2           |   |   | 1.2  |   |   | (1.0  | )
|Other net loss                                                    |  |                                  | (0.2  | )             |   | (0.4                            | ) |          | 0.2   |      |   | (0.4          | ) |   | (0.4 | ) |   |      |  
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|Dividend income and other net loss                                |  |                                  | (0.1  | )             |   | 0.6                             |   |          | (0.7  | )    |   | (0.2          | ) |   | 0.8  |   |   | (1.0  | )
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|Total other income and gain (loss)                                |  | $                                | (45.3 | )             | $ | 6.3                             |   | $        | (51.6 | )    | $ | (40.3         | ) | $ | 11.3 |   | $ | (51.6 | )
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|Total net realized gain (loss)                                    |  | $                                | (9.4  | )             | $ | 4.9                             |   | $        | (14.3 | )    | $ | (1.4          | ) | $ | 13.2 |   | $ | (14.6 | )
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  
|Total net unrealized gain (loss)                                  |  | $                                | (35.9 | )             | $ | 1.4                             |   | $        | (37.3 | )    | $ | (38.9         | ) | $ | (1.9 | ) | $ | (37.0 | )
|                                                                  |  |                                  |       |               |   |                                 |   |          |       |      |   |               |   |   |      |   |   |       |  

For
the three months ended September 30, 2007, other income and gain (loss)
decreased by $51.6 million as compared to the same period in 2006. This
decrease is primarily attributable to increased losses on available-for-sale
securities, loans and derivatives of $25.0 million, $7.9 million and $20.6
million, respectively, partially offset by an increase in trading security
gains of $2.6 million. The increased losses on available-for-sale securities
are the net result of sales at unfavorable prices to increase liquidity and
impairment charges recorded during the three months ended September 30, 2007.
The increased losses on loans were largely attributable to asset write-downs to
fair value in the held-for-sale portfolio. The increase in derivative losses
are primarily attributable to increases in realized losses on interest rate
swaps of $3.6 million, unrealized losses on total return swaps of $3.1 million
and unrealized losses on interest rate swaps of $11.5 million and interest rate
floors and caps of $3.4 million which were primarily a result of unfavorable
interest rate changes on these instruments during the period. These losses were
partially offset by a $2.6 million gain on trading securities.

For
the nine months ended September 30, 2007, other income and gain (loss)
decreased by $51.6 million as compared to the same period in 2006. This
decrease is primarily attributable to increased losses on available-for-sale
securities, loans and derivatives of $26.0 million, $7.8 million and $18.1
million, respectively, partially offset by an increase in trading security
gains of $1.3 million. The increased losses on available-for-sale securities
are the net result of sales at unfavorable prices to increase liquidity and
impairment charges recorded during the nine months ended September 30, 2007.
The increased losses on loans were largely attributable to asset write-downs to
fair value in the held-for-sale portfolio. The increase in derivative losses
are primarily attributable to increased unrealized losses on interest rate
swaps of $13.4 million and interest rate floors and caps of $1.8 million which
were primarily a result of unfavorable interest rate changes to these
instruments during the period. Additionally, we experienced $2.8 million in
unrealized losses on total return swaps during the nine months ended September
30, 2007 due to wider credit spreads.

52

---



Income Tax Expense

We
have elected to be taxed as a REIT and intend to continue to comply with the
provisions of the Internal Revenue Code of 1986, as amended (or the Code), with
respect thereto. Accordingly, we will largely be exempt from federal or state
income tax to the extent of our distributions to stockholders and as long as
certain asset, income, distribution and stock ownership tests are met. 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 federal taxation as a REIT, we may be subject to some amount
of federal, state and local taxes on our taxable income.

We
have made a joint election with Deerfield Triarc TRS Holdings, Inc. to treat
this domestic subsidiary as a TRS. As such, Deerfield Triarc TRS Holdings, Inc.
is taxable as a domestic C corporation and subject to federal, state and local
taxes based upon its taxable income. 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 the REIT and to earn income that
would not be REIT qualifying income if earned directly by the REIT. For the
three and nine months ended September 30, 2007, Deerfield Triarc TRS Holdings,
Inc. invested primarily in short-term bank loans and bond trading positions,
resulting in loss before income taxes of $0.8 million and $0.3 million, less
income tax benefit of $0.3 million and $0.1 million, respectively.

Market
Square CLO, DFR MM CLO and Deerfield Triarc TRS (Bahamas) Ltd., or Deerfield
Triarc Bahamas, are foreign TRSs. Market Square CLO and DFR MM CLO were formed
to complete securitization transactions structured as a secured financing, and
Deerfield Triarc Bahamas was formed for certain loan investments within the
warehouse funding facility. Market Square CLO and DFR MM CLO are organized as
exempted companies 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. The three
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 TRSs, they generally will not be subject to corporate
income tax on their earnings; however, we are generally required to include
their current taxable income in our calculation of REIT taxable income.

