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

FORM 10-Q

|                                                                 |                                                                      
|---------------------------------------------------------------- | ---------------------------------------------------------------------
|x                                                                | QUARTERLY
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
|EXCHANGE ACT OF 1934                                            
|For the quarterly period ended June 30, 2006                    
|                                                                
|OR                                                              
|                                                                
|o                                                                | TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|EXCHANGE ACT OF 1934                                            
|For the transition period from ______________ to _______________
|                                                                

Commission file number: 1-32551

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

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

6250 N. River Road, 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 51,698,860 shares of the registrants Common Stock
  outstanding as of August 10, 2006.

---



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

|                                |                                                                                                         |     
|------------------------------- | ------------------------------------------------------------------------------------------------------- | ----
|                                |                                                                                                         | Page
|Part I. Financial
  Information |                                                                                                        
|                                |                                                                                                         |     
|Item 1.                         | Condensed Consolidated Financial
  Statements and Notes (Unaudited)                                     |     
|                                | Condensed
  Consolidated Balance Sheets  June 30, 2006 and December 31, 2005                           | 3   
|                                | Condensed
  Consolidated Statements of Operations  Three and Six Months Ended June 30,
  2006 and 2005 | 4   
|                                | Condensed
  Consolidated Statement of Stockholders Equity  Six Months Ended June 30,
  2006           | 5   
|                                | Condensed
  Consolidated Statements of Cash Flows  Six Months Ended June 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                 | 19  
|Item 3.                         | Quantitative and Qualitative
  Disclosures About Market Risk                                            | 41  
|Item 4.                         | Controls and Procedures                                                                                 | 44  
|                                |                                                                                                         |     
|Part II. Other
  Information    |                                                                                                        
|                                |                                                                                                         |     
|Item 1A.                        | Risk Factors                                                                                            | 44  
|Item 4.                         | Submission of Matters to a Vote of
  Security Holders                                                   | 44  
|Item 6.                         | Exhibits                                                                                                | 45  
|                                | Signatures                                                                                              | 45  

SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

2

---



PART I.
FINANCIAL INFORMATION

Item 1.
Financial Statements

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

|                                                                                                                                 |  |              |           |                  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---------------- | - | --------- | -
|                                                                                                                                 |  | June 30,2006 |           | December 31,2005 |  
|                                                                                                                                 |  |              |           |                  |  
|ASSETS                                                                                                                           |  |              |           |                  |   |           |  
|Cash and cash
  equivalents                                                                                                      |  | $            | 54,816    |                  | $ | 35,542    |  
|Due from broker                                                                                                                  |  |              | 11,433    |                  |   | 191,845   |  
|Restricted cash
  and cash equivalents                                                                                           |  |              | 23,181    |                  |   | 85,311    |  
|Available-for-sale
  securities, including $7,412,121 and $6,847,723 pledgedat fair value                                       |  |              | 8,109,531 |                  |   | 7,285,052 |  
|Trading
  securitiesat fair value                                                                                               |  |              | 2,009     |                  |   | 4,738     |  
|Other
  investments                                                                                                              |  |              | 12,301    |                  |   | 12,303    |  
|Derivative
  assets                                                                                                              |  |              | 145,820   |                  |   | 69,406    |  
|Loans held for
  sale                                                                                                            |  |              | 282,502   |                  |   | 294,063   |  
|Loans                                                                                                                            |  |              | 274,455   |                  |   | 158,111   |  
|Interest
  receivable                                                                                                            |  |              | 48,668    |                  |   | 40,648    |  
|Other receivable                                                                                                                 |  |              | 20,291    |                  |   | 16,976    |  
|Prepaid and
  other assets                                                                                                       |  |              | 11,182    |                  |   | 9,817     |  
|                                                                                                                                 |  |              |           |                  |   |           |  
|                                                                                                                                 |  |              |           |                  |   |           |  
|TOTAL ASSETS                                                                                                                     |  | $            | 8,996,189 |                  | $ | 8,203,812 |  
|                                                                                                                                 |  |              |           |                  |   |           |  
|                                                                                                                                 |  |              |           |                  |   |           |  
|LIABILITIES                                                                                                                      |  |              |           |                  |   |           |  
|Repurchase
  agreements, including $40,068 and $26,788 of accrued interest                                                       |  | $            | 7,452,188 |                  | $ | 6,768,396 |  
|Due to broker                                                                                                                    |  |              | 43,300    |                  |   | 77,327    |  
|Dividends
  payable                                                                                                              |  |              |          |                  |   | 18,081    |  
|Derivative
  liabilities                                                                                                         |  |              | 2,881     |                  |   | 6,053     |  
|Interest payable                                                                                                                 |  |              | 24,761    |                  |   | 18,262    |  
|Long term debt                                                                                                                   |  |              | 791,335   |                  |   | 615,550   |  
|Management and
  incentive fee payable                                                                                           |  |              | 1,932     |                  |   | 2,453     |  
|Other payables                                                                                                                   |  |              | 1,002     |                  |   | 487       |  
|                                                                                                                                 |  |              |           |                  |   |           |  
|                                                                                                                                 |  |              |           |                  |   |           |  
|TOTAL
  LIABILITIES                                                                                                              |  |              | 8,317,399 |                  |   | 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; 51,698,860 and 51,659,701 shares issued and outstanding
  (including 269,232 restricted shares) |  |              | 51        |                  |   | 51        |  
|Additional
  paid-in capital                                                                                                     |  |              | 746,739   |                  |   | 747,919   |  
|Deferred equity
  compensation                                                                                                   |  |              |          |                  |   | (2,397    | )
|Accumulated
  other comprehensive loss                                                                                           |  |              | (83,063   | )                |   | (44,703   | )
|Retained
  earnings (deficit)                                                                                                    |  |              | 15,063    |                  |   | (3,667    | )
|                                                                                                                                 |  |              |           |                  |   |           |  
|                                                                                                                                 |  |              |           |                  |   |           |  
|TOTAL
  STOCKHOLDERS EQUITY                                                                                                     |  |              | 678,790   |                  |   | 697,203   |  
|                                                                                                                                 |  |              |           |                  |   |           |  
|                                                                                                                                 |  |              |           |                  |   |           |  
|TOTAL
  LIABILITIES AND STOCKHOLDERS EQUITY                                                                                     |  | $            | 8,996,189 |                  | $ | 8,203,812 |  
|                                                                                                                                 |  |              |           |                  |   |           |  

See notes to condensed consolidated financial
statements.

3

---



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

|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|--------------------------------------------------------------- |  | ----------------------------------- | ---------- | --------------------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                                |  | Three months
        ended June 30, |            | Six months
        ended June 30, |  
|                                                                |  |                                     |            |                                   |  
|                                                                |  | 2006                                |            | 2005                              |   | 2006       |   | 2005 |           
|                                                                |  |                                     |            |                                   |   |            |   |      |           
|REVENUES                                                        |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|Net
        interest income:                                    |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|Interest
        income                                         |  | $                                   | 117,436    |                                   | $ | 39,145     |   | $    | 219,464    |   | $ | 64,385     |  
|Interest
        expense                                        |  |                                     | 96,297     |                                   |   | 28,366     |   |      | 175,402    |   |   | 44,748     |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|Net
        interest income                                     |  |                                     | 21,139     |                                   |   | 10,779     |   |      | 44,062     |   |   | 19,637     |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|EXPENSES                                                        |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|Management
        and incentive fee expense to related party   |  |                                     | 4,433      |                                   |   | 2,978      |   |      | 9,308      |   |   | 5,604      |  
|Professional
        services                                   |  |                                     | 448        |                                   |   | 210        |   |      | 926        |   |   | 237        |  
|Insurance
        expense                                       |  |                                     | 184        |                                   |   | 181        |   |      | 365        |   |   | 345        |  
|Other
        general and administrative expenses               |  |                                     | 456        |                                   |   | 422        |   |      | 948        |   |   | 483        |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|Total
        expenses                                          |  |                                     | 5,521      |                                   |   | 3,791      |   |      | 11,547     |   |   | 6,669      |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|OTHER
        INCOME AND GAIN (LOSS)                            |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|Net
        gain (loss) on available-for-sale securities        |  |                                     | 1,215      |                                   |   | (1,003     | ) |      | 3,307      |   |   | (1,003     | )
|Net
        gain (loss) on trading securities                   |  |                                     | 54         |                                   |   | 576        |   |      | (1,759     | ) |   | 503        |  
|Net
        gain (loss) on loans                                |  |                                     | (172       | )                                 |   | (752       | ) |      | 360        |   |   | (886       | )
|Net
        gain on derivatives                                 |  |                                     | 1,389      |                                   |   | 1,018      |   |      | 2,832      |   |   | 1,142      |  
|Dividend
        income                                         |  |                                     | 93         |                                   |   | 22         |   |      | 194        |   |   | 22         |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|Net
        other income and gain (loss)                        |  |                                     | 2,579      |                                   |   | (139       | ) |      | 4,934      |   |   | (222       | )
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|Income
        before income tax expense                        |  |                                     | 18,197     |                                   |   | 6,849      |   |      | 37,449     |   |   | 12,746     |  
|Income
        tax expense                                      |  |                                     | 33         |                                   |   |           |   |      | 122        |   |   |           |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|NET
        INCOME                                              |  | $                                   | 18,164     |                                   | $ | 6,849      |   | $    | 37,327     |   | $ | 12,746     |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|NET
        INCOME PER SHAREBasic                              |  | $                                   | 0.35       |                                   | $ | 0.25       |   | $    | 0.73       |   | $ | 0.47       |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|NET
        INCOME PER SHAREDiluted                            |  | $                                   | 0.35       |                                   | $ | 0.25       |   | $    | 0.72       |   | $ | 0.47       |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|WEIGHTED-AVERAGE
        NUMBER OF SHARES OUTSTANDING - Basic   |  |                                     | 51,397,785 |                                   |   | 27,462,671 |   |      | 51,394,148 |   |   | 27,194,396 |  
|                                                                |  |                                     |            |                                   |   |            |   |      |            |   |   |            |  
|WEIGHTED-AVERAGE
        NUMBER OF SHARES OUTSTANDING - Diluted |  |                                     | 51,552,764 |                                   |   | 27,554,457 |   |      | 51,534,571 |   |   | 27,255,568 |  

See notes to condensed consolidated financial
statements.

4

---



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

|                                                                                            |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   |          |   |   |         |   |   |          |   |   |          |  
|------------------------------------------------------------------------------------------- |  | -------------- | ------ | ---------------------------------- | - | ---------------------------------- |  | ----------------------------------------------- | --------------------------------- | ----- | - | ------ | ----------------------------------- | - | -------- | - | - | ------- | - | - | -------- | - | - | -------- | -
|                                                                                            |  | Common
  Stock |        |                                    |   |                                    |  | Accumulated
  
  Other 
  Comprehensive 
  Loss |                                   |       |   |        |                                     |   |         
|                                                                                            |  |                |        | Additional
  
  Paid-in 
  Capital |   | Deferred 
  Equity 
  Compensation |  |                                                 | Retained 
  Earnings 
  (Deficit) |       |   |        | Comprehensive
  
  Income 
  (Loss) |  
|                                                                                            |  | Shares         |        | Par 
  Value                       |   |                                    |  |                                                 |                                   | Total |   |       
|                                                                                            |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   |          |   |  
|                                                                                            |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   |         
|Balance - January 1, 2006                                                                   |  |                | 51,660 |                                    | $ | 51                                 |  | $                                               | 747,919                           |       | $ | (2,397 | )                                   | $ | (44,703  | ) | $ | (3,667  | ) | $ | 697,203  |   |   |          |  
|                                                                                            |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   |          |   |   |         |   |   |          |   |   |          |  
|Net income                                                                                  |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   |          |   |   | 37,327  |   |   | 37,327   |   | $ | 37,327   |  
|Available-for-sale securities - fair value adjustment net of
  reclassification adjustments |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   | (119,139 | ) |   |         |   |   | (119,139 | ) |   | (119,139 | )
|Designated derivatives - fair value adjustment net of
  reclassification adjustments        |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   | 80,779   |   |   |         |   |   | 80,779   |   |   | 80,779   |  
|                                                                                            |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   |          |   |   |         |   |   |          |   |   |          |  
|Comprehensive loss                                                                          |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   |          |   |   |         |   |   |          |   | $ | (1,033   | )
|                                                                                            |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   |          |   |   |         |   |   |          |   |   |          |  
|Reclassification of deferred equity to additional paid-in
capital                           |  |                |        |                                    |   |                                    |  |                                                 | (2,397                            | )     |   | 2397   |                                     |   |          |   |   |         |   |   |         |   |   |          |  
|Dividends declared                                                                          |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   |          |   |   | (18,597 | ) |   | (18,597  | ) |   |          |  
|Offering costs                                                                              |  |                |        |                                    |   |                                    |  |                                                 | 48                                |       |   |        |                                     |   |          |   |   |         |   |   | 48       |   |   |          |  
|Share-based compensations                                                                   |  |                | 39     |                                    |   |                                    |  |                                                 | 1,169                             |       |   |        |                                     |   |          |   |   |         |   |   | 1,169    |   |   |          |  
|                                                                                            |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   |          |   |   |         |   |   |          |   |   |          |  
|Balance - June 30, 2006                                                                     |  |                | 51,699 |                                    | $ | 51                                 |  | $                                               | 746,739                           |       | $ |       |                                     | $ | (83,063  | ) | $ | 15,063  |   | $ | 678,790  |   |   |          |  
|                                                                                            |  |                |        |                                    |   |                                    |  |                                                 |                                   |       |   |        |                                     |   |          |   |   |         |   |   |          |   |   |          |  

See notes to condensed consolidated financial
statements.

