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

FORM 10-Q

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

For the quarterly period ended June 30, 2007

OR

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

For the transition period from ______________
to _______________

Commission file number:1-32551

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

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

6250 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K      o

Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, 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 August
9th,
2007.

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

|           |                                                                                                      |     
|---------- | ---------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                      | Page
|Part I.    | Financial Information                                                                                |     
|           |                                                                                                      |     
|Item 1.    | Condensed Consolidated Financial Statements
 and Notes (Unaudited)                                   |     
|           | Condensed Consolidated Balance
Sheets 
 June 30, 2007 and December 31, 2006                         | 4   
|           | Condensed Consolidated Statements of
 Operations  Three and Six Months Ended June 30, 2007 and 2006 | 5   
|           | Condensed Consolidated Statement of
 Stockholders Equity  Six Months Ended June 30, 2007           | 6   
|           | Condensed Consolidated Statements of
Cash
 Flows  Six Months Ended June 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               | 23  
|Item 3.    | Quantitative and Qualitative Disclosures
 About Market Risk                                          | 51  
|Item 4.    | Controls and Procedures                                                                              | 54  
|           |                                                                                                      |     
|Part II.   | Other Information                                                                                    |     
|           |                                                                                                      |     
|Item 1A.   | Risk Factors                                                                                         | 54  
|Item 6.    | Exhibits                                                                                             | 63  
|           |                                                                                                      |     
|Signatures |                                                                                                      |     

2

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SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

The
statements in this Quarterly Report on Form 10-Q that are not historical facts,
including most importantly 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 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 real estate
investment trust (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 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); adverse changes in
accounting principles, tax law, or legal/regulatory requirements; competition
with other REITs for the 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; ability to retain key employees; liability
resulting from actual or potential future litigation; competition and the
impact of competition; actions of foreign governments; 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 REIT qualification requirements, and other aspects of our
business; 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

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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)

|                                                                                                                               |  |              |           |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | --------- | ---------------- | - | --------- | -
|                                                                                                                               |  | June 30,2007 |           | December 31,2006 |  
|                                                                                                                               |  |              |           |                  |  
|ASSETS                                                                                                                         |  |              |           |                  |   |           |  
|Cash and cash equivalents                                                                                                      |  | $            | 35,178    |                  | $ | 72,523    |  
|Due from broker, including $ - and $176,650 of securities
pledgedat
  fair value                                              |  |              | 23,853    |                  |   | 257,818   |  
|Restricted cash and cash equivalents                                                                                           |  |              | 59,761    |                  |   | 27,243    |  
|Available-for-sale securities, including $7,360,040 and $7,245,844
  pledgedat fair value                                     |  |              | 7,871,472 |                  |   | 7,941,091 |  
|Trading securitiesat fair value                                                                                               |  |              | 187,422   |                  |   | 94,019    |  
|Other investments                                                                                                              |  |              | 6,682     |                  |   | 6,382     |  
|Derivative assets                                                                                                              |  |              | 73,728    |                  |   | 55,624    |  
|Loans held for sale                                                                                                            |  |              | 271,532   |                  |   | 282,768   |  
|                                                                                                                               |  |              |           |                  |   |           |  
|Loans                                                                                                                          |  |              | 501,067   |                  |   | 432,335   |  
|Allowance for loan losses                                                                                                      |  |              | (8,933    | )                |   | (2,000    | )
|                                                                                                                               |  |              |           |                  |   |           |  
|Loans, net of allowance for loan losses                                                                                        |  |              | 492,134   |                  |   | 430,335   |  
|                                                                                                                               |  |              |           |                  |   |           |  
|Interest receivable                                                                                                            |  |              | 50,563    |                  |   | 51,627    |  
|Other receivable                                                                                                               |  |              | 21,947    |                  |   | 18,362    |  
|Prepaid and other assets                                                                                                       |  |              | 13,362    |                  |   | 12,199    |  
|                                                                                                                               |  |              |           |                  |   |           |  
|                                                                                                                               |  |              |           |                  |   |           |  
|TOTAL ASSETS                                                                                                                   |  | $            | 9,107,634 |                  | $ | 9,249,991 |  
|                                                                                                                               |  |              |           |                  |   |           |  
|                                                                                                                               |  |              |           |                  |   |           |  
|LIABILITIES                                                                                                                    |  |              |           |                  |   |           |  
|Repurchase agreements, including $44,673 and $46,858 of accrued
  interest                                                     |  | $            | 7,348,493 |                  | $ | 7,372,035 |  
|Due to broker                                                                                                                  |  |              | 28,845    |                  |   | 158,997   |  
|Dividends payable                                                                                                              |  |              |          |                  |   | 21,723    |  
|Derivative liabilities                                                                                                         |  |              | 8,985     |                  |   | 21,456    |  
|Interest payable                                                                                                               |  |              | 37,134    |                  |   | 33,646    |  
|Long term debt                                                                                                                 |  |              | 1,005,231 |                  |   | 948,492   |  
|Management and incentive fee payable to related party                                                                          |  |              | 1,099     |                  |   | 1,092     |  
|Other payables                                                                                                                 |  |              | 1,687     |                  |   | 3,597     |  
|                                                                                                                               |  |              |           |                  |   |           |  
|                                                                                                                               |  |              |           |                  |   |           |  
|TOTAL LIABILITIES                                                                                                              |  |              | 8,431,474 |                  |   | 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                                                                                                     |  |              | 749,477   |                  |   | 748,803   |  
|Accumulated other comprehensive loss                                                                                           |  |              | (75,924   | )                |   | (47,159   | )
|Retained earnings (deficit)                                                                                                    |  |              | 2,556     |                  |   | (12,742   | )
|                                                                                                                               |  |              |           |                  |   |           |  
|                                                                                                                               |  |              |           |                  |   |           |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                     |  |              | 676,160   |                  |   | 688,953   |  
|                                                                                                                               |  |              |           |                  |   |           |  
|                                                                                                                               |  |              |           |                  |   |           |  
|TOTAL LIABILITIES AND
  STOCKHOLDERS EQUITY                                                                                   |  | $            | 9,107,634 |                  | $ | 9,249,991 |  
|                                                                                                                               |  |              |           |                  |   |           |  

See notes to condensed
consolidated financial statements.

4

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

|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|------------------------------------------------------- |  | --------------------------- | ---------- | ------------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                        |  | Three months ended June 30, |            | Six months ended June 30, |  
|                                                        |  |                             |            |                           |  
|                                                        |  | 2007                        |            | 2006                      |   | 2007       |   | 2006 |           
|                                                        |  |                             |            |                           |   |            |   |      |           
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Revenues                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Net interest income:                                    |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Interest income                                         |  | $                           | 129,712    |                           | $ | 117,436    |   | $    | 252,411    |   | $ | 219,464    |  
|Interest expense                                        |  |                             | 102,539    |                           |   | 96,297     |   |      | 201,398    |   |   | 175,402    |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Net interest income                                     |  |                             | 27,173     |                           |   | 21,139     |   |      | 51,013     |   |   | 44,062     |  
|Provision for loan losses                               |  |                             | 5,133      |                           |   |           |   |      | 6,933      |   |   |           |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Net interest income after provision for loan losses     |  |                             | 22,040     |                           |   | 21,139     |   |      | 44,080     |   |   | 44,062     |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Expenses                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Management fee expense to related party                 |  |                             | 3,430      |                           |   | 3,615      |   |      | 6,760      |   |   | 7,305      |  
|Incentive fee expense to related party                  |  |                             |           |                           |   | 818        |   |      | 2,185      |   |   | 2,003      |  
|Professional services                                   |  |                             | 800        |                           |   | 448        |   |      | 1,417      |   |   | 926        |  
|Insurance expense                                       |  |                             | 205        |                           |   | 184        |   |      | 341        |   |   | 365        |  
|Other general and administrative expenses               |  |                             | 791        |                           |   | 456        |   |      | 1,160      |   |   | 948        |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Total expenses                                          |  |                             | 5,226      |                           |   | 5,521      |   |      | 11,863     |   |   | 11,547     |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Other
  Income and Gain (Loss)                          |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Net gain (loss) on available-for-sale securities        |  |                             | (243       | )                         |   | 1,215      |   |      | 2,306      |   |   | 3,307      |  
|Net gain (loss) on trading securities                   |  |                             | (5,688     | )                         |   | 54         |   |      | (3,048     | ) |   | (1,759     | )
|Net gain (loss) on loans                                |  |                             | (1,492     | )                         |   | (172       | ) |      | 470        |   |   | 360        |  
|Net gain on derivatives                                 |  |                             | 5,327      |                           |   | 1,389      |   |      | 5,373      |   |   | 2,832      |  
|Dividend income and other net gain (loss)               |  |                             | (361       | )                         |   | 93         |   |      | (97        | ) |   | 194        |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Net other income and gain (loss)                        |  |                             | (2,457     | )                         |   | 2,579      |   |      | 5,004      |   |   | 4,934      |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Income before income tax expense                        |  |                             | 14,357     |                           |   | 18,197     |   |      | 37,221     |   |   | 37,449     |  
|Income tax expense (benefit)                            |  |                             | (137       | )                         |   | 33         |   |      | 200        |   |   | 122        |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Net
  Income                                            |  | $                           | 14,494     |                           | $ | 18,164     |   | $    | 37,021     |   | $ | 37,327     |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|NET INCOME PER SHARE -
  BASIC                          |  | $                           | 0.28       |                           | $ | 0.35       |   | $    | 0.72       |   | $ | 0.73       |  
|NET INCOME PER SHARE -
  DILUTED                        |  | $                           | 0.28       |                           | $ | 0.35       |   | $    | 0.72       |   | $ | 0.72       |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING - Basic   |  |                             | 51,596,928 |                           |   | 51,397,785 |   |      | 51,592,137 |   |   | 51,394,148 |  
|                                                        |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING - Diluted |  |                             | 51,759,376 |                           |   | 51,552,764 |   |      | 51,760,265 |   |   | 51,534,571 |  

See notes to condensed
consolidated financial statements.

5

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

|                                                                                           |  |              |        |            |   |    |  |                              |         |                                         |   |                               |   |       |         |                               |   |         |   |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------ | ------ | ---------- | - | -- |  | ---------------------------- | ------- | --------------------------------------- | - | ----------------------------- | - | ----- | ------- | ----------------------------- | - | ------- | - | - | ------- | -
|                                                                                           |  |              |        |            |   |    |  | Additional
 Paid-in
 Capital |         | Accumulated
 Other
 Comprehensive
 Loss |   | Retained
 Earnings
 (Deficit) |   | Total |         | Comprehensive
 Income
 (Loss) |  
|                                                                                           |  | Common Stock |        |            |   |    |  |                             
|                                                                                           |  |              |        |            |   |    |  |                             
|                                                                                           |  | Shares       |        | Par
 Value |   |    |  |                              |         |                                        
|                                                                                           |  |              |        |            |   |    |  |                              |         |                                         |   |                               |   |       |        
|                                                                                          
|Balance - December 31, 2006                                                                |  |              | 51,722 |            | $ | 51 |  | $                            | 748,803 |                                         | $ | (47,159                       | ) | $     | (12,742 | )                             | $ | 688,953 |   |   |         |  
|                                                                                          
|Net income                                                                                 |  |              |        |            |   |    |  |                              |         |                                         |   |                               |   |       | 37,021  |                               |   | 37,021  |   | $ | 37,021  |  
|Available-for-sale securities - fair value adjustment net of
 reclassification adjustments |  |              |        |            |   |    |  |                              |         |                                         |   | (47,901                       | ) |       |         |                               |   | (47,901 | ) |   | (47,901 | )
|Designated derivatives - fair value adjustment net of reclassification
 adjustments        |  |              |        |            |   |    |  |                              |         |                                         |   | 19,136                        |   |       |         |                               |   | 19,136  |   |   | 19,136  |  
|                                                                                           |  |              |        |            |   |    |  |                              |         |                                         |   |                               |   |       |         |                               |   |         |   |   |         |  
|                                                                                          
|Comprehensive Income                                                                       |  |              |        |            |   |    |  |                              |         |                                         |   |                               |   |       |         |                               |   |         |   | $ | 8,256   |  
|                                                                                           |  |              |        |            |   |    |  |                              |         |                                         |   |                               |   |       |         |                               |   |         |   |   |         |  
|                                                                                          
|Dividends declared                                                                         |  |              |        |            |   |    |  |                              |         |                                         |   |                               |   |       | (21,723 | )                             |   | (21,723 | ) |   |         |  
|Share-based compensation                                                                   |  |              | 31     |            |   |    |  |                              | 674     |                                         |   |                               |   |       |         |                               |   | 674     |   |   |         |  
|                                                                                           |  |              |        |            |   |    |  |                              |         |                                         |   |                               |   |       |         |                               |   |         |   |   |         |  
|Balance - June 30, 2007                                                                    |  |              | 51,753 |            | $ | 51 |  | $                            | 749,477 |                                         | $ | (75,924                       | ) | $     | 2,556   |                               | $ | 676,160 |   |   |         |  
|                                                                                           |  |              |        |            |   |    |  |                              |         |                                         |   |                               |   |       |         |                               |   |         |   |   |         |  

See notes to
condensed consolidated financial statements.

6

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

|                                                                                             |  |                           |            |      |   |            |  
|-------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | ---- | - | ---------- | -
|                                                                                             |  | Six months ended June 30, |           
|                                                                                             |  |                           |           
|                                                                                             |  | 2007                      |            | 2006 |  
|                                                                                             |  |                           |            |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |  |                           |            |      |   |            |  
|Net income                                                                                   |  | $                         | 37,021     |      | $ | 37,327     |  
|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               |  |                           | 14,386     |      |   | 12,508     |  
|Share-based compensation                                                                     |  |                           | 671        |      |   | 968        |  
|Hedge ineffectiveness                                                                        |  |                           | (284       | )    |   | (376       | )
|Net purchase of trading securities                                                           |  |                           | (97,703    | )    |   |           |  
|Net loss from trading securities                                                             |  |                           | 3,048      |      |   | 1,759      |  
|Other-than-temporary impairment on available-for-sale
securities                             |  |                           | 202        |      |   | 2,034      |  
|Equity method loss on other investments                                                      |  |                           | 250        |      |   |           |  
|Net proceeds on loans held for sale                                                          |  |                           | 12,545     |      |   | 11,398     |  
|Net gain on loans                                                                            |  |                           | (411       | )    |   | (426       | )
|Provision for loan losses                                                                    |  |                           | 6,933      |      |   |           |  
|Net realized gain on available-for-sale securities                                           |  |                           | (2,508     | )    |   | (5,341     | )
|Net changes in undesignated derivatives                                                      |  |                           | (499       | )    |   |           |  
|Net realized gain on designated derivatives                                                  |  |                           | (10,080    | )    |   | (1,123     | )
|Net cash (paid) received on terminated designated
derivatives                                |  |                           | (3,791     | )    |   | 2,116      |  
|Changes in operating assets and liabilities:                                                 |  |                           |            |      |   |            |  
|Due from broker                                                                              |  |                           | 10,418     |      |   | (7,515     | )
|Interest receivable                                                                          |  |                           | (2,005     | )    |   | (10,302    | )
|Other receivable                                                                             |  |                           | 585        |      |   | (992       | )
|Prepaid and other assets                                                                     |  |                           | (392       | )    |   | (471       | )
|Accrued interest on repurchase agreements                                                    |  |                           | (2,185     | )    |   | 13,280     |  
|Due to broker                                                                                |  |                           | 1,838      |      |   | 5,717      |  
|Interest payable                                                                             |  |                           | 6,943      |      |   | 7,856      |  
|Management and incentive fee payable to related party                                        |  |                           | 10         |      |   | (320       | )
|Other payables                                                                               |  |                           | (1,639     | )    |   | 39         |  
|                                                                                             |  |                           |            |      |   |            |  
|Net cash provided by (used in) operating activities                                          |  |                           | (26,647    | )    |   | 68,136     |  
|                                                                                             |  |                           |            |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |  |                           |            |      |   |            |  
|Change in restricted cash and cash equivalents                                               |  |                           | (32,517    | )    |   | 62,131     |  
|Purchase of available-for-sale securities                                                    |  |                           | (1,778,615 | )    |   | (1,957,198 | )
|Proceeds from the sale of available-for-sale securities                                      |  |                           | 1,157,721  |      |   | 438,245    |  
|Principal payments on available-for-sale securities                                          |  |                           | 730,049    |      |   | 724,531    |  
|Origination and purchase of loans                                                            |  |                           | (173,071   | )    |   | (151,982   | )
|Principal payments on loans                                                                  |  |                           | 94,687     |      |   | 40,147     |  
|Proceeds from the sale of loans                                                              |  |                           | 3,166      |      |   |           |  
|Purchase of other investments                                                                |  |                           | (550       | )    |   |           |  
|                                                                                             |  |                           |            |      |   |            |  
|Net cash provided by (used in) investing activities                                          |  |                           | 870        |      |   | (844,126   | )
|                                                                                             |  |                           |            |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |  |                           |            |      |   |            |  
|Net borrowings (payments) under repurchase agreements                                        |  |                           | (21,357    | )    |   | 658,345    |  
|Payments made on long-term debt                                                              |  |                           | (261       | )    |   |           |  
|Proceeds from warehouse funding agreement                                                    |  |                           | 62,600     |      |   | 175,785    |  
|Payments made on warehouse funding agreement                                                 |  |                           | (5,600     | )    |   |           |  
|Payment of debt issuance costs                                                               |  |                           | (3,478     | )    |   | (1,408     | )
|Payment on designated derivative containing a financing
element                              |  |                           | (26        | )    |   | (780       | )
|Dividends paid                                                                               |  |                           | (43,446    | )    |   | (36,678    | )
|                                                                                             |  |                           |            |      |   |            |  
|Net cash provided by (used in) financing activities                                          |  |                           | (11,568    | )    |   | 795,264    |  
|                                                                                             |  |                           |            |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                                         |  |                           | (37,345    | )    |   | 19,274     |  
|Cash and cash equivalents at beginning of period                                             |  |                           | 72,523     |      |   | 35,542     |  
|                                                                                             |  |                           |            |      |   |            |  
|Cash and cash equivalents at end of period                                                   |  | $                         | 35,178     |      | $ | 54,816     |  
|                                                                                             |  |                           |            |      |   |            |  
|SUPPLEMENTAL DISCLOSURE:                                                                     |  |                           |            |      |   |            |  
|Cash paid for interest                                                                       |  | $                         | 227,247    |      | $ | 197,972    |  
|Cash paid for income taxes                                                                   |  | $                         |           |      | $ | 23         |  
|                                                                                            
|NONCASH INVESTING AND FINANCING ACTIVITIES:                                                  |  |                           |            |      |   |            |  
|Net change in unrealized gain (loss) on available-for-sale
securities                        |  | $                         | (48,104    | )    | $ | 121,173    |  
|Net change in unrealized gain on designated derivatives                                      |  | $                         | 29,500     |      | $ | 81,353     |  
|Unsettled available-for-sale securities purchases - due to
broker                            |  | $                         |           |      | $ | 1,986      |  
|Unsettled held for investment loan sales - due from broker                                   |  | $                         | 9,000      |      | $ |           |  
|Non-cash settlement of interest expense from derivatives                                     |  | $                         | 3,429      |      | $ | 577        |  
|Non-cash settlement of interest income added to principal balance of
 bank loans             |  | $                         | 3,069      |      | $ | 2,282      |  
|Principal payments receivable from available-for-sale
securities                             |  | $                         | 21,362     |      | $ | 19,226     |  
|Principal payments receivable from bank loans held for
investment                            |  | $                         | 232        |      | $ |           |  
|Issuance of stock for payment of prior year incentive fee                                    |  | $                         | 3          |      | $ | 201        |  
|Unpaid offering costs                                                                        |  | $                         |           |      | $ | (48        | )
|Receipt of stock warrants                                                                    |  | $                         | 214        |      | $ |           |  

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) are 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.

Reclassifications

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

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 six months ended June 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,
or 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 Standard, or
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.

8

---



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 Company on January 1, 2008. The Company is currently
evaluating this new guidance and has not determined whether it will be required
to apply the provisions of the Guide in presenting its financial statements.

3. PENDING
AQUISITION

On
April 20, 2007, the Company announced that it has 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. The transaction is
scheduled to be completed in the next several business days because the
stockholders approved the issuance of shares necessary to complete the merger
at the Companys annual meeting held on August 9, 2007.

The
definitive Agreement and Plan of Merger, dated as of April 19, 2007 (the
Merger Agreement), was entered into by and among the Company, DFR Merger
Company, LLC (Buyer Sub), an Illinois limited liability company and a
wholly-owned subsidiary of Deerfield Triarc Capital LLC formed in April of 2007
for the purpose of effecting the transactions contemplated by the Merger
Agreement, Deerfield, and Triarc as the sellers representative. Simultaneously
with the execution of the Merger Agreement, the Company also entered into a
Registration Rights Agreement, dated as of April 19, 2007 (the Registration
Rights Agreement), with Triarc Deerfield Holdings, LLC (a subsidiary of Triarc)
and Triarc as the sellers representative.

Set
forth below are brief descriptions of the material terms and conditions of each
of the Merger Agreement and the Registration Rights Agreement.

MERGER
AGREEMENT

Upon
the terms and subject to the conditions set forth in the Merger Agreement, at
the contemplated effective time, Buyer Sub will be merged with and into
Deerfield, the result of which will be that Deerfield will become an indirect
wholly-owned subsidiary of the Company (the Merger).

The
aggregate consideration to be paid by the Company in connection with the Merger
is approximately $290.0 million, consisting of $145.0 million in cash and
approximately 9.6 million shares of Company common stock (which had a value of
approximately $145.0 million based on the average of the closing price of the
Companys common stock on the New York Stock Exchange over the 10 trading days
prior to and including April 18, 2007), subject to various adjustments,
including the deduction of an amount equal to the principal amount of debt
outstanding of Deerfield (together with all accrued and unpaid interest).

The
Merger Agreement also permits Deerfield, prior to the effective time of the
Merger, to distribute to its members up to approximately $6.0 million of cash
(plus amounts for income taxes relating to pre-closing periods), and requires
Deerfield to distribute to its members, prior to the effective time of the
Merger, 329,692 shares of Company common stock currently owned by Deerfield. In
order to fund the cash portion of the consideration and our expenses associated
with the Merger, the Company and its subsidiaries intend to incur $155.0
million in debt financing.

Approximately
2.5 million shares of the Company common stock being issued pursuant to the
Merger Agreement will be deposited into an escrow account (the Escrow Fund)
and will be available to satisfy the post-closing indemnification and other
payment obligations of the pre-closing members of Deerfield. Subject to certain
limitations and qualifications, the Merger Agreement contains customary
indemnification provisions for the benefit of the Company as well as the
pre-closing members of Deerfield. Barring any outstanding indemnification
claims, the Escrow Fund will terminate one year from the closing date of the
Merger, and any remaining shares of Company common stock and other assets in
the Escrow Fund will be released to the pre-closing members of Deerfield,
including Triarc.

