Drive Shack 10Q 2007 Q3 Quarterly report

Drive Shack (DSHK) 10-Q2007 Q3 Quarterly report

Content analysis

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2007
or


	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: 001-31458

Newcastle Investment Corp.

(Exact name of registrant as specified in its charter)


Maryland			81-0559116
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
1345 Avenue of the Americas, New York, NY			10105
(Address of principal executive offices)			(Zip Code)
(212) 798-6100
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 No

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

Large accelerated filer Accelerated filer Non-accelerated filer

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.

Common stock, $0.01 par value per share: 52,779,179 shares outstanding as of November 7, 2007.

NEWCASTLE INVESTMENT CORP.
FORM 10-Q

INDEX


		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006		1
	Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2007 and 2006		2
	Consolidated Statements of Stockholders’ Equity (unaudited) for the nine months ended September 30, 2007 and 2006		3
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2007 and 2006		4
	Notes to Consolidated Financial Statements (unaudited)		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44
Item 4.	Controls and Procedures		50
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		51
Item 1A.	Risk Factors		51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		52
Item 3.	Defaults upon Senior Securities		52
Item 4.	Submission of Matters to a Vote of Security Holders		52
Item 5.	Other Information		52
Item 6.	Exhibits		53
	SIGNATURES		54

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)


	September 30, 2007				December 31, 2006
	(Unaudited)
Assets
Real estate securities, available for sale		$	5,186,147			$	5,581,228
Real estate related loans, net			1,960,762				1,568,916
Residential mortgage loans, net			662,624				809,097
Subprime mortgage loans subject to call option – Note 5			392,992				288,202
Investments in unconsolidated subsidiaries			34,097				22,868
Operating real estate, net			33,348				29,626
Cash and cash equivalents			40,772				5,371
Restricted cash			107,415				184,169
Derivative assets			21,907				62,884
Receivables and other assets			65,409				52,031
		$	8,505,473			$	8,604,392
Liabilities and Stockholders’ Equity
Liabilities
CBO bonds payable		$	4,728,805			$	4,313,824
Other bonds payable			588,971				675,844
Notes payable			85,233				128,866
Repurchase agreements			1,583,842				760,346
Repurchase agreements subject to ABCP facility			98,655				1,143,749
Financing of subprime mortgage loans subject to call option – Note 5			392,992				288,202
Credit facility			—				93,800
Junior subordinated notes payable (security for trust preferred)			100,100				100,100
Derivative liabilities			46,164				17,715
Dividends payable			40,251				33,095
Due to affiliates			7,741				13,465
Accrued expenses and other liabilities			12,098				33,406
			7,684,852				7,602,412
Stockholders’ Equity
Preferred stock, $0.01 par value, 100,000,000 shares authorized, 2,500,000 shares of 9.75% Series B Cumulative Redeemable Preferred Stock, 1,600,000 shares of 8.05% Series C Cumulative Redeemable Preferred Stock and 2,000,000 shares of 8.375% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, issued and outstanding (Series D issued in 2007)			152,500				102,500
Common stock, $0.01 par value, 500,000,000 shares authorized, 52,779,179 and 45,713,817 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively			528				457
Additional paid-in capital			1,033,322				833,887
Dividends in excess of earnings			(91,973	)			(10,848	)
Accumulated other comprehensive income (loss)			(273,756	)			75,984
			820,621				1,001,980
		$	8,505,473			$	8,604,392

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(dollars in thousands, except share data)


	Three Months Ended September 30,								Nine Months Ended September 30,
	2007				2006				2007				2006
Revenues
Interest income		$	169,770			$	140,330			$	523,860			$	378,446
Rental and escalation income			1,323				834				3,898				3,616
Gain on sale of investments, net			4,825				2,642				14,014				10,722
Other income (loss), net			(7,053	)			288				(557	)			4,545
			168,865				144,094				541,215				397,329
Expenses
Interest expense			117,434				100,239				368,108				265,113
Loss on extinguishment of debt – Note 6			7,752				—				15,032				658
Property operating expense			1,019				1,041				3,099				2,808
Loan and security servicing expense			2,091				1,553				7,772				4,961
Provision for credit losses			2,820				2,682				7,945				5,868
Provision for losses, loans held for sale – Note 5			—				—				5,754				4,127
General and administrative expense			1,335				1,187				4,150				3,979
Management fee to affiliate			4,597				3,475				13,048				10,420
Incentive compensation to affiliate			—				3,094				6,209				8,780
Depreciation and amortization			359				290				1,030				767
			137,407				113,561				432,147				307,481
Other Gains (Losses)
Other-than-temporary impairment – Note 3			(67,860	)			—				(73,813	)			—
Income (loss) before equity in earnings of unconsolidated subsidiaries			(36,402	)			30,533				35,255				89,848
Equity in earnings of unconsolidated subsidiaries			488				1,506				2,154				3,916
Income (loss) from continuing operations			(35,914	)			32,039				37,409				93,764
Income (loss) from discontinued operations			17				(12	)			(2	)			212
Net Income (Loss)			(35,897	)			32,027				37,407				93,976
Preferred dividends			(3,375	)			(2,328	)			(9,265	)			(6,985	)
Income (Loss) Applicable to Common Stockholders		$	(39,272	)		$	29,699			$	28,142			$	86,991
Income (Loss) Per Share of Common Stock
Basic		$	(0.74	)		$	0.68			$	0.55			$	1.98
Diluted		$	(0.74	)		$	0.67			$	0.55			$	1.97
Income (loss) from continuing operations per share of common stock, after preferred dividends
Basic		$	(0.74	)		$	0.68			$	0.55			$	1.97
Diluted		$	(0.74	)		$	0.67			$	0.55			$	1.97
Income from discontinued operations per share of common stock
Basic		$	0.00			$	0.00			$	0.00			$	0.01
Diluted		$	0.00			$	0.00			$	0.00			$	0.00
Weighted Average Number of Shares of Common Stock Outstanding
Basic			52,779,179				43,999,817				50,894,424				43,978,625
Diluted			52,779,179				44,136,956				51,045,418				44,091,003
Dividends Declared per Share of Common Stock		$	0.720			$	0.650			$	2.130			$	1.925

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(dollars in thousands)


	Preferred Stock					Common Stock					Additional Paid-in Capital				Dividends in Excess of Earnings				Accum. Other Comp. Income (Loss)				Total Stockholders’ Equity
	Shares		Amount			Shares		Amount			Additional Paid-in Capital				Dividends in Excess of Earnings				Accum. Other Comp. Income (Loss)				Total Stockholders’ Equity
Stockholders’ equity – December 31, 2006		4,100,000		$	102,500		45,713,817		$	457		$	833,887			$	(10,848	)		$	75,984			$	1,001,980
Dividends declared		—			—		—			—			—				(118,532	)			—				(118,532	)
Issuance of common stock		—			—		6,980,000			70			199,703				—				—				199,773
Exercise of common stock options		—			—		83,198			1			1,442				—				—				1,443
Issuance of common stock to directors		—			—		2,164			—			60				—				—				60
Issuance of preferred stock		2,000,000			50,000		—			—			(1,770	)			—				—				48,230
Comprehensive income:
Net income		—			—		—			—			—				37,407				—				37,407
Net unrealized (loss) on securities		—			—		—			—			—				—				(292,713	)			(292,713	)
Reclassification of net realized (gain) loss on securities into earnings		—			—		—			—			—				—				(20,831	)			(20,831	)
Foreign currency translation		—			—		—			—			—				—				3,205				3,205
Net unrealized (loss) on derivatives designated as cash flow hedges		—			—		—			—			—				—				(39,466	)			(39,466	)
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings		—			—		—			—			—				—				65				65
Total comprehensive income (loss)																									(312,333	)
Stockholders’ equity – September 30, 2007		6,100,000		$	152,500		52,779,179		$	528		$	1,033,322			$	(91,973	)		$	(273,756	)		$	820,621
Stockholders’ equity – December 31, 2005		4,100,000		$	102,500		43,913,409		$	439		$	782,735			$	(13,235	)		$	45,564			$	918,003
Dividends declared		—			—		—			—			—				(91,664	)			—				(91,664	)
Exercise of common stock options		—			—		84,000			1			1,439				—				—				1,440
Issuance of common stock to directors		—			—		2,408			—			60				—				—				60
Comprehensive income:
Net income		—			—		—			—			—				93,976				—				93,976
Net unrealized gain on securities		—			—		—			—			—				—				31,775				31,775
Reclassification of net realized (gain) on securities into earnings		—			—		—			—			—				—				(637	)			(637	)
Foreign currency translation		—			—		—			—			—				—				763				763
Net unrealized gain on derivatives designated as cash flow hedges		—			—		—			—			—				—				6,801				6,801
Reclassification of net realized (gain) on derivatives designated as cash flow hedges into earnings		—			—		—			—			—				—				(3,351	)			(3,351	)
Total comprehensive income																									129,327
Stockholders’ equity – September 30, 2006		4,100,000		$	102,500		43,999,817		$	440		$	784,234			$	(10,923	)		$	80,915			$	957,166

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(dollars in thousands)


	Nine Months Ended September 30,
	2007				2006
Cash Flows From Operating Activities
Net income		$	37,407			$	93,976
Adjustments to reconcile net income to net cash provided by (used in) operating activities (inclusive of amounts related to discontinued operations):
Depreciation and amortization			1,028				767
Accretion of discount and other amortization			(18,751	)			(14,976	)
Equity in earnings of unconsolidated subsidiaries			(2,154	)			(3,916	)
Distributions of earnings from unconsolidated subsidiaries			2,154				3,916
Deferred rent			234				(1,274	)
Gain on sale of investments			(14,155	)			(10,430	)
Unrealized gain on non-hedge derivatives and hedge ineffectiveness			829				(4,421	)
Loss on extinguishment of debt			10,278				—
Provision for credit losses			7,945				5,868
Provision for losses, loans held for sale			5,754				4,127
Other-than-temporary impairment			73,813				—
Purchase of loans held for sale – Notes 4 and 5			(1,089,202	)			(1,511,086	)
Sale of loans held for sale – Note 5			969,747				1,411,530
Non-cash directors’ compensation			60				60
Change in:
Restricted cash from operating activities			(8,268	)			34,398
Receivables and other assets			(13,138	)			(524	)
Due to affiliates			(5,724	)			1,155
Accrued expenses and other liabilities			(5,030	)			8,757
Net cash provided by (used in) operating activities			(47,173	)			17,927
Cash Flows From Investing Activities
Purchase of real estate securities			(416,408	)			(1,020,618	)
Proceeds from sale of real estate securities			237,892				306,618
Purchase of and advances on loans			(896,500	)			(1,267,511	)
Repayments of loan and security principal			925,431				417,277
Margin received on derivative instruments			73,978				(33,387	)
Return of margin on derivative instruments			(90,097	)			30,349
Margin deposits on total rate of return swaps (treated as derivative instruments)			(60,085	)			(46,158	)
Return of margin deposits on total rate of return swaps (treated as derivative instruments)			67,632				89,255
Proceeds from termination of derivative instruments			26,801				17,982
Proceeds from sale of derivative instrument into Securitization Trust 2006 – Note 5			—				5,623
Purchase and improvement of operating real estate			(1,537	)			(1,314	)
Contributions to unconsolidated subsidiaries			(12,191	)			(100	)
Distributions of capital from unconsolidated subsidiaries			962				1,504
Change in restricted cash from investing activities			(2,516	)			—
Net cash used in investing activities			(146,638	)			(1,500,480	)

Continued on Page 5

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(dollars in thousands)


	Nine Months Ended September 30,
	2007				2006
Cash Flows From Financing Activities
Issuance of CBO bonds payable			1,835,071				—
Repayments of CBO bonds payable			(1,430,506	)			(27,716	)
Issuance of other bonds payable			—				631,988
Repayments of other bonds payable			(88,067	)			(276,082	)
Repayments of notes payable			(43,633	)			(106,484	)
Borrowings under repurchase agreements			4,785,636				3,300,477
Repayments of repurchase agreements			(3,962,140	)			(2,150,900	)
Issuance of repurchase agreement subject to ABCP facility			247,409				—
Repayments of repurchase agreement subject to ABCP facility			(1,292,503	)			—
Draws under credit facility			382,800				393,900
Repayments of credit facility			(476,600	)			(288,900	)
Issuance of junior subordinated notes payable			—				100,100
Issuance of common stock			200,165				—
Costs related to issuance of common stock			(358	)			—
Exercise of common stock options			1,443				1,440
Issuance of preferred stock			50,000				—
Costs related to issuance of preferred stock			(1,770	)			—
Dividends paid			(111,376	)			(90,564	)
Payment of deferred financing costs			(2,244	)			(9,664	)
Change in restricted cash from financing activities			135,885				—
Net cash provided by financing activities			229,212				1,477,595
Net Increase (Decrease) in Cash and Cash Equivalents			35,401				(4,958	)
Cash and Cash Equivalents, Beginning of Period			5,371				21,275
Cash and Cash Equivalents, End of Period		$	40,772			$	16,317
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest expense		$	345,777			$	248,594
Cash paid during the period for income taxes		$	—			$	244
Supplemental Schedule of Non-Cash Investing and Financing Activities
Common stock dividends declared but not paid		$	38,001			$	28,600
Preferred stock dividends declared but not paid		$	2,250			$	1,552
Foreclosure of loans		$	—			$	12,200
Acquisition and financing of loans subject to call option		$	102,457			$	286,315

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)


1.	GENERAL

Newcastle Investment Corp. (and its subsidiaries, ‘‘Newcastle’’) is a Maryland corporation that was formed in 2002. Newcastle conducts its business through three primary segments: (i) real estate securities and real estate related loans, (ii) residential mortgage loans, and (iii) operating real estate.

Newcastle is organized and conducts its operations to qualify as a real estate investment trust (‘‘REIT’’) for U.S. federal income tax purposes. As such, Newcastle will generally not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements.

Newcastle is party to a management agreement (the ‘‘Management Agreement’’) with FIG LLC (the ‘‘Manager’’), an affiliate of Fortress Investment Group LLC, under which the Manager advises Newcastle on various aspects of its business and manages its day-to-day operations, subject to the supervision of Newcastle’s board of directors. For its services, the Manager receives an annual management fee and incentive compensation, both as defined in the Management Agreement.

Approximately 5.1 million shares of Newcastle’s common stock were held by the Manager, through its affiliates, and its principals at September 30, 2007. In addition, the Manager, through its affiliates, held options to purchase approximately 1.5 million shares of Newcastle’s common stock at September 30, 2007.

The accompanying consolidated financial statements and related notes of Newcastle have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Newcastle’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with Newcastle’s consolidated financ ial statements for the year ended December 31, 2006 and notes thereto included in Newcastle’s annual report on Form 10-K filed with the Securities and Exchange Commission. Capitalized terms used herein, and not otherwise defined, are defined in Newcastle’s consolidated financial statements for the year ended December 31, 2006.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)


2.	INFORMATION REGARDING BUSINESS SEGMENTS

Newcastle conducts its business through three primary segments: real estate securities and real estate related loans, residential mortgage loans, and operating real estate.