5

---



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

|                                                                                                |  |                             |            |      |   |            |  
|----------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | ---- | - | ---------- | -
|                                                                                                |  | Six months
  ended June 30, |           
|                                                                                                |  |                             |           
|                                                                                                |  | 2006                        |            | 2005 |  
|                                                                                                |  |                             |            |      |  
|CASH
  FLOWS FROM OPERATING ACTIVITIES:                                                         |  |                             |            |      |   |            |  
|Net income                                                                                      |  | $                           | 37,327     |      | $ | 12,746     |  
|Adjustments
  to reconcile net income to net cash provided by (used in) operating
  activities: |  |                             |            |      |   |            |  
|Net amortization
  on investments, loans, and debt issuance                                     |  |                             | 12,508     |      |   | 4,312      |  
|Accretion of
  discount on held to maturity securities                                          |  |                             |           |      |   | (145       | )
|Share-based
  compensation                                                                      |  |                             | 968        |      |   | 2,426      |  
|(Gain) loss on
  undesignated derivatives                                                       |  |                             | (925       | )    |   | 1,013      |  
|Hedge
  ineffectiveness                                                                         |  |                             | (376       | )    |   | (12        | )
|Purchase of
  trading securities                                                                |  |                             |           |      |   | (4,627     | )
|Unrealized (gain)
  loss from trading securities                                                |  |                             | 1,759      |      |   | (503       | )
|Other-than-temporary
  impairment on securities available-for-sale                              |  |                             | 2,034      |      |   |           |  
|Purchase of
  loans held for sale                                                               |  |                             | (177,440   | )    |   | (302,203   | )
|Proceeds from
  sale and principal payments received on loans held for sale                     |  |                             | 188,838    |      |   | 55,855     |  
|Net (gain) loss
  on loans held for sale                                                        |  |                             | (426       | )    |   | 886        |  
|Net realized
  (gain) loss on sale of securities available-for-sale                             |  |                             | (5,341     | )    |   | 1,003      |  
|Net realized
  gain on terminated derivatives                                                   |  |                             | (198       | )    |   | (1,701     | )
|Net payments
  received (paid) on designated terminated derivatives                             |  |                             | 2,116      |      |   | (854       | )
|Changes
  in operating assets and liabilities:                                                  |  |                             |            |      |   |            |  
|Due from broker                                                                                 |  |                             | (7,515     | )    |   | (1,751     | )
|Interest
  receivable                                                                           |  |                             | (10,302    | )    |   | (17,289    | )
|Other receivable                                                                                |  |                             | (992       | )    |   | (23        | )
|Prepaid and
  other assets                                                                      |  |                             | (471       | )    |   | (518       | )
|Accrued interest
  on repurchase agreements                                                     |  |                             | 13,280     |      |   | 16,010     |  
|Due to broker                                                                                   |  |                             | 5,717      |      |   | 46,181     |  
|Interest payable                                                                                |  |                             | 7,856      |      |   | 16,893     |  
|Management and
  incentive fee payable                                                          |  |                             | (320       | )    |   | 412        |  
|Other payables                                                                                  |  |                             | 39         |      |   | 169        |  
|                                                                                                |  |                             |            |      |   |            |  
|Net
  cash provided by (used in) operating activities                                           |  |                             | 68,136     |      |   | (171,720   | )
|                                                                                                |  |                             |            |      |   |            |  
|                                                                                                |  |                             |            |      |   |            |  
|CASH
  FLOWS FROM INVESTING ACTIVITIES:                                                         |  |                             |            |      |   |            |  
|Change in
  restricted cash and cash equivalents                                                |  |                             | 62,131     |      |   | (3,824     | )
|Purchase of
  available-for-sale securities                                                     |  |                             | (1,957,198 | )    |   | (3,624,913 | )
|Proceeds from
  the sale of available-for-sale securities                                       |  |                             | 438,245    |      |   | 369,784    |  
|Purchase of held-to-maturity
  securities                                                       |  |                             |           |      |   | (34,719    | )
|Principal
  payments received on available-for-sale securities                                  |  |                             | 724,531    |      |   | 232,758    |  
|Proceeds from
  the maturity of held-to-maturity securities                                     |  |                             |           |      |   | 134,990    |  
|Purchase of
  loans                                                                             |  |                             | (151,982   | )    |   | (46,181    | )
|Proceeds from sale
  of loans                                                                   |  |                             | 25,000     |      |   |           |  
|Principal
  payments received on loans                                                          |  |                             | 15,147     |      |   |           |  
|                                                                                                |  |                             |            |      |   |            |  
|Net
  cash used in investing activities                                                         |  |                             | (844,126   | )    |   | (2,972,105 | )
|                                                                                                |  |                             |            |      |   |            |  
|                                                                                                |  |                             |            |      |   |            |  
|CASH
  FLOWS FROM FINANCING ACTIVITIES:                                                         |  |                             |            |      |   |            |  
|Net borrowings
  under repurchase agreements                                                    |  |                             | 658,345    |      |   | 2,741,909  |  
|Proceeds from
  revolving warehouse facility                                                    |  |                             | 175,785    |      |   |           |  
|Proceeds from
  issuance of debt securities                                                     |  |                             |           |      |   | 276,000    |  
|Payment of debt
  issuance costs                                                                |  |                             | (1,408     | )    |   | (4,237     | )
|Payments on
  designated derivative containing a financing element                              |  |                             | (780       | )    |   |           |  
|Dividends paid                                                                                  |  |                             | (36,678    | )    |   | (6,149     | )
|Payment of
  offering costs                                                                     |  |                             |           |      |   | (1,411     | )
|                                                                                                |  |                             |            |      |   |            |  
|Net
  cash provided by financing activities                                                     |  |                             | 795,264    |      |   | 3,006,112  |  
|                                                                                                |  |                             |            |      |   |            |  
|                                                                                                |  |                             |            |      |   |            |  
|Net increase
  (decrease) in cash and cash equivalents                                          |  |                             | 19,274     |      |   | (137,713   | )
|Cash and cash
  equivalents at beginning of period                                              |  |                             | 35,542     |      |   | 268,686    |  
|                                                                                                |  |                             |            |      |   |            |  
|Cash
  and cash equivalents at end of period                                                    |  | $                           | 54,816     |      | $ | 130,973    |  
|                                                                                                |  |                             |            |      |   |            |  
|                                                                                                |  |                             |            |      |   |            |  
|SUPPLEMENTAL
  DISCLOSURE OF CASH FLOW INFORMATION:                                             |  |                             |            |      |   |            |  
|Cash paid for
  interest                                                                        |  | $                           | 197,972    |      | $ | 23,963     |  
|Cash paid for
  income taxes                                                                    |  | $                           | 23         |      | $ |           |  
|Net change in
  unrealized loss on available-for-sale securities                                |  | $                           | 121,173    |      | $ | 13,890     |  
|Net change in
  unrealized gain on derivatives                                                  |  | $                           | 81,353     |      | $ | 3,691      |  
|Principal payments
  receivable on available-for-sale securities                                |  | $                           | 19,226     |      | $ | 14,098     |  
|Non-cash
  settlement of interest expense added to principal balance of bank loans              |  | $                           | 2,282      |      | $ |           |  
|Unsettled
  available-for-sale securities purchases - due to broker                             |  | $                           | 1,986      |      | $ | 698,265    |  
|Non-cash
  settlement of interest expense from derivatives                                      |  | $                           | 577        |      | $ | 3,785      |  
|Issuance of
  stock for payment of prior year incentive fee                                     |  | $                           | 201        |      | $ |           |  
|Unpaid offering
  costs                                                                         |  | $                           | (48        | )    | $ | 2,046      |  
|Proceeds
  receivable from issuance of common stock                                             |  | $                           |           |      | $ | 365,784    |  
|Warehouse
  participation liability                                                             |  | $                           |           |      | $ | 147,258    |  
|Dividend
  declared but not yet paid                                                            |  | $                           |           |      | $ | 9,569      |  

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 was incorporated in Maryland on November 22, 2004. On
December 23, 2004, the Company commenced its operations of investing in real
estate related investments, primarily mortgage-backed securities, as well as
alternative investments.

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

Intercompany
accounts and transactions have been eliminated in consolidation.

Variable
Interest Entities

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

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

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

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

Reclassifications

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

8

---



2. SIGNIFICANT ACCOUNTING
POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Significant
Accounting Policies

The
Companys significant accounting policies are included in the Notes to the
Consolidated Financial Statements included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2005; such policies have not 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 off
setting reduction to additional paid-in capital. This reclassification had no
impact on the Companys total stockholders equity.

The
FASB issued SFAS No. 155, Accounting for
Certain Hybrid Financial Instruments in February 2006. SFAS No. 155
amends SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, and SFAS No. 140 Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities and addresses the
application of SFAS No. 133 to beneficial interests in securitized financial
assets. SFAS No. 155 establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation. Additionally, SFAS No. 155 permits fair value
measurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. SFAS No. 155 is effective
for financial instruments acquired or issued after January 1, 2007. The
adoption of this standard is not expected to have a material impact on the
Companys 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 Company does not anticipate
any material impact to its financial statements as a result of adopting FIN 48.

3. AVAILABLE-FOR-SALE
SECURITIES

The
following table summarizes the Companys investment securities classified as
available-for-sale as of June 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 |  | $                | 8,017,238 |                    | $ | 5,015               |  | $                      | (238,902 | ) | $ | 7,783,351 | 
|Asset-backed securities                |  |                  | 297,436   |                    |   | 2,988               |  |                        | (2,923   | ) |   | 297,501   | 
|High-yield corporate bonds             |  |                  | 25,958    |                    |   | 303                 |  |                        | (550     | ) |   | 25,711    | 
|Other investments                      |  |                  | 2,944     |                    |   | 24                  |  |                        |         |   |   | 2,968     | 
|                                       |  |                  |           |                    |   |                     |  |                        |          |   |   |           | 
|Total                                  |  | $                | 8,343,576 |                    | $ | 8,330               |  | $                      | (242,375 | ) | $ | 8,109,531 | 
|                                       |  |                  |           |                    |   |                     |  |                        |          |   |   |           | 

The following table summarizes the
Companys securities classified as available-for-sale as of June 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                              |  | $                | 6,010     |                        | $ | 5,927                       |  |  | 6.53 | %
|Greater than one year and less than five years  |  |                  | 5,897,340 |                        |   | 5,738,360                   |  |  | 4.82 | %
|Greater than five years and less than ten years |  |                  | 2,111,131 |                        |   | 2,055,518                   |  |  | 5.58 | %
|Greater than ten years                          |  |                  | 329,095   |                        |   | 309,726                     |  |  | 6.04 | %
|                                                |  |                  |           |                        |   |                             |  |  |      |  
|Total                                           |  | $                | 8,343,576 |                        | $ | 8,109,531                   |  |  | 5.06 | %
|                                                |  |                  |           |                        |   |                             |  |  |      |  

9

---



The
weighted average lives of available-for-sale securities at June 30, 2006 in the
tables above are based upon contractual maturity for the high-yield corporate
bonds and other investments while mortgage-backed securities and asset-backed
securities weighted average life is 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 pay 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
June 30, 2006, available-for-sale securities include unsettled security
purchases totaling $2.0 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 June 30, 2006:

|                                       |  |                        |     |                     |   |                       |  |                    |          |                    |  |                       |  |                    |           |                    |   |                       |   |  |     |  |   |           |  |   |          |  
|-------------------------------------- |  | ---------------------- | --- | ------------------- | - | --------------------- |  | ------------------ | -------- | ------------------ |  | --------------------- |  | ------------------ | --------- | ------------------ | - | --------------------- | - |  | --- |  | - | --------- |  | - | -------- | -
|                                       |  | Less than 12 Months    |     | More than 12 Months |   | Total                 | 
|                                       |  |                        |     |                     |   |                       | 
|                                       |  | NumberofSecurities     |     | EstimatedFairValue  |   | GrossUnrealizedLosses |  | NumberofSecurities |          | EstimatedFairValue |  | GrossUnrealizedLosses |  | NumberofSecurities |           | EstimatedFairValue |   | GrossUnrealizedLosses |  
|                                       |  |                        |     |                     |   |                       |  |                    |          |                    |  |                       |  |                    |           |                    |   |                       |  
|                                       |  | (Dollars in thousands) |    
|                                       |  |                        |    
|Residential mortgage-backed securities |  |                        | 235 |                     | $ | 5,741,153             |  | $                  | (167,109 | )                  |  | 91                    |  | $                  | 2,010,638 |                    | $ | (71,793               | ) |  | 326 |  | $ | 7,751,791 |  | $ | (238,902 | )
|Asset-backed securities                |  |                        | 59  |                     |   | 108,155               |  |                    | (2,339   | )                  |  | 10                    |  |                    | 18,068    |                    |   | (584                  | ) |  | 69  |  |   | 126,223   |  |   | (2,923   | )
|High-yield corporate bonds             |  |                        | 2   |                     |   | 5,590                 |  |                    | (443     | )                  |  | 1                     |  |                    | 2,293     |                    |   | (107                  | ) |  | 3   |  |   | 7,883     |  |   | (550     | )
|                                       |  |                        |     |                     |   |                       |  |                    |          |                    |  |                       |  |                    |           |                    |   |                       |   |  |     |  |   |           |  |   |          |  
|Total temporarily impaired securities  |  |                        | 296 |                     | $ | 5,854,898             |  | $                  | (169,891 | )                  |  | 102                   |  | $                  | 2,030,999 |                    | $ | (72,484               | ) |  | 398 |  | $ | 7,885,897 |  | $ | (242,375 | )
|                                       |  |                        |     |                     |   |                       |  |                    |          |                    |  |                       |  |                    |           |                    |   |                       |   |  |     |  |   |           |  |   |          |  

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

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

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

During
the six months ended June 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 income (loss) as an immediate
reduction of earnings recognized as a reduction to net gain (loss) on
available-for-sale securities of $0.2 million and $2.0 million for the three and
six months ended June 30, 2006, respectively, in the condensed consolidated
statements of operations. Since these securities have been adjusted to their
estimated fair value at June 30, 2006, they are not included in gross
unrealized losses in the table above.

The
Companys available-for-sale securities primarily consist of residential
mortgage-backed securities, which are all agency or AAA-rated in quality with
the exception of $73.4 million of interest-only or principal-only securities.
In addition, at June 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

10

---



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 June 30, 2006.

4. TRADING SECURITIES

The
Company holds trading securities as of June 30, 2006, carried at fair value of
$2.0 million. Net gains of $54,000 and net losses of $1.8 million on trading
securities were recognized in the condensed consolidated statements of
operations for three and six months ended June 30, 2006, respectively, due to
declines in fair values of these securities.

5. OTHER INVESTMENTS

The
Company holds other investments as of June 30, 2006, carried at cost of $12.3
million. These positions consist of equity securities in the Trust of $1.6
million (see Note 8), a $3.0 million equity investment in Hometown Commercial
Capital LLC (HCC) (see Note 6) and $7.7 million in other common and preferred
equities that are not traded in an active market.

6. LOANS AND LOANS HELD FOR
SALE

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

|                                |  |                |         |                         |   |         |  |   |         | 
|------------------------------- |  | -------------- | ------- | ----------------------- | - | ------- |  | - | ------- | 
|                                |  | Carrying Value |        
|                                |  |                |        
|Type of Loan                    |  | Loans          |         | Loans
  Held
  for Sale |   | Total   | 
|                                |  |                |         |                         |   |         | 
|                                |  | (In thousands) |        
|                                |  |                |        
|Loans held in CLO               |  | $              |        |                         | $ | 273,014 |  | $ | 273,014 | 
|Structured and syndicated loans |  |                | 274,455 |                         |   | 1,000   |  |   | 275,455 | 
|Commercial mortgage loans (1)   |  |                |        |                         |   | 8,488   |  |   | 8,488   | 
|                                |  |                |         |                         |   |         |  |   |         | 
|                                |  | $              | 274,455 |                         | $ | 282,502 |  | $ | 556,957 | 
|                                |  |                |         |                         |   |         |  |   |         | 

|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|   
|(1) | Commercial mortgage loans
  represent a participating interest in commercial mortgage loans

At
June 30, 2006, the Company held loans totaling $557.0 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 $1.0 million. Loans classified as held
for investment and carried at amortized cost totaled $274.5 million. The
Company identified no impaired held for investment loans at June 30, 2006, and
thus has established no allowance for loan losses. At June 30, 2006, there were
$5.9 million of unsettled loan purchases and $11.4 million of unsettled loan
sales. At June 30, 2006, the Company held loans that settle interest accruals
by increasing the principal balance of the loan outstanding. As of June 30,
2006, the Company had increased the principal balance by $2.3 million as
settlement of interest for these loans.

On
November 29, 2005, the Company entered into a master participation agreement
with HCC, a commercial mortgage loan originator. HCC originates commercial
mortgages with a targeted principal range of $1.0 million to $15.0 million.
Under the master participation agreement, the Company will purchase a junior
participating beneficial ownership interest of 10.0% (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
June 30, 2006, the Company held junior participation interests in 18 commercial
mortgage loans originated by HCC of $8.5 million. These interests are
classified as loans held for sale and carried at the lower of cost or fair
value.

7. REPURCHASE AGREEMENTS

The repurchase agreements are
short-term borrowings from financial institutions that bear interest rates that
have historically moved in close relationship to the one-month, two-month or
three-month LIBOR. At June 30, 2006 and December 31, 2005, the Company had
repurchase agreements outstanding in the amount of $7.5 billion and $6.8
billion, with a weighted-average borrowing rate of 5.19% and 4.31%,
respectively.