9

---



The
Company and Buyer Sub, on the one hand, and Deerfield and Triarc (as the
sellers representative), on the other hand, have made customary
representations, warranties, covenants and agreements to each other in the
Merger Agreement. The completion of the Merger is subject to the satisfaction
or waiver of conditions customary to transactions of this type including, among
others:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the
 expiration or termination of the applicable waiting period under the
 Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
 which condition has already been satisfied;                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | the approval
 of the issuance of 9,635,192 shares of Company common stock in the Merger by
 the Companys stockholders representing (1) a majority of the
 votes cast on the proposal (provided that the total votes cast on the
 proposal represent a majority of the outstanding shares of our common stock
 entitled to vote on the proposal) and (2) a majority of the votes cast by
 stockholders not affiliated with Deerfield or Triarc, which condition has already
 been satisfied;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | the Company
 having obtained debt financing for the aggregate cash consideration payable
 in the Merger and related fees and expenses;                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Deerfield
 having obtained consents from the requisite number of its clients with respect
 to the Merger, which condition has already been satisfied;                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | the resale
 registration statement contemplated by the Registration Rights Agreement
 having been declared effective by the SEC, which condition has
 already been satisfied;                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | the Company
 having furnished to Deerfield the requisite REIT qualification legal opinion;
 and                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | the
 satisfaction by Triarc of certain put rights held by certain Deerfield
 members.                                                                                                                                                                                                                                                                                                                                                                                                       

The
closing of the Merger is expected to be completed in the next several business
days because the stockholders approved the issuance of shares necessary to
complete the Merger at the Companys annual meeting held on August 9, 2007.
When the transaction closes, the Company will discontinue the use of Triarc
in its name.

The
Merger Agreement also contains certain customary termination rights for both
the Company and Deerfield, including the right of either party to terminate the
Merger Agreement if the closing of the Merger has not occurred by October 19,
2007.

The
Company and its subsidiaries will incur substantial indebtedness to complete
the Merger. The Company intends to enter into a senior secured term credit
facility with UBS Loan Finance LLC, UBS Securities LLC, Bank of America, N.A.
and Bank of America Securities LLC, providing for $155.0 million of financing
to the Company and its subsidiaries. The amount borrowed under this credit
facility is expected to be payable in full on a date five years from the
closing date. The proceeds of this indebtedness will be used to pay the cash
portion of the Merger consideration and related fees and expenses.

REGISTRATION
RIGHTS AGREEMENT

The
Registration Rights Agreement, which was entered into by the Company, Triarc
Deerfield Holdings, LLC and Triarc, as the sellers representative (but may be
subsequently entered into by any and all of the other members of Deerfield),
provides, among other things, that the Company must file, prior to the closing
date of the Merger, a registration statement to permit resales of the shares of
our common stock being issued pursuant to the Merger Agreement. The Company
must use commercially reasonable efforts to keep the registration statement
continuously effective (subject to specified limitations) for a period of two
years or until such shares of Company common stock cease to be registrable
securities under the Registration Rights Agreement. In addition, the
Registration Rights Agreement grants additional demand and piggyback
registration rights to holders of shares of Company common stock issued in
connection with the Merger that continue to be registrable securities under the
Registration Rights Agreement after the resale registration statement described
above is no longer required to be kept effective.

10

---



4.
AVAILABLE-FOR-SALE SECURITIES

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

|                                            |  |                |           |                      |   |                       |  |                 |         |                   |   |                    |  |                       |       |  |   |          |   |   |           | 
|------------------------------------------- |  | -------------- | --------- | -------------------- | - | --------------------- |  | --------------- | ------- | ----------------- | - | ------------------ |  | --------------------- | ----- |  | - | -------- | - | - | --------- | 
|Security Description                        |  | Current
 Face  |           | Unamortized
 Premium |   | Unamortized
 Discount |  | Amortized
 Cost |         | Unrealized
 Gains |   | Unrealized
 Losses |  | Estimated
 Fair Value |      
|                                            |  |                |           |                      |   |                       |  |                 |         |                   |   |                    |  |                       |      
|                                            |  | (In thousands) |          
|                                            |  |                |          
|                                            | 
|Residential mortgage-backed securities:     |  |                |           |                      |   |                       |  |                 |         |                   |   |                    |  |                       |       |  |   |          |   |   |           | 
|Hybrid adjustable and fixed rate securities |  | $              | 7,616,237 |                      | $ | 64,713                |  | $               | (7,677  | )                 | $ | 7,673,273          |  | $                     | 299   |  | $ | (140,874 | ) | $ | 7,532,698 | 
|Interest- and principal- only securities    |  |                | 5,769     |                      |   | 20,929                |  |                 | (1,425  | )                 |   | 25,273             |  |                       | 8,157 |  |   | (295     | ) |   | 33,135    | 
|Asset-backed securities held in CDO (1)     |  |                | 301,491   |                      |   | 283                   |  |                 | (2,312  | )                 |   | 299,462            |  |                       | 223   |  |   | (20,906  | ) |   | 278,779   | 
|High-yield corporate bonds                  |  |                | 18,800    |                      |   | 57                    |  |                 | (51     | )                 |   | 18,806             |  |                       | 470   |  |   | (507     | ) |   | 18,769    | 
|Commercial mortgage-backed securities       |  |                | 7,512     |                      |   | 7                     |  |                 | (2,732  | )                 |   | 4,787              |  |                       |      |  |   | (32      | ) |   | 4,755     | 
|Equity securities                           |  |                | 393       |                      |   |                      |  |                 |        |                   |   | 393                |  |                       |      |  |   |         |   |   | 393       | 
|Other investments                           |  |                | 3,000     |                      |   |                      |  |                 | (41     | )                 |   | 2,959              |  |                       |      |  |   | (16      | ) |   | 2,943     | 
|                                            |  |                |           |                      |   |                       |  |                 |         |                   |   |                    |  |                       |       |  |   |          |   |   |           | 
|Total                                       |  | $              | 7,953,202 |                      | $ | 85,989                |  | $               | (14,238 | )                 | $ | 8,024,953          |  | $                     | 9,149 |  | $ | (162,630 | ) | $ | 7,871,472 | 
|                                            |  |                |           |                      |   |                       |  |                 |         |                   |   |                    |  |                       |       |  |   |          |   |   |           | 




(1)Collateralized debt
obligation (CDO)


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

|                                                 |  |                  |           |                        |   |                             |  |  |      |  
|------------------------------------------------ |  | ---------------- | --------- | ---------------------- | - | --------------------------- |  |  | ---- | -
|Weighted Average Life                            |  | Amortized 
 Cost |           | Estimated 
 Fair Value |   | Weighted 
 Average 
 Coupon | 
|                                                 |  |                  |           |                        |  
|                                                 |  | (In thousands)   |           |                        |   |                            
|                                                 |  |                  |           |                        |   |                            
|                                                
|Less than one year                               |  | $                | 53,842    |                        | $ | 51,775                      |  |  | 8.58 | %
|Greater than one year and less than five
 years  |  |                  | 5,904,583 |                        |   | 5,802,094                   |  |  | 5.14 | %
|Greater than five years and less than ten
 years |  |                  | 1,669,110 |                        |   | 1,632,765                   |  |  | 5.76 | %
|Greater than ten years                           |  |                  | 397,025   |                        |   | 384,445                     |  |  | 6.00 | %
|                                                 |  |                  |           |                        |   |                             |  |  |      |  
|Total                                            |  | $                | 8,024,560 |                        | $ | 7,871,079                   |  |  | 5.33 | %
|                                                 |  |                  |           |                        |   |                             |  |  |      |  

The
weighted average lives of available-for-sale debt securities as of June 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, commercial
mortgage-backed securities and asset-backed securities are 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.

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 June 30, 2007, available-for-sale securities include unsettled security
purchases totaling $5.3 million. These purchases settled in the following
month.

11

---



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 June 30, 2007:

|                                       |  |                        |     |                        |   |                           |  |                        |         |                        |  |                           |  |                        |           |                        |   |                           |   |  |     |  |   |           |  |   |          |  
|-------------------------------------- |  | ---------------------- | --- | ---------------------- | - | ------------------------- |  | ---------------------- | ------- | ---------------------- |  | ------------------------- |  | ---------------------- | --------- | ---------------------- | - | ------------------------- | - |  | --- |  | - | --------- |  | - | -------- | -
|                                       |  | Less than 12 Months    |     | More than 12 Months    |   | Total                     | 
|                                       |  |                        |     |                        |   |                           | 
|                                       |  | Number
 of
 Securities |     | Estimated
 Fair
 Value |   | Gross
 Unrealized
 Losses |  | Number
 of
 Securities |         | Estimated
 Fair
 Value |  | Gross
 Unrealized
 Losses |  | Number
 of
 Securities |           | Estimated
 Fair
 Value |   | Gross
 Unrealized
 Losses |  
|                                       |  |                        |     |                        |   |                           |  |                        |         |                        |  |                           |  |                        |           |                        |   |                           |  
|                                       |  | (Dollars in thousands) |    
|                                       |  |                        |    
|Residential mortgage-backed securities |  |                        | 104 |                        | $ | 2,768,765                 |  | $                      | (32,303 | )                      |  | 207                       |  | $                      | 4,749,636 |                        | $ | (108,866                  | ) |  | 311 |  | $ | 7,518,401 |  | $ | (141,169 | )
|Asset-backed securities                |  |                        | 118 |                        |   | 180,117                   |  |                        | (13,675 | )                      |  | 44                        |  |                        | 70,104    |                        |   | (7,231                    | ) |  | 162 |  |   | 250,221   |  |   | (20,906  | )
|High-yield corporate bonds             |  |                        |    |                        |   |                          |  |                        |        |                        |  | 1                         |  |                        | 2,993     |                        |   | (507                      | ) |  | 1   |  |   | 2,993     |  |   | (507     | )
|Commercial mortgage-backed securities  |  |                        | 13  |                        |   | 4,189                     |  |                        | (32     | )                      |  |                          |  |                        |          |                        |   |                          |   |  | 13  |  |   | 4,189     |  |   | (32      | )
|Other investments                      |  |                        | 1   |                        |   | 2,943                     |  |                        | (16     | )                      |  |                          |  |                        |          |                        |   |                           |   |  | 1   |  |   | 2,943     |  |   | (16      | )
|                                       |  |                        |     |                        |   |                           |  |                        |         |                        |  |                           |  |                        |           |                        |   |                           |   |  |     |  |   |           |  |   |          |  
|Total temporarily impaired securities  |  |                        | 236 |                        | $ | 2,956,014                 |  | $                      | (46,026 | )                      |  | 252                       |  | $                      | 4,822,733 |                        | $ | (116,604                  | ) |  | 488 |  | $ | 7,778,747 |  | $ | (162,630 | )
|                                       |  |                        |     |                        |   |                           |  |                        |         |                        |  |                           |  |                        |           |                        |   |                           |   |  |     |  |   |           |  |   |          |  

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, in most cases 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 declining net spread, 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.

For
the three and six months ended June 30, 2007 and 2006, the Company recognized
zero and $0.2 million and $0.2 million $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
factors 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, these securities were written
down to their then estimated fair value and the unrealized loss transferred
from accumulated other comprehensive loss as an immediate reduction of earnings
recognized as a reduction to net gain (loss) on available-for-sale securities
in the condensed consolidated statements of operations.

12

---



As
of June 30, 2007, four of the 180 asset-backed securities held in the CDO had
been downgraded to below investment grade by a major credit rating agency since
purchase (face value of $5.3 million at June 30, 2007), however, an analysis
    of cash flows on these and certain other asset-backed securities held in
    the CDO, in accordance with our policy, indicated that an other-than-temporary
    impairment had not occurred. All other asset-backed securities held in the
    CDO are investment grade. As of June 30, 2007, the Company has an accumulated
    net $20.7 million of unrealized loss related to asset-backed securities held
    in CDO reflected as an increase to other comprehensive loss in stockholders equity
while the Companys economic risk is $12.0 million, which represents the
Companys total equity investment in the CDO. Any realized losses in excess
of our equity investment would be borne by the debt holders. The Company does
not believe any of the securities held in the CDO are other-than-temporarily
impaired as of June 30, 2007. The residential mortgage-backed securities
primarily consist of agency issued or AAA-rated in credit quality and the
Company intends and has the ability to hold these securities until the fair
value of the securities is recovered, which may be maturity if necessary. As
such, the Company expects to collect all contractual amounts due and does not
believe any of these securities held were other-than-temporarily impaired as
of June 30, 2007.

As
of June 30, 2007, two of the high yield corporate bonds have been downgraded
    by a major credit rating agency, however, an analysis of cash flows supported
that an other-than-temporary impairment had not occurred.

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 June 30, |      | Six months ended June 30, |  
|                                 |  |                             |      |                           |  
|                                 |  | 2007                        |      | 2006                      |   | 2007  |   | 2006 |       
|                                 |  |                             |      |                           |   |       |   |      |       
|                                 |  | (In
thousands)              |     
|                                 |  |                             |     
|Gross
 realized gains            |  | $                           | 112  |                           | $ | 1,415 |   | $    | 4,679  |   | $ | 5,367  |  
|Gross
 realized losses           |  |                             | (355 | )                         |   |      |   |      | (2,171 | ) |   | (23    | )
|                                 |  |                             |      |                           |   |       |   |      |        |   |   |        |  
|Net realized
 gains (losses)     |  |                             | (243 | )                         |   | 1,415 |   |      | 2,508  |   |   | 5,344  |  
|Other-than-temporary
 impairment |  |                             |     |                           |   | (200  | ) |      | (202   | ) |   | (2,037 | )
|                                 |  |                             |      |                           |   |       |   |      |        |   |   |        |  
|Net gain
 (loss)                 |  | $                           | (243 | )                         | $ | 1,215 |   | $    | 2,306  |   | $ | 3,307  |  
|                                 |  |                             |      |                           |   |       |   |      |        |   |   |        |  

5. TRADING
SECURITIES

The
Company holds trading securities as of June 30, 2007, carried at fair value of
$187.4 million. Net losses of $5.7 million and $3.0 million on trading
securities were recognized in the condensed consolidated statements of
operations for the three and six months ended June 30, 2007, respectively. Net
gains of $0.1 million and net losses of $1.8 million were recognized for the
three and six months ended June 30, 2006, respectively.

6. OTHER
INVESTMENTS

Cost
Method Investments

The
Company holds certain other investments as of June 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 June 30, 2007, initially
recorded at cost of $3.0 million and adjusted to a current carrying value of
$1.2 million. Losses of $0.5 million and $0.3 million were recorded for the
three and six months ended June 30, 2007, to recognize the Companys 13% share
of the investee, Hometown Commercial Capital LLC (HCC) losses through March
31, 2007. 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 statement 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 June 30,
2007:

|                                  |  |                          |         |       |   |         |   |   |         |  
|--------------------------------- |  | ------------------------ | ------- | ----- | - | ------- | - | - | ------- | -
|                                  |  | Carrying Value           |        
|                                  |  |                          |        
|Type of Loan                      |  | Loans Held
 for Sale (1) |         | Loans |   | Total   |  
|                                  |  |                          |         |       |   |         |  
|                                  |  | (In
thousands)           |        
|                                  |  |                          |        
|Loans held in
 CLO (2)            |  | $                        | 263,083 |       | $ |        |   | $ | 263,083 |  
|Corporate
 leveraged loans        |  |                          | 6,989   |       |   | 469,162 |   |   | 476,151 |  
|Commercial
 real estate loans (3) |  |                          | 1,460   |       |   | 31,905  |   |   | 33,365  |  
|                                  |  |                          |         |       |   |         |   |   |         |  
|                                  |  | $                        | 271,532 |       |   | 501,067 |   |   | 772,599 |  
|                                  |  |                          |         |       |   |         |   |   |         |  
|Allowance
 for loan losses        |  |                          |         |       |   | (8,933  | ) |   | (8,933  | )
|                                  |  |                          |         |       |   |         |   |   |         |  
|                                  |  |                          |         |       | $ | 492,134 |   | $ | 763,666 |  
|                                  |  |                          |         |       |   |         |   |   |         |  

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

As
of June 30, 2007, the Company held loans totaling $772.6 million. Loans
classified as held for sale and carried at the lower of cost or fair value
totaled $271.5 million, net of a valuation allowance of $0.7 million. Loans
classified as held for investment and carried at amortized cost totaled $501.1
million. As of June 30, 2007, there were $15.0 million unsettled loan purchases
and $23.9 million unsettled sales of loans held for sale. As of June 30, 2007,
the Company held loans that settle interest accruals by increasing the
principal balance of the loan outstanding. For the three and six months ended
June 30, 2007, the Company settled interest receivable through an increase to
the loans outstanding principal balance in the amounts of $2.1 million and $3.1
million, respectively.

The
Company identified two impaired loans held for investment as of June 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 | 
|                             |  |                            |      

The
provision for loan losses increased by $5.1 million during the three months ended
    June 30, 2007. The increase consisted solely of the outstanding principal
    balance of a mortgage lending company that filed Chapter 7 bankruptcy shortly
    after June 30, 2007. The previously recognized allowance for loan losses
    of $3.8 million consisted of the discounted expected future cash flows on
    an identified impaired loan being less than the amortized cost basis. As
    of June 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 $0.8 million of interest income on these
    loans for the three and six months ended June 30, 2007, respectively. The
    Company did not record any recoveries or write-offs of loans for the six
    months ended June 30, 2007.

On
June 13, 2007, the Company purchased $2.2 million or 50% of the lowest-rated
non-investment grade tranches of mortgage pass-through notes from an entity
established to securities loans of HCC (these securities are classified as
available-for-sale securities). Concurrent with the purchase of securities the
Company received a payment of $14.8 million related to the participating
interest in commercial mortgage loans for which the Company was providing
warehouse financing.

As
of June 30, 2007, the Companys commercial real estate loans consisted of
junior participation interests in six commercial mortgage loans originated by
HCC and classified as held for sale totaling $1.5 million and nine commercial
real estate loans classified as held for investment totaling $31.9 million.

14

---



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
one-month, two-month or three-month LIBOR. As of June 30, 2007, the Company had
repurchase agreements outstanding in the amount of $7.3 billion (including
$44.7 million of accrued interest) with a weighted-average borrowing rate of
5.32%.

As
of June 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 |  | $                         |  |                         | $ | 4,589,072                |   | $                 | 2,793,792 |       | $ |  |  | $ | 7,382,864 |  
|Repurchase agreement liabilities associated with
these securities   |  |                           |  |                         |   | 4,578,803                |   |                   | 2,760,875 |       |   |  |  |   | 7,339,678 |  
|Weighted average interest rate of repurchase
agreement liabilities  |  |                           |  |                         |   | 5.31                     | % |                   | 5.32      | %     |   |  |  |   | 5.31      | %
|High yield corporate bonds:                                         |  |                           |   |                         |   |                          |   |                   |           |       |   |   |  |   |           |  
|Estimated fair value of securities sold, including
accrued interest |  | $                         |  |                         | $ | 7,340                    |   | $                 |          |       | $ |  |  | $ | 7,340     |  
|Repurchase agreement liabilities associated with
these securities   |  |                           |  |                         |   | 6,120                    |   |                   |          |       |   |  |  |   | 6,120     |  
|Weighted average interest rate of repurchase
agreement liabilities  |  |                           |  |                         |   | 5.65                     | % |                   |          |       |   |  |  |   | 5.65      | %
|Other investments:                                                  |  |                           |   |                         |   |                          |   |                   |           |       |   |   |  |   |           |  
|Estimated fair value of securities sold, including
accrued interest |  | $                         |  |                         | $ | 2,950                    |   | $                 |          |       | $ |  |  | $ | 2,950     |  
|Repurchase agreement liabilities associated with
these securities   |  |                           |  |                         |   | 2,695                    |   |                   |          |       |   |  |  |   | 2,695     |  
|Weighted average interest rate of repurchase
agreement liabilities  |  |                           |  |                         |   | 5.82                     | % |                   |          |       |   |  |  |   | 5.82      | %
|Total:                                                              |  |                           |   |                         |   |                          |   |                   |           |       |   |   |  |   |           |  
|Estimated fair value of securities sold, including
accrued interest |  | $                         |  |                         | $ | 4,599,362                |   | $                 | 2,793,792 |       | $ |  |  | $ | 7,393,154 |  
|Repurchase agreement liabilities associated with
these securities   |  |                           |  |                         |   | 4,587,618                |   |                   | 2,760,875 |       |   |  |  |   | 7,348,493 |  
|Weighted average interest rate of repurchase
agreement liabilities  |  |                           |  |                         |   | 5.31                     | % |                   | 5.32      | %     |   |  |  |   | 5.32      | %

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

|                                        |  |                                                                         |        |                                                                |   |        | 
|--------------------------------------- |  | ----------------------------------------------------------------------- | ------ | -------------------------------------------------------------- | - | ------ | 
|Type of Investment Pledged              |  | Accrued Interest
 Included in Estimated
 Fair Value of
 Securities Sold |        | Accrued Interest
 Included in
 Repurchase Agreement
 Liability |  
|                                        |  |                                                                         |        |                                                                |  
|                                        |  | (In
thousands)                                                          |       
|                                        |  |                                                                         |       
|                                       
|Residential
 mortgage-backed securities |  | $                                                                       | 32,940 |                                                                | $ | 44,655 | 
|High yield
 corporate bonds             |  |                                                                         | 167    |                                                                |   | 12     | 
|Other
 investments                      |  |                                                                         | 7      |                                                                |   | 6      | 
|                                        |  |                                                                         |        |                                                                |   |        | 
|                                        |  | $                                                                       | 33,114 |                                                                | $ | 44,673 | 
|                                        |  |                                                                         |        |                                                                |   |        | 

15

---



As
of June 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)                                            | 
|                                          |  |                    |        |                                                      | 
|Barclays
 Bank Plc.                       |  | $                  | (5,357 | )                                                    |  | 38 | 
|Countrywide
 Securities Corporation       |  |                    | 15,163 |                                                      |  | 49 | 
|Credit
 Suisse Securities (USA) LLC       |  |                    | 14,639 |                                                      |  | 33 | 
|Fortis
 Securities LLC                    |  |                    | 35     |                                                      |  | 3  | 
|ING                                       |  |                    | 13,119 |                                                      |  | 36 | 
|J.P. Morgan
 Securities Inc.              |  |                    | (402   | )                                                    |  | 31 | 
|Lehman
 Brothers Inc.                     |  |                    | 1,475  |                                                      |  | 18 | 
|Merrill
 Lynch Government Securities Inc. |  |                    | (1,044 | )                                                    |  | 23 | 
|Mitsubishi
 UFJ Securities (USA), Inc.    |  |                    | 2,342  |                                                      |  | 16 | 
|Nomura
 Securities International, Inc.    |  |                    | (1,280 | )                                                    |  | 25 | 
|UBS
 Securities LLC                       |  |                    | 5,971  |                                                      |  | 37 | 
|                                          |  |                    |        |                                                      |  |    | 
|Total                                     |  | $                  | 44,661 |                                                      |  | 34 | 
|                                          |  |                    |        |                                                      |  |    | 



---

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

9. LONG-TERM
DEBT

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

|                                               |  |                        |           |                                       |       |                                                |   |        |  | 
|---------------------------------------------- |  | ---------------------- | --------- | ------------------------------------- | ----- | ---------------------------------------------- | - | ------ |  | 
|                                               |  | Carrying
        Value |           | Weighted
        Average
        Rate |       | Unamortized
        Debt Issuance
        Cost |  
|                                               |  |                        |           |                                       |       |                                                |  
|                                               |  | (In thousands)         |           |                                       |       | (In
            thousands)                     |  
|Revolving warehouse funding
          facility |  | $                      | 317,950   |                                       | 6.24% |                                                | $ | 728    | 
|Market Square CLO                              |  |                        | 276,000   |                                       | 5.85% |                                                |   | 3,480  | 
|Pinetree CDO                                   |  |                        | 287,564   |                                       | 5.89% |                                                |   | 4,474  | 
|Trust preferred securities                     |  |                        | 123,717   |                                       | 8.13% |                                                |   | 2,737  | 
|                                               |  |                        |           |                                       |       |                                                |   |        | 
|Total                                          |  | $                      | 1,005,231 |                                       | 6.27% |                                                | $ | 11,419 | 
|                                               |  |                        |           |                                       |       |                                                |   |        | 

Revolving
Warehouse Funding Facility

On
March 10, 2006, the Company entered into an up to $300.0 million (amended to
$375.0 million) three-year revolving warehouse funding agreement with Wachovia
Capital Markets, LLC (the Facility), subject to annual renewal approval.
Financing under the Facility will be secured by assets ranging from large
syndicated bank loans to subordinated notes and preferred stock. Advance rates
under the Facility vary by asset type 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 $475.4 million as of June 30, 2007. As of June 30, 2007, $11.9
million of the cash located within these entities is considered restricted. The
Company expects to pursue term funding of these assets via securitization in
a future collateralized loan obligation (See Note 17 under Middle Market Loan
CLO). As of June 30, 2007, the Company had $318.0 million of debt outstanding
related to the Facility. The Company is amortizing $1.2 million of debt
issuance costs into interest expense over the term of the Facility. The annual
interest rate for the Facility is based on short-term commercial paper rates
as defined in the warehouse funding agreement, plus 0.75% for large syndicated
loans or plus 0.90% for all other loans. Including $0.7 million of commitment
fees and $22,000 of unused line fees, the weighted average interest rate was
6.24% as of June 30, 2007.

