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

FORM 10-Q

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

For the quarterly
period ended September 30, 2006

OR

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

Commission file
number: 1-32551

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

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

6250
N. River Road, 9th Floor, Rosemont, Illinois, 60018 (773) 380-1600(Address, including zip code, and telephone number, including area code, of registrants
principal executive offices)

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days.   Yes x    No o

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

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

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

There were 51,708,181 shares of the registrants
Common Stock outstanding as of November 10, 2006.

---



DEERFIELD
TRIARC CAPITAL CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED September 30, 2006
INDEX

|                                      |                                                                                                                           |  |      | 
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|                                      |                                                                                                                           |  | Page
|Part I.
        Financial Information |                                                                                                                           |  |     
|                                      |                                                                                                                           |  |      | 
|Item 1.                               | Condensed Consolidated
        Financial Statements and Notes (Unaudited)                                                 |  |      | 
|                                      | Condensed
        Consolidated Balance Sheets  September 30, 2006 and December 31,
        2005                          |  | 3    | 
|                                      | Condensed
        Consolidated Statements of Operations  Three and Nine Months Ended
        September 30, 2006 and 2005 |  | 4    | 
|                                      | Condensed
        Consolidated Statement of Stockholders Equity  Nine Months
        Ended September 30, 2006           |  | 5    | 
|                                      | Condensed
        Consolidated Statements of Cash Flows  Nine Months Ended September
        30, 2006 and 2005           |  | 6    | 
|                                      | Notes
        to Condensed Consolidated Financial Statements                                                              |  | 7    | 
|Item 2.                               | Managements Discussion
        and Analysis of Financial Condition and Results of Operations                             |  | 20   | 
|Item 3.                               | Quantitative and Qualitative
        Disclosures About Market Risk                                                        |  | 43   | 
|Item 4.                               | Controls and Procedures                                                                                                   |  | 46   | 
|                                      |                                                                                                                           |  |      | 
|Part II.
        Other Information    |                                                                                                                           |  |     
|                                      |                                                                                                                           |  |      | 
|Item 1A.                              | Risk Factors                                                                                                              |  | 46   | 
|Item 6.                               | Exhibits                                                                                                                  |  | 46   | 
|                                      | Signatures                                                                                                                |  | 47   | 

SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

For
those statements, we claim the protection of the safe harbor for
forward-looking statements in the Reform Act. Many important factors could
affect our future results and could cause them to differ materially from those
expressed in the forward-looking statements contained herein. Such factors
include 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 adequately to hedge our holdings sensitive to changes in interest
rates; narrowing of credit spreads, thus decreasing our net interest income on
future credit investments (such as bank loans); changes in REIT qualification
requirements, making it difficult for us to conduct our investment strategy; lack
of availability of qualifying real estate-related investments; disruption in
the services we receive from 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; 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 Report on Form 10-Q as a result of
new information, future events or developments, except as required by federal
securities laws. In addition, it is our policy generally not to make any
specific projections as to future earnings, and we do not endorse any
projections regarding future performance that may be made by third
parties.  You should carefully consider
the factors referenced in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 17, 2006, including those set forth
under the sections captioned Part I  Item
1A. Risk Factors and Part II -
Item 7. Managements Discussion and Analysis of Financial Conditions and
Results of Operations as such factors that, among others, could
cause actual results to vary from our forward-looking statements.

2

---



PART
I.  FINANCIAL INFORMATION

Item 1.
Financial Statements

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

|                                                                                                                                 |  |                      |           |                     |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | --------- | ------------------- | - | --------- | -
|                                                                                                                                 |  | September 30,
  2006 |           | December 31,
  2005 |  
|                                                                                                                                 |  |                      |           |                     |   |           |  
|ASSETS                                                                                                                           |  |                      |           |                     |   |           |  
|Cash and cash
  equivalents                                                                                                      |  | $                    | 96,665    |                     | $ | 35,542    |  
|Due from broker                                                                                                                  |  |                      | 25,723    |                     |   | 191,845   |  
|Restricted cash
  and cash equivalents                                                                                           |  |                      | 26,669    |                     |   | 85,311    |  
|Available-for-sale
  securities, including $7,481,285 and $6,847,723 pledgedat fair value                                       |  |                      | 8,449,538 |                     |   | 7,285,052 |  
|Trading
  securitiesat fair value                                                                                               |  |                      | 23,391    |                     |   | 4,738     |  
|Other
  investments                                                                                                              |  |                      | 11,168    |                     |   | 12,303    |  
|Derivative
  assets                                                                                                              |  |                      | 74,377    |                     |   | 69,406    |  
|Loans held for
  sale                                                                                                            |  |                      | 282,482   |                     |   | 294,063   |  
|Loans                                                                                                                            |  |                      | 339,447   |                     |   | 158,111   |  
|Interest
  receivable                                                                                                            |  |                      | 55,006    |                     |   | 40,648    |  
|Other receivable                                                                                                                 |  |                      | 20,789    |                     |   | 16,976    |  
|Prepaid and
  other assets                                                                                                       |  |                      | 11,405    |                     |   | 9,817     |  
|                                                                                                                                 |  |                      |           |                     |   |           |  
|                                                                                                                                 |  |                      |           |                     |   |           |  
|TOTAL ASSETS                                                                                                                     |  | $                    | 9,416,660 |                     | $ | 8,203,812 |  
|                                                                                                                                 |  |                      |           |                     |   |           |  
|LIABILITIES                                                                                                                      |  |                      |           |                     |   |           |  
|Repurchase
  agreements, including $40,314 and $26,788 of accrued interest                                                       |  | $                    | 7,374,379 |                     | $ | 6,768,396 |  
|Due to broker                                                                                                                    |  |                      | 411,634   |                     |   | 77,327    |  
|Dividends
  payable                                                                                                              |  |                      |          |                     |   | 18,081    |  
|Derivative
  liabilities                                                                                                         |  |                      | 25,355    |                     |   | 6,053     |  
|Interest payable                                                                                                                 |  |                      | 24,012    |                     |   | 18,262    |  
|Long-term
        debt                                                                                                           |  |                      | 863,279   |                     |   | 615,550   |  
|Management and
  incentive fee payable                                                                                           |  |                      | 3,532     |                     |   | 2,453     |  
|Other payables                                                                                                                   |  |                      | 1,945     |                     |   | 487       |  
|                                                                                                                                 |  |                      |           |                     |   |           |  
|                                                                                                                                 |  |                      |           |                     |   |           |  
|TOTAL
  LIABILITIES                                                                                                              |  |                      | 8,704,136 |                     |   | 7,506,609 |  
|                                                                                                                                 |  |                      |           |                     |   |           |  
|                                                                                                                                 |  |                      |           |                     |   |           |  
|STOCKHOLDERS
  EQUITY                                                                                                           |  |                      |           |                     |   |           |  
|Preferred stock,
  par value $0.001:                                                                                             |  |                      |           |                     |   |           |  
|100,000,000
  shares authorized; none issued and outstanding                                                                     |  |                      |          |                     |   |          |  
|Common stock,
  par value $0.001:                                                                                                |  |                      |           |                     |   |           |  
|500,000,000 shares
  authorized; 51,708,181 and 51,659,701 shares issued and outstanding
  (including 269,232 restricted shares) |  |                      | 51        |                     |   | 51        |  
|Additional
  paid-in capital                                                                                                     |  |                      | 747,238   |                     |   | 747,919   |  
|Deferred equity
  compensation                                                                                                   |  |                      |          |                     |   | (2,397    | )
|Accumulated
  other comprehensive loss                                                                                           |  |                      | (49,746   | )                   |   | (44,703   | )
|Retained
  earnings (deficit)                                                                                                    |  |                      | 14,981    |                     |   | (3,667    | )
|                                                                                                                                 |  |                      |           |                     |   |           |  
|                                                                                                                                 |  |                      |           |                     |   |           |  
|TOTAL
  STOCKHOLDERS EQUITY                                                                                                     |  |                      | 712,524   |                     |   | 697,203   |  
|                                                                                                                                 |  |                      |           |                     |   |           |  
|                                                                                                                                 |  |                      |           |                     |   |           |  
|TOTAL
  LIABILITIES AND STOCKHOLDERS EQUITY                                                                                     |  | $                    | 9,416,660 |                     | $ | 8,203,812 |  
|                                                                                                                                 |  |                      |           |                     |   |           |  

See notes to condensed consolidated financial statements.

3

---



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

|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|------------------------------------------------------- |  | ---------------------------------- | ---------- | --------------------------------- | - | ---------- | - | ---- | ---------- |  | - | ---------- | -
|                                                        |  | Three
  months ended September 30, |            | Nine
  months ended September 30, |  
|                                                        |  |                                    |            |                                   |  
|                                                        |  | 2006                               |            | 2005                              |   | 2006       |   | 2005 |           
|                                                        |  |                                    |            |                                   |   |            |   |      |           
|REVENUES                                                |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|Net interest income:                                    |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|Interest income                                         |  | $                                  | 117,548    |                                   | $ | 74,554     |   | $    | 337,012    |  | $ | 138,939    |  
|Interest expense                                        |  |                                    | 97,839     |                                   |   | 55,839     |   |      | 273,241    |  |   | 100,587    |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|Net interest income                                     |  |                                    | 19,709     |                                   |   | 18,715     |   |      | 63,771     |  |   | 38,352     |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|EXPENSES                                                |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|Management and incentive fee expense to related
party   |  |                                    | 5,031      |                                   |   | 3,931      |   |      | 14,339     |  |   | 9,535      |  
|Professional services                                   |  |                                    | 588        |                                   |   | 314        |   |      | 1,514      |  |   | 551        |  
|Insurance expense                                       |  |                                    | 186        |                                   |   | 167        |   |      | 551        |  |   | 512        |  
|Other general and administrative expenses               |  |                                    | 378        |                                   |   | 558        |   |      | 1,326      |  |   | 1,041      |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|Total expenses                                          |  |                                    | 6,183      |                                   |   | 4,970      |   |      | 17,730     |  |   | 11,639     |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|OTHER INCOME AND GAIN (LOSS)                            |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|Net gain (loss) on available-for-sale
securities        |  |                                    | 1,780      |                                   |   | 174        |   |      | 5,087      |  |   | (829       | )
|Net gain (loss) on trading securities                   |  |                                    | 3,042      |                                   |   | (1,914     | ) |      | 1,283      |  |   | (1,411     | )
|Net gain (loss) on loans                                |  |                                    | 495        |                                   |   | 454        |   |      | 855        |  |   | (432       | )
|Net gain on derivatives                                 |  |                                    | 392        |                                   |   | 1,487      |   |      | 3,224      |  |   | 2,629      |  
|Dividend income and other net gain                      |  |                                    | 610        |                                   |   | 223        |   |      | 804        |  |   | 245        |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|Net other income and gain (loss)                        |  |                                    | 6,319      |                                   |   | 424        |   |      | 11,253     |  |   | 202        |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|Income before income tax expense                        |  |                                    | 19,845     |                                   |   | 14,169     |   |      | 57,294     |  |   | 26,915     |  
|Income tax expense                                      |  |                                    | 282        |                                   |   | 88         |   |      | 404        |  |   | 88         |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|NET INCOME                                              |  | $                                  | 19,563     |                                   | $ | 14,081     |   | $    | 56,890     |  | $ | 26,827     |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|NET INCOME PER SHAREBasic                              |  | $                                  | 0.38       |                                   | $ | 0.27       |   | $    | 1.11       |  | $ | 0.76       |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|NET INCOME PER SHAREDiluted                            |  | $                                  | 0.38       |                                   | $ | 0.27       |   | $    | 1.10       |  | $ | 0.76       |  
|                                                        |  |                                    |            |                                   |   |            |   |      |            |  |   |            |  
|WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING - Basic   |  |                                    | 51,430,136 |                                   |   | 51,255,854 |   |      | 51,406,276 |  |   | 35,213,888 |  
|                                                       
|WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING - Diluted |  |                                    | 51,615,604 |                                   |   | 51,405,806 |   |      | 51,560,210 |  |   | 35,315,932 |  

See notes to
condensed consolidated financial statements.

4

---



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

|                                                                                            |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        |         |   |   |         |   |   |         |   |   |        |  
|------------------------------------------------------------------------------------------- |  | -------------- | ------ | ------------------------------ | - | -------------------------------- |  | ------------------------------------------ | ------- | ------------------------------- | - | ------ | - | ---------------------- | ------- | - | - | ------- | - | - | ------- | - | - | ------ | -
|                                                                                            |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        |         |   |   |         |   |   |         |   |   |        |  
|                                                                                            |  | Common
  Stock |        | Additional
  Paid-in
  Capital |   | Deferred
  Equity
  Compensation |  | Accumulated
  Other
  Comprehensive
  Loss |         | Retained
  Earnings
  (Deficit) |   | Total  |   | Comprehensive
  Income |        
|                                                                                            |  |                |        |                                |   |                                  |  |                                            |        
|                                                                                            |  | Shares         |        | Par
  Value                    |   |                                  |  |                                            |         |                                 |  
|                                                                                            |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        |         |   |  
|                                                                                            |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        |         |   |   |         |   |   |         |   |   |        |  
|Balance - January 1, 2006                                                                   |  |                | 51,660 |                                | $ | 51                               |  | $                                          | 747,919 |                                 | $ | (2,397 | ) | $                      | (44,703 | ) | $ | (3,667  | ) | $ | 697,203 |   |   |        |  
|                                                                                           
|Net income                                                                                  |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        |         |   |   | 56,890  |   |   | 56,890  |   | $ | 56,890 |  
|Available-for-sale securities - fair value adjustment net of
  reclassification adjustments |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        | 3,906   |   |   |         |   |   | 3,906   |   |   | 3,906  |  
|Designated derivatives - fair value adjustment net of
reclassification
  adjustments        |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        | (8,949  | ) |   |         |   |   | (8,949  | ) |   | (8,949 | )
|                                                                                            |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        |         |   |   |         |   |   |         |   |   |        |  
|Comprehensive income                                                                        |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        |         |   |   |         |   |   |         |   | $ | 51,847 |  
|                                                                                            |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        |         |   |   |         |   |   |         |   |   |        |  
|Reclassification of deferred equity to additional paid-in
capital                           |  |                |        |                                |   |                                  |  |                                            | (2,397  | )                               |   | 2,397  |   |                        |         |   |   |         |   |   |        |   |   |        |  
|Dividends declared                                                                          |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        |         |   |   | (38,242 | ) |   | (38,242 | ) |   |        |  
|Reversal of offering costs                                                                  |  |                |        |                                |   |                                  |  |                                            | 48      |                                 |   |        |   |                        |         |   |   |         |   |   | 48      |   |   |        |  
|Share-based compensation                                                                    |  |                | 48     |                                |   |                                  |  |                                            | 1,668   |                                 |   |        |   |                        |         |   |   |         |   |   | 1,668   |   |   |        |  
|                                                                                            |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        |         |   |   |         |   |   |         |   |   |        |  
|Balance - September 30, 2006                                                                |  |                | 51,708 |                                | $ | 51                               |  | $                                          | 747,238 |                                 | $ |       |   | $                      | (49,746 | ) | $ | 14,981  |   | $ | 712,524 |   |   |        |  
|                                                                                            |  |                |        |                                |   |                                  |  |                                            |         |                                 |   |        |   |                        |         |   |   |         |   |   |         |   |   |        |  



See notes to
condensed consolidated financial statements.

5

---



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

|                                                                                                |  |                                   |            |      |   |            |  
|----------------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | ---- | - | ---------- | -
|                                                                                                |  | Nine
  months ended September 30, |           
|                                                                                                |  |                                   |           
|                                                                                                |  | 2006                              |            | 2005 |  
|                                                                                                |  |                                   |            |      |  
|CASH FLOWS
  FROM OPERATING ACTIVITIES:                                                         |  |                                   |            |      |   |            |  
|Net income                                                                                      |  | $                                 | 56,890     |      | $ | 26,827     |  
|Adjustments
  to reconcile net income to net cash provided by (used in) operating
  activities: |  |                                   |            |      |   |            |  
|Net amortization on investments, loans, and debt
issuance                                       |  |                                   | 20,171     |      |   | 10,250     |  
|Share-based compensation                                                                        |  |                                   | 1,467      |      |   | 3,102      |  
|Gain
        on undesignated derivatives                                                        |  |                                   | (292       | )    |   | (601       | )
|Hedge ineffectiveness                                                                           |  |                                   | 742        |      |   | (97        | )
|Net purchases of trading securities                                                             |  |                                   | (19,235    | )    |   | (9,402     | )
|Net (gain) loss from trading securities                                                         |  |                                   | (1,283     | )    |   | 1,411      |  
|Other-than-temporary impairment on securities
available-for-sale                                |  |                                   | 2,034      |      |   |           |  
|Unrealized loss from other investments                                                          |  |                                   | 361        |      |   |           |  
|Sales and principal payments of loans held for
sale                                             |  |                                   | 244,874    |      |   | 129,816    |  
|Purchases of loans held for sale                                                                |  |                                   | (250,951   | )    |   | (404,890   | )
|Net (gain) loss on loans held for sale                                                          |  |                                   | (197       | )    |   | 337        |  
|Net
        realized (gain) loss on securities available-for-sale                               |  |                                   | (7,121     | )    |   | 829        |  
|Net realized gain on derivatives                                                                |  |                                   | (4,266     | )    |   | (1,767     | )
|Net payments received (paid) on undesignated
derivatives                                        |  |                                   | 6,201      |      |   | (568       | )
|Net payments paid on terminated designated
derivatives                                          |  |                                   | (2,147     | )    |   |           |  
|Changes in
  operating assets and liabilities:                                                  |  |                                   |            |      |   |            |  
|Interest receivable                                                                             |  |                                   | (17,065    | )    |   | (37,672    | )
|Other receivable                                                                                |  |                                   | (1,982     | )    |   | (628       | )
|Prepaid and other assets                                                                        |  |                                   | (1,007     | )    |   | (280       | )
|Accrued interest on repurchase agreements                                                       |  |                                   | 13,526     |      |   | 20,572     |  
|Due to broker                                                                                   |  |                                   | 5,473      |      |   | 8,991      |  
|Interest payable                                                                                |  |                                   | 10,350     |      |   | 15,712     |  
|Management and incentive fee payable                                                            |  |                                   | 1,280      |      |   | 945        |  
|Other payables                                                                                  |  |                                   | 588        |      |   | 315        |  
|                                                                                                |  |                                   |            |      |   |            |  
|Net cash provided by (used in) operating
activities                                             |  |                                   | 58,411     |      |   | (236,798   | )
|                                                                                                |  |                                   |            |      |   |            |  
|CASH FLOWS
  FROM INVESTING ACTIVITIES:                                                         |  |                                   |            |      |   |            |  
|Change in restricted cash and cash
equivalents                                                  |  |                                   | 58,642     |      |   | (29,724    | )
|Purchase of available-for-sale securities                                                       |  |                                   | (2,611,908 | )    |   | (8,354,710 | )
|Proceeds from the sale of available-for-sale
securities                                         |  |                                   | 832,494    |      |   | 1,280,214  |  
|Purchase of held-to-maturity securities                                                         |  |                                   |           |      |   | (34,719    | )
|Principal payments received on available-for-sale
securities                                    |  |                                   | 1,130,808  |      |   | 542,939    |  
|Proceeds from the maturity of held-to-maturity
securities                                       |  |                                   |           |      |   | 134,990    |  
|Origination or purchase of loans                                                                |  |                                   | (254,349   | )    |   | (74,325    | )
|Proceeds from sale of loans                                                                     |  |                                   | 33,125     |      |   |           |  
|Principal payments received on loans                                                            |  |                                   | 44,841     |      |   | 46         |  
|Purchase of other investments                                                                   |  |                                   | (1,482     | )    |   | (1,550     | )
|                                                                                                |  |                                   |            |      |   |            |  
|Net cash used in investing
activities                                                           |  |                                   | (767,829   | )    |   | (6,536,839 | )
|                                                                                                |  |                                   |            |      |   |            |  
|CASH FLOWS
  FROM FINANCING ACTIVITIES:                                                         |  |                                   |            |      |   |            |  
|Net borrowings under repurchase
agreements                                                      |  |                                   | 580,290    |      |   | 5,899,835  |  
|Proceeds from revolving warehouse funding
agreement                                             |  |                                   | 222,050    |      |   |           |  
|Proceeds from issuance of long-term debt                                                        |  |                                   | 25,774     |      |   | 327,550    |  
|Payments made on long-term debt                                                                 |  |                                   | (95        | )    |   |           |  
|Payment of debt issuance costs                                                                  |  |                                   | (1,698     | )    |   | (5,539     | )
|Proceeds from designated derivative containing a
financing element                              |  |                                   | 544        |      |   |           |  
|Dividends paid                                                                                  |  |                                   | (56,324    | )    |   | (15,718    | )
|Issuance of common stock                                                                        |  |                                   |           |      |   | 365,783    |  
|Payment of offering costs                                                                       |  |                                   |           |      |   | (3,657     | )
|                                                                                                |  |                                   |            |      |   |            |  
|Net cash provided by financing
activities                                                       |  |                                   | 770,541    |      |   | 6,568,254  |  
|                                                                                                |  |                                   |            |      |   |            |  
|Net increase (decrease) in
  cash and cash equivalents                                          |  |                                   | 61,123     |      |   | (205,383   | )
|Cash and cash equivalents
  at beginning of period                                              |  |                                   | 35,542     |      |   | 268,686    |  
|                                                                                                |  |                                   |            |      |   |            |  
|Cash and
  cash equivalents at end of period                                                    |  | $                                 | 96,665     |      | $ | 63,303     |  
|                                                                                                |  |                                   |            |      |   |            |  
|SUPPLEMENTAL
  DISCLOSURE OF CASH FLOW INFORMATION:                                             |  |                                   |            |      |   |            |  
|Cash paid for interest                                                                          |  | $                                 | 311,582    |      | $ | 69,380     |  
|Cash paid for income tax                                                                        |  | $                                 | 162        |      | $ |           |  
|Net change in unrealized gain on available-for-sale
securities                                  |  | $                                 | (1,872     | )    | $ | 82,360     |  
|Net change in unrealized loss on
derivatives                                                    |  | $                                 | 8,356      |      | $ | (48,014    | )
|Unsettled available-for-sale securities purchases -
due to broker                               |  | $                                 | 366,483    |      | $ | 238,131    |  
|Unsettled available-for-sale securities purchases -
due from broker                             |  | $                                 |           |      | $ | 80,204     |  
|Unpaid offering costs                                                                           |  | $                                 | (48        | )    | $ | 250        |  
|Non-cash settlement of interest expense added to
principal balance of
  bank loans              |  | $                                 | 2,706      |      | $ |           |  
|Non-cash settlement of interest expense from
derivatives                                        |  | $                                 | 5,143      |      | $ | 3,818      |  
|Principal payments receivable on available-for-sale
securities                                  |  | $                                 | 18,733     |      | $ | 19,917     |  
|Issuance of stock for payment of prior year
incentive fee                                       |  | $                                 | 201        |      | $ |           |  

See notes to
condensed consolidated financial statements.