11

---



The
repurchase agreements had remaining weighted average maturities of 31 days at
June 30, 2006 and are summarized below:

|                                       |  |                                          |           |                                |   |                             |  |  |      |  
|-------------------------------------- |  | ---------------------------------------- | --------- | ------------------------------ | - | --------------------------- |  |  | ---- | -
|Type of Investment Pledged             |  | EstimatedFair Valueof InvestmentsPledged |           | RepurchaseAgreementLiabilities |   | WeightedAverageInterestRate | 
|                                       |  |                                          |           |                                |   |                             | 
|                                       |  | (In thousands)                           |           |                                |   |                            
|                                       |  |                                          |           |                                |   |                            
|Residential mortgage-backed securities |  | $                                        | 7,510,723 |                                | $ | 7,434,159                   |  |  | 5.19 | %
|High yield corporate bonds             |  |                                          | 18,385    |                                |   | 15,372                      |  |  | 4.86 | %
|Other investments                      |  |                                          | 2,975     |                                |   | 2,657                       |  |  | 5.77 | %
|                                       |  |                                          |           |                                |   |                             |  |  |      |  
|                                       |  | $                                        | 7,532,083 |                                | $ | 7,452,188                   |  |  | 5.19 | %
|                                       |  |                                          |           |                                |   |                             |  |  |      |  

The fair
value of the investments pledged at June 30, 2006 includes accrued interest and
dividends of $33.3 million consisting of $32.8 million, $0.5 million and $7,000
for the residential mortgage-backed securities, high yield corporate bonds and
other investments, respectively. Additionally, repurchase agreement liabilities
at June 30, 2006 included accrued interest of $40.0 million, $0.1 million and
$5,000 for the residential mortgage-backed securities, high yield corporate
bonds and other investments, respectively.

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

|                                       |  |                  |        |                                   |  |    |  | 
|-------------------------------------- |  | ---------------- | ------ | --------------------------------- |  | -- |  | 
|                                       |  | AmountatRisk (1) |        | Weighted-AverageRemainingMaturity | 
|                                       |  |                  |        |                                   | 
|Repurchase
  Agreement Counterparties: |  | (In thousands)   |        | (In days)                         | 
|                                       |  |                  |        |                                   | 
|                                       |  |                  |        |                                   |  |    | 
|Bear, Stearns & Co. Inc.               |  | $                | 2,761  |                                   |  | 24 |  | 
|Barclays Bank Plc.                     |  |                  | (962   | )                                 |  | 34 |  | 
|Citigroup, Inc.                        |  |                  | (8,608 | )                                 |  | 9  |  | 
|Countrywide Securities Corp.           |  |                  | 12,947 |                                   |  | 34 |  | 
|Credit Suisse LLC                      |  |                  | 22,206 |                                   |  | 33 |  | 
|JPMorgan Chase and Co.                 |  |                  | (6,066 | )                                 |  | 22 |  | 
|Lehman Brothers Inc.                   |  |                  | 3,331  |                                   |  | 14 |  | 
|Merrill Lynch & Co., Inc.              |  |                  | 28,319 |                                   |  | 27 |  | 
|Mitsubishi Securities (USA), Inc.      |  |                  | 11,826 |                                   |  | 13 |  | 
|Nomura Securities International        |  |                  | (2,831 | )                                 |  | 33 |  | 
|UBS Securities LLC                     |  |                  | 16,972 |                                   |  | 47 |  | 
|                                       |  |                  |        |                                   |  |    |  | 
|Total                                  |  | $                | 79,895 |                                   |  |    |  | 
|                                       |  |                  |        |                                   |  |    |  | 

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

8. LONG-TERM DEBT

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

|                             |  |                |         |                                    |  |      |  
|---------------------------- |  | -------------- | ------- | ---------------------------------- |  | ---- | -
|                             |  | CarryingValue  |         | WeightedAverageRateat June 30,2006 | 
|                             |  |                |         |                                    | 
|                             |  | (In thousands) |         |                                    |  |     
|                             |  |                |         |                                    |  |     
|Revolving warehouse facility |  | $              | 175,785 |                                    |  | 6.09 | %
|Market Square                |  |                | 276,000 |                                    |  | 5.57 | %
|Pinetree                     |  |                | 288,000 |                                    |  | 5.55 | %
|Trust Preferred Securities   |  |                | 51,550  |                                    |  | 8.65 | %
|                             |  |                |         |                                    |  |      |  
|Total                        |  | $              | 791,335 |                                    |  | 5.88 | %
|                             |  |                |         |                                    |  |      |  

12

---



Revolving Warehouse
Facility

On
March 10, 2006, the Company entered into a $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 assets of these entities, which totaled $248.9 million at
June 30, 2006. The Company expects to pursue term funding of these assets via
securitization in a future collateralized loan obligation. At June 30, 2006,
the Company had $175.8 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 warehouse funding agreement, plus 0.75% for large syndicated loans or plus
0.90% for all other loans. 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 5.57%, using the last
reset dates as of June 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
assets of Market Square, which were $310.0 million as of June 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 5.55%, using the last reset date as of
June 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 assets of
Pinetree, which were $312.1 million at June 30, 2006.

Trust
Preferred Securities

On
September 29, 2005, the Trust issued preferred securities to unaffiliated
investors for gross proceeds of $50.0 million and common securities to the
Company for $1.6 million. The combined proceeds were invested by the Trust in
$51.6 million of unsecured junior subordinated debt securities issued by DTC
LLC. The junior subordinated debt securities are the sole assets of the Trust
and mature on October 30, 2035 but are callable by DTC LLC on or after October
30, 2010. Interest is payable quarterly at a floating rate equal to three-month
LIBOR plus 3.50% per annum. This rate at June 30, 2006 was 8.65%.

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

Unamortized
deferred issuance costs associated with the junior subordinated debt securities
are $1.2 million at June 30, 2006 and are classified as part of prepaid and
other assets on the condensed consolidated balance sheet. These costs are being
amortized into interest expense using the effective yield method over the
period to the call date.

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

13

---



9. STOCKHOLDERS EQUITY

On
June 13, 2006, the Company issued 29,159 shares of common stock to the
Companys manager pursuant to the Management Agreement. This grant represents
15% of the incentive fee due to the Manager for the fourth quarter 2005 and
first quarter 2006 incentive fees.

On
April 24, 2006, the Company declared a cash dividend of $0.36 per share on the
Companys common stock for the first quarter of 2006. The record date for the
cash dividend 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 during 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 June 30, 2006 was $1.4 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:

|                         |  |                             |       |                           |  |       |   |      |       |   |  |       |  
|------------------------ |  | --------------------------- | ----- | ------------------------- |  | ----- | - | ---- | ----- | - |  | ----- | -
|                         |  | Three months ended June 30, |       | Six months ended June 30, | 
|                         |  |                             |       |                           | 
|                         |  | 2006                        |       | 2005                      |  | 2006  |   | 2005 |      
|                         |  |                             |       |                           |  |       |   |      |      
|Dividend yield           |  |                             | 10.53 | %                         |  | 9.25  | % |      | 10.53 | % |  | 9.25  | %
|Expected volatility      |  |                             | 21.66 | %                         |  | 21.29 | % |      | 21.66 | % |  | 21.29 | %
|Risk-free interest rate  |  |                             | 5.14  | %                         |  | 3.92  | % |      | 5.14  | % |  | 3.92  | %
|Expected life (in years) |  |                             | 8.5   |                           |  | 9.5   |   |      | 8.5   |   |  | 9.5   |  

10. COMPUTATION OF EARNINGS PER SHARE

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

|                                                      |  |                             |        |                          |   |        |  |      |        |  |   |        | 
|----------------------------------------------------- |  | --------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------ | 
|                                                      |  | Three months ended June 30, |        | Six months ended June 30 |  
|                                                      |  |                             |        |                          |  
|                                                      |  | 2006                        |        | 2005                     |   | 2006   |  | 2005 |       
|                                                      |  |                             |        |                          |   |        |  |      |       
|                                                      |  | (In thousands)              |       
|                                                      |  |                             |       
|                                                      |  |                             |       
|Net income                                            |  | $                           | 18,164 |                          | $ | 6,849  |  | $    | 37,327 |  | $ | 12,746 | 
|                                                      |  |                             |        |                          |   |        |  |      |        |  |   |        | 
|                                                      |  |                             |       
|Weighted average
  shares used in basic computation   |  |                             | 51,398 |                          |   | 27,463 |  |      | 51,394 |  |   | 27,194 | 
|                                                      |  |                             |        |                          |   |        |  |      |        |  |   |        | 
|Dilutive effect
  of:                                 |  |                             |        |                          |   |        |  |      |        |  |   |        | 
|Unvested
  restricted stock                           |  |                             | 155    |                          |   | 91     |  |      | 141    |  |   | 62     | 
|                                                      |  |                             |        |                          |   |        |  |      |        |  |   |        | 
|Weighted average
  shares used in diluted computation |  |                             | 51,553 |                          |   | 27,554 |  |      | 51,535 |  |   | 27,256 | 
|                                                      |  |                             |        |                          |   |        |  |      |        |  |   |        | 
|                                                      |  |                             |        |                          |   |        |  |      |        |  |   |        | 
|Net income per
  share - Basic                        |  | $                           | 0.35   |                          | $ | 0.25   |  | $    | 0.73   |  | $ | 0.47   | 
|                                                      |  |                             |        |                          |   |        |  |      |        |  |   |        | 
|                                                      |  |                             |        |                          |   |        |  |      |        |  |   |        | 
|Net income per
  share - Diluted                      |  | $                           | 0.35   |                          | $ | 0.25   |  | $    | 0.72   |  | $ | 0.47   | 
|                                                      |  |                             |        |                          |   |        |  |      |        |  |   |        | 

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

14

---



11. RELATED-PARTY
TRANSACTIONS

On
April 4, 2006, the Company approved pursuant to the Management Agreement,
granting shares of common stock relating to payment of 15% of the fourth
quarter 2005 incentive fee to the Companys Manager. The issuance of these
shares did not occur until June 13, 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. Additionally, the one-year holding period, as
defined in the agreement with our Manager, was deemed to start on March 24,
2006. The Company also determined that any future issuance of common stock for
partial payment of the incentive fee to the Companys Manager may be deemed
issued as of a specific date as approved by the Company in the case that the
actual shares are not issued.

The
Companys base management fee expense for the three and six months ended June
30, 2006 and 2005 was $3.3 million and $6.6 million, and $1.7 million and $3.4
million, respectively. In addition to the base management fee, amortization for
the three and six months ended June 30, 2006 and 2005 was $0.3 million and $0.7
million, and $1.3 million and $2.2 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 six months ended June 30, 2006 of $0.8 million and $2.0 million, respectively.
The Company recorded expenses related to reimbursable out-of-pocket and certain
other costs incurred by the Manager totaling $0.2 million and $0.3 million for
the three and six months ended June 30, 2006, respectively, and $ 0.1 million
for both the three and six months ended June 30, 2005. At June 30, 2006, the
Company had outstanding payables related to its agreement with the Manager in
the amount of $1.9 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 June 30, 2006, for which the disclosure of fair values is
required were as follows:

|                                           |  |                  |           |                          |   |           | 
|------------------------------------------ |  | ---------------- | --------- | ------------------------ | - | --------- | 
|                                           |  | Carrying
  Value |           | Estimated
  Fair
  Value |  
|                                           |  |                  |           |                          |  
|                                           |  | (In thousands)   |          
|                                           |  |                  |          
|Financial
  assets:                        |  |                  |          
|Cash and cash
  equivalents (a)            |  | $                | 54,816    |                          | $ | 54,816    | 
|Restricted cash
  and cash equivalents (a) |  |                  | 23,181    |                          |   | 23,181    | 
|Available-for
  sale securities (b)        |  |                  | 8,109,531 |                          |   | 8,109,531 | 
|Trading
  securities (b)                   |  |                  | 2,009     |                          |   | 2,009     | 
|Other
  investments (c)                    |  |                  | 12,301    |                          |   | 12,301    | 
|Derivative
  assets (d)                    |  |                  | 145,820   |                          |   | 145,820   | 
|Loans held for
  sale (e)                  |  |                  | 282,502   |                          |   | 283,629   | 
|Loans (e)                                  |  |                  | 274,455   |                          |   | 274,455   | 

15

---



|                                   |  |                  |           |                          |   |           | 
|---------------------------------- |  | ---------------- | --------- | ------------------------ | - | --------- | 
|                                   |  | Carrying
  Value |           | Estimated
  Fair
  Value |  
|                                   |  |                  |           |                          |  
|                                   |  | (In thousands)   |          
|                                   |  |                  |          
|Financial
  liabilities:           |  |                  |          
|Repurchase
  agreements (a)        |  | $                | 7,452,188 |                          | $ | 7,452,188 | 
|Derivative
  liabilities (d)       |  |                  | 2,881     |                          |   | 2,881     | 
|Long-term debt:                    |  |                  |           |                          |   |           | 
|Market Square
  (f)                |  |                  | 276,000   |                          |   | 276,000   | 
|Pinetree (f)                       |  |                  | 288,000   |                          |   | 288,000   | 
|Revolving
  warehouse facility (f) |  |                  | 175,785   |                          |   | 175,785   | 
|Trust preferred
  (f)              |  |                  | 51,550    |                          |   | 51,550    | 



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The carrying amounts
  approximated the fair value due to the short-term nature of these
  instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(b) | The estimated fair values
  were determined through references to price estimates provided by independent
  pricing services and/or dealers in the securities.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(c) | It was not practicable to
  estimate the fair value of these investments because the investments are not
  traded in an active market.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(d) | All derivatives are
  recognized on the condensed consolidated balance sheets at fair value and
  take into consideration the effects of legally enforceable master netting
  arrangements that allow the Company to settle positive and negative positions
  with the same counterparty on a net basis. Determination of fair values is
  based on internally developed and tested market-standard pricing models.                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(e) | The estimated fair values
  are determined primarily by using price estimates provided by an independent
  pricing service. If the independent pricing service cannot provide estimates
  for a given loan, the Company determines estimated fair value based on some
  or all of the following: (a) current financial information of the
  borrowing company and performance against its operating plan; (b) changing
  value of collateral supporting the loan; (c) changes to the market for the
  borrowing companys service or product and (d) present value of projected future cash flows.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(f) | The carrying amount
  approximated fair value as the interest rate on all of the Companys
  long-term debt resets quarterly to 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 six months ended June 30, 2006 |         
|                                                |  |                                        |         
|                                                |  | Available-for-
  Sale Securities       |          | Cash Flow
  Hedges |   | Total   |  
|                                                |  |                                        |          |                    |   |         |  
|                                                |  | (In thousands)                         |         
|                                                |  |                                        |         
|Beginning balance                               |  | $                                      | (114,906 | )                  | $ | 70,203  |   | $ | (44,703 | )
|Unrealized net
  gain (loss) for the period     |  |                                        | (115,832 | )                  |   | 95,654  |   |   | (20,178 | )
|Reclassification
  adjustments:                 |  |                                        |          |                    |   |         |   |   |         |  
|Securities sold                                 |  |                                        | (5,341   | )                  |   |        |   |   | (5,341  | )
|Other-than-temporary
  impairment of securities |  |                                        | 2,034    |                    |   |        |   |   | 2,034   |  
|Hedging net gain
  recognized in earnings       |  |                                        |         |                    |   | (14,875 | ) |   | (14,875 | )
|                                                |  |                                        |          |                    |   |         |   |   |         |  
|Ending balance                                  |  | $                                      | (234,045 | )                  | $ | 150,982 |   | $ | (83,063 | )
|                                                |  |                                        |          |                    |   |         |   |   |         |  

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.