Off-Balance Sheet Arrangements

As
of September 30, 2007, there have been no material changes in the off-balance
sheet arrangements from those disclosed in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2006.

Liquidity and Capital Resources

We
held cash and cash equivalents of $125.9 million as of September 30, 2007.

Our
operating activities used cash of $654.3 million for the nine months ended
September 30, 2007, primarily through the following:

Net
inflows and non-cash adjustments of $82.5million, consisting of the following:

| |  |   |                                                                                   
| |  | - | ----------------------------------------------------------------------------------
| |  |  | Net income -
 $13.8 million                                                       
| |  |   |                                                                                   
| |  |  | Net premium
 and discount amortization - $19.2 million                            
| |  |   |                                                                                   
| |  |  | Other-than-temporary
 impairment of available-for-sale securities - $16.6 million 
| |  |   |                                                                                   
| |  |  | Proceeds
 from sales and principal payments on loans held for sale - $14.0 million

53

---



| |                                                                                             |   |                                                                   
| | ------------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------
| |                                                                                             |  | Net loss on
 loans - $7.1 million                                 
| |                                                                                             |   |                                                                   
| |                                                                                             |  | Provision
 for loan loss - $6.9 million                           
| |                                                                                             |   |                                                                   
| |                                                                                             |  | Net realized
 loss on available-for-sale securities - $4.3 million
| |                                                                                             |   |                                                                   
| |                                                                                             |  | Equity
 method loss on other investments - $0.4 million           
| |                                                                                             |   |                                                                   
| |                                                                                             |  | Share based
 compensation - $0.2 million                          
| |                                                                                             |   |                                                                   
| | Net decrease
 in operating assets and liabilities  $10.4 million                          
| |                                                                                             |   |                                                                   
| | Net outflows
 and non-cash adjustments totaled $726.4 million, consisting of the following:
| |                                                                                             |   |                                                                   
| |                                                                                             |  | Net
 purchases of trading securities - $721.3 million             
| |                                                                                             |   |                                                                   
| |                                                                                             |  | Net gain on
 trading securities - $2.6 million                    
| |                                                                                             |   |                                                                   
| |                                                                                             |  | Net impact
 of derivatives - $2.5 million                         

Our
investing activities provided cash of $1.3 billion for the nine months ended
September 30, 2007, primarily the result of the purchase of available-for-sale
securities and loans totaling $1.9 billion, offset by principal payments and
proceeds from sale of available-for-sale securities of $3.0 billion, and
principal payments and proceeds from loans of $202.8 million. Restricted cash
and cash equivalents decreased $17.6 million and there were purchases of other
investments of $0.6 million.

Our
financing activities used cash of $571.6 million for the nine months ended
September 30, 2007, primarily from net payments made on our repurchase
agreements, payments made on our warehouse funding agreement, payments of
dividends and debt issuance costs of $550.2 million, $262.2 million, $65.2
million, and $2.7 million, respectively. These payments were offset by proceeds
from the issuance of long-term debt and proceeds from the revolving warehouse
funding agreement of $231.0 million and $78.2 million, respectively.

Leverage

As
of September 30, 2007 and 2006 our leverage was 14.1 times equity and 11.5
times equity, which was calculated by dividing our total debt (principal
outstanding of repurchase agreements and long-term debt) of $7.8 billion and
$8.2 billion by total stockholders equity of $550.7 million and $712.5
million, as reported in our financial statements as of September 30, 2007 and
2006, respectively.

This
increased leverage as of September 30, 2007 is primarily driven by our $131.8
million increase in long term borrowings to fund growth in assets and net
income and a $161.8 million decrease in stockholders equity as of September
30, 2007 compared to the same period in 2006. The increase in borrowings is
primarily the result of the securitization of DFR MM CLO and the use of trust
preferred debt securities, partially offset by the reduction of use of the
revolving warehouse funding facility. The decrease in stockholders equity is
primarily the result of an increase in accumulated other comprehensive loss due
to fair value adjustments on available-for-sale securities and designated
derivatives and an increase in the accumulated deficit due to dividend
distributions in excess of earnings which we distributed in order to maintain
our REIT status.

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. We have also generated proceeds through long-term
debt issuances of Market Square CLO, DFR MM CLO and Pinetree CDO, the issuance
of trust preferred debt securities, and in March of 2006, we closed an
alternative asset

54

---



revolving
warehouse funding facility with Wachovia Capital Markets, LLC, providing
financing up to $300.0 million (amended to $375.0 million on February 7, 2007)
in borrowing capacity.