6

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

1.
ORGANIZATION AND BASIS OF PRESENTATION

Deerfield
Triarc Capital Corp. and its subsidiaries (the Company) is a diversified
financial company that invests in real estate related assets, primarily
mortgage-backed securities, as well as alternative 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 real
estate investment trust (REIT) under the Internal Revenue Code of 1986, as
amended (the Code).

Initial Private Placement

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

Initial
Public Offering

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

Basis
of Presentation

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

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

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

7

---



|  |                                                                                                                                            | 
|- | ------------------------------------------------------------------------------------------------------------------------------------------ | 
| | Deerfield
  Triarc TRS (Bahamas) Ltd., a Bahamian international business company, is a
  wholly owned subsidiary of the Company and a TRS.

On
September 29, 2005 and August 2, 2006, the Company formed Deerfield Triarc
Capital Trust I (Trust I) and Deerfield Capital Trust II, (Trust II),
respectively.  Both Trust I and Trust II
are unconsolidated VIEs that were formed in connection with trust preferred
securities transactions.

Intercompany
accounts and transactions have been eliminated in consolidation.

Variable
Interest Entities

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

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

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

Trust
Preferred Securities

In
September 2005 and August 2006, the Company formed Trust I and Trust II
(collectively the Trusts), respectively.
The Trusts were formed for the sole purpose of issuing and selling trust
preferred securities. In accordance with FIN 46R, the Trusts are not
consolidated into the Companys condensed consolidated financial statements
because the Company is not deemed the primary beneficiary of the Trusts. The
Company owns 100% of the common shares of the Trusts ($1.6 million in Trust I
and $0.8 million in Trust II). Trust I and Trust II issued $50.0 million and
$25.0 million, respectively, of preferred shares to unaffiliated investors. The
rights of holders of common shares of the Trusts are subordinate to the rights
of the holders of preferred shares only in the event of a default; otherwise the
common shareholders economic and voting rights are pari passu with the
preferred shareholders. The Companys $2.4 million investment in the Trusts
common shares, which represents the Companys maximum exposure to loss, is
recorded as other investments at cost with dividend income recognized upon
declaration by the Trusts.

In
connection with the issuance and sale of the trust preferred securities, DTC
LLC issued junior subordinated debt securities to Trust I and Trust II of $51.6
million and $25.8 million, respectively, which are guaranteed by Deerfield
Triarc Capital Corp. The junior subordinated debt securities are recorded as
long-term debt and debt issuance costs are deferred in prepaid and other assets
in the condensed consolidated balance sheet. Interest expense on the debt
securities and amortization of debt issuance costs are recorded in the
condensed consolidated statements of operations.

On
August 2, 2006, the Company entered into a letter agreement with Taberna
Securities, LLC (TS) and Bear, Stearns & Co. Inc. providing for the
issuance and sale of up to an additional $45.0 million in aggregate amount of
trust preferred securities (the Additional Trust Preferred Securities) to be
issued by a subsidiary of DTC LLC other than Trust II. (See Note 16 for a
discussion of the subsequent issuance of trust preferred securities) The
Company may require TS to cause the purchase of the Additional Trust Preferred
Securities prior to October 31, 2006 in no more than two separate transactions
of at least $15.0 million in principal amount each.  TSs obligation to purchase the Additional Trust Preferred
Securities is subject to a customary material adverse event condition.  The Additional Trust Preferred Securities
will have the same interest rate,

8

---



maturity,
guarantee and other terms as Trust IIs terms.
The Company is not obligated to cause the issuance of the Additional
Trust Preferred Securities.

See
Notes 8 and 16 for further discussion of the trust preferred securities and
junior subordinated debt securities.

Reclassifications

Certain
amounts in the condensed consolidated financial statements and notes as of
December 31, 2005 and for the three and nine months ended September 30, 2005
have been reclassified to conform to the presentation as of and for the three
and nine months ended September 30, 2006.

2. ACCOUNTING
POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Accounting
Policies

The
Companys accounting policies are included in the Notes to the Consolidated
Financial Statements included in the Companys Annual Report on Form 10-K for
the year ended December 31, 2005; such policies have not significantly changed
during 2006.

Recent
Accounting Pronouncements

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

In
February 2006, the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments. SFAS No. 155 amends SFAS No.
133, Accounting for Derivative Instruments
and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which addresses the application of
SFAS No. 133 to beneficial interests in securitized financial assets. SFAS No.
155 establishes a requirement to evaluate interests in securitized financial
assets to identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an embedded derivative requiring
bifurcation. Additionally, SFAS No. 155 permits fair value measurement for any
hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation. SFAS No. 155 is effective for financial instruments
acquired or issued after January 1, 2007. The adoption of this standard is not
expected to have a material impact on the Companys consolidated financial
statements.

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

In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108).
SAB 108 clarifies SEC staff views regarding the process by which misstatements
in financial statements are evaluated for purposes of determining whether
financial statement restatement is necessary. SAB 108 is effective for fiscal
years ending after November 15, 2006, and early application is encouraged. The
adoption of SAB 108 is not expected to have a material impact on the Companys
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 the Company as of January 1, 2008.
The Company is currently evaluating the impact of adopting this standard.

9

---



3.
AVAILABLE-FOR-SALE SECURITIES

The
following table summarizes the Companys investment securities classified as
available-for-sale as of September 30, 2006, which are carried at fair
value:

|                                         |  |                  |           |                    |   |                     |  |                        |          |   |   |           | 
|---------------------------------------- |  | ---------------- | --------- | ------------------ | - | ------------------- |  | ---------------------- | -------- | - | - | --------- | 
|Security Description                     |  | Amortized
  Cost |           | Unrealized
  Gains |   | Unrealized
  Losses |  | Estimated
  Fair Value |         
|                                         |  |                  |           |                    |   |                     |  |                        |         
|                                         |  | (In thousands)   |          
|                                         |  |                  |          
|                                         |  |                  |           |                    |   |                     |  |                        |          |   |   |           | 
|Residential mortgage-backed
  securities |  | $                | 8,232,051 |                    | $ | 4,277               |  | $                      | (115,997 | ) | $ | 8,120,331 | 
|Asset-backed securities                  |  |                  | 295,313   |                    |   | 2,879               |  |                        | (1,421   | ) |   | 296,771   | 
|High-yield corporate bonds               |  |                  | 27,975    |                    |   | 402                 |  |                        | (977     | ) |   | 27,400    | 
|Common and preferred
  equities          |  |                  | 2,250     |                    |   |                    |  |                        | (191     | ) |   | 2,059     | 
|Other investments                        |  |                  | 2,947     |                    |   | 30                  |  |                        |         |   |   | 2,977     | 
|                                         |  |                  |           |                    |   |                     |  |                        |          |   |   |           | 
|Total                                    |  | $                | 8,560,536 |                    | $ | 7,588               |  | $                      | (118,586 | ) | $ | 8,449,538 | 
|                                         |  |                  |           |                    |   |                     |  |                        |          |   |   |           | 

The
following table summarizes the Companys debt securities classified as
available-for-sale as of September 30, 2006, according to their weighted
average life:

|                                                  |  |                  |           |                        |   |                             |  |  |      |  
|------------------------------------------------- |  | ---------------- | --------- | ---------------------- | - | --------------------------- |  |  | ---- | -
|Weighted Average Life                             |  | Amortized
  Cost |           | Estimated
  Fair Value |   | Weighted
  Average
  Coupon | 
|                                                  |  |                  |           |                        |  
|                                                  |  | (In thousands)   |           |                        |   |                            
|                                                  |  |                  |           |                        |   |                            
|Less than one year                                |  | $                | 17,805    |                        | $ | 17,800                      |  |  | 7.24 | %
|Greater than one year and
  less than five years  |  |                  | 5,979,293 |                        |   | 5,898,274                   |  |  | 5.09 | %
|Greater than five years and
  less than ten years |  |                  | 2,246,279 |                        |   | 2,231,867                   |  |  | 5.61 | %
|Greater than ten years                            |  |                  | 314,909   |                        |   | 299,538                     |  |  | 5.70 | %
|                                                  |  |                  |           |                        |   |                             |  |  |      |  
|Total                                             |  | $                | 8,558,286 |                        | $ | 8,447,479                   |  |  | 5.25 | %
|                                                  |  |                  |           |                        |   |                             |  |  |      |  

The
weighted average lives of available-for-sale debt securities at September 30,
2006 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 life for residential mortgage-backed securities and
asset-backed securities is based on a prepayment model that considers current
yield, forward yield, slope of the yield curve, mortgage rates, contractual
rate of the outstanding loans, loan age, margin and volatility. For purposes of
this disclosure, weighted average life represents the average number of years
for which each dollar of unpaid principal remains outstanding.  Weighted average life estimates how many
years it will take to receive half of the outstanding principal.

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.

At
September 30, 2006, available-for-sale securities include unsettled security
purchases totaling $366.5 million.

The
following table shows the fair value and gross unrealized losses of
available-for-sale securities in which amortized cost exceeds fair value,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at September 30, 2006:

|                                       |  |                          |    |                          |   |                             |  |                          |        |                          |  |                             |  |                          |           |                          |   |                             |   |  |     |  |   |           |  |   |          |  
|-------------------------------------- |  | ------------------------ | -- | ------------------------ | - | --------------------------- |  | ------------------------ | ------ | ------------------------ |  | --------------------------- |  | ------------------------ | --------- | ------------------------ | - | --------------------------- | - |  | --- |  | - | --------- |  | - | -------- | -
|                                       |  | Less than 12 Months      |    | More than 12 Months      |   | Total                       | 
|                                       |  |                          |    |                          |   |                             | 
|                                       |  | Number
  of
  Securities |    | Estimated
  Fair
  Value |   | Gross
  Unrealized
  Losses |  | Number
  of
  Securities |        | Estimated
  Fair
  Value |  | Gross
  Unrealized
  Losses |  | Number
  of
  Securities |           | Estimated
  Fair
  Value |   | Gross
  Unrealized
  Losses |  
|                                       |  |                          |    |                          |   |                             |  |                          |        |                          |  |                             |  |                          |           |                          |   |                             |  
|                                       |  | (Dollars in thousands)   |   
|                                       |  |                          |   
|Residential mortgage-backed securities |  |                          | 40 |                          | $ | 1,262,486                   |  | $                        | (6,759 | )                        |  | 246                         |  | $                        | 5,874,573 |                          | $ | (109,238                    | ) |  | 286 |  | $ | 7,137,059 |  | $ | (115,997 | )
|Asset-backed securities                |  |                          | 30 |                          |   | 52,957                      |  |                          | (644   | )                        |  | 35                          |  |                          | 62,991    |                          |   | (777                        | ) |  | 65  |  |   | 115,948   |  |   | (1,421   | )
|High-yield corporate bonds             |  |                          | 3  |                          |   | 6,295                       |  |                          | (654   | )                        |  | 1                           |  |                          | 3,177     |                          |   | (323                        | ) |  | 4   |  |   | 9,472     |  |   | (977     | )
|Common and preferred equities          |  |                          | 1  |                          |   | 2,059                       |  |                          | (191   | )                        |  |                            |  |                          |          |                          |   |                            |   |  | 1   |  |   | 2,059     |  |   | (191     | )
|                                       |  |                          |    |                          |   |                             |  |                          |        |                          |  |                             |  |                          |           |                          |   |                             |   |  |     |  |   |           |  |   |          |  
|Total temporarily impaired securities  |  |                          | 74 |                          | $ | 1,323,797                   |  | $                        | (8,248 | )                        |  | 282                         |  | $                        | 5,940,741 |                          | $ | (110,338                    | ) |  | 356 |  | $ | 7,264,538 |  | $ | (118,586 | )
|                                       |  |                          |    |                          |   |                             |  |                          |        |                          |  |                             |  |                          |           |                          |   |                             |   |  |     |  |   |           |  |   |          |  

Temporary
impairment of available-for-sale securities results from the fair value of
securities falling below the amortized cost basis primarily due to changes in
the interest rate environment.  When the
fair value of an available-for-sale security is less than its amortized cost
for an extended period, the Company considers whether there is an
other-than-temporary impairment in the value of the security. If, in the
Companys judgment, an other-than-temporary impairment exists, the cost basis
of the security is written down to the then-current fair value, and the
unrealized loss is transferred from accumulated other

10

---



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 realization.
  The determination of other-than-temporary impairment is made at least quarterly.

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

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

During
the nine months ended September 30, 2006, the Company recognized a $2.0 million
other-than-temporary impairment related to two inverse interest-only
securities.  These inverse interest-only
securities cash flows decrease as the London interbank offered rate (LIBOR)
increases. The Company used updated cash flow projections from a third party to
determine the amount of the impairment.
As a result of the impairment charge, the cost basis of these securities
was written down to the current fair value, and the unrealized loss transferred
from accumulated other comprehensive loss as an immediate reduction of
earnings, recognized as a reduction to net gain (loss) on available-for-sale
securities of $2.0 million for the nine months ended September 30, 2006 in the
condensed consolidated statements of operations.  For the three months ended September 30, 2006 and in 2005, the
Company did not recognize any other-than-temporary impairment.

The
Companys available-for-sale securities primarily consist of residential
mortgage-backed securities, which are all agency or AAA-rated in quality.  In addition, at September 30, 2006, none of
the available-for-sale securities held had been downgraded by the two major
credit rating agencies since their purchase. The residential mortgage-backed
securities are of high credit rating 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 does not
believe any securities held, other than the two securities discussed above,
were other-than-temporarily impaired at September 30, 2006.

4. TRADING
SECURITIES

The
Company holds trading securities as of September 30, 2006, carried at fair
value of $23.4 million. Net gains of $3.0 million and $1.3 million on trading
securities were recognized in the condensed consolidated statements of
operations for the three and nine months ended September 30, 2006,
respectively, due to increases in fair values of these securities.

5.  OTHER INVESTMENTS

Cost
Investments

The
Company holds certain other investments as of September 30, 2006, carried at
cost of $8.6 million.  These positions
consist of equity securities in the Trusts of $2.4 million (see Note 8) and
$6.2 million in other common and preferred equities that are not traded in an
active market.

Equity
Method Investments

The
Company holds one equity method investment as of September 30, 2006, initially
recorded at cost of $3.0 million and adjusted to $2.6 million to recognize the
Companys 13% share of losses by the investee, Hometown Commercial Capital LLC
(HCC) through June 30, 2006.  The
Company expects to receive financial information on HCC on a quarterly basis,
with a one-quarter lag.  The adjustment
to the Companys carrying value is recorded in the condensed consolidated
financial statements as dividend income and other net gain.  See Note 6 for further investments related
to HCC.

11

---



6. LOANS AND
LOANS HELD FOR SALE

The
following summarizes the Companys loans and loans held for sale as of
September 30, 2006:

|                                |  |                |         |                         |   |         |  |   |         | 
|------------------------------- |  | -------------- | ------- | ----------------------- | - | ------- |  | - | ------- | 
|                                |  | Carrying Value |        
|                                |  |                |        
|Type of Loan                    |  | Loans          |         | Loans
  Held
  for Sale |   | Total   | 
|                                |  |                |         |                         |   |         | 
|                                |  | (In thousands) |        
|                                |  |                |        
|Loans held in CLO               |  | $              |        |                         | $ | 265,322 |  | $ | 265,322 | 
|Structured and syndicated loans |  |                | 330,118 |                         |   | 5,000   |  |   | 335,118 | 
|Commercial mortgages (1)        |  |                | 9,329   |                         |   | 12,160  |  |   | 21,489  | 
|                                |  |                |         |                         |   |         |  |   |         | 
|                                |  | $              | 339,447 |                         | $ | 282,482 |  | $ | 621,929 | 
|                                |  |                |         |                         |   |         |  |   |         | 

|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|   
|(1) | Commercial mortgage loans
  include participating interests in commercial mortgage loans

At
September 30, 2006, the Company held loans totaling $621.9 million. Loans
classified as held for sale and carried at the lower of cost or fair value
totaled $282.5 million, net of a valuation allowance of $1.2 million. Loans
classified as held for investment and carried at amortized cost totaled $339.4
million. The Company identified no impaired loans held for investment at
September 30, 2006, and thus has established no allowance for loan losses. At
September 30, 2006, there were $25.6 million unsettled purchases and $25.3 million
unsettled sales of loans held for sale. At September 30, 2006, the Company held
loans that settle interest accruals by increasing the principal balance of the
loan outstanding. For the three and nine months ended September 30, 2006, the
Company had increased the principal balance by $0.4 million and $2.7 million,
respectively, as settlement of interest receivable.

On
November 29, 2005, the Company entered into a master participation agreement
with HCC, a commercial mortgage loan originator. HCC originates loans with a
targeted principal range of $1.0 million to $15.0 million. Under the master
participation agreement, the Company will purchase a junior participating
beneficial ownership interest of 10.0% (the Company holds one investment with a
15% beneficial ownership interest) of the principal balance of each approved
commercial mortgage. Interest accrues on the Companys outstanding principal
balance at a rate of 15.0% annually. HCC retains legal title and control of the
loans and has custody of the original loan documents. The Company retains
approval rights for loans included in the participation portfolio.
Additionally, the Company has agreed to buy 50.0% of the lowest-rated
non-investment grade tranche of the commercial mortgages upon securitization at
fair value.

At
September 30, 2006, the Companys commercial mortgages consisted of junior
participation interests in 32 commercial mortgage loans originated by HCC and
held three loans directly originated by the Company totaling $12.2 million and
$9.3 million, respectively. The junior participating interests are held for
sale while the three loans directly originated are held for investment.

7. 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. At September 30, 2006, the Company had repurchase agreements
  outstanding in the amount of $7.4 billion (including $40.3 million of accrued
  interest), with a weighted-average borrowing rate of 5.39%.