16

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

|                                    |  |                |           |                 |   |                  |  |                     |        |   |   |         | 
|----------------------------------- |  | -------------- | --------- | --------------- | - | ---------------- |  | ------------------- | ------ | - | - | ------- | 
|                                    |  | NotionalAmount |           | UnrealizedGains |   | UnrealizedLosses |  | EstimatedFair Value |       
|                                    |  |                |           |                 |   |                  |  |                     |       
|                                    |  | (In thousands) |          
|                                    |  |                |          
|Interest rate swaps - designated    |  | $              | 5,674,450 |                 | $ | 144,903          |  | $                   | (2,761 | ) | $ | 142,142 | 
|Interest rate swaps - undesignated  |  |                | 103,250   |                 |   | 348              |  |                     |       |   |   | 348     | 
|Credit default swaps - undesignated |  |                | 73,000    |                 |   | 551              |  |                     | (120   | ) |   | 431     | 
|Total return swaps - undesignated   |  |                | 7,500     |                 |   | 18               |  |                     |       |   |   | 18      | 
|                                    |  |                |           |                 |   |                  |  |                     |        |   |   |         | 
|                                    |  | $              | 5,858,200 |                 | $ | 145,820          |  | $                   | (2,881 | ) | $ | 142,939 | 
|                                    |  |                |           |                 |   |                  |  |                     |        |   |   |         | 

Cash
Flow Hedging Strategies

Hedging
instruments are designated, as appropriate, as cash flow hedges based upon the
specifically identified exposure, which may be an individual item or a group of
similar items. Hedged exposure is primarily interest expense on forecasted
rollover/reissuance of repurchase agreements for a specified future time period
and the hedged risk is the variability in those payments due to changes in the
benchmark rate. Hedging transactions are structured at inception so that the
notional amounts of the hedges are matched with an equal amount of repurchase
agreements forecasted to be outstanding in that specified period for which the
borrowing rate is not yet fixed. Cash flow hedging strategies include the
utilization of interest rate swaps and interest rate swap forwards. Any
ineffectiveness in the hedging relationship is recognized in interest expense
during the period in which it arises. Prior to the end of the specified hedge
period, the effective portion of all contract gains and losses is recorded in
other comprehensive income or loss. Realized gains and losses due to net
settlements on the hedging instruments are reclassified into earnings as an
adjustment to interest expense during the specified hedge time period. Hedging instruments
under these strategies are deemed to be designated to the outstanding
repurchase portfolio and the forecasted rollover thereof. At June 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 six months ended June 30, 2006, the Company recognized an
increase to interest expense of $0.2 million and reduction to interest expense
of $0.4 million, respectively, while recognizing an increase to interest
expense of $0.3 million and a decrease to interest expense of $12,000 for the
three and six months ended June 30, 2005, respectively, due to ineffectiveness.
The weighted average fixed rate payable on the cash flow hedges at June 30,
2006 is 4.29%. 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 June 30, 2006, the Company held 206 designated
interest rate swaps with a notional amount outstanding of $5.7 billion. Based
on amounts included in the accumulated other comprehensive income (loss) at
June 30, 2006 from designated interest rate swaps, the Company expects to
recognize a decrease of $29.7 million in interest expense over the next twelve
months.

Other
Interest Rate Derivatives

The
Company held three interest rate swaps with a total notional amount of $103.3
million as of June 30, 2006 that were not designated as hedges. Accordingly,
changes in fair value of these derivatives are recorded in net gain on
derivatives in the condensed consolidated statement of operations. As of June
30, 2006, these interest rate swaps had a total fair value of $0.3 million,
recorded in derivative assets in the condensed consolidated balance sheet.

Credit
Default Swaps

As
of June 30, 2006, the Company held 23 credit default swaps (CDS), as the
protection seller, with a notional amount of $73.0 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 June 30, 2006, these CDSs had a net fair value
recorded in derivative assets and derivative liabilities in the condensed
consolidated balance sheet in the amounts of $0.5 million and $0.1 million,
respectively.

17

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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 a cost of financing. The TR contract is valued based on the fair
value of the underlying asset, including interest, offset by the notional
amount financed plus accrued interest. The Company had one TR as of June 30,
2006 with a notional amount of $7.5 million. The TR had fair value recorded in
derivative assets in the condensed consolidated balance sheet in the amount of
$18,000.

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 $31.3
million at June 30, 2006.

16. SUBSEQUENT EVENTS

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

On
  August 2, 2006, the Company closed an offering of $25.0 million of trust preferred
  securities, which were placed in a private placement transaction exempted from
  registration under the Securities Act of 1933, as amended. This is the initial
  tranche of an aggregate offering of up to $70 million of trust preferred securities,
  the remaining portion of which may be drawn in up to two additional tranches,
  by October 31, 2006. The interest rate will float based on three-month Libor
  plus 2.25%, resetting quarterly. The trust preferred securities mature on October
  31, 2036 and may be called at par by the Company any time after October 30,
  2011. The trust preferred securities benefit from the Companys guarantee
  of the notes issued to the trust, which have corresponding obligations with
  respect to distributions and amounts payable upon liquidation, redemption or
  repayment of the trust preferred securities. Each additional tranche will have
  the same interest rate, maturity, guarantee and other terms as the initial tranche;
  will be issued by a separate trust established by the Company; and must be at
  least $15.0 million of principal amount. The purchasers obligation to
  purchase the additional tranche(s) is subject to a customary material adverse
  event condition.

18

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

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

Overview

Deerfield
Triarc Capital Corp. (together with its subsidiaries) is a diversified
financial company formed in November 2004 to invest in real estate-related
securities and various other asset classes. We commenced operations in December
2004. We have elected and intend to continue our qualification as a real estate
investment trust, or REIT, for federal income tax purposes. We invest in
financial assets and utilize leverage where we consider appropriate to seek to
achieve attractive risk-adjusted returns that 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 June 30, 2006:

|                                      |  |                |           |           |  |      |  
|------------------------------------- |  | -------------- | --------- | --------- |  | ---- | -
|                                      |  | Carrying       |           | %of Total | 
|Principal Investments                 |  | Value          |           | Portfolio | 
|                                      |  |                |           |           | 
|                                      |  | (In thousands) |           |           |  |     
|                                      |  |                |           |           |  |     
|RMBS (1)                              |  | $              | 7,785,360 |           |  | 89.7 | %
|Loans:                                |  |                |           |           |  |      |  
|Loans held in
  CLO                   |  |                | 273,014   |           |  | 3.2  | %
|Structured and
  syndicated loans (2) |  |                | 275,455   |           |  | 3.2  | %
|Commercial
  mortgage loans (3)       |  |                | 8,488     |           |  | 0.1  | %
|ABS held in CDO (4)                   |  |                | 297,501   |           |  | 3.4  | %
|Common and preferred equities         |  |                | 12,301    |           |  | 0.1  | %
|High yield corporate bonds (5)        |  |                | 25,711    |           |  | 0.3  | %
|Other investments                     |  |                | 2,968     |           |  | 0.0  | %
|                                      |  |                |           |           |  |      |  
|Total                                 |  | $              | 8,680,798 |           |  |      |  
|                                      |  |                |           |           |  |      |  

|    |                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | RMBS assets include both trading interest-only strip
  securities and available-for-sale interest- and principal- only strip
  securities with a fair value of $2.0 million and $73.4 million with notional
  value of $406.8 million and $276.8 million, respectively.
|    |                                                                                                                                                                                                                                                                        
|(2) | Structured and syndicated loans exclude credit
  default swaps and total return swaps with a fair value of $0.4 million and
  $18,000 and a $73.0 million and $7.5 million notional value, respectively.                                                               
|    |                                                                                                                                                                                                                                                                        
|(3) | Commercial mortgage loans
  represent a participating interest in commercial mortgage loans                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                        
|(4) | ABS held in CDO includes RMBS, CMBS and ABS.                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                        
|(5) | High yield corporate bonds include $7.9 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 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 June 30, 2006, of
$8.7 billion. We are externally managed by Deerfield

19

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

We
earn income and generate cash through our investments. We use a substantial
amount of leverage to seek to enhance our returns. We finance each of our
investments with different degrees of leverage. The cost of borrowings to
finance our investments comprises a significant portion of our operating expenses.
Our net income will depend to a significant degree 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 to seek to enhance our potential returns. Leverage can
enhance returns but also magnifies losses.

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

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

20

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

Trends

The
following trends may also affect our business:

Rising
interest rate environment. Interest rates have recently
increased and may continue to increase. With respect to our existing MBS
portfolio, which is heavily concentrated in hybrid adjustable rate RMBS, such
interest rate increases should result in decreases in our net interest income,
as there is a timing mismatch between the reset dates on our MBS portfolio and
the financing of these investments. We currently have invested and intend to
continue to invest in hybrid adjustable-rate RMBS which are based on mortgages
with interest rate caps. The financing of these RMBS is short term in nature
and does not include an interest rate cap. This mismatch should result in a
decrease in our net interest income if rates increase sharply after the initial
fixed rate period and our interest cost increases more than the interest rate
earned on our RMBS due to the cap. In a rising rate environment, prepayment
rates are generally expected to decline. If prepayment rates are lower than
expected, we could have less capital to reinvest into higher rate mortgage
securities, which should result in a decrease in our net interest income. We
have increasingly invested in 15 and 30 year fixed rate securities, which are
similarly exposed to prepayment rates and the mismatched funding applicable to
hybrid adjustable rate securities. With respect to our existing and future
floating rate investments such as loans, 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 June 30,
2006, however, this trend was less pronounced, with the yield on the three-month
U.S. Treasury bill increasing by 86 basis points and the yield on the
three-year U.S. Treasury note increasing by 82 basis points. Given the economic
environment and the current flatness of the U.S. Treasury yield curve, the
chance that the yield curve will steepen is as great, in our estimation, as the
chance of continued flattening or curve inversion. With respect to our RMBS
portfolio, we believe that a steepening of the yield curve should result in
increases in our net interest income, as the financing of our RMBS investments
is usually shorter in term than the fixed rate period of our RMBS portfolio,
which is heavily weighted towards hybrid adjustable rate RMBS. Similarly, we
believe that a flattening of the yield curve should result in decreases in our
net interest income. Our hedging program will offset some of the impact of
changes in the shape of the yield curve. However, since we do not hedge 100% of
our interest rate exposure, the impact from the swaps will not fully offset the
impact to net interest income.

Prepayment
rates. Prepayment rates generally increase when interest
rates fall and decrease when interest rates rise, but changes in prepayment
rates are difficult to predict. Prepayment rates also may be affected by other
factors, including, without limitation, conditions in the housing and financial
markets, general economic conditions and the relative interest rates on
adjustable-rate and fixed-rate mortgage loans. Because interest rates may
continue to increase, RMBS prepayment rates may fall. If interest rates begin
to fall, triggering an increase in prepayment rates, our current portfolio,
which is heavily weighted towards hybrid adjustable-rate mortgages, would 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 10.3% of

21

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our total portfolio as of June 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 Deerfield Capitals
experience and analysis of historical and current market data in order to
arrive at what we believe to be reasonable estimates. Under varying conditions,
we could report materially different amounts arising under these critical
accounting policies. We have identified our most critical accounting policies
to be the following:

Classifications of Investment Securities

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

Valuations of RMBS and ABS

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

When
the fair value of an available-for-sale security is less than its amortized
cost for an extended period, we consider whether there is an
other-than-temporary impairment in the value of the security. If, in our
judgment, an other-than-temporary impairment exists, the cost basis of the
security is written down to the then-current fair value, and the unrealized
loss is transferred from accumulated other comprehensive income (loss) as an
immediate reduction of current earnings (as if the loss had been 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 three and six months ended June 30, 2006, we recognized a $0.2 million
and $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 $242.4 million at June 30, 2006, which, if not 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 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.

22

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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. If the independent
pricing service cannot provide estimates for a given loan, our valuation
committee determines estimated fair value based on some or all of the
following: (a) current financial information of the borrowing company and
performance against its operating plan; (b) changing value of collateral
supporting the loan; (c) changes to the market for the borrowing companys
service or product and (d)
present value of projected future cash flows. If an individual loans
fair market value is below its cost, a valuation adjustment is recognized in
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 loan quality in regular reviews by our valuation committee.
In accordance with SFAS No. 114, Accounting
by Creditors for Impairment of a Loan, we recognize an allowance for
loan losses on our loans held for investment at a level considered adequate
based on managements evaluation of all available and relevant information
related to the loan portfolio, including historical and industry loss
experience, economic conditions and trends, estimated fair values and quality
of collateral, estimated fair values of our loans and other relevant factors.

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

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

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

Accounting For Derivative Financial Instruments and Hedging
Activities

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

These
contracts, or hedge instruments, have been designated as cash flow hedges and
are evaluated at inception and on an ongoing basis in order to determine
whether they qualify for hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended and interpreted. We formally document all
relevant relationships between hedging instruments and hedged items at
inception, as well as our risk-management objective and strategy for
undertaking each hedge transaction. The hedge instrument must be highly
effective in achieving changes in cash flow, which offset changes in 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

23

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

We
are not required to account for the derivative contracts using hedge
accounting, as described above. If we decide not to designate the derivative
contracts as hedges and monitor their effectiveness as hedges, or if we enter
into other types of financial instruments that do not meet the criteria to be
designated as hedges, changes in the fair values of these instruments are
recorded in current earnings. One such derivative 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 Deerfield
Capital if our financial performance exceeds certain benchmarks. Incentive fees
are calculated on a quarterly basis and paid in arrears. Subsequent to each
quarter of the fiscal year, we will calculate whether an incentive fee is
payable and, if necessary, record the expense accrual in the quarter incurred.
The management agreement provides that 15.0% of Deerfield Capitals incentive
fee is to be paid in shares of our common stock (provided that under our
management agreement, Deerfield Capital may not receive payment of its
incentive fee in shares of our common stock if such payment would result in
Deerfield Capital owning directly or indirectly through one or more
subsidiaries more than 9.8% of our common stock) and the balance in cash.
Deerfield Capital may, in its sole discretion, elect to receive a greater
percentage of its incentive fee in the form of our common stock. The number of
shares to be received by Deerfield Capital will be based on the average of the
closing prices of our common stock during the thirty-day period ending three
days prior to issuance of these shares. Shares of our common stock delivered as
payment of the incentive fee will be immediately vested or exercisable,
provided that Deerfield Capital has agreed not to sell the shares prior to one
year after the date they are paid.

Equity Compensation

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

Variable Interest Entities

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

Trust Preferred Securities

In
September 2005, we formed Deerfield Triarc Capital Trust I, or the Trust,
for the sole purpose of issuing and selling trust preferred securities. In
accordance with FIN 46R, the Trust is not consolidated into our condensed
consolidated financial statements because management has determined that we are
not the primary beneficiary of the Trust. Through Deerfield Triarc Capital LLC,
or DTC LLC, we own 100% of the common shares of the Trust, which also issued
$50.0 million

24

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of preferred shares to unaffiliated investors. The
rights of holders of common shares of the Trust are subordinate to the rights
of holders of preferred shares only in the event of a default, otherwise common
shareholders economic and voting rights are pari passu with the preferred
shareholders. We recorded our investment in the Trusts common shares as other
investments at cost and record dividend income upon declaration of dividends by
the Trust.