The
following is a summary of our borrowings as of September 30, 2007 (dollars in
thousands):

|                                                      |  |                         |           |                  |   |                               |     |                                |         |       |   |         |     |   |           |  
|----------------------------------------------------- |  | ----------------------- | --------- | ---------------- | - | ----------------------------- | --- | ------------------------------ | ------- | ----- | - | ------- | --- | - | --------- | -
|                                                      |  | Repurchase 
 Agreements |           | Term 
 Financing |   | Warehouse
 Funding 
 Facility |     | Trust 
 Preferred 
 Securities |         | Total |  
|                                                      |  |                         |           |                  |   |                               |     |                                |         |       |  
|Outstanding balance                                   |  | $                       | 6,811,182 |                  | $ | 794,466                       | (1) | $                              | 76,935  |       | $ | 123,717 |     | $ | 7,806,300 |  
|Weighted average borrowing rate                       |  |                         | 5.23      | %                |   | 5.91                          | %   |                                | 6.54    | %     |   | 8.13    | %   |   | 5.36      | %
|Weighted-average remaining maturity (in years)        |  |                         | 0.05      |                  |   | 20.52                         | (2) |                                | 1.44    |       |   | 28.69   | (3) |   | 2.60      |  
|Fair value of collateral (including accrued interest) |  | $                       | 7,017,288 |                  | $ | 835,865                       |     | $                              | 138,048 |       |   | n/a     |     |   | n/m       |  

---

n/a  not applicable


n/m  not meaningful


(1) Excludes $19.0 million of
DFR MM CLO debt that is owned by the Company and eliminated upon consolidation.
Had this debt been included the weighted-average borrowing rate would be 5.99%
and the weighted-average remaining maturity would be 20.32 years.

(2) $276.0 million of the term
financing is callable after July 20, 2007 and quarterly thereafter, $287.5
million is callable after January 5, 2010, and quarterly thereafter and $231.0
million is callable after October 20, 2010 and quarterly thereafter.

(3) $51.6 million of the trust
preferred securities are callable after October 30, 2010 and $72.1 million are
callable after October 30, 2011.

Repurchase
Agreements. As of September 30, 2007, repurchase agreements outstanding totaled
$6.8 billion, with a weighted-average current borrowing rate of 5.23%, which
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
September 30, 2007, we had established 18 borrowing arrangements with various
investment banking firms and other lenders, 15 of which we had an outstanding
repurchase agreement balance as of September 30, 2007. Increases in 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. In addition, an increase in haircuts (the percentage deduction off
fair value of RMBS collateral that we receive in cash at the inception of a
repurchase agreement) limits our borrowing capacity. 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.

Of
our 15 active repurchase counterparties, our largest agency provider represents
23.7% of our outstanding repurchase agreement balance and of our largest AAA
     counterparty represents 54.8 % of such balance. While
    we believe we have adequate capacity within our available
    repurchase agreement counterparties, there is a risk that certain counterparties
    may increase margin requirements or seek to reduce their repurchase agreement
    exposure and as a result, we may need to sell securities if we are no longer
    able to secure adequate funding for a portion of our mortgage portfolio.

Recent
developments in the market for many types of mortgage products (including
mortgage-backed securities) have resulted in reduced liquidity for these
assets. Although this reduction in liquidity has been most acute with regard to
nonprime assets, there has been an overall reduction in liquidity across the
credit spectrum of mortgage products. We liquidated a portion of our RMBS
securities in response to these developments, reducing the carrying value of
this portfolio from $7.8 billion at June 30, 2007 to $7.4 billion at September
30, 2007.

Our
short-term (one year or less) liquidity needs are met primarily with proceeds
from overnight investments and by maintaining a portfolio of unencumbered RMBS.
Unencumbered RMBS and unrestricted cash and cash equivalents totaled $49.2 million
    and $125.9 million, respectively as of September 30, 2007. As of September
    30, 2007 the RMBS available to be pledged was $7.2 billion. This was composed
    of owned RMBS of $7.4 billion, RMBS received in as collateral of $1.5 million
    and pending RMBS sales of $93.5 million less pending RMBS purchases of $273.4
    million. The amount of RMBS pledged as of September 30, 2007 was $7.2 billion
    which was composed of $7.0 billion representing the fair value of RMBS securities
    sold (excluding accrued interest), $98.8 million of additional RMBS to cover
repurchase

55

---



agreeement
haircuts and $80.7 pledged in conjunction with derivative collateral calls.
RMBS monthly paydowns, net interest from invested assets and dividends from
subsidiaries are also significant sources of cash used in the liquidity
management process. As of October 31, 2007 unencumbered RMBS and unrestricted
    cash and cash equivalents were $94.9 million and $33.6 million, respectively.
    We have established 18 repurchase agreement borrowing relationships with
    various financial institutions and other lenders. We currently have balances
    outstanding with 15 of those counterparties. The majority of our remaining
    sources of borrowings are term financing and trust preferred securities,
    which are not subject to margin calls.

While
we believe current financing sources and cash flows from operations are
adequate to meet the our ongoing liquidity needs for the short-term, our
investment strategy has been refocused to that of preserving liquidity until
the current market conditions subside.