The
repurchase agreements had remaining weighted average maturities of 34 days at
September 30, 2006 and are summarized below:

|                                       |  |                                                   |           |                                      |   |                                      |  |  |      |  
|-------------------------------------- |  | ------------------------------------------------- | --------- | ------------------------------------ | - | ------------------------------------ |  |  | ---- | -
|Type of Investment Pledged             |  | Estimated
  Fair Value
  of Investments
  Pledged |           | Repurchase
  Agreement
  Liabilities |   | Weighted
  Average
  Interest
  Rate | 
|                                       |  |                                                   |           |                                      |   |                                      | 
|                                       |  | (In thousands)                                    |           |                                      |  
|                                       |  |                                                   |           |                                      |  
|Residential mortgage-backed securities |  | $                                                 | 7,474,873 |                                      | $ | 7,339,013                            |  |  | 5.39 | %
|High yield corporate bonds             |  |                                                   | 18,099    |                                      |   | 14,370                               |  |  | 5.31 | %
|Other investments                      |  |                                                   | 21,437    |                                      |   | 20,996                               |  |  | 5.15 | %
|                                       |  |                                                   |           |                                      |   |                                      |  |  |      |  
|                                       |  | $                                                 | 7,514,409 |                                      | $ | 7,374,379                            |  |  | 5.39 | %
|                                       |  |                                                   |           |                                      |   |                                      |  |  |      |  

12

---



The
fair value of the investments pledged at September 30, 2006 includes accrued
interest and dividends of $33.1 million consisting of $32.3 million, $0.7
million and $0.1 for the residential mortgage-backed securities, high yield
corporate bonds and other investments, respectively. Additionally, repurchase
agreement liabilities at September 30, 2006 included accrued interest of $40.3
million consisting of $40.2 million, $0.1 million and $41,000 for the
residential mortgage-backed securities, high yield corporate bonds and other
investments, respectively.

At
September 30, 2006, the Company had amounts at risk with the following
repurchase agreement counterparties:

|                                                     |  |                        |         |                                         |  |    | 
|---------------------------------------------------- |  | ---------------------- | ------- | --------------------------------------- |  | -- | 
|                                                     |  | Amount
  at
  Risk (1) |         | Weighted-Average
  Remaining
  Maturity | 
|                                                     |  |                        |         |                                         | 
|Repurchase
  Agreement Counterparties:               |  | (In thousands)         |         | (In days)                               | 
|                                                     |  |                        |         |                                         | 
|                                                     |  |                        |         |                                         | 
|Bear, Stearns & Co. Inc.                             |  | $                      | 1,218   |                                         |  | 25 | 
|Barclays Capital Inc.                                |  |                        | 7,024   |                                         |  | 46 | 
|Countrywide Securities Corporation                   |  |                        | 14,872  |                                         |  | 36 | 
|Credit Suisse Securities (USA) LLC                   |  |                        | 24,067  |                                         |  | 32 | 
|J.P. Morgan Securities Inc.                          |  |                        | (3,621  | )                                       |  | 15 | 
|Lehman Brothers Inc.                                 |  |                        | 4,010   |                                         |  | 14 | 
|Merrill Lynch Government Securities Inc.             |  |                        | 31,353  |                                         |  | 28 | 
|Merrill Lynch, Pierce, Fenner & Smith
  Incorporated |  |                        | (1,360  | )                                       |  | 25 | 
|Mitsubishi UFJ Securities (USA), Inc.                |  |                        | 12,290  |                                         |  | 15 | 
|Nomura Securities International, Inc.                |  |                        | 17,244  |                                         |  | 35 | 
|UBS Securities LLC                                   |  |                        | 32,933  |                                         |  | 44 | 
|                                                     |  |                        |         |                                         |  |    | 
|Total                                                |  | $                      | 140,030 |                                         |  |    | 
|                                                     |  |                        |         |                                         |  |    | 

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

8. LONG-TERM
DEBT

The
following table summarizes the Companys long-term debt at September 30, 2006:

|                             |  |                  |         |                                                     |  |      |  
|---------------------------- |  | ---------------- | ------- | --------------------------------------------------- |  | ---- | -
|                             |  | Carrying
  Value |         | Weighted
  Average
  Rate at
  September 30,
  2006 | 
|                             |  |                  |         |                                                     | 
|                             |  | (In thousands)   |         |                                                     | 
|                             |  |                  |         |                                                     | 
|Revolving warehouse facility |  | $                | 222,050 |                                                     |  | 5.38 | %
|Market Square                |  |                  | 276,000 |                                                     |  | 5.99 | %
|Pinetree                     |  |                  | 287,905 |                                                     |  | 6.03 | %
|Trust I                      |  |                  | 51,550  |                                                     |  | 8.99 | %
|Trust II                     |  |                  | 25,774  |                                                     |  | 7.72 | %
|                             |  |                  |         |                                                     |  |      |  
|Total                        |  | $                | 863,279 |                                                     |  | 6.08 | %
|                             |  |                  |         |                                                     |  |      |  

Revolving
Warehouse Facility

On
March 10, 2006, the Company entered into an up to $300.0 million three year
revolving warehouse funding agreement with Wachovia Capital Markets, LLC (the Facility).
Financing under the Facility will be secured by assets ranging from large
syndicated bank loans to subordinated notes and preferred stock. Advance rates
under the Facility vary by asset type. The Facility is available to two
bankruptcy remote special purpose vehicles (DWFC, LLC and Deerfield Triarc TRS
(Bahamas) Ltd. as discussed in Note 1) and the debt holder has recourse only to
the collateral of these entities, which totaled $338.4 million at September 30,
2006. The Company expects to pursue term funding of these assets via
securitization in a future collateralized loan obligation. At September 30,
2006, the Company had $222.1 million of debt outstanding related to the
Facility. The Company incurred $1.2 million of debt issuance costs that are
being amortized 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

13

---



warehouse
funding agreement, plus 0.75% for large syndicated loans or plus 0.90% for all
other loans, resulting in a weighted average rate of 5.38% as of September 30,
2006. The Facility also includes commitment and unused line fees that the
Company recognizes in interest expense.

Market
Square Collateralized Loan Obligation (CLO)

Market
Squares debt securities bear interest rates that reset quarterly based on
varying spreads to three-month LIBOR. The Companys long-term debt issued by
Market Square has a weighted average interest rate of 5.99%, using the last
reset dates as of September 30, 2006.

The
  Market Square notes are callable, at par, by the Company on July 20, 2007 and
  quarterly thereafter, subject to certain conditions. Market Square is a bankruptcy
  remote subsidiary and the debt holders have recourse only to the collateral
  of Market Square, which was $303.7 million as of September 30, 2006.

Pinetree
Collateralized Debt Obligation (CDO)

Pinetrees
debt securities bear interest rates that reset quarterly based on varying
spreads to three-month LIBOR. The Companys long-term debt issued by Pinetree
has a weighted average interest rate of 6.03%, using the last reset date as of
September 30, 2006.

The
  Pinetree notes are callable, at par, by the Company on January 5, 2010 and quarterly
  thereafter, subject to certain conditions. Pinetree is a bankruptcy remote subsidiary
  and the debt holders have recourse only to the collateral of Pinetree, which
  was $307.2 million at September 30, 2006.

Trust
Preferred Securities

On
September 29, 2005 and August 2, 2006, Trust I and Trust II issued preferred
securities to unaffiliated investors for gross proceeds of $50.0 million and
$25.0 million, respectively, and common securities to the Company for $1.6
million and $0.8 million, respectively. The combined proceeds were invested by
Trust I and Trust II in $51.6 million and $25.8 million, respectively, of
unsecured junior subordinated debt securities issued by DTC LLC. The junior
subordinated debt securities are the sole assets of the Trusts. The Trust I
securities mature on October 30, 2035 but are callable by DTC LLC on or after
October 30, 2010. The Trust II securities mature on October 30, 2036 but are
callable by DTC LLC on or after October 30, 2011. Interest is payable quarterly
at a floating rate equal to three-month LIBOR plus 3.50% per annum and 2.25%
per annum for the Trust I and Trust II, respectively. The rate at September 30,
2006 was 8.99% and 7.72% for Trust I and Trust II, respectively.

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

Unamortized
deferred issuance costs associated with the junior subordinated debt securities
total $1.9 million at September 30, 2006 and are classified as part of prepaid
and other assets on the condensed consolidated balance sheet. These costs are
amortized into interest expense using the effective yield method until the
respective junior subordinated debt securities call date.

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

9. STOCKHOLDERS
EQUITY

On
September 25, 2006 and June 13, 2006, the Company issued 9,321 and 29,159 shares
of common stock, respectively, to the Manager pursuant to the Management
Agreement, which requires the Manager to receive at least 15% of each incentive
fee in the form of such stock rather than cash. The 9,321 shares and 29,169
shares issued represented the 15% portion of the second quarter 2006 and the
combined first quarter 2006 and fourth quarter 2005 incentive fee,
respectively.

14

---



On
July 25, 2006, the Company declared a cash dividend of $0.38 per share on its
common stock for the second quarter of 2006. The record date for the cash
dividend was August 4, 2006, and the payment date was August 28, 2006. The
total amount of the dividend paid was $19.6 million.

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

On
February 7, 2006, the Company approved a resolution to award a total of 10,000
fully vested shares of common stock to the four independent board members, each
receiving 2,500 shares. In accordance with SFAS No. 123R the Company determined
that February 7, 2006 was the grant date and recognized the entire fair market
value of the grant on such date, as the shares have no vesting period. The fair
market value of the grant was determined as the closing price on the grant date
of $13.00 per share. These shares were issued in June 2006.

On
December 23, 2004, the Company granted 403,847 shares of restricted common
stock, par value $0.001, and restricted options to purchase 1,346,156 shares of
common stock at an exercise price of $15.00 per share, to the Manager. The
Companys restrictions lapse, and full rights of ownership vest in three equal
installments on the first, second and third anniversary from the grant date. Vesting
is predicated on the continuing involvement of the Manager in providing
services to the Company. One third of the shares of restricted stock and
restricted stock options vested on December 23, 2005.

In
accordance with Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments that are Issued to
other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, the Company revalues the unvested restricted stock and
stock options at fair value each reporting period and recognizes over the
vesting period a contribution to additional paid-in capital and an equal
offsetting amount to expense. The total unamortized fair value of the
restricted stock and stock options as of September 30, 2006 was $1.0 million.

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

|                         |  |                     |       |      |  |       |  
|------------------------ |  | ------------------- | ----- | ---- |  | ----- | -
|                         |  | As of September 30, |      
|                         |  |                     |      
|                         |  | 2006                |       | 2005 | 
|                         |  |                     |       |      | 
|Dividend yield           |  |                     | 11.01 | %    |  | 9.45  | %
|Expected volatility      |  |                     | 21.41 | %    |  | 21.79 | %
|Risk-free interest rate  |  |                     | 4.63  | %    |  | 4.51  | %
|Expected life (in years) |  |                     | 8.3   |      |  | 9.3   |  

10. COMPUTATION OF EARNINGS PER SHARE

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

|                                                    |  |                                  |        |                                 |   |        |  |      |        |  |   |        | 
|--------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------ | 
|                                                    |  | Three months ended September 30, |        | Nine months ended September 30, |  
|                                                    |  |                                  |        |                                 |  
|                                                    |  | 2006                             |        | 2005                            |   | 2006   |  | 2005 |       
|                                                    |  |                                  |        |                                 |   |        |  |      |       
|                                                    |  | (In thousands)                   |       
|                                                    |  |                                  |       
|                                                    |  |                                  |        |                                 |   |        |  |      |       
|Net income                                          |  | $                                | 19,563 |                                 | $ | 14,081 |  | $    | 56,890 |  | $ | 26,827 | 
|                                                    |  |                                  |        |                                 |   |        |  |      |        |  |   |        | 
|                                                   
|Weighted average shares used in basic computation   |  |                                  | 51,430 |                                 |   | 51,256 |  |      | 51,406 |  |   | 35,214 | 
|Dilutive effect of:                                 |  |                                  |        |                                 |   |        |  |      |        |  |   |        | 
|Unvested restricted stock                           |  |                                  | 186    |                                 |   | 150    |  |      | 154    |  |   | 102    | 
|                                                    |  |                                  |        |                                 |   |        |  |      |        |  |   |        | 
|Weighted average shares used in diluted
computation |  |                                  | 51,616 |                                 |   | 51,406 |  |      | 51,560 |  |   | 35,316 | 
|                                                    |  |                                  |        |                                 |   |        |  |      |        |  |   |        | 
|                                                   
|Net income per share - Basic                        |  | $                                | 0.38   |                                 | $ | 0.27   |  | $    | 1.11   |  | $ | 0.76   | 
|                                                    |  |                                  |        |                                 |   |        |  |      |        |  |   |        | 
|                                                   
|Net income per share - Diluted                      |  | $                                | 0.38   |                                 | $ | 0.27   |  | $    | 1.10   |  | $ | 0.76   | 
|                                                    |  |                                  |        |                                 |   |        |  |      |        |  |   |        | 

Potentially
dilutive shares relating to a stock option to purchase 1,346,156 shares of
common stock for both the three and nine months ended September 30, 2006 and
2005 are not included in the calculation of diluted net income per share
because the effect is anti-dilutive.

15

---



11.
RELATED-PARTY TRANSACTIONS

On
April 4, 2006, the Company approved pursuant to the Management Agreement,
granting shares of its common stock to the Manager relating to the required 15%
stock portion of the incentive fee payable to the Manager for the fourth
quarter of 2005. In its April 4, 2006 approval, the Company determined that the
actual issuance of the shares would not occur until the first to occur of the
Companys receipt of confirmation from the New York Stock Exchange (NYSE) that
the issuance did not require approval of the Companys shareholders under NYSE
rules, or such shareholder approval. The Company issued the shares on June 13,
2006, upon the receipt of such confirmation from the NYSE. In its April 4, 2006
approval, the Company had specified that the shares would be deemed issued as
of March 24, 2006, such that upon issuance of the shares the Company would also
pay the Manager an amount equal to the dividends on the shares that the Manager
would have received if they had been issued on March 24, 2006, and that the
one-year holding period for the shares would be deemed to start on March 24,
2006. The Company compensated the Manager and recognized an incentive fee
expense of approximately $5,000, representing the first quarter 2006 dividend
declaration of $0.36 per share attributable to the equivalent unissued shares.

The
Companys base management fee expense for the three and nine months ended
September 30, 2006 and 2005 was $3.3 million and $10.0 million, and $3.3 million
and $6.6 million, respectively. In addition to the base management fee,
amortization for the three and nine months ended September 30, 2006 and 2005
was $0.4 million and $1.0 million, and $0.6 million and $2.9 million,
respectively, related to the restricted stock and stock options granted to the
Manager, and was included in management and incentive fee expense to related
party in the condensed consolidated statements of operations. See Note 9 for
additional information regarding the grant to the Manager. The Manager earned
an incentive fee for the three and nine months ended September 30, 2006 of $1.3
million and $3.3 million, respectively, and no incentive fee for the three and
nine months ended September 30, 2005. The Company recorded expenses related to
reimbursable out-of-pocket and certain other costs incurred by the Manager
totaling $0.1 million and $0.5 million for the three and nine months ended
September 30, 2006, respectively, and $0.3 million and $0.5 million for the
three and nine months ended September 30, 2005. At September 30, 2006, the
Company had outstanding payables related to its agreement with the Manager in
the amount of $3.5 million, which is included in management and incentive fee
payable in the condensed consolidated balance sheet.

12. FAIR VALUE
OF FINANCIAL INSTRUMENTS

SFAS
No. 107, Disclosure About Fair Value of
Financial Instruments, requires disclosure of the fair value of
financial instruments for which it is practicable to estimate that value. The
fair value of financial instruments is the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Quoted market prices if available are utilized as
estimates of the fair values of financial instruments. Since no quoted market
price exists for certain of the Companys financial instruments, the fair
values of such instruments have been derived based on managements assumptions,
the estimated amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimates. The
carrying amounts and estimated fair values of the Companys financial
instruments at September 30, 2006, for which the disclosure of fair values is
required were as follows:

|                                         |  |                  |           |                          |   |           | 
|---------------------------------------- |  | ---------------- | --------- | ------------------------ | - | --------- | 
|                                         |  | Carrying
  Value |           | Estimated
  Fair
  Value |  
|                                         |  |                  |           |                          |  
|Financial
  assets:                      |  | (In thousands)   |          
|                                         |  |                  |          
|Cash and cash equivalents (a)            |  | $                | 96,665    |                          | $ | 96,665    | 
|Restricted cash and cash equivalents (a) |  |                  | 26,669    |                          |   | 26,669    | 
|Available-for sale securities (b)        |  |                  | 8,449,538 |                          |   | 8,449,538 | 
|Trading securities (b)                   |  |                  | 23,391    |                          |   | 23,391    | 
|Other investments (c)                    |  |                  | 11,168    |                          |   | 11,168    | 
|Derivative assets (d)                    |  |                  | 74,377    |                          |   | 74,377    | 
|Loans held for sale (e)                  |  |                  | 282,482   |                          |   | 283,522   | 
|Loans (e)                                |  |                  | 339,447   |                          |   | 339,487   | 

16

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|                                   |  |                        |           |                                      |   |           | 
|---------------------------------- |  | ---------------------- | --------- | ------------------------------------ | - | --------- | 
|                                   |  | Carrying
        Value |           | Estimated
        Fair
        Value |  
|                                   |  |                        |           |                                      |  
|Financial liabilities:             |  | (In thousands)         |          
|                                   |  |                        |          
|Repurchase
        agreements (a)  |  | $                      | 7,374,379 |                                      | $ | 7,374,379 | 
|Derivative
        liabilities (d) |  |                        | 25,355    |                                      |   | 25,355    | 
|Long-term
        debt:            |  |                        |           |                                      |   |           | 
|Market
        Square (f)          |  |                        | 276,000   |                                      |   | 276,000   | 
|Pinetree
        (f)               |  |                        | 287,905   |                                      |   | 287,905   | 
|Wachovia
        facility (f)      |  |                        | 222,050   |                                      |   | 222,050   | 
|Trust
        preferred (f)        |  |                        | 77,324    |                                      |   | 77,324    | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(a) | The carrying
  amounts approximated the fair value due to the short-term nature of these
  instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(b) | The
  estimated fair values were determined through references to price estimates
  provided by independent pricing services and/or dealers in the securities.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(c) | It was not
  practicable to estimate the fair value of these investments because the
  investments are not traded in an active market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(d) | All
  derivatives are recognized on the condensed consolidated balance sheets at
  fair value. 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.
|   
|(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.                                                                                                                                                                                                                                                                                                                                                                                                                  

13.
ACCUMULATED OTHER COMPREHENSIVE LOSS

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

|                                              |  |                                              |          |                    |   |         |   |   |         |  
|--------------------------------------------- |  | -------------------------------------------- | -------- | ------------------ | - | ------- | - | - | ------- | -
|                                              |  | For the nine months ended September 30, 2006 |         
|                                              |  |                                              |         
|                                              |  | Available-for-
  Sale Securities             |          | Cash Flow
  Hedges |   | Total   |  
|                                              |  |                                              |          |                    |   |         |  
|                                              |  | (In thousands)                               |         
|                                              |  |                                              |         
|Beginning balance                             |  | $                                            | (114,906 | )                  | $ | 70,203  |   | $ | (44,703 | )
|Unrealized
        net gain for the period    |  |                                              | 8,999    |                    |   | 22,014  |   |   | 31,013  |  
|Reclassification adjustments:                 |  |                                              |          |                    |   |         |   |   |         |  
|Securities sold                               |  |                                              | (7,127   | )                  |   |        |   |   | (7,127  | )
|Other-than-temporary impairment of
securities |  |                                              | 2,034    |                    |   |        |   |   | 2,034   |  
|Hedging net gain recognized in earnings       |  |                                              |         |                    |   | (30,963 | ) |   | (30,963 | )
|                                              |  |                                              |          |                    |   |         |   |   |         |  
|Ending balance                                |  | $                                            | (111,000 | )                  | $ | 61,254  |   | $ | (49,746 | )
|                                              |  |                                              |          |                    |   |         |   |   |         |  

14. DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES

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

17

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The following table is a summary of
derivative instruments held as of September 30, 2006:

|                                      |  |                   |           |            |             |                        |  |   |         |   |   |        |  
|------------------------------------- |  | ----------------- | --------- | ---------- | ----------- | ---------------------- |  | - | ------- | - | - | ------ | -
|                                      |  |                   |           | Derivative |             |                        | 
|                                      |  | Notional
  Amount |           |            |             | Estimated
  Fair Value | 
|                                      |  |                   | Assets    |            | Liabilities |                        | 
|                                      |  |                   |           |            |             |                        |  |   |        
|                                      |  | (In
  thousands)  |          
|                                      |  |                   |          
|Interest rate swaps -
  designated    |  | $                 | 6,586,450 |            | $           | 73,412                 |  | $ | (21,285 | ) | $ | 52,127 |  
|Interest rate swaps -
  undesignated  |  |                   | 74,000    |            |             |                       |  |   | (178    | ) |   | (178   | )
|Interest rate floors -
  undesignated |  |                   | 409,849   |            |             |                       |  |   | (3,814  | ) |   | (3,814 | )
|Credit default swaps -
  undesignated |  |                   | 71,000    |            |             | 806                    |  |   | (78     | ) |   | 728    |  
|Total return swaps -
  undesignated   |  |                   | 7,500     |            |             | 159                    |  |   |        |   |   | 159    |  
|                                      |  |                   |           |            |             |                        |  |   |         |   |   |        |  
|                                      |  | $                 | 7,148,799 |            | $           | 74,377                 |  | $ | (25,355 | ) | $ | 49,022 |  
|                                      |  |                   |           |            |             |                        |  |   |         |   |   |        |  

Cash
Flow Hedging Strategies

Hedging
instruments are designated, as appropriate, as cash flow hedges based upon the
specifically identified exposure, which may be an individual item or a group of
similar items. Hedged exposure is primarily interest expense on forecasted
rollover/reissuance of repurchase agreements for a specified future time period
and the hedged risk is the variability in those payments due to changes in the
benchmark rate. Hedging transactions are structured at inception so that the
notional amounts of the hedges are matched with an equal amount of repurchase
agreements forecasted to be outstanding in that specified period for which the
borrowing rate is not yet fixed. Cash flow hedging strategies include the
utilization of interest rate swaps and interest rate swap forwards. Any
ineffectiveness in the hedging relationship is recognized in interest expense
during the period in which it arises. Prior to the end of the specified hedge
period, the effective portion of all contract gains and losses is recorded in
other comprehensive income or loss. Realized gains and losses due to net
settlements on the hedging instruments are reclassified into earnings as an
adjustment to interest expense during the specified hedge time period. Hedging
instruments under these strategies are deemed to be designated to the outstanding
repurchase agreements and the forecasted rollover thereof. At September 30,
2006, the maximum length of time over which the Company is hedging its exposure
to the variability of future cash flows for forecasted transactions is
approximately 10 years.