Summary financial data on Newcastle’s segments is given below, together with a reconciliation to the same data for Newcastle as a whole:


	Real Estate Securities and Real Estate Related Loans				Residential Mortgage Loans				Operating Real Estate				Unallocated				Total
September 30, 2007 and the Nine Months then Ended
Gross revenues		$	416,458			$	119,607			$	3,867			$	1,283			$	541,215
Operating expenses			(2,115	)			(19,390	)			(3,224	)			(23,248	)			(47,977	)
Operating income (loss)			414,343				100,217				643				(21,965	)			493,238
Interest expense			(285,462	)			(74,453	)			(44	)			(8,149	)			(368,108	)
Loss on extinguishment of debt			(15,032	)			—				—				—				(15,032	)
Other-than-temporary impairment			(73,813	)			—				—				—				(73,813	)
Depreciation and amortization			—				—				(812	)			(218	)			(1,030	)
Equity in earnings of unconsolidated subsidiaries			432				—				1,717				5				2,154
Income (loss) from continuing operations			40,468				25,764				1,504				(30,327	)			37,409
Income (loss) from discontinued operations			—				—				(2	)			—				(2	)
Net income (loss)			40,468				25,764				1,502				(30,327	)			37,407
Preferred dividends			—				—				—				(9,265	)			(9,265	)
Income (loss) applicable to common stockholders		$	40,468			$	25,764			$	1,502			$	(39,592	)		$	28,142
Revenue derived from non-U.S. sources:
Canada		$	—			$	—			$	2,229			$	—			$	2,229
Total assets		$	7,265,735			$	1,142,322			$	52,152			$	45,264			$	8,505,473
Long-lived assets outside the U.S.:
Canada		$	—			$	—			$	20,403			$	—			$	20,403
December 31, 2006
Total assets		$	7,366,684			$	1,179,547			$	48,518			$	9,643			$	8,604,392
Long-lived assets outside the U.S.:
Canada		$	—			$	—			$	16,553			$	—			$	16,553
Three Months Ended September 30, 2007
Gross revenues		$	133,852			$	32,730			$	1,301			$	982			$	168,865
Operating expenses			(716	)			(4,208	)			(1,057	)			(5,881	)			(11,862	)
Operating income (loss)			133,136				28,522				244				(4,899	)			157,003
Interest expense			(94,087	)			(21,253	)			(19	)			(2,075	)			(117,434	)
Loss of extinguishment of debt			(7,752	)			—				—				—				(7,752	)
Other-than-temporary impairment			(67,860	)			—				—				—				(67,860	)
Depreciation and amortization			—				—				(285	)			(74	)			(359	)
Equity in earnings of unconsolidated subsidiaries			(50	)			—				537				1				488
Income (loss) from continuing operations			(36,613	)			7,269				477				(7,047	)			(35,914	)
Income from discontinued operations			—				—				17				—				17
Net income (loss)			(36,613	)			7,269				494				(7,047	)			(35,897	)
Preferred dividends			—				—				—				(3,375	)			(3,375	)
Income (loss) applicable to common stockholders		$	(36,613	)		$	7,269			$	494			$	(10,422	)		$	(39,272	)
Revenue derived from non-U.S. sources:
Canada		$	—			$	—			$	752			$	—			$	752

continued on page 8

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)


	Real Estate Securities and Real Estate Related Loans				Residential Mortgage Loans				Operating Real Estate				Unallocated				Total
Nine Months Ended September 30, 2006
Gross revenues		$	317,138			$	75,878			$	3,851			$	462			$	397,329
Operating expenses			(2,026	)			(13,274	)			(3,006	)			(22,637	)			(40,943	)
Operating income (loss)			315,112				62,604				845				(22,175	)			356,386
Interest expense			(210,793	)			(46,696	)			—				(7,624	)			(265,113	)
Loss on extinguishment of debt			—				—				—				(658	)			(658	)
Depreciation and amortization			—				—				(562	)			(205	)			(767	)
Equity in earnings of unconsolidated subsidiaries			1,975				—				1,940				1				3,916
Income (loss) from continuing operations			106,294				15,908				2,223				(30,661	)			93,764
Income from discontinued operations			—				—				212				—				212
Net income (loss)			106,294				15,908				2,435				(30,661	)			93,976
Preferred dividends			—				—				—				(6,985	)			(6,985	)
Income (loss) applicable to common stockholders		$	106,294			$	15,908			$	2,435			$	(37,646	)		$	86,991
Revenue derived from non-U.S. sources:
Canada		$	—			$	—			$	2,933			$	—			$	2,933
Three Months Ended September 30, 2006
Gross revenues		$	116,680			$	26,466			$	834			$	114			$	144,094
Operating expenses			(731	)			(3,608	)			(1,088	)			(7,605	)			(13,032	)
Operating income (loss)			115,949				22,858				(254	)			(7,491	)			131,062
Interest expense			(78,696	)			(17,777	)			—				(3,766	)			(100,239	)
Depreciation and amortization			—				—				(221	)			(69	)			(290	)
Equity in earnings of unconsolidated subsidiaries			629				—				877				—				1,506
Income (loss) from continuing operations			37,882				5,081				402				(11,326	)			32,039
Income from discontinued operations			—				—				(12	)			—				(12	)
Net income (loss)			37,882				5,081				390				(11,326	)			32,027
Preferred dividends			—				—				—				(2,328	)			(2,328	)
Income (loss) applicable to common stockholders		$	37,882			$	5,081			$	390			$	(13,654	)		$	29,699
Revenue derived from non-U.S. sources:
Canada		$	—			$	—			$	295			$	—			$	295

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)

Unconsolidated Subsidiaries

The following table summarizes the activity for significant subsidiaries affecting the equity held by Newcastle in unconsolidated subsidiaries:


	Operating Real Estate				Real Estate Loan
Balance at December 31, 2006		$	12,528			$	10,249
Contributions to unconsolidated subsidiaries			—				—
Distributions from unconsolidated subsidiaries			(1,154	)			(1,957	)
Equity in earnings of unconsolidated subsidiaries			1,717				823
Balance at September 30, 2007		$	13,091			$	9,115

Summarized financial information related to Newcastle’s significant unconsolidated subsidiaries was as follows:


	Operating Real Estate (A) (B)								Real Estate Loan (A) (C)
	September 30, 2007				December 31, 2006				September 30, 2007				December 31, 2006
Assets		$	78,834			$	78,381			$	18,334			$	20,615
Liabilities			(52,162	)			(52,856	)			—				—
Minority interest			(491	)			(470	)			(104	)			(116	)
Equity		$	26,181			$	25,055			$	18,230			$	20,499
Equity held by Newcastle		$	13,091			$	12,528			$	9,115			$	10,249


	Nine Months Ended September 30,								Nine Months Ended September 30,
	2007				2006				2007				2006
Revenues		$	6,021			$	6,493			$	1,672			$	3,996
Expenses			(2,523	)			(2,541	)			(18	)			(25	)
Minority interest			(64	)			(72	)			(9	)			(22	)
Net income		$	3,434			$	3,880			$	1,645			$	3,949
Newcastle’s equity in net income		$	1,717			$	1,940			$	823			$	1,975

(A)

The unconsolidated subsidiaries’ summary financial information is presented on a fair value basis, consistent with their internal basis of accounting.

(B)

Included in the operating real estate segment.

(C)

Included in the real estate securities and real estate related loans segment.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)


3.	REAL ESTATE SECURITIES

The following is a summary of Newcastle’s real estate securities at September 30, 2007, all of which are classified as available for sale and are therefore reported at fair value with changes in the fair value recorded in other comprehensive income.


																							Weighted Average
Asset Type	Current Face Amount			Amortized Cost Basis			Other-than- temporary Impairment (D)				Gross Unrealized							Carrying Value			Number of Securities		S&P Equivalent Rating	Coupon			Yield			Maturity (Years)
Asset Type	Current Face Amount			Amortized Cost Basis			Other-than- temporary Impairment (D)				Gains			Losses				Carrying Value			Number of Securities		S&P Equivalent Rating	Coupon			Yield			Maturity (Years)
CMBS-Conduit		$	1,550,585		$	1,495,256		$	—			$	9,432		$	(103,481	)		$	1,401,207		198	BBB		5.89	%		6.40	%		6.74
CMBS-Large Loan			685,383			684,568			—				309			(17,966	)			666,911		53	BBB−		7.01	%		6.89	%		2.15
CMBS-CDO			16,000			14,518			(3,477	)			—			—				11,041		1	B−		10.60	%		16.00	%		7.95
CMBS-B-Note			270,277			259,375			—				1,127			(9,802	)			250,700		40	BB		6.89	%		7.42	%		5.26
REIT Debt			926,873			941,006			—				5,609			(27,033	)			919,582		93	BBB−		6.34	%		5.97	%		5.36
ABS–Manufactured Housing			61,839			59,822			—				102			(5,231	)			54,693		9	BBB−		6.68	%		7.48	%		5.36
ABS-Subprime			618,818			607,885			(70,336	)			—			(102,959	)			434,590		122	BBB		6.94	%		7.61	%		2.94
ABS-Franchise			47,244			47,341			—				2			(5,124	)			42,219		17	BBB		7.72	%		7.87	%		4.94
FNMA/FHLMC (C)			1,266,142			1,276,284			—				4,449			(3,953	)			1,276,780		43	AAA		5.31	%		5.28	%		4.41
Subtotal/Average (A)			5,443,161			5,386,055			(73,813	)			21,030			(275,549	)			5,057,723		576	BBB+		6.18	%		6.34	%		4.85
Retained Securities (B)			76,380			70,182			—				—			(8,711	)			61,471		6	BBB		7.32	%		10.37	%		3.02
Residual Interest (B)			74,197			74,197			—				—			(7,244	)			66,953		2	NR		0.00	%		20.78	%		2.76
Total/Average		$	5,593,738		$	5,530,434		$	(73,813	)		$	21,030		$	(291,504	)		$	5,186,147		584	BBB+		6.11	%		6.59	%		4.80

(A)	The total current face amount of fixed rate securities was $4.4 billion, and of floating rate securities was $1.2 billion.

(B)

Represents the retained bonds and equity from Subprime Portfolios I and II described in Note 5. These securities have been treated as part of the residential mortgage loan segment — see Note 2. The residuals do not have stated coupons and therefore their coupons have been treated as zero for purposes of the table.

(C)	FNMA/FHLMC has an implied AAA rating.

(D)	Represents the cumulative write-down against amortized cost basis through earnings.

Unrealized losses that are considered other-than-temporary are recognized currently in income. In the three and nine months ended September 30, 2007, Newcastle recorded other-than-temporary impairment charges of $67.9 million and $73.8 million, respectively, relating to nineteen subprime and one CDO securities with an aggregate face amount of $133.5 million at September 30, 2007. Management closely monitors market valuations and, based on the results of recent market events, has concluded that these securities are other-than-temporarily impaired under the generally accepted accounting principles (GAAP). The remaining unrealized losses on Newcastle’s securities are primarily the result of market factors, rather than credit impairment, and Newcastle has performed credit analyses in relation to such securities which support its belief that the carrying values of such securities are fully recoverable over their expected holdi ng period. Although management expects to hold these securities until their recovery, there is no assurance that such securities will not be sold or at what price they may be sold.


							Gross Unrealized												Weighted Average
Securities in an Unrealized Loss Position	Current Face Amount			Amortized Cost Basis			Gains			Losses				Carrying Value			Number of Securities		S&P Equivalent Rating		Coupon			Yield			Maturity (Years)
Less Than Twelve Months		$	2,637,155		$	2,574,437		$	—		$	(201,452	)		$	2,372,985		300		BBB		6.82	%		7.10	%		4.91
Twelve or More Months			1,555,523			1,564,101			—			(90,052	)			1,474,049		159		A−		5.72	%		5.60	%		4.80
Total		$	4,192,678		$	4,138,538		$	—		$	(291,504	)		$	3,847,034		459		BBB+		6.41	%		6.53	%		4.87

As of September 30, 2007, Newcastle had $51.0 million of restricted cash held in CBO financing structures pending its investment in real estate securities and loans.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)


4.	REAL ESTATE RELATED LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS

The following is a summary of real estate related loans, residential mortgage loans and subprime mortgage loans at September 30, 2007. The loans contain various terms, including fixed and floating rates, self-amortizing and interest only. They are generally subject to prepayment.


Loan Type	Current Face Amount			Carrying Value			Loan Count		Wtd. Avg. Yield			Weighted Average Maturity (Years) (D)		Floating Rate Loans as a % of Face Amount			Delinquent Carrying Amount (E)
Mezzanine Loans (A)		$	912,833		$	909,827		25		9.03	%		1.85		89.4	%		$	—
B-Notes			436,455			434,928		14		8.22	%		1.93		84.7	%			—
Corporate Bank Loans			397,620			397,489		12		7.79	%		4.20		100.0	%			—
Whole Loans			110,065			110,489		4		10.47	%		1.57		100.0	%			—
ICH Loans (B)			107,785			108,029		59		7.62	%		0.50		0.0	%			263
Total Real Estate Related Loans		$	1,964,758		$	1,960,762		114		8.60	%		2.25		86.2	%		$	263
Residential Loans		$	108,187		$	110,957		349		6.19	%		2.78					$	3,121
Manufactured Housing Loans			562,931			551,667		16,210		8.58	%		6.07						4,250
Total Residential Mortgage Loans		$	671,118		$	662,624		16,559		8.18	%		5.54					$	7,371
Subprime Mortgage Loans Subject
to Call Option (C)		$	406,217		$	392,992

(A)	One of these loans has an $8.9 million contractual exit fee which Newcastle will begin to accrue when management believes it is probable that such exit fee will be received.

(B)

In October 2003, pursuant to FIN No. 46, Newcastle consolidated an entity which holds a portfolio of commercial mortgage loans which has been securitized. This investment, which is referred to as the ICH CMO, was previously treated as a non-consolidated residual interest in such securitization. The primary effect of the consolidation is the requirement that Newcastle reflect the gross loan assets and gross bonds payable of this entity in its financial statements.

(C)	See Note 5.

(D)	The weighted average maturities for the residential loan portfolio and the two manufactured housing loan portfolios were calculated based on constant prepayment rates (CPR) of 30%, 8% and 9%, respectively.

(E)	This face amount of loans is 60 or more days past due, in foreclosure or real estate owned, representing 2.9% and 0.75% of the total current face amounts of the Residential Loans and the Manufactured Housing Loans, respectively.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)

The following is a reconciliation of loss allowance.


	Real Estate Related Loans				Residential Mortgage Loans
Balance at December 31, 2006		$	(2,150	)		$	(7,256	)
Provision for credit losses			(500	)			(7,445	)
Realized losses			2,250				8,144
Balance at September 30, 2007		$	(400	)		$	(6,557	)

Newcastle has entered into total rate of return swaps with major investment banks to finance certain loans whereby Newcastle receives the sum of all interest, fees and any positive change in value amounts (the total return cash flows) from a reference asset with a specified notional amount, and pays interest on such notional plus any negative change in value amounts from such asset. These agreements are recorded in Derivative Liabilities and treated as non-hedge derivatives for accounting purposes and are therefore marked to market through income. Net interest received is recorded to Interest Income and the mark to market is recorded to Other Income. If Newcastle owned the reference assets directly, they would not be marked to market. Under the agreements, Newcastle is required to post an initial margin deposit to an interest bearing account and additional margin may be payable in the event of a decline in value of the reference asset. Any margin on deposit (rec orded in Restricted Cash), less any negative change in value amounts, will be returned to Newcastle upon termination of the contract.

As of September 30, 2007, Newcastle held an aggregate of $273.5 million notional amount of total rate of return swaps on 9 reference assets, including an unfunded asset with a notional amount of $38.1 million, on which it had deposited $39.2 million of margin. These total rate of return swaps had an aggregate fair value of approximately $(4.8) million, a weighted average receive interest rate of LIBOR + 2.01%, a weighted average pay interest rate of LIBOR + 0.52 %, and a weighted average swap maturity of 0.68 years.


5.	SECURITIZATION OF SUBPRIME MORTGAGE LOANS

Subprime Portfolio I

In March 2006, Newcastle, through a consolidated subsidiary, acquired a portfolio of approximately 11,300 residential mortgage loans, predominantly originated in 2005, to subprime borrowers (the ‘‘Subprime Portfolio I’’) for $1.50 billion. The loans are being serviced by Nationstar Mortgage, LLC, an affiliate of the Manager, for a servicing fee equal to 0.50% per annum on the unpaid principal balance of the Subprime Portfolio I.