On
February 7, 2007, the Company amended the warehouse funding agreement with
Wachovia Capital Markets, LLC to increase the facility 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 connection with this facility expansion. On April
6, 2007, the Company amended the term of the warehouse funding agreement with
Wachovia Capital Markets, LLC to adjust the annual renewal date to April 8,
2008.

16

---



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 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
Square Collateralized Loan Obligation (CLO)

Market
Square CLO Ltd.s (Market Square) debt securities bear interest rates that
reset quarterly based on varying spreads to three-month LIBOR. The Companys
long-term debt issued by Market Square has a weighted average interest rate of
5.85%, using the last reset date as of June 30, 2007.

The Market Square notes
are due in 2017, but are callable, at par, by the Company on July 20, 2007 and
quarterly thereafter, subject to certain conditions. Market Square is a
consolidated bankruptcy remote subsidiary and the debt holders have recourse
only to the collateral of Market Square, which had a carrying value of $312.3
million as of June 30, 2007.

Pinetree
Collateralized Debt Obligation (CDO)

Pinetree
CDO Ltd.s (Pinetree) debt securities bear interest rates that reset
quarterly based on varying spreads to three-month LIBOR. The Companys
long-term debt issued by Pinetree has a weighted average interest rate of 5.89%
using the last reset date as of June 30, 2007.

The Pinetree 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 is a consolidated
bankruptcy remote subsidiary and the debt holders have recourse only to the
collateral of Pinetree, which had a carrying value of $290.6 million as of June
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 June 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.

Unamortized
deferred issuance costs associated with the junior subordinated debt securities
totaled $2.7 million as of June 30, 2007, 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.

10.
STOCKHOLDERS EQUITY

The
Companys dividends are recorded on the declaration date. On April 23, 2007,
the Company declared a cash dividend of $0.42 per share on its common stock for
the first quarter of 2007. The record date for the cash dividend was May 7,
2007, and the payment date was May 30, 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 to employees and services providers to purchase up
the 2,692,313 shares of the Companys common stock. The 2004 plan was established
to assist the Company 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 associate their interests with those of the
Company and its stockholders.

17

---



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 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) | Fair market value per share
 represents the price the Company sold shares in the December 23, 2004 initial
 private offering

On
December 23, 2004, the Company granted 403,847 shares of restricted common
stock, par value $0.001, and restricted options to purchase 1,346,156 shares of
common stock at an exercise price of $15.00 per share, to the Manager. The
Companys restrictions lapse, and full rights of ownership vest in three equal
installments on the first, second and third anniversary 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 June 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 six months
ended June 30, 2007:

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

18

---



The
following table summarizes our stock option activity for the six months ended
June 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, June 30, 2007      |  |                    | 1,346,156 |                                        | $ | 15.00                                                    |  |                            | 7.5 |  | $ | 
|                                |  |                    |           |                                        |   |                                                          |  |                            |     |  |   |  
|                               
|Exercisable, June 30, 2007      |  |                    | 897,437   |                                        | $ | 15.00                                                    |  |                            | 7.5 |  | $ | 

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 is 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
$0.3 million and $39,000, respectively, as of June 30, 2007 and $0.7 million
and $0.1 million, respectively, as of December 31, 2006.

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 June 30, |      
|                          |  |                |      
|                          |  | 2007           |       | 2006 | 
|                          |  |                |       |      | 
|Dividend
 yield           |  |                | 10.85 | %    |  | 10.53 | %
|Expected
 volatility      |  |                | 25.90 | %    |  | 21.66 | %
|Risk-free
 interest rate  |  |                | 5.03  | %    |  | 5.14  | %
|Expected
 life (in years) |  |                | 7.5   |      |  | 8.5   |  

11.
COMPUTATION OF EARNINGS PER SHARE

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

|                                                    |  |                                       |        |                           |   |        |  |      |        |  |   |        | 
|--------------------------------------------------- |  | ------------------------------------- | ------ | ------------------------- | - | ------ |  | ---- | ------ |  | - | ------ | 
|                                                    |  | Three months ended June 30,           |        | Six months ended June 30, |  
|                                                    |  |                                       |        |                           |  
|                                                    |  | 2007                                  |        | 2006                      |   | 2007   |  | 2006 |       
|                                                    |  |                                       |        |                           |   |        |  |      |       
|                                                    |  | (In thousands, except per share data) |       
|                                                    |  |                                       |       
|Net income                                          |  | $                                     | 14,494 |                           | $ | 18,164 |  | $    | 37,021 |  | $ | 37,327 | 
|                                                    |  |                                       |        |                           |   |        |  |      |        |  |   |        | 
|Weighted average shares used in basic computation   |  |                                       | 51,597 |                           |   | 51,398 |  |      | 51,592 |  |   | 51,394 | 
|                                                    |  |                                       |        |                           |   |        |  |      |        |  |   |        | 
|Dilutive effect of:                                 |  |                                       |        |                           |   |        |  |      |        |  |   |        | 
|Unvested restricted stock                           |  |                                       | 109    |                           |   | 155    |  |      | 101    |  |   | 141    | 
|Unexercised options to purchase stock               |  |                                       | 53     |                           |   |       |  |      | 67     |  |   |       | 
|                                                    |  |                                       |        |                           |   |        |  |      |        |  |   |        | 
|Weighted average shares used in diluted
computation |  |                                       | 51,759 |                           |   | 51,553 |  |      | 51,760 |  |   | 51,535 | 
|                                                    |  |                                       |        |                           |   |        |  |      |        |  |   |        | 
|                                                   
|Net income per share - Basic                        |  | $                                     | 0.28   |                           | $ | 0.35   |  | $    | 0.72   |  | $ | 0.73   | 
|                                                    |  |                                       |        |                           |   |        |  |      |        |  |   |        | 
|                                                   
|Net income per share - Diluted                      |  | $                                     | 0.28   |                           | $ | 0.35   |  | $    | 0.72   |  | $ | 0.72   | 
|                                                    |  |                                       |        |                           |   |        |  |      |        |  |   |        | 

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 six months ended June 30, 2006 because the effect was
anti-dilutive.

19

---



12.
RELATED-PARTY TRANSACTIONS

The
Companys base management fee expense was $3.3 million and $6.6 million for
both the three and six months ended June 30, 2007 and 2006. In addition to the
base management fee, amortization expense for the three and six months ended
June 30, 2007 and 2006 was $0.1 and $0.2 million, and $0.3 million and $0.7
million, respectively, related to the restricted stock and stock options
granted to the Manager, and was included in management fee expense to related
party in the condensed consolidated statements of operations. Additionally, the
expense for the incentive fee earned by the Manager was zero and $2.2 million,
and $0.8 million and $2.0 million for the three and six months ended June 30,
2007 and 2006, respectively. At June 30, 2007, the Company had outstanding
payables related to its agreement with the Manager in the amount of $1.1
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 $0.2 and
$0.3 for both the three and six months ended June 30, 2007, and 2006 respectively.
See Note 3 for further discussion of the Companys pending acquisition of the
Manager.

13. 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 June 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)               |  | $               | 35,178    |                        | $ | 35,178    | 
|Restricted cash and cash equivalents (a)    |  |                 | 59,761    |                        |   | 59,761    | 
|Available-for sale securities (b)           |  |                 | 7,871,472 |                        |   | 7,871,472 | 
|Trading securities (b)                      |  |                 | 187,422   |                        |   | 187,422   | 
|Other investments (c)                       |  |                 | 6,682     |                        |   | 6,682     | 
|Derivative assets (d)                       |  |                 | 73,728    |                        |   | 73,728    | 
|Loans held for sale (e)                     |  |                 | 271,532   |                        |   | 275,206   | 
|Loans, net of allowance for loan losses
(e) |  |                 | 492,134   |                        |   | 502,008   | 
|                                           
|Financial liabilities:                      |  |                 |           |                        |   |           | 
|Repurchase agreements (a)                   |  |                 | 7,348,493 |                        |   | 7,348,493 | 
|Derivative liabilities (d)                  |  |                 | 8,985     |                        |   | 8,985     | 
|Long-term debt:                             |  |                 |           |                        |   |           | 
|Wachovia facility (f)                       |  |                 | 317,950   |                        |   | 317,950   | 
|Market Square (f)                           |  |                 | 276,000   |                        |   | 276,000   | 
|Pinetree (f)                                |  |                 | 287,564   |                        |   | 287,564   | 
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

20

---



14.
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      |  |                                 | (45,594  | )                 |   | 48,149  |   |   | 2,555   |  
|Reclassification adjustments:                  |  |                                 |          |                   |   |         |   |   |         |  
|Securities sold                                |  |                                 | (2,509   | )                 |   |        |   |   | (2,509  | )
|Other-than-temporary impairment of
 securities |  |                                 | 202      |                   |   |        |   |   | 202     |  
|Hedging net gain recognized in earnings        |  |                                 |         |                   |   | (29,013 | ) |   | (29,013 | )
|                                               |  |                                 |          |                   |   |         |   |   |         |  
|Balance - June 30, 2007                        |  | $                               | (153,480 | )                 | $ | 77,556  |   | $ | (75,924 | )
|                                               |  |                                 |          |                   |   |         |   |   |         |  

15. 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 June 30,
2007:

|                                         |  |       |     |                |                |           |            |             |                         |  |   |        |   |   |        |  
|---------------------------------------- |  | ----- | --- | -------------- | -------------- | --------- | ---------- | ----------- | ----------------------- |  | - | ------ | - | - | ------ | -
|                                         |  |       |     |                |                |           | Derivative |             |                         | 
|                                         |  |       |     |                | NotionalAmount |           |            |             | Estimated NetFair Value | 
|                                         |  |       |     |                |                | Assets    |            | Liabilities |                         | 
|                                         |  |       |     |                |                |           |            |             |                         |  |   |       
|                                         |  | Count |     | (In thousands) |               
|                                         |  |       |     |                |               
|Interest rate swaps - designated         |  |       | 192 |                | $              | 6,196,100 |            | $           | 70,702                  |  | $ | (4,042 | ) | $ | 66,660 |  
|Undesignated:                            |  |       |     |                |                |           |            |             |                         |  |   |        |   |   |        |  
|Interest rate swaps                      |  |       | 13  |                |                | 441,000   |            |             | 802                     |  |   | (2,930 | ) |   | (2,128 | )
|Interest rate floors                     |  |       | 5   |                |                | 456,856   |            |             |                        |  |   | (2,009 | ) |   | (2,009 | )
|Credit default swaps - protection seller |  |       | 16  |                |                | 50,000    |            |             | 840                     |  |   | (4     | ) |   | 836    |  
|Total return swaps                       |  |       | 2   |                |                | 13,477    |            |             | 1,170                   |  |   |       |   |   | 1,170  |  
|Warrants                                 |  |       | 1   |                |                | n/a       |            |             | 214                     |  |   |       |   |   | 214    |  
|                                         |  |       |     |                |                |           |            |             |                         |  |   |        |   |   |        |  
|                                         |  |       | 229 |                | $              | 7,157,433 |            | $           | 73,728                  |  | $ | (8,985 | ) | $ | 64,743 |  
|                                         |  |       |     |                |                |           |            |             |                         |  |   |        |   |   |        |  




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
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 June 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.

21

---



For
the three and six months ended June 30, 2007, the Company recognized a net
decrease to interest expense of $14.8 million and $29.0 million, respectively,
related to designated cash flow hedging. Included in these amounts was the
effect of ineffectiveness, which decreased interest expense $0.3 million for
the three and six months ended June 30, 2007, respectively. For the three and
six months ended June 30, 2006, the Company recognized a net decrease to
interest expense of $9.9 million and $14.9 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 $0.2 million and a
reduction of interest expense of $0.4 million, respectively. The weighted
average fixed rate payable on the cash flow hedges as of June 30, 2007 and 2006
was 4.80% and 4.29%, respectively. As of June 30, 2007 and 2006, the Company
held 192 and 206 designated interest rate swaps with notional amounts
outstanding of $6.2 billion and $5.7 billion, respectively. Based on amounts
included in the accumulated other comprehensive loss as of June 30, 2007 from
designated interest rate swaps, the Company expects to recognize a decrease of
$48.5 million in interest expense over the next twelve months.

Undesignated
Interest Rate Swaps

As
of June 30, 2007, the Company held 13 undesignated interest rate swaps with
notional amounts of $441.0 million. Accordingly, changes in fair value of these
derivatives are recorded in net gain on derivatives in the condensed
consolidated statement of operations. As of June 30, 2007, the undesignated
interest rate swaps had a gross positive and gross negative fair value of $0.8
million and $2.9 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 June 30, 2007
was 5.20%. For the three and six months ended June 30, 2007 and 2006, the Company
recognized a net gain of $2.7 million and $2.2 million, and net gain of $1.0
million and $1.7 million on derivatives, respectively, related to undesignated
interest rate swaps.

Undesignated
Interest Rate Floors

As
of June 30, 2007, the Company held five interest rate floors with notional
amounts in the aggregate of $456.9 million that were not designated as hedges.
As of June 30, 2007, the floors had a net negative fair value of $2.0 million
recorded in derivative liabilities in the condensed consolidated balance sheet.
In connection with the five interest rate floors, the Company received payments
totaling $4.4 million at inception of the floors. There were zero and $0.5
million in payments received during the three and six months ended June 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 six months ended June 30, 2007, the Company recognized a net
gain of $2.2 million and $1.6 million in net gain on derivatives, respectively,
related to the floors.

Undesignated
Credit Default Swaps

As
of June 30, 2007, the Company held 16 credit default swaps (CDS), with an
aggregate notional amount of $50.0 million where the Company has sold
protection. As of June 30, 2007, these CDS had a net fair value of $0.8
million, recorded in derivative assets in the condensed consolidated balance
sheet. For the three and six months ended June 30, 2007 and 2006, the Company
recognized net gain of $0.1 million and $1.0 million, and $0.4 million and $1.1
million in net gain on derivatives, respectively, related to CDSs.

Undesignated
Total Return Swaps

The
Company held two total return swaps as of June 30, 2007, for which we receive
the total return and pay a specified interest rate, with a notional amount of
$13.5 million and a fair value of $1.2 million, recorded in derivative assets
in the condensed consolidated balance sheet. For the three and six months ended
June 30, 2007, the Company recognized a net gain of $0.3 million and $0.5 million
in net gain on derivatives, respectively, related to total return swaps. The
Company held no total return swaps during the same periods in 2006.

Undesignated
Warrants

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 June 30, 2007,
these warrants had a fair value of $0.2 million, recorded in the condensed
consolidated balance sheet. The Company is amortizing the value of the warrants
into income over the remaining life of the loan.

16.
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
$43.8 million as of June 30, 2007.

22

---



17. SUBSEQUENT
EVENTS

MIDDLE
MARKET LOAN CLO

On
July 17, 2007 the Company announced the closing of DFR Middle Market CLO Ltd.
(MM CLO), a $300.0 million middle market collateralized loan obligation
(CLO) transaction. The securities issued by MM CLO consist of $250.0 million
of investment grade notes and $50.0 million of subordinated notes. We purchased
all of the BBB/Baa2 rated and subordinated notes, for a total investment of
$69.0 million. The $231.0 million investment grade securities issued by MM CLO
that were sold to third parties are rated AAA/Aaa through A/A2 and have a
weighted-average interest rate of three month Libor plus 68.9 basis points. The
notes pay interest on a quarterly basis. The Company will consolidate MM CLOs
assets and liabilities for financial reporting purposes. MM CLO is a
consolidated bankruptcy remote subsidiary and the debt holders have recourse
only to the collateral of MM CLO. Our Manager will serve as the Collateral
Manager for MM CLO.

DIVIDEND

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 will be August 28, 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.

The Companys short-term (one year or less) liquidity needs are met primarily with proceeds from overnight investments and repurchase agreement borrowings.  Un-pledged residential mortgage-backed securities (RMBS) as of June 30, 2007 totaled $189.4 million. 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 July 31, 2007 un-pledged RMBS increased to $229.4 million. The Company has established 18 repurchase agreement borrowing relationships with various financial institutions and other lenders. The Company currently has balances outstanding with 11 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s management believes current financing sources and cash flows from operations are adequate to meet the Companys 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.

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) are 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                      

23

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The
following is a summary of our portfolio:

|                                                 |  |                  |                |                        |  |        | 
|------------------------------------------------ |  | ---------------- | -------------- | ---------------------- |  | ------ | 
|                                                 |  | June 30, 2007    |               
|                                                 |  |                  |               
|Principal
 Investments                           |  | Carrying 
 Value |                | % of Total Investments | 
|                                                 |  |                  |                |                        | 
|                                                 |  |                  | (In thousands) |                        |  |        | 
|                                                 |  |                  |                |                        |  |        | 
|Real Estate Investments:                         |  |                  |                |                        |  |        | 
|Residential mortgage-backed securities (1)       |  | $                | 7,753,255      |                        |  | 87.8%  | 
|Commercial real estate loans and securities
 (2) |  |                  | 38,120         |                        |  | 0.4%   | 
|Asset-backed securities held in CDO (3)          |  |                  | 278,779        |                        |  | 3.2%   | 
|                                                 |  |                  |                |                        |  |        | 
|                                                 |  |                  | 8,070,154      |                        |  | 91.4%  | 
|                                                 |  |                  |                |                        |  |        | 
|Corporate Investments:                           |  |                  |                |                        |  |        | 
|Corporate loans and securities:                  |  |                  |                |                        |  |        | 
|Corporate leveraged loans (4)                    |  |                  | 476,151        |                        |  | 5.3%   | 
|High yield corporate bonds                       |  |                  | 10,308         |                        |  | 0.1%   | 
|Assets held in CLO (5)                           |  |                  | 271,544        |                        |  | 3.1%   | 
|Equity securities                                |  |                  | 7,075          |                        |  | 0.1%   | 
|Other investments                                |  |                  | 2,943          |                        |  | 0.0%   | 
|                                                 |  |                  |                |                        |  |        | 
|                                                 |  |                  | 768,021        |                        |  | 8.6%   | 
|                                                 |  |                  |                |                        |  |        | 
|                                                 |  |                  |                |                        |  |        | 
|Total invested assets                            |  |                  | 8,838,175      |                        |  | 100.0% | 
|                                                 |  |                  |                |                        |  |        | 
|Allowance for loan losses                        |  |                  | (8,933         | )                      |  |        | 
|                                                 |  |                  |                |                        |  |        | 
|                                                 |  | $                | 8,829,242      |                        |  |        | 
|                                                 |  |                  |                |                        |  |        | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Residential mortgage-backed
securities are agency or AAA rated and includes both trading and available-for
sale interest-only and principal-only strip securities with a fair value of
$20.0 million and $37.2 million, respectively.                                                                                                                                                                                       
|(2) | Commercial real estate loans
and securities include $1.5 million of participating interests in commercial
mortgage loans.                                                                                                                                                                                                                                                                                                   
|(3) | Asset-backed securities held
in CDO include RMBS (non-agency), CMBS and other asset-backed securities, or
ABS, in the amount of $230.5 million, $33.7 million, and $14.6 million,
respectively. The real-estate assets (RMBS & CMBS) represented 94.8% of the
ABS held in 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 $0.8 million
and a $50.0 million gross notional value, total return swaps with an estimated net
fair value of $1.2 million and a $13.5 million notional value. This amount is
also reported gross of the $8.9 million of allowance for loan losses.                                                                              
|(5) | Assets held in CLO include
syndicated bank loans of $263.1 million and high yield corporate bonds of $8.5
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 June 30, 2007, of $8.8
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, the Company announced
that it has 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. Please refer
to the Recent Developments section later in this document for more
information on this agreement.

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.

24

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

     interest rate trends,

     rates of prepayment on mortgages underlying our mortgage-backed
securities, or MBS,

     competition, and

     other market developments.

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

     our leverage,

     our access to funding and borrowing capacity,

     our borrowing costs,

     our hedging activities,

     changes in the credit ratings of the loans, securities, and other
assets we own,

     the market value of our investments, and

     requirements to maintain REIT status and to qualify for an exemption
under the 1940 Act.

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

We
leverage our investments in an effort to enhance our potential returns.
Leverage can enhance returns but also magnifies losses.

We
anticipate that, for any period during which our assets are not match-funded,
such assets will reprice more slowly than the corresponding liabilities.
Consequently, changes in interest rates, particularly short-term interest
rates, may significantly 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.