For
the three and nine months ended September 30, 2006, the Company recognized an
increase to interest expense of $1.1 million and $0.7 million, respectively,
while recognizing a decrease to interest expense of $0.1 million for both the
three and nine months ended September 30, 2005, due to ineffectiveness. The
weighted average fixed rate payable on the cash flow hedges at September 30,
2006 is 4.50%. In November 2005, the Company entered into a designated swap
that contained a financing element, resulting in the receipt of a $3.7 million
cash payment that is being repaid through an above-market interest rate over
the life of the swap. As of September 30, 2006, the Company held 227 designated
interest rate swaps with a notional amount outstanding of $6.6 billion. Based
on amounts included in the accumulated other comprehensive loss at September
30, 2006 from designated interest rate swaps, the Company expects to recognize
a decrease of $50.2 million in interest expense over the next twelve months.

Other
Interest Rate Derivatives

As
of September 30, 2006, the Company held two interest rate swaps and two
interest rate floors with notional amounts of $74.0 million and $409.8 million,
respectively, that were not designated as hedges. Accordingly, changes in fair
value of these derivatives are recorded in net gain on derivatives in the
condensed consolidated statement of operations. As of September 30, 2006, these
interest rate swaps and interest rate floors had a net negative fair value of
$0.2 million and $3.8 million, respectively, recorded in derivative liabilities
in the condensed consolidated balance sheet. In connection with the two
interest rate floors, the Company received a payment of $3.3 million and in
return will make payments based on the spread in rates, if a one-month LIBOR
rate decreases below 5.05% and 5.00%, on the amortizing notional amounts. As of
September 30, 2006, the notional amount of the two interest rate floors was
$255.9 and $153.9 and are amortizing over four and twelve years, respectively.

Credit
Default Swaps

As
of September 30, 2006, the Company held 25 credit default swaps (CDS), as the
protection seller, with an aggregate notional amount of $71.0 million. A CDS is
a financial instrument used to transfer the credit risk of a reference entity
from one party to another for a specified period of time. In a standard CDS
contract, one party, referred to as the protection buyer, purchases credit
default protection from another party, referred to as the protection seller,
for a specific notional amount of obligations of a reference entity. In these
transactions, the protection buyer pays a premium to the protection seller. The
premium is generally paid quarterly in arrears, but may be paid in full up
front in the case of a CDS with a short maturity. Generally, if a pre-defined
credit event occurs during the term of the CDS, the protection seller pays the
protection buyer the notional amount and takes delivery of the reference
entitys obligation. As of September 30, 2006, these

18

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CDSs had a net
fair value of $0.7 million, recorded in derivative assets and derivative
liabilities in the condensed consolidated balance sheet in the amounts of $0.8
million and $0.1 million, respectively.

Total
Return Swaps

In
June 2006, the Company entered into a total return swap (TR). A TR represents
a total return on an underlying asset (e.g. a syndicated bank loan or bond)
offset by the cost of financing. The Company had one TR as of September 30,
2006 with a notional amount of $7.5 million. As of September 30, 2006, the TR
had a fair value of $0.2 million recorded in derivative assets in condensed
consolidated balance sheet.

15.
COMMITMENTS

The
timing and amount of additional funding on certain bank loans are at the
discretion of the borrower. The Company had unfunded commitments of $28.2
million at September 30, 2006.

16. SUBSEQUENT
EVENTS

On
  October 24, 2006, the Company declared a cash dividend of $0.40 per share on
  its common stock for the third quarter of 2006. The record date for the cash
  dividend was November 7, 2006, and the payment date is November 27, 2006.

On
October 27, 2006, the Company formed Deerfield Triarc Capital Trust III (Trust
III). Trust III was formed for the sole purpose of issuing and selling trust
preferred securities. In accordance with FIN 46R, Trust III will not be
consolidated into the Companys condensed consolidated financial statements
because the Company is not deemed to be the primary beneficiary of Trust III.
Through DTC LLC, the Company owns 100% of the common shares, totaling $1.4
million, of Trust III. Trust III issued $45.0 million of preferred shares to
unaffiliated investors. The rights of holders of common shares of the Trust are
subordinate to the rights of the holders of preferred shares only in the event
of a default; otherwise the common shareholders economic and voting rights are
pari passu with the preferred shareholders. In connection with the issuance and
sale of the trust preferred securities, DTC LLC issued junior subordinated debt
securities to Trust III of $46.4 million, which are guaranteed by the Company.

19

---



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 2 under the title Special Note Regarding Forward Looking
  Statements and our Annual Report on Form 10-K filed March 17, 2006 in
  Part I - Item 1A. Risk Factors. You should read the following
  discussion together with our condensed consolidated financial statements and
  notes thereto included in Part I - Item 1. Financial Statements
  on this Form 10-Q.

Overview

Deerfield
Triarc Capital Corp. (together with its subsidiaries) is a diversified
financial company formed in November 2004 to invest in real estate-related
assets, primarily mortgage-backed securities as well as alternative
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 asset classes:

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

The
following is a summary of our portfolio as of September 30, 2006:

|                                    |  |                  |           |                        |  |       | 
|----------------------------------- |  | ---------------- | --------- | ---------------------- |  | ----- | 
|Principal Investments               |  | Carrying
  Value |           | % of Total
  Portfolio | 
|                                    |  |                  |           |                        | 
|                                    |  | (In thousands)   |           |                        |  |      
|                                    |  |                  |           |                        |  |      
|RMBS (1)                            |  | $                | 8,125,381 |                        |  | 89.2% | 
|Loans:                              |  |                  |           |                        |  |       | 
|Loans held in CLO                   |  |                  | 265,322   |                        |  | 2.9%  | 
|Structured and syndicated loans (2) |  |                  | 335,118   |                        |  | 3.7%  | 
|Commercial mortgage loans (3)       |  |                  | 21,489    |                        |  | 0.2%  | 
|ABS held in
  CDO (4)               |  |                  | 296,771   |                        |  | 3.3%  | 
|Common and
  preferred equities     |  |                  | 13,227    |                        |  | 0.2%  | 
|High yield
  corporate bonds (5)    |  |                  | 27,400    |                        |  | 0.3%  | 
|Other
  investments                 |  |                  | 21,318    |                        |  | 0.2%  | 
|                                    |  |                  |           |                        |  |       | 
|Total                               |  | $                | 9,106,026 |                        |  |       | 
|                                    |  |                  |           |                        |  |       | 

|    |                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | RMBS assets include both trading interest-only strip securities
        and available-for-sale interest- and principal- only strip securities
        with a fair value of $5.1 million and $67.5 million, and notional value
        of $548.6 million and $291.1 million, respectively.
|    |                                                                                                                                                                                                                                                                                          
|(2) | Structured and syndicated
  loans exclude credit default swaps and total return swaps with a fair value
  of $0.7 million and $0.2 million and a $71.0 million and $7.5 million
  notional value, respectively.                                                                          
|    |                                                                                                                                                                                                                                                                                          
|(3) | Commercial mortgage loans includes participating interests in
        commercial mortgage loans.                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                          
|(4) | ABS held in CDO includes
  RMBS, CMBS and ABS.                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                          
|(5) | High yield corporate bonds
  include $10.0 million of bonds held in a CLO.                                                                                                                                                                                                               

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 $378.8 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

20

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leverage as
well as the proceeds from our initial private offering of common stock in a
leveraged portfolio of RMBS and alternative investments with total invested
assets, as of September 30, 2006, of $9.1 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.

Triarc
  Companies, Inc., or Triarc, is a holding company listed on the New York Stock
  Exchange. In addition to its ownership of approximately 64% of our Managers
  capital interests and 94% of its voting interests, Triarc, through its subsidiaries,
  is the franchisor of the Arbys® restaurant system and the owner and
  operator of Arbys® restaurants. Triarc has advised us that it is
  continuing to explore a possible corporate restructuring that is expected to
  involve the disposition of its asset management business, whether through a
  sale of its ownership interest in our Manager, a spin-off of its ownership interest
  in the Manager to Triarcs stockholders or such other means as Triarcs
  Board of Directors may conclude would be in the best interests of Triarcs
  stockholders. Triarc has also advised us that it can provide no assurance that
  the restructuring will occur or the form, terms, or timing of such restructuring
  if it does occur. Under the terms of our Management Agreement with the Manager,
  if the restructuring of Triarc results in a change of control (as defined in
  the Management Agreement) of the Manager, we have the right to terminate the
  Management Agreement upon 30 days prior written notice from our Board
  of Directors. Our Board has not yet made a determination as to any action it
  may take if the Triarc restructuring resulted in a change of control of the
  Manager, and does not expect to make such determination before the public announcement
  of a transaction by Triarc.

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

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

| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | interest rate trends,                                                                
| |   |                                                                                      
| |  | rates of prepayment on mortgages underlying our mortgage-backed
  securities, 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 magnify losses.

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

The
yield on our assets may be affected by a difference between the actual
prepayment rates and our projections. Prepayments on loans and securities may
be influenced by changes in market interest rates and a variety of economic,
geographic and other factors beyond our control, and consequently, such
prepayment rates cannot be predicted with certainty.

21

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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 our interest income on our assets
remain relatively constant.

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

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

The
Manager is entitled to receive a base management fee that is derived from the
amount of our equity (as defined in the Management Agreement), which is not significantly
impacted by the performance of our portfolio. Accordingly, our management fee
will not decrease significantly in the event of a decline in our profitability.

Trends

The
following trends may also affect our business:

Rising
interest rate environment. While the general level of
interest rates has recently declined slightly, interest rates have been
trending upwards since the middle of 2003.With respect to our existing MBS portfolio, which is heavily
concentrated in hybrid adjustable rate RMBS, such interest rate increases
should result in decreases in our net interest income, as there is a timing
mismatch between the reset dates on our MBS portfolio and the financing of
these investments. We currently have invested and intend to continue to invest
in hybrid adjustable-rate RMBS which are based on mortgages with interest rate
caps. The financing of these RMBS is short term in nature and does not include
an interest rate cap. This mismatch should result in a decrease in our net
interest income if rates increase sharply after the initial fixed rate period
and our interest cost increases more than the interest rate earned on our RMBS
due to the cap. In a rising rate environment, prepayment rates are generally
expected to decline. If prepayment rates are lower than expected, we could have
less capital to reinvest into higher rate mortgage securities, which should
result in a decrease in our net interest income. We have increasingly invested
in 15 and 30 year fixed rate securities, which are similarly exposed to
prepayment rates and the mismatched funding applicable to hybrid adjustable
rate securities. With respect to our existing and future floating rate
investments such as loans, 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 and interest rate swap forwards to hedge a
significant portion of the risk associated with increases in interest rates.
However, because we do not hedge 100% of the amount of short-term financing
outstanding, increases in interest rates should result in a decline in the
value of our portfolio, net of hedges. Similarly, decreases in interest rates
should result in an increase in the value of our portfolio.

Shape
of the yield curve. For much of 2005, the yield curve
experienced significant flattening as short term rates increased at a greater
rate than long term rates. For example, between December 31, 2004 and December
31, 2005, the yield on the three-month U.S. Treasury bill increased by 190
basis points, while the yield on the three-year U.S. Treasury note increased by
only 107 basis points. Between December 31, 2005 and September 30, 2006, this
trend continued, with the yield on the three-month U.S. Treasury bill
increasing by 80 basis points and the yield on the three-year U.S. Treasury
note increasing by 25 basis points. Given the economic environment and the
current flatness of the U.S. Treasury curve, it is difficult to predict if
the yield curve will steepen or a continued flattening or inversion 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 there be a flattening of
the yield curve or an inversion, 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.

22

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Prepayment
rates. Prepayment rates generally increase when
interest rates fall and decrease when interest rates rise, but changes in
prepayment rates are difficult to predict. Prepayment rates also may be
affected by other factors, including, without limitation, conditions in the
housing and financial markets, general economic conditions and the relative
interest rates on adjustable-rate and fixed-rate mortgage loans. Because
interest rates may continue to increase, RMBS prepayment rates may fall. If
interest rates begin to fall, triggering an increase in prepayment rates, our
current portfolio, which is heavily weighted towards hybrid adjustable-rate
mortgages, would cause decreases in our net interest income due to reinvestment
opportunities being in a lower rate environment.

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

Credit
spreads. The credit markets have experienced tight
credit spreads due to the robust demand for lending opportunities. With respect
to our credit portfolio, which includes commercial mortgage loans, asset-backed
securities held in a CDO, bank loans, high yield corporate bonds, preferred
shares and other corporate securities, and which accounts for 10.8% of our
total portfolio as of September 30, 2006, a narrowing of credit spreads could
result in decreases in the net interest income on future credit-oriented
investments.

Critical Accounting Policies

Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP. These accounting
principles require us to make some complex and subjective decisions and
assessments. Our most critical accounting policies involve decisions and
assessments that could affect our reported assets and liabilities, as well as
our reported revenues and expenses. We believe that all of the decisions and
assessments inherent in our financial statements were reasonable, based upon
information available to us at that time. 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 and dealers in the securities.
Different judgments and assumptions used in pricing could result in different
presentations of value.

When
  the fair value of an available-for-sale security is less than its amortized
  cost for an extended period, we consider whether there is an other-than-temporary
  impairment in the value of the security. If, in our judgment, an other-than-temporary
  impairment exists, the cost basis of the security is written down to the then-current
  fair value, and the unrealized loss is transferred from accumulated other comprehensive
  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:

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

The
determination of other-than-temporary impairment is made at least quarterly.
For the nine months ended September 30, 2006, we recognized a $2.0 million
other-than-temporary impairment related to two interest-only securities. We
have gross unrealized holding losses on available-for-sale securities of $118.6
million at September 30, 2006, which, if not

23

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recovered, may
result in the recognition of future losses. However, the majority of these
securities are of high credit rating and we intend and have the ability to hold
these securities until the fair value is recovered, which may be maturity, if
necessary.

Interest Income
Recognition

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

The
  amount of premium 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.

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, with any premium or
discount being amortized or accreted to income, and an allowance for loan
losses, if necessary. We determine fair value for our loans held for sale using
price estimates provided by an independent pricing service or dealer quotes. 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: (a) current financial information of the borrowing company and
performance against its operating plan; (b) changing value of collateral
supporting the loan; (c) changes to the market for the borrowing companys
service or product and (d) present value of projected future cash flows. If an
individual loans fair market value is below its cost, a valuation adjustment
is recognized in net gain (loss) on loans in our statement of operations and
the loans cost basis is adjusted. This valuation allowance is recoverable in
future periods. We accrue interest income based on the outstanding principal
amounts of the loans and their contractual terms.

Allowance and
Provision for Loan Losses

We
continually monitor 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 one of the following:
(i) observable market quotes, if available; (ii) the estimated sales price of
the collateral less estimated disposition costs, or (iii) the present value of
projected future cash flows. Increases in the allowance for loan losses are
recognized in the statements of operations as a provision for loan losses. If
the loan or a portion thereof is considered uncollectible and of such little
value that further pursuit of collection is not warranted, a charge-off or
write-down of a loan is recorded, and the allowance for loan losses is reduced.

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

We
identified no impaired loans in our portfolio at September 30, 2006 and have
not provided an allowance for loan losses at this time.

24

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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 is a credit
default swap, or CDS, in which we 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.

Management and
Incentive Fee Expense

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

Equity Compensation

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

25

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Variable Interest
Entities

In
accordance with Financial Accounting Standards Board, or FASB, Interpretation
46R,Consolidation of Variable Interest
Entities, or FIN 46R, we identify any potential variable interest
entities, or VIEs, and determine if the assets, liabilities, noncontrolling
interests, and results of operations of a VIE need to be included in our
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
deemed to be the primary beneficiary. This analysis may involve significant
judgments about projected cash flows of the VIE.

Trust Preferred
Securities

In
September 2005 and August 2006, we formed Deerfield Triarc Capital Trust I, or
Trust I, and Deerfield Triarc Capital Trust II, or Trust II (collectively the
Trusts), respectively, for the sole purpose of issuing and selling trust
preferred securities. In accordance with FIN 46R, the Trusts are not
consolidated into our condensed consolidated financial statements because
management has determined that we are not the primary beneficiary of the
Trusts. Through Deerfield Triarc Capital LLC, or DTC LLC, we own 100% of the
common shares of the Trusts, which also issued an aggregate of $75.0 million of
preferred shares to unaffiliated investors. The rights of holders of common
shares of the Trusts are subordinate to the rights of holders of preferred
shares only in the event of a default; otherwise common shareholders economic
and voting rights are pari passu with the preferred shareholders. We recorded
our investment in the Trusts common shares as other investments at cost and
record dividend income upon declaration of dividends by the Trusts.

On
August 2, 2006, we entered into a letter agreement with Taberna Securities,
LLC, or TS, and Bear, Stearns & Co. Inc. providing for the issuance and
sale of up to an additional $45.0 million in aggregate amount of trust
preferred securities, or the Additional Trust Preferred Securities, to be issued
by a subsidiary of DTC LLC other than Trust II. (See Recent Developments for
a discussion of the subsequent issuance of additional trust preferred
securities) We may require TS to cause the purchase of the Additional Trust
Preferred Securities prior to October 31, 2006 in no more than two separate
transactions of at least $15.0 million in principal amount each. TSs
obligation to purchase the Additional Trust Preferred Securities is subject to
a customary material adverse event condition. The Additional Trust Preferred
Securities will have the same interest rate, maturity, guarantee and other
terms as Trust IIs terms. We are not obligated to cause the issuance of the
Additional Preferred Securities.

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

Income Taxes

We
have elected to be taxed, and intend to continue to qualify, as a REIT and, as
a result, we do not expect to pay substantial corporate-level income taxes.
Many of the requirements for REIT qualification, however, are highly technical
and complex. If we were to fail to meet these requirements and do not qualify
for certain statutory relief provisions, we would be subject to federal and
state income tax, which could have a material adverse impact on our results of
operations and amounts available for distributions to our stockholders.
However, Deerfield Triarc TRS Holdings, Inc., a taxable REIT subsidiary, or
TRS, is subject to corporate-level income taxes.

Recent Accounting Pronouncements

In
February 2006, the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments. SFAS No. 155 amends SFAS
No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, which addresses the
application of SFAS No. 133 to beneficial interests in securitized financial
assets. SFAS No. 155 establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation. Additionally, SFAS No. 155 permits fair value
measurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. SFAS No. 155 is effective
for financial instruments acquired or issued after January 1, 2007. The
adoption of this standard is not expected to have a material impact on our
financial statements.

In
June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109(FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a

26

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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. FIN 48 will be effective for us
beginning in 2007. The adoption of FIN 48 is not expected to have a material
impact on our financial statements.

In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108).
SAB 108 clarifies SEC staff views regarding the process by which misstatements
in financial statements are evaluated for purposes of determining whether
financial statement restatement is necessary. SAB 108 is effective for fiscal
years ending after November 15, 2006, and early application is encouraged. The
adoption of SAB 108 is not expected to have a material impact on our 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.

Financial Condition

All
of our assets at September 30, 2006 were acquired through the use of proceeds
from our December 2004 initial private placement and June 2005 initial public
offering, operating cash flows, and 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.