Warehouse
Funding Facility. Financing under the Facility is secured by assets ranging
from large syndicated bank loans to subordinated notes and preferred stock.
Advance rates under the Facility vary by asset type and are subject to certain
compliance criteria. The Facility is available to two bankruptcy remote special
purpose vehicles (DWFC, LLC and Deerfield Triarc TRS (Bahamas) Ltd.) and the
debt holder has recourse only to the collateral of these entities, which total
$138.0 million as of September 30, 2007. On July 17, 2007, we closed DFR MM
CLO. As a result of this securitization, $213.2 million of debt was paid down
on the Facility. As of September 30, 2007 we had $76.9 million of debt
outstanding related to the Facility. We expect to pursue term funding of these
assets via securitization in a future CDO. Unamortized debt issuance costs
associated with the Facility totaled $0.6 million as of September 30, 2007, and
are classified as part of prepaid and other assets on the condensed
consolidated balance sheet. 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. The weighted average interest rate as of September 30, 2007 was 6.54%.

The
Facility is subject to several non-financial covenants, including those of
which relate to compliance with laws, maintenance of service agreements,
protection of collateral and various notification requirements. Failure to meet
these requirements could result in reduction of advances from the Facility or
more severe default remedies, including acceleration of the outstanding
indebtedness. Effective August 3, 2007 we received a waiver for a technical
default that occurred in July 2007 related to a historical charge-off ratio
within the Facility. The waiver provides for a six month forbearance on the
technical default that occurred such that we are currently in compliance with
the debt covenants. The forbearance period of six months effectively remedies
the situation as the current technical default will not continue beyond that
period.

The
remaining sources of liquidity include, term financing and trust preferred
securities, totaling $918.2 million as of September 30, 2007, which provide
long-term sources of capital.

56

---



The
following table presents certain information regarding the amount at risk
related to our repurchase agreements:

|                                      |  |                    |         |                                                        |  |    | 
|------------------------------------- |  | ------------------ | ------- | ------------------------------------------------------ |  | -- | 
|                                      |  | Amount at Risk (1) |         | Weighted-Average 
 Maturity of Repurchase 
 Agreements | 
|                                      |  |                    |         |                                                        | 
|Repurchase
 Agreement Counterparties: |  | (In
thousands)     |         | (In
days)                                              | 
|                                      |  |                    |         |                                                        | 
|                                      |  |                    |         |                                                        |  |    | 
|Bear, Stearns & Co. Inc.              |  | $                  | 9,036   |                                                        |  | 2  | 
|BNP Paribas Securities Corp.          |  |                    | 24,936  |                                                        |  | 20 | 
|Barclays Capital Inc.                 |  |                    | 26,925  |                                                        |  | 12 | 
|Citigroup Global Markets, Inc.        |  |                    | 4,976   |                                                        |  | 1  | 
|Credit Suisse Securities (USA) LLC    |  |                    | 52,231  |                                                        |  | 28 | 
|Countrywide Securities Corporation    |  |                    | 10,286  |                                                        |  | 18 | 
|Fortis Securities LLC                 |  |                    | (252    | )                                                      |  | 8  | 
|Greenwich Capital Markets, Inc.       |  |                    | 1,241   |                                                        |  | 4  | 
|HSBC Securities (USA) Inc.            |  |                    | 9,989   |                                                        |  | 1  | 
|ING Financial Markets LLC             |  |                    | 62,587  |                                                        |  | 21 | 
|J.P. Morgan Securities Inc.           |  |                    | 11,130  |                                                        |  | 24 | 
|Lehman Brothers Inc.                  |  |                    | 463     |                                                        |  | 17 | 
|Morgan Stanley & Co. Incorporated     |  |                    | 5,247   |                                                        |  | 9  | 
|Nomura Securities International, Inc. |  |                    | 46,120  |                                                        |  | 18 | 
|UBS Securities LLC                    |  |                    | 36,187  |                                                        |  | 19 | 
|                                      |  |                    |         |                                                        |  |    | 
|Total                                 |  | $                  | 301,102 |                                                        |  | 18 | 
|                                      |  |                    |         |                                                        |  |    | 

|    |                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Equal to the fair value of
 securities pledged (including additional repurchase agreement collateral
 pledged of $95.0 million, which including $0.4 million of accrued interest
 receivable), and related accrued interest receivable, minus repurchase
 agreement liabilities, and related accrued interest payable.

The
    three largest providers of repurchase agreement financing represented
    22.9%, 17.5% and 12.6% of the $6.8 billion total amount of repurchase agreement
liabilities. Except as noted below, the repurchase agreements for these
facilities do not include substantive provisions other than those contained in
the standard master repurchase agreement as published by the Bond Market
Association. We have agreements for two repurchase facilities which together
    include provisions that establish termination events if (i) 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, (ii) we fail
    to maintain a minimum net asset value of $355 million, (iii) the Manager
    ceases to be our manager, (iv) we fail to qualify as a REIT, (v) we fail
    to be publicly traded on the New York Stock Exchange, (vi) we cease to own
    100% of the equity of Deerfield Triarc Capital LLC or (vii) 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.