25

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Trends

The
following trends may also affect our business:

Interest
rate environment. Since mid 2006, short-term financing
rates have remained almost constant, while mid and longer-term rates have
fluctuated in a fairly narrow range. With respect to our existing RMBS
portfolio, which contains both hybrid adjustable and fixed-rate RMBS, any
short-term financing rate increases should result in minor decreases in our net
interest income, as we would expect the decrease in margin would be largely
offset by our hedging efforts. Additionally, since the hybrid adjustable
mortgages contain caps on the interest rate, a significant rise in rates after
the initial fixed rate period would also result in a decrease in 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
increases should result in increases in our net interest income because our
floating rate assets are greater in amount than the related floating rate
liabilities. Similarly, such an increase in interest rates should generally
result in an increase in our net interest income on future fixed rate
investments made by us because our fixed rate assets would be greater in amount
than our liabilities. However, we would expect that our fixed rate assets would
decline in value in a rising interest rate environment and our net interest
spreads on fixed rate assets could decline 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, increases in interest rates will likely result in a decline in the
net interest income of our portfolio, net of hedges. Similarly, decreases in
interest rates will likely result in an increase 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 June 30, 2007, however, the yield curve steepened, with
the yield on the three-month U.S. Treasury bill decreasing by 20 basis points
and the yield on the three-year U.S. Treasury note increasing by 15 basis
points. As of June 30, 2007, the yield on the three-month U.S. Treasury bill
was 4.80% versus a yield of 4.88% on the three-year U.S. Treasury note,
suggesting a very 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 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, general economic conditions and the relative
interest rates on adjustable-rate and fixed-rate mortgage loans. Because
interest rates may continue to increase, RMBS prepayment rates may fall. If
interest rates begin to fall, triggering an increase in prepayment rates, our
current portfolio, which is heavily weighted towards hybrid adjustable-rate
mortgages, would experience decreases in its net interest income due to
reinvestment opportunities being in a lower rate environment.

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 two
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 12.2% of
our total portfolio as of June 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 has caused further tightening of credit spreads.
The recent spread widening 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.

26

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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 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 June 30, 2007, our
total holdings of subprime mortgages was $180.9 million (par amount) held in Pinetree
CDO Ltd, or Pinetree. Although we consolidate these assets under GAAP, our
economic risk of loss is limited to our $12.0 million equity investment in
Pinetree. If our Pinetree portfolio experiences significant credit
deterioration, we may be forced to realize some of those 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. As of June 30, 2007, we
have accumulated a net $20.7 million of unrealized loss related to asset-backed
securities held in Pinetree reflected as an increase of other comprehensive
loss in stockholders equity while our economic risk is $12.0 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 primarily classified as available-for-sale
securities and carried on the balance sheet at fair value. This classification
results in changes in fair value being recorded as balance sheet adjustments to
accumulated other comprehensive 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.

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.

27

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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 June 30, 2007, our RMBS portfolio had an unamortized net premium of $76.5
million, $57.0 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 4.1 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 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.

28

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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 June 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. 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 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.

29

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Variable Interest
Entities

In
accordance with Financial Accounting Standard Board, or FASB, Interpretation
46R,Consolidation of Variable Interest
Entities, or FIN 46R, we identify any potential variable interest
entities, or 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 two VIEs, Market Square CLO Ltd., or Market Square and Pinetree CDO
Ltd, or Pinetree, in our condensed consolidated financial statements.

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, 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, or 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 us on January 1, 2008. We are currently evaluating this
new guidance and has not determined whether it will be required to apply the
provisions of the Guide in presenting its 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.

30

---



The
following table summarizes the carrying value of our investment portfolio by
balance sheet classification, excluding credit default swaps and total return
swaps, at June 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)                       |  | $                               | 7,565,833 |                     | $ | 187,422            |  | $                    |      |       | $ |        |  | $ |        |   | $ | 7,753,255 | 
|                                        |  |                                 |           |                     |   |                    |  |                      |       |       |   |         |  |   |         |   |   |           | 
|                                        |  |                                 |           |                     |   |                    |  |                      |       |       |   |         |  |   |         |   |   |           | 
|Corporate leveraged loans (1)           |  |                                 |          |                     |   |                   |  |                      |      |       |   |        |  |   | 469,162 |   |   | 469,162   | 
|Commercial mortgage-backed assets (2)   |  |                                 | 4,755     |                     |   |                   |  |                      |      |       |   | 1,460   |  |   | 31,905  |   |   | 38,120    | 
|Equity securities                       |  |                                 | 393       |                     |   |                   |  |                      | 6,682 |       |   |        |  |   |        |   |   | 7,075     | 
|                                        |  |                                 |           |                     |   |                    |  |                      |       |       |   |         |  |   |         |   |   |           | 
|Total structured and syndicated assets  |  |                                 | 5,148     |                     |   |                   |  |                      | 6,682 |       |   | 1,460   |  |   | 501,067 |   |   | 514,357   | 
|Assets held in CLO (3)                  |  |                                 | 8,461     |                     |   |                   |  |                      |      |       |   | 263,083 |  |   |        |   |   | 271,544   | 
|Asset-backed securities held in CDO (4) |  |                                 | 278,779   |                     |   |                   |  |                      |      |       |   |        |  |   |        |   |   | 278,779   | 
|High yield corporate bonds              |  |                                 | 10,308    |                     |   |                   |  |                      |      |       |   |        |  |   |        |   |   | 10,308    | 
|Other investments and loans (5)         |  |                                 | 2,943     |                     |   |                   |  |                      |      |       |   | 6,989   |  |   |        |   |   | 9,932     | 
|                                        |  |                                 |           |                     |   |                    |  |                      |       |       |   |         |  |   |         |   |   |           | 
|Total alternative assets                |  |                                 | 305,639   |                     |   |                   |  |                      | 6,682 |       |   | 271,532 |  |   | 501,067 |   |   | 1,084,920 | 
|                                        |  |                                 |           |                     |   |                    |  |                      |       |       |   |         |  |   |         |   |   |           | 
|Total invested assets                   |  | $                               | 7,871,472 |                     | $ | 187,422            |  | $                    | 6,682 |       | $ | 271,532 |  |   | 501,067 |   | $ | 8,838,175 | 
|                                        |  |                                 |           |                     |   |                    |  |                      |       |       |   |         |  |   |         |   |   |           | 
|Allowance for loan losses               |  |                                 |           |                     |   |                    |  |                      |       |       |   |         |  |   | (8,933  | ) |   |           | 
|                                        |  |                                 |           |                     |   |                    |  |                      |       |       |   |         |  |   |         |   |   |           | 
|                                        |  |                                 |           |                     |   |                    |  |                      |       |       |   |         |  | $ | 492,134 |   |   |           | 
|                                        |  |                                 |           |                     |   |                    |  |                      |       |       |   |         |  |   |         |   |   |           | 

|    |                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Corporate leveraged loans
 exclude credit default swaps with an estimated net fair value of $0.8 million
 and a $50.0 million gross notional value, total return swaps with an
 estimated net fair value of $1.2 million and a $13.5 million notional value
 and this amount is reported gross of the $8.9 million allowance for loan
 losses.
|(2) | Commercial mortgage-backed
 assets include $1.5 million of participating interests in commercial mortgage
 loans.                                                                                                                                                                                                                             
|(3) | Assets held in CLO include
 high yield corporate bonds of $8.5 million.                                                                                                                                                                                                                                                                       
|(4) | Asset-backed securities held
 in CDO include RMBS (non-agency), CMBS and ABS in the amount of $230.5 million,
 $33.7 million, and $14.6 million, respectively. The real-estate assets (RMBS
 and CMBS) represented 94.8% of the Asset-backed securities held in CDO.                                                                          
|(5) | Other investments and loans
 include $7.0 of non-structured and syndicated 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:

|                     |  |                |           |                                             |   |        |   |   |           |  
|-------------------- |  | -------------- | --------- | ------------------------------------------- | - | ------ | - | - | --------- | -
|                     |  | June 30, 2007  |          
|                     |  |                |          
|                     |  | RMBS           |           | Interest-only &
 Principal-only
 Securities |   | Total  |  
|                     |  |                |           |                                             |   |        |  
|                     |  | (In thousands) |          
|                     |  |                |          
|                     |  |                |           |                                             |   |        |   |   |           |  
|Par amount (1)       |  | $              | 7,616,237 |                                             | $ | 5,769  |   | $ | 7,622,006 |  
|Unamortized premium  |  |                | 64,713    |                                             |   | 20,929 |   |   | 85,642    |  
|Unamortized discount |  |                | (7,677    | )                                           |   | (1,425 | ) |   | (9,102    | )
|                     |  |                |           |                                             |   |        |   |   |           |  
|Amortized cost       |  |                | 7,673,273 |                                             |   | 25,273 |   |   | 7,698,546 |  
|Unrealized gains     |  |                | 299       |                                             |   | 8,157  |   |   | 8,456     |  
|Unrealized losses    |  |                | (140,874  | )                                           |   | (295   | ) |   | (141,169  | )
|                     |  |                |           |                                             |   |        |   |   |           |  
|Fair value           |  | $              | 7,532,698 |                                             | $ | 33,135 |   | $ | 7,565,833 |  
|                     |  |                |           |                                             |   |        |   |   |           |  

|    |                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | The par amount for
 interest-only and principal-only securities has been reduced by $0.2 million
 of other-than temporary impairment recognized for the six months ended June
 30, 2007.

As
of June 30, 2007, we held 311 RMBS securities classified as available-for-sale
with a fair value of $7.5 billion, valued below cost, of which 207 securities
with a fair value of $4.7 billion were valued below cost for greater than
twelve months. During the six months ended June 30, 2007, we recognized a $0.2
million of other-than-temporary impairment related to our interest-only
securities. The expected future cash flows for all of these securities are
primarily dependent upon contingent factors such as interest rates and
prepayments that are dependent on a variety of market factors. We used updated
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 transferred from accumulated other comprehensive loss to the
net gain (loss) on available-for-sale securities in the condensed consolidated
statements of operations.

31

---



As
of June 30, 2007, excluding the interest-only and principal-only strips, our
available-for-sale RMBS portfolio had a net amortized cost of 100.7% of the
face amount. The RMBS (excluding the stripped securities) are valued below par
as of June 30, 2007 because the weighted-average interest rate is lower than
prevailing market rates. As of June 30, 2007, the relative fair value of our
RMBS portfolio versus its amortized cost remained consistent with December 31,
    2006. Our total RMBS
    net premium amortization expense for the three and six months ended June
    30, 2007 was $6.0 million, and $12.6 million, respectively. As of June 30,
    2007, we had unamortized net premium of $76.5 million, $57.0 million excluding
    the stripped securities, included in the cost basis of our available-for-sale
    RMBS securities. As of June 30, 2007, the current weighted average life of
    the portfolio was 4.1 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 0.40 years as of June 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.

As
of June 30, 2007, our agency issued and AAA-rated RMBS totaled $5.5 billion and
$2.3 billion, respectively. The following table details our RMBS holdings as of
June 30, 2007, of which $7.6 billion and $187.4 million are classified as
available-for-sale securities and trading securities, respectively:

|                                            |  |                           |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 
|------------------------------------------- |  | ------------------------- | --------- | --------------------- | - | --------- |  | -------------------- | ----- | ------------------ |  | --------------------- |  | ---------------------------- | ------ | ---------------------- |  | -------- |  |  | ---- |  | ----- | - | 
|                                            |  |                           |           |                       |   |           |  | Weighted Average     |      
|                                            |  |                           |           |                       |   |           |  |                      |      
|Security
 Description (1)                   |  | Par and
 Notional
 Amount |           | Estimated
 Fair Value |   | Coupon    |  | Months to
 Reset (2) |       | Yield to
 Maturity |  | Contractual
 Maturity |  | Constant
 PrepaymentRate (3) |        | Modified
 Duration (4) | 
|                                            |  |                           |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        | 
|                                            |  | (In
thousands)            |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |     
|                                            |  |                           |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |     
|Hybrid Adjustable Rate
 RMBS:               |  |                           |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 
|Rate reset in 1 year or less                |  | $                         | 388,836   |                       | $ | 391,477   |  |                      | 4.43% |                    |  | 5                     |  |                              | 5.58%  |                        |  | 04/03/35 |  |  | 42.2 |  | 0.6   |   | 
|Rate reset in 1 to 3 years                  |  |                           | 2,598,360 |                       |   | 2,576,210 |  |                      | 4.98% |                    |  | 32                    |  |                              | 5.90%  |                        |  | 04/10/35 |  |  | 30.2 |  | 1.7   |   | 
|Rate reset in 3 to 5 years                  |  |                           | 2,263,465 |                       |   | 2,246,893 |  |                      | 5.34% |                    |  | 45                    |  |                              | 5.34%  |                        |  | 01/22/36 |  |  | 26.7 |  | 2.0   |   | 
|Rate reset in 5 to 7 years                  |  |                           | 270,386   |                       |   | 270,179   |  |                      | 5.90% |                    |  | 73                    |  |                              | 5.99%  |                        |  | 09/25/36 |  |  | 22.5 |  | 2.4   |   | 
|Rate reset in 7 to 10 years                 |  |                           | 407,314   |                       |   | 396,258   |  |                      | 5.25% |                    |  | 98                    |  |                              | 6.08%  |                        |  | 08/04/35 |  |  | 15.7 |  | 3.7   |   | 
|                                            |  |                           |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 
|Fixed Rate RMBS:                            |  |                           |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 
|15 year                                     |  |                           | 54,963    |                       |   | 54,181    |  |                      | 5.50% |                    |  | n/a                   |  |                              | 5.87%  |                        |  | 09/08/20 |  |  | 12.2 |  | 3.2   |   | 
|30 year                                     |  |                           | 1,798,202 |                       |   | 1,760,877 |  |                      | 5.87% |                    |  | n/a                   |  |                              | 6.21%  |                        |  | 02/02/36 |  |  | 12.3 |  | 4.4   |   | 
|                                            |  |                           |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 
|Total
 hybrid and fixed rate RMBS           |  | $                         | 7,781,526 |                       |   | 7,696,075 |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 
|                                            |  |                           |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 
|Other:                                      |  |                           |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 
|Interest-only strips (5)                    |  |                           | 148,089   |                       |   | 25,269    |  |                      | n/m   |                    |  | n/a                   |  |                              | 13.37% |                        |  | 04/27/35 |  |  | 9.2  |  | (31.1 | ) | 
|Interest-only strips - trading (5)          |  |                           | 1,151,096 |                       |   | 20,012    |  |                      | n/m   |                    |  | n/a                   |  |                              | 9.05%  |                        |  | 03/13/36 |  |  | 11.1 |  | 25.6  |   | 
|Interest-only and principal only strips
(5) |  |                           | 37,113    |                       |   | 11,899    |  |                      | n/m   |                    |  | n/a                   |  |                              | 8.30%  |                        |  | 10/26/35 |  |  | 10.1 |  | (7.6  | ) | 
|                                            |  |                           |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 
|Total other RMBS                            |  | $                         | 1,336,298 |                       |   | 57,180    |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 
|                                            |  |                           |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 
|Total RMBS estimated fair value             |  |                           |           |                       | $ | 7,753,255 |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 
|                                            |  |                           |           |                       |   |           |  |                      |       |                    |  |                       |  |                              |        |                        |  |          |  |  |      |  |       |   | 

---

|                     |                                                                                                                                                                                                                                                                   
|-------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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- and principal-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 June 30, 2007, the mortgages underlying our hybrid adjustable rate RMBS had
fixed interest rates for a weighted average period of approximately 42 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 June 30, 2007.

32

---



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 June 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
4.1%, 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 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:

|                                                 |  |                       |           |                 |   |           | 
|------------------------------------------------ |  | --------------------- | --------- | --------------- | - | --------- | 
|                                                 |  | June 30, 2007         |          
|                                                 |  |                       |          
|Weighted
 Average Life                           |  | Estimated
 Fair Value |           | Amortized
 Cost |  
|                                                 |  |                       |           |                 |  
|Greater than one year and
 less than five years  |  | $                     | 5,783,033 |                 | $ | 5,876,234 | 
|Greater than five years
 and less than ten years |  |                       | 1,597,528 |                 |   | 1,631,561 | 
|Greater than ten years                           |  |                       | 372,694   |                 |   | 384,874   | 
|                                                 |  |                       |           |                 |   |           | 
|Total                                            |  | $                     | 7,753,255 |                 | $ | 7,892,669 | 
|                                                 |  |                       |           |                 |   |           | 

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 CDO

Pinetree,
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,
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 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 is a bankruptcy remote entity and we
consolidate 100% of the assets and liabilities of Pinetree. This has resulted
    in an accumulated net unrealized loss of $20.7 million related to asset-backed
securities held in Pinetree reflected as an increase of other comprehensive
loss in stockholders equity, while our economic risk is limited to $12.0
million, which represents our total equity investment in Pinetree. 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.

33

---



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

|                                    |  |             |         |                 |   |                        |  |                         |         |  |  |     | 
|----------------------------------- |  | ----------- | ------- | --------------- | - | ---------------------- |  | ----------------------- | ------- |  |  | --- | 
|Asset Class                         |  | Par
 Amount |         | Amortized
 Cost |   | Estimated
 Fair
 Value |  | Weighted
 Average
 Life |        
|                                    |  |             |         |                 |   |                        |  |                         |        
|                                    |  |             |         | (In thousands)  |   |                        |  | (In years)              |        
|                                    |  |             |         |                 |  
|Residential
 B/C mortgage           |  | $           | 180,919 |                 | $ | 179,809                |  | $                       | 165,988 |  |  | 2.7 | 
|Residential
 A mortgage             |  |             | 35,073  |                 |   | 34,690                 |  |                         | 33,326  |  |  | 6.3 | 
|Home equity
 loan                   |  |             | 34,233  |                 |   | 33,944                 |  |                         | 31,223  |  |  | 2.1 | 
|CMBS conduit                        |  |             | 30,998  |                 |   | 30,717                 |  |                         | 29,235  |  |  | 7.6 | 
|CMBS large
 loan                    |  |             | 4,585   |                 |   | 4,586                  |  |                         | 4,469   |  |  | 1.8 | 
|ABS
 collateralized bond obligation |  |             | 8,209   |                 |   | 8,146                  |  |                         | 7,119   |  |  | 4.9 | 
|Credit card                         |  |             | 3,000   |                 |   | 3,096                  |  |                         | 3,054   |  |  | 0.9 | 
|Student loan                        |  |             | 1,357   |                 |   | 1,357                  |  |                         | 1,376   |  |  | 3.5 | 
|Automobile
 loan                    |  |             | 2,000   |                 |   | 2,000                  |  |                         | 1,972   |  |  | 4.0 | 
|Small
 business loan                |  |             | 1,117   |                 |   | 1,117                  |  |                         | 1,017   |  |  | 2.4 | 
|                                    |  |             |         |                 |   |                        |  |                         |         |  |  |     | 
|Total                               |  | $           | 301,491 |                 | $ | 299,462                |  | $                       | 278,779 |  |  | 3.6 | 
|                                    |  |             |         |                 |   |                        |  |                         |         |  |  |     | 

As
of June 30, 2007, Pinetree held $278.8 million of ABS classified as
available-for-sale securities and $11.0 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 24.6% and
75.4% of the portfolio, respectively, as of June 30, 2007. The fixed portfolio
had a weighted average interest rate of 5.80% while the variable portfolio has
a weighted average spread of 1.95% over LIBOR as of June 30, 2007.

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

|               |  |            |  | 
|-------------- |  | ---------- |  | 
|Moodys Rating |  | % of Total | 
|               |  |            | 
|Aaa            |  | 3.65%      | 
|Aa1            |  | 0.45%      | 
|Aa2            |  | 0.66%      | 
|Aa3            |  | 1.62%      | 
|A1             |  | 0.83%      | 
|A2             |  | 3.15%      | 
|A3             |  | 4.91%      | 
|Baa1           |  | 15.54%     | 
|Baa2           |  | 33.16%     | 
|Baa3           |  | 35.67%     | 
|Ba1            |  | 0.00%      | 
|Ba2            |  | 0.00%      | 
|Ba3            |  | 0.36%      | 
|               |  |            |  | 
|               |  | 100.00%    | 
|               |  |            |  | 

The
Moodys weighted average rating factor, or WARF, for the Pinetree portfolio as
of June 30, 2007 is 398, which equates to a weighted average Moodys rating of
between Baa2 and Baa3. As of June 30, 2007, we held 162 asset-backed securities
with a fair value of $250.2 million, valued below cost, of which 44 securities
with a fair value of $70.1 million were valued below cost for greater than
twelve months. Four of the 180 asset-backed securities held in Pinetree had
been downgraded to below investment grade by a major credit rating agency since
their purchase (face value of $5.3 million at June 30, 2007) through June 30,
2007. We reviewed the cash flows for these and certain other asset-backed
securities held in Pinetree in accordance with our policy and determined that
we do not believe any of the asset-backed securities are other-than-temporarily
impaired as of June 30, 2007, as we currently expect to collect all contractual
amounts due and have the intent and ability to hold these securities until the
value is recovered, which may be to maturity. Between June 30, 2007 and July
31, 2007 the major credit rating agencies issued downgrades on a significant
amount of asset-backed securities but only seven securities held in Pinetree,
with a face value of $11.8 million at July 31, 2007, were downgraded as a result
of these actions. All other asset-backed securities held in Pinetree 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.

34

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Loans and Credit
Derivatives

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

|                                  |  |                          |         |       |                |         |   |   |         |  
|--------------------------------- |  | ------------------------ | ------- | ----- | -------------- | ------- | - | - | ------- | -
|                                  |  |                          |         |       | Carrying Value |         |   |   |        
|                                  |  |                          |        
|Type of Loan                      |  | Loans Held
 for Sale (1) |         | Loans |                | Total   |  
|                                  |  |                          |         |       |                |         |  
|                                  |  |                          |         |       | (In thousands) |         |   |   |        
|                                  |  |                          |         |       |                |         |  
|                                  |  |                          |         |       |                |         |   |   |         |  
|Loans held
 in CLO                |  | $                        | 263,083 |       | $              |        |   | $ | 263,083 |  
|Corporate
 leveraged loans        |  |                          | 6,989   |       |                | 469,162 |   |   | 476,151 |  
|Commercial
 real estate loans (2) |  |                          | 1,460   |       |                | 31,905  |   |   | 33,365  |  
|                                  |  |                          |         |       |                |         |   |   |         |  
|                                  |  | $                        | 271,532 |       |                | 501,067 |   |   | 772,599 |  
|                                  |  |                          |         |       |                |         |   |   |         |  
|Allowance
 for loan losses        |  |                          |         |       |                | (8,933  | ) |   | (8,933  | )
|                                  |  |                          |         |       |                |         |   |   |         |  
|                                  |  |                          |         |       | $              | 492,134 |   | $ | 763,666 |  
|                                  |  |                          |         |       |                |         |   |   |         |  

---

|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|(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 CLO

Market
Square, one of our qualified REIT subsidiaries, is a VIE under FIN 46R and we
are the primary beneficiary of the VIE, causing us to consolidate Market
Square. We own 100% of the preference shares, representing substantially all of
the equity interest in Market Square, which we purchased for $24.0 million. As
of June 30, 2007, Market Square had $263.6 million of loan principal
outstanding with a carrying value of $263.1 million, which is included in loans
held for sale, $36.8 million of restricted cash and cash equivalents, which are
generally utilized to purchase additional loans and pay distribution to debt
and equity holders, and $276.0 million of notes payable included in long-term
debt. Market Square is a bankruptcy remote entity and although we consolidate
100% of the assets and liabilities of Market Square, it should be noted that
our maximum exposure to loss is limited to our initial investment of $24.0
million. The weighted average coupon spread over LIBOR on the loan portfolio
was 2.57% and the weighted average contractual maturity was 5.4 years as of
June 30, 2007.