In April 2006, Newcastle, through Newcastle Mortgage Securities Trust 2006-1 (the ‘‘Securitization Trust 2006’’), closed on a securitization of the Subprime Portfolio I. The Securitization Trust 2006 is not consolidated by Newcastle. Newcastle sold the Subprime Portfolio I and the related interest rate swap to the Securitization Trust 2006. The Securitization Trust 2006 issued $1.45 billion of notes. Newcastle retained $37.6 million face amount of the low investment grade notes and all of the equity issued by the Securitization Trust 2006. The notes have a stated maturity of March 25, 2036. Newcastle, as holder of the equity of the Securitization Trust 2006, has the option to redeem the notes once the aggregate principal balance of the Subprime Portfolio I is equal to or less than 20% of such balance at the date of the transfer. The proceeds from the securitization were used to repay the repurchase agreement descr ibed above.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)

The transaction between Newcastle and the Securitization Trust 2006 qualified as a sale for accounting purposes. However, 20% of the loans which are subject to call option by Newcastle were not treated as being sold and are classified as ‘‘held for investment’’ subsequent to the completion of the securitization.

Subprime Portfolio II

In March 2007, Newcastle entered into an agreement to acquire a portfolio of approximately 7,300 residential mortgage loans to subprime borrowers (the ‘‘Subprime Portfolio II’’) for up to $1.7 billion of unpaid principal balance. Following its due diligence review, Newcastle funded $1.3 billion or approximately 75% of the original commitment. The agreement between the seller and Newcastle required the seller to repurchase any delinquent loans for three months following Newcastle’s acquisition. The loans are being serviced by Nationstar Mortgage LLC, an affiliate of the Manager, for a servicing fee equal to 0.50% per annum on the unpaid principal balance of the Subprime Portfolio II.

This acquisition was initially funded with a repurchase agreement which bore interest at LIBOR + 0.60%. A write down of $5.8 million due to changes in market interest rates was recorded to Provisions for Losses, Loans Held for Sale in June 2007 related to these loans. No write down for credit was recorded related to these loans. Newcastle entered into an interest rate swap in order to hedge its exposure to the risk of changes in market interest rates with respect to the Subprime Portfolio II. In April 2007, this swap was de-designated as a hedge for accounting purposes and a non-hedge derivative gain of $5.8 million was recorded to Other Income in the second quarter of 2007. The swap was terminated at the time of pricing in June 2007.

In July 2007, Newcastle, through Newcastle Mortgage Securities Trust 2007-1 (the ‘‘Securitization Trust 2007’’), closed on a securitization of the Subprime Portfolio II. As a result of the repurchase of delinquent loans by the seller, as well as borrower repayments, the unpaid principal balance of the portfolio upon securitization in July 2007 was $1.1 billion, or approximately 85.9% of the loans acquired. The Securitization Trust 2007 is not consolidated by Newcastle. Newcastle sold the Subprime Portfolio II to the Securitization Trust 2007. The Securitization Trust 2007 issued $1.02 billion face amount of notes and entered into an interest rate swap agreement to hedge its exposure to the risk of changes in market interest rates. Newcastle retained $38.8 million face amount of the investment grade notes and all of the equity issued by the Securitization Trust 2007. The notes have a stated maturity of April 2 5, 2037. Newcastle, as holder of the equity of the Securitization Trust 2007, has the option to redeem the notes once the aggregate principal balance of the Subprime Portfolio II is equal to or less than 10% of such balance at the date of the transfer. Newcastle received $969.7 million of proceeds from the securitization, which were used to repay the repurchase agreement described above.

The transaction between Newcastle and the Securitization Trust 2007 qualified as a sale for accounting purposes, resulting in a gain in the amount of $0.1 million recorded to earnings in July 2007. However, 10% of the loans which are subject to call option by Newcastle were not treated as being sold and are classified as ‘‘held for investment’’ subsequent to the completion of the securitization.

Following the securitization, Newcastle held the following interests in the Subprime Portfolio II, all valued at the date of securitization: (i) the $46.7 million equity of the Securitization Trust 2007, (ii) the $35.0 million of retained notes ($38.8 million face amount), and (iii) subprime mortgage loans subject to call option of $107.0 million and related financing in the amount of 100% of such loans.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)

The key assumptions utilized in measuring the $46.7 million fair value of the equity, or residual interest, to call date in the Securitization Trust 2007 were as follows:


Weighted average life (years) of residual interest	3.8
Expected credit losses	8.0	%
Weighted average constant prepayment rate	30.1	%
Discount rate	22.5	%

The weighted average yield of the retained notes was 10.6% as of the date of securitization. The loans subject to call option and the corresponding financing will recognize interest income and expense based on the expected weighted average coupon of the loans subject to future repurchase at the call date.

In both transactions, the residual interests and the retained bonds are reported as real estate securities, available for sale. The retained loans subject to call option and corresponding financing are reported as separate line items on our balance sheet.

Newcastle has no obligation to repurchase any loans from either of its subprime securitizations. Therefore, it is expected that its exposure to loss is limited to the carrying amount of its retained interests in the securitization entities, as described above. A subsidiary of Newcastle gave limited representations and warranties with respect to the Subprime Portfolio II; however, it has no assets and does not have recourse to the general credit of Newcastle.

The following table presents information on the retained interests in securitizations of the Subprime Portfolios I and II, which includes the residual interests and the retained notes described above, and the sensitivity of their fair value to call date for immediate 10% and 20% adverse changes in the assumptions utilized in calculating such fair value, at September 30, 2007:


	Subprime Portfolio
	I				II
Total securitized loans (unpaid principal balance) (A)		$	969,900			$	1,036,246
Loans subject to call option (carrying value)		$	290,494			$	102,498
Retained interests (fair value) (B)		$	63,599			$	64,825
Weighted average life (years) of residual interest			1.8				3.5
Weighted average expected credit losses (C)			5.3	%			8.0	%
Effect on fair value of retained interests of 10% adverse change		$	(2,711	)		$	(3,275	)
Effect on fair value of retained interests of 20% adverse change		$	(5,635	)		$	(8,024	)
Weighted average constant prepayment rate (D)			30.5	%			31.3	%
Effect on fair value of retained interests of 10% adverse change		$	(3,218	)		$	(1,775	)
Effect on fair value of retained interests of 20% adverse change		$	(5,815	)		$	(10,514	)
Weighted average discount rate			18.3	%			20.8	%
Effect on fair value of retained interests of 10% adverse change		$	(1,807	)		$	(2,992	)
Effect on fair value of retained interests of 20% adverse change		$	(3,551	)		$	(5,771	)

(A)

Average loan seasoning of 25 months and 7 months for Subprime Portfolios I and II, respectively, at September 30, 2007.

(B)

The retained interests include residual interests and retained bonds of the securitizations. Their fair value is estimated based on pricing models.

(C)

Represents the percentage of losses on the original principal balance of the loans at the time of securitization (April 2006 and July 2007) to the maturity of the loans.

(D)

Represents the weighted average voluntary prepayment rate for the loans as of September 30, 2007 until maturity of such loans.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)

The sensitivity analysis is hypothetical and should be used with caution. In particular, the results are calculated by stressing a particular economic assumption independent of changes in any other assumption; in practice, changes in one factor may result in changes in another, which might counteract or amplify the sensitivities. Also, changes in the fair value based on a 10% or 20% variation in an assumption generally may not be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear.

The following table summarizes certain characteristics of the underlying loans in the securitizations as of September 30, 2007:


	Subprime Portfolio
	I				II
Loan unpaid principal balance (UPB)		$	969,900			$	1,036,246
Delinquencies of 60 or more days (UPB)		$	86,424			$	—
Net credit losses for nine months ended September 30, 2007		$	1,874			$	—
Cumulative net credit losses		$	1,931			$	—
Cumulative net credit losses as a % of original UPB			0.13	%			0.00	%

Delinquencies include loans 60 or more days past due, in foreclosure or real estate owned, representing 8.9% of the total unpaid principal balance of Subprime Portfolio I. Newcastle received net cash inflows of $18.9 million and $9.0 million from the retained interests of Subprime Portfolios I and II, respectively, during the nine months ended September 30, 2007.

The weighted average yields of the retained notes of Subprime Portfolios I and II were 10.88% and 9.86%, respectively, as of September 30, 2007. The loans subject to call option and the corresponding financing recognize interest income and expense based on the expected weighted average coupons of the loans subject to call option at the call date of 9.24% and 8.68%, for Subprime Portfolios I and II, respectively.


6.	RECENT ACTIVITIES

In January 2007, Newcastle issued 2.42 million shares of its common stock in a public offering at a price to the public of $31.30 per share for net proceeds of approximately $75.0 million. For the purpose of compensating the Manager for its successful efforts in raising capital for Newcastle, in connection with this offering, Newcastle granted options to the Manager to purchase 242,000 shares of Newcastle’s common stock at the public offering price, which were valued at approximately $0.8 million.

In January and February 2007, certain of the Manager’s employees exercised options to acquire 75,882 shares of Newcastle’s common stock for net proceeds of $1.3 million.

In January 2007, Newcastle entered into a $700 million non-recourse warehouse agreement with a major investment bank to finance a portfolio of real estate related loans and securities prior to them being financed with a CBO. The financing primarily bore interest at LIBOR + 0.50% and was terminated simultaneously with the closing of the CBO financing in May 2007.

In February 2007, Newcastle filed a new registration statement with the SEC to replace the previous shelf registration statement to issue various types of securities, such as common stock, preferred stock, depositary shares, debt securities and warrants. The new shelf registration statement covers an unspecified amount of securities that can be offered.

In February 2007, Newcastle entered into a $400 million facility, in the form of a repurchase agreement, with a major investment bank to finance our investments in real estate related loans

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)

from time to time. The repurchase agreement has a rolling maturity of one year, with a maximum maturity of February 2010. The financing bears interest at LIBOR plus an applicable spread which varies depending on the type of assets.

In March 2007, Newcastle issued 2.0 million shares ($50.0 million face amount) of its 8.375% Series D Cumulative Redeemable Preferred Stock (the ‘‘Series D Preferred’’) for net proceeds of approximately $48.4 million. The Series D Preferred is non-voting, has a $25 per share liquidation preference, no maturity date and no mandatory redemption. Newcastle has the option to redeem the Series D Preferred beginning in March 2012.

In March 2007, Newcastle acquired a portfolio of subprime loans which was subsequently securitized in July 2007. Refer to Note 5.

In April 2007, Newcastle issued 4.56 million shares of its common stock in a public offering at a price to the public of $27.75 per share for net proceeds of approximately $124.9 million. For the purpose of compensating the Manager for its successful efforts in raising capital for Newcastle, in connection with this offering, Newcastle granted options to the Manager to purchase 456,000 shares of Newcastle’s common stock at the public offering price, which were valued at approximately $1.2 million.

In April 2007, Newcastle entered into a facility, in the form of repurchase agreement, with a major investment bank to finance acquisitions of real estate related loans and securities from time to time. The facility provides for the financing of assets of up to $400.0 million and bears interest at LIBOR plus an applicable spread, which varies depending on the type of assets being financed. The facility has a rolling one year maturity.

In May 2007, Newcastle completed its tenth CBO financing to term finance an $825.0 million portfolio of real estate related loans and securities. Newcastle issued, through a consolidated subsidiary, $710.5 million of investment grade notes in the offering. At closing, the investment grade notes had an initial weighted average spread over LIBOR of 0.70% and a weighted average life of 7 years. Approximately 82%, or $585.8 million, of the investment grade notes are rated AAA through AA− and were sold to third parties. The remaining $124.7 million of investment grade notes rated A+ through BBB− have been retained by Newcastle. Newcastle has also retained the below investment grade notes and preferred shares of the offering.

In May 2007, Newcastle entered into a facility, in the form of a repurchase agreement, with a major investment bank to finance acquisitions of real estate related securities and loans from time to time. The facility provides for the financing of assets of up to $400.0 million and bears interest at LIBOR plus an applicable spread, which varies depending on the type of assets being financed. The facility has a one year maturity with an option for us to extend for an additional two years for assets being financed at the time of extension.

In June 2007, Newcastle redeemed securities issued in two prior CBOs with face amounts totaling $932.0 million. At the same time, Newcastle entered into a repurchase agreement with a major investment bank to interim finance the assets from the two redeemed CBOs. In July 2007, Newcastle completed its eleventh CBO financing to term finance a $1.4 billion portfolio of real estate securities. Newcastle issued, through a consolidated subsidiary, $1,288 million of investment grade notes in the offering. The proceeds from this offering were used to redeem a CBO in July with a face amount of $444.0 million of issued securities and to repay the repurchase agreement related to the redemption of the two prior CDOs in June 2007. At closing, the investment grade notes had an initial weighted average spread over LIBOR of 0.36% and a remaining term to expected maturity of 10 years. Approximately 97% or $1,248 million of th e investment grade

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)

notes were rated AAA through AA and were sold to third parties. The remaining $40.0 million of investment grade notes, rated A, were retained by Newcastle and financed. Newcastle also retained the remaining $112.0 million of the subordinated capital structure. The following is a summary of the one-time costs, representing early termination payments and the write-off of deferred financing fees and expenses, by quarter:


	Cash Costs			Non-Cash Costs			Total
2nd Quarter 2007		$	1,019		$	6,261		$	7,280
3rd Quarter 2007			3,730			1,981			5,711
Total		$	4,749		$	8,242		$	12,991

In connection with this transaction, Newcastle sold $95.6 million and $82.6 million face amount of assets in the second quarter and third quarter of 2007, respectively. As a result, a portion of the costs incurred was offset by the gain on sale from these assets.

In August 2007, Newcastle’s board of directors approved a potential repurchase of up to $100 million of Newcastle’s common stock. As of November 7, 2007, no shares have been repurchased.

In August and September 2007, Newcastle refinanced approximately $1.2 billion of debt subject to the asset backed commercial paper (ABCP) program with repurchase agreements, having one to six month maturities with major investment banks. As a result, Newcastle recorded a non-cash expense of $3.5 million related to the write-off of deferred financing costs and other hedge related items in the third quarter of 2007. In October 2007, Newcastle refinanced the remaining debt subject to the ABCP program of $99.0 million with repurchase agreements.


7.	DERIVATIVE INSTRUMENTS

The following table summarizes the notional amounts and fair (carrying) values of Newcastle’s derivative financial instruments, excluding the total rate of return swap arrangements described in Note 4, as of September 30, 2007.


	Notional Amount			Fair Value				Longest Maturity
Interest rate swaps, treated as hedges (A)		$	3,874,437		$	(19,145	)	September 2017
Interest rate caps, treated as hedges (A)			229,926			4		March 2009
Non-hedge derivative obligations (A) (B)			147,500			(348	)	July 2038

(A)

Included in Derivative Assets or Derivative Liabilities, as applicable. Derivative Liabilities also include accrued interest.

(B)

Represents two essentially offsetting interest rate caps and two essentially offsetting interest rate swaps, each with notional amounts of $32.5 million, an interest rate cap with a notional amount of $17.5 million.

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 2007
(dollars in tables in thousands, except share data)


8.	EARNINGS PER SHARE

Newcastle is required to present both basic and diluted earnings per share (‘‘EPS’’). Basic EPS is calculated by dividing net income available for common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted EPS is calculated by dividing net income available for common stockholders by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of common stock equivalents during each period. Newcastle’s common stock equivalents are its outstanding stock options. Net income available for common stockholders is equal to net income less preferred dividends.