The
following table summarizes the carrying value of our investment portfolio,
excluding credit default swaps and total return swaps, and the respective
balance sheet classification at September 30, 2006:

|                                                            |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|----------------------------------------------------------- |  | -------------------------------- | --------- | -------------------- | - | ------------------- |  | --------------------- | ------ | ----- | - | ------- |  | - | ------- |  | - | --------- | 
|                                                            |  | Carrying Value                   |          
|                                                            |  |                                  |          
|Security Description                                        |  | Available-for-
  Sale Securities |           | Trading
  Securities |   | Other
  Investments |  | Loans Held
  For Sale |        | Loans |   | Total   | 
|                                                            |  |                                  |           |                      |   |                     |  |                       |        |       |   |         | 
|                                                            |  | (In thousands)                   |          
|                                                            |  |                                  |          
|RMBS                                                        |  | $                                | 8,120,331 |                      | $ | 5,050               |  | $                     |       |       | $ |        |  | $ |        |  | $ | 8,125,381 | 
|                                                            |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|                                                            |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|Loans - structured and syndicated (1)                       |  |                                  |          |                      |   |                    |  |                       |       |       |   | 17,160  |  |   | 339,447 |  |   | 356,607   | 
|Common and preferred equities                               |  |                                  | 2,059     |                      |   |                    |  |                       | 11,168 |       |   |         |  |   |        |  |   | 13,227    | 
|Other investments                                           |  |                                  | 2,977     |                      |   |                    |  |                       |       |       |   |        |  |   |        |  |   | 2,977     | 
|                                                            |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|Total structured and syndicated assets                      |  |                                  | 5,036     |                      |   |                    |  |                       | 11,168 |       |   | 17,160  |  |   | 339,447 |  |   | 372,811   | 
|                                                            |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|Loans held in CLO                                           |  |                                  |          |                      |   |                    |  |                       |       |       |   | 265,322 |  |   |        |  |   | 265,322   | 
|Asset-backed securities held in CDO (2)                     |  |                                  | 296,771   |                      |   |                    |  |                       |       |       |   |        |  |   |        |  |   | 296,771   | 
|High yield corporate bonds and other trading securities
(3) |  |                                  | 27,400    |                      |   | 18,341              |  |                       |       |       |   |        |  |   |        |  |   | 45,741    | 
|                                                            |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|Total alternative assets                                    |  |                                  | 329,207   |                      |   | 18,341              |  |                       | 11,168 |       |   | 282,482 |  |   | 339,447 |  |   | 980,645   | 
|                                                            |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|Total invested assets                                       |  | $                                | 8,449,538 |                      | $ | 23,391              |  | $                     | 11,168 |       | $ | 282,482 |  | $ | 339,447 |  | $ | 9,106,026 | 
|                                                            |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 

---

|    |                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Loans  structured and
  syndicated includes $12.2 million of participating interests in commercial
  mortgage loans and excludes credit default swaps and total return swaps with
  a fair value of approximately $0.7 million and $0.2 million and $71.0 million
  and $7.5 million notional value, respectively.
|   
|   
|(2) | Asset-backed securities
  held in CDO include RMBS, CMBS and ABS.                                                                                                                                                                                                                                                  
|   
|(3) | High yield corporate bonds
  include $10.0 million of bonds held in a CLO.                                                                                                                                                                                                                                         

Mortgage-Backed
Securities

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

|                     |  |                          |           |                                                   |   |          |   |   |           |  
|-------------------- |  | ------------------------ | --------- | ------------------------------------------------- | - | -------- | - | - | --------- | -
|                     |  | As of September 30, 2006 |          
|                     |  |                          |          
|                     |  | RMBS                     |           | Interest-only
  and
  Principal-only
  Securities |   | Total    |  
|                     |  |                          |           |                                                   |   |          |  
|                     |  | (In
thousands)           |          
|                     |  |                          |          
|Par amount (1)       |  | $                        | 8,115,178 |                                                   | $ | 291,079  |   | $ | 8,406,257 |  
|Unamortized premium  |  |                          | 63,234    |                                                   |   |         |   |   | 63,234    |  
|Unamortized discount |  |                          | (17,380   | )                                                 |   | (220,060 | ) |   | (237,440  | )
|                     |  |                          |           |                                                   |   |          |   |   |           |  
|Amortized cost       |  |                          | 8,161,032 |                                                   |   | 71,019   |   |   | 8,232,051 |  
|Unrealized gains     |  |                          | 3,515     |                                                   |   | 762      |   |   | 4,277     |  
|Unrealized losses    |  |                          | (111,706  | )                                                 |   | (4,291   | ) |   | (115,997  | )
|                     |  |                          |           |                                                   |   |          |   |   |           |  
|Fair value           |  | $                        | 8,052,841 |                                                   | $ | 67,490   |   | $ | 8,120,331 |  
|                     |  |                          |           |                                                   |   |          |   |   |           |  

---

|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The par amount for
  interest-only and principal-only securities has been reduced by $2.0 million
  of other-than temporary impairment recognized on securities held as of
  September 30, 2006.

27

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The
  Companys RMBS are agency or AAA-rated in credit quality. At September
  30, 2006, we held 286 RMBS securities with a fair value of $7.1 billion, valued
  below cost, of which 246 securities with a fair value of $5.9 billion were valued
  below cost for greater than twelve months. During the nine months ended September
  30, 2006, we recognized a $2.0 million other-than-temporary impairment related
  to two inverse interest-only securities. These inverse interest-only securities
  cash flows decrease as LIBOR increases. We used updated cash flow projections
  from a third party to determine the amount of the impairment. As a result of
  the impairment charge, these two securities were written down to the then-current
  fair value, and the unrealized loss transferred from accumulated other comprehensive
  income (loss) as an immediate reduction of earnings recognized as a reduction
  to the net gain (loss) on available-for-sale securities in the condensed consolidated
  statements of operations. We do not believe any other RMBS are other-than-temporarily
  impaired at September 30, 2006 and we have the intent and ability to hold these
  securities until the value is recovered, which may be to maturity.

At
September 30, 2006, a large portion of the RMBS in our portfolio were purchased
at a premium to their par value and our portfolio had a net amortized cost of
100.6% of the face amount. The RMBS (excluding the stripped securities) are
valued below par at September 30, 2006 because the weighted-average yield is
lower than prevailing market rates. Premium bonds tend to have shorter
durations than discount or par bonds and their values are thus less sensitive
to interest rate movement. As of September 30, 2006, the relative fair value of
our RMBS portfolio versus its amortized cost declined from December 31, 2005
due to an increase in prevailing market interest rates. Our total RMBS net
premium amortization expense for the three and nine months ended September 30,
2006 was $6.6 million, and $18.1 million, respectively. As of September 30,
2006, we had $45.9 million of unamortized net premium, excluding the stripped
securities, included in the cost basis of our available-for-sale RMBS
securities. The current weighted average life of the portfolio is 4.2 years,
which represents the average number of years for which each dollar of unpaid
principal remains outstanding. Accordingly, 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 0.3 years at September 30, 2006. 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 discussion of leverage on page 38).

The
following table details our RMBS holdings as of September 30, 2006, of which
$8.1 billion and $5.1 million are classified as available-for-sale securities
and trading securities, respectively:

|                                                |  |                |           |                        |   |                  |  |                       |   |                     |  |                        |  |                                  |   |                         |  |          |  |  |      |  |       |   | 
|----------------------------------------------- |  | -------------- | --------- | ---------------------- | - | ---------------- |  | --------------------- | - | ------------------- |  | ---------------------- |  | -------------------------------- | - | ----------------------- |  | -------- |  |  | ---- |  | ----- | - | 
|                                                |  |                |           |                        |   | Weighted Average | 
|                                                |  |                |           |                        |   |                  | 
|Security Description (1)                        |  | Par Amount     |           | Estimated
  Fair Value |   | Coupon           |  | Months to
  Reset (2) |   | Yield to
  Maturity |  | Contractual
  Maturity |  | Constant
  Prepayment
  Rate (3) |   | Modified
  Duration (4) | 
|                                                |  |                |           |                        |   |                  |  |                       |   |                     |  |                        |  |                                  |   |                         | 
|                                                |  | (In thousands) |           |                        |   |                  |  |                       |   |                     |  |                        |  |                                  |  
|                                                |  |                |           |                        |   |                  |  |                       |   |                     |  |                        |  |                                  |  
|Agency Hybrid Adjustable Rate RMBS:             |  |                |           |                        |   |                  |  |                       |   |                     |  |                        |  |                                  |   |                         |  |          |  |  |      |  |       |   | 
|Rate reset in 1 year or less                    |  | $              | 307,656   |                        | $ | 306,137          |  | 4.36                  | % |                     |  | 6                      |  | 5.56                             | % |                         |  | 12/25/34 |  |  | 40.3 |  | 1.2   |   | 
|Rate reset in 1 to 3 years                      |  |                | 1,123,494 |                        |   | 1,113,270        |  | 4.67                  | % |                     |  | 25                     |  | 5.59                             | % |                         |  | 01/17/35 |  |  | 31.0 |  | 1.8   |   | 
|Rate reset in 3 to 5 years                      |  |                | 2,778,084 |                        |   | 2,756,517        |  | 4.91                  | % |                     |  | 41                     |  | 5.52                             | % |                         |  | 05/25/35 |  |  | 28.1 |  | 1.9   |   | 
|Rate reset in 5 to 7 years                      |  |                | 95,865    |                        |   | 94,568           |  | 4.96                  | % |                     |  | 66                     |  | 5.62                             | % |                         |  | 06/24/35 |  |  | 21.8 |  | 2.6   |   | 
|Rate reset in 7 to 10 years                     |  |                | 422,648   |                        |   | 416,792          |  | 5.22                  | % |                     |  | 106                    |  | 5.67                             | % |                         |  | 07/22/35 |  |  | 15.5 |  | 3.5   |   | 
|                                                |  |                |           |                        |   |                  |  |                       |   |                     |  |                        |  |                                  |   |                         |  |          |  |  |      |  |       |   | 
|Agency Fixed Rate RMBS:                         |  |                |           |                        |   |                  |  |                       |   |                     |  |                        |  |                                  |   |                         |  |          |  |  |      |  |       |   | 
|15 year                                         |  |                | 120,065   |                        |   | 120,129          |  | 5.50                  | % |                     |  | n/a                    |  | 5.48                             | % |                         |  | 10/23/20 |  |  | 11.9 |  | 3.0   |   | 
|30 year                                         |  |                | 1,795,771 |                        |   | 1,789,883        |  | 5.82                  | % |                     |  | n/a                    |  | 5.81                             | % |                         |  | 12/18/35 |  |  | 13.3 |  | 3.3   |   | 
|                                                |  |                |           |                        |   |                  |  |                       |   |                     |  |                        |  |                                  |   |                         |  |          |  |  |      |  |       |   | 
|Non-Agency AAA-Rated RMBS:                      |  |                |           |                        |   |                  |  |                       |   |                     |  |                        |  |                                  |   |                         |  |          |  |  |      |  |       |   | 
|Hybrid adjustable rate                          |  |                | 789,851   |                        |   | 787,726          |  | 5.36                  | % |                     |  | 43                     |  | 5.78                             | % |                         |  | 05/15/35 |  |  | 29.2 |  | 1.6   |   | 
|Fixed rate                                      |  |                | 681,744   |                        |   | 667,819          |  | 5.55                  | % |                     |  | n/a                    |  | 5.88                             | % |                         |  | 01/31/34 |  |  | 12.2 |  | 4.9   |   | 
|                                               
|Other (5):                                      |  |                |           |                        |   |                  |  |                       |   |                     |  |                        |  |                                  |   |                         |  |          |  |  |      |  |       |   | 
|Interest-only
        strips                    |  |                | 220,802   |                        |   | 33,568           |  | n/m                   |   |                     |  | n/a                    |  | 15.00                            | % |                         |  | 05/01/35 |  |  | 10.3 |  | (43.1 | ) | 
|Interest-only
        strips - trading          |  |                | 548,614   |                        |   | 5,050            |  | n/m                   |   |                     |  | n/a                    |  | 11.67                            | % |                         |  | 05/13/35 |  |  | 12.3 |  | 74.0  |   | 
|Interest-only
        and principal only strips |  |                | 70,277    |                        |   | 33,922           |  | n/m                   |   |                     |  | n/a                    |  | 6.04                             | % |                         |  | 09/25/34 |  |  | 10.2 |  | 3.8   |   | 
|                                                |  |                |           |                        |   |                  |  |                       |   |                     |  |                        |  |                                  |   |                         |  |          |  |  |      |  |       |   | 
|Total RMBS                                      |  | $              | 8,954,871 |                        | $ | 8,125,381        |  |                       |   |                     |  |                        |  |                                  |   |                         |  |          |  |  |      |  |       |   | 
|                                                |  |                |           |                        |   |                  |  |                       |   |                     |  |                        |  |                                  |   |                         |  |          |  |  |      |  |       |   | 

---

|                                            |                                                                                                                                                                                                                                                                       
|------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 par amount reflected should not be used as a comparison to 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.

28

---



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

As
of September 30, 2006, 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 30
years from date of issuance.

After
the reset date, interest rates on our hybrid adjustable rate RMBS float based
on spreads over various LIBOR indices. These interest rates are subject to caps
that limit the amount the applicable interest rate can increase during any
year, known as an annual cap, and through the maturity of the applicable
security, known as a lifetime cap. At September 30, 2006, the weighted average
lifetime cap for the portfolio is an increase of 10.3% over the fixed rate, the
weighted average maximum increase in the first year that the rates are
adjustable is 4.6% and the weighted average maximum annual increase for years
subsequent to the first year is 2.1%.

Interest-only
strips are purchased primarily as duration management tools or to enhance
overall yields. 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 available-for sale RMBS,
according to their weighted average life:

|                                                  |  |                    |           |                          |   |           | 
|------------------------------------------------- |  | ------------------ | --------- | ------------------------ | - | --------- | 
|                                                  |  | September 30, 2006 |          
|                                                  |  |                    |          
|Weighted
  Average Life                           |  | Amortized
  Cost   |           | Estimated
  Fair
  Value |  
|                                                  |  |                    |           |                          |  
|Greater than
  one year and less than five years  |  | $                  | 5,725,858 |                          | $ | 5,643,533 | 
|Greater than
  five years and less than ten years |  |                    | 2,191,284 |                          |   | 2,177,260 | 
|Greater than
  ten years                          |  |                    | 314,909   |                          |   | 299,538   | 
|                                                  |  |                    |           |                          |   |           | 
|Total                                             |  | $                  | 8,232,051 |                          | $ | 8,120,331 | 
|                                                  |  |                    |           |                          |   |           | 

The
weighted average lives of the RMBS in the tables above are based upon
prepayment models obtained through subscription-based financial information
service providers. The prepayment model considers current yield, forward yield,
slope of the yield curve, mortgage rates, the contractual rate of the
outstanding loan, loan age, margin and volatility. For purposes of this
disclosure, weighted average life represents the average number of years for
which each dollar of unpaid principal remains outstanding. Weighted average
life estimates how many years it will take to pay half of the outstanding
principal.

The
actual weighted average lives of the RMBS in our investment portfolio could be
longer or shorter than the estimates in the table above depending on the actual
prepayment rates experienced over the lives of the applicable securities and
the sensitivity to changes in both prepayment rates and interest rates. Our
RMBS are recorded in available-for-sale securities in our condensed
consolidated balance sheet as of September 30, 2006 and include our inverse
interest-only strip securities, with the exception of two inverse interest-only
strip securities, with a fair value of $5.1 million, classified as trading
securities.

Asset-Backed
Securities Held in CDO

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

29

---



The
following table summarizes the Pinetree investments by asset class at September
30, 2006:

|                                     |  |                |         |              |   |                           | 
|------------------------------------ |  | -------------- | ------- | ------------ | - | ------------------------- | 
|Asset Class                          |  | Par
  Amount   |         | Fair
  Value |   | Weighted
  Average
  Life | 
|                                     |  |                |         |              |   |                           | 
|                                     |  | (In thousands) |         | (In years)   |  
|                                     |  |                |         |              |  
|Residential B/C mortgage             |  | $              | 178,356 |              | $ | 179,331                   | 
|Residential A mortgage               |  |                | 29,272  |              |   | 28,515                    | 
|Home equity loan                     |  |                | 38,421  |              |   | 37,812                    | 
|CMBS conduit                         |  |                | 28,996  |              |   | 28,867                    | 
|CMBS large loan                      |  |                | 7,384   |              |   | 7,394                     | 
|ABS collateralized bond
  obligation |  |                | 8,362   |              |   | 8,327                     | 
|Credit card                          |  |                | 3,000   |              |   | 3,097                     | 
|Automobile loan                      |  |                | 2,000   |              |   | 1,976                     | 
|Small business loan                  |  |                | 1,431   |              |   | 1,452                     | 
|                                     |  |                |         |              |   |                           | 
|Total                                |  | $              | 297,222 |              | $ | 296,771                   | 
|                                     |  |                |         |              |   |                           | 

At
September 30, 2006, Pinetree held $296.8 million of ABS classified as
available-for-sale securities and $9.7 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 24.7% and 75.3% of the portfolio,
respectively.  The fixed portfolio has a
weighted average rate of 5.69% while the variable portfolio has a weighted
average spread of 2.01% over LIBOR.

The
table below summarizes the Pinetree portfolio by Moodys rating at September
30, 2006:

|               |  |  |            |  
|-------------- |  |  | ---------- | -
|Moodys Rating |  |  | % of Total
|               |  |  |           
|Aaa            |  |  | 3.65       | %
|Aa1            |  |  | 0.44       | %
|Aa2            |  |  | 0.67       | %
|Aa3            |  |  | 1.68       | %
|A1             |  |  | 1.20       | %
|A2             |  |  | 4.31       | %
|A3             |  |  | 4.81       | %
|Baa1           |  |  | 13.34      | %
|Baa2           |  |  | 33.46      | %
|Baa3           |  |  | 36.44      | %
|               |  |  |            |  
|               |  |  | 100.00     | %
|               |  |  |            |  

The
Moodys weighted average rating factor, or WARF, for the Pinetree portfolio as
of September 30, 2006 is 393, which translates to a weighted average Moodys
rating of between Baa2 and Baa3.  At
September 30, 2006, we held 65 asset-backed securities with a fair value of
$115.9 million, valued below cost, of which 35 securities with a fair value of
$63.0 million were valued below cost for greater than twelve months.  None of the asset-backed securities had been
downgraded by the two major credit rating agencies since their purchase.  We do not believe any of the asset-backed
securities are other-than-temporarily impaired at September 30, 2006 and we
have the intent and ability to hold these securities until the value is
recovered, which may be to maturity.

Loans and Credit
Derivatives

At
  September 30, 2006, we held loans totaling $621.9 million, or 6.8% of our investment
  portfolio. We held $351.6 million funded directly, $265.3 million via a CLO
  transaction in one of our taxable REIT subsidiary entities, Market Square CLO
  Ltd, or Market Square and $5.0 million of loans we purchased. These loans are
  classified in held for sale and carried at the lower of cost or fair value.
  Loans held for investment were $339.4 million at September 30, 2006. These loans
  are carried at amortized cost with any discount or premium accreted or amortized
  in interest income using the interest method. We assess loans held for investment
  for impairment and record an allowance for loan losses if necessary. We identified
  no estimated probable credit losses in our portfolio as of September 30, 2006
  and thus have not provided an allowance for loan losses.

30

---



The following
summarizes our loan portfolio, excluding credit default swaps, by loan classification
at September 30,  2006:

|                                  |  | Carrying Value |        
|--------------------------------- |  | -------------- | -------
|                                  |  |                |        
|Type of
  Loan                    |  | Loans          |        
|                                  |  |                |        
|                                  |  | (In thousands) |        
|                                  |  |                |        
|Loans held in CLO                 |  | $              |       
|Structured and syndicated
  loans |  |                | 330,118
|Commercial mortgages              |  |                | 9,329  
|                                  |  |                |        
|                                  |  | $              | 339,447
|                                  |  |                |        

---

|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(1) | Commercial mortgage
  loans include participating interests in commercial mortgage loans

Loans
Held in CLO

In
March 2005, we entered into an agreement to finance the purchase of up to
$300.0 million of syndicated bank loans by Market Square during the warehouse
period. In May 2005, Market Square repaid the warehouse borrowing and issued
preference shares of $24.0 million and several classes of notes aggregating
$276.0 million. We purchased 100% of the preference shares representing
substantially all of the equity interest in Market Square.  Upon review of the transaction and
subsequent securitization, we determined that Market Square was a VIE under FIN
46R and we were the primary beneficiary of the VIE, causing us to consolidate
Market Square. The notes have a weighted average interest rate of LIBOR plus
0.49% and are secured by the loan portfolio. At September 30, 2006, Market
Square had $265.9 million of loans outstanding with a carrying value of $266.3
million which is included in loans held for sale, $16.9 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. The weighted average coupon spread
over LIBOR on the loan portfolio was 2.73% and the weighted average contractual
maturity was 5.3 years.