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

|        |  |       |         |          |                |         |  |           |         |                  |  |       |  |  |          | 
|------- |  | ----- | ------- | -------- | -------------- | ------- |  | --------- | ------- | ---------------- |  | ----- |  |  | -------- | 
|        |  |       |         |          |                |         |  |           |         | Weighted Average | 
|        |  |       |         |          |                |         |  | Estimated |         |                  | 
|Moodys |  | Par   |         | Carrying |                | Fair    |  |           |         | Contractual      | 
|Rating  |  | Value |         | Value    |                | Value   |  | Spread    |         | Maturity         | 
|        |  |       |         |          |                |         |  |           |         |                  | 
|        |  |       |         |          | (In thousands) |         |  |           |         |                  |  |       |  |  |         
|        |  |       |         |          |                |         |  |           |        
|Baa3    |  | $     | 6,557   |          | $              | 6,563   |  | $         | 6,574   |                  |  | 1.89% |  |  | 10/02/09 | 
|Ba1     |  |       | 13,275  |          |                | 13,278  |  |           | 13,326  |                  |  | 1.63% |  |  | 06/18/11 | 
|Ba2     |  |       | 11,959  |          |                | 11,955  |  |           | 11,982  |                  |  | 1.82% |  |  | 07/15/13 | 
|Ba3     |  |       | 42,280  |          |                | 42,254  |  |           | 42,427  |                  |  | 2.21% |  |  | 03/17/13 | 
|B1      |  |       | 69,162  |          |                | 69,027  |  |           | 69,269  |                  |  | 2.47% |  |  | 12/18/12 | 
|B2      |  |       | 87,502  |          |                | 87,254  |  |           | 87,608  |                  |  | 2.80% |  |  | 12/13/12 | 
|B3      |  |       | 28,140  |          |                | 28,030  |  |           | 28,113  |                  |  | 3.36% |  |  | 10/13/12 | 
|Caa1    |  |       | 4,736   |          |                | 4,722   |  |           | 4,722   |                  |  | 3.71% |  |  | 03/05/12 | 
|        |  |       |         |          |                |         |  |           |         |                  |  |       |  |  |          | 
|        |  | $     | 263,611 |          | $              | 263,083 |  | $         | 264,021 |                  |  | 2.57% |  |  | 11/01/12 | 
|        |  |       |         |          |                |         |  |           |         |                  |  |       |  |  |          | 

The
Market Square bank loan portfolio is diversified across 29 Moodys industry
classifications and has a WARF of 2357, which equates to a weighted average
Moodys rating of between B1 and B2 as of June 30, 2007.

35

---



Corporate
Leveraged Loans

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

|                           |  |                 |         |                           |  |       
|-------------------------- |  | --------------- | ------- | ------------------------- |  | ------
|Type of Loan               |  | Carrying
 Value |         | Weighted
 Average
 Coupon
|                           |  |                 |         |                          
|                           |  | (In thousands)  |         |                           | 
|                           |  |                 |         |                           | 
|First lien
 secured        |  | $               | 134,918 |                           |  | 10.56%
|Second lien
 secured       |  |                 | 260,365 |                           |  | 12.24%
|Mezzanine                  |  |                 | 60,291  |                           |  | 14.93%
|Hold Co.                   |  |                 | 20,577  |                           |  | 12.63%
|                           |  |                 |         |                           |  |       
|                           |  |                 | 476,151 |                           |  | 12.12%
|                           |  |                 |         |                           |  |       
|Allowance
 for loan losses |  |                 | (8,933  | )                         |  |       
|                           |  |                 |         |                           |  |       
|                           |  | $               | 467,218 |                           |  |       
|                           |  |                 |         |                           |  |       

As
of June 30, 2007, we had corporate leveraged loans totaling $476.2 million,
classified as loans held for investment with the exception of $7.0 million
classified as loans held for sale. The mezzanine and Hold Co. loans are
generally unsecured. As of June 30, 2007, we recognized 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 June 30, 2007.

During the second
quarter of 2007 we determined that one of our first lien secured loans in the
amount of $5.1 million was impaired as a result of the companys declaration of
bankruptcy, among other factors, and an additional provision for the full
amount of the loan was required. Additionally, one of our mezzanine loans in
the amount of $8.0 million was impaired and an additional provision for loan
losses in the amount of $1.8 million was required for this loan for the three
months ended March 31, 2007. This was in addition to the $2.0 million allowance
for this loan that was established as of December 31, 2006.

Commercial
Real Estate Loans (including participating interests)

As
of June 30, 2007, we had invested in junior participation interests in
commercial mortgages originated by Hometown Commercial Capital, LLC with a
total carrying value of $1.5 million. These loans are classified as held for
sale on our condensed consolidated balance sheet. As of June 30, 2007, we held
commercial mortgage loans with a carrying value of $31.9 million. These loans
are classified as held for investment on our condensed consolidated balance
sheet.

Credit
Default Swaps

As
of June 30, 2007, we held 16 CDSs with an aggregate notional amount of $50.0
million. As of June 30, 2007, these CDSs had a net fair value of $0.8 million,
recorded in derivative assets and derivative liabilities in the condensed
consolidated balance sheet in the amounts of $0.8 million and $4,000,
respectively.

Total
Return Swaps

As
of June 30, 2007, we held two total return swaps with an aggregate notional
amount of $13.5 million and an aggregate fair value of $1.2 million recorded in
derivative assets.

Equity Securities

As
of June 30, 2007, our equity securities had a total carrying value of $7.1
million. Equity securities with a readily determinable fair value of $0.4
million are classified as available-for-sale securities in our condensed
consolidated balance sheet. All other equity securities are classified as other
investments.

Due From Broker

As of June 30,
2007, we had $23.9 million due from broker; all amounts are expected to settle
in the following quarter. The due from broker consisted of the following:

| |   |                                                     
| | - | ----------------------------------------------------
| |  | Unsettled
 loan sales - $22.2 million               
| |   |                                                     
| |  | Unsettled
 sales of loans held in CLO - $1.7 million

36

---



Interest Receivable

As
of June 30, 2007, our interest receivable of $50.6 million related to the
following:

| |   |                                          
| | - | -----------------------------------------
| |  | RMBS - $38.8
 million                    
| |   |                                          
| |  | Loans - $7.9
 million                    
| |   |                                          
| |  | Derivatives
 - $2.5 million              
| |   |                                          
| |  | Various
 other investments - $1.4 million

Other Receivables

As
of June 30, 2007, other receivables of $21.9 million consisted of:

| |   |                                              
| | - | ---------------------------------------------
| |  | RMBS
 paydowns - $21.3 million               
| |   |                                              
| |  | Paydowns on
 loans held in CLO - $0.5 million
| |   |                                              
| |  | Miscellaneous
 - $0.1 million                

Prepaid and Other
Assets

As
of June 30, 2007, prepaid and other assets of $13.4 million consisted of:

| |   |                                  
| | - | ---------------------------------
| |  | Debt issue
 costs - $11.3 million
| |   |                                  
| |  | Prepaid
 assets - $2.1 million   

Hedging Instruments

There
can be no assurance that our hedging activities will have the desired
beneficial impact on our results of operations, financial condition or net cash
flows. Moreover, no hedging activity can completely insulate us from the risks
associated with changes in interest rates and prepayment rates. We generally intend
to hedge as much of the interest rate risk as 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 June 30, 2007, we had a portfolio of 192 designated interest rate swaps with
maturities ranging from July 2007 to June 2017 and a total notional amount of
$6.2 billion and a net fair value of $66.7 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
June 30, 2007, the unrecognized gain on interest rate swap transactions in
accumulated other comprehensive loss of $77.6 million includes cumulative
deferred gains on terminated swaps of $6.8 million that will be amortized over
the original hedging period.

37

---



As
of June 30, 2007, we held 13 interest rate swaps and five interest rate floors
with notional amounts in the aggregate of $441.0 million and $456.9 million,
respectively, which were not designated as hedges. Accordingly, changes in fair
value of these derivatives are recorded in net gain on derivatives in the
condensed consolidated statement of operations. As of June 30, 2007, these
interest rate swaps and interest rate floors had a net negative fair value of
$2.1 million and $2.0 million, respectively, recorded in derivative liabilities
in the condensed consolidated balance sheet. In connection with the interest
rate floors, we received aggregate payments of $4.4 million upon inception of
the floors, $0.5 million during the first six 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.

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 June 30, 2007, we
established 18 borrowing relationships with various financial institutions and
other lenders. As of June 30, 2007, we had an outstanding repurchase agreement
balance with 11 of those counterparties.

As
of June 30, 2007, we had outstanding repurchase agreement liabilities of $7.3
billion, including accrued interest, with a weighted-average current borrowing
rate of 5.32%. 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 June 30, 2007, the repurchase agreements were
secured by RMBS and other investment securities with an estimated fair value of
$7.4 billion and had weighted-average remaining maturities of 34 days. The net
amount at risk, defined as fair value of securities sold, including accrued
interest income, minus repurchase agreement liabilities, including accrued
interest expense, with all counterparties was $44.7 million as of June 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 $475.4 million as of June 30, 2007. We expect to pursue term
funding of these assets via securitization in a future CDO (See Recent
Developments for a discussion of the Middle Market Loan CLO). As of June 30,
2007, we had $318.0 million of debt outstanding related to the Facility. We are
amortizing $1.2 million of debt issuance costs into interest expense over the
term of the Facility. The annual interest rate for the Facility is based on
short-term commercial paper rates as defined in the warehouse funding
agreement, plus 0.75% for large syndicated loans or plus 0.90% for all other
loans. The weighted average rate as of June 30, 2007 was 6.24%. See further
details about the Facility later in this section under the heading Sources of
Funds.

As
of June 30, 2007, the Pinetree and Market Square long-term debt issuances bear
weighted average interest rates, that reset quarterly, of LIBOR plus 0.55% and
0.49% and based on the last reset date were 5.89% and 5.85%, respectively. As
of June 30, 2007, we have $287.6 million and $276.0 million of long-term debt
resulting from the Pinetree and Market Square 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 June 30, 2007.

Due To Broker

Due
to broker as of June 30, 2007 of $28.8 million consisted of the following (all
amounts are expected to settle in the following quarter):

| |   |                                                                   
| | - | ------------------------------------------------------------------
| |  | Unsettled
 purchases of loans held in CLO - $12.0 million         
| |   |                                                                   
| |  | Swap margin
 due to broker - $8.5 million                         
| |   |                                                                   
| |  | Unsettled
 purchases of ABS held in CDO - $5.3 million            
| |   |                                                                   
| |  | Unsettled
 corporate loans and securities purchases - $3.0 million

38

---



Interest Payable

Interest
payable as of June 30, 2007 of $37.1 million consisted of:

| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | Net accrued
 interest payable on interest rate swaps - $24.0 million        
| |   |                                                                             
| |  | Pinetree
 long-term debt interest payable - $4.1 million                    
| |   |                                                                             
| |  | Revolving
 warehouse facility long-term debt interest payable - $4.1 million
| |   |                                                                             
| |  | Market
 Square long-term debt interest payable - $3.2 million               
| |   |                                                                             
| |  | Unsecured
 junior subordinated interest payable to Trusts - $1.7 million    

Management and
Incentive Fee Payable to Related Party

As
of June 30, 2007, we had $1.1 million payable to our Manager for management
fees.

Other Payables

As
of June 30, 2007, other payables of $1.7 million consisted of:

| |   |                                               
| | - | ----------------------------------------------
| |  | Miscellaneous
 - $1.2 million                 
| |   |                                               
| |  | Audit and
 tax related services - $0.5 million

Stockholders Equity

Stockholders
equity as of June 30, 2007 was $676.2 million and primarily consisted of the
following 2007 activity:

| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net
 unrealized loss on available-for-sale securities - $47.9 million                                                                                          
| |   |                                                                                                                                                                
| |  | Net
 unrealized gain on cash flow hedges - $19.1 million                                                                                                       
| |   |                                                                                                                                                                
| |  | Contributions
 to additional paid-in capital related to compensation for restricted stock,
 common stock grants and option grants to our Manager - $0.5 million
| |   |                                                                                                                                                                
| |  | Contributions
 to additional paid-in capital related to compensation paid to our independent
 directors in the form of fully vested common stock- $0.2 million 
| |   |                                                                                                                                                                
| |  | Retained
 earnings - $37.0 million of net income less $21.7 million of declared
 dividends                                                                     

39

---



Results of Operations

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

Summary

The
following table summarizes selected historical consolidated financial
information:

|                                 |  |                                                  |         |                           |   |         |   |      |         |   |   |         |  
|-------------------------------- |  | ------------------------------------------------ | ------- | ------------------------- | - | ------- | - | ---- | ------- | - | - | ------- | -
|                                 |  | Three months ended June 30,                      |         | Six months ended June 30, |  
|                                 |  |                                                  |         |                           |  
|                                 |  | 2007                                             |         | 2006                      |   | 2007    |   | 2006 |        
|                                 |  |                                                  |         |                           |   |         |   |      |        
|                                 |  | (Dollars in millions, except for per share data) |        
|                                 |  |                                                  |        
|Net income                       |  | $                                                | 14.5    |                           | $ | 18.2    |   | $    | 37.0    |   | $ | 37.3    |  
|Dividends (1)                    |  | $                                                | 21.7    |                           | $ | 19.6    |   | $    | 43.5    |   | $ | 38.2    |  
|Net income per share -
 diluted  |  | $                                                | 0.28    |                           | $ | 0.35    |   | $    | 0.72    |   | $ | 0.72    |  
|Dividends per share (1)          |  | $                                                | 0.42    |                           | $ | 0.38    |   | $    | 0.84    |   | $ | 0.74    |  
|Book value per share             |  | $                                                | 13.07   |                           | $ | 13.13   |   | $    | 13.07   |   | $ | 13.13   |  
|Total invested assets (2)        |  | $                                                | 8,829.2 |                           | $ | 8,680.8 |   | $    | 8,829.2 |   | $ | 8,680.8 |  
|Alternative asset portfolio
 (2) |  | $                                                | 1,075.9 |                           | $ | 895.4   |   | $    | 1,075.9 |   | $ | 895.4   |  
|Return on equity (3)             |  |                                                  | 7.8     | %                         |   | 9.8     | % |      | 10.0    | % |   | 10.1    | %
|Leverage (4)                     |  |                                                  | 12.3    |                           |   | 12.1    |   |      | 12.3    |   |   | 12.1    |  

|    |                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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 $3.7 million for the three months ended June 30, 2007
compared to the same period 2006 was primarily attributable to an increase in
the provision for loan losses of $5.1 million and a $5.1 decrease to net other
income and gain (loss). This was offset by a $6.0 million increase in net interest
income which was the result our increased diversification into alternative assets
combined with a higher interest rate environment. The decrease in net income
    of $0.3 million for the six months ended June 30, 2007 compared to the same
    period 2006 was primarily attributable to an increase in the provision for
    loan losses of $6.9 million which was offset by a $7.0 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
borrowings of $213.9 million as of June 30, 2007 compared to the same period in
2006, primarily through the use of our revolving warehouse funding facility and
trust preferred debt securities. We utilized this additional leverage primarily
to fund our corporate leveraged loans and other alternative assets.

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 June 30, 2007, we had $1.1 billion of alternative assets, or 12.2%
of our portfolio compared to $895.4 million of alternative assets, or 10.3% of
our portfolio as of June 30, 2006. Corporate leveraged loans have been the
primary driver of our alternative portfolio increasing to total $476.2 million
or 5.3% of our total investments as of June 30, 2007 compared to $275.5 million
or 3.2% of our total investments as of June 30, 2006.

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.

40

---



Net Interest Income

The
following table summarizes our interest income:

|                                             |  |                             |       |                         |   |                            |                             |   |      |   |  |       |   |  |  |       |  
|-------------------------------------------- |  | --------------------------- | ----- | ----------------------- | - | -------------------------- | --------------------------- | - | ---- | - |  | ----- | - |  |  | ----- | -
|                                             |  | Three months ended June 30, |       |                         |   | % of total interest income
|                                             |  |                             |       | Variance
 2007 vs. 2006 |   |                           
|                                             |  | 2007                        |       | 2006                    |   |                            | Three months ended June 30,
|                                             |  |                             |       |                         |   |                            |                             |  
|                                             |  | (In millions)               |       | 2007                    |   | 2006                      
|                                             |  |                             |       |                         |   |                           
|Real
 Estate Investments:                    |  |                             |       |                         |   |                            |                             |   |      |   |  |       |   |  |  |       |  
|Residential mortgage-backed
 securities      |  | $                           | 99.8  |                         | $ | 97.7                       |                             | $ | 2.1  |   |  | 76.9  | % |  |  | 83.2  | %
|Commercial real estate
 loans and securities |  |                             | 1.6   |                         |   | 0.5                        |                             |   | 1.1  |   |  | 1.2   | % |  |  | 0.4   | %
|Asset-backed securities
 held in CDO         |  |                             | 5.4   |                         |   | 5.1                        |                             |   | 0.3  |   |  | 4.2   | % |  |  | 4.4   | %
|                                             |  |                             |       |                         |   |                            |                             |   |      |   |  |       |   |  |  |       |  
|Total real estate investments                |  |                             | 106.8 |                         |   | 103.3                      |                             |   | 3.5  |   |  | 82.3  | % |  |  | 88.0  | %
|                                             |  |                             |       |                         |   |                            |                             |   |      |   |  |       |   |  |  |       |  
|                                             |  |                             |       |                         |   |                            |                             |   |      |   |  |       |   |  |  |       |  
|Corporate
 Investments:                      |  |                             |       |                         |   |                            |                             |   |      |   |  |       |   |  |  |       |  
|Corporate loans and
 securities:             |  |                             |       |                         |   |                            |                             |   |      |   |  |       |   |  |  |       |  
|Corporate leveraged loans                    |  |                             | 16.5  |                         |   | 7.0                        |                             |   | 9.5  |   |  | 12.8  | % |  |  | 6.0   | %
|High yield corporate bonds                   |  |                             | 0.3   |                         |   | 0.4                        |                             |   | (0.1 | ) |  | 0.2   | % |  |  | 0.3   | %
|Assets held in CLO                           |  |                             | 5.6   |                         |   | 5.7                        |                             |   | (0.1 | ) |  | 4.3   | % |  |  | 4.9   | %
|Tresuries and short-term
 investments        |  |                             | 0.4   |                         |   | 0.4                        |                             |   |     |   |  | 0.3   | % |  |  | 0.3   | %
|Equity securities                            |  |                             |      |                         |   | 0.5                        |                             |   | (0.5 | ) |  | 0.0   | % |  |  | 0.4   | %
|Other investments                            |  |                             | 0.1   |                         |   | 0.1                        |                             |   |     |   |  | 0.1   | % |  |  | 0.1   | %
|                                             |  |                             |       |                         |   |                            |                             |   |      |   |  |       |   |  |  |       |  
|Total corporate investments                  |  |                             | 22.9  |                         |   | 14.1                       |                             |   | 8.8  |   |  | 17.7  | % |  |  | 12.0  | %
|                                             |  |                             |       |                         |   |                            |                             |   |      |   |  |       |   |  |  |       |  
|                                             |  |                             |       |                         |   |                            |                             |   |      |   |  |       |   |  |  |       |  
|Total interest income                        |  | $                           | 129.7 |                         | $ | 117.4                      |                             | $ | 12.3 |   |  | 100.0 | % |  |  | 100.0 | %
|                                             |  |                             |       |                         |   |                            |                             |   |      |   |  |       |   |  |  |       |  

|                                             |  |                                     |       |                              |   |                                      |                                     |   |      |   |  |       |   |  |  |       |  
|-------------------------------------------- |  | ----------------------------------- | ----- | ---------------------------- | - | ------------------------------------ | ----------------------------------- | - | ---- | - |  | ----- | - |  |  | ----- | -
|                                             |  |                                     |       |                              |   |                                      |                                     |   |      |   |  |      
|                                             |  | Six
          months ended June 30, |       |                              |   | % of total
          interest income
|                                             |  |                                     |       | Variance
      2007 vs. 2006 |   |                                     
|                                             |  | 2007                                |       | 2006                         |   |                                      | Six months
          ended June 30,
|                                             |  |                                     |       |                              |   |                                      |                                     |  
|                                             |  | (In millions)                       |       | 2007                         |   | 2006                                
|                                             |  |                                     |       |                              |   |                                     
|Real
 Estate Investments:                    |  |                                     |       |                              |   |                                      |                                     |   |      |   |  |       |   |  |  |       |  
|Residential mortgage-backed
 securities      |  | $                                   | 195.8 |                              | $ | 182.1                                |                                     | $ | 13.7 |   |  | 77.6  | % |  |  | 83.0  | %
|Commercial real estate
 loans and securities |  |                                     | 3.0   |                              |   | 1.2                                  |                                     |   | 1.8  |   |  | 1.2   | % |  |  | 0.5   | %
|Asset-backed securities
 held in CDO         |  |                                     | 10.7  |                              |   | 9.9                                  |                                     |   | 0.8  |   |  | 4.2   | % |  |  | 4.5   | %
|                                             |  |                                     |       |                              |   |                                      |                                     |   |      |   |  |       |   |  |  |       |  
|Total real estate investments                |  |                                     | 209.5 |                              |   | 193.2                                |                                     |   | 16.3 |   |  | 83.0  | % |  |  | 88.0  | %
|                                             |  |                                     |       |                              |   |                                      |                                     |   |      |   |  |       |   |  |  |       |  
|                                             |  |                                     |       |                              |   |                                      |                                     |   |      |   |  |       |   |  |  |       |  
|Corporate
 Investments:                      |  |                                     |       |                              |   |                                      |                                     |   |      |   |  |       |   |  |  |       |  
|Corporate loans and
 securities:             |  |                                     |       |                              |   |                                      |                                     |   |      |   |  |       |   |  |  |       |  
|Corporate leveraged loans                    |  |                                     | 29.8  |                              |   | 12.5                                 |                                     |   | 17.3 |   |  | 11.8  | % |  |  | 5.7   | %
|High yield corporate bonds                   |  |                                     | 0.6   |                              |   | 0.7                                  |                                     |   | (0.1 | ) |  | 0.2   | % |  |  | 0.3   | %
|Assets held in CLO                           |  |                                     | 11.4  |                              |   | 11.0                                 |                                     |   | 0.4  |   |  | 4.5   | % |  |  | 5.0   | %
|Tresuries and short-term
 investments        |  |                                     | 1.0   |                              |   | 0.8                                  |                                     |   | 0.2  |   |  | 0.4   | % |  |  | 0.4   | %
|Equity securities                            |  |                                     |      |                              |   | 1.2                                  |                                     |   | (1.2 | ) |  | 0.0   | % |  |  | 0.5   | %
|Other investments                            |  |                                     | 0.1   |                              |   | 0.1                                  |                                     |   |     |   |  | 0.1   | % |  |  | 0.1   | %
|                                             |  |                                     |       |                              |   |                                      |                                     |   |      |   |  |       |   |  |  |       |  
|Total corporate investments                  |  |                                     | 42.9  |                              |   | 26.3                                 |                                     |   | 16.6 |   |  | 17.0  | % |  |  | 12.0  | %
|                                             |  |                                     |       |                              |   |                                      |                                     |   |      |   |  |       |   |  |  |       |  
|                                             |  |                                     |       |                              |   |                                      |                                     |   |      |   |  |       |   |  |  |       |  
|Total interest income                        |  | $                                   | 252.4 |                              | $ | 219.5                                |                                     | $ | 32.9 |   |  | 100.0 | % |  |  | 100.0 | %
|                                             |  |                                     |       |                              |   |                                      |                                     |   |      |   |  |       |   |  |  |       |  

The
increase in interest income by $12.3 million and $32.9 million for the three
and six months ended June 30, 2007, compared to the three and six months ended
June 30, 2006, was primarily attributable to the diversification of our
portfolio to higher yielding alternative assets, the corporate leverage loans
being the largest contributing factor. Corporate leverage loans increased
$185.2 million from June 30, 2006 to June 30, 2007 and contributed an increase
of $9.5 million and $17.3 million to the increase in interest income for the
three and six months ended June 30, 2007, respectively. As of June 30, 2007,
our RMBS and alternative portfolio was $7.8 billion and $1.1 billion,
respectively, as compared to $7.8 billion and $0.9 billion, respectively, at
June 30, 2006. Although the RMBS balances remained relatively consistent from
June 30, 2006 to June 30, 2007, RMBS contributed $2.1 million and $13.7 million
    to the increase in interest income for the three and six months ended June
    30, 2007, respectively. This was primarily attributable to the overall increase
    in the interest rate environment for the periods presented.