Distribution Policy

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 late in the month following the
quarter end, 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 excluding net capital gains on an annual basis. This
requirement can impact our liquidity and capital resources.

57

---



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 securities or issuing new debt, possibly including classes of
preferred stock, common stock, commercial paper, medium-term notes, CDOs, CLOs,
collateralized mortgage obligations and senior or subordinated notes. The
ability to execute these strategies 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 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.

Recent Developments

On
April 20, 2007, we announced that we had entered into a definitive agreement to
acquire Deerfield & Company LLC (Deerfield), the parent of the Manager,
from Triarc Companies, Inc. (Triarc), which owns a controlling interest in
Deerfield, and Deerfields other members. On August 16, 2007, we announced
that we had not yet been able to complete on acceptable terms the financing
necessary for us to consummate the acquisition of Deerfield, due to, among
other things, instability in the credit markets. Our obligation to complete the
acquisition was subject to the receipt by us of financing for the cash portion
of the purchase price and related transaction costs. Under the existing
definitive agreement, each party had the right to terminate the agreement
beginning October 19, 2007. The parties mutually terminated the agreement on
October 19, 2007. On October 22, 2007, the Company announced that it was
continuing to explore with Triarc the revised terms and conditions of the
Deerfield acquisition and that there was no assurance that we will reach
agreement with Triarc on revised terms and conditions for the acquisition of
Deerfield and that even if reached, such terms and conditions would likely
differ materially from those set forth in the terminated agreement. Our Special
Committee of its Board of Directors has not considered or approved any revised
terms or conditions.

DIVIDEND

On
October 23, 2007, we declared a cash dividend of $0.42 per share on our common
stock for the third quarter of 2007. The record date for the cash dividend was
November 6, 2007, and the payment date will be November 27, 2007.

CURRENT
ENVIRONMENT

Recent
developments in the market for many types of mortgage products (including
mortgage-backed securities) have resulted in reduced liquidity for these
assets. Although this reduction in liquidity has been most acute with regard to
nonprime assets, there has been an overall reduction in liquidity across the
credit spectrum of mortgage products.

Our
short-term (one year or less) liquidity needs are met primarily with proceeds
from unrestricted cash and cash equivalents and repurchase agreement borrowings.
    Unencumbered RMBS and unrestricted cash and cash equivalents as of September
    30, 2007 totaled $49.2 and $125.9 million, respectively. RMBS monthly paydowns,
    net interest from invested assets and dividends from subsidiaries are also
    significant sources of cash used in the liquidity management process. As
    of October 31, 2007 unrestricted cash and cash equivalents and unencumbered
    RMBS were $94.9 million and $33.6 million, respectively. We have established
    18 repurchase agreement borrowing relationships with various financial institutions
    and other lenders. We currently have balances outstanding with 15 of those
    counterparties. The majority of our remaining sources of borrowings are term
    financing and trust preferred securities, which are not subject to margin
    calls.

While
we believe current financing sources and cash flows from operations are
adequate to meet our ongoing liquidity needs for the short-term, our investment
strategy has been refocused to that of preserving liquidity until the current
market conditions subside.

58

---



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:

|                                                                      |  |                                       |        |  
|--------------------------------------------------------------------- |  | ------------------------------------- | ------ | -
|                                                                      |  | Nine months ended
 September 30, 2007 |       
|                                                                      |  |                                       |       
|                                                                      |  | (In thousands)                        |       
|                                                                      |  |                                       |       
|                                                                     
|GAAP net income                                                       |  | $                                     | 13,786 |  
|                                                                      |  |                                       |        |  
|Adjustments to GAAP net income:                                       |  |                                       |        |  
|Difference in rate of
amortization and accretion                      |  |                                       | 1,991  |  
|Interest income on non-accrual
loans                                  |  |                                       | 881    |  
|Amortization of terminated
swaps                                      |  |                                       | 221    |  
|Amortization of financing
element in Pinetree swap                    |  |                                       | (116   | )
|Unrealized (gain)/loss -
hedging                                      |  |                                       | 85     |  
|Provision for loan losses
(1)                                         |  |                                       | 1,800  |  
|Stock and options
grant                                               |  |                                       | (279   | )
|Organization costs                                                    |  |                                       | (6     | )
|Non-allowable deduction for
meals and entertainment                   |  |                                       | 102    |  
|Tax capital losses in excess of
capital gains (tax loss carryforward) |  |                                       | 17,444 |  
|Security basis difference
recognized upon sale                        |  |                                       | (6,811 | )
|Gain on intercompany sale
eliminated for GAAP                         |  |                                       | 1,293  |  
|Unrealized impairment of
available-for-sale securities                |  |                                       | 16,567 |  
|Other unrealized (gain)
loss                                          |  |                                       | 22,131 |  
|Exclusion of Deerfield Triarc
TRS Holdings, LLC net income            |  |                                       | 190    |  
|                                                                      |  |                                       |        |  
|Net adjustments to GAAP net
income                                    |  |                                       | 55,493 |  
|                                                                      |  |                                       |        |  
|Estimated REIT taxable
income                                         |  | $                                     | 69,279 |  
|                                                                      |  |                                       |        |  

|    |                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | We recognized the $5.1
 million provision for loan losses for both GAAP and Estimated REIT taxable
 income related to our loan to a company that filed bankruptcy in July 2007.