The following is a reconciliation of the weighted average number of shares of common stock outstanding on a diluted basis.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Weighted average number of shares of common stock outstanding, basic		52,779,179		43,999,817		50,894,424		43,978,625
Dilutive effect of stock options, based on the treasury stock method		—		137,139		150,994		112,378
Weighted average number of shares of common stock outstanding, diluted		52,779,179		44,136,956		51,045,418		44,091,003

As of September 30, 2007, Newcastle’s outstanding options were summarized as follows:


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

The following should be read in conjunction with the unaudited consolidated financial statements and notes included herein.

GENERAL

Newcastle Investment Corp. actively manages real estate related investments and related financing vehicles. We invest in, and actively manage, a portfolio of real estate securities, loans and other real estate related assets. In addition, we consider other opportunistic investments which capitalize on our manager’s expertise and which we believe present attractive risk/return profiles and are consistent with our investment guidelines. We seek to deliver stable dividends and attractive risk-adjusted returns to our stockholders through prudent asset selection, active management and the use of match funded financing structures, when appropriate, which reduce our interest rate and financing risks. Our objective is to maximize the difference between the yield on our investments and the cost of financing these investments while hedging our interest rate risk. We emphasize portfolio management, asset quality, diversification, match funded financing and credit ris k management.

We currently own a diversified portfolio of moderately credit sensitive real estate debt investments including securities and loans. Our portfolio of real estate securities includes commercial mortgage backed securities (CMBS), senior unsecured debt issued by property REITs, real estate related asset backed securities (ABS), and FNMA/FHLMC securities. Mortgage backed securities are interests in or obligations secured by pools of mortgage loans. We generally target investments rated A through BB, except for our FNMA/FHLMC securities which are generally considered AAA rated. We also own, directly and indirectly, interests in loans and pools of loans, including real estate related loans, commercial mortgage loans, residential mortgage loans, manufactured housing loans, and subprime mortgage loans. We also own, directly and indirectly, interests in operating real estate.

We employ leverage in order to achieve our return objectives. We do not have a predetermined target debt to equity ratio as we believe the appropriate leverage for the particular assets we are financing depends on the credit quality of those assets. As of September 30, 2007, our debt to equity ratio as computed based on our consolidated balance sheet is approximately 9.2 to 1. Our general investment guidelines adopted by our board of directors limits total leverage (as defined under the governing documents) to maximum 9.0 to 1.0 debt to equity ratio. As of September 30, 2007, our debt to equity ratio, as computed under this method, was approximately 6.4 to 1.

We strive to maintain access to a broad array of capital resources in an effort to insulate our business from potential fluctuations in the availability of capital. We utilize multiple forms of financing including collateralized bond obligations (CBOs), other securitizations, term loans, a credit facility, and trust preferred securities, as well as short term financing in the form of repurchase agreements.

We seek to match fund our investments with respect to interest rates and maturities in order to minimize the impact of interest rate fluctuations on earnings and reduce the risk of refinancing our liabilities prior to the maturity of the investments. We seek to finance a substantial portion of our real estate securities and loans through the issuance of term debt, which are obligations issued in multiple classes secured by an underlying portfolio of assets. Specifically with respect to our CBO financings, they offer us the structural flexibility to buy and sell certain investments to manage risk and, subject to certain limitations, to optimize returns.

Market Considerations

Our ability to maintain our dividends is dependent on our ability to invest our capital on a timely basis at attractive levels. The primary market factors that bear on this are credit spreads and the availability of financing on favorable terms.

Generally speaking, widening credit spreads reduce the unrealized gains on our current investments (or cause unrealized losses) and increase our financing costs, but increase the yields

available on potential new investments, while tightening credit spreads increase the unrealized gains on our current investments and reduce our financing costs, but reduce the yields available on potential new investments. By reducing unrealized gains (or causing unrealized losses), widening credit spreads would also impact our ability to realize gains on existing investments if we were to sell such assets.

In the first nine months of 2007 and continuing into the fourth quarter, credit spreads widened substantially. This widening of credit spreads caused the net unrealized gains on our securities and derivatives, recorded in accumulated other comprehensive income, and therefore our book value per share, to decrease and resulted in net unrealized losses. One of the key drivers of the widening of credit spreads has been the recent disruption in the subprime mortgage lending sector. This disruption has spread rapidly, causing adverse conditions throughout the credit markets.

Widening credit spreads, while reducing our book value per share, also result in higher yields on new investment opportunities. However, we must have additional capital available at attractive terms, either through debt financings or equity offerings, in order to take advantage of these investment opportunities. Currently, we are unable to take full advantage of the increased yields available on investments due to a lack of available capital. Non-recourse term financing not subject to margin requirements is generally not available and we must maintain our current sources of capital, such as our credit facility, in order to meet our working capital needs. Furthermore, an equity offering at our current common share price would likely not be accretive as our common dividend yield currently exceeds the yield available on many new investments.

In addition, the recent credit and liquidity crisis has adversely affected the market in which we operate in a number of other ways. For example, it has reduced the market trading activity for many real estate securities, resulting in less liquid markets for those securities. As the securities held by us and many other companies in our industry are marked to market at the end of each quarter, the decreased liquidity and concern over market conditions have resulted in what we believe are relatively conservative mark-to-market valuations of many real estate securities. These lower valuations have affected us by, among other things, decreasing our net book value and contributing to our decision to record other than temporary impairment in each of the last two quarters (discussed below under ‘‘Application of Critical Accounting Policies’’).

Furthermore, Standard & Poor’s and Moody’s have issued a series of credit rating downgrades on a large number of real estate securities, predominantly subprime securities, including a number that we own. These downgrades do not currently impact our compliance with the terms of our financings.

We do not currently know the full extent to which this market disruption will affect us or the markets in which we operate, and we are unable to predict its length or ultimate severity. If the disruption continues, we may experience further tightening of liquidity, additional impairment charges and increased margin requirements as well as additional challenges in raising capital and obtaining investment financing on attractive terms.

Based on our cash balances and committed financing, including our line of credit and warehouse facilities, we have sufficient liquidity to maintain our ongoing operations in the current market environment. We have not experienced a material decrease in our current cash flow; however, future cash flows may be materially impacted if conditions do not substantially improve. Should the current conditions worsen, or persist for an extended period of time, our available capital could be reduced upon the expiration or termination of our capital resources. See, for example, our discussion of the covenants under our credit facility in ‘‘— Liquidity and Capital Resources.’’

Certain aspects of these effects are more fully described in ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate, Credit and Spread Risk’’ as well as in ‘‘Quantitative and Qualitative Disclosures About Market Risk.’’

Organization

Our initial public offering occurred in October 2002. The following table presents information on shares of our common stock issued since our formation:


Year	Shares Issued		Range of Issue Prices (1)	Net Proceeds (millions)
Formation		16,488,517	N/A	N/A
2002		7,000,000	$13.00		$	80.0
2003		7,886,316	$20.35 – $22.85		$	163.4
2004		8,484,648	$26.30 – $31.40		$	224.3
2005		4,053,928	$29.60		$	108.2
2006		1,800,408	$29.42		$	51.2
Nine Months 2007		7,065,362	$27.75 – $31.30		$	201.3
September 30, 2007		52,779,179

As of September 30, 2007, approximately 5.1 million shares of our common stock were held by our manager, through affiliates, and its principals. In addition, our manager, through its affiliates, held options to purchase approximately 1.5 million shares of our common stock at September 30, 2007.

We are organized and conduct our operations to qualify as a REIT for U.S. federal income tax purposes. As such, we will generally not be subject to U.S. federal income tax on that portion of our income that is distributed to stockholders if we distribute at least 90% of our REIT taxable income to our stockholders by prescribed dates and comply with various other requirements.

We conduct our business by investing in three primary business segments: (i) real estate securities and real estate related loans, (ii) residential mortgage loans and (iii) operating real estate.

Revenues attributable to each segment are disclosed below (unaudited) (in thousands).


For the Nine Months Ended September 30,	Real Estate Securities and Real Estate Related Loans			Residential Mortgage Loans			Operating Real Estate			Unallocated			Total
2007		$	416,458		$	119,607		$	3,867		$	1,283		$	541,215
2006		$	317,138		$	75,878		$	3,851		$	462		$	397,329

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (‘‘GAAP’’). The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates. Management believes that the estimates and assumptions utilized in the preparation of the consolidated financial statements are prudent and reasonable. Actual results have been in line with management’s estimates and judgments used in applying each of the accounting policies described below. The following is a summary of our accounting policies that are most effected b y judgments, estimates and assumptions.

Variable Interest Entities

In December 2003, Financial Accounting Standards Board Interpretation (‘‘FIN’’) No. 46R ‘‘Consolidation of Variable Interest Entities’’ was issued as a modification of FIN 46. FIN 46R clarified the methodology for determining whether an entity is a variable interest entity (‘‘VIE’’) and the methodology for assessing who is the primary beneficiary of a VIE. VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, and only by its primary beneficiary, which is defined as the party who will absorb a majority of the VIE’s expected losses or receive a majority of the expected residual returns as a result of h olding variable interests.

Prior to the adoption of FIN 46R, we consolidated our existing CBO transactions (the ‘‘CBO Entities’’) because we own the entire equity interest in each of them, representing a substantial portion of their capitalization, and we control the management and resolution of their assets. We have determined that certain of the CBO Entities are VIEs and that we are the primary beneficiary of each of these VIEs and therefore continue to consolidate them. We have also determined that the application of FIN 46R did not result in a change in our accounting for any other entities which were previously consolidated. However, it did cause us to consolidate one entity which was previously not consolidated, ICH CMO, as described below under ‘‘Liquidity and Capital Resources.’’ Furthermore, as a result of FIN 46R, we are precluded from consolidating our wholly owned subsidiary which has issued trust preferred securities as describe d in ‘‘Liquidity and Capital Resources’’ below. We will continue to analyze future CBO entities, as well as other investments, pursuant to the requirements of FIN 46R. These analyses require considerable judgment in determining the primary beneficiary of a VIE since they involve subjective probability weighting of subjectively determined possible cash flow scenarios. The result could be the consolidation of an entity acquired or formed in the future that would otherwise not have been consolidated or the non-consolidation of such an entity that would otherwise have been consolidated.

Valuation and Impairment of Securities

We have classified our real estate securities as available for sale. As such, they are carried at fair value with net unrealized gains or losses reported as a component of accumulated other comprehensive income. Fair value is based primarily upon broker quotations, as well as counterparty quotations, which provide valuation estimates based upon reasonable market order indications or a good faith estimate thereof. These quotations are subject to significant variability based on market conditions, such as interest rates and credit spreads. Certain securities are not traded in an active market and therefore have little or no price transparency, predominantly the 2006 vintage subprime securities and the residual and retained bonds on our two subprime securitizations. As a result, for the third quarter, we have estimated the fair value for these illiquid securities based on internal pricing models rather than broker quotations. As of September 30, 2007, app roximately $328.9 million of face amount of securities (or 6% of our total securities portfolio) was valued at $214.6 million based on our

pricing models. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in our book equity. For securities valued with pricing models, these inputs include the discount rate, assumptions relating to prepayments, default rates and loss severities, as well as other variables. We must also assess whether unrealized losses on securities, if any, reflect a decline in value which is other than temporary and, accordingly, write the impaired security down to its value through earnings. For example, a decline in value is deemed to be other than temporary if it is probable that we will be unable to collect all amounts due according to the contractual terms of a security which was not impaired at acquisition, or if we do not have the ability and intent to hold a security in an unrealized loss position until its anticipated recovery (if any). Temporary declines in value generally result from changes in market fact ors, such as market interest rates and credit spreads, or from certain macroeconomic events, including market disruptions and supply changes, which do not directly impact our ability to collect amounts contractually due. We continually evaluate the credit status of each of our securities and the collateral supporting our securities. This evaluation includes a review of the credit of the issuer of the security (if applicable), the credit rating of the security, the key terms of the security (including credit support), debt service coverage and loan to value ratios, the performance of the pool of underlying loans and the estimated value of the collateral supporting such loans, including the effect of local, industry and broader economic trends and factors. These factors include loan default expectations and loss severities, which are analyzed in connection with a particular security’s credit support, as well as prepayment rates. The result of this evaluation is considered in relation to the amount of the unrealized loss and the period elapsed since it was incurred. Significant judgment is required in this analysis.

Revenue Recognition on Securities

Income on these securities is recognized using a level yield methodology based upon a number of cash flow assumptions that are subject to uncertainties and contingencies. Such assumptions include the rate and timing of principal and interest receipts (which may be subject to prepayments and defaults). These assumptions are updated on at least a quarterly basis to reflect changes related to a particular security, actual historical data, and market changes. These uncertainties and contingencies are difficult to predict and are subject to future events, and economic and market conditions, which may alter the assumptions. For securities acquired at a discount for credit losses, the net income recognized is based on a ‘‘loss adjusted yield’’ whereby a gross interest yield is recorded to Interest Income, offset by a provision for probable, incurred credit losses which is accrued on a periodic basis to Provision for Credit Losses. The provision is determined based on an evaluation of the credit status of securities, as described in connection with the analysis of impairment above.

Valuation of Derivatives

Similarly, our derivative instruments are carried at fair value pursuant to Statement of Financial Accounting Standards (‘‘SFAS’’) No. 133 ‘‘Accounting for Derivative Instruments and Hedging Activities,’’ as amended. Fair value is based on counterparty quotations. To the extent they qualify as cash flow hedges under SFAS No. 133, net unrealized gains or losses are reported as a component of accumulated other comprehensive income; otherwise, they are reported currently in income. To the extent they qualify as fair value hedges, net unrealized gains or losses on both the derivative and the related portion of the hedged item are reported currently in income. Fair values of such derivatives are subject to significant variability based on many of the same factors as the securities discussed above. The results of such variability could be a significant increase or decrease in our book equity and/or earnings.

Impairment of Loans

We purchase, directly and indirectly, real estate related, commercial mortgage and residential mortgage loans, including manufactured housing loans and subprime mortgage loans, to be held for investment. We must periodically evaluate each of these loans or loan pools for possible impairment. Impairment is indicated when it is deemed probable that we will be unable to collect all amounts due

according to the contractual terms of the loan, or, for loans acquired at a discount for credit losses, when it is deemed probable that we will be unable to collect as anticipated. Upon determination of impairment, we would establish a specific valuation allowance with a corresponding charge to earnings. We continually evaluate our loans receivable for impairment. Our residential mortgage loans, including manufactured housing loans, are aggregated into pools for evaluation based on like characteristics, such as loan type and acquisition date. Individual loans are evaluated based on an analysis of the borrower’s performance, the credit rating of the borrower, debt service coverage and loan to value ratios, the estimated value of the underlying collateral, the key terms of the loan, and the effect of local, industry and broader economic trends and factors. Pools of loans are also evaluated based on similar criteria, including trends in defaults and loss severities for the type and seasoning of loans bein g evaluated. This information is used to estimate specific impairment charges on individual loans as well as provisions for estimated unidentified incurred losses on pools of loans. Significant judgment is required both in determining impairment and in estimating the resulting loss allowance.

Revenue Recognition on Loans

Income on these loans is recognized similarly to that on our securities and is subject to similar uncertainties and contingencies, which are also analyzed on at least a quarterly basis. For loan pools acquired at a discount for credit losses, the net income recognized is based on a ‘‘loss adjusted yield’’ whereby a gross interest yield is recorded to Interest Income, offset by a provision for probable, incurred credit losses which is accrued on a periodic basis to Provision for Credit Losses. The provision is determined based on an evaluation of the loans as described under ‘‘Impairment of Loans’’ above. A rollforward of the provision is included in Note 4 to our consolidated financial statements.

Impairment of Operating Real Estate

We own operating real estate held for investment. We review our operating real estate for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon determination of impairment, we would record a write-down of the asset, which would be charged to earnings. Significant judgment is required both in determining impairment and in estimating the resulting write-down. To date, we have determined that no write-downs have been necessary on the operating real estate in our portfolio. In addition, when operating real estate is classified as held for sale, it must be recorded at the lower of its carrying amount or fair value less costs of sale. Significant judgment is required in determining the fair value of such properties.