The
following table summarizes our interest expense:

|                                   |  |                             |       |                         |   |                           |      |                         |      |   |   |       |   |   |       |   |   |       |  
|---------------------------------- |  | --------------------------- | ----- | ----------------------- | - | ------------------------- | ---- | ----------------------- | ---- | - | - | ----- | - | - | ----- | - | - | ----- | -
|                                   |  | Three months ended June 30, |       |                         |   | Six months ended June 30, |      |                         |     
|                                   |  |                             |       | Variance
 2007 vs. 2006 |   |                           |      | Variance
 2007 vs. 2006 |     
|                                   |  | 2007                        |       | 2006                    |   |                           | 2007 |                         | 2006 |   |  
|                                   |  |                             |       |                         |   |                           |      |                         |      |   |   |       |  
|                                   |  | (In millions)               |       | (In millions)           |  
|                                   |  |                             |       |                         |  
|Repurchase agreements              |  | $                           | 100.8 |                         | $ | 94.8                      |      | $                       | 6.0  |   | $ | 198.0 |   | $ | 170.5 |   | $ | 27.5  |  
|Designated hedging activity        |  |                             | (14.9 | )                       |   | (9.9                      | )    |                         | (5.0 | ) |   | (29.0 | ) |   | (14.9 | ) |   | (14.1 | )
|Long-term debt                     |  |                             | 15.0  |                         |   | 10.2                      |      |                         | 4.8  |   |   | 29.6  |   |   | 18.4  |   |   | 11.2  |  
|Amortization of debt issuance cost |  |                             | 1.3   |                         |   | 0.9                       |      |                         | 0.4  |   |   | 2.5   |   |   | 1.0   |   |   | 1.5   |  
|Margin borrowing                   |  |                             | 0.3   |                         |   | 0.3                       |      |                         |     |   |   | 0.3   |   |   | 0.4   |   |   | (0.1  | )
|                                   |  |                             |       |                         |   |                           |      |                         |      |   |   |       |   |   |       |   |   |       |  
|Total interest expense             |  | $                           | 102.5 |                         | $ | 96.3                      |      | $                       | 6.2  |   | $ | 201.4 |   | $ | 175.4 |   | $ | 26.0  |  
|                                   |  |                             |       |                         |   |                           |      |                         |      |   |   |       |   |   |       |   |   |       |  

41

---



The
increase in interest expense of $6.2 million and $26.0 million for the three
and six months ended June 30, 2007, compared to the three and six months ended
June 30, 2006, was primarily a result of an increase in the overall interest
rate environment, as our funding sources are primarily tied to short term
interest rates or reset on a relatively short-term basis. The higher interest
rates contributed a $6.0 million and a $27.5 million increase in repurchase agreements
for the three and six months ended June 30, 2007, offset by the $5.0 million
and $14.1 million increased reduction of interest expense from our designated
hedging for the same periods. We are currently in a net-receive position on
substantially all of our interest rate swaps due to the higher variable
interest rates, which are the basis for our receipt of payments, above the
fixed rate payments we are making on these interest rate swaps.

Additionally,
the interest expense related to long-term debt increased by $4.8 million and
$11.2 million for the three and six months ended June 30, 2007, compared to the
    same periods in 2006. We increased our use of leverage through our warehouse
    funding facility and additional trust preferred securities, which had $318.0
    million and $123.7 million, respectively, outstanding as of June 30, 2007,
    and $175.8 million and $51.6 million, respectively, outstanding as of June
    30, 2006.

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
(excluding the planned debt issuance related to the Merger), subsequent to June
30, 2007 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
identified two impaired loans held for investment as of June 30, 2007. We
determined that additions to the provision for loan losses in the amount of
$5.1 million and $6.9 million for the three and six months ended June 30, 2007
were required for these loans. The $5.1 million increase during the three
months ended June 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 dollar addition to the provision during the six
months ended June 30, 2007 represented the excess of the amortized cost basis
over the discounted expected future cash flows for another loan.

We
had not recognized an allowance for loan losses for the same periods during
2006.

Expenses

The
following table summarizes our expenses for the periods presented:

|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|---------------------------------------------------- |  | --------------------------- | --- | ----------------------- | - | ------------------------- | ---- | ----------------------- | ---- | - | - | ---- |  | - | ---- |  | - | ---- | -
|                                                     |  | Three months ended June 30, |     |                         |   | Six months ended June 30, |      |                         |     
|                                                     |  |                             |     | Variance
 2007 vs. 2006 |   |                           |      | Variance
 2007 vs. 2006 |     
|                                                     |  | 2007                        |     | 2006                    |   |                           | 2007 |                         | 2006 |   |  
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      | 
|                                                     |  | (In millions)               |     | (In millions)           |  
|                                                     |  |                             |     |                         |  
|Base management fee                                  |  | $                           | 3.3 |                         | $ | 3.3                       |      | $                       |     |   | $ | 6.6  |  | $ | 6.6  |  | $ |     |  
|Amortization related to restricted stock and options |  |                             | 0.1 |                         |   | 0.3                       |      |                         | (0.2 | ) |   | 0.2  |  |   | 0.7  |  |   | (0.5 | )
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|Total management fee expense to related
party        |  |                             | 3.4 |                         |   | 3.6                       |      |                         | (0.2 | ) |   | 6.8  |  |   | 7.3  |  |   | (0.5 | )
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|Incentive fee expense to related party               |  |                             |    |                         |   | 0.8                       |      |                         | (0.8 | ) |   | 2.2  |  |   | 2.0  |  |   | 0.2  |  
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|Audit and audit-related fees                         |  |                             | 0.3 |                         |   | 0.2                       |      |                         | 0.1  |   |   | 0.7  |  |   | 0.4  |  |   | 0.3  |  
|Legal fees                                           |  |                             | 0.2 |                         |   | 0.1                       |      |                         | 0.1  |   |   | 0.3  |  |   | 0.2  |  |   | 0.1  |  
|Other professional fees                              |  |                             | 0.3 |                         |   | 0.1                       |      |                         | 0.2  |   |   | 0.4  |  |   | 0.3  |  |   | 0.1  |  
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|Total professional services                          |  |                             | 0.8 |                         |   | 0.4                       |      |                         | 0.4  |   |   | 1.4  |  |   | 0.9  |  |   | 0.5  |  
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|Insurance expense                                    |  |                             | 0.2 |                         |   | 0.2                       |      |                         |     |   |   | 0.3  |  |   | 0.4  |  |   | (0.1 | )
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|Board of directors fees                              |  |                             | 0.5 |                         |   | 0.1                       |      |                         | 0.4  |   |   | 0.6  |  |   | 0.3  |  |   | 0.3  |  
|Banking and other administrative fees                |  |                             | 0.2 |                         |   | 0.2                       |      |                         |     |   |   | 0.3  |  |   | 0.3  |  |   |     |  
|Software and data feeds                              |  |                             |    |                         |   | 0.1                       |      |                         | (0.1 | ) |   | 0.1  |  |   | 0.1  |  |   |     |  
|Other general and administrative expenses            |  |                             | 0.1 |                         |   | 0.1                       |      |                         |     |   |   | 0.2  |  |   | 0.2  |  |   |     |  
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|Total general and administrative expenses            |  |                             | 0.8 |                         |   | 0.5                       |      |                         | 0.3  |   |   | 1.2  |  |   | 0.9  |  |   | 0.3  |  
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  
|Total expenses                                       |  | $                           | 5.2 |                         | $ | 5.5                       |      | $                       | (0.3 | ) | $ | 11.9 |  | $ | 11.5 |  | $ | 0.4  |  
|                                                     |  |                             |     |                         |   |                           |      |                         |      |   |   |      |  |   |      |  |   |      |  

42

---



For
the three months ended June 30, 2007, our expenses decreased by $0.3 million as
compared to the same period in 2006. This decrease was primarily attributable
to a decrease in incentive fee expense of $0.8 million resulting from a
decrease in our net income and a decrease in amortization on restricted stock
and options of $0.2 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. These decreases
in expenses were partially offset by an increase in professional services
expense of $0.4 million and an increase in board of directors fees of $0.4
million primarily attributable to certain legal expenses, an increase in audit
fees and increased board compensation for additional board meetings.

For
the six months ended June 30, 2007, our expenses increased by $0.4 million as
compared to the same period in 2006. This increase was primarily attributable
to increases in professional services expense, board of directors fees and
incentive fees to related party of $0.5 million, $0.3 million and $0.2 million,
respectively. These increases were partially offset by a decrease in
amortization on restricted stock options of $0.5 million.

Other Income and Gain (Loss)

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

|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|---------------------------------------------------------------- |  | ---------------------------- | ---- | -------------- | - | -------------------------- | - | -------- | ---- | ---- | - | -------------- | - | - | ---- | - | - | ---- | -
|                                                                 |  | Three
 months ended June 30, |      |                |   | Six
 months ended June 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        |  | $                            | (0.2 | )              | $ | 1.4                        |   | $        | (1.6 | )    | $ | 2.5            |   | $ | 5.3  |   | $ | (2.8 | )
|Other-than-temporary impairment on available-for-sale
securities |  |                              |     |                |   | (0.2                       | ) |          | 0.2  |      |   | (0.2           | ) |   | (2.0 | ) |   | 1.8  |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|Net gain (loss) on available-for-sale securities                 |  |                              | (0.2 | )              |   | 1.2                        |   |          | (1.4 | )    |   | 2.3            |   |   | 3.3  |   |   | (1.0 | )
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|Net realized gain on trading securities                          |  |                              | 0.3  |                |   |                           |   |          | 0.3  |      |   | 0.4            |   |   |     |   |   | 0.4  |  
|Net unrealized gain (loss) on trading securities                 |  |                              | (6.0 | )              |   | 0.1                        |   |          | (6.1 | )    |   | (3.4           | ) |   | (1.8 | ) |   | (1.6 | )
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|Net gain (loss) on trading securities                            |  |                              | (5.7 | )              |   | 0.1                        |   |          | (5.8 | )    |   | (3.0           | ) |   | (1.8 | ) |   | (1.2 | )
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|Net realized gain (loss) on loans                                |  |                              | (1.4 | )              |   | 0.2                        |   |          | (1.6 | )    |   | 0.2            |   |   | 0.7  |   |   | (0.5 | )
|Net unrealized gain (loss) on loans                              |  |                              | (0.1 | )              |   | (0.4                       | ) |          | 0.3  |      |   | 0.3            |   |   | (0.3 | ) |   | 0.6  |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|Net gain (loss) on loans                                         |  |                              | (1.5 | )              |   | (0.2                       | ) |          | (1.3 | )    |   | 0.5            |   |   | 0.4  |   |   | 0.1  |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|Net realized gain on interest rate swaps                         |  |                              | 3.2  |                |   | 1.9                        |   |          | 1.3  |      |   | 3.5            |   |   | 1.0  |   |   | 2.5  |  
|Net realized gain on credit default swaps                        |  |                              | 0.6  |                |   | 0.5                        |   |          | 0.1  |      |   | 1.1            |   |   | 0.9  |   |   | 0.2  |  
|Net realized gain on total return swaps                          |  |                              | 0.5  |                |   |                           |   |          | 0.5  |      |   | 0.2            |   |   |     |   |   | 0.2  |  
|Net unrealized gain (loss) on interest rate swaps                |  |                              | (0.5 | )              |   | (0.9                       | ) |          | 0.4  |      |   | (1.3           | ) |   | 0.7  |   |   | (2.0 | )
|Net unrealized gain (loss) on credit default swaps               |  |                              | (0.5 | )              |   | (0.1                       | ) |          | (0.4 | )    |   | (0.1           | ) |   | 0.2  |   |   | (0.3 | )
|Net unrealized gain (loss) on total return swaps                 |  |                              | (0.2 | )              |   |                           |   |          | (0.2 | )    |   | 0.3            |   |   |     |   |   | 0.3  |  
|Net unrealized gain on interest rate floors                      |  |                              | 2.2  |                |   |                           |   |          | 2.2  |      |   | 1.6            |   |   |     |   |   | 1.6  |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|Net gain on derivatives                                          |  |                              | 5.3  |                |   | 1.4                        |   |          | 3.9  |      |   | 5.3            |   |   | 2.8  |   |   | 2.5  |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|Dividend income                                                  |  |                              | 0.1  |                |   | 0.1                        |   |          |     |      |   | 0.2            |   |   | 0.2  |   |   |     |  
|Other net gain (loss)                                            |  |                              | (0.5 | )              |   |                           |   |          | (0.5 | )    |   | (0.3           | ) |   |     |   |   | (0.3 | )
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|Dividend income and other net gain (loss)                        |  |                              | (0.4 | )              |   | 0.1                        |   |          | (0.5 | )    |   | (0.1           | ) |   | 0.2  |   |   | (0.3 | )
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|Total other income and gain (loss)                               |  | $                            | (2.5 | )              | $ | 2.6                        |   | $        | (5.1 | )    | $ | 5.0            |   | $ | 4.9  |   | $ | 0.1  |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|Total net realized gain                                          |  | $                            | 3.1  |                | $ | 4.1                        |   | $        | (1.0 | )    | $ | 8.1            |   | $ | 8.1  |   | $ |     |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  
|Total net unrealized loss                                        |  | $                            | (5.6 | )              | $ | (1.5                       | ) | $        | (4.1 | )    | $ | (3.1           | ) | $ | (3.2 | ) | $ | 0.1  |  
|                                                                 |  |                              |      |                |   |                            |   |          |      |      |   |                |   |   |      |   |   |      |  

For
the three months ended June 30, 2007, other income and gain (loss) decreased
    by $5.1 million as compared to the same period in 2006. This decrease is
    primarily attributable to increased losses on trading securities, available-for-sale
securities, loans and other net gain (loss) of $5.8
million, $1.4 million, $1.3 million and $0.5 million, respectively, offset by
an increase in derivative gains of $3.9 million. The increased losses on
trading securities are the net result of unfavorable changes in interest rates
related to residential mortgage-backed securities and interest-only securities
in this category. The increased losses on loans were driven by the closing out
of certain loan positions to mitigate future exposure and the increased losses
on available-for-sale securities are primarily driven by portfolio decisions
    to reposition the RMBS portfolio. The increased losses in other
    net gain (loss) are the result of losses incurred on our equity method investment
in HCC of $0.5 million. The increase in derivative gains are primarily
attributable to increases realized gains on interest rate swaps of $1.3 million
and unrealized gains on interest rate floors of $2.2 million which were
primarily a result of favorable interest rate changes to these instruments
during the period.

43

---



For
the six months ended June 30, 2007, other income remained relatively flat with
an increase of $0.1 million compared to the same period in 2006. This slight
increase is attributable to increased gains on derivatives of $2.5 million
offset by decreased gains on available for sale securities of $1.0 million and
increased losses on trading securities of $1.2 million. The increase in
derivative gains are primarily driven by increases in realized gains on
interest rate swaps of $2.5 million and unrealized gains on interest rate
floors of $1.6 million which were the result of favorable interest rate changes
to these instruments during the period. The decreased gains on
available-for-sale securities are primarily driven by portfolio decisions to
opportunistically reposition the RMBS portfolio. These decreased gains were
offset by a decrease in other-than-temporary impairment on available-for-sale
securities as a result of more favorable interest rate changes for certain
inverse-only and digital interest-only securities we held primarily for
duration management and yield enhancement for the six months ended June 30,
2007 compared to 2006. The increased losses on trading securities are the net
result of unfavorable changes in interest rates related to residential
mortgage-backed securities and interest-only securities in this category.

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 taxable REIT subsidiary. 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 six months ended June 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 $0.4 million and income
before income taxes of $0.5, less income tax benefit of $0.1 million and income
tax expense of $0.2 million, respectively.

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

Off-Balance Sheet Arrangements

As
of June 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.

44

---



Liquidity and Capital Resources

We
held cash and cash equivalents of $35.2 million as of June 30, 2007.

Our
operating activities used cash of $26.6 million for the six months ended June
30, 2007, primarily through the following:

Net
inflows and non-cash adjustments of $75.1 million, consisting of the following:

| |                                                                                             |   |                                                                                        
| | ------------------------------------------------------------------------------------------- | - | ---------------------------------------------------------------------------------------
| |                                                                                             |  | Net income -
 $37.0 million                                                            
| |                                                                                             |   |                                                                                        
| |                                                                                             |  | Net premium and discount amortization - $14.4
        million                          
| |                                                                                             |   |                                                                                        
| |                                                                                             |  | Proceeds
 from sales and principal payments on bank loans held for sale - $12.6 million
| |                                                                                             |   |                                                                                        
| |                                                                                             |  | Provision
 for credit loss - $6.9 million                                              
| |                                                                                             |   |                                                                                        
| |                                                                                             |  | Net loss on
 trading securities - $3.0 million                                         
| |                                                                                             |   |                                                                                        
| |                                                                                             |  | Share based
 compensation - $0.7 million                                               
| |                                                                                             |   |                                                                                        
| |                                                                                             |  | Equity method loss on other investments - $0.3 million                                 
| |                                                                                             |   |                                                                                        
| |                                                                                             |  | Other-than-temporary
 impairment of available-for-sale securities - $0.2 million       
| |                                                                                             |   |                                                                                        
| | Net change
 in operating assets and liabilities - $13.6 million                            
| |                                                                                             |   |                                                                                        
| | Net outflows
 and non-cash adjustments totaled $115.3 million, consisting of the following:
| |                                                                                             |   |                                                                                        
| |                                                                                             |  | Net
 purchases of trading securities - $97.7 million                                   
| |                                                                                             |   |                                                                                        
| |                                                                                             |  | Net impact
 of derivatives - $14.7 million                                             
| |                                                                                             |   |                                                                                        
| |                                                                                             |  | Net realized
 gains on available for sale securities - $2.5 million                    
| |                                                                                             |   |                                                                                        
| |                                                                                             |  | Net gain on
 loans held for sale - $0.4 million                                        

Our
investing activities provided cash of $0.9 million for the six months ended
June 30, 2007, primarily the result of the purchase of available-for-sale
securities and loans totaling $2.0 billion, offset by principal payments and
proceeds from sale of available-for-sale securities of $1.9 billion, and
principal payments and proceeds from loans of $97.9 million. Restricted cash
and cash equivalents increased $32.5 million and there were purchases of other
investments of $0.6 million.

Our
financing activities used cash of $11.6 million for the six months ended June
30, 2007, primarily from payments of dividends, net payments made on our
repurchase agreements, payment made on warehouse funding agreement, debt
issuance costs and long-term debt principal payments of $43.4 million, $21.4 million,
$5.6 million, $3.5 million and $0.3 million, respectively. These payments were
offset by net borrowings under our revolving warehouse funding agreement of
$62.6 million.

Leverage

As
of June 30, 2007 and 2006 our leverage was 12.3 times equity and 12.1 times
equity, which was calculated by dividing our total debt (principal outstanding
of repurchase agreements and long-term debt) of $8.3 billion and $8.2 billion
by total stockholders equity of $676.2 million and $678.8 million, as reported
in our financial statements as of June 30, 2007 and 2006, respectively.

This
increased leverage as of June 30, 2007 is primarily driven by our increased
borrowings to fund growth in assets and net income. The net increase in
principal outstanding related to repurchase agreements and warehouse funding
from June 30, 2006 to June 30, 2007 was $33.9 million.

45

---



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 and Pinetree, the issuance of trust preferred
debt securities, and in March of 2006, we closed an alternative asset 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 June 30, 2007 (dollars in
thousands):

|                                                      |  |                        |           |                 |   |                              |     |                              |         |       |   |         |     |   |           |  
|----------------------------------------------------- |  | ---------------------- | --------- | --------------- | - | ---------------------------- | --- | ---------------------------- | ------- | ----- | - | ------- | --- | - | --------- | -
|                                                      |  | Repurchase
 Agreements |           | Term
 Financing |   | Warehouse
 Funding
 Facility |     | Trust
 Preferred
 Securities |         | Total |  
|                                                      |  |                        |           |                 |   |                              |     |                              |         |       |  
|Outstanding balance                                   |  | $                      | 7,348,493 |                 | $ | 563,564                      |     | $                            | 317,950 |       | $ | 123,717 |     | $ | 8,353,724 |  
|Weighted average borrowing rate                       |  |                        | 5.32      | %               |   | 5.87                         | %   |                              | 6.24    | %     |   | 8.13    | %   |   | 5.43      | %
|Weighted-average remaining maturity (in years)        |  |                        | 0.09      |                 |   | 24.35                        | (1) |                              | 1.70    |       |   | 28.94   | (2) |   | 2.22      |  
|Fair value of collateral (including accrued interest) |  | $                      | 7,393,154 |                 | $ | 602,922                      |     | $                            | 475,381 |       |   | n/a     |     |   | n/m       |  

|                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                         
|n/a  not applicable                                                                                                                                     
|n/m  not
meaningful                                                                                                                                     
|(1)  $276.0 million of the
term financing is callable after July 20, 2007 and quarterly thereafter and
$287.6 million is callable after January 5, 2010.
|(2)  $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 June 30, 2007, repurchase agreements
outstanding totaled $7.3 billion, with a weighted-average current borrowing
rate of 5.32%, 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 June 30, 2007, we had established 18 borrowing arrangements
with various investment banking firms and other lenders, 11 of which we had an
outstanding repurchase agreement balance as of June 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. 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.