The
Difference in rate of amortization and accretion line above includes, among
other items, a different accretion rate 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 that are currently not updated through September 30,
2007 and the numbers reflected above include estimates as of September 30,
2007. 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
September 30, 2007 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.

We
believe that the presentation of our estimated REIT taxable income is useful to
investors because it demonstrates 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,

59

---



we expect to
also consider our cash flow and what we believe to be an appropriate and
competitive dividend yield relative to other diversified financial 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 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 September 30, 2007, the primary component of our market risk was interest
rate risk, as described below. We believe that a significant portion of risk
can be quantified from historical experience. While we do not seek to avoid
risk completely, we 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 RMBS primarily 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 period 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.

60

---



In
order to mitigate our interest rate exposure, we have entered into 170
designated interest rate swap hedging transactions as of September 30, 2007.
The following table summarizes the expiration dates of these contracts and
their notional amounts:

|                    |  |                  |           | 
|------------------- |  | ---------------- | --------- | 
|Year of
 Expiration |  | Notional
 Amount |          
|                    |  |                  |          
|                    |  | (In thousands)   |          
|2008                |  | $                | 1,410,100 | 
|2009                |  |                  | 922,000   | 
|2010                |  |                  | 1,371,200 | 
|2011                |  |                  | 659,000   | 
|2012 - 2017         |  |                  | 894,000   | 
|                    |  |                  |           | 
|Total               |  | $                | 5,256,300 | 
|                    |  |                  |           | 

Hedging
strategies 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 changes the net impact of our hedging activity 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 several years of the loan
(typically 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 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 period 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 maturity 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

Our
hybrid adjustable-rate RMBS 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

61

---



a net loss
during periods of rising interest rates, which would negatively impact our
financial condition, cash flows and results of operations.

Interest Rate
Mismatch Risk

We
intend to fund a substantial portion of our purchases of RMBS with borrowings
that, after the effect of hedging, have interest rates based on indices and
repricing terms similar to, the interest rate indices and repricing terms of
the RMBS. 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, quantitative
analysis 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. 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 unamortized premium
and a corresponding reduction of our net interest income by such amount.
Additionally, 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 fair value of our assets. We face the risk that the fair 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
calculate duration using various third party financial models and empirical
data. Different models and methodologies can produce different duration numbers
for the same securities.

62

---



The
following sensitivity analysis table shows the impact on the estimated fair
value of our RMBS interest rate-sensitive investments (including
available-for-sale investments of $6.6 billion and trading investments of
$816.3 million) and interest rate swaps and floors as of September 30, 2007,
assuming rates instantaneously fall 100 basis points and rise 100 basis points:

|                                                                   |  |                                    |           |           |   |                                    |   |   |           |   
|------------------------------------------------------------------ |  | ---------------------------------- | --------- | --------- | - | ---------------------------------- | - | - | --------- | --
|                                                                   |  | Interest RatesFall 100Basis Points |           | Unchanged |   | Interest RatesRise 100Basis Points |  
|                                                                   |  |                                    |           |           |   |                                    |  
|                                                                   |  | (In thousands)                     |          
|                                                                   |  |                                    |          
|RMBS                                                               |  |                                    |           |           |   |                                    |   |   |           |   
|Fair value (1)                                                     |  | $                                  | 7,530,210 |           | $ | 7,390,574                          |   | $ | 7,170,190 |   
|Change in fair value                                               |  | $                                  | 139,636   |           |   |                                    |   | $ | (220,384  | ) 
|Change as a percent of fair value                                  |  |                                    | 1.89      | %         |   |                                    |   |   | (2.98     | )%
|Designated and Undesignated Interest Rate
  Swaps, Floors and Caps |  |                                    |           |           |   |                                    |   |   |           |   
|Fair value                                                         |  | $                                  | (231,317  | )         | $ | (56,137                            | ) | $ | 110,826   |   
|Change in fair value                                               |  | $                                  | (175,180  | )         |   |                                    |   | $ | 166,963   |   
|Net Portfolio Impact                                               |  | $                                  | (35,544   | )         |   |                                    |   | $ | (53,421   | ) 



---

|                     |                                                              
|-------------------- | -------------------------------------------------------------
|(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 rate changes exceed 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.