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

The
FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments in February 2006.
SFAS No. 155 amends SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities, and SFAS
No. 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
and addresses the application of SFAS No. 133 to beneficial interests in
securitized financial assets. SFAS No. 155 establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation. Additionally, SFAS
No. 155 permits fair value measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation.
SFAS No. 155 is effective for financial instruments acquired or issued
after January 1, 2007. The adoption of this standard is not expected to
have a material impact on the Companys 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 Company does not anticipate
any material impact to its financial statements as a result of adopting FIN 48.

Financial
Condition

All
of our assets at June 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 our use of leverage. We used the proceeds
from our June 2005 initial public offering of common stock to create additional
leveraging capacity by paying down repurchase agreement obligations.

25

---



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 June 30, 2006:

|                                          |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|----------------------------------------- |  | -------------------------------- | --------- | -------------------- | - | ------------------- |  | --------------------- | ------ | ----- | - | ------- |  | - | ------- |  | - | --------- | 
|                                          |  | Carrying Value                   |          
|                                          |  |                                  |          
|Security Description                      |  | Available-for-
  Sale Securities |           | Trading
  Securities |   | Other
  Investments |  | Loans Held
  For Sale |        | Loans |   | Total   | 
|                                          |  |                                  |           |                      |   |                     |  |                       |        |       |   |         | 
|                                          |  | (In thousands)                   |          
|                                          |  |                                  |          
|                                          |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|RMBS                                      |  | $                                | 7,783,351 |                      | $ | 2,009               |  | $                     |       |       | $ |        |  | $ |        |  | $ | 7,785,360 | 
|                                          |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|                                          |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|Loans -
  structured and syndicated (2)   |  |                                  |          |                      |   |                    |  |                       |       |       |   | 9,488   |  |   | 274,455 |  |   | 283,943   | 
|Common and
  preferred equities           |  |                                  |          |                      |   |                    |  |                       | 12,301 |       |   |        |  |   |        |  |   | 12,301    | 
|Other
  investments                       |  |                                  | 2,968     |                      |   |                    |  |                       |       |       |   |        |  |   |        |  |   | 2,968     | 
|                                          |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|Total structured
  and syndicated assets  |  |                                  | 2,968     |                      |   |                    |  |                       | 12,301 |       |   | 9,488   |  |   | 274,455 |  |   | 299,212   | 
|                                          |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|Loans held in
  CLO                       |  |                                  |          |                      |   |                    |  |                       |       |       |   | 273,014 |  |   |        |  |   | 273,014   | 
|Asset-backed
  securities held in CDO (1) |  |                                  | 297,501   |                      |   |                    |  |                       |       |       |   |        |  |   |        |  |   | 297,501   | 
|High yield
  corporate bonds (3)          |  |                                  | 25,711    |                      |   |                    |  |                       |       |       |   |        |  |   |        |  |   | 25,711    | 
|                                          |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|Total
  alternative assets                |  |                                  | 326,180   |                      |   |                    |  |                       | 12,301 |       |   | 282,502 |  |   | 274,455 |  |   | 895,438   | 
|                                          |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 
|Total invested
  assets                   |  | $                                | 8,109,531 |                      | $ | 2,009               |  | $                     | 12,301 |       | $ | 282,502 |  | $ | 274,455 |  | $ | 8,680,798 | 
|                                          |  |                                  |           |                      |   |                     |  |                       |        |       |   |         |  |   |         |  |   |           | 

|    |                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Asset-backed securities held in CDO include RMBS,
  CMBS and ABS.                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                           
|(2) | Loans  structured and syndicated includes $8.5
  million of a participating interest in commercial mortgage loans and excludes
  credit default swaps and total return swaps with a fair value of
  approximately $431,000 and $18,000 and
  $73.0 million and $7.5 million notional value, respectively.
|    |                                                                                                                                                                                                                                                                                                           
|(3) | High yield corporate bonds include $7.9 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 June
  30, 2006 |          
|                     |  |                       |          
|                     |  |                       |           |            | Stripped |          |   |   |          
|                     |  | RMBS                  |           | Securities |          | Total    |  
|                     |  |                       |           |            |          |          |  
|                     |  | (In
  thousands)      |          
|                     |  |                       |          
|Par amount (1)       |  | $                     | 7,901,510 |            | $        | 276,805  |   | $ | 8,178,315 |  
|Unamortized premium  |  |                       | 60,717    |            |          |         |   |   | 60,717    |  
|Unamortized discount |  |                       | (16,086   | )          |          | (205,708 | ) |   | (221,794  | )
|                     |  |                       |           |            |          |          |   |   |           |  
|Amortized cost       |  |                       | 7,946,141 |            |          | 71,097   |   |   | 8,017,238 |  
|Unrealized gains     |  |                       |          |            |          | 5,015    |   |   | 5,015     |  
|Unrealized losses    |  |                       | (236,172  | )          |          | (2,730   | ) |   | (238,902  | )
|                     |  |                       |           |            |          |          |   |   |           |  
|Fair value           |  | $                     | 7,709,969 |            | $        | 73,382   |   | $ | 7,783,351 |  
|                     |  |                       |           |            |          |          |   |   |           |  

|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | The par amount for stripped securities has been
  reduced by the $2.0 million of other-than temporary impairment recognized on
  securities held as of June 30, 2006.

The
Companys RMBS are agency or AAA-rated in credit quality, with the exception of
$73.4 million, in estimated fair value, of interest-only or principal-only
available-for-sale securities. At June 30, 2006, we held 326 RMBS
securities with a fair value of $7.8 billion, valued below cost, of which 91
securities with a fair value of $2.0 billion were valued below cost for greater
than twelve months. During the six months ended June 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 securities are
other-than-temporarily impaired at June 30, 2006 and we have the intent and
ability to hold these securities until the value is recovered, which may be to
maturity.

At
June 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 June 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 June 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 six months ended June 30, 2006 was $5.8
million, and $11.5 million, respectively. As of June 30, 2006, we had $44.6
million of

26

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unamortized net premium included in the cost basis of
our available-for-sale RMBS securities. The current weighted average life of
the portfolio is 4.4 years.

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 1.0 years at June 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 37).

The
following table details our RMBS holdings as of June 30, 2006, of which $7.8
billion and $2.0 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
  Pre-payment
  Rate |       | Modified
        Duration
        in Years | 
|                                           |  |                |           |                        |   |           |  |                        |      |                     |  |                        |  |                               |       |                                            | 
|                                           |  | (In thousands) |           |                        |   |           |  |                        |      |                     |  |                        |  |                               |       |                                            |  |          |  |  |     
|                                           |  |                |           |                        |   |           |  |                        |      |                     |  |                        |  |                               |       |                                            |  |          |  |  |     
|Agency RMBS:                               |  |                |           |                        |   |           |  |                        |      |                     |  |                        |  |                               |       |                                            |  |          |  |  |      |  |  |       | 
|3-1 hybrid adjustable rate                 |  | $              | 722,304   |                        | $ | 710,946   |  |                        | 4.39 | %                   |  | 16                     |  |                               | 6.00  | %                                          |  | 10/03/34 |  |  | 22.1 |  |  | 1.5   | 
|5-1 hybrid adjustable rate                 |  |                | 3,453,750 |                        |   | 3,384,669 |  |                        | 4.89 | %                   |  | 45                     |  |                               | 6.01  | %                                          |  | 03/18/35 |  |  | 20.1 |  |  | 2.1   | 
|7-1 hybrid adjustable rate                 |  |                | 163,526   |                        |   | 159,233   |  |                        | 4.96 | %                   |  | 67                     |  |                               | 6.10  | %                                          |  | 01/10/35 |  |  | 22.7 |  |  | 2.6   | 
|10-1 hybrid adjustable rate                |  |                | 433,759   |                        |   | 419,467   |  |                        | 5.23 | %                   |  | 109                    |  |                               | 6.15  | %                                          |  | 08/03/35 |  |  | 17.6 |  |  | 3.6   | 
|15 year fixed rate                         |  |                | 126,146   |                        |   | 123,761   |  |                        | 5.50 | %                   |  | NA                     |  |                               | 5.98  | %                                          |  | 06/22/20 |  |  | 11.5 |  |  | 3.5   | 
|30 year fixed rate                         |  |                | 1,518,172 |                        |   | 1,471,395 |  |                        | 5.70 | %                   |  | NA                     |  |                               | 6.25  | %                                          |  | 07/06/35 |  |  | 12.7 |  |  | 4.4   | 
|                                           |  |                |           |                        |   |           |  |                        |      |                     |  |                        |  |                               |       |                                            |  |          |  |  |      |  |  |       | 
|Non-Agency AAA-Rated RMBS:                 |  |                |           |                        |   |           |  |                        |      |                     |  |                        |  |                               |       |                                            |  |          |  |  |      |  |  |       | 
|Hybrid adjustable rate                     |  |                | 844,644   |                        |   | 835,029   |  |                        | 5.37 | %                   |  | NA                     |  |                               | 6.14  | %                                          |  | 03/23/35 |  |  | 12.1 |  |  | 2.0   | 
|Fixed rate                                 |  |                | 639,209   |                        |   | 605,469   |  |                        | 5.50 | %                   |  | NA                     |  |                               | 6.33  | %                                          |  | 09/22/31 |  |  | 13.7 |  |  | 5.4   | 
|                                           |  |                |           |                        |   |           |  |                        |      |                     |  |                        |  |                               |       |                                            |  |          |  |  |      |  |  |       | 
|Other:                                     |  |                |           |                        |   |           |  |                        |      |                     |  |                        |  |                               |       |                                            |  |          |  |  |      |  |  |       | 
|Interest-only strips (3)                   |  |                | 201,144   |                        |   | 36,159    |  |                        | n/m  |                     |  | NA                     |  |                               | 14.39 | %                                          |  | 12/07/34 |  |  | 11.8 |  |  | -26.3 | 
|Interest-only strips - trading (3)         |  |                | 406,803   |                        |   | 2,009     |  |                        | n/m  |                     |  | NA                     |  |                               | 16.05 | %                                          |  | 01/09/35 |  |  | 12.5 |  |  | 97.6  | 
|Interest-only and principal only strip (3) |  |                | 75,661    |                        |   | 37,223    |  |                        | n/m  |                     |  | NA                     |  |                               | 6.51  | %                                          |  | 10/14/33 |  |  | 25.7 |  |  | 5.3   | 
|                                           |  |                |           |                        |   |           |  |                        |      |                     |  |                        |  |                               |       |                                            |  |          |  |  |      |  |  |       | 
|Total RMBS                                 |  | $              | 8,585,118 |                        | $ | 7,785,360 |  |                        |      |                     |  |                        |  |                               |       |                                            |  |          |  |  |      |  |  |       | 
|                                           |  |                |           |                        |   |           |  |                        |      |                     |  |                        |  |                               |       |                                            |  |          |  |  |      |  |  |       | 

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

Actual
maturities of RMBS are generally shorter than stated contractual maturities, as
they are affected by the contractual lives of the underlying mortgages,
periodic payments of principal, and prepayments of principal. The stated
contractual final maturity of the mortgage loans underlying our portfolio of
RMBS ranges up to 30 years from date of issuance, but the expected
maturity is subject to change based on the actual and estimated prepayments of
the underlying loans.

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

As
of June 30, 2006, the mortgages underlying our hybrid adjustable rate RMBS had
fixed interest rates for a weighted average period of approximately 47 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 June 30, 2006, the weighted average
lifetime cap for the portfolio is an increase of 10.2% over the fixed rate, the
weighted average maximum increase in the first year that the rates are
adjustable is 4.7% and the weighted average maximum annual increase for years
subsequent to the first year is 2.0%.

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

27

---



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

|                                                |  |                 |           |       |           |           | 
|----------------------------------------------- |  | --------------- | --------- | ----- | --------- | --------- | 
|                                                |  | June 30,
  2006 |          
|                                                |  |                 |          
|                                                |  |                 |           |       | Estimated |          
|                                                |  | Amortized       |           | Fair  |          
|Weighted Average Life                           |  | Cost            |           | Value |          
|                                                |  |                 |           |       |          
|Greater than one year and less than five years  |  | $               | 5,638,898 |       | $         | 5,479,584 | 
|Greater than five years and less than ten years |  |                 | 2,049,245 |       |           | 1,994,040 | 
|Greater than ten years                          |  |                 | 329,095   |       |           | 309,727   | 
|                                                |  |                 |           |       |           |           | 
|Total                                           |  | $               | 8,017,238 |       | $         | 7,783,351 | 
|                                                |  |                 |           |       |           |           | 

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 June 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 $2.0 million, classified as trading
securities.

Asset-Backed Securities Held in CDO

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

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

|                                   |  |                  |         |            |   |         |  |          |      | 
|---------------------------------- |  | ---------------- | ------- | ---------- | - | ------- |  | -------- | ---- | 
|                                   |  |                  |         |            |   |         |  | Weighted |     
|                                   |  | Par              |         | Fair       |   | Average | 
|Asset
  Class                      |  | Amount           |         | Value      |   | Life    | 
|                                   |  |                  |         |            |   |         | 
|                                   |  | (In
  thousands) |         | (In years) |  
|                                   |  |                  |         |            |  
|Residential B/C mortgage           |  | $                | 175,755 |            | $ | 176,675 |  |          | 3.49 | 
|Residential A mortgage             |  |                  | 29,483  |            |   | 28,192  |  |          | 3.71 | 
|Home equity loan                   |  |                  | 38,633  |            |   | 37,823  |  |          | 3.21 | 
|CMBS conduit                       |  |                  | 31,577  |            |   | 30,856  |  |          | 4.26 | 
|CMBS large loan                    |  |                  | 7,384   |            |   | 7,363   |  |          | 2.65 | 
|ABS collateralized bond obligation |  |                  | 8,423   |            |   | 8,386   |  |          | 3.36 | 
|Credit card                        |  |                  | 3,000   |            |   | 3,127   |  |          | 1.64 | 
|Student loan                       |  |                  | 1,357   |            |   | 1,575   |  |          | 6.35 | 
|Automobile loan                    |  |                  | 2,000   |            |   | 1,951   |  |          | 3.70 | 
|Small business loan                |  |                  | 1,532   |            |   | 1,553   |  |          | 7.63 | 
|                                   |  |                  |         |            |   |         |  |          |      | 
|Total                              |  | $                | 299,144 |            | $ | 297,501 |  |          | 3.55 | 
|                                   |  |                  |         |            |   |         |  |          |      | 

At
  June 30, 2006, Pinetree held $297.5 million of ABS classified as available-for-sale
  securities and $9.3 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 23.0% and 77.0% 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 2.02% over LIBOR.

28

---



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

| |  |                  |  |            |  |  |  |  |        |   | 
| |  | ---------------- |  | ---------- |  |  |  |  | ------ | - | 
| |  | Moodys
  Rating |  | % of Total | 
| |  |                  |  |            | 
| |  |                  |  | Aaa        |  |  |  |  | 3.65   | % | 
| |  |                  |  | Aa1        |  |  |  |  | 0.29   | % | 
| |  |                  |  | Aa2        |  |  |  |  | 0.67   | % | 
| |  |                  |  | Aa3        |  |  |  |  | 1.35   | % | 
| |  |                  |  | A1         |  |  |  |  | 0.36   | % | 
| |  |                  |  | A2         |  |  |  |  | 4.08   | % | 
| |  |                  |  | A3         |  |  |  |  | 4.60   | % | 
| |  |                  |  | Baa1       |  |  |  |  | 13.52  | % | 
| |  |                  |  | Baa2       |  |  |  |  | 35.47  | % | 
| |  |                  |  | Baa3       |  |  |  |  | 36.01  | % | 
| |  |                  |  |            |  |  |  |  |        |   | 
| |  |                  |  |            |  |  |  |  | 100.00 | % | 
| |  |                  |  |            |  |  |  |  |        |   | 

The
Moodys weighted average rating factor, or WARF, for the Pinetree portfolio as
of June 30, 2006 is 394, which translates to a weighted average Moodys rating
of between Baa2 and Baa3.