Short-term
    (one year or less)
liquidity needs are met primarily with proceeds from overnight investments and
repurchase agreement borrowings, utilizing un-pledged RMBS as collateral.
Un-pledged RMBS as of June 30, 2007 totaled $189.4 million. 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 July 31, 2007 un-pledged RMBS increased to $229.4 million.

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 $475.4 million as of June 30, 2007. We expect to
pursue term funding of these assets via securitization in a future CDO (See
Recent Developments for a discussion of the Middle Market Loan CLO). As of June
30, 2007, we had $318.0 million of debt outstanding related to the Facility.
We are amortizing $1.2 million of debt issuance costs into interest expense over
the term of the Facility. The annual interest rate for the Facility is based
on short-term commercial paper rates as defined in the warehouse funding
agreement, plus 0.75% for large syndicated loans or plus 0.90% for all other
loans. The weighted average interest rate as of June 30, 2007 was 6.24%.

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 funds, term financing and trust preferred securities,
totaling $687.3 million as of June 30, 2007, are term funded. See Recent
Developments for a discussion our discussion related to the Middle Market Loan
CLO.

46

---



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)                                            | 
|                                          |  |                    |        |                                                      | 
|                                          |  |                    |        |                                                      | 
|Barclays
 Bank Plc.                       |  | $                  | (5,357 | )                                                    |  | 38 | 
|Countrywide
 Securities Corporation       |  |                    | 15,163 |                                                      |  | 49 | 
|Credit
 Suisse Securities (USA) LLC       |  |                    | 14,639 |                                                      |  | 33 | 
|Fortis
 Securities LLC                    |  |                    | 35     |                                                      |  | 3  | 
|ING                                       |  |                    | 13,119 |                                                      |  | 36 | 
|J.P. Morgan
 Securities Inc.              |  |                    | (402   | )                                                    |  | 31 | 
|Lehman
 Brothers Inc.                     |  |                    | 1,475  |                                                      |  | 18 | 
|Merrill
 Lynch Government Securities Inc. |  |                    | (1,044 | )                                                    |  | 23 | 
|Mitsubishi
 UFJ Securities (USA), Inc.    |  |                    | 2,342  |                                                      |  | 16 | 
|Nomura
 Securities International, Inc.    |  |                    | (1,280 | )                                                    |  | 25 | 
|UBS
 Securities LLC                       |  |                    | 5,971  |                                                      |  | 37 | 
|                                          |  |                    |        |                                                      |  |    | 
|Total                                     |  | $                  | 44,661 |                                                      |  | 34 | 
|                                          |  |                    |        |                                                      |  |    | 

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

Except
as noted below, the repurchase agreements for these facilities do not include
substantive provisions other than those contained in the standard master
repurchase agreement as published by the Bond Market Association. The agreement
for one repurchase facility includes provisions that 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
or (v) 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.

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.

47

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Recent Developments

On
April 20, 2007, we announced entering into a definitive agreement to acquire
Deerfield & Company LLC, or Deerfield, the parent of our Manager, from
Triarc Companies, Inc., or Triarc, which owns a controlling interest in
Deerfield, and Deerfields other members. The transaction is scheduled to
be completed in the next several business days because the stockholders approved
the issuance of shares necessary to complete the merger at the Companys
annual meeting held on August 9, 2007.

The
definitive Agreement and Plan of Merger, dated as of April 19, 2007 (the
Merger Agreement), was entered into by and among the Company, DFR Merger
Company (Buyer Sub), LLC, an Illinois limited liability company and a
wholly-owned subsidiary of Deerfield Triarc Capital LLC formed in April of 2007
for the purpose of effecting the transactions contemplated by the Merger
Agreement, Deerfield, and Triarc as the sellers representative. Simultaneously
with the execution of the Merger Agreement, the Company also entered into a
Registration Rights Agreement, dated as of April 19, 2007 (the Registration
Rights Agreement), with Triarc Deerfield Holdings, LLC (a subsidiary of
Triarc) and Triarc as the sellers representative.

Set
forth below are brief descriptions of the material terms and conditions of each
of the Merger Agreement and the Registration Rights Agreement.

MERGER AGREEMENT

Upon
the terms and subject to the conditions set forth in the Merger Agreement, at
the contemplated effective time, Buyer Sub will be merged with and into
Deerfield, the result of which will be that Deerfield will become an indirect
wholly-owned subsidiary of the Company (the Merger).

The
aggregate consideration to be paid by Company in connection with the Merger is
approximately $290.0 million, consisting of $145.0 million in cash and
approximately 9.6 million shares of Company common stock (which had a value of
approximately $145.0 million based on the average of the closing price of the
Companys common stock on the New York Stock Exchange over the 10 trading days
prior to and including April 18, 2007), subject to various adjustments,
including the deduction of an amount equal to the principal amount of debt
outstanding of Deerfield (together with all accrued and unpaid interest).

The
Merger Agreement also permits Deerfield, prior to the effective time of the
Merger, to distribute to its members up to approximately $6.0 million of cash
(plus amounts for income taxes relating to pre-closing periods), and requires
Deerfield to distribute to its members, prior to the effective time of the
Merger, 329,692 shares of Company common stock currently owned by Deerfield. In
order to fund the cash portion of the consideration and our expenses associated
with the Merger, we and our subsidiaries intend to incur $155.0 million in debt
financing.

Approximately
2.5 million shares of the Company common stock being issued pursuant to the
Merger Agreement will be deposited into an escrow account (the Escrow Fund)
and will be available to satisfy the post-closing indemnification and other
payment obligations of the pre-closing members of Deerfield. Subject to certain
limitations and qualifications, the Merger Agreement contains customary
indemnification provisions for the benefit of the Company as well as the
pre-closing members of Deerfield. Barring any outstanding indemnification
claims, the Escrow Fund will terminate one year from the closing date of the
Merger, and any remaining shares of Company common stock and other assets in
the Escrow Fund will be released to the pre-closing members of Deerfield,
including Triarc.

The
Company and Buyer Sub, on the one hand, and Deerfield and Triarc (as the
sellers representative), on the other hand, have made customary
representations, warranties, covenants and agreements to each other in the
Merger Agreement. The completion of the Merger is subject to the satisfaction
or waiver of conditions customary to transactions of this type including, among
others:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the
 expiration or termination of the applicable waiting period under the
 Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which
 condition has already been satisfied;                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | the approval
 of the issuance of 9,635,192 shares of Company common stock in the Merger by
 the Companys stockholders representing (1) a majority of the votes cast on
 the proposal (provided that the total votes cast on the proposal represent a majority
 of the outstanding shares of our common stock entitled to vote on the
 proposal) and (2) a majority of the votes cast by stockholders not affiliated
 with Deerfield or Triarc, which condition has already been satisfied;
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | the Company
 having obtained debt financing for the aggregate cash consideration payable
 in the Merger and related fees and expenses;                                                                                                                                                                                                                                                                                                                                                     

48

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|  |                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Deerfield
 having obtained consents from the requisite number of its clients with
 respect to the Merger, which condition has already been satisfied;                        
|  |                                                                                                                                                                              
| | the resale
 registration statement contemplated by the Registration Rights Agreement
 having been declared effective by the SEC, which condition has already been
 satisfied;
|  |                                                                                                                                                                              
| | the Company
 having furnished to Deerfield the requisite REIT qualification opinion; and                                                                                     
|  |                                                                                                                                                                              
| | the
 satisfaction by Triarc of certain put rights held by certain Deerfield
 members.                                                                                        

The
closing of the Merger is expected to occur in the next several business days
because the stockholders approved the issuance of shares necessary to complete
the Merger at the Companys annual meeting held on August 9, 2007. When the
transaction closes, the Company will discontinue the use of Triarc in its
name.

The
Merger Agreement also contains certain customary termination rights for both
the Company and Deerfield, including the right of either party to terminate the
Merger Agreement if the closing of the Merger has not occurred by October 19,
2007.

We
and our subsidiaries will incur substantial indebtedness to complete the
Merger. We intend to enter into a senior secured term credit facility with UBS
Loan Finance LLC, UBS Securities LLC, Bank of America, N.A. and Bank of America
Securities LLC, providing for $155.0 million of financing to us and our subsidiaries.
The amount borrowed under this credit facility is expected to be payable in
full on a date five years from the closing date. The proceeds of this
indebtedness will be used to pay the cash portion of the Merger consideration
and related fees and expenses.

REGISTRATION
RIGHTS AGREEMENT

The
Registration Rights Agreement, which was entered into by us, Triarc Deerfield
Holdings, LLC and Triarc, as the sellers representative (but may be
subsequently entered into by any and all of the other members of Deerfield),
provides, among other things, that the we must file, prior to the closing date
of the Merger, a registration statement to permit resales of the shares of our
common stock being issued pursuant to the Merger Agreement. We must use
commercially reasonable efforts to keep the registration statement continuously
effective (subject to specified limitations) for a period of two years or until
such shares of our common stock cease to be registrable securities under the
Registration Rights Agreement. In addition, the Registration Rights Agreement
grants additional demand and piggyback registration rights to holders of
shares of our common stock issued in connection with the Merger that continue
to be registrable securities under the Registration Rights Agreement after the
resale registration statement described above is no longer required to be kept
effective.

MIDDLE
MARKET LOAN CLO

On
July 17, 2007 we announced the closing of DFR Middle Market CLO Ltd. (MM CLO),
a $300.0 million middle market collateralized loan obligation (CLO)
transaction. The securities issued by MM CLO consist of $250.0 million of
investment grade notes and $50.0 million of subordinated notes. We purchased
all of the BBB/Baa2 rated and subordinated notes, for a total investment of
$69.0 million. The $231.0 million investment grade securities issued by MM CLO
that were sold to third parties are rated AAA/Aaa through A/A2 and have a
weighted-average interest rate of three month Libor plus 68.9 basis points. The
notes pay interest on a quarterly basis. We will consolidate MM CLOs assets
and liabilities for financial reporting purposes. MM CLO is a consolidated
bankruptcy remote subsidiary and the debt holders have recourse only to the
collateral of MM CLO. Our Manager will serve as the Collateral Manager for the
MM CLO.

DIVIDEND

On
July 24, 2007, we declared a cash dividend of $0.42 per share on our common
stock for the second quarter of 2007. The record date for the cash dividend was
August 7, 2007, and the payment date will be August 28, 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 overnight investments and repurchase agreement borrowings.  Un-pledged RMBS as of June 30, 2007 totaled $189.4 million. 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 July 31, 2007 un-pledged RMBS increased to $229.4 million. We have established 18 repurchase agreement borrowing relationships with various financial institutions and other lenders. We currently have balances outstanding with 11 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.

ANNUAL MEETING OF STOCKHOLDERS

The Annual Meeting of Stockholders of Deerfield Triarc Capital Corp. was held on August 9, 2007. The matters voted upon and approved at the meeting are as follows:

- the issuance of 9,635,192 shares of our common stock to the members of Deerfield as part of the consideration for the merger of
Merger Sub with and into Deerfield pursuant to the Merger Agreement, which will enable us to complete the Merger;
- the re-election of Robert B. Machinist and Jonathan W. Trutter as Class III directors of DFR to serve on our Board for a
three-year term or until their successors have been duly elected and qualified;
- the ratification of the appointment
    by our audit committee of Deloitte & Touche LLP to serve as DFRs independent
auditors for the fiscal year ending December 31, 2007; and
- the approval of an amendment and restatement of the Deerfield Triarc Capital Corp. Stock Incentive Plan to among other things
increase the shares of common stock reserved for issuance under the plan from 2,692,313 to 6,136,725.

49

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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:

|                                                            |  |                                 |        |  
|----------------------------------------------------------- |  | ------------------------------- | ------ | -
|                                                            |  | Six months ended
 June 30, 2007 |       
|                                                            |  |                                 |       
|                                                            |  | (In thousands)                  |       
|                                                            |  |                                 |       
|GAAP net
 income                                            |  | $                               | 37,021 |  
|                                                            |  |                                 |        |  
|Adjustments
 to GAAP net income:                            |  |                                 |        |  
|Difference in rate of amortization and
 accretion           |  |                                 | 2,451  |  
|Interest on non-accrual loans                               |  |                                 | 586    |  
|Amortization of terminated swaps                            |  |                                 | 138    |  
|Amortization of financing element in
 Pinetree swap         |  |                                 | (82    | )
|Hedge ineffectiveness                                       |  |                                 | (284   | )
|Provision for loan losses (1)                               |  |                                 | 1,800  |  
|Stock and options grant                                     |  |                                 | 178    |  
|Organization costs                                          |  |                                 | (4     | )
|Non-allowable deduction for meals and
 entertainment        |  |                                 | 72     |  
|Security basis difference recognized upon
 sale             |  |                                 | 75     |  
|Gain on intercompany sale eliminated for
 GAAP              |  |                                 | (24    | )
|Unrealized impairment of available-for-sale
 securities     |  |                                 | 202    |  
|Other unrealized (gain) loss                                |  |                                 | 2,548  |  
|Exclusion of Deerfield Triarc TRS Holdings,
 LLC net income |  |                                 | (315   | )
|                                                            |  |                                 |        |  
|Net
 adjustments to GAAP net income                         |  |                                 | 7,341  |  
|                                                            |  |                                 |        |  
|Estimated
 REIT taxable income                              |  | $                               | 44,362 |  
|                                                            |  |                                 |        |  

|    |                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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 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 June 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 June 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, 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.

50

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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 June 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.

In
order to mitigate our interest rate exposure, we have entered into 192
designated interest rate swap hedging transactions as of June 30, 2007. The
following table summarizes the expiration dates of these contracts and their
notional amounts:

|                    |  |                  |           | 
|------------------- |  | ---------------- | --------- | 
|Year of
 Expiration |  | Notional
 Amount |          
|                    |  |                  |          
|                    |  | (In thousands)   |          
|2007                |  | $                | 60,000    | 
|2008                |  |                  | 1,948,900 | 
|2009                |  |                  | 1,137,000 | 
|2010                |  |                  | 1,544,200 | 
|2011                |  |                  | 759,000   | 
|2012 - 2017         |  |                  | 747,000   | 
|                    |  |                  |           | 
|Total               |  | $                | 6,196,100 | 
|                    |  |                  |           | 

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.

51

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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 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.

52

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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 $7.6 billion and trading investments of
$187.4 million) and interest rate swaps and floors as of June 30, 2007,
assuming rates instantaneously fall 100 basis points and rise 100 basis points
(the below table excludes the ABS available-for-sale securities held in CDO and
Loans held in CLO as our equity at risk in these entities limited to is $12.0
million and $24.0 million, respectively):

|                                                           |  |                                        |   |           |   |                                        |   |           |  |  |   |           |    | 
|---------------------------------------------------------- |  | -------------------------------------- | - | --------- | - | -------------------------------------- | - | --------- |  |  | - | --------- | -- | 
|                                                           |  | Interest Rates
 Fall 100
 Basis Points |   | Unchanged |   | Interest Rates
 Rise 100
 Basis Points |  
|                                                           |  |                                        |   |           |   |                                        |  
|                                                           |  | (In
thousands)                         |  
|                                                           |  |                                        |  
|RMBS                                                       |  |                                        |   |           |   |                                        |   |           |  | 
|                                                          
|Fair value
 (1)                                            |  |                                        | $ | 7,916,555 |   |                                        | $ | 7,753,255 |  |  | $ | 7,544,899 |    | 
|Change in
 fair value                                      |  |                                        | $ | 163,300   |   |                                        |   |           |  |  | $ | (208,356  | )  | 
|Change as a
 percent of fair value                         |  |                                        |   | 2.11      | % |                                        |   |           |  |  |   | (2.69     | )% | 
|Designated and Undesignated Interest Rate Swaps and Floors |  |                                        |   |           |   |                                        |   |           |  |  |   |           |    | 
|Fair value                                                 |  |                                        | $ | (91,027   | ) |                                        | $ | 65,441    |  |  | $ | 212,057   |    | 
|Change in
 fair value                                      |  |                                        | $ | (156,468  | ) |                                        |   |           |  |  | $ | 146,616   |    | 
|Net Portfolio Impact                                       |  |                                        | $ | 6,832     |   |                                        |   |           |  |  | $ | (61,740   | )  | 




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

53

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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 currently believe would be
applicable to our business and relating to the Merger. Because the Merger is
not expected to close until the several business days following the August 9,
2007 stockholders approval of the issuance of shares necessary to complete the
Merger at the Companys annual meeting, during which time significant changes
could occur with respect to Deerfield or us, new and significant risks may
arise before the closing that are not identified in this section.

The
failure to fulfill all conditions precedent to the Merger may prevent the
consummation of the Merger, which would cause us to receive little or no
benefit from the substantial costs we have incurred in connection with the
Merger, or may lead to a change in the terms of the Merger Agreement that may
be unfavorable to us.

The
obligation of the parties to complete the Merger is subject to the satisfaction
or waiver of numerous conditions. If one or more of the conditions to the
completion of the Merger are not met, then the party to the Merger Agreement
entitled to the benefit of such condition may elect not to proceed with the
Merger or may instead waive any or all conditions precedent. Accordingly, the
Merger may not be consummated or, if consummated, the final terms of the Merger
may be less favorable to us than the terms in the current version of the Merger
Agreement.

Our
existing stockholders may be substantially diluted by the issuance of shares of
our common stock in the Merger and this issuance may depress the market price
of our common stock.

In
determining whether to vote in favor of the issuance of approximately 9,635,192
shares of our common stock to enable us to complete the Merger, our
stockholders should consider that they are subject to the risk of substantial
dilution of their interests which will result from the issuance of such shares,
and that as a result of this issuance, Deerfields members will receive
approximately 18.6% of our outstanding common stock as of June 30, 2007.
Accordingly, our current stockholders ownership interest would decrease by
approximately 15.7%. This economic ownership dilution could reduce the market
price of our common stock unless and until we realize improved economic
performance as a result of the Merger. If we do not achieve the economic benefits
of the Merger that we seek, our stockholders could suffer substantial dilution
without corresponding value.

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We
have always been externally managed and we may not be able to successfully
transition to an internally managed company.

We
have always been externally managed and have not had our own management
personnel. With the exception of Mr. Sachs, Mr. Roberts, Ms. Horn and other
professionals on DCMs investment grade corporate debt team, we expect
substantially all of the key members of DCMs management team who are currently
providing services to us will remain employed by DCM following the Merger, and
will continue to provide services to us through a services agreement with DCM.
Following the Merger these individuals will be employees of DCM, our subsidiary
following the Merger, or us, and we will be responsible for designing and
implementing our own compensation structure. We may not be successful when
designing and implementing our own compensation structure and our management team
may not be satisfied with the new arrangement. If we do not successfully
transition to an internally managed company and otherwise successfully
integrate Deerfields operations, our operations and financial performance
could be significantly damaged.

We
may not uncover all risks associated with acquiring Deerfield and significant
liabilities may arise after completion of the Merger.

There
may be risks that we fail or are unable to discover in the course of performing
our due diligence in connection with the completion of the acquisition. All of
Deerfields liabilities will remain intact after the Merger, whether
pre-existing or contingent, as a matter of law. While we have tried to minimize
this risk by conducting due diligence, there could be numerous liabilities that
we failed to identify. Any significant liability that may arise or be
discovered after the closing may harm our business, financial condition,
results of operations and prospects. Further, any rights to indemnification we
have are subject to a one-year survival period and other limitations, and the
shares held in escrow could be insufficient to satisfy any claims we may have.

If
the Merger is not completed, we will have nonetheless incurred substantial
costs, and our financial results and operations and the market price of our
common stock may be adversely affected.

We
have incurred and expect to continue to incur substantial costs in connection
with the Merger. 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
Merger. If the Merger is not completed, we will receive little or no benefit
from these costs. In addition, if the Merger 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.

We
will need to incur substantial indebtedness to consummate the Merger and our
leverage could adversely affect our financial health.

As
of March 31, 2007, our total long-term outstanding debt on a consolidated basis
was approximately $972.2 million. In order to complete the Merger, we plan to
incur an additional $155.0 million of indebtedness, and will also assume debt
of Deerfield outstanding as of March 31, 2007 in the amount of $3.6 million.
Our indebtedness could adversely affect our financial health and business and
future operations by, among other things:

| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | making it
 more difficult for us to satisfy our obligations, including with respect to
 our indebtedness;                                                                   
| |   |                                                                                                                                                                             
| |  | increasing
 our vulnerability to adverse economic and industry conditions;                                                                                                  
| |   |                                                                                                                                                                             
| |  | limiting our
 ability to obtain any additional financing we may need to operate, develop
 and expand our business;                                                          
| |   |                                                                                                                                                                             
| |  | requiring us
 to dedicate a substantial portion of any cash flows to service our debt,
 which reduces our funds available for operations and future business
 opportunities;
| |   |                                                                                                                                                                             
| |  | potentially
 making us more highly leveraged than our competitors, which could potentially
 decrease our ability to compete in our industry;                                
| |   |                                                                                                                                                                             
| |  | increasing
 our exposure to risks of interest rate fluctuations as some of our borrowings
 are at variable rates of interest; and                                           
| |   |                                                                                                                                                                             
| |  | limiting our
 flexibility in planning for, or reacting to, changes in our business, and the
 industry in which we operate.                                                  

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Our
ability to make payments on our debt will depend upon our future operating
performance, which is subject to general economic and competitive conditions
and to financial, business and other factors, many of which we cannot control.
If the cash flows from our operations are insufficient to service our debt
obligations, we may take actions, such as delaying or reducing capital
expenditures, attempting to restructure or refinance our debt, selling assets
or operations or seeking additional equity capital. Any or all of these actions
may not be sufficient to allow us to service our debt obligations. Further, we
may be unable to take any of these actions on satisfactory terms, in a timely
manner or at all. Our failure to generate sufficient funds to pay our debts or
to successfully undertake any of these actions could, among other things,
materially adversely affect the market value of our common stock and our
ability to repay our obligations under our indebtedness.

We
anticipate that the terms of our proposed senior secured term loan facility
that we will obtain to assist with the funding of the cash portion of the
Merger consideration will impose operating and financial restrictions, which
may prevent us from raising additional capital and capitalizing on certain
business opportunities.