The
following table summarizes the Market Square loan portfolio by Moodys rating
as of September 30, 2006:

|                 |  |                |         |                          |        |                  |  |                        |   |  |  |          | 
|---------------- |  | -------------- | ------- | ------------------------ | ------ | ---------------- |  | ---------------------- | - |  |  | -------- | 
|                 |  |                |         |                          |        | Weighted Average | 
|                 |  |                |         | Estimated
  Fair
  Value |        |                  | 
|Moodys
  Rating |  | Par
  Value    |         |                          | Spread |                  |  | Contractual
  Maturity |  
|                 |  |                |         |                          |        |                  |  |                        |   | 
|                 |  | (In thousands) |         |                          |        |                  | 
|                 |  |                |         |                          |        |                  | 
|Baa3             |  | $              | 1,994   |                          | $      | 1,998            |  | 2.25                   | % |  |  | 12/09/06 | 
|Ba1              |  |                | 11,458  |                          |        | 11,492           |  | 1.74                   | % |  |  | 09/02/10 | 
|Ba2              |  |                | 12,234  |                          |        | 12,264           |  | 1.80                   | % |  |  | 03/18/12 | 
|Ba3              |  |                | 43,546  |                          |        | 43,603           |  | 2.24                   | % |  |  | 02/14/12 | 
|B1               |  |                | 68,428  |                          |        | 68,340           |  | 2.35                   | % |  |  | 02/19/12 | 
|B2               |  |                | 102,628 |                          |        | 103,062          |  | 3.23                   | % |  |  | 05/22/12 | 
|B3               |  |                | 22,705  |                          |        | 22,680           |  | 3.46                   | % |  |  | 06/25/11 | 
|Caa1             |  |                | 2,948   |                          |        | 2,878            |  | 3.52                   | % |  |  | 01/30/12 | 
|                 |  |                |         |                          |        |                  |  |                        |   |  |  |          | 
|                 |  | $              | 265,941 |                          | $      | 266,317          |  | 2.73                   | % |  |  |          | 
|                 |  |                |         |                          |        |                  |  |                        |   |  |  |          | 

The
Market Square bank loan portfolio is diversified across 31 Moodys industries
as of September 30, 2006.  The Market
Square portfolio as of September 30, 2006 has a WARF of 2365, which translates
to a weighted average Moodys rating of between B1and B2.

31

---



Structured
and Syndicated Loans

The
following table summarizes our structured and syndicated loans as of September
30, 2006:

|                      |  |                  |         |                             |  |       |  
|--------------------- |  | ---------------- | ------- | --------------------------- |  | ----- | -
|Type of
  Loan        |  | Carrying
  Value |         | Weighted
  Average
  Coupon | 
|                      |  |                  |         |                             | 
|                      |  | (In thousands)   |         |                             | 
|                      |  |                  |         |                             | 
|First lien            |  | $                | 104,358 |                             |  | 11.05 | %
|Second lien           |  |                  | 159,876 |                             |  | 13.11 | %
|Mezzanine
  and other |  |                  | 70,884  |                             |  | 14.05 | %
|                      |  |                  |         |                             |  |       |  
|                      |  | $                | 335,118 |                             |  | 12.67 | %
|                      |  |                  |         |                             |  |       |  

At
September 30, 2006, we had structured and syndicated loans totaling $335.1
million, $330.1 million classified as loans held for investment and $5.0
million of loans held for sale.  The
mezzanine and other loans are generally unsecured.

Commercial
Mortgage Loans (including participating interests)

At
September 30, 2006, we had invested in junior participation interests in
commercial mortgages originated by Hometown Commercial Capital, LLC, classified
as held for sale, and held three commercial mortgage loans, classified as held
for investment, we originated with a carrying value of $12.2 million and $9.3
million, respectively.

Credit
Default Swaps

At
September 30, 2006, we held 25 credit default swaps, as the protection seller,
with an aggregate notional amount of $71.0 million.  As of September 30, 2006, these CDS had a net fair value of $0.7
million, recorded in derivative assets and derivative liabilities in the
condensed consolidated balance sheet in the amounts of $0.8 million and $0.1
million, respectively.

Total
Return Swaps

At
September 30, 2006, we held one total return swap with a notional amount of
$7.5 million and a fair value of $0.2 million recorded in derivative assets.

Common and Preferred
Equities

At
September 30, 2006, our common and preferred equities investments had a total
carrying value of $13.2 million.  Equity
investments with a readily determinable fair value are classified as
available-for-sale securities in our condensed consolidated balance sheet.   All other equity investments are classified
as other investments.

Interest Receivable

At
September 30, 2006, our interest receivable of $55.0 million related to the
following:

| |   |                                           
| | - | ------------------------------------------
| |  | RMBS - $37.8
  million                    
| |   |                                           
| |  | Loans  - $10.1 million                    
| |   |                                           
| |  | Derivatives
  - $4.5 million              
| |   |                                           
| |  | Various
  other investments - $2.6 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.

For
each of the periods ended September 30, 2006 and 2005, we entered into interest
rate swaps and interest rate swap forwards as a means of mitigating our
interest rate risk on forecasted interest expense associated with repurchase
agreements for a specified future time period, represented by the term of the
interest rate swap contract. An interest rate swap is a

32

---



contractual
agreement entered into by two parties under which each agrees to make periodic
payments to the other for an agreed period of time based upon a notional amount
of principal. Under the most common form of interest rate swap, a series of
payments calculated by applying a fixed rate of interest to a notional amount
of principal is exchanged for a stream of payments similarly calculated using a
floating rate of interest. This is a fixed-floating interest rate swap. We
hedge a portion of our short-term debt by entering into fixed-floating interest
rate swap agreements whereby we receive the floating rate of interest and pay a
fixed rate of interest. An interest rate swap forward is an interest rate swap
based on a floating interest rate to be set at an agreed future date at which
time the swap becomes effective.

At
September 30, 2006, we had a portfolio of 227 designated interest rate swaps
with maturities ranging from December 2006 to August 2016 and a total notional
amount of $6.6 billion and a net fair value of $52.1 million. Under the
interest rate swap and interest rate swap forward agreements we have in place,
we receive interest at rates that reset periodically, generally every one or
three months, and usually pay a rate fixed at the initiation of and for the
life of the swap agreements. The current market value of interest rate swaps is
heavily dependent on the current market fixed rate, the corresponding term
structure of floating rates as well as the expectation of changes in future floating
rates (yield curve). As expectations of future floating rates change, the
market value of interest rate swaps changes. Based on the daily market value of
those interest rate swaps and interest rate swap forward contracts, our
counterparties may request additional margin collateral or we may request
additional collateral from our counterparties to ensure that an appropriate
margin account balance is maintained at all times through the maturity of the
contracts. At September 30, 2006, the unrecognized gain on interest rate swap
transactions in accumulated other comprehensive income of $61.3 million
includes cumulative deferred gains on terminated swaps of $4.4 million that
will be amortized over the original hedging period.

As
of September 30, 2006, we held two interest rate swaps and two interest rate
floors with notional amounts of $74.0 million and $409.8 million, respectively,
that were not designated as hedges. Accordingly, changes in fair value of these
derivatives are recorded in net gain on derivatives in the condensed
consolidated statement of operations. As of September 30, 2006, these interest
rate swaps and interest rate floors had a net negative fair value of $0.2
million and $3.8 million, respectively, recorded in derivative liabilities in
the condensed consolidated balance sheet. In connection with the two interest
rate floors, we received a payment of $3.3 million and in return will make
payments based on the spread in LIBOR rates, if a one-month LIBOR decreases
below 5.05% and 5.00%, on the amortizing notional amounts. As of September 30,
2006, the notional amount of the two interest rate floors was $255.9 and $153.9
and are amortizing over four and twelve years, respectively.

Liabilities

We
have entered into repurchase agreements to finance many of our purchases of
RMBS. These agreements are secured by RMBS and bear interest rates that have
historically moved in close relationship to LIBOR. As of September 30, 2006, we
established 17 borrowing relationships with various financial institutions and
other lenders. As of September 30, 2006, we had an outstanding repurchase
agreement balance with 11 of those relationships.

At
September 30, 2006, we had outstanding repurchase agreement liabilities of $7.4
billion, including accrued interest, with a weighted-average current borrowing
rate of 5.39%. We intend to renew these repurchase agreements as they mature
under the then-applicable borrowing terms of the counterparties to the
repurchase agreements. At September 30, 2006, the repurchase agreements were
secured by RMBS and other investment securities with an estimated fair value of
$7.5 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 $140.0 million at September 30,
2006. 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). Financing under the Facility will be secured by assets ranging
from large syndicated bank loans to subordinated notes and preferred stock.
Advance rates under the Facility vary by asset type. The Facility is available
to two bankruptcy remote special purpose vehicles (DWFC, LLC and Deerfield
Triarc TRS (Bahamas) Ltd.) and the debt holder has recourse only to the assets
of these entities, which total $339.4 million at September 30, 2006. We expect
to pursue term funding of these assets via securitization in a future CDO. At
September 30, 2006, we had $222.1 million of debt outstanding related to the
Facility. We incurred $1.2 million of debt issuance costs that are being
amortized 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.

We
terminated warehousing agreements and replaced those liabilities with the
issuance of long-term debt and equity securities by Pinetree and Market Square
as of November 30, 2005 and May 10, 2005, respectively. The Pinetree and Market
Square long-term debt issuances bear weighted average interest rates, that
reset quarterly, of LIBOR plus 0.55% and 0.49% and

33

---



based on the last reset date
were 6.03% and 5.99%, respectively, as of September 30, 2006. As of September
30, 2006, we have $287.9 million and $276.0 million of long-term debt resulting
from the Pinetree and Market Square transactions, respectively.

On
September 29, 2005 and August 2, 2006, we issued $51.6 million and $25.8
million of unsecured junior subordinated notes payable to Trust I and Trust II,
respectively. The Trust I securities mature on October 23, 2035 but are
callable by us on or after October 10, 2010 and the Trust II securities mature
on October 20, 2036 but are callable by us on or after October 30, 2011.
Interest is payable quarterly at a floating rate equal to LIBOR plus 3.50% per
annum and 2.25% per annum for the Trust I and Trust II, respectively. This rate
was 8.99% and 7.72% for Trust I and Trust II, respectively, at September 30,
2006.

At
September 30, 2006, we had $411.6 million due to broker; all amounts are
expected to settle in the following quarter. The due to broker consisted of the
following:

| |   |                                                
| | - | -----------------------------------------------
| |  | Unsettled
  RMBS purchases - $366.5 million    
|
| |  | Unsettled
  bank loan purchases - $25.7 million
|
| |  | Swap margin
  due to broker - $19.5 million    

Interest
payable at September 30, 2006 of $24.0 million consists of:

| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | Net accrued
  interest payable on interest rate swaps - $12.5 million        
|
| |  | Market
  Square long-term debt interest payable - $3.3 million               
|
| |  | Pinetree
  long-term debt interest payable - $4.2 million                    
|
| |  | Revolving
  Warehouse Facility long-term debt interest payable - $2.9 million
|
| |  | Unsecured
  junior subordinated interest payable to Trusts - $1.1 million    

At
September 30, 2006, we had $3.5 million payable to our Manager for management
and incentive fees totaling $2.2 million and $1.3 million, respectively.

At
September 30, 2006, other payables of $1.9 million consisted of:

| |   |                                                
| | - | -----------------------------------------------
| |  | Debt
  issuance costs - $0.9 million           
|
| |  | Audit and
  tax related services - $0.2 million
|
| |  | Income taxes
  payable - $0.2 million          
|
| |  | Other
  miscellaneous - $0.6 million           

Stockholders Equity

Stockholders
equity at September 30, 2006 was $712.5 million and primarily consisted of the
following 2006 activity:

| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net
  unrealized gain on available-for-sale securities - $3.9 million                                                                                                                                                    
|
| |  | Net unrealized
  loss on cash flow hedges - $8.9 million (including a net change of $(1.7)
  million related to deferred gains on terminated interest rate swaps that are
  amortized over their original hedging period)
|
| |  | Contributions
  to additional paid-in capital related to compensation for restricted stock,
  common stock grants and option grants to our Manager - $1.6 million                                                        
|
| |  | Contributions
  to additional paid-in capital related to compensation paid to our independent
  directors in the form of fully vested shares of common stock - $0.1 million                                              
|
| |  | Retained
  earnings - $56.9 million of net income less $38.2 million of declared
  dividends                                                                                                                             

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

Results of Operations

For the three and
nine months ended September 30, 2006 compared to the three and nine months
ended September 30, 2005

Summary

Our
net income for the three and nine months ended September 30, 2006 was $19.6
million and $56.9 million or $0.38 and $1.10 per weighted-average diluted share
outstanding, respectively. This compared to $14.1 million and $26.8 million or
$0.27 and $0.76 per weighted-average diluted share outstanding, respectively,
for the same periods in 2005. The increase in net income for the three and nine
months ended September 30, 2006 compared to the same periods ended September
30, 2005

34

---



was primarily
attributable to a larger average investment portfolio balance. For the three
months ended September 30, 2006, our portfolio increased by $0.4 billion to
$9.1 billion and during the same period in the prior year, the portfolio
increased by $3.0 billion to $7.5 billion. For the nine months ended September
30, 2006 and 2005, our portfolio increased by $1.4 billion and $6.9 billion,
respectively. We commenced operations in late December 2004, with a private
placement netting us $379.7 million of capital and an additional $365.8 million
of capital was raised in late June 2005 through our initial public offering.
The raising of this new capital and commencement of operations resulted in our
portfolio ramping for most of 2005. Therefore, in addition to comparing the
periods presented we have also included certain discussion and analysis in this
summary compared to the quarterly periods ended June 30, 2006 and March 31,
2006 to provide some more recent trends and analysis.

In
addition to the size of the portfolio increasing in 2006, we have also been
diversifying our overall portfolio mix by increasing our investments in what we
classify as alternative assets. As of September 30, 2006, we had $980.6 million
of alternative assets, or 10.8% of our portfolio, compared to $608.6 million,
or 8.1% of our portfolio at September 30, 2005. Alternative assets were $895.4
million, or 10.3% of our portfolio, and $820.2 million, or 9.2% of our
portfolio as of June 30, 2006 and March 31, 2006, respectively. We closed a
warehouse funding agreement with Wachovia Capital Markets, LLC, or the
Facility, in March 2006 and as of September 30, 2006 had utilized $222.1
million of the Facility. We expect to utilize the full $300.0 million available
to us under the Facility to fund future alternative investments.

We
diversified our RMBS portfolio during 2006 by investing in more fixed 15-year
and 30-year RMBS. We expect to continue to invest opportunistically in RMBS,
which could result in investing in either fixed or hybrid adjustable rate RMBS.
As of September 30, 2006, $2.6 billion of our RMBS are fixed rate securities
compared to $433.2 million as of September 30, 2005. As a percentage of our
total RMBS portfolio, fixed rate securities composed 31.7%, 28.3%, 26.6% and
11.8% of our September 30, 2006, June 30, 2006, March 31, 2006, and December
31, 2005 total RMBS balances, respectively. This recent shift toward fixed
securities was done with the expectation of providing a higher coupon and lower
priced RMBS, in the form of 15-year and 30-year fixed RMBS, which complement a
mortgage portfolio with lower interest rates and the embedded option risk
attributable to our seasoning hybrid adjustable rate RMBS. This activity is not
necessarily indicative of future purchases. Additionally, we are anticipating
the eventual decrease in hedging income due to expiration of interest rate
swaps that are currently providing a net interest income contribution. Over
time, we expect the mortgage portfolio to be able to generate adequate profit
margins to funding without the contribution of interest rate swaps as a larger
percentage of higher yielding mortgages replace the existing amortizing
portfolio.

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

Net Interest Income

The
following table summarizes our interest income components:

|                                                 |  |                                  |         |                                 |   |            |   |      |        |      |   |            |   |   |         |   |   |         |  
|------------------------------------------------ |  | -------------------------------- | ------- | ------------------------------- | - | ---------- | - | ---- | ------ | ---- | - | ---------- | - | - | ------- | - | - | ------- | -
|                                                 |  | Three months ended September 30, |         | Nine months ended September 30, |  
|                                                 |  |                                  |         |                                 |  
|                                                 |  | 2006                             |         | 2005                            |   | Difference |   | 2006 |        | 2005 |   | Difference |  
|                                                 |  |                                  |         |                                 |   |            |   |      |        |      |   |            |  
|                                                 |  | (In thousands)                   |        
|                                                 |  |                                  |        
|RMBS                                             |  | $                                | 100,349 |                                 | $ | 69,952     |   | $    | 30,397 |      | $ | 293,942    |   | $ | 131,255 |   | $ | 162,687 |  
|Amortization of purchase (premium) discount,
net |  |                                  | (6,615  | )                               |   | (5,813     | ) |      | (802   | )    |   | (18,110    | ) |   | (10,075 | ) |   | (8,035  | )
|                                                 |  |                                  |         |                                 |   |            |   |      |        |      |   |            |   |   |         |   |   |         |  
|Net RMBS                                         |  |                                  | 93,734  |                                 |   | 64,139     |   |      | 29,595 |      |   | 275,832    |   |   | 121,180 |   |   | 154,652 |  
|                                                 |  |                                  |         |                                 |   |            |   |      |        |      |   |            |   |   |         |   |   |         |  
|Loans                                            |  |                                  | 17,074  |                                 |   | 6,409      |   |      | 10,665 |      |   | 41,417     |   |   | 10,425  |   |   | 30,992  |  
|ABS held in CDO                                  |  |                                  | 5,295   |                                 |   | 2,457      |   |      | 2,838  |      |   | 15,206     |   |   | 3,420   |   |   | 11,786  |  
|All other asset classes                          |  |                                  | 955     |                                 |   | 589        |   |      | 366    |      |   | 3,259      |   |   | 1,206   |   |   | 2,053   |  
|Short-term investments                           |  |                                  | 490     |                                 |   | 960        |   |      | (470   | )    |   | 1,298      |   |   | 2,708   |   |   | (1,410  | )
|                                                 |  |                                  |         |                                 |   |            |   |      |        |      |   |            |   |   |         |   |   |         |  
|Total interest income                            |  | $                                | 117,548 |                                 | $ | 74,554     |   | $    | 42,994 |      | $ | 337,012    |   | $ | 138,939 |   | $ | 198,073 |  
|                                                 |  |                                  |         |                                 |   |            |   |      |        |      |   |            |   |   |         |   |   |         |  




|    |                                   
|--- | ----------------------------------
|(1) | Loans includes loans held for sale

The
increase in interest income by $43.0 million and $198.1 million for the three
and nine months ended September 30, 2006 compared to the three and nine months
ended September 30, 2005, was primarily attributable to the significant
increase in our investment portfolio. For the three months ended September 30,
2006, our portfolio increased by $0.4 billion to $9.1 billion and during the
same period in the prior year, the portfolio increased by $3.0 billion to $7.5
billion. For the nine months ended September 30, 2006 and 2005, our portfolio
increased by $1.4 billion and $6.9 billion, respectively. To a lesser extent
the overall increase in overall interest rate environment and our
diversification into alternative assets, which provide a higher interest rate
than our RMBS portfolio, also contributed to the increase in interest income.