Loans and Credit Derivatives

At
  June 30, 2006, we held loans totaling $557.0 million, or 6.4% of our investment
  portfolio. We held $284.0 million funded directly and $273.0 million via a CLO
  transaction in one of our taxable REIT subsidiary entities, Market Square CLO
  Ltd, or Market Square. The Market Square bank loans and $8.5 million of directly
  funded loans are classified in held for sale and carried at the lower of cost
  or fair value. Loans held for investment were $274.5 million at June 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 June
  30, 2006 and thus have not provided an allowance for loan losses.

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

|                                |  |                  |         |            |   |         |  |   |         | 
|------------------------------- |  | ---------------- | ------- | ---------- | - | ------- |  | - | ------- | 
|                                |  | Carrying
  Value |        
|                                |  |                  |        
|                                |  |                  |         | Loans Held |   |         |  |  
|Type of
  Loan                  |  | Loans            |         | for Sale   |   | Total   | 
|                                |  |                  |         |            |   |         | 
|                                |  | (In thousands)   |        
|                                |  |                  |        
|Loans held in CLO               |  | $                |        |            | $ | 273,014 |  | $ | 273,014 | 
|Structured and syndicated loans |  |                  | 274,455 |            |   | 1,000   |  |   | 275,455 | 
|Commercial mortgage loans (1)   |  |                  |        |            |   | 8,488   |  |   | 8,488   | 
|                                |  |                  |         |            |   |         |  |   |         | 
|                                |  | $                | 274,455 |            | $ | 282,502 |  | $ | 556,957 | 
|                                |  |                  |         |            |   |         |  |   |         | 

|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|   
|(1) | Commercial
mortgage loans represent a participating interest 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 June 30, 2006,Market Square had
$273.0 million of loans outstanding which are included in loans held for sale,
$13.9 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 2.65% and
the weighted average contractual maturity was 5.3 years.

29

---



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

|        |  |                |         |                  |   |                  |             |          |  |         
|------- |  | -------------- | ------- | ---------------- | - | ---------------- | ----------- | -------- |  | --------
|        |  |                |         |                  |   | Weighted Average
|        |  |                |         | Estimated
  Fair |   |                 
|Moodys |  | Par            |         |                  |   |                  | Contractual
|Rating  |  | Value          |         | Value            |   | Spread           |             | Maturity
|        |  |                |         |                  |   |                  |             |         
|        |  | (In thousands) |         |                  |   |                 
|        |  |                |         |                  |   |                 
|Baa2    |  | $              | 2,559   |                  | $ | 2,570            |             | 2.25%    |  | 12/09/06
|Ba1     |  |                | 13,089  |                  |   | 13,103           |             | 1.70%    |  | 04/16/10
|Ba2     |  |                | 14,587  |                  |   | 14,604           |             | 1.70%    |  | 09/28/11
|Ba3     |  |                | 40,535  |                  |   | 40,541           |             | 2.17%    |  | 01/11/12
|B1      |  |                | 77,284  |                  |   | 77,164           |             | 2.35%    |  | 11/03/11
|B2      |  |                | 103,308 |                  |   | 103,351          |             | 3.16%    |  | 01/27/12
|B3      |  |                | 18,408  |                  |   | 18,323           |             | 3.40%    |  | 04/18/11
|Caa1    |  |                | 2,942   |                  |   | 2,860            |             | 3.31%    |  | 08/07/12
|Caa3    |  |                | 498     |                  |   | 498              |             | 3.00%    |  | 06/29/12
|        |  |                |         |                  |   |                  |             |          |  |         
|        |  | $              | 273,210 |                  | $ | 273,014          |             | 2.65%    |  | 04/04/11
|        |  |                |         |                  |   |                  |             |          |  |         

The
Market Square bank loan portfolio is diversified across 30 Moodys industries
as of June 30, 2006. The Market Square portfolio as of June 30, 2006 has a WARF
of 2325, which translates to a weighted average Moodys rating of between B1
and B2.

Structured and Syndicated
Loans

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

|                                      |  |                |         |          |  |        | 
|------------------------------------- |  | -------------- | ------- | -------- |  | ------ | 
|                                      |  |                |         | Weighted | 
|                                      |  | Carrying       |         | Average  | 
|Type of
  Loan                        |  | Value          |         | Coupon   | 
|                                      |  |                |         |          | 
|                                      |  | (In thousands) |         |          | 
|                                      |  |                |         |          | 
|First and second lien
  secured loans |  | $              | 203,762 |          |  | 11.81% | 
|Mezzanine and other                   |  |                | 71,693  |          |  | 14.13% | 
|                                      |  |                |         |          |  |        | 
|                                      |  | $              | 275,455 |          |  | 12.41% | 
|                                      |  |                |         |          |  |        | 

At
June 30, 2006, we had structured and syndicated loans totaling $275.5 million,
$274.5 million classified as loans held for investment and $1.0 million of
loans held for sale. The mezzanine and other loans are often unsecured.

Commercial
Mortgage Loans (Participating interest)

At
June 30, 2006, we had invested in junior participation interests in commercial
mortgages originated by Hometown Commercial Capital, LLC with a total carrying
value of $8.5 million. These amounts are included in loans held for sale on our
condensed consolidated balance sheet.

Credit
Default Swaps

At
June 30, 2006, we held 23 credit default swaps, as the protection seller, with
a notional amount of $73.0 million. As of June 30, 2006, these CDS had a net
fair value of $0.4 million, recorded in derivative assets and derivative
liabilities in the condensed consolidated balance sheet in the amounts of $0.5
million and $0.1 million, respectively.

Total
Return Swaps

At
June 30, 2006, we held one total return swap with a notional amount of $7.5
million and a fair value of $18,000 recorded in derivative assets.

Common and Preferred
Equities

At
June 30, 2006, our common and preferred equities investments had a total
carrying value of $12.3 million.

30

---



Interest Receivable

At
June 30, 2006, our interest receivable of $48.7 million related to the
following:

| |   |                                           
| | - | ------------------------------------------
| |  | RMBS - $38.6
  million                    
| |   |                                           
| |  | Loans - $6.2
  million                    
| |   |                                           
| |  | Various
  other investments - $2.1 million
| |   |                                           
| |  | Derivatives
  - $1.8 million              

Hedging Instruments

There
can be no assurance that our hedging activities will have the desired
beneficial impact on our results of operations, financial condition or net cash
flows. Moreover, no hedging activity can completely insulate us from the risks
associated with changes in interest rates and prepayment rates. We generally
intend to hedge as much of the interest rate risk as Deerfield Capital
determines is in the best interest of Deerfield Triarc Capital Corp.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 June 30, 2006 and June 30, 2005, we entered into
interest rate swaps and interest rate swap forwards as a means of mitigating
our interest rate risk on forecasted interest expense associated with
repurchase agreements for a specified future time period, represented by the
term of the interest rate swap contract. An interest rate swap is a contractual
agreement entered into by two 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 but
using a floating rate of interest. This is a fixed-floating interest rate swap.
We hedge a portion of our short-term debt by entering into fixed-floating
interest rate swap agreements whereby we receive the floating rate of interest
and pay a fixed rate of interest. An interest rate swap forward is an interest
rate swap based on a floating interest rate to be set at an agreed future date
at which time the swap becomes effective.

At
June 30, 2006, we had a portfolio of 206 designated interest rate swaps with
maturities ranging from July 2006 to July 2016 and a total notional amount of
$5.7 billion and a net fair value of $142.1 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 June 30, 2006, the unrecognized gain on interest rate swap
transactions in accumulated other comprehensive income of $151.0 million
includes cumulative deferred gains on terminated swaps of $5.2 million that
will be amortized over the original hedging period.

At
June 30, 2006, we held three interest rate swaps with a total notional amount
of $103.3 million that were not designated as hedges. At June 30, 2006, these
interest rate swaps had a total fair value of $0.3 million, recorded in
derivative assets in the condensed consolidated balance sheet.

Liabilities

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

At
June 30, 2006, we had outstanding repurchase agreement liabilities of $7.5
billion, including accrued interest, with a weighted-average current borrowing
rate of 5.19%. We intend to renew these repurchase agreements as they mature under
the then-applicable borrowing terms of the counterparties to the repurchase
agreements. At June 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 31 days. The net amount at
risk, defined as fair value of securities sold, plus accrued interest income,
minus repurchase agreement liabilities, plus accrued interest expense, with all
counterparties was $79.9 million at June 30, 2006. See details of the net
amount at risk later in this section under the heading Liquidity and Capital
Resources.

31

---



On
March 10, 2006, we entered into a $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 totaled $248.9 million. We expect to pursue term funding of
these assets via securitization in a future CDO. At June 30, 2006, we had
$175.8 million 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 based on the last reset date
were 5.55% and 5.57%, respectively, as of June 30, 2006. As of June 30, 2006,
we have $288.0 million and $276.0 million of long-term debt resulting from the
Pinetree and Market Square transactions, respectively.

On
September 29, 2005, we issued $51.6 million of unsecured junior subordinated
notes payable to the Trust. The notes mature on October 23, 2035, but are
callable by us on or after October 10, 2010. Interest is payable quarterly
at a floating rate equal to LIBOR plus 3.50%. This rate was 8.65% at June 30,
2006.

At
June 30, 2006, we had $43.3 million due to broker; all unsettled amounts are
expected to settle in the following quarter. The due to broker consisted of the
following:

| |   |                                                     
| | - | ----------------------------------------------------
| |  | Unsettled
  ABS held in CDO purchases - $2.0 million
| |   |                                                     
| |  | Unsettled
  bank loan purchases - $5.9 million      
| |   |                                                     
| |  | Swap margin
  due to broker - $35.4 million         

Interest
payable at June 30, 2006 of $24.8 million consists of:

| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | Net accrued
  interest payable on interest rate swaps - $15.8 million        
| |   |                                                                              
| |  | Market
  Square long-term debt interest payable - $3.1 million               
| |   |                                                                              
| |  | Pinetree
  long-term debt interest payable - $3.9 million                    
| |   |                                                                              
| |  | Revolving
  Warehouse Facility long-term debt interest payable - $1.3 million
| |   |                                                                              
| |  | Unsecured
  junior subordinated interest payable to the Trust - $0.7 million 

At
June 30, 2006, we had $1.9 million payable to our Manager for management and
incentive fees totaling $1.1 million and $0.8 million, respectively.

At
June 30, 2006, other payables consist primarily of liabilities for
audit-related and tax services of $0.3 million, and various other payables of
$0.7 million.

Stockholders Equity

Stockholders
equity at June 30, 2006 was $678.8 million and primarily consisted of the
following 2006 activity:

| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net
  unrealized losses on available-for-sale securities - $119.1 million                                                                                                                                            
| |   |                                                                                                                                                                                                                      
| |  | Unrealized
  gains on cash flow hedges - $80.8 million (including a net change of $2.6
  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 - $1.0 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 - $37.3 million of net income less $18.6 million of declared
  dividends                                                                                                                         

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

32

---



Results of Operations

For the three and
six months ended June 30, 2006 compared to the three and six months ended June
30, 2005

Summary

Our
net income for the three and six months ended June 30, 2006 was $18.2 million
and $37.3 million or $0.35 and $0.72 per weighted-average diluted share
outstanding, respectively. This compared to $6.8 million and $12.7 million or
$0.25 and $0.47 per weighted-average diluted share outstanding, respectively,
for the same periods in 2005. The increase in net income for the three and six
months ended June 30, 2006 compared to the same periods ended June 30, 2005 was
primarily attributable to the significant increase in our investment portfolio.
At June 30, 2006 our RMBS and alternative asset portfolios were $7.8 billion
and $895.4 million, respectively, as compared to $4.0 billion and $482.9
million, respectively, at June 30, 2005. Therefore, in addition to comparing
the periods presented we have also included certain discussion and analysis in
this summary of our financial results compared to the periods ended March 31,
2005 and December 31, 2005 to provide a more meaningful discussion and
comparison.

Our
  total investment portfolio increased $0.9 billion to $8.7 billion at June 30,
  2006 from $7.8 billion at December 31, 2005 but decreased $0.2 billion from
  March 31, 2006. RMBS increased to $7.8 billion, or 89.7% of our portfolio at
  June 30, 2006 compared to $7.0 billion, or 90.4% of our total portfolio at December
  31, 2005 and decreased from $8.1 billion, or 90.8% of our total portfolio at
  March 31, 2006. We continued diversifying our investment portfolio during the
  first six months of 2006, increasing our overall alternative investments at
  June 30, 2006 over alternative investments at December 31, 2005 and March 31,
  2006 by $152.0 million and $75.2 million, an increase of 20.5% and 9.2%, respectively.

During
  2006 we have also shifted from investing in hybrid adjustable rate RMBS toward
  fixed 15-year and 30-year RMBS. As a percentage of our total RMBS portfolio,
  fixed rate securities have composed 28.3%, 26.6% and 11.8% of our June 30, 2006,
  March 31, 2006 and December 31, 2005 total RMBS balance, respectively. We have
  made this shift toward fixed securities 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 rate and embedded
  option risk due to the seasoning of our hybrid adjustable rate RMBS. Additionally,
  we are anticipating the eventual decrease in hedging income due to expiration
  of interest rate swaps that are currently providing a net interest income contribution.
  Over time, we expect the mortgage portfolio to be able to generate adequate
  profit margins to funding without the contribution of interest rate swaps as
  a larger percentage of higher yielding mortgages replace the existing amortizing
  portfolio. At June 30, 2005, our portfolio was significantly smaller totaling
  $4.5 billion due to our smaller capital base. Although we commenced operations
  on December 23, 2004 in connection with raising $378.8 million in proceeds from
  our initial private placement and subsequently raised $363.1 million of net
  proceeds from our initial public offering, which commenced on June 29, 2005
  and closed on July 5, 2005, none of the proceeds from our initial public offering
  were available at June 30, 2005 for investments.

In
an effort to increase our overall earnings and to continue the diversification
of our portfolio, we expect to increase our investment into alternative assets
during the remainder of 2006. We closed a warehouse funding agreement with
Wachovia Capital Markets, LLC, or the Facility, in March 2006 and as of June
30, 2006 had utilized $175.8 million of the Facility. We received $101.7
million related to alternative assets that we had previously funded with our
own equity. Moving these existing assets into this facility provided additional
capital that we redeployed into RMBS. We expect to utilize the full $300.0
million available to us under the Facility to fund future alternative
investments that were previously funded with equity.