Accounting Treatment for Certain Investments Financed with Repurchase Agreements

We owned $212.2 million of assets purchased from particular counterparties which are financed via $163.2 million of repurchase agreements with the same counterparties at September 30, 2007. Currently, we record such assets and the related financings gross on our balance sheet, and the corresponding interest income and interest expense gross on our income statement. In addition, if the asset is a security, any change in fair value is reported through other comprehensive income (since it is considered ‘‘available for sale’’).

However, in a transaction where assets are acquired from and financed under a repurchase agreement with the same counterparty, the acquisition may not qualify as a sale from the seller’s perspective; in such cases, the seller may be required to continue to consolidate the assets sold to us, based on their ‘‘continuing involvement’’ with such investments. The result is that we may be precluded from presenting the assets gross on our balance sheet as we currently do, and may instead be required to treat our net investment in such assets as a derivative.

If it is determined that these transactions should be treated as investments in derivatives, the interest rate swaps entered into by us to hedge our interest rate exposure with respect to these transactions would no longer qualify for hedge accounting, but would, as the underlying asset transactions, also be marked to market through the income statement.

This potential change in accounting treatment does not affect the economics of the transactions but does affect how the transactions are reported in our financial statements. Our cash flows, our liquidity and our ability to pay a dividend would be unchanged, and we do not believe our taxable income would be affected. Our net income and net equity would not be materially affected. In addition, this would not affect Newcastle’s status as a REIT or cause it to fail to qualify for its Investment Company Act exemption. This issue has been addressed in the proposed accounting standard FSP FAS 140-d, ‘‘Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.’’ If this standard is ratified as proposed, we may have to adopt a net treatment for these transactions. If we were to change our current accounting treatment for these transactions, our total assets and total liabilities would each be reduced by approximatel y $164.3 million at September 30, 2007.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), ‘‘Share-Based Payment,’’ which requires all equity-based payments to employees to be recognized using a fair value based method. Our policy is to expense all equity-based compensation awards granted or modified under the fair value recognition provisions of SFAS 123. On January 1, 2006, we adopted SFAS No. 123(R) using the modified prospective method. Under this method prior period amounts are not restated. The adoption of SFAS 123(R) did not have a material impact on our historical financial statements.

In June 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109’’ (‘‘FIN 48’’). FIN 48 requires companies to recognize the tax benefits of uncertain tax positions only where the position is ‘‘more likely than not’’ to be sustained assuming examination by tax authorities. The tax benefit recognized is the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on our financial condition, liquidity or results of operations.

In February 2006, the FASB issued Statement of Financial Accounting Standards (‘‘SFAS’’) No. 155, ‘‘Accounting for Certain Hybrid Financial Instruments,’’ which amends SFAS 133, ‘‘Accounting for Derivative Instruments and Hedging Activities,’’ and SFAS 140, ‘‘Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.’’ SFAS 155 provides, among other things, that (i) for embedded derivatives which would otherwise be required to be bifurcated from their host contracts and accounted for at fair value in accordance with SFAS 133 an entity may make an irrevocable election, on an instrument-by-instrument basis, to measure the hybrid financial instrument at fair value in its entirety, with changes in fair value recognized in earnings and (ii) concentrations of credit risk in the form of subordination are not considered embedded d erivatives. SFAS 155 is effective for all financial instruments acquired, issued or subject to remeasurement after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Upon adoption, differences between the total carrying amount of the individual components of an existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative effect adjustment to beginning retained earnings. Prior periods are not restated. The adoption of SFAS 155 did not have a material impact on our financial statements.

In September 2006, the FASB cleared Statement of Position No. 07-1, ‘‘Clarification of the Scope of the Audit and Accounting Guide — Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies’’ (‘‘SOP 07-1’’) for issuance. SOP 07-1 addresses whether the accounting principles of the Audit and Accounting Guide for Investment Companies may be applied to an entity by clarifying the definition of an investment company and whether those accounting principles may be retained by a parent company in consolidation or by an investor in the application of the equity method of accounting. SOP 07-1 eliminates the previously existing exemption for REITs from being considered investment companies. We are currently evaluating the potential effect on our financial condition, liquidity and results of operations upon adoption of SOP 07-1. If we, or any of our subsidiaries, are considered an investment

company under this new guidance, it would result in material changes to our financial statements. The primary change would be the recording of all of our (or our subsidiaries’) investments at fair value, with changes in fair value being recorded through the income statement. In October 2007, the FASB voted to indefinitely postpone the adoption of SOP 07-1.

In September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurements.’’ SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies to reporting periods beginning after November 15, 2007. We are currently evaluating the potential effect on our financial condition, liquidity and results of operations upon adoption of SFAS 157.

In February 2007, the FASB issued SFAS No. 159, ‘‘The Fair Value Option for Financial Assets and Financial Liabilities.’’ SFAS 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 applies to reporting periods beginning after November 15, 2007. We are currently evaluating the potential effect on our financial condition, liquidity and results of operations upon adoption of SFAS 159. The impact could be material if we elected to measure material investments or debt at fair value (with changes in value recorded to income).

RESULTS OF OPERATIONS

The following table summarizes the changes in our results of operations from the three and nine months ended September 30, 2007 to the three and nine months ended September 30, 2006 (dollars in thousands):


	Period to Period Change								Period to Period Percent Change
	Nine Months Ended September 30, 2007/2006				Three Months Ended September 30, 2007/2006				Nine Months Ended September 30, 2007/2006			Three Months Ended September 30, 2007/2006			Explanation
Interest income		$	145,414			$	29,440			38.4	%		21.0	%		(1	)
Rental and escalation income			282				489			7.8	%		58.6	%		(2	)
Gain on sale of investments			3,292				2,183			30.7	%		82.6	%		(3	)
Other income			(5,102	)			(7,341	)		(112.3	%)		(2549.0	%)		(4	)
Interest expense			102,995				17,195			38.8	%		17.2	%		(1	)
Gain (loss) on extinguishment of debt			14,374				7,752			2,184.5	%		N/A			(5	)
Property operating expense			291				(22	)		10.4	%		(2.1	%)		(2	)
Loan and security servicing expense			2,811				538			56.7	%		34.6	%		(1	)
Provision for credit losses			2,077				138			35.4	%		5.1	%		(6	)
Provision for losses, loans held for sale			1,627				—			39.4	%		N/A			(7	)
Other-than-temporary impairment			73,813				67,860			N/A			N/A			(8	)
General and administrative expense			171				148			4.3	%		12.5	%		(9	)
Management fee to affiliate			2,628				1,122			25.2	%		32.3	%		(10	)
Incentive compensation to affiliate			(2,571	)			(3,094	)		(29.3	%)		(100.0	%)		(10	)
Depreciation and amortization			263				69			34.3	%		23.8	%		(2	)
Equity in earnings of unconsolidated subsidiaries			(1,762	)			(1,018	)		(45.0	%)		(67.6	%)		(11	)
Income (loss) from continuing operations		$	(56,355	)		$	(67,953	)		(60.1	%)		(212.1	%)

(1)	Changes in interest income and expense are primarily related to our acquisition and disposition during these periods of interest bearing assets and related financings, as follows:


	Nine Months Ended September 30, 2007/2006								Three Months Ended September 30, 2007/2006
	Period to Period Increase (Decrease)
	Interest Income				Interest Expense				Interest Income				Interest Expense
Real estate security and loan portfolios (A)		$	69,171			$	50,795			$	15,421			$	10,279
FNMA/FHLMC securities			19,332				18,058				4,716				4,338
Other real estate related loans (B)			21,550				6,996				4,056				959
Subprime mortgage loan portfolio			29,741				19,557				6,284				4,029
Credit facility and junior subordinated notes			—				525				—				(1,691	)
Residential mortgage loan portfolio (C)			13,059				8,200				91				(553	)
Other real estate related loans (D)			(7,439	)			(1,136	)			(1,128	)			(166	)
		$	145,414			$	102,995			$	29,440			$	17,195

(A)

Represents our CBO financings and the acquisition of related collateral in these periods.

(B)

Primarily due to the acquisition of related assets in these periods.

(C)

Primarily due to the acquisition of a manufactured housing loan pool in the third quarter of 2006.

(D)

These loans received paydowns during the period which served to offset the amounts listed above.

Changes in loan and security servicing expense are also primarily due to these acquisitions and paydowns.

(2)	These changes are primarily the results of the acceleration of lease termination income in the first quarter of 2006, offset by the effect of foreign currency fluctuations and the foreclosure of $12.2 million of loans in March 2006.

(3)

This change is primarily a result of the volume of sales of real estate securities. Sales of real estate securities are based on a number of factors including credit, asset type and industry and can be expected to increase or decrease from time to time. Periodic fluctuations in the volume of sales of securities is dependent upon, among other things, management’s assessment of credit risk, asset concentration, portfolio balance and other factors.

(4)

The change to other income is primarily related to the changes in mark to market on total rate of return swaps and the ineffectiveness of derivatives designated as hedges. We recorded gains of $5.8 million and $5.5 million in the second quarter of 2007 and the first quarter of 2006, respectively, on derivatives used to hedge the interim financing of subprime mortgage loans held for sale, which were offset by the losses described in (7) below.

(5)

The change is due to the redemption of securities issued in three prior CBOs and the repayment of the debt related to the ABCP facility, which resulted in $4.7 million of cash costs, representing early termination payments, and $10.3 million of non-cash charges related to the write-off of deferred financing fees and expenses.

(6)	This change is primarily due to the acquisition of a manufactured housing loan pool at a discount for credit quality in the third quarter of 2006.

(7)	This change results from the unrealized losses on the two pools of subprime mortgage loans which were considered held for sale as of June 30, 2007 and March 31, 2006 respectively. These losses were related to changes in market interest rates and were offset by the gains described in (4) above.

(8)	This change is due to other-than-temporary impairment of $67.9 million and $73.8 million recorded in the three and nine months ended September 30, 2007 primarily related to subprime securities.

(9)	The change in general and administrative expense is primarily a result of increased market data services.

(10)	The increase in management fees is a result of our increased size resulting from our equity issuances. The change in incentive compensation is primarily a result of decreased funds from operations, as described below under ‘‘Funds from Operations’’.

(11)	This change is primarily the result of a decrease in earnings from an LLC which owns franchise loans. During the periods presented, our investment in this LLC decreased due to return of capital distributions which resulted in a corresponding reduction in earnings.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, and other general business needs. Additionally, to maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT taxable income. Our primary sources of funds for liquidity consist of net cash provided by operating activities, borrowings under loans, and the issuance of debt and

equity securities. Additional sources of liquidity include investments that are readily saleable prior to their maturity. Our debt obligations are generally secured directly by our investment assets.

We expect that our cash on hand and our cash flow provided by operations, as well as proceeds from the repayment or sale of investments and borrowings, will satisfy our liquidity needs with respect to our current investment portfolio over the next twelve months. However, we may seek additional capital in order to grow our investment portfolio. We have an effective shelf registration statement with the SEC which allows us to issue various types of securities, such as common stock, preferred stock, depositary shares, debt securities and warrants from time to time. The shelf registration statement covers an unspecified amount of securities that can be offered.

We expect to meet our long-term liquidity requirements, specifically the repayment of our debt obligations, through additional borrowings and the liquidation or refinancing of our assets at maturity. In this regard, we have unencumbered assets of approximately $300.0 million at September 30, 2007. We believe that the value of these assets is, and will continue to be, sufficient to repay our debt at maturity under either scenario. Our ability to meet our long-term liquidity requirements relating to capital required for the growth of our investment portfolio is subject to obtaining additional equity and debt financing. Decisions by investors and lenders to enter into such transactions with us will depend upon a number of factors, such as our historical and projected financial performance, compliance with the terms of our current credit arrangements, industry and market trends, the availability of capital and our investors’ and lenders’ p olicies and rates applicable thereto, and the relative attractiveness of alternative investment or lending opportunities. We strive to maintain access to a broad array of capital resources in an effort to insulate our business from potential fluctuations in the availability of capital.

Our ability to execute our business strategy, particularly the growth of our investment portfolio, depends to a significant degree on our ability to obtain additional capital. Our core business strategy is dependent upon our ability to finance our real estate securities, loans and other real estate related assets with match funded debt at rates that provide a positive net spread. Currently, spreads for such liabilities have widened and demand for such liabilities has become extremely limited, therefore restricting our ability to execute future financings.

At September 30, 2007 we had an unrestricted cash balance of $40.8 million and an undrawn balance of $200.0 million on our credit facility. We also had $883.3 million available under various term financing facilities for certain investment categories. Our cash flow provided by operations differs from our net income due to these primary factors: (i) accretion of discount or premium on our real estate securities and loans (including the accrual of interest and fees payable at maturity), discount on our debt obligations, deferred financing costs and interest rate cap premiums, and deferred hedge gains and losses, (ii) gains and losses from sales of assets financed with CBOs, (iii) depreciation and straight — lined rental income of our operating real estate, (iv) the provision for credit losses recorded in connection with our loan assets, as well as other-than-temporary impairment recorded on our securities, (v) unrealized gains or los ses on our non-hedge derivatives, particularly our total return swaps, and (vi) the non-cash charges associated with our early extinguishment of debt. Proceeds from the sale of assets which serve as collateral for our CBO financings, including gains thereon, are required to be retained in the CBO structure until the related bonds are retired and are therefore not available to fund current cash needs outside of these structures. As of September 30, 2007, we had $51.0 million of restricted cash held in CBO financing structures pending its investment in real estate securities and loans.

Our match funded investments are financed long-term and their credit status is continuously monitored; therefore, these investments are expected to generate a generally stable current return, subject to interest rate fluctuations. See ‘‘Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Exposure’’ below. Our remaining investments, generally financed with short term repurchase agreements, are also subject to refinancing risk upon the maturity of the related debt. See ‘‘Debt Obligations’’ below.

With respect to our operating real estate, we expect to incur expenditures of approximately $2.2 million relating to tenant improvements, in connection with the inception of leases, and capital expenditures during the twelve months ending September 30, 2008.

With respect to two of our real estate related loans, we were committed to fund up to an additional $107.0 million at September 30, 2007, subject to certain conditions to be met by the borrowers.

As described below, under ‘‘Interest Rate, Credit and Spread Risk,’’ we are subject to margin calls in connection with our assets financed with repurchase agreements or total rate of return swaps.

See ‘‘— Market Considerations’’ above for a further discussion of recent trends and events affecting our liquidity.