35

---



The
following table summarizes our interest expense:

|                                     |  |                                  |         |                                 |   |            |  |      |         |      |   |            |   |   |         |  |   |         |  
|------------------------------------ |  | -------------------------------- | ------- | ------------------------------- | - | ---------- |  | ---- | ------- | ---- | - | ---------- | - | - | ------- |  | - | ------- | -
|                                     |  | Three months ended September 30, |         | Nine months ended September 30, |  
|                                     |  |                                  |         |                                 |  
|                                     |  | 2006                             |         | 2005                            |   | Difference |  | 2006 |         | 2005 |   | Difference |  
|                                     |  |                                  |         |                                 |   |            |  |      |         |      |   |            |  
|                                     |  | (In thousands)                   |        
|                                     |  |                                  |        
|Repurchase
  agreements              |  | $                                | 99,702  |                                 | $ | 49,073     |  | $    | 50,629  |      | $ | 270,213    |   | $ | 85,048  |  | $ | 185,165 |  
|Designated
  hedging activity        |  |                                  | (16,088 | )                               |   | 3,915      |  |      | (20,003 | )    |   | (30,962    | ) |   | 10,106  |  |   | (41,068 | )
|Long-term debt                       |  |                                  | 12,932  |                                 |   | 2,743      |  |      | 10,189  |      |   | 31,273     |   |   | 5,275   |  |   | 25,998  |  
|Amortization of
  debt issuance cost |  |                                  | 997     |                                 |   | 89         |  |      | 908     |      |   | 2,033      |   |   | 139     |  |   | 1,894   |  
|Margin borrowing                     |  |                                  | 296     |                                 |   | 19         |  |      | 277     |      |   | 684        |   |   | 19      |  |   | 665     |  
|                                     |  |                                  |         |                                 |   |            |  |      |         |      |   |            |   |   |         |  |   |         |  
|Total interest
  expense             |  | $                                | 97,839  |                                 | $ | 55,839     |  | $    | 42,000  |      | $ | 273,241    |   | $ | 100,587 |  | $ | 172,654 |  
|                                     |  |                                  |         |                                 |   |            |  |      |         |      |   |            |   |   |         |  |   |         |  

The
increase in interest expense of $42.0 million and $172.7 million for the three
and nine months ended September 30, 2006 compared to the three and nine months
ended September 30, 2005, was primarily a result of carrying a larger
outstanding debt balance for the 2006 periods compared to the prior year
periods, as well as higher interest rates. Interest expense related to
repurchase agreements increased $50.6 million and $185.2 million for the three
and nine months ended September 30, 2006 compared to the three and nine months
ended September 30, 2005. The increase in outstanding repurchase agreements
during the period was primarily the result being fully ramped in 2006 and
increasing our overall leverage as compared to the ramping of the portfolio
during 2005. Interest expense related to long-term debt for the three and nine
months ended September 30, 2006 increased $10.2 million and $26.0 million
compared to the same periods in 2005, respectively. In addition to the Market
Square, Trust I and Pinetree long-term debt that has been outstanding since May
2005, late September 2005, and late November 2005, respectively, being
outstanding for all periods during 2006 we also increased our use of leverage
through the Facility we closed in March 2006 and Trust II closed in August 2006
which had $222.1 million and $25.8 million outstanding at September 30, 2006.
These increases in interest expense were partially offset by our designated
hedging, which reduced interest expense by $16.1 million and $31.1 million for
the three and nine months ended September 30, 2006, respectively, compared to
increases of $3.9 million and $10.1 million for the same periods in 2005,
respectively. Included in the designated hedging activity was an increase to
interest expense of $1.1 million and $0.7 million for the three and nine months
ended September 30, 2006 compared to a decrease to interest expense of $0.1
million for both the prior year periods. We are currently in a net-receive
position on substantially all of our interest rate swaps due to the increase in
variable interest rates, which is the basis for our receipt of payments, above
the fixed rate payments we are making on these interest rate swaps. For the
three months ended September 30, 2006 we increased the notional value of our
designated interest rate swaps by $0.9 billion to manage the overall duration
of our RMBS portfolio and manage the future expiration of swaps. To a lesser
extent, the increase in short-term borrowing rates and overall rising interest
rate environment, partially offset by our hedging activity, also contributed to
increased interest expense since our funding sources are primarily tied to
short-term interest rates or reset on a relatively short-term basis.

Expenses

The
following table summarizes our expenses for the periods presented:

|                                                       |  |                                  |       |                                 |   |            |  |      |       |      |   |            |  |   |        |  |   |        |  
|------------------------------------------------------ |  | -------------------------------- | ----- | ------------------------------- | - | ---------- |  | ---- | ----- | ---- | - | ---------- |  | - | ------ |  | - | ------ | -
|                                                       |  | Three months ended September 30, |       | Nine months ended September 30, |  
|                                                       |  |                                  |       |                                 |  
|                                                       |  | 2006                             |       | 2005                            |   | Difference |  | 2006 |       | 2005 |   | Difference | 
|                                                       |  |                                  |       |                                 |   |            |  |      |       |      |   |            | 
|                                                       |  | (In thousands)                   |      
|                                                       |  |                                  |      
|Base management
  fee                                  |  | $                                | 3,338 |                                 | $ | 3,254      |  | $    | 84    |      | $ | 9,982      |  | $ | 6,613  |  | $ | 3,369  |  
|Amortization
  related to restricted stock and options |  |                                  | 377   |                                 |   | 677        |  |      | (300  | )    |   | 1,038      |  |   | 2,922  |  |   | (1,884 | )
|Incentive fee                                          |  |                                  | 1,316 |                                 |   |           |  |      | 1,316 |      |   | 3,319      |  |   |       |  |   | 3,319  |  
|                                                       |  |                                  |       |                                 |   |            |  |      |       |      |   |            |  |   |        |  |   |        |  
|Total management
  and incentive fees                  |  |                                  | 5,031 |                                 |   | 3,931      |  |      | 1,100 |      |   | 14,339     |  |   | 9,535  |  |   | 4,804  |  
|                                                       |  |                                  |       |                                 |   |            |  |      |       |      |   |            |  |   |        |  |   |        |  
|Audit and
  audit-related fees                         |  |                                  | 248   |                                 |   | 253        |  |      | (5    | )    |   | 691        |  |   | 442    |  |   | 249    |  
|Legal fees                                             |  |                                  | 127   |                                 |   | 46         |  |      | 81    |      |   | 308        |  |   | 91     |  |   | 217    |  
|Other
  professional fees                              |  |                                  | 213   |                                 |   | 15         |  |      | 198   |      |   | 515        |  |   | 18     |  |   | 497    |  
|                                                       |  |                                  |       |                                 |   |            |  |      |       |      |   |            |  |   |        |  |   |        |  
|Total
  professional services                          |  |                                  | 588   |                                 |   | 314        |  |      | 274   |      |   | 1,514      |  |   | 551    |  |   | 963    |  
|                                                       |  |                                  |       |                                 |   |            |  |      |       |      |   |            |  |   |        |  |   |        |  
|Insurance
  premiums                                   |  |                                  | 186   |                                 |   | 167        |  |      | 19    |      |   | 551        |  |   | 512    |  |   | 39     |  
|                                                       |  |                                  |       |                                 |   |            |  |      |       |      |   |            |  |   |        |  |   |        |  
|Board of
  directors fees                              |  |                                  | 105   |                                 |   | 72         |  |      | 33    |      |   | 441        |  |   | 319    |  |   | 122    |  
|Banking and
  other administrative fees                |  |                                  | 149   |                                 |   | 56         |  |      | 93    |      |   | 430        |  |   | 158    |  |   | 272    |  
|Software and
  data feeds                              |  |                                  | 58    |                                 |   | 111        |  |      | (53   | )    |   | 212        |  |   | 165    |  |   | 47     |  
|Other general
  and administrative fees                |  |                                  | 66    |                                 |   | 319        |  |      | (253  | )    |   | 243        |  |   | 399    |  |   | (156   | )
|                                                       |  |                                  |       |                                 |   |            |  |      |       |      |   |            |  |   |        |  |   |        |  
|Total general
  and administrative fees                |  |                                  | 378   |                                 |   | 558        |  |      | (180  | )    |   | 1,326      |  |   | 1,041  |  |   | 285    |  
|                                                       |  |                                  |       |                                 |   |            |  |      |       |      |   |            |  |   |        |  |   |        |  
|Total expenses                                         |  | $                                | 6,183 |                                 | $ | 4,970      |  | $    | 1,213 |      | $ | 17,730     |  | $ | 11,639 |  | $ | 6,091  |  
|                                                       |  |                                  |       |                                 |   |            |  |      |       |      |   |            |  |   |        |  |   |        |  

Our
expenses increased $1.2 million and $6.1 million for the three and nine months
ended September 30, 2006 compared to the same periods in 2005, respectively.
The increase in expenses for the three and nine months ended September 30,
2006, was primarily attributable to an increase in total management and
incentive fees of $1.1 million and $4.8 million compared to the same periods in
2005, respectively. The increase in management and incentive fees is primarily
attributed to our increased equity and the impact of the effective use of our
leverage, which increased our invested assets and provided increased net income
per share, resulting in our Manager earning an incentive fee for the each of the
periods presented in 2006 compared to zero in 2005. The overall growth of our
operations and costs associated with becoming a publicly traded

36

---



company were the primary drivers for the remaining
increased expenses of $0.1 million and $1.3 million in all other expense line
items for the three and nine months ended September 30, 2006 compared to the
same periods in 2005, respectively.

Other
Income and Gain (Loss)

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

|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|------------------------------------------------------------------ |  | -------------------------------- | ----- | ------------------------------- | - | ---------- | - | ---- | ------ | ---- | - | ---------- | - | - | ------ | - | - | ------ | -
|                                                                   |  | Three months ended September 30, |       | Nine months ended September 30, |  
|                                                                   |  |                                  |       |                                 |  
|                                                                   |  | 2006                             |       | 2005                            |   | Difference |   | 2006 |        | 2005 |   | Difference |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |  
|                                                                   |  | (In thousands)                   |      
|                                                                   |  |                                  |      
|Net realized
  gain (loss) on available-for-sale securities        |  | $                                | 1,780 |                                 | $ | 174        |   | $    | 1,606  |      | $ | 7,121      |   | $ | (829   | ) | $ | 7,950  |  
|Other-than-temporary
  impairment on available-for-sale securities |  |                                  |      |                                 |   |           |   |      |       |      |   | (2,034     | ) |   |       |   |   | (2,034 | )
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|Net gain (loss)
  on available-for-sale securities                 |  |                                  | 1,780 |                                 |   | 174        |   |      | 1,606  |      |   | 5,087      |   |   | (829   | ) |   | 5,916  |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|Net realized
        gain on trading securities                    |  |                                  | 469   |                                 |   |           |   |      | 469    |      |   | 469        |   |   |       |   |   | 469    |  
|Net unrealized
  gain (loss) on trading securities                 |  |                                  | 2,573 |                                 |   | (1,914     | ) |      | 4,487  |      |   | 814        |   |   | (1,411 | ) |   | 2,225  |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|Net gain (loss)
  on trading securities                            |  |                                  | 3,042 |                                 |   | (1,914     | ) |      | 4,956  |      |   | 1,283      |   |   | (1,411 | ) |   | 2,694  |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|Net realized
  gain (loss) on loans                                |  |                                  | 728   |                                 |   | 157        |   |      | 571    |      |   | 1,419      |   |   | (95    | ) |   | 1,514  |  
|Net unrealized
  gain (loss) on loans                              |  |                                  | (233  | )                               |   | 297        |   |      | (530   | )    |   | (564       | ) |   | (337   | ) |   | (227   | )
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|Net gain (loss)
  on loans                                         |  |                                  | 495   |                                 |   | 454        |   |      | 41     |      |   | 855        |   |   | (432   | ) |   | 1,287  |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|Net realized
  gain (loss) on undesignated interest rate swaps     |  |                                  | 451   |                                 |   | (640       | ) |      | 1,091  |      |   | 1,460      |   |   | 1,598  |   |   | (138   | )
|Net realized
        gain on credit default swaps                  |  |                                  | 575   |                                 |   | 272        |   |      | 303    |      |   | 1,472      |   |   | 430    |   |   | 1,042  |  
|Net unrealized
  gain (loss) on undesignated interest rate swaps   |  |                                  | (866  | )                               |   | 1,441      |   |      | (2,307 | )    |   | (196       | ) |   | 393    |   |   | (589   | )
|Net unrealized
  gain (loss) on credit default swaps               |  |                                  | 232   |                                 |   | 414        |   |      | (182   | )    |   | 488        |   |   | 208    |   |   | 280    |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|Net gain (loss)
  on derivatives                                   |  |                                  | 392   |                                 |   | 1,487      |   |      | (1,095 | )    |   | 3,224      |   |   | 2,629  |   |   | 595    |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|Dividend income
  and other net gain                               |  |                                  | 610   |                                 |   | 223        |   |      | 387    |      |   | 804        |   |   | 245    |   |   | 559    |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|Total other
  income and gain (loss)                               |  | $                                | 6,319 |                                 | $ | 424        |   | $    | 5,895  |      | $ | 11,253     |   | $ | 202    |   | $ | 11,051 |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|Total realized
        net gain                                    |  | $                                | 4,613 |                                 | $ | 186        |   | $    | 4,427  |      | $ | 12,745     |   | $ | 1,349  |   | $ | 11,396 |  
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  
|Total unrealized
        net gain (loss)                           |  | $                                | 1,706 |                                 | $ | 238        |   | $    | 1,468  |      | $ | (1,492     | ) | $ | (1,147 | ) | $ | (345   | )
|                                                                   |  |                                  |       |                                 |   |            |   |      |        |      |   |            |   |   |        |   |   |        |  

For
the three and nine months ended September 30, 2006, our other income and gain
(loss) increased by $5.9 million and $11.1 million as compared to the same
periods in 2005. This increase is largely a result of increases of $1.6 million
and $8.0 million in net realized gains on sale of available-for sale securities
for the three and nine months ended September 30, 2006 compared to the same
periods in the prior year, respectively. This increase was partially offset by
a $2.0 million other-than-temporary impairment identified on two inverse
interest-only strip securities for the nine months ended September 30, 2006. We
also had increased net gains on trading securities, totaling $5.0 million and
$2.7 million for the three and nine months ended September 30, 2006 compared to
the same periods in 2005, respectively. These increases are primarily
attributable to two inverse interest-only strip securities. Our inverse
interest-only strip securities have been purchased for duration management or
yield enhancement to our RMBS portfolio. The increases for the three months
ended September 30, 2006 and nine months ended September 30, 2006, compared to
the same periods in the prior year were offset by a $1.1 million decrease in
net gains on derivatives and further increased by a $0.6 million increase in
net gain on derivatives, respectively. For the three and six months ended
September 30, 2006 $4.6 million and $12.7 million, respectively, of the total
other income and gain (loss) are realized.

Income
Tax Expense

We
have elected and intend to continue our qualification as a REIT under the
Internal Revenue Code, or the Code. Accordingly, we are largely exempt from
federal or state income tax to the extent that we distribute all taxable income
to our stockholders and meet certain REIT asset, income and ownership tests
and record keeping requirements are fulfilled. We continue to make and hold
most of our investments and conduct most of our other operations through our
wholly owned limited liability company subsidiary. Even if we qualify for
exemption from federal taxation as a REIT, we may be subject to some amount of
federal, state and local taxes on our taxable income. Deerfield Triarc TRS Holdings,
Inc., our domestic taxable REIT subsidiary, is taxed as a regular subchapter C
corporation under the Code. Deerfield Triarc TRS Holdings, Inc. was formed to
make, from time to time, certain investments that would not be REIT qualifying
investments if made directly by us and to earn income that would not be REIT
qualifying income if earned directly by us. For the three and nine months ended
September 30, 2006, Deerfield Triarc TRS Holdings, Inc. invested primarily in
short-term bank loan and bond trading positions, which contributed to gross
taxable income of $0.7 million and $1.0 million less tax expense of $0.3
million and $0.4 million, respectively. TRS Holdings, Inc. reported $0.2
million of taxable income and $0.1 million of tax expense for both the three
and nine months ended September 30, 2005.

Market
Square and Deerfield Triarc TRS (Bahamas) Ltd., or Deerfield Triarc Bahamas,
are foreign taxable REIT subsidiaries. Market Square was formed to complete a
securitization transaction structured as a secured financing and Deerfield
Triarc Bahamas was formed for certain loan investments within the 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

37

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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.

Liquidity
and Capital Resources

We
held cash and cash equivalents of $96.7 million at September 30, 2006.

Our
operating activities provided cash of $58.4 million for the nine months ended
September 30, 2006, primarily through the following:

Net
income and adjustments for non-cash items netted to inflows of $68.4 million,
consisting of the following:

| |                                                                                         |                                                                                  
| | --------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------
| |                                                                                        | Net income - $56.9 million                                                       
| |                                                                                         |                                                                                  
| |                                                                                        | Net premium and discount amortization - $20.2
  million                          
| |                                                                                         |                                                                                  
| |                                                                                        | Other-than-temporary impairment of
  available-for-sale securities - $2.0 million
| |                                                                                         |                                                                                  
| |                                                                                        | Share-based compensation - $1.5 million                                          
| |                                                                                         |                                                                                  
| |                                                                                        | Unrealized loss from other
  investment - $0.3 million                           
| |                                                                                         |                                                                                  
| |                                                                                        | Net realized gains on available for sale securities
  - $(7.1) million           
| |                                                                                         |                                                                                  
| |                                                                                        | Net non-cash derivative impact on operating
  activities - $(3.9) million        
| |                                                                                         |                                                                                  
| |                                                                                        | Net gain on trading securities - $(1.3) million                                  
| |                                                                                         |                                                                                  
| |                                                                                        | Net gain on loans held for sale - $(0.2) million                                 
| | Net change in operating assets and liabilities of $11.2 million                        
| | Additional,
net inflows from operations from net receipts on derivatives - $4.1 million
| | Net
outflows totaled $25.3 million, consisting of the following:                       

| |   |                                                    
| | - | ---------------------------------------------------
| |  | Net change in loans held for sale - $6.1 million   
| |   |                                                    
| |  | Net purchases of trading securities - $19.2 million

Our
investing activities used cash of $767.8 million during the nine months ended
September 30, 2006 primarily from purchase of available-for-sale securities and
loans totaling $2.9 billion, purchase of other investments of $1.5 million
offset primarily by principal payments and proceeds from sale of
available-for-sale securities of $2.0 billion, principal payments and proceeds
from loans totaled $78.0 million, and the $58.6 million of change in restricted
cash and cash equivalents.

Our
financing activities provided cash of $770.5 million during the nine months
ended September 30, 2006, primarily from net borrowings under repurchase
agreements and our revolving warehouse funding agreement of $580.3 million and
$222.1 million, respectively. Additionally, proceeds from the issuance of
long-term debt and receipt of payments for a designated derivative containing a
financing element were $25.8 million and $0.5 million, respectively. These
inflows were offset by payments of debt issuance costs, principal payments on
long-term and dividends of $1.7million, $0.1 million and $56.3 million,
respectively.

During
the second and third quarter of 2006, we began to utilize a portion of
principal and interest receipts from our RMBS portfolio to reduce our
repurchase agreement balance. This action was taken in order to manage our
liquidity and maintain our leverage at a level we believe is appropriate. As
additional proceeds become available we will continue to evaluate the
appropriate use of those funds between funding new investments and reducing our
overall leverage.

Leverage

At
September 30, 2006, our GAAP leverage was 11.5 times equity, which was
calculated by dividing our total debt (repurchase agreements and long-term
debt) of $8.2 billion by total stockholders equity of $712.5 million, as
reported in our GAAP financial statements. However, when we discuss leverage we
are referring to our total debt of $8.2 billion less trust preferred debt of
$77.3 million. We then divide this amount by our total stockholders equity of
$712.5 million plus trust preferred debt of $77.3 million. We believe that this
is a reasonable measure for leverage and we utilize this amount for managing
our business. Using this methodology our overall leverage was 10.3 times
adjusted equity at September 30, 2006 compared with 11.2, 10.1 and 9.8 times
adjusted equity at June 30, 2006, March 31, 2006 and December 31, 2005,
respectively.

The
decrease in leverage during the three months ended September 30, 2006 is
primarily driven by a combination of the fluctuation in the fair value of our
available-for-sale securities and designated derivatives, which are recognized
as

38

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adjustments to other comprehensive income and to a
lesser extent our paydown of repurchase agreements. Other comprehensive income
increased by $33.3 million, decreased by $28.9 million and decreased by $9.5
million for the three months ended September 30, 2006, June 30, 2006 and March
31, 2006, respectively. The fluctuation in the fair value of our RMBS portfolio
and designated interest rate swaps is primarily determined by whether the
securities or swaps are above or below the current prevailing interest rates as
well as changes in the hybrid adjustable rate loans as they approach their
reset date.

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 of Market Square and Pinetree, the issuance of trust preferred debt
securities, and more recently, in August of 2006 we closed a trust preferred
securities transaction providing an additional $25.8 million and in March of
2006 we closed an alternative asset revolving warehouse funding facility with
Wachovia Capital Markets, LLC. providing up to $300.0 million.

The
following is a summary of our borrowings at September 30, 2006:

|                                                        |  |                      |           |                   |   |                  |   |                          |         |       |   |        |   |   |           |  
|------------------------------------------------------- |  | -------------------- | --------- | ----------------- | - | ---------------- | - | ------------------------ | ------- | ----- | - | ------ | - | - | --------- | -
|                                                        |  | RepurchaseAgreements |           | TermFinancingCDOs |   | WachoviaFacility |   | TrustPreferredSecurities |         | Total |  
|                                                        |  |                      |           |                   |   |                  |   |                          |         |       |  
|Outstanding
  balance                                   |  | $                    | 7,374,379 |                   | $ | 563,905          |   | $                        | 222,050 |       | $ | 77,324 |   | $ | 8,237,658 |  
|Weighted average
  borrowing rate                       |  |                      | 5.39      | %                 |   | 6.01             | % |                          | 5.38    | %     |   | 8.56   | % |   | 5.46      | %
|Weighted-average
  remaining maturity (in years)        |  |                      | 0.09      |                   |   | 25.10            |   |                          | 2.44    |       |   | 29.44  |   |   | 2.14      |  
|Fair value of
  collateral (including accrued interest) |  | $                    | 7,514,409 |                   | $ | 610,992          |   | $                        | 338,449 |       |   | n/a    |   |   | n/m       |  

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

For
the nine months ended September 30, 2006, net proceeds from repurchase
agreements totaling $7.4 billion, with a weighted-average current borrowing
rate of 5.39%, were primarily used to finance the acquisition of
mortgage-related assets. We expect to continue to borrow funds in the form of
repurchase agreements. As of September 30, 2006, we had established 17
borrowing arrangements with various investment banking firms and other lenders,
11 of which we had an outstanding repurchase agreement balance as of September
30, 2006. Increases in short-term interest rates could negatively impact the
valuation of our mortgage-related assets, which could limit our borrowing
ability or cause our lenders to initiate margin calls. Amounts due upon
maturity of our repurchase agreements will be funded primarily through the
rollover/reissuance of repurchase agreements and monthly principal and interest
payments received on our mortgage-backed securities.