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

33

---



Net Interest Income

The
following table summarizes our interest income components:

|                                                   |  |                             |         |                           |   |        |   |      |         |   |   |        |  
|-------------------------------------------------- |  | --------------------------- | ------- | ------------------------- | - | ------ | - | ---- | ------- | - | - | ------ | -
|                                                   |  | Three months ended June 30, |         | Six months ended June 30, |  
|                                                   |  |                             |         |                           |  
|                                                   |  | 2006                        |         | 2005                      |   | 2006   |   | 2005 |        
|                                                   |  |                             |         |                           |   |        |   |      |        
|                                                   |  | (In thousands)              |        
|                                                   |  |                             |        
|RMBS                                               |  | $                           | 103,431 |                           | $ | 36,807 |   | $    | 193,593 |   | $ | 61,303 |  
|Amortization of purchase
  (premium) discount, net |  |                             | (5,778  | )                         |   | (3,054 | ) |      | (11,495 | ) |   | (4,262 | )
|                                                   |  |                             |         |                           |   |        |   |      |         |   |   |        |  
|Net RMBS                                           |  |                             | 97,653  |                           |   | 33,753 |   |      | 182,098 |   |   | 57,041 |  
|                                                   |  |                             |         |                           |   |        |   |      |         |   |   |        |  
|Loans (1)                                          |  |                             | 13,012  |                           |   | 3,611  |   |      | 24,343  |   |   | 4,016  |  
|ABS held in CDO                                    |  |                             | 5,143   |                           |   | 963    |   |      | 9,911   |   |   | 963    |  
|All other asset classes                            |  |                             | 1,192   |                           |   | 471    |   |      | 2,304   |   |   | 617    |  
|Short-term investments                             |  |                             | 436     |                           |   | 347    |   |      | 808     |   |   | 1,748  |  
|                                                   |  |                             |         |                           |   |        |   |      |         |   |   |        |  
|Total interest income                              |  | $                           | 117,436 |                           | $ | 39,145 |   | $    | 219,464 |   | $ | 64,385 |  
|                                                   |  |                             |         |                           |   |        |   |      |         |   |   |        |  

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

The
increase in interest income by $78.3 million and $155.1 million for the three
and six months ended June 30, 2006 compared to the three and six months ended
June 30, 2005, was primarily attributable to the significant increase in our
investment portfolio. At June 30, 2006 our RMBS and alternative asset portfolio
was $7.8 billion and $895.4 million, respectively, as compared to $4.0 billion
and $482.9 million, respectively, at June 30, 2005.

The
following table summarizes our interest expense:

|                                     |  |                             |        |                           |   |        |  |      |         |   |   |        | 
|------------------------------------ |  | --------------------------- | ------ | ------------------------- | - | ------ |  | ---- | ------- | - | - | ------ | 
|                                     |  | Three months ended June 30, |        | Six months ended June 30, |  
|                                     |  |                             |        |                           |  
|                                     |  | 2006                        |        | 2005                      |   | 2006   |  | 2005 |        
|                                     |  |                             |        |                           |   |        |  |      |        
|                                     |  | (In thousands)              |       
|                                     |  |                             |       
|Repurchase agreements                |  | $                           | 94,799 |                           | $ | 22,462 |  | $    | 170,512 |   | $ | 35,975 | 
|Designated hedging
  activity        |  |                             | (9,881 | )                         |   | 3,562  |  |      | (14,875 | ) |   | 6,191  | 
|Long-term debt                       |  |                             | 10,219 |                           |   | 2,292  |  |      | 18,341  |   |   | 2,532  | 
|Amortization of debt
  issuance cost |  |                             | 856    |                           |   | 50     |  |      | 1,036   |   |   | 50     | 
|Margin borrowing                     |  |                             | 304    |                           |   |       |  |      | 388     |   |   |       | 
|                                     |  |                             |        |                           |   |        |  |      |         |   |   |        | 
|Total interest expense               |  | $                           | 96,297 |                           | $ | 28,366 |  | $    | 175,402 |   | $ | 44,748 | 
|                                     |  |                             |        |                           |   |        |  |      |         |   |   |        | 

The
increase in interest expense of $67.9 million and $130.7 million for the three
and six months ended June 30, 2006 compared to the three and six months ended
June 30, 2005, was primarily a result of an increase in the outstanding debt as
well as higher interest rates. The increase in outstanding repurchase
agreements during this period was the result of having additional capital and
leveraging that capital to increase our investment portfolio. Interest expense
related to repurchase agreements increased $72.3 million and $134.5 million for
the three and six months ended June 30, 2006 compared to the three and six
months ended June 30, 2005. Interest expense related to long-term debt for the
three and six months ended June 30, 2006 increased $7.9 million and $15.8
million compared to the same periods in 2005, respectively. Our repurchase
agreements balance was $7.5 billion and $3.2 billion at June 30, 2006 and June
30, 2005, respectively. Additionally, we had $791.3 million of long-term debt
outstanding at June 30, 2006 and $276.0 million for the same period in 2005,
respectively. These increases in interest expense were partially offset by our
designated hedging, which reduced interest expense by $13.4 million and $21.1
million for the three and six months ended June 30, 2006 compared to the same
periods in 2005, respectively. We are currently in a net-receive position on
substantially all of our interest rate swaps due to the increase in variable
interest rates, which is the basis for our receipt of payments, above the fixed
rate payments we are making on these interest rate swaps. Although to a lesser
extent, the increase in short-term borrowing rates and overall rising interest
rate environment, partially offset by our hedging activity, also contributed to
increased interest expense since our funding sources are primarily tied to
short-term interest rates or reset on a relatively short-term basis.

34

---



Expenses

The
following table summarizes our expenses for the periods presented:

|                                                       |  |                               |       |                             |   |       |  |      |        |  |   |       | 
|------------------------------------------------------ |  | ----------------------------- | ----- | --------------------------- | - | ----- |  | ---- | ------ |  | - | ----- | 
|                                                       |  | Three months ended
  June 30, |       | Six months ended
  June 30, |  
|                                                       |  |                               |       |                             |  
|                                                       |  | 2006                          |       | 2005                        |   | 2006  |  | 2005 |       
|                                                       |  |                               |       |                             |   |       |  |      |       
|                                                       |  | (In thousands)                |      
|                                                       |  |                               |      
|Base management fee                                    |  | $                             | 3,339 |                             | $ | 1,685 |  | $    | 6,644  |  | $ | 3,359 | 
|Amortization related to
  restricted stock and options |  |                               | 276   |                             |   | 1,293 |  |      | 661    |  |   | 2,245 | 
|Incentive fee                                          |  |                               | 818   |                             |   |      |  |      | 2,003  |  |   |      | 
|                                                       |  |                               |       |                             |   |       |  |      |        |  |   |       | 
|Total management and incentive
fees                    |  |                               | 4,433 |                             |   | 2,978 |  |      | 9,308  |  |   | 5,604 | 
|                                                       |  |                               |       |                             |   |       |  |      |        |  |   |       | 
|Audit and audit-related
  fees                         |  |                               | 222   |                             |   | 163   |  |      | 443    |  |   | 189   | 
|Legal fees                                             |  |                               | 117   |                             |   | 44    |  |      | 181    |  |   | 45    | 
|Other professional fees                                |  |                               | 109   |                             |   | 3     |  |      | 302    |  |   | 3     | 
|                                                       |  |                               |       |                             |   |       |  |      |        |  |   |       | 
|Total professional
services                            |  |                               | 448   |                             |   | 210   |  |      | 926    |  |   | 237   | 
|                                                       |  |                               |       |                             |   |       |  |      |        |  |   |       | 
|Insurance premiums                                     |  |                               | 184   |                             |   | 181   |  |      | 365    |  |   | 345   | 
|                                                       |  |                               |       |                             |   |       |  |      |        |  |   |       | 
|Board of directors fees                                |  |                               | 104   |                             |   | 217   |  |      | 336    |  |   | 247   | 
|Banking and other
  administrative fees                |  |                               | 174   |                             |   | 77    |  |      | 281    |  |   | 102   | 
|Software and data feeds                                |  |                               | 68    |                             |   | 54    |  |      | 154    |  |   | 54    | 
|Other general and administrative
  fees                |  |                               | 110   |                             |   | 74    |  |      | 177    |  |   | 80    | 
|                                                       |  |                               |       |                             |   |       |  |      |        |  |   |       | 
|Total general and
administrative fees                  |  |                               | 456   |                             |   | 422   |  |      | 948    |  |   | 483   | 
|                                                       |  |                               |       |                             |   |       |  |      |        |  |   |       | 
|Total expenses                                         |  | $                             | 5,521 |                             | $ | 3,791 |  | $    | 11,547 |  | $ | 6,669 | 
|                                                       |  |                               |       |                             |   |       |  |      |        |  |   |       | 

Our
expenses increased $1.7 million and $4.9 million for the three and six months
ended June 30, 2006 compared to the same periods in 2005, respectively. The
increase in expenses for the three and six months ended June 30, 2006, was
primarily attributable to an increase in total management and incentive fees of
$1.5 million and $3.7 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 use of our leverage,
which increased our invested assets and provided increased net income,
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 company were
the primary drivers for the remaining increased expenses of $0.2 million and
$1.2 million in all other expense line items for the three and six months ended
June 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 June 30, |        | Six months ended June 30, |  
|                                                                  |  |                             |        |                           |  
|                                                                  |  | 2006                        |        | 2005                      |   | 2006   |   | 2005 |       
|                                                                  |  |                             |        |                           |   |        |   |      |       
|                                                                  |  | (In thousands)              |       
|                                                                  |  |                             |       
|Net realized gain (loss) on sale of
available-for-sale securities |  | $                           | 1,412  |                           | $ | (1,003 | ) | $    | 5,341  |   | $ | (1,003 | )
|Other-than-temporary impairment on
available-for-sale securities  |  |                             | (197   | )                         |   |       |   |      | (2,034 | ) |   |       |  
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|Net gain (loss) on available-for-sale
securities                  |  |                             | 1,215  |                           |   | (1,003 | ) |      | 3,307  |   |   | (1,003 | )
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|Net unrealized gain (loss) on trading
securities                  |  |                             | 54     |                           |   | 576    |   |      | (1,759 | ) |   | 503    |  
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|Net realized gain (loss) on loans                                 |  |                             | 205    |                           |   | (410   | ) |      | 691    |   |   | (252   | )
|Net unrealized gain (loss) on loans                               |  |                             | (377   | )                         |   | (342   | ) |      | (331   | ) |   | (634   | )
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|Net gain (loss) on loans                                          |  |                             | (172   | )                         |   | (752   | ) |      | 360    |   |   | (886   | )
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|Net realized gain (loss) on undesignated
interest rate swaps      |  |                             | 1,852  |                           |   | 2,238  |   |      | 1,009  |   |   | 2,238  |  
|Net realized gain (loss) on credit default
swaps                  |  |                             | 507    |                           |   | 119    |   |      | 897    |   |   | 158    |  
|Net unrealized gain (loss) on undesignated
interest rate swaps    |  |                             | (891   | )                         |   | (1,072 | ) |      | 670    |   |   | (1,048 | )
|Net unrealized gain (loss) on credit default
swaps                |  |                             | (79    | )                         |   | (267   | ) |      | 256    |   |   | (206   | )
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|Net gain on derivatives                                           |  |                             | 1,389  |                           |   | 1,018  |   |      | 2,832  |   |   | 1,142  |  
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|Dividend income                                                   |  |                             | 93     |                           |   | 22     |   |      | 194    |   |   | 22     |  
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|Total other income and gain (loss)                                |  | $                           | 2,579  |                           | $ | (139   | ) | $    | 4,934  |   | $ | (222   | )
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|Total realized gain (loss)                                        |  | $                           | 4,069  |                           | $ | 966    |   | $    | 8,132  |   | $ | 1,163  |  
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  
|Total unrealized gain (loss)                                      |  | $                           | (1,490 | )                         | $ | (1,105 | ) | $    | (3,198 | ) | $ | (1,385 | )
|                                                                  |  |                             |        |                           |   |        |   |      |        |   |   |        |  

For
the three and six months ended June 30, 2006, our other income and gain (loss)
increased by $2.7 million and $5.2 million as compared to the same periods in
2005. This increase is primarily a result of increases of $2.4 million and $6.3

35

---



million in net realized gains on sale of available-for sale securities
  for the three and six months ended June 30, 2006 compared to the same period
  in the prior year, respectively. This increase was partially offset by a $0.2
  million and $2.0 million other-than-temporary impairment identified on two inverse
  interest-only strip securities for the three and six months ended June 30, 2006.
  Additionally, we experienced decreases related to trading securities totaling
  $0.5 million and $2.3 million for the three and six months ended June 30, 2006
  compared to the same periods in 2005, respectively, on two inverse interest-only
  strip securities. The sources of the other-than-temporary impairment and decreases
  in trading securities are inverse interest-only securities, which have been
  purchased for duration management or yield enhancement to our RMBS portfolio,
  and have decreased in fair value as their cash flow moves inversely to the direction
  of LIBOR which has been primarily increasing through 2006.

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 six months ended
June 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 $86,000 and $0.3 million less tax expense of $33,000 and $0.1
million, respectively. TRS Holdings, Inc. reported no taxable income or tax
expense for the three and six months ended June 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. Market Square is
organized as an exempted company incorporated with limited liability under the
laws of the Cayman Islands, and Deerfield Triarc Bahamas is organized as an
international business company under the laws of the Commonwealth of the
Bahamas. Both companies are generally exempt from federal and state income tax
at the corporate entity level because they restrict their activities in the
United States to trading in stock and securities for their own account.
Therefore, despite their status as taxable REIT subsidiaries, they generally
will not be subject to corporate income tax on their earnings; however, we will
generally be required to include their current taxable income in our
calculation of REIT taxable income.

Liquidity and Capital Resources

We
held cash and cash equivalents of $54.8 million at June 30, 2006.

Our
operating activities provided cash of $68.1 million for the six months ended
June 30, 2006, primarily through the following net increases to cash:

| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | Net income -
  $37.3 million                                                       
|
| |  | Net premium
  and discount amortization - $12.5 million                            
|
| |  | Proceeds
  from sale and principal payments of loans held for sale - $188.8 million
|
| |  | Other-than-temporary
  impairment of available-for-sale securities - $2.0 million  
|
| |  | Loss on
  trading securities - $1.8 million                                        
|
| |  | Share-based
  compensation - $1.0 million                                          
|
| |  | Net
  derivative impact on operating activities - $0.6 million                     
|
| |  | Net change
  in operating assets and liabilities of $7.2 million                   

| |                                                                       |                                                                     
| | --------------------------------------------------------------------- | --------------------------------------------------------------------
| | These net
  increases to cash were offset primarily by the following:
|
| |                                                                      | Purchase of
  loans held for sale - $177.4 million                  
|
| |                                                                      | Net realized
  gains on available for sale securities - $5.3 million
|
| |                                                                      | Net loss on
  loans held for sale - $0.4 million                    

Our
investing activities used cash of $844.1 million during the six months ended
June 30, 2006 primarily from purchase of available-for-sale securities and
loans totaling $2.1 billion, offset primarily by proceeds received on sale of
available-for-sale securities of $438.2 million, proceeds from sales and
principal payments on available-for-sale securities and loans totaled $764.7
million, and the $62.1 million of change in restricted cash and cash
equivalents.

Our
financing activities provided cash of $795.3 million during the six months
ended June 30, 2006, primarily from net borrowings under repurchase agreements
and our revolving warehouse funding agreement of $658.3 million and $175.8

36

---



million,
respectively, offset by payments of debt issuance costs totaling $1.4 million,
payments for a derivative containing a financing element of $0.7 million and
dividend payments of $36.7 million.

During
the second quarter of 2006, we began to utilize cash received on principal
payments of our RMBS portfolio that was not used to purchase alternative assets
to reduce our repurchase agreement balance. This measure was done in order to
manage our liquidity and maintain our leverage at a level we believe is
appropriate.

Leverage

At
June 30, 2006, our GAAP leverage was 12.1 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 $678.8 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 $51.6 million.
We then divide this amount by our total stockholders equity of $678.8 million
plus trust preferred debt of $51.6 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 increased to 11.2 times
adjusted equity at June 30, 2006 compared with 10.1 and 9.8 at March 31, 2006
and December 31, 2005, respectively. This increased leverage at June 30, 2006
is primarily driven by a $175.8 million increase in long-term debt during the
second quarter of 2006 through the use our revolving warehouse facility.
Another significant contributing factor is the net decline of $28.9 million and
$38.4 million in other comprehensive loss, due to a $62.8 million and $119.1
million decline in value of our available-for-sale securities, which primarily
consist of our RMBS, offset by a $33.9 million and $80.8 million increase in
value of our designated hedges for the three and six months ended June 30,
2006, respectively. The decrease in the fair value of our RMBS portfolio is
primarily a result of the increasing interest rate environment. This is largely
a result of the rates on our RMBS portfolio being below current prevailing
interest rates for hybrid adjustable rate loans which were at lower fixed
interest rates at time of purchase and have not yet experienced a reset in
rates.