Debt Obligations

The following tables present certain information regarding our debt obligations and related hedges as of September 30, 2007 (unaudited) (dollars in thousands):


Debt Obligation/Collateral	Month Issued	Current Face Amount			Carrying Value			Unhedged Weighted Average Funding Cost	Final Stated Maturity	Weighted Average Funding Cost (1)			Weighted Average Maturity (Years)		Face Amount of Floating Rate Debt			Collateral Carrying Value			Collateral Weighted Average Maturity (Years)		Face Amount of Floating Rate Collateral			Aggregate Notional Amount of Current Hedges
CBO Bonds Payable
Real estate securities	Jul 1999		$	343,860		$	341,639	6.18%(2)	Jul 2038		6.34	%		1.53		$	248,860		$	478,220		3.41		$	—		$	229,926
Real estate securities and loans	Mar 2004			414,000			411,397	5.67%(2)	Mar 2039		5.31	%		4.86			382,750			420,900		4.02			197,126			177,300
Real estate securities and loans	Sep 2004			454,500			451,521	5.65%(2)	Sep 2039		5.42	%		5.44			442,500			460,856		4.29			223,528			209,023
Real estate securities and loans (11)	Apr 2005			447,000			443,258	5.45%(2)	Apr 2040		5.44	%		6.41			439,600			435,907		5.18			194,954			242,716
Real estate securities and loans	Dec 2005			442,800			439,178	5.50%(2)	Dec 2050		5.52	%		7.73			436,800			449,832		6.58			121,039			341,506
Real estate securities and loans (11)	Nov 2006			807,500			807,041	5.60%(2)	Nov 2052		5.74	%		6.31			799,900			796,172		4.15			589,991			161,655
Real estate securities and loans	May 2007			585,750			587,370	5.51%(2)	May 2052		5.68	%		6.02			585,750			816,240		3.09			615,796			91,979
Real estate securities and loans	Jul 2007			1,247,750			1,247,401	5.44%(2)	Jul 2052		5.80	%		7.38			1,247,750			1,295,496		4.82			296,421			966,307
				4,743,160			4,728,805				5.67	%		6.14			4,583,910			5,153,623		4.42			2,238,855			2,420,412
Other Bonds Payable
ICH loans	Aug 1998			89,207			89,207	6.81%(2)	Aug 2030		6.81	%		0.52			1,404			108,029		0.50			—			—
Manufactured housing loans	Jan 2006			190,425			189,548	LIBOR+1.25%	Jan 2009		6.14	%		1.16			190,425			211,040		6.57			3,763			180,370
Manufactured housing loans	Aug 2006			312,192			310,216	LIBOR+1.25%	Aug 2011		7.02	%		2.84			312,192			340,626		5.75			59,608			306,856
				591,824			588,971				6.70	%		1.95			504,021			659,695		5.18			63,371			487,226
Notes Payable
Residential mortgage loans (3)	Nov 2004			85,233			85,233	LIBOR+0.16%	Nov 2007		5.46	%		0.16			85,233			99,166		2.78			96,662			—
				85,233			85,233				5.46	%		0.16			85,233			99,166		2.78			96,662			—
Repurchase Agreements (3) (4)
FNMA/FHLMC securities	Rolling			1,139,163			1,139,163	LIBOR-0.03%	Various (6)		4.91	%		0.29			1,139,163			1,172,654		4.40			—			885,905
Other real estate securities (5)	Rolling			126,670			126,670	LIBOR+0.72%	Oct 2007		5.85	%		0.08			126,670			39,967		6.06			68,807			—
Real estate related loans	Rolling			307,766			307,766	LIBOR+0.70%	Various (7)		5.86	%		0.80			307,766			391,757		1.33			391,994			—
Residential mortgage loans	Rolling			10,243			10,243	LIBOR+0.75%	Nov 2007		5.87	%		0.08			10,243			11,791		2.80			11,525			—
				1,583,842			1,583,842				5.18	%		0.37			1,583,842			1,616,169		3.74			472,326			885,905
Repo subject to ABCP
FNMA/FHLMC securities	Jul 2007			98,655			98,655	LIBOR+0.16%	Oct 2007		5.08	%		0.08			98,655			104,126		4.46			—			80,894
				98,655			98,655				5.08	%		0.08			98,655			104,126		4.46			—			80,894
Corporate
Credit facility (8)	May 2006			—			—	LIBOR+1.60%	Jun 2009		6.73	%		1.69			—			—		—			—			—
Junior subordinated notes payable	Mar 2006			100,100			100,100	7.57%(10)	Apr 2036		7.71	%		28.50			—			—		—			—			—
				100,100			100,100				7.71	%		28.50			—			—		—			—			—
Subtotal debt obligations				7,202,814			7,185,606				5.67	%		4.68		$	6,855,661		$	7,632,779		4.32		$	2,871,214		$	3,874,437
Financing on subprime mortgage
loans subject to call option (9)				406,217			392,992
Total debt obligations			$	7,609,031		$	7,578,598

(1)	Includes the effect of applicable hedges.

(2)	Weighted average, including floating and fixed rate classes and excluding the amortization of the financing costs.

(3)	Subject to potential mandatory prepayments based on collateral value.

(4)	The counterparties on our repurchase agreements include: Bear Stearns ($573.9 million), Lehman Brothers ($399.7 million), JP Morgan ($286.4 million), Deutsche Bank ($203.3 million) Credit Suisse ($73.4 million), and other ($47.1 million).

(5)	Debt carrying value exceeds collateral carrying value due to $116.5 million of repurchase agreements secured by investments in Newcastle’s CBO bonds, which are eliminated in consolidation.

(6)	The longest maturity is March 2008.

(7)	The longest maturity is September 2008.

(8)	A maximum of $200.0 million can be drawn.

(9)	Issued in April 2006 and July 2007. See ‘‘Liquidity and Capital Resources’’ below regarding the securitizations of Subprime Portfolios I and II.

(10)	LIBOR + 2.25% after April 2016

(11)	Debt carrying value exceeds collateral carrying value due to the fact that security valuations have been reduced while the related debt is not marked to market.

Our debt obligations existing at September 30, 2007 (gross of $30.4 million of discounts) had contractual maturities as follows (unaudited) (in thousands):


Period from October 1, 2007 through December 31, 2007	$	831,589
2008		936,141
2009		190,425
2010		—
2011		312,192
2012		—
Thereafter		5,338,684
Total	$	7,609,031

Certain of the debt obligations included above are obligations of our consolidated subsidiaries which own the related collateral. In some cases, including the CBO and Other Bonds Payable, such collateral is not available to other creditors of ours.

Our debt obligations contain various customary loan covenants. Such covenants do not, in management’s opinion, materially restrict our investment strategy or ability to raise capital. We are in compliance with all of our loan covenants as of September 30, 2007.

Our credit facility contains a covenant requiring that we earn positive net income during each period of two consecutive fiscal quarters. Currently, the facility is undrawn and we are in compliance with this covenant. Because we had a net loss for the third quarter, if our net income for the fourth quarter does not sufficiently offset the third quarter net loss, we will experience an event of default under our credit facility. If this occurs, we will not be permitted to borrow under this facility, and the lender will have the right to terminate its commitment and to require that any amounts outstanding be paid immediately. In addition, failure to cure an event of default would result in a default under certain of our other non-CBO financing agreements. However, the Company has the ability to cure an event of default by terminating the facility at any time. Failure to cure an event of default would materially negatively impact our liquidity if we are not able to obtain alternate sources of financing.

One class of CBO bonds, with an aggregate $323.0 million face amount, was issued subject to remarketing procedures and related agreements whereby such bonds are remarketed and sold on a periodic basis. If the bonds are not successfully remarketed and sold, the only effect on Newcastle is that the interest rate on the bonds may increase to a maximum of LIBOR + 0.30%. As of September 30, 2007, the interest rate on these bonds is LIBOR + 0.22%.

In October 2003, pursuant to FIN No. 46R, we consolidated an entity which holds a portfolio of commercial mortgage loans which has been securitized. This investment, which we refer to as ICH, was previously treated as a non-consolidated residual interest in such securitization. The primary effect of the consolidation is the requirement that we reflect the gross loan assets and gross bonds payable of this entity in our financial statements.

In March 2006, a consolidated subsidiary of ours acquired a portfolio of approximately 11,300 subprime mortgage loans (the ‘‘Subprime Portfolio I’’) for $1.50 billion. In April 2006, Newcastle Mortgage Securities Trust 2006-1 (the ‘‘Securitization Trust 2006’’) closed on a securitization of the Subprime Portfolio I. We do not consolidate the Securitization Trust 2006. We sold the Subprime Portfolio I to the Securitization Trust 2006. The Securitization Trust 2006 issued $1.45 billion of notes. The notes have a stated maturity of March 25, 2036. We, as holder of the equity of the Securitization Trust 2006, have the option to redeem the notes once the aggregate principal balance of the Subprime Portfolio I is equal to or less than 20% of such balance at the date of the transfer. The transaction between us and the Securitization Trust 2006 qualified as a sale for accounting purposes. However, 20% of the loans which are subject to call option by us were not treated as being sold. Following the securitization, we held the following interests in the Subprime Portfolio I: (i) the equity of the Securitization Trust 2006, (ii) the retained notes, and (iii) subprime mortgage loans subject to call option and related financing in the amount of 100% of such loans.

In March 2006, we completed the placement of $100.0 million of trust preferred securities through our wholly owned subsidiary, Newcastle Trust I (the ‘‘Preferred Trust’’). We own all of the common stock of the Preferred Trust. The Preferred Trust used the proceeds to purchase $100.1 million of our junior subordinated notes. These notes represent all of the Preferred Trust’s assets. The terms of the junior subordinated notes are substantially the same as the terms of the trust preferred securities. The trust preferred securities may be redeemed at par beginning in April 2011. We do not consolidate the Preferred Trust; as a result, we have reflected the obligation to the Preferred Trust under the caption Junior Subordinated Notes Payable.

In February 2007, we entered into a $400 million facility, in the form of a repurchase agreement, with a major investment bank to finance our investments in real estate related loans from time to time. The repurchase agreement has a rolling maturity of one year, with a maximum maturity of February 2010. The financing bears interest at LIBOR plus an applicable spread, which varies depending on the type of assets. As of September 30, 2007, $73.4 million has been drawn and $326.6 million is available under the facility.

In March 2007, we entered into an agreement to acquire a portfolio of subprime mortgage loans. This acquisition was originally funded with a repurchase agreement. We entered into an interest rate swap in order to hedge our exposure to the risk of changes in market interest rates with respect to the portfolio of loans. In the second quarter of 2007, we recorded a write down of $5.8 million related to these loans due to changes in market interest rates. No write down for credit was recorded related to these loans. We also recorded a gain of $5.8 million related to the termination of the swap in the second quarter of 2007.

In July 2007, Newcastle Mortgage Securities Trust 2007-1 (the ‘‘Securitization Trust 2007’’), closed on a securitization of the Subprime Portfolio II. We do not consolidate the Securitization Trust 2007. We sold the Subprime Portfolio II to the Securitization Trust 2007 and terminated the related interest rate swap. The Securitization Trust 2007 issued $1.02 billion face amount of notes and entered into an interest rate swap agreement to hedge its exposure to the risk of changes in market interest rates. The proceeds from the securitization were used to repay the repurchase agreement described above. The notes have a stated maturity of April 25, 2037. We, as holder of the equity of the Securitization Trust 2007, have the option to redeem the notes once the aggregate principal balance of the Subprime Portfolio II is equal to or less than 10% of such balance at the date of the transfer.

The transaction between us and the Securitization Trust 2007 qualified as a sale for accounting purposes, resulting in a nominal amount being recorded to earnings in July 2007. However, 10% of the loans which are subject to call option by us were not treated as being sold and are classified as ‘‘held for investment’’ subsequent to the completion of the securitization. Following the securitization, we held the following interests in the Subprime Portfolio II: (i) the equity of the Securitization Trust 2007, (ii) the retained notes, and (iii) subprime mortgage loans subject to call option and related financing in the amount of 100% of such loans.

We have no obligation to repurchase any loans from either of our subprime securitizations. Therefore, it is expected that our exposure to loss is limited to the carrying amount of our retained interests in the securitization entities, as described above. A subsidiary of ours gave limited representations and warranties with respect to the second securitization; however, it has no assets and does not have recourse to the general credit of Newcastle.

In April 2007, we entered into a facility, in the form of a repurchase agreement, with a major investment bank to finance acquisitions of real estate related loans and securities from time to time. The facility provides for the financing of assets of up of to $400.0 million and bears interest at LIBOR plus an applicable spread, which varies depending on the type of assets being financed. The facility has a rolling one year maturity. As of September 30, 2007, $203.3 million has been drawn and $196.7 million is available under the facility.

In May 2007, we completed our tenth CBO financing to term finance an $825.0 million portfolio of real estate related loans and securities. We issued, through a consolidated subsidiary, $710.5 million of investment grade notes in the offering. At closing, the investment grade notes had an initial

weighted average spread over LIBOR of 0.70% and a weighted average life of 7 years. Approximately 82%, or $585.8 million, of the investment grade notes are rated AAA through AA− and were sold to third parties. The remaining $124.7 million of investment grade notes, rated A+ through BBB−, have been retained and financed. We also retained the below investment grade notes and preferred shares of the offering.

In May 2007, we entered into a facility, in the form of a repurchase agreement, with a major investment bank to finance acquisitions of real estate related securities and loans. The facility provides for the financing of assets of up to $400.0 million and bears interest at LIBOR plus an applicable spread, which varies depending on the type of assets being financed. The facility has a one year maturity with an option for us to extend for an additional two years for assets being financed at the time of extension. As of September 30, 2007, $40.0 million has been drawn and $360.0 million is available under the facility.

In June 2007, we redeemed securities issued in two prior CBOs with face amounts totaling $932.0 million. At the same time, we entered into a repurchase agreement with a major investment bank to interim finance the assets from the two redeemed CBOs. In July 2007, we completed our eleventh CBO financing to term finance a $1.4 billion portfolio of real estate related securities. The proceeds from the offering were used to redeem a CBO in July with a face amount of $444.0 million of issued securities and to repay the repurchase agreement related to the redemption of the two CDOs in June 2007. Through a consolidated subsidiary, we issued $1,288 million of investment grade notes in the offering. At closing, the investment grade notes had an initial weighted average spread over LIBOR of 0.36% and a remaining term to expected maturity of 10 years. Approximately 97% or $1,248 million, of the investment grade not es were rated AAA through AA and were sold to third parties. The remaining $40.0 million of investment grade notes, rated A, were retained by us and financed. Newcastle also retained the remaining $112.0 million of the subordinated capital structure. The following is a summary of the one-time cash costs, representing early termination payments and the write-off of deferred financing fees and expenses, by quarter:


	Cash Costs			Non-Cash Costs			Total
2nd Quarter 2007		$	1,019		$	6,261		$	7,280
3rd Quarter 2007			3,730			1,981			5,711
Total		$	4,749		$	8,242		$	12,991

In connection with this transaction, we sold $95.6 million and $82.6 million face amount of assets in the second quarter and third quarter of 2007, respectively. As a result, a portion of the costs incurred was offset by the gain on sale from these assets.

In August and September 2007, we refinanced approximately $1.2 billion of debt subject to the asset backed commercial paper (ABCP) facility with repurchase agreements, having one to six month maturities with major investment banks. As a result, we recorded a non-cash expense of $3.5 million related to the write-off of deferred financing costs and other hedge related items in the third quarter of 2007. In October 2007, we refinanced the remaining debt subject to ABCP facility of $99.0 million with repurchase agreements.

Other

We have entered into total rate of return swaps with major investment banks to finance certain loans whereby we receive the sum of all interest, fees and any positive change in value amounts (the total return cash flows) from a reference asset with a specified notional amount, and pay interest on such notional plus any negative change in value amounts from such asset. These agreements are recorded in Derivative Liabilities and treated as non-hedge derivatives for accounting purposes and are therefore marked to market through income. Net interest received is recorded to Interest Income and the mark to market is recorded to Other Income. If we owned the reference assets directly, they would not be marked to market. Under the agreements, we are required to post an initial margin deposit to an interest bearing account and additional margin may be payable in the event of a decline

in value of the reference asset. Any margin on deposit, less any negative change in value amounts, will be returned to us upon termination of the contract.

As of September 30, 2007, we held an aggregate of $273.5 million notional amount of total rate of return swaps on 9 reference assets, including an unfunded asset with a notional amount of $38.1 million, on which we had deposited $39.2 million of margin. These total rate of return swaps had an aggregate fair value of approximately $(4.8) million, a weighted average receive interest rate of LIBOR + 2.01%, a weighted average pay interest rate of LIBOR + 0.52%, and a weighted average maturity of 0.68 years.

Stockholders’ Equity

Common Stock

The following table presents information on shares of our common stock issued since December 31, 2006:

Period

Shares Issued

Range of
Issue Prices (1)

Net Proceeds
(millions)

Options Granted
to Manager

Nine Months Ended September 30, 2007

7,065,362

$27.75 – $31.30

201.3

698,000

(1)	Excludes prices of shares issued pursuant to the exercise of options and of shares issued to our independent directors.