As
of September 30, 2007, substantially all investments in our alternative
investments portfolio (non-RMBS) 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:

| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | attempting
  to structure borrowing agreements to have a range of different maturities,
  terms, amortizations and interest rate adjustment periods;                                                            
| |   |                                                                                                                                                                                                                 
| |  | using
  interest rate derivatives including, swaps, caps, floors, mortgage
  derivatives and forward sales, to adjust the interest rate sensitivity of
  RMBS and borrowings; and                               
| |   |                                                                                                                                                                                                                 
| |  | actively
  managing, on an aggregate basis, the interest rate indices, interest rate
  adjustment periods, and gross reset margins of RMBS and the interest rate
  indices and adjustment periods of 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

63

---



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, 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 and
Chief Financial Officer, of the effectiveness of the Companys disclosure
controls and procedures (as defined under Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act), as of the end of the
period covered by this report. Based upon that evaluation, the Companys Chief
Executive Officer and Senior Vice President and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective.

Change in Internal Control Over Financial
Reporting

No
change in our internal control over financial reporting was made during our
most recent fiscal quarter that materially affected, or is reasonably likely to
materially affect, our 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, our management,
including our Chief Executive Officer and our Senior Vice President and Chief
Financial Officer does not expect that our control system can prevent or detect
all errors 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

In
addition to the risk factors disclosed in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2006 (see Part I, Item 1A), set forth in
this section are additional risk factors we believe applicable to our business
(a) as a result of the current dislocations in the sub-prime mortgage sector
and (b) if we acquired Deerfield & Company LLC (Deerfield).

Risks Related to
Current Market Dislocations

The
current dislocations in the sub-prime mortgage sector, and the current weakness
in the broader mortgage market, could adversely affect one or more of our
lenders, which could result in increases in our borrowing costs and, reductions
        in our liquidity and reductions in the value of the investments in our
        portfolio.

64

---



Our
    direct exposure to sub-prime mortgages is limited to our remaining $8.1 million
    exposure in Pinetree, which represents our total equity investment in the
    CDO of $12.0 million less the $3.9 million of other-than-temporary impairment
    charges recorded during the three months ended September 30, 2007. However, the continuing
    dislocations in the sub-prime mortgage sector and the current weakness in
    the broader mortgage market could adversely affect one or more of the
    counterparties providing repurchase agreement funding for our AAA/agency
    mortgage-backed securities portfolio and could cause those counterparties
    to be unwilling or unable to provide us with additional financing. This could
    potentially increase our financing costs and reduce our liquidity. This risk
    is exacerbated by the fact that a substantial portion of our repurchase agreement
    financing is provided by a relatively small number of counterparties. If
    one or more major market participants fails or withdraws from the market,
    it could negatively impact the marketability of all fixed income securities,
    including government mortgage securities, and this could reduce the value
    of the securities in our portfolio, thus reducing our net book value. Furthermore,
    if one or more of our counterparties are unwilling or unable to provide us
    with ongoing financing, we could be forced to sell our investments at
    a time when prices are depressed. If this were to occur, it could prevent
    us from compliance with the REIT asset and income tests necessary to fulfill
    our REIT qualification requirements and otherwise materially harm our results
    of operations and financial outlook.

Recent
developments in the market for many types of mortgage products (including
mortgage-backed securities) have resulted in reduced liquidity for these
assets. Although this reduction in liquidity has been most acute with regard to
nonprime assets, there has been an overall reduction in liquidity across the
credit spectrum of mortgage products.

In
addition, the liquidity of our portfolio may also be adversely affected by
margin calls under our repurchase agreements. Our repurchase agreements allow
the counterparty to varying degrees, to revalue the collateral to values that
the lender considers to reflect current market conditions. If a counterparty
determines that the value of the collateral has decreased, it may initiate a
margin call requiring us to post additional collateral to cover the decrease.
When we are subject to such a margin call, we must provide the counterparty
with additional collateral or repay a portion of the outstanding borrowing, on
minimal notice. A significant increase in margin calls as a result of spread
widening could harm our liquidity, results of operations, financial condition,
and business prospects. Additionally, in order to obtain cash to satisfy a
margin call, we may be required to liquidate assets at a disadvantageous time,
which could cause us to incur further losses and adversely affect our results
of operations, financial condition, and may impair our ability to maintain our
current level of dividends.