Sources of
Funds

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

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

|                                                        |  |            |           |           |      |          |   |            |         |       |   |        |   |   |           |  
|------------------------------------------------------- |  | ---------- | --------- | --------- | ---- | -------- | - | ---------- | ------- | ----- | - | ------ | - | - | --------- | -
|                                                        |  |            |           |           | Term |          |   |            |         | Trust |   |        |   |  
|                                                        |  | Repurchase |           | Financing |      | Wachovia |   | Preferred  |         |       |   |       
|                                                        |  | Agreements |           | CDOs      |      | Facility |   | Securities |         | Total |  
|                                                        |  |            |           |           |      |          |   |            |         |       |  
|Outstanding balance                                     |  | $          | 7,452,188 |           | $    | 564,000  |   | $          | 175,785 |       | $ | 51,550 |   | $ | 8,243,523 |  
|Weighted average borrowing
  rate                       |  |            | 5.19      | %         |      | 5.56     | % |            | 6.09    | %     |   | 8.65   | % |   | 5.26      | %
|Weighted-average
        remaining maturity (in years)  |  |            | 0.08      |           |      | 25.36    |   |            | 2.70    |       |   | 29.35  |   |   | 2.05      |  
|Fair value of collateral
  (including accrued interest) |  | $          | 7,532,083 |           | $    | 613,706  |   | $          | 247,876 |       |   | n/a    |   |   | n/m       |  

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

For
the six months ended June 30, 2006, net proceeds from repurchase agreements
totaling $7.5 billion, with a weighted-average current borrowing rate of 5.19%,
were primarily used to finance the acquisition of mortgage-related assets. We
expect to continue to borrow funds in the form of repurchase agreements. As of
June 30, 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 June 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 a $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 June 30, 2006 we had $175.8 million outstanding related
to the Facility. The Facility has provided additional leverage for our loan
portfolio that was previously being funded with equity.

37

---



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

|                                       |  |                |        |                  |  |    |  | 
|-------------------------------------- |  | -------------- | ------ | ---------------- |  | -- |  | 
|                                       |  | Amount         |        | Weighted-Average | 
|                                       |  | at             |        | Remaining        | 
|                                       |  | Risk (1)       |        | Maturity         | 
|                                       |  |                |        |                  | 
|Repurchase
  Agreement Counterparties: |  | (In thousands) |        | (In days)        | 
|                                       |  |                |        |                  | 
|                                       |  |                |        |                  |  |    | 
|Bear, Stearns & Co.
  Inc.             |  | $              | 2,761  |                  |  | 24 |  | 
|Barclays Bank Plc.                     |  |                | (962   | )                |  | 34 |  | 
|Citigroup, Inc.                        |  |                | (8,608 | )                |  | 9  |  | 
|Countrywide Securities
  Corp.         |  |                | 12,947 |                  |  | 34 |  | 
|Credit Suisse LLC                      |  |                | 22,206 |                  |  | 33 |  | 
|JPMorgan Chase and Co.                 |  |                | (6,066 | )                |  | 22 |  | 
|Lehman Brothers Inc.                   |  |                | 3,331  |                  |  | 14 |  | 
|Merrill Lynch & Co.,
  Inc.            |  |                | 28,319 |                  |  | 27 |  | 
|Mitsubishi Securities
  (USA), Inc.    |  |                | 11,826 |                  |  | 13 |  | 
|Nomura Securities
  International      |  |                | (2,831 | )                |  | 33 |  | 
|UBS Securities LLC                     |  |                | 16,972 |                  |  | 47 |  | 
|                                       |  |                |        |                  |  |    |  | 
|Total                                  |  | $              | 79,895 |                  |  |    |  | 
|                                       |  |                |        |                  |  |    |  | 

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

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

|            |  |          |  |          |  |           |      |          |   |        | 
|----------- |  | -------- |  | -------- |  | --------- | ---- | -------- | - | ------ | 
|Declaration |  | Record   |  | Payment  |  | Per Share |      | Dividend |  
|Date        |  | Date     |  | Date     |  | 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 | 
|            |  |          |  |          |  |           |      |          |   |        | 
|            |  |          |  | Total    |  | $         | 0.74 |          | $ | 38,243 | 
|            |  |          |  |          |  |           |      |          |   |        | 

We
intend to make regular quarterly distributions of all or substantially all of
our REIT taxable income to holders of our common stock. We expect to declare
dividends on a quarterly basis and typically on a one-month lag, except for the
fourth quarter of the year, which we expect to declare in December in order to
avoid additional excise tax. In order to avoid corporate-level income tax on
our income, we are required to distribute 100% of our REIT taxable income and
short-term capital gains on an annual basis. This requirement can impact our
liquidity and capital resources. The following summarizes our dividends during
2006:

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

38

---



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
August 2, 2006, we closed an offering of $25.0 million of trust preferred
securities, which were placed in a private placement transaction exempted from
registration under the Securities Act of 1933, as amended. This is the initial
tranche of an aggregate offering of up to $70 million of trust preferred
securities, the remaining portion of which may be drawn in up to two additional
tranches, by October 31, 2006. The interest rate will float at a rate of three-month
Libor plus 2.25%, resetting quarterly. The trust preferred securities mature on
October 31, 2036 and may be called at par by us any time after October 30,
2011. The trust preferred securities benefit from our guarantee of the notes
issued to the trust, which have corresponding obligations with respect to
distributions and amounts payable upon liquidation, redemption or repayment of
the trust preferred securities. Each additional tranche will have the same
interest rate, maturity, guarantee and other terms as the initial tranche; will
be issued by a separate trust established by us; and must be at least $15.0
million of principal amount. The purchasers obligation to purchase the
additional tranche(s) is subject to a customary material adverse event condition.

As
  of August 9, 2006, we entered into additional interest rate swaps, which increased
  the notional value by $863.0 million compared to the balance at June 30, 2006.
  This decreased our 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, to 0.4 years at August
  9, 2006, compared to 1.0 years at June 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 37).

39

---



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 six months ended June 30, 2006:

|                                                                              |  |                                    |        |  
|----------------------------------------------------------------------------- |  | ---------------------------------- | ------ | -
|                                                                              |  | Six months
  ended
  June 30, 2006 |       
|                                                                              |  |                                    |       
|                                                                              |  | (In thousands)                     |       
|                                                                              |  |                                    |       
|GAAP net income                                                               |  | $                                  | 37,327 |  
|                                                                              |  |                                    |        |  
|Adjustments to
  GAAP net income:                                             |  |                                    |        |  
|Amortization/accretion
  of security premium (discount)                       |  |                                    | 1,777  |  
|Amortization of
  terminated swaps                                            |  |                                    | 356    |  
|Amortization of
  financing element in Pinetree swap                          |  |                                    | (117   | )
|Hedge
  ineffectiveness                                                       |  |                                    | (376   | )
|Stock and
  options grant                                                     |  |                                    | 661    |  
|Organization
  costs                                                          |  |                                    | (4     | )
|Non-allowable
  deduction for meals and entertainment                         |  |                                    | 63     |  
|Security basis
  difference recognized upon sale                              |  |                                    | (565   | )
|Impairment of
  available-for sale securities not recognized for tax purposes |  |                                    | 2,034  |  
|Unrealized gain
  (loss)                                                      |  |                                    | 1,337  |  
|Gain on
  intercompany sale eliminated for GAAP                               |  |                                    | 228    |  
|Exclusion of
  Deerfield Triarc TRS Holdings, LLC net income                  |  |                                    | 195    |  
|                                                                              |  |                                    |        |  
|Net adjustments
  to GAAP net income                                          |  |                                    | 5,589  |  
|                                                                              |  |                                    |        |  
|                                                                              |  |                                    |        |  
|Estimated REIT
  taxable income                                               |  | $                                  | 42,916 |  
|                                                                              |  |                                    |        |  

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 June 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.

40

---



Inflation

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

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

As
of June 30, 2006, the primary component of our market risk was interest rate
risk, as described below. While we do not seek to avoid risk completely, we
believe that a significant portion of the risk can be quantified from
historical experience. We seek to actively manage interest rate risk, and
regularly assess whether earnings in the portfolio include appropriate
compensation for the inherent market risks to which it is exposed. In light of
these risks, we regularly consider our capital levels and believe that our
capital is sufficient.

Interest Rate Risk

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

Effect on Net Interest Income

We
fund our investments in RMBS with short-term borrowings under repurchase
agreements. During periods of rising interest rates, short-term borrowing costs
tend to increase while the income earned on hybrid adjustable-rate (during the
fixed-rate component of such securities) and fixed-rate RMBS may remain
substantially unchanged. This results in a narrowing of the net interest spread
between the related assets and borrowings and may even result in losses.

In order to mitigate our interest rate exposure, we have entered into 206
designated interest rate swap hedging transactions as of June 30, 2006. The
following table summarizes the expiration dates of these contracts and their notional
amounts:

|                  |  |                   |           | 
|----------------- |  | ----------------- | --------- | 
|Expiration
  Date |  | Notional
  Amount |          
|                  |  |                   |          
|                  |  | (In thousands)    |          
|2006              |  | $                 | 83,000    | 
|2007              |  |                   | 575,400   | 
|2008              |  |                   | 3,335,150 | 
|2009              |  |                   | 313,000   | 
|2010              |  |                   | 884,200   | 
|2011              |  |                   | 170,000   | 
|2015              |  |                   | 238,700   | 
|2016              |  |                   | 75,000    | 
|                  |  |                   |           | 
|Total             |  | $                 | 5,674,450 | 
|                  |  |                   |           | 

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

41

---



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

We
have structured our swaps to roll off or expire in conjunction with the
estimated weighted average life of the fixed period of the mortgage portfolio.
However, if prepayment rates decrease in a rising interest rate environment,
the weighted average life of the fixed-rate portion of the related RMBS could
extend beyond the term of the swap agreement or other hedging instrument. This
could have a negative impact on our results from operations, as borrowing costs
would no longer be effectively fixed after the end of the hedging instrument
while the income earned on the remaining hybrid adjustable-rate RMBS would
remain fixed for a period of time. This situation may also cause the market
value of our hybrid adjustable-rate RMBS to decline, with little or no
offsetting gain from the related hedging transactions. In extreme situations,
we may be forced to sell assets to maintain adequate liquidity, which could
cause us to incur losses.

Hybrid Adjustable-Rate RMBS Interest Rate Cap Risk

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

Interest Rate Mismatch Risk

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

Our
analysis of risks is based on managements experience, estimates, models and
assumptions. These analyses rely on models, which utilize estimates of fair
value and interest rate sensitivity. Actual economic conditions or
implementation of investment decisions by our management may produce results
that differ significantly from the estimates and assumptions used in our models
and the projected results reflected herein.

Prepayment Risk

Prepayments
are the full or partial repayment of principal prior to contractual due dates
of a mortgage loan and often occur due to refinancing activity. Prepayment
rates for existing RMBS generally increase when prevailing interest rates fall
below the market rate existing when the underlying mortgages were originated.
In addition, prepayment rates on adjustable-rate and hybrid adjustable-rate
RMBS generally increase when the spread between long-term and short-term
interest rates declines or becomes negative. Prepayments of RMBS could impact
our results of operations in several ways. Some adjustable-rate mortgages
underlying our adjustable-rate RMBS may bear initial teaser interest rates that
are lower than their fully-indexed rates, which refers to the applicable index
rates plus a margin. In the event that such an adjustable-rate mortgage is
prepaid prior to or soon after the time of adjustment to a fully-indexed rate,
the holder of the related residential mortgage-backed security would have held
such security while it was less profitable and lost the opportunity to receive
interest at the fully-indexed rate over the expected life of the
adjustable-rate residential mortgage-backed security. Although we currently do
not own any adjustable-rate RMBS with teaser rates, we may obtain some in the
future which would expose us to this prepayment risk. Additionally, we
currently own RMBS that were purchased at a premium. The prepayment of such
RMBS at a rate faster than anticipated would result in a write-off of any
remaining capitalized premium amount and a 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 market value of our assets. We face the risk that the market value
of our assets will increase or decrease at different rates than that of our
liabilities, including our hedging instruments.

42

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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 $2.0
million), repurchase agreement liabilities, and interest rate swaps at June 30,
2006, assuming rates instantaneously fall 100 basis points and rise 100 basis
points:

|                                                  |  |                                          |           |                |   |                                          |  |   |           |  
|------------------------------------------------- |  | ---------------------------------------- | --------- | -------------- | - | ---------------------------------------- |  | - | --------- | -
|                                                  |  | Interest Rates
  Fall 100
  Basis Points |           | Unchanged      |   | Interest Rates
  Rise 100
  Basis Points | 
|                                                  |  |                                          |           |                |   |                                          | 
|                                                  |  |                                          |           | (In thousands) |   |                                          | 
|                                                  |  |                                          |           |                |   |                                          | 
|RMBS                                              |  |                                          |           |                |   |                                          |  |   |           |  
|Fair value(1)                                     |  | $                                        | 7,981,585 |                | $ | 7,785,360                                |  | $ | 7,554,348 |  
|Change in fair value                              |  | $                                        | 196,225   |                |   |                                          |  | $ | (231,012  | )
|Change as a percent of fair value                 |  |                                          | 2.52      | %              |   |                                          |  |   | -2.97     | %
|Designated and Undesignated
  Interest Rate Swaps |  |                                          |           |                |   |                                          |  |   |           |  
|Fair value                                        |  | $                                        | 12,827    |                | $ | 142,490                                  |  | $ | 267,228   |  
|Change in fair value                              |  | $                                        | (129,663  | )              |   |                                          |  | $ | 124,738   |  
|Change as a percent of fair value                 |  |                                          | n/m       |                |   |                                          |  |   | n/m       |  
|Net Portfolio Impact                              |  | $                                        | 66,562    |                |   |                                          |  | $ | (106,274  | )

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

43

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

The
Annual Meeting of Stockholders of Deerfield Triarc Capital Corp. was held on
May 23, 2006. The matters voted upon at the meeting and the votes cast with
respect to such matters are as follows:

Election of Directors

|                 |  |           |            |                |  |         |  |  |  | 
|---------------- |  | --------- | ---------- | -------------- |  | ------- |  |  |  | 
|Nominee          |  | Votes For |            | Votes Withheld |  |         | 
|                 |  |           |            |                |  |         | 
|Gregory H. Sachs |  |           | 43,370,514 |                |  | 183,731 |  |  |  | 
|Howard Rubin     |  |           | 43,610,255 |                |  | 943,990 |  |  |  | 

Ratification of Deloitte &
Touche LLP as certified independent accountants for the fiscal year ended
December 31, 2006

|           |  |               |         |             |  |                  |  |  |   | 
|---------- |  | ------------- | ------- | ----------- |  | ---------------- |  |  | - | 
|Votes For  |  | Votes Against |         | Abstentions |  | Broker Non-Votes | 
|           |  |               |         |             |  |                  | 
|42,574,609 |  |               | 966,422 |             |  | 13,214           |  |  |  | 

44

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ITEM 6. Exhibits

(b) Documents filed as part of this Report:

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

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

SIGNATURES

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

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

45

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