At September 30, 2007, we had 52,779,179 shares of common stock outstanding.

As of September 30, 2007, our outstanding options were summarized as follows:

In August 2007, our board of directors authorized a potential repurchase of up to $100 million of our common stock. As of November 7, 2007, no shares have been repurchased.

Preferred Stock

In March 2003, we issued 2.5 million shares ($62.5 million face amount) of 9.75% Series B Cumulative Redeemable Preferred Stock (the ‘‘Series B Preferred’’). In October 2005, we issued 1.6 million shares ($40.0 million face amount) of 8.05% Series C Cumulative Redeemable Preferred Stock (the ‘‘Series C Preferred’’). In March 2007, we issued 2.0 million shares ($50.0 million face amount) of 8.375% Series D Cumulative Redeemable Preferred Stock (the ‘‘Series D Preferred). The Series B Preferred, Series C Preferred and Series D Preferred have a $25 liquidation preference, no maturity date and no mandatory redemption. We have the option to redeem the Series B Preferred beginning in March 2008, the Series C Preferred beginning in October 2010 and the Series D Preferred beginning in March 2012. If the Series C Preferred or Series D Preferred cease to be listed on the NYSE or the AMEX, or quoted on the NASDAQ, and we are not subject to the reporting requirements of the Exchange Act, we have the option to redeem the Series C or Series D Preferred, as applicable, at their face amount and, during such time any shares of the Series C Preferred or the Series D Preferred are outstanding, the dividend will increase to 9.05% or 9.375% per annum, respectively.

Other Comprehensive Income (Loss)

During the nine months ended September 30, 2007, our accumulated other comprehensive income (loss) changed due to the following factors (in thousands):


Accumulated other comprehensive income, December, 31, 2006	$	75,984
Net unrealized gain (loss) on securities		(292,713	)
Reclassification of net realized (gain) loss on securities into earnings		(20,831	)
Foreign currency translation		3,205
Net unrealized gain (loss) on derivatives designated as cash flow hedges		(39,466	)
Reclassification of net realized (gain) loss on derivatives designated as cash flow hedges into earnings		65
Accumulated other comprehensive (loss), September 30, 2007	$	(273,756	)

Our book equity changes as our real estate securities portfolio and derivatives are marked-to-market each quarter, among other factors. The primary causes of mark-to-market changes are changes in interest rates and credit spreads. During the period, sharply widening credit spreads and decreasing interest rates caused a net decrease in unrealized gains on our real estate securities and derivatives, resulting in net unrealized losses. While such an environment would likely result in a decrease in the fair value of our existing securities portfolio and, therefore, reduced our book equity and ability to realize gains on such existing securities, it did not directly affect our current cash flow or our ability to pay dividends.

See ‘‘— Market Considerations’’ above for a further discussion of recent trends and events affecting our unrealized gains and losses as well as our liquidity.

Common Dividends Paid


Declared for the Period Ended	Paid	Amount Per Share
December 31, 2006	January 2007		$	0.690
March 31, 2007	April 2007		$	0.690
June 30, 2007	July 2007		$	0.720
September 30, 2007	October 2007		$	0.720

Cash Flow

Net cash flow provided by (used in) operating activities decreased to ($47.2 million) for the nine months ended September 30, 2007 from $17.9 million for the nine months ended September 30, 2006. This change primarily resulted from the acquisition and settlement of our investments as described above, and the performance thereof. The nine months ended September 30, 2007 and September 30, 2006 included the purchase of loans held for sale of $1.1 million and $1.5 million, respectively.

Investing activities used ($146.6 million) and ($1.5 billion) during the nine months ended September 30, 2007 and 2006, respectively. Investing activities consisted primarily of investments made in certain real estate securities, loans and other real estate related assets, net of proceeds from the sale or settlement of investments.

Financing activities provided $229.2 million and $1.5 billion during the nine months ended September 30, 2007 and 2006, respectively. The equity issuances, borrowings and debt issuances described above served as the primary sources of cash flow from financing activities. Offsetting uses included the payment of related deferred financing costs, the purchase of hedging instruments, the payment of dividends, and the repayment of debt as described above.

See the consolidated statements of cash flows included in our consolidated financial statements included herein for a reconciliation of our cash position for the periods described herein.

INTEREST RATE, CREDIT AND SPREAD RISK

We are subject to interest rate, credit and spread risk with respect to our investments.

Interest Rate Risk

Changes in interest rates, including changes in expected interest rates or ‘‘yield curves,’’ affect our investments in two distinct ways, each of which is discussed below.

First, changes in interest rates affect our net interest income, which is the difference between the interest income earned on assets and the interest expense incurred in connection with our debt obligations and hedges.

Our general financing strategy focuses on the use of match funded structures. This means that we seek to match the maturities of our debt obligations with the maturities of our assets to minimize the risk that we have to refinance our liabilities prior to the maturities of our assets, and to reduce the impact of changing interest rates on our earnings. In addition, we generally match fund interest rates on our assets with like-kind debt (i.e., fixed rate assets are financed with fixed rate debt and floating rate assets are financed with floating rate debt), directly or through the use of interest rate swaps, caps or other financial instruments, or through a combination of these strategies, which also allows us to reduce the impact of changing interest rates on our earnings.

However, increases in interest rates can nonetheless reduce our net interest income to the extent that we are not completely match funded. Furthermore, a period of rising interest rates can negatively impact our return on certain floating rate investments. Although these investments may be financed with floating rate debt, the interest rate on the debt may reset prior to, or more frequently than, the interest rate on the assets, causing a decrease in return on equity during a period of rising interest rates.

Changes in the level of interest rates also affect the yields required by the marketplace on debt. Increasing interest rates would reduce the value of the fixed rate assets we hold at the time because higher required yields result in lower prices on existing fixed rate assets in order to adjust their yield upward to meet the market.

We generally have the intent and ability to hold our assets until maturity. Such assets are considered available for sale and may be sold prior to maturity on an opportunistic basis or for other reasons.

Changes in unrealized gains or losses resulting from changes in market interest rates do not directly affect our cash flows, or our ability to pay a dividend, as the related assets are expected to be held and their fair value is not relevant to their underlying cash flows. Our assets are largely financed to maturity through long term CBO financings that are not redeemable as a result of book value changes. As long as these fixed rate assets continue to perform as expected, our cash flows from these assets would not be affected by increasing interest rates. Changes in unrealized gains or losses would impact our ability to realize gains on existing investments if they were sold. Furthermore, with respect to changes in unrealized gains or losses on investments which are carried at fair value, changes in unrealized gains or losses would impact our net book value and, in the case of non-hedge derivatives, our net income.

Changes in the value of our assets could affect our ability to borrow and access capital. Also, if the value of our assets subject to repurchase agreements were to decline, it could cause us to fund margin and affect our ability to refinance such assets upon the maturity of the related repurchase agreements, adversely impacting our rate of return on such securities.

Credit Risk

Credit risk refers to the ability of each individual borrower under our loans and securities to make required interest and principal payments on the scheduled due dates. The commercial mortgage and asset backed securities we invest in are generally junior in right of payment of interest and principal to one or more senior classes, but benefit from the support of one or more subordinate classes of securities or other form of credit support (which absorbs losses before the securities in

which we invest) within a securitization transaction. The senior unsecured REIT debt securities we invest in reflect comparable credit risk. We also invest in loans and securities which represent ‘‘first loss’’ pieces; in other words, they do not benefit from credit support although we believe they predominantly benefit from underlying collateral value well in excess of their carrying amounts.

We believe, based on our due diligence process, that these assets offer attractive risk-adjusted returns with long term principal protection under a variety of default and loss scenarios. We further minimize credit risk by actively monitoring our asset portfolio and the underlying credit quality of our holdings and, where appropriate, repositioning our investments to upgrade their credit quality. In the event of a significant rising interest rate environment and/or economic downturn, loan and collateral defaults may increase and result in credit losses that would adversely affect our liquidity and operating results. As described above in ‘‘— Market Considerations’’ and elsewhere in this quarterly report, adverse market and credit conditions have resulted in our recording of other-than-temporary impairment in certain securities, predominantly 2006 vintage subprime securities.

Spread Risk

Credit spreads measure the yield demanded on loans and securities by the market based on their credit relative to U.S. Treasuries, for fixed rate credit, or LIBOR, for floating rate credit. Our fixed rate loans and securities are valued based on a market credit spread over the rate payable on fixed rate U.S. Treasuries of like maturity. Our floating rate loans and securities are valued based on a market credit spread over LIBOR. Excessive supply of such loans and securities combined with reduced demand will generally cause the market to require a higher yield on such loans and securities, resulting in the use of a higher (or ‘‘wider’’) spread over the benchmark rate to value them.

Changes in credit spreads affect our investments in two distinct ways, each of which is discussed below.

First, widening credit spreads would result in higher yields being required by the marketplace on loans and securities. This widening would reduce the value of the loans and securities we hold at the time because higher required yields result in lower prices on existing securities in order to adjust their yield upward to meet the market. The effects of such a decrease in values on our financial position, results of operations and liquidity are discussed above under ‘‘— Interest Rate Risk.’’

Our financing strategy is dependent on our ability to place the match funded debt we use to finance our investments at rates that provide a positive net spread. Currently, spreads for such liabilities have widened and demand for such liabilities has become extremely limited, therefore restricting our ability to execute future financings.

However, a second impact of widening of credit spreads is that it would also result in increased yields on new investments we purchase during or subsequent to the widening, thereby benefiting our ongoing investment activities, as we would earn a higher yield on the same investment amount in comparison to the investing environment prior to such widening. As noted, in ‘‘— Market Considerations’’ above, we could only take advantage of these investment opportunities if we have sufficient liquidity and financing is available on favorable terms.

In an environment where spreads are tightening, if spreads tighten on the assets we purchase to a greater degree than they tighten on the liabilities we issue, our net spread will be reduced.

Margin

Certain of our investments are financed through repurchase agreements or total rate of return swaps which are subject to margin calls based on the value of such investments. Margin calls resulting from decreases in value related to rising interest rates are substantially offset by our ability to make margin calls on our interest rate derivatives. We maintain adequate cash reserves or availability on our credit facility to meet any margin calls resulting from decreases in value related to a reasonably possible (in the opinion of management) widening of credit spreads. Funding a margin call on our credit facility would have a dilutive effect on our earnings, however we would not expect this to be material.

For a further discussion of these risks, see ‘‘Quantitative and Qualitative Disclosures About Market Risk’’ below.

STATISTICS

The following summarizes our investment portfolio at September 30, 2007. It excludes operating real estate of $39.1 million at September 30, 2007.

Asset Quality and Diversification at September 30, 2007

Newcastle’s $8.9 billion investment portfolio consists primarily of commercial, residential and corporate debt. The following describes our investment portfolio at September 30, 2007 ($ in millions):


	Face Amount			Percentage of Total Portfolio			Number of Investments		Credit (1)	Weighted Average Life (years)
Commercial
CMBS		$	2,522		28.2	%		292	BBB−		5.3
Mezzanine Loans			949		10.6	%		26	72%		1.8
B-Notes			436		4.9	%		14	63%		1.9
Whole Loans			129		1.5	%		5	75%		1.5
Investment in Joint Venture			39		0.4	%		106	NR		12.0
Total Commercial Assets			4,075		45.6	%					4.1
Residential
Manufactured Housing and Residential Mortgage Loans			671		7.5	%		16,559	696		5.5
Subprime Securities (3)			619		6.9	%		122	BBB		2.9
Loans Subject to Call Option			406		4.6	%		NA	NR		1.6
Subprime Residual/Retained Securities (2)			151		1.7	%		8	NR		2.9
Real Estate ABS			109		1.2	%		26	BBB		5.2
Total Residential Assets			1,956		21.9	%					3.7
Corporate
REIT Debt			927		10.4	%		93	BBB−		5.4
Corporate Bank Loans			597		6.7	%		14	58%		3.0
Total Corporate Assets			1,524		17.1	%					4.4
Other Assets
FNMA/FHLMC			1,266		14.2	%		43	AAA		4.4
ICH Loans			108		1.2	%		59	NR		0.5
Total Other Assets			1,374		15.4	%					4.1
TOTAL		$	8,929		100.0	%					4.1

(1)	Credit represents weighted average rating for rated assets, LTV for non-rated commercial assets, FICO score for non-rated residential assets and implied AAA for Agency RMBS.

(2)	Represents $76.4 million and $74.2 million of face amount of retained bonds and residual interests, respectively, in the securitizations of Subprime Portfolios I and II.

(3)	The following table illustrates the exposure by vintage in our subprime securities portfolio as of September 30, 2007:


	Collateral Characteristics													Security Characteristics
Deal Vintage (A)	Deal Age (months)		Collateral Factor (B)		Delinquency (C)			3 month CRR (D)			Cumulative Losses to Date			Weighted Average Rating	Number of Securities		Current Face Amount (E)			Percentage			Principal Subordination (F)
2003		49		0.15		9.9	%		23.8	%		2.1	%	A		16		$	47,601		7.7	%		24.4	%
2004		39		0.20		12.0	%		30.5	%		1.0	%	A−		30			202,667		32.7	%		19.1	%
2005		26		0.42		14.6	%		38.4	%		0.9	%	BBB+		44			201,303		32.5	%		14.1	%
2006		14		0.75		14.2	%		20.3	%		0.4	%	BB+		29			159,497		25.8	%		3.9	%
2007		6		0.93		4.5	%		15.5	%		0.0	%	BBB+		3			7,750		1.3	%		10.0	%
Total		29		0.42		13.2	%		29.7	%		0.9	%	BBB		122		$	618,818		100.0	%		13.8	%

(A)	The year in which the securities were issued.

(B)	The ratio of original unpaid principal balance of loans still outstanding.

(C)	The percentage of underlying loans that are 90+ days delinquent, or in foreclosure or considered real estate owned (REO).

(D)	Three month average constant voluntary prepayment rate.

(E)	Excludes subprime retained securities and residual interests of $150.6 million.

(F)	The percentage of the current face amount of securities and residual interests that is subordinate to our investments.

OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2007, we had two material off-balance sheet arrangements. We believe that these off-balance sheet structures presented the most efficient and least expensive form of financing for these assets at the time they were entered, and represented the most common market-accepted method for financing such assets.


	•	In April 2006, we securitized our Subprime Portfolio I. The loans were sold to a securitization trust, of which 80% were treated as a sale, which is an off-balance sheet financing as described in ‘‘— Liquidity and Capital Resources.’’


	•	In July 2007, we securitized our Subprime Portfolio II. The loans were sold to a securitization trust, of which 90% were treated as a sale, which is an off-balance sheet financing as described in ‘‘— Liquidity and Capital Resources.’’

We also had the following arrangements which do not meet the definition of off-balance sheet arrangements, but do have some of the characteristics of off-balance sheet arrangements.


	•	We are party to total rate of return swaps which are treated as non-hedge derivatives. For further information on these investments, see ‘‘Liquidity and Capital Resources.’’


	•	We have made investments in four unconsolidated subsidiaries.

In each case, our exposure to loss is limited to the carrying (fair) value of our investment, except for the total rate of return swaps where our exposure to loss is limited to their fair value plus their notional amount.

CONTRACTUAL OBLIGATIONS

During the first nine months of 2007, we had all of the material contractual obligations referred to in our annual report on Form 10-K for the year ended December 31, 2006, as well as the following:


Contract Category			Change
Repurchase agreements			We financed certain newly acquired loans and securities with repurchase agreements. We entered into three facilities, in the form of repurchase agreements, to finance newly acquired loans and securities.
Interest rate swaps			Certain floating rate debt issuances as well as certain assets were hedged with interest rate swaps.
Loan servicing agreement			We entered into an agreement related to our second subprime mortgage loan portfolio.
CBO bonds payable			The financing of our tenth CBO was closed in May 2007 and of our eleventh CBO was closed in July 2007.