On
March 10, 2006, we entered into an up to $300 million revolving warehouse
funding agreement with Wachovia Capital Markets, LLC, or the 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. The Facility is available to two bankruptcy remote
special purpose vehicles (DWFC, LLC and Deerfield Triarc TRS (Bahamas) Ltd.)
and debt holders have recourse only to the assets of these entities. We expect
to pursue term funding of these assets via securitization in a CLO structure at
some point in the future. At September 30, 2006 we had $222.1 million outstanding
related to the Facility. The Facility has provided additional leverage for our
loan portfolio that was previously being funded with equity.

On
August 2, 2006, we issued $25.8 million of unsecured junior subordinated notes
payable to Trust II. The Trust II securities mature on October 20, 2036 but are
callable by us on or after October 30, 2011. Interest is payable quarterly at a
floating rate equal to LIBOR plus 2.25% per annum, this rate was 7.72% at
September 30, 2006.

39

---



The
following table presents certain information regarding the amount at risk
related to our repurchase agreements as of September 30, 2006:

|                                                     |  |                  |         |                                   |  |    | 
|---------------------------------------------------- |  | ---------------- | ------- | --------------------------------- |  | -- | 
|                                                     |  |                  |         |                                   |  |    | 
|                                                     |  | AmountatRisk (1) |         | Weighted-AverageRemainingMaturity | 
|                                                     |  |                  |         |                                   | 
|Repurchase Agreement Counterparties:                 |  | (In
  thousands) |         | (In days)                         | 
|                                                     |  |                  |         |                                   | 
|                                                     |  |                  |         |                                   |  |    | 
|Bear, Stearns & Co. Inc.                             |  | $                | 1,218   |                                   |  | 25 | 
|Barclays Capital Inc.                                |  |                  | 7,024   |                                   |  | 46 | 
|Countrywide Securities Corporation                   |  |                  | 14,872  |                                   |  | 36 | 
|Credit Suisse Securities (USA) LLC                   |  |                  | 24,067  |                                   |  | 32 | 
|J.P. Morgan Securities Inc.                          |  |                  | (3,621  | )                                 |  | 15 | 
|Lehman Brothers Inc.                                 |  |                  | 4,010   |                                   |  | 14 | 
|Merrill Lynch Government Securities Inc.             |  |                  | 31,353  |                                   |  | 28 | 
|Merrill Lynch, Pierce, Fenner & Smith
  Incorporated |  |                  | (1,360  | )                                 |  | 25 | 
|Mitsubishi UFJ Securities (USA), Inc.                |  |                  | 12,290  |                                   |  | 15 | 
|Nomura Securities International, Inc.                |  |                  | 17,244  |                                   |  | 35 | 
|UBS Securities LLC                                   |  |                  | 32,933  |                                   |  | 44 | 
|                                                     |  |                  |         |                                   |  |    | 
|Total                                                |  | $                | 140,030 |                                   |  |    | 
|                                                     |  |                  |         |                                   |  |    | 

|    |                                                                                                                                                                           | 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|    |                                                                                                                                                                          
|(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 (a) limit our ability to
resell or transfer bearer debt securities issued by a non-US entity and
securities that have not been registered under the Securities Act and (b) establish
an event of default upon our insolvency or our default under any other
agreement with the counterparty. Another repurchase facility includes
provisions that establish termination events if (a) we incur a net asset value
decline of 15% on a monthly basis, 25% on a quarterly basis and 35% on an
annual basis, except that net asset value reductions resulting from
distributions are excluded in measuring such declines, (b) we fail to maintain
a minimum net asset value of $188 million, (c) the Manager ceases to be our
manager, (d) we fail to qualify as a REIT or (e) we fail to deliver certain
documents, including monthly net asset value, prospectus, performance or other
reports delivered to our stockholders and an annual representation of our
president or chief financial officer. An event of default or termination event
under the standard master repurchase agreement or additional provisions
explained above would give our counterparty the option to terminate all
repurchase transactions existing with us and make any amount due by us to the
counterparty to be payable immediately.

We
intend to make regular quarterly distributions of all or substantially all of
our REIT taxable income to holders of our common stock. We expect to declare
dividends on a quarterly basis and typically 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 and short-term capital gains on an annual basis. This
requirement can impact our liquidity and capital resources. The following
summarizes our dividends during 2006:

|                      |  |                |          |                 |  |                       |  |                     |      |  |   |        | 
|--------------------- |  | -------------- | -------- | --------------- |  | --------------------- |  | ------------------- | ---- |  | - | ------ | 
|Declaration
  
  Date |  | Record 
  Date |          | Payment 
  Date |  | Per Share 
  Dividend |  | Dividend 
  Payment |     
|                      |  |                |          |                 |  |                       |  |                     |     
|04/24/06              |  |                | 05/04/06 |                 |  | 05/26/06              |  | $                   | 0.36 |  | $ | 18,597 | 
|07/25/06              |  |                | 08/04/06 |                 |  | 08/28/06              |  |                     | 0.38 |  |   | 19,646 | 
|10/24/06              |  |                | 11/07/06 |                 |  | 11/27/06              |  |                     | 0.40 |  |   | 20,683 | 
|                      |  |                |          |                 |  |                       |  |                     |      |  |   |        | 
|                      |  |                |          |                 |  | Total                 |  | $                   | 1.14 |  | $ | 58,926 | 
|                      |  |                |          |                 |  |                       |  |                     |      |  |   |        | 

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

40

---



positive arbitrage. If spreads for CDO borrowings
widen or if demand for such borrowings ceases to exist, then our ability to
execute the CDO strategy will be restricted.

Based
on our current portfolio, leverage rate and available borrowing arrangements,
we believe that the net proceeds of our December 2004 private offering and June
2005 initial public offering combined with the cash flow from operations and
the utilization of borrowings, will be sufficient to enable us to meet
anticipated short-term (one year or less) liquidity requirements such as to
fund our investment activities, pay fees under our management agreement, fund
our distributions to stockholders and for general corporate expenses. However,
an increase in prepayment rates or decreases in the fair value of our RMBS
substantially different from our expectations could cause a temporary liquidity
shortfall due to the timing of the necessary margin calls on the financing
arrangements and the actual receipt of the cash related to principal paydowns.
Our leverage ratio would increase above our target threshold and could
eventually lead to our cash resources becoming insufficient to satisfy our
liquidity requirements. If such a situation would arise, we may have to sell
some of our investment securities. If required, the sale of MBS at prices lower
than their carrying value would result in losses and reduced income. A sale of
a portion of our MBS portfolio could also call into question our intent and
ability to hold the remaining securities until their values recover, requiring
us to recognize unrealized losses. As explained more fully below, we have
additional capacity to leverage our equity further should the need for
additional short term (one year or less) liquidity arise.

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

Recent Developments

On
October 24, 2006, the Company declared a cash dividend of $0.40 per share on
the Companys common stock for the third quarter of 2006. The record date for
the cash dividend is November 7, 2006, and the payment date is November 27, 2006.

On
October 27, 2006, the Company formed Deerfield Triarc Capital Trust III (Trust
III). Trust III was formed for the sole purpose of issuing and selling trust
preferred securities. In accordance with FIN 46R, Trust III will not be
consolidated into the Companys condensed consolidated financial statements
because the Company is not deemed to be the primary beneficiary of Trust III.
Through DTC LLC, the Company owns 100% of the common shares, totaling $1.4
million, of Trust III. Trust III issued $45.0 million of preferred shares to
unaffiliated investors. The rights of holders of common shares of the Trust are
subordinate to the rights of the holders of preferred shares only in the event
of a default; otherwise the common shareholders economic and voting rights are
pari passu with the preferred shareholders. In connection with the issuance and
sale of the trust preferred securities, DTC LLC issued junior subordinated debt
securities to Trust III of $46.4 million, which are guaranteed by the Company.

41

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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 for the nine months ended September 30, 2006:

|                                                                              |  |                                    |        |  
|----------------------------------------------------------------------------- |  | ---------------------------------- | ------ | -
|                                                                              |  | Nine monthsendedSeptember 30, 2006 |       
|                                                                              |  |                                    |       
|                                                                              |  | (In thousands)                     |       
|                                                                              |  |                                    |       
|GAAP net income                                                               |  | $                                  | 56,890 |  
|                                                                              |  |                                    |        |  
|                                                                              |  |                                    |        |  
|Adjustments to GAAP net income:                                               |  |                                    |        |  
|Organization
  costs                                                          |  |                                    | (7     | )
|Impairment of
  available-for sale securities not recognized for tax purposes |  |                                    | 2,034  |  
|Amortization/accretion
  of security premium (discount)                       |  |                                    | 2,803  |  
|Security basis
  difference recognized upon sale                              |  |                                    | (825   | )
|Realized gain
  previously deferred for tax as return of capital              |  |                                    | 1,107  |  
|Hedge
  ineffectiveness                                                       |  |                                    | 742    |  
|Stock and
  options grant                                                     |  |                                    | 1,038  |  
|Unrealized gain
  (loss)                                                      |  |                                    | (322   | )
|Amortization of
  terminated swaps                                            |  |                                    | 670    |  
|Amortization of
  financing element in Pinetree swap                          |  |                                    | (166   | )
|Gain on
  intercompany sale eliminated for GAAP                               |  |                                    | 216    |  
|Non-allowable
  deduction for meals and entertainment                         |  |                                    | 96     |  
|Exclusion of
  Deerfield Triarc TRS Holdings, LLC net income                  |  |                                    | (635   | )
|                                                                              |  |                                    |        |  
|Net adjustments to GAAP net income                                            |  |                                    | 6,751  |  
|                                                                              |  |                                    |        |  
|                                                                              |  |                                    |        |  
|Estimated REIT taxable income                                                 |  | $                                  | 63,641 |  
|                                                                              |  |                                    |        |  

The
Amortization/accretion of security premium (discount) line above includes a
difference for accretion of original issue discount, or OID on interest-only,
or IO, securities. The tax accretion calculations of OID on IO securities are dependent
on factors provided by administrators of the underlying mortgage pools. These
factors are influenced by actual versus planned prepayment activity and net
interest spread on the underlying mortgage pools, and as a result, recognition
of tax OID accretion income is subject to change. We therefore believe that the
OID contribution to our estimated taxable income as of September 30, 2006 is
not necessarily indicative of what our final taxable income will be for the
year. OID accretes to the tax basis of the IO securities, thus upon sale of
such a security, the tax cost basis will typically be higher than the book
basis resulting in a smaller tax gain.

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.

Inflation

42

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

Item 3. Quantitative and Qualitative
Disclosures About Market Risk

As
of September 30, 2006, 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 seek to actively manage interest rate risk, and regularly
assess whether earnings in the portfolio include appropriate compensation for
the inherent market risks to which it is exposed. In light of these risks, we
regularly consider our capital levels and believe that our capital is
sufficient.

Interest Rate Risk

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

Effect on Net
Interest Income

We
fund our investments in 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 component of such securities) and
fixed-rate RMBS may remain substantially unchanged. This results in a narrowing
of the net interest spread between the related assets and borrowings and may
even result in losses.

In
order to mitigate our interest rate exposure, we have entered into 227
designated interest rate swap hedging transactions as of September 30, 2006.
The following table summarizes the expiration dates of these contracts and
their notional amounts:

|                     |  |                   |           | 
|-------------------- |  | ----------------- | --------- | 
|Year of
  Expiration |  | Notional
  Amount |          
|                     |  |                   |          
|                     |  | (In thousands)    |          
|2006                 |  | $                 | 61,000    | 
|2007                 |  |                   | 575,400   | 
|2008                 |  |                   | 3,270,150 | 
|2009                 |  |                   | 370,000   | 
|2010                 |  |                   | 1,106,200 | 
|2011                 |  |                   | 681,000   | 
|2013                 |  |                   | 90,000    | 
|2015                 |  |                   | 237,700   | 
|2016                 |  |                   | 195,000   | 
|                     |  |                   |           | 
|Total                |  | $                 | 6,586,450 | 
|                     |  |                   |           | 

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

Extension Risk

The
majority of our securities portfolio is hybrid adjustable-rate RMBS, which have
interest rates that are fixed for the first few years of the loan (typically
three, five, seven or 10 years) and thereafter reset periodically on the same
basis as adjustable-rate RMBS. We compute the projected weighted-average life
of our hybrid adjustable-rate RMBS based on assumptions regarding the rate at
which the borrowers will prepay the underlying mortgages. In general, when a
fixed-rate or hybrid adjustable-rate residential mortgage-backed security is
funded by a short-term borrowing, we may, but are not required to, enter into
an interest rate swap agreement or other hedging instrument that effectively
fixes a portion of our borrowing costs

43

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for a period
close to the anticipated weighted-average life of the fixed-rate portion of the
related RMBS. This strategy is designed to protect a portion of our portfolio
from increased funding costs due to rising interest rates because the borrowing
costs are not fixed for the duration of the fixed-rate portion of the related
residential mortgage-backed security.

We
have structured our swaps to roll off or expire in conjunction with the estimated
weighted average life of the fixed period of the mortgage portfolio. However,
if prepayment rates decrease in a rising interest rate environment, the
weighted average life of the fixed-rate portion of the related RMBS could
extend beyond the term of the swap agreement or other hedging instrument. This
could have a negative impact on our results from operations, as borrowing costs
would no longer be effectively fixed after the 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

We
also invest in hybrid adjustable-rate RMBS which are based on mortgages that
are typically subject to periodic and lifetime interest rate caps and floors,
which limit the amount by which the securitys interest yield may change during
any given period. However, our borrowing costs pursuant to our repurchase
agreements will not be subject to similar restrictions. Therefore, in a period
of increasing interest rates, interest rate costs on our borrowings could
increase without limitation by caps, while the interest-rate yields on our
hybrid adjustable-rate RMBS could be limited by caps. These factors could lower
our net interest income or cause a net loss during periods of rising interest
rates, which would negatively impact our financial condition, cash flows and
results of operations.

Interest Rate
Mismatch Risk

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

Our
analysis of risks is based on managements experience, estimates, 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. Some adjustable-rate mortgages
underlying our adjustable-rate RMBS may bear initial teaser interest rates that
are lower than their fully-indexed rates, which refers to the applicable index
rates plus a margin. In the event that such an adjustable-rate mortgage is
prepaid prior to or soon after the time of adjustment to a fully-indexed rate,
the holder of the related residential mortgage-backed security would have held
such security while it was less profitable and lost the opportunity to receive
interest at the fully-indexed rate over the expected life of the
adjustable-rate residential mortgage-backed security. Although we currently do
not own any adjustable-rate RMBS with teaser rates, we may obtain some in the
future which would expose us to this prepayment risk. Additionally, we
currently own RMBS that were purchased at a premium. The prepayment of such
RMBS at a rate faster than anticipated would result in a write-off of any
remaining unamortized premium amount and a corresponding reduction of our net
interest income by such amount. Finally, in the event that we are unable to
acquire new RMBS or are forced to acquire RMBS with lower coupon rates due to
prevailing market conditions to replace the prepaid RMBS, our financial
condition, cash flow and results of operations could be negatively impacted.

Effect on Fair Value

Another
component of interest rate risk is the effect changes in interest rates will
have on the 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.

44

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We
primarily assess our interest rate risk by estimating the duration of our
assets and the duration of our liabilities. Duration essentially measures the
market price volatility of financial instruments as interest rates change. We
generally calculate duration using various third party financial models and
empirical data. Different models and methodologies can produce different
duration numbers for the same securities.

The
following sensitivity analysis table shows the impact on the estimated fair
value of our RMBS interest rate-sensitive investments (including
available-for-sale investments of $8.1 billion and trading investments of $5.1
million) and interest rate swaps at September 30, 2006 (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 is $12.0 million and $24.0 million,
respectively, assuming rates instantaneously fall 100 basis points and rise 100
basis points:

|                                                             |  |                                          |           |                |   |                                          |  |   |           |   
|------------------------------------------------------------ |  | ---------------------------------------- | --------- | -------------- | - | ---------------------------------------- |  | - | --------- | --
|                                                             |  | Interest Rates
  Fall 100
  Basis Points |           | Unchanged      |   | Interest Rates
  Rise 100
  Basis Points | 
|                                                             |  |                                          |           |                |   |                                          | 
|                                                             |  |                                          |           | (In thousands) |   |                                          | 
|                                                             |  |                                          |           |                |   |                                          | 
|RMBS                                                         |  |                                          |           |                |   |                                          |  |   |           |   
|Fair value (1)                                               |  | $                                        | 8,273,876 |                | $ | 8,125,381                                |  | $ | 7,902,288 |   
|Change in fair value                                         |  | $                                        | 148,495   |                |   |                                          |  | $ | (223,093  | ) 
|Change as a percent of fair value                            |  |                                          | 1.83      | %              |   |                                          |  |   | (2.75     | )%
|Designated and
  Undesignated Interest Rate Swaps and Floors |  |                                          |           |                |   |                                          |  |   |           |   
|Fair value                                                   |  | $                                        | (119,411  | )              | $ | 52,425                                   |  | $ | 213,097   |   
|Change in fair value                                         |  | $                                        | (171,836  | )              |   |                                          |  | $ | 160,672   |   
|Change as a percent of fair value                            |  |                                          | n/m       |                |   |                                          |  |   | n/m       |   
|Net Portfolio Impact                                         |  | $                                        | (23,341   | )              |   |                                          |  | $ | (62,421   | ) 
|                                                             |  |                                          |           |                |   |                                          |  |   |           |   

---

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

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

At
September 30, 2006, 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 our borrowing agreements to have a range of different
  maturities, terms, amortizations and interest rate adjustment periods;                                                                
| 
| | using
  derivatives, financial futures, swaps, options, caps, floors, mortgage
  derivatives and forward sales, to adjust the interest rate sensitivity of our
  RMBS and our borrowings; and                           
| 
| | actively
  managing, on an aggregate basis, the interest rate indices, interest rate
  adjustment periods, and gross reset margins of our RMBS and the interest rate
  indices and adjustment periods of our borrowings.

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

45

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

Change in Internal Control Over Financial
Reporting

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

Inherent Limitations on Effectiveness of
Controls

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

PART II. OTHER INFORMATION

ITEM 1A. Risk Factors

As
of September 30, 2006, there have been no material changes in the risk factors
of the Company as previously disclosed in the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2005.

ITEM 6. Exhibits

(b) Documents filed as part
of this Report:

| |      |   |                                                                                                                                                                                                         
| | ---- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | No.  |   | Description                                                                                                                                                                                             
| |      |   |                                                                                                                                                                                                         
| | 3.1  |  | Articles of Amendment and Restatement of Deerfield
        Triarc Capital Corp.*                                                                                                                        
| | 3.2  |  | Bylaws of Deerfield Triarc Capital Corp.*                                                                                                                                                               
| | 4.1  |  | Form of Certificate for Common Stock for Deerfield
        Triarc Capital Corp.*                                                                                                                        
| | 31.1 |  | Certification of Principal Executive Officer
        Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
        as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | 31.2 |  | Certification of Principal Financial Officer
        Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
        as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | 32.1 |  | Certification of Principal Executive Officer
        and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
        adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  



---

|  |                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------
|* | Incorporated by reference
  to the Companys Registration Statement on Form S-11 (Registration No.
  333-123762), as amended.

46

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SIGNATURES

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

|                        |                                                                       | 
|----------------------- | --------------------------------------------------------------------- | 
|                        | DEERFIELD TRIARC CAPITAL CORP.                                       
|                        | (Registrant)                                                         
|                        |                                                                      
|Date: November 14, 2006 | By: /S/ JONATHAN W. TRUTTER                                           | 
|                        |                                                                       | 
|                        | Jonathan W. Trutter, Chief
  Executive Officer                       
|                        | (On behalf of the Company)                                           
|                       
|Date: November 14, 2006 | By: /S/ RICHARD G. SMITH                                              | 
|                        |                                                                       | 
|                        | Richard G. Smith, Senior
  Vice President and Chief Financial Officer
|                        | (Principal Financial and
  Accounting Officer)                       
|                        |                                                                      

47

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