Risks Relating to
the Potential Acquisition

On
October 19, 2007, after we were unable to obtain financing on acceptable terms
to consummate the acquisition of Deerfield, the parties mutually agreed to
terminate the Agreement and Plan of Merger dated April 19, 2007 (Merger
Agreement).  We are continuing to explore with Triarc Companies, Inc.
revised terms and conditions to effect an acquisition of Deerfield; however,
those terms and conditions would likely be materially different from the terms
and conditions set forth in the terminated Merger Agreement.  We may be
unable to negotiate and enter into new definitive agreement to acquire
Deerfield on acceptable terms, and even if we are able to negotiate and enter
into a new definitive agreement, that transaction would be subject to numerous
closing conditions.  If we do negotiate a new definitive agreement on
acceptable terms and an acquisition of Deerfield does occur, we would be
subject to the same or very similar risks as those described under the heading
Risk Factors set forth in Item 1.A. of Part II of our Quarterly Report on Form
10-Q for the period ended June 30, 2007, each of which risks are incorporated
herein by reference

We
have incurred and expect to continue to incur substantial costs in connection
with the potential acquisition. These costs are primarily associated with the
fees of financial advisors, attorneys, accountants and consultants. In
addition, we have diverted significant management resources in an effort to
complete the potential acquisition. If the potential acquisition is not
completed, we will receive little or no benefit from these costs. In addition,
if the potential acquisition is not completed, we may experience negative
reactions from the financial markets and others. Each of these factors may
adversely affect the trading price of our common stock and our financial
results and operations.

65

---



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

The
Annual Meeting of Stockholders of Deerfield Triarc Capital Corp was held on
August 9, 2007. The matters voted upon at the meeting were disclosed in the S-3
filing dated August 8th, 2007 and the votes cast with respect to
such matters are as follows:

Election of Directors

| |                   |  |            |  |               | 
| | ----------------- |  | ---------- |  | ------------- | 
| | Nominee           |  | Votes For  |  | Votes Against | 
| |                   |  |            |  |               | 
| | Robert
 Machinist |  | 48,419,026 |  | 470,081       | 
| | Jonathan
 Trutter |  | 48,402,300 |  | 486,807       | 

Ratification
of Deloitte & Touche LLP as certified independent accountants for the
fiscal year ended December 31, 2007

|                                                                                                                                                                                                                                                                                                        |            |  |               |  |             |  |                  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- |  | ------------- |  | ----------- |  | ---------------- | 
|                                                                                                                                                                                                                                                                                                        | Votes For  |  | Votes Against |  | Abstentions |  | Broker Non-Votes | 
|                                                                                                                                                                                                                                                                                                        |            |  |               |  |             |  |                  | 
|                                                                                                                                                                                                                                                                                                        | 48,514,231 |  | 235,142       |  | 139,734     |  |                 | 
|                                                                                                                                                                                                                                                                                                        |            |  |               |  |             |  |                  | 
|Issuance of 9,635,192 shares of common stock to the members of
 Deerfield & Company LLC as considations for the merger of DFR Merger
 Company, LLC, our wholly owned subsidiary, with and into Deerfield &
 Company LLC pursuant to the Merger Agreement, which will enable us to
 complete the Merger.
|                                                                                                                                                                                                                                                                                                        |            |  |               |  |             |  |                  | 
|                                                                                                                                                                                                                                                                                                        | Votes For  |  | Votes Against |  | Abstentions |  | Broker Non-Votes | 
|                                                                                                                                                                                                                                                                                                        |            |  |               |  |             |  |                  | 
|                                                                                                                                                                                                                                                                                                        | 32,821,575 |  | 963,564       |  | 159,732     |  | 14,944,236       | 
|                                                                                                                                                                                                                                                                                                        |            |  |               |  |             |  |                  | 
|Amendment and restatement of the Deerfield Triarc Capital Corp. Stock
 Incentive Plan to increase the shares of common stock reserved for issuance
 under the plan from 2,692,313 to 6,136,725.                                                                                                        
|                                                                                                                                                                                                                                                                                                        |            |  |               |  |             |  |                  | 
|                                                                                                                                                                                                                                                                                                        | Votes For  |  | Votes Against |  | Abstentions |  | Broker Non-Votes | 
|                                                                                                                                                                                                                                                                                                        |            |  |               |  |             |  |                  | 
|                                                                                                                                                                                                                                                                                                        | 32,302,025 |  | 1,415,643     |  | 227,203     |  | 14,944,236       | 

ITEM
6. EXHIBITS

|                                             |                                                                                                                                                                                           
|-------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b)
 Documents filed as part of this Report:
|                                             |                                                                                                                                                                                           
|10.1                                         | Summary of
 Compensation to Members of the Special Committee of the Board of Directors                                                                                                    
|                                             |                                                                                                                                                                                           
|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.  

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:
 November 7, 2007 |  | By: /s/
 JONATHAN W. TRUTTER                                        
|                        |  |                                                                     
|                        |  | Jonathan W.
 Trutter, Chief Executive Officer                       
|                        |  | (Principal
 Executive Officer)                                      
|                        |  |                                                                     
|Date:
 November 7, 2007 |  | By: /s/
 RICHARD G. SMITH                                           
|                        |  |                                                                     
|                        |  | Richard G.
 Smith, Senior Vice President and Chief Financial Officer
|                        |  | (Principal
 Financial and Accounting Officer)                       

66

---