The terms of these contracts are described under ‘‘Quantitative and Qualitative Disclosures About Market Risk’’ below.

INFLATION

We believe that our risk of increases in the market interest rates on our floating rate debt as a result of inflation is largely offset by our use of match funding and hedging instruments as described above. See ‘‘Quantitative and Qualitative Disclosure About Market Risk — Interest Rate Exposure’’ below.

FUNDS FROM OPERATIONS

We believe FFO is one appropriate measure of the operating performance of real estate companies. We also believe that FFO is an appropriate supplemental disclosure of operating performance for a REIT due to its widespread acceptance and use within the REIT and analyst communities. Furthermore, FFO is used to compute our incentive compensation to the Manager. FFO, for our purposes, represents net income available for common stockholders (computed in accordance with GAAP), excluding extraordinary items, plus depreciation of operating real estate, and after adjustments for unconsolidated subsidiaries, if any. We consider gains and losses on resolution of our investments to be a normal part of our recurring operations and therefore do not exclude such gains and losses when arriving at FFO. Adjustments for unconsolidated subsidiaries, if any, are calculated to reflect FFO on the same basis. FFO does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity and is not necessarily indicative of cash available to fund cash needs. Our calculation of FFO may be different from the calculation used by other companies and, therefore, comparability may be limited.

Funds from Operations (FFO) is calculated as follows (unaudited) (in thousands):


	For the Nine Months Ended September 30, 2007			For the Three Months Ended September 30, 2007
Income (loss) applicable to common stockholders		$	28,142		$	(39,272	)
Operating real estate depreciation			812			285
Funds from Operations (FFO)		$	28,954		$	(38,987	)

Funds from Operations was derived from our segments as follows (unaudited) (in thousands):


	Book Equity at September 30, 2007				Average Invested Common Equity for the Nine Months Ended September 30, 2007 (2)				FFO for the Nine Months Ended September 30, 2007				Return on Invested Common Equity (ROE) (3)
Real estate securities and real estate related loans		$	1,011,313			$	1,049,403			$	40,469			5.14	%
Residential mortgage loans			149,361				132,897				25,764			25.85	%
Operating real estate			50,948				49,795				2,314			6.20	%
Unallocated (1)			(264,020	)			(270,444	)			(39,593	)		N/A
Total (2)			947,602			$	961,651			$	28,954			4.01	%
Preferred stock			152,500
Accumulated depreciation			(5,725	)
Accumulated other comprehensive income (loss)			(273,756	)
Net book equity		$	820,621


	Book Equity at September 30, 2007				Average Invested Common Equity for the Three Months Ended September 30, 2007 (2)				FFO for the Three Months Ended September 30, 2007				Return on Invested Common Equity (ROE) (3)
Real estate securities and real estate related loans		$	1,011,313			$	1,041,873			$	(36,612	)		(14.07	%)
Residential mortgage loans			149,361				134,076				7,269			21.68	%
Operating real estate			50,948				50,309				779			6.19	%
Unallocated (1)			(264,020	)			(221,780	)			(10,423	)		N/A
Total (2)			947,602			$	1,004,478			$	(38,987	)		(15.54	%)
Preferred stock			152,500
Accumulated depreciation			(5,725	)
Accumulated other comprehensive income (loss)			(273,756	)
Net book equity		$	820,621

(1)

Unallocated FFO represents ($3,375) and ($9,265) of preferred dividends, ($2,075) and ($8,149) of interest on our credit facility and junior subordinated notes payable, and ($4,973) and ($22,179) of corporate general and administrative expenses, management fees and incentive compensation for the three and nine months ended September 30, 2007, respectively.

(2)	Invested common equity is equal to book equity excluding preferred stock, accumulated depreciation and accumulated other comprehensive income.

(3)	FFO divided by average invested common equity, annualized.

As a result of the effect of the other-than-temporary impairment on our FFO, we expect that there will be no incentive compensation payable to the Manager for an indeterminable amount of time.

RELATED PARTY TRANSACTIONS

In March 2007, we entered into a servicing agreement with a portfolio company of a private equity fund advised by an affiliate of our Manager for them to service a portfolio of subprime mortgage loans, which was acquired at the same time. As compensation under the servicing agreement, the portfolio company will receive, on a monthly basis, a net servicing fee equal to 0.5% per annum on the annual principal balance of the loans being serviced. The aggregate outstanding unpaid principal balance of this and another portfolio of subprime mortgage loans, both serviced by this portfolio company of a private equity fund advised by an affiliate of our Manager, was approximately $2.0 billion at September 30, 2007.

As of September 30, 2007, we held on our balance sheet total investments of $156.8 million face amount of real estate securities and related loans issued by affiliates of our manager and $127.5 million face amount of real estate loans issued by affiliates of our manager financed under total rate of return swaps and earned approximately $14.6 million of interest on such investments for the nine months ended September 30, 2007.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in interest rates, credit spreads, foreign currency exchange rates, commodity prices and equity prices. The primary market risks that we are exposed to are interest rate risk and credit spread risk. These risks are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. All of our market risk sensitive assets, liabilities and related derivative positions are for non-trading purposes only. For a further understanding of how market risk may affect our financial position or operating results, please refer to ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Application of Critical Accounting Policies’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Resul ts of Operations — Interest Rate, Credit and Spread Risk.’’

Interest Rate Exposure

Changes in interest rates, including changes in expected interest rates or ‘‘yield curves,’’ affect our investments in two distinct ways, each of which is discussed below.

Our general financing strategy focuses on the use of match funded structures. This means that we seek to match the maturities of our debt obligations with the maturities of our assets to minimize the risk that we have to refinance our liabilities prior to the maturities of our assets, and to reduce the impact of changing interest rates on our earnings. In addition, we generally match fund interest rates on our assets with like-kind debt (i.e., fixed rate assets are financed with fixed rate debt and floating rate assets are financed with floating rate debt), directly or through the use of interest rate swaps, caps or other financial instruments (see below), or through a combination of these strategies, which also allows us to reduce the impact of changing interest rates on our earnings.

However, increases in interest rates can nonetheless reduce our net interest income to the extent that we are not completely match funded. Furthermore, a period of rising interest rates can negatively impact our return on certain floating rate investments. Although these investments may be financed with floating rate debt, the interest rate on the debt may reset prior to, and in some cases more frequently than, the interest rate on the assets, causing a decrease in return on equity during a period of rising interest rates.

As of September 30, 2007, a 100 basis point increase in short term interest rates would increase our earnings by approximately $0.8 million per annum.

Changes in the level of interest rates also affect the yields required by the marketplace on debt. Increasing interest rates would decrease the value of the fixed rate assets we hold at the time because higher required yields result in lower prices on existing fixed rate assets in order to adjust their yield upward to meet the market.

As of September 30, 2007, a 100 basis point change in short term interest rates would impact our net book value by approximately $9.8 million.

Interest rate swaps are agreements in which a series of interest rate flows are exchanged with a third party (counterparty) over a prescribed period. The notional amount on which swaps are based is not exchanged. In general, our swaps are ‘‘pay fixed’’ swaps involving the exchange of floating rate interest payments from the counterparty for fixed interest payments from us. This can effectively convert a floating rate debt obligation into a fixed rate debt obligation.

Similarly, an interest rate cap or floor agreement is a contract in which we purchase a cap or floor contract on a notional face amount. We will make an up-front payment to the counterparty for which the counterparty agrees to make future payments to us should the reference rate (typically one- or three-month LIBOR) rise above (cap agreements) or fall below (floor agreements) the ‘‘strike’’ rate specified in the contract. Should the reference rate rise above the contractual strike rate in a cap, we will earn cap income; should the reference rate fall below the contractual strike rate in a floor, we will earn floor income. Payments on an annualized basis will equal the contractual notional face amount multiplied by the difference between the actual reference rate and the contracted strike rate.

While a REIT may utilize these types of derivative instruments to hedge interest rate risk on its liabilities or for other purposes, such derivative instruments could generate income that is not qualified income for purposes of maintaining REIT status. As a consequence, we may only engage in such instruments to hedge such risks within the constraints of maintaining our standing as a REIT. We do not enter into derivative contracts for speculative purposes nor as a hedge against changes in credit risk.

Our hedging transactions using derivative instruments also involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. The counterparties to our derivative arrangements are major financial institutions with high credit ratings with which we and our affiliates may also have other financial relationships. As a result, we do not anticipate that any of these counterparties will fail to meet their obligations. There can be no assurance that we will be able to adequately protect against the foregoing risks and will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.

Credit Spread Exposure

Changes in credit spreads affect our investments in two distinct ways, each of which is discussed below.

The effects of such a decrease in values on our financial position, results of operations and liquidity are discussed above under ‘‘— Interest Rate Risk.’’

As of September 30, 2007, a 25 basis point movement in credit spreads would impact our net book value by approximately $44.6 million, but would not directly affect our earnings or cash flow.

However, a second impact of widening of credit spreads is that it would also result in increased yields on new investments we purchase during or subsequent to the widening, thereby benefiting our ongoing investment activities, as we would earn a higher yield on the same investment amount in comparison to the investing environment prior to such widening. As noted in ‘‘— Market Considerations’’ above, we could only take advantage of these investment opportunities if we have sufficient liquidity and financing is available on favorable terms.

In an environment where spreads are tightening, if spreads tighten on the assets we purchase to a greater degree than they tighten the liabilities we issue, our net spread will be reduced.

Margin

Certain of our investments are financed through repurchase agreements or total return swaps which are subject to margin calls based on the value of such investments. Margin calls resulting from decreases in value related to rising interest rates are substantially offset by our ability to make margin calls on our interest rate derivatives. We maintain adequate cash reserves or availability on our credit facility to meet any margin calls resulting from decreases in value related to a reasonably possible (in the opinion of management) widening of credit spreads. Funding a margin call on our credit facility would have a dilutive effect on our earnings, however we would not expect this to be material.

Fair Values

Fair values for a majority of our investments are readily obtainable through broker quotations. For certain of our financial instruments, fair values are not readily available since there are no active trading markets as characterized by current exchanges between willing parties or due to market conditions. Accordingly, fair values can only be derived or estimated for these instruments using various valuation techniques, such as computing the present value of estimated future cash flows using discount rates commensurate with the risks involved. However, the determination of estimated future cash flows is inherently subjective and imprecise. We note that minor changes in assumptions or estimation methodologies can have a material effect on these derived or estimated fair values, and that the fair values reflected below are indicative of the interest rate and credit spread environments as of September 30, 2007 and do not take into consideration the effec ts of subsequent interest rate or credit spread fluctuations.

We note that the values of our investments in real estate securities, loans and derivative instruments, primarily interest rate hedges on our debt obligations, are sensitive to changes in market interest rates, credit spreads and other market factors. The value of these investments can vary, and has varied, materially from period to period.

Trends

See ‘‘— Market Considerations’’ above for a further discussion of recent trends and events affecting our liquidity, unrealized gains and losses.

Interest Rate and Credit Spread Risk

We held the following interest rate and credit spread risk sensitive instruments at September 30, 2007 (unaudited) (dollars in thousands):


	Carrying Value			Principal Balance or Notional Amount			Weighted Average Yield/Funding Cost			Maturity Date			Fair Value
Assets:
Real estate securities, available for sale (1)		$	5,186,147		$	5,593,738		6.59	%		(1	)		$	5,186,147
Real estate related loans (2)			1,960,762			1,964,758		8.60	%		(2	)			1,918,135
Residential mortgage loans (3)			662,624			671,118		8.09	%		(3	)			657,813
Subprime mortgage loans subject to call option (4)			392,992			406,217		8.18	%		(4	)			392,992
Interest rate caps, treated as hedges (5)			4			229,926		N/A			(5	)			4
Liabilities:
CBO bonds payable (6)			4,728,805			4,743,160		5.67	%		(6	)			4,536,441
Other bonds payable (7)			588,971			591,824		6.70	%		(7	)			582,239
Notes payable (8)			85,233			85,233		5.46	%		(8	)			85,233
Repurchase agreements (9)			1,583,842			1,583,842		5.11	%		(9	)			1,582,360
Repurchase agreements subject to ABCP facility (9)			98,655			98,655		5.08	%		(9	)			98,655
Financing of subprime mortgage loans subject to call option (4)			392,992			406,217		8.09	%		(4	)			392,992
Credit facility (10)			—			—		6.73	%		(10	)			—
Junior subordinated notes payable (11)			100,100			100,100		7.71	%		(11	)			93,694
Interest rate swaps, treated as hedges (12)			19,145			3,874,437		N/A			(12	)			19,145
Total rate of return swaps (13)			4,768			273,524		N/A			(13	)			4,768
Non-hedge derivatives (14)			348			147,500		N/A			(14	)			348

For information regarding the impact of prepayment, reinvestment, and expected loss factors on the timing of realization of our investments, please refer to the financial statements included in this Form 10-Q as well as our most recent annual financial statements included in our Form 10-K.

(1)

These securities contain various terms, including fixed and floating rates, self-amortizing and interest only. Their weighted average maturity is 4.80 years. The fair value of these securities is estimated by obtaining third party broker quotations, and available and practicable, counterparty quotations, and pricing models. A face amount of approximately $328.9 million of securities, or 5.9% of the total face amount of our real estate securities portfolio, was valued at $214.6 million using pricing models. Inputs for the pricing models include discount rates, assumptions for prepayment, default rates and loss severities, as well as other variables.

(2)	Represents the following loans:


Loan Type	Current Face Amount			Carrying Value			Weighted Avg. Yield			Weighted Average Maturity (Years)		Floating Rate Loans as a % of Face Amount			Fair Value
Mezzanine Loans		$	912,833		$	909,827		9.03	%		1.85		89.4	%		$	892,151
Corporate B-Notes			436,455			434,928		8.22	%		1.93		84.7	%			427,950
Corporate Bank Loans			397,620			397,489		7.79	%		4.20		100.0	%			381,168
Whole Loans			110,065			110,489		10.47	%		1.57		100.0	%			109,121
ICH Loans			107,785			108,029		7.62	%		0.50		0.0	%			107,745
		$	1,964,758		$	1,960,762		8.60	%		2.25		86.2	%		$	1,918,135

The ICH loans were valued by discounting expected future cash flows by applying an applicable spread over the benchmark rate. The rest of the loans were valued by obtaining third party broker quotations, if available and practicable, and counterparty quotations.

(3)

This aggregate portfolio of residential loans consists of a portfolio of floating rate residential mortgage loans and two portfolios of substantially fixed rate manufactured housing loans. The $108.2 million portfolio of residential mortgage loans has a weighted average maturity of 2.78 years. The $562.9 million manufactured housing loan portfolios have a weighted average maturity of 6.07 years. These loans were valued by discounting expected future cash flows based on current market interest rates and credit spreads.

(4)	These two items, related to the securitizations of subprime mortgage loans, are equal and offsetting. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources’’ for a further discussion of these items.

(5)	Represents the following cap agreement:

Notional Balance

Effective Date

Maturity Date

Capped Rate

Strike Rate

Fair Value

$229,926

Current

March 2009

1-Month LIBOR

6.50%

The fair value of this agreement is estimated by obtaining a counterparty quotation.

(6)

These bonds were valued based on broker quotations, representing the discounted expected future cash flows at a yield which reflects current market interest rates and credit spreads. The weighted average maturity of the CBO bonds payable is 6.14 years. The CBO bonds payable amortize principal prior to maturity based on collateral receipts, subject to reinvestment requirements.

(7)

The ICH bonds amortize principal prior to maturity based on collateral receipts and have a weighted average maturity of 0.52 years. The manufactured housing loan bonds amortize principal prior to