We
expect that the terms of our new credit facility that we will enter into in
connection with the Merger will require us to comply with certain financial
covenants, including a maximum senior leverage ratio, a minimum interest
coverage ratio and a minimum tangible net worth. The proposed terms of our new
credit facility also include certain covenants restricting or limiting our
ability to, among other things:

| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | dispose of
 non-financial assets other than in the ordinary course of business;                                                                 
| |   |                                                                                                                                                 
| |  | merge or
 consolidate with any entity or make an acquisition;                                                                                   
| |   |                                                                                                                                                 
| |  | declare
 dividends (subject to maintaining our status as a REIT) or redeem or
 repurchase capital stock or make other stockholder distributions;
| |   |                                                                                                                                                 
| |  | prepay,
 redeem or purchase certain debt;                                                                                                       
| |   |                                                                                                                                                 
| |  | make loans
 to or invest in certain subsidiaries;                                                                                               
| |   |                                                                                                                                                 
| |  | create
 additional liens;                                                                                                                       
| |   |                                                                                                                                                 
| |  | enter into
 transactions with affiliates;                                                                                                       
| |   |                                                                                                                                                 
| |  | modify or
 waive our organizational documents; or                                                                                               
| |   |                                                                                                                                                 
| |  | change our
 fiscal year.                                                                                                                        

These
covenants may adversely affect our ability to finance future operations or
limit our ability to pursue certain business opportunities or take certain
corporate actions. The covenants may also restrict our flexibility in planning
for changes in our business and the industry and make us more vulnerable to
economic downturns and adverse developments. The documentation governing the
credit facility has not been finalized and, accordingly, the actual terms may
further restrict our operation of our business.

Following
completion of the Merger, our performance will be subject to significant risks
that are associated with DCMs business to which we have not historically been
subject.

Historically
we have been a financial company that invests primarily in mortgage-backed
securities and other real estate investments, as well as corporate investments.
We generate risk-adjusted spread-based income from our investment portfolio.
DCM is a Chicago based, SEC-registered asset manager that, as of May 1, 2007,
managed approximately $14.2 billion of client funds. DCM generates fee-based
revenue from the management of these client funds. Accordingly, while the
completion of the Merger would significantly diversify our business, it will
also subject us to significant new risks and uncertainties associated with
DCMs business to which we have not historically been subject, which are
described in this proxy statement.

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We
may in the future issue shares of additional capital stock, to raise proceeds
for a wide variety of purposes, which could dilute and therefore reduce the
value of our existing outstanding capital stock.

We
may issue shares of our capital stock, either in public offerings, private
transactions or both, to raise additional capital. Such issuances could
substantially dilute the stock of our existing stockholders without any
corresponding increase in value. We may raise capital for a wide variety of
purposes, such as buying real estate assets to help our continued qualification
as a REIT, implementing our business plan in connection with the Merger and
repayment of indebtedness. Our management will have broad discretion over how
we use the proceeds of any capital raise. We may not be able to raise capital
at the time or times that we wish, in the amounts we wish, or on the terms or
at the prices we consider favorable to us and our stockholders. We may use the
proceeds of any future offering in ways in which you disagree and that yield
less than our expected return, or no return at all, which could result in
substantial losses to us.

The
income from Deerfield and DCM will be subject to federal, state and local
income tax, and our ownership of Deerfield and DCM may jeopardize our REIT
qualification and may limit our ability to conduct our investment strategy.

Deerfields
income consists solely of the income earned by DCM, which consists primarily of
advisory fee income. That advisory fee income is not qualifying income for
purposes of either the 75% or 95% gross income test applicable to REITs. A
REIT, however, may own stock and securities in one or more TRSs that may earn
income that would not be qualifying income if earned directly by the parent
REIT. Consequently, following the Merger, we will hold our ownership interest
in Deerfield and DCM through domestic TRSs. Overall, no more than 20% of the
value of a REITs assets may consist of stock or securities of one or more
TRSs. A TRS pays federal, state and local income tax at regular corporate rates
on any income it earns. In addition, the TRS rules limit the deductibility of
interest paid or accrued by a TRS to its parent REIT to assure that the TRS is
subject to an appropriate level of corporate taxation. The rules also impose a
100% excise tax on certain transactions between a TRS and its parent REIT that
are not conducted on an arms-length basis.

Because
we will hold our ownership interest in Deerfield and DCM through domestic TRSs,
the income earned by Deerfield and DCM will be fully subject to federal, state
and local income tax. Moreover, the value of our investment in the stock and
securities of our TRSs may not, in the aggregate, exceed 20% of the value of
our total assets. In addition, our income from our TRSs, combined with our
other nonqualifying income for purposes of the 75% gross income test, may not
exceed 25% of our gross income on an annual basis. Accordingly, our ownership
of Deerfield and DCM may limit our ability to invest in other TRSs and other
assets that produce nonqualifying income, even though such investments would
otherwise have been in accordance with our investment strategy.

DCMs
revenues fluctuate based on the amount and/or value of client assets, which
could decrease for various reasons including investment losses, withdrawal of
capital, or both.

DCMs
success depends on its ability to earn investment advisory fees from the client
accounts it manages. Such fees generally consist of payments based on the
amount of assets in the account (management fees), and on the profits earned by
the account or the returns to certain investors in the accounts (performance
fees). If there is a reduction in an accounts assets, there will be a
corresponding reduction in DCMs management fees from the account, and a likely
reduction in DCMs performance fees (if any) relating to the account, since the
smaller the accounts asset base the smaller will be the potential profits
earned by the account. There could be a reduction in an accounts assets as the
result of investment losses in the account, the withdrawal by investors of
their capital in the account, or both.

Investors
in the accounts managed by DCM have various types of withdrawal rights, ranging
from the right of investors in separate accounts to withdraw any or all of
their capital on a daily basis, the right of investors in hedge funds to
withdraw their capital on a monthly or quarterly basis, and the right of
investors in CDOs to terminate the CDO in specified situations. Investors in
hedge funds and managed accounts might withdraw capital for many reasons,
including their dissatisfaction with the accounts performance, adverse
publicity regarding DCM, DCMs loss of key personnel, errors in reporting to
investors account values or account performance, other matters resulting from
problems in DCMs systems technology, investors desire to invest their capital
elsewhere, and their need (in the case of investors that are themselves
investment funds) for the capital to fund withdrawals by their investors. DCM
could experience a major loss of account assets, and thus advisory fee revenue,
at any time.

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Poor
investment performance could lead to a loss of clients and a decline in DCMs
revenues.

Investment
performance is a key factor for the retention of client assets, the growth of
DCMs assets under management and the generation of management fee revenue.
Poor investment performance could impair DCMs revenues and growth because:

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | existing
 clients might withdraw funds in favor of better performing products, which
 would result in lower investment management fees for DCM;
| |   |                                                                                                                                                
| |  | DCMs
 subordinate management fees for a CDO may be deferred;                                                                                  
| |   |                                                                                                                                                
| |  | DCMs
 ability to attract funds from existing and new clients might diminish; and                                                              
| |   |                                                                                                                                                
| |  | DCM might
 earn minimal or no performance fees.                                                                                                

The
failure of DCMs investment products to perform well both on an absolute basis
and in relation to competing products, therefore, could have a material adverse
effect on DCMs business.

DCM
derives much of its revenues from contracts that may be terminated on short
notice.

DCM
derives a substantial portion of its revenues from investment management
agreements with accounts that generally have the right to remove DCM as the
investment advisor of the account and replace it with a substitute investment
advisor. Some of these investment management agreements may be terminated for
various reasons, including failure to follow the accounts investment
guidelines, fraud, breach of fiduciary duty and gross negligence, or,
alternatively, may not be renewed.

With
respect to DCMs agreements with some of the CDOs it manages, DCM can be
removed without cause by investors that hold a specified amount of the
securities issued by the CDO. All of DCMs agreements with CDOs allow investors
that hold a specified amount of securities issued by the CDO to remove DCM for
cause, which typically includes DCMs violation of the management agreement
or the CDOs indenture, DCMs breach of its representations and warranties
under the agreement, DCMs bankruptcy or insolvency, DCMs fraud or a criminal
offense by DCM or its employees, and the failure of certain of the CDOs
performance tests. These cause provisions may be triggered from time to time
with respect to our CDOs, and as a result DCM could be removed as the
investment manager of such CDOs.

Although
DCM is expected to remain as the investment advisor for each of its clients,
the Merger, if consummated, will constitute a change of control of DCM and thus
result in a deemed assignment of DCMs advisory contracts under the Investment
Advisers Act. In addition, certain of DCMs advisory contracts require the
explicit consent of the client, the underlying investors in the client, or
other third parties to the assignment of the advisory contract that results
from the Merger. As the Merger Agreement requires that DCM obtain consents to
the assignment or deemed assignment of advisory contracts from clients
constituting at least 80% of its assets under management, we could be obligated
to complete the Merger even if clients constituting up to 20% of DCMs assets
under management determine not to consent to the assignment or deemed
assignment of the advisory contracts. Under such circumstances, we may lose a
portion of DCMs expected advisory fees, which we may not be able to replace.

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DCM
could lose client assets as the result of the loss of key DCM personnel.

DCM
generally assigns the management of its investment products to specific teams,
consisting of DCM portfolio management and other personnel. The loss of a
particular member or members of such a teamfor example, because of resignation
or retirementcould cause investors in the product to withdraw, to the extent
they have withdrawal rights, all or a portion of their investment in the
product, and adversely affect the marketing of the product to new investors and
the products performance. In the case of certain CDOs, DCM can be removed as
investment advisor upon its loss of specified key employees. In the case of
certain other accounts, investors have the right to immediately redeem their
investments upon DCMs loss of specified key employees. In addition to the loss
of specific portfolio management team members, the loss of one or more members
of DCMs senior management involved in supervising the portfolio teams could
have similar adverse effects on DCMs investment products. In connection with
the exercise by certain affiliates of Mr. Sachs of their right under
Deerfields existing operating agreement to require Triarc to purchase for cash
all of their membership interests in Deerfield simultaneously with the
completion of the Merger, on May 25, 2007, Mr. Sachs tendered his
resignation as a director and as chairman and chief executive officer of
Deerfield and its subsidiaries, effective upon completion of the Merger.
Furthermore, if the proposed acquisition by an affiliate of Mr. Roberts of
certain assets of DCM related to a contemplated derivative products company is
completed, Mr. Roberts, Ms. Horn and other professionals on DCMs investment
grade corporate debt team will leave their positions at DCM. The Merger might
also cause DCM to lose one or more other key employees, which may result in the
loss of existing clients.

DCM
may need to offer new investment strategies and products in order to continue
to generate revenue.

The
segments of the asset management industry in which DCM operates are subject to
rapid change. Investment strategies and products that had historically been
attractive to investors may lose their appeal for various reasons. Thus,
strategies and products that have generated fee revenue for DCM in the past may
fail to do so in the future. In such case, DCM would have to develop new
strategies and products in order to retain investors or replace withdrawing
investors with new investors.

It
could be both expensive and difficult for DCM to develop new strategies and
products, and DCM may not be successful in this regard. In addition,
alternative asset management products represent a substantially smaller segment
of the overall asset management industry than traditional asset management
products (such as many corporate bond funds). DCMs inability to expand its
offerings beyond alternative asset management products could inhibit its growth
and harm its competitive position in the investment management industry.

Changes
in the fixed income markets could adversely affect DCM.

DCMs
success depends largely on the attractiveness to institutional investors of
investing in the fixed income markets, and changes in those markets could
significantly reduce the appeal of DCMs investment products to such investors.
Such changes could include increased volatility in the prices of fixed income
instruments, periods of illiquidity in the fixed income trading markets,
changes in the taxation of fixed income instruments, significant changes in the
spreads in the fixed income markets (the amount by which the yields on particular
fixed income instruments exceed the yields on benchmark U.S. Treasury
securities), and the lack of arbitrage opportunities between U.S. Treasury
securities and their related instruments (such as interest rate swap and
futures contracts).

The
fixed income markets can be highly volatile, and the prices of fixed income
instruments may fluctuate for many reasons beyond DCMs control or ability to
anticipate, including economic and political events and terrorism acts. Any adverse
changes in the fixed income markets could reduce DCMs revenues.

The
narrowing of CDO spreads could make it difficult for DCM to launch new CDOs.

It
is important for DCM to be able to launch new CDO products from time to time,
both to expand its CDO activities (which are a major part of DCMs business)
and to replace existing CDOs as they are terminated or mature. The ability to
launch new CDOs is dependent on the amount by which the interest earned on the
collateral held by the CDO (such as bank loans or asset-backed securities)
exceeds the interest payable by the CDO on the debt obligations it issues to
investors, as well as other factors. If these spreads are not wide enough,
the proposed CDO will not be attractive to investors and thus cannot be
launched. There may be sustained periods when such spreads will not be
sufficient for DCM to launch new CDO products, which could impair DCMs
business.

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DCM
could incur losses due to trading errors.

DCM
could make errors in placing transaction orders for client accounts, such as
purchasing a security for an account whose investment guidelines prohibit the
account from holding the security, purchasing an unintended amount of the
security, or placing a buy order when DCM intended to place a sell order. If
the transaction resulted in a loss for the account, DCM might be required to
reimburse the account for the loss, or DCM might choose to do so for client
relations purposes. Such reimbursements could be substantial.

DCM
could lose management fee income from its CDOs because of payment defaults by
issuers of collateral held by the CDOs or the triggering of certain structural
protections built into CDOs.

Under
the investment management agreements between DCM and the CDOs it manages, DCMs
management fee from the CDO is generally subject to a waterfall structure,
under which DCM will not receive all or a portion of its fees if, among other
things, the CDO does not have sufficient cash flows from its underlying collateral
(such as bank loans or asset-backed securities) to pay the required interest on
the notes it has issued to investors and certain expenses. This could occur if
there are defaults by issuers of the collateral on their payments of principal
or interest relating to the collateral. In that event, DCMs management fees
would be deferred until funds are available to pay the fees, if such funds
become available. In addition, many CDOs have structural provisions meant to
protect investors from deterioration in the credit quality of the underlying
collateral pool. If those provisions are triggered, then certain portions of
DCMs management fees may be deferred indefinitely.

DCM
may be unable to increase its assets under management in certain of its investment
vehicles, or it may have to reduce such assets, because of capacity
constraints.

Some
of DCMs investment vehicles are limited in the amount of client assets they
can accommodate by the amount of liquidity in the instruments traded by the
vehicles, the arbitrage opportunities available in those instruments, or other
factors. DCM may thus manage investment vehicles that are relatively successful
but that cannot accept additional capital because of such constraints. In
addition, DCM might have to reduce the amount of assets managed in investment
vehicles that face capacity constraints. Changes in the fixed income markets
could materially reduce capacity, such as an increase in the number of asset
managers using the same or similar strategies as DCM.

The
fixed income investment management market is highly competitive and DCM may
lose client assets due to competition from other asset managers that have
greater resources than DCM or that are able to offer services and products at
more competitive prices.

The
alternative asset management industry is very competitive. Many firms offer
similar and additional investment management products and services to the same
types of clients that DCM targets. DCM currently focuses almost exclusively on
fixed income securities and related financial instruments in managing client
accounts. It has limited experience in equity securities. This is in contrast
to numerous other asset managers with comparable assets under management, which
have significant background and experience in both the equity and debt markets
and thus are more diversified.

In
addition, many of DCMs competitors have or may in the future develop greater
financial and other resources, more extensive distribution capabilities, more
effective marketing strategies, more attractive investment vehicle structures
and broader name recognition. DCMs competitors may be able to use these
resources and capabilities to place DCM at a competitive disadvantage in
retaining assets under management and adding new assets. Also, DCM may be at a
disadvantage in competing with other asset managers that are subject to less
regulation and are thus less restricted in their client solicitation and
portfolio management activities, and DCM may be competing for non-U.S. clients
with asset managers that are based in the jurisdiction of the prospective
clients domicile.

Because
barriers to entry into the alternative asset management business are relatively
low, DCM may face increased competition from many new entrants into DCMs
relatively limited market of providing fixed income asset management services
to institutional clients.

Additionally,
if other asset managers offer services and products at more competitive prices
than DCM, DCM may not be able to maintain its current fee structure. Although
DCMs investment management fees vary somewhat from product to product,
historically DCM has competed primarily on the performance of its products and
not on the level of its investment management fees relative to those of its
competitors. In recent years, however, despite the fact that alternative asset
managers typically charge higher fees than traditional managers, particularly
with respect to hedge funds and similar products, there has been a trend toward
lower fees in the investment management industry generally.

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In
order to maintain its fee structure in a competitive environment, DCM must be
able to continue to provide clients with investment returns and service that make
investors willing to pay DCMs fees. DCM might not succeed in providing
investment returns and service that will allow it to maintain its current fee
structure. Fee reductions on existing or future business could impair DCMs
profit margins and results of operations.

DCM
could lose client assets as the result of adverse publicity.

Asset
managers such as DCM can be particularly vulnerable to losing clients because
of adverse publicity. Asset managers are generally regarded as fiduciaries, and
if they fail to adhere at all times to a high level of honesty, fair dealing
and professionalism they can incur large and rapid losses of client assets.
Accordingly, a relatively small perceived lapse in this regard, particularly if
it resulted in a regulatory investigation or enforcement proceeding, could
materially harm DCMs business. In February 2007, the staff of the SEC asked
DCM to voluntarily provide information to the staff in connection with its
ongoing informal inquiry concerning practices in the markets for Collateralized
Mortgage Obligations, Real Estate Mortgage Investment Conduits, and re-REMIC.
DCM provided documents in response to this request and is responding to an
additional request for information from the SEC staff. DCM intends to cooperate
in all respects with any further requests for information.

Changes
in laws, regulations or government policies affecting DCMs businesses could
limit its revenues, increase its costs of doing business and materially and
adversely affect its business.

DCMs
business is subject to extensive government regulation. This regulation is
primarily at the federal level, through regulation by the SEC under the
Investment Advisers Act of 1940, as amended, and regulation by the Commodity
Futures Trading Commission, or CFTC, under the Commodity Exchange Act, as
amended. DCM is also regulated by state regulators.

The
Investment Advisers Act imposes numerous obligations on investment advisers
including anti-fraud prohibitions, advertising and custody requirements,
disclosure obligations, compliance program duties and trading restrictions. The
CFTC regulates commodity futures and option markets and imposes numerous
obligations on the industry. DCM is registered with the CFTC as both a
commodity trading advisor and a commodity pool operator and certain of its
employees are registered with the CFTC as associated persons. DCM is also a
member of the National Futures Association, the self-regulatory organization
for the U.S. commodity futures industry, and thus subject to its regulations.

If
DCM fails to comply with applicable laws or regulations, DCM could be subject
to fines, censure, suspensions of personnel or other sanctions, including
revocation of its registration as an investment adviser, commodity trading
advisor or commodity pool operator. Changes in laws, regulations or government
policies could limit DCMs revenues, increase its costs of doing business and
materially harm its business.

DCM
Europe, a subsidiary of Deerfield, is subject to extensive government
regulation, primarily by the United Kingdom Financial Services Authority under
the U.K. Financial Services and Markets Act of 2000. Such regulation is
generally similar to the regulation governing DCM.

The
non-U.S. domiciled investment funds that DCM manages are regulated in the
jurisdiction of their domicile. Changes in the laws or government policies of
these foreign jurisdictions could limit DCMs revenues from these funds,
increase DCMs costs of doing business in these jurisdictions and materially
adversely affect DCMs business.

The
level of investor participation in DCMs products may also be affected by the
regulatory and self-regulatory requirements and restrictions applicable to
DCMs products and investors, the financial reporting requirements imposed on
DCMs investors and financial intermediaries, and the tax treatment of DCMs
products. Adverse changes in any of these areas may result in a loss of
existing investors or difficulties in attracting new investors.

DCMs
business may be harmed by it becoming a subsidiary of a REIT.

DCMs
status as a subsidiary of a REIT may make it difficult for DCM to retain
existing clients, including the underlying investors in the investment funds
DCM manages, and to attract new clients. Such clients may determine that DCM
has an incentive to favor its management of our investing over DCMs investing
for those clients, particularly if the client account is likely to compete with
us, for example with regard to the allocation of scarce investment
opportunities. While we cannot predict the effect on DCMs business that will
result from DCM becoming a wholly-owned subsidiary of a REIT, the completion of
the Merger could have an adverse effect on DCMs existing and future client
relationships and its business and revenues.

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Our
ownership of Deerfield might jeopardize our 1940 Act exemption or limit our
ability to conduct our investment strategy and thus reduce our earnings and
ability to pay dividends.

In
order to be exempt from regulation under the Investment Company Act of 1940, or
1940 Act, weand each of our subsidiariesmust qualify for one of the
exemptions from investment company status in the 1940 Act. Our ownership of
Deerfield will be held through our subsidiary Deerfield Triarc Capital LLC, or
DTC LLC, which relies on an exemption from investment company status that
generally requires it to maintain at least 55% of its assets in specified real
estate assets and at least 80% of its assets in real estate and real-estate
related securities. DTC LLCs ownership interest in Deerfield will not
constitute such a security, and thus may make it more difficult for DTC LLC to
comply with the 80% asset test. As a result, we will need to monitor carefully
DTC LLCs compliance with the 80% asset test, and the Merger may make it
difficult for DTC LLC to acquire other assets that do not qualify for the 80%
test, which might generate higher returns than Deerfield. If DTC LLC fails to
meet the 80% asset test, we could be required to materially restructure our
activities and to register as an investment company under the 1940 Act, which
could impair our operating results.

Our
status as a proprietary account of DCM might restrict DCMs management of our
investing.

For
regulatory purposes, we are likely to be considered a proprietary account of
DCM after the Merger. This may restrict DCMs management of our account, for
example with regard to crossing transactions between our account and the
account of a non-proprietary DCM client. DCM may not be successful in managing
these restrictions after the completion of the Merger.

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, reductions in
our liquidity and reductions in the value of the investments in our portfolio.

Although
our direct exposure to sub-prime mortgages is limited to our $12.0 million equity
    investment in Pinetree, 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 repurchase counterparties providing funding for
    our AAA/agency mortgage-backed securities portfolio and could cause one or
    more of our counterparties to be unwilling or unable to provide us with additional
    financing. This could potentially increase our financing costs and reduce
    our liquidity. 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
    negatively impact the value of the securities in our portfolio, thus reducing
    our net book value. Furthermore, if many of our counterparties are unwilling
    or unable to provide us with additional financing, we could be forced to
    sell our investments at a time when prices are depressed. If this were to
    occur, it could potentially have a negative impact on our 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, our liquidity 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 market. 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 with 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
    impact our ability to maintain our current level of dividends.

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ITEM 6. EXHIBITS

|                                             |                                                                                                                                                                                           
|-------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b)
 Documents filed as part of this Report:
|                                             |                                                                                                                                                                                           
|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: August
 9, 2007 |  | By: /s/
 JONATHAN W. TRUTTER                                        
|                      |  |                                                                     
|                      |  | Jonathan W.
 Trutter, Chief Executive Officer                       
|                      |  | (Principal
 Executive Officer)                                      
|                      |  |                                                                     
|Date: August
 9, 2007 |  | By: /s/
 RICHARD G. SMITH                                           
|                      |  |                                                                     
|                      |  | Richard G.
 Smith, Senior Vice President and Chief Financial Officer
|                      |  | (Principal
 Financial and Accounting Officer)                       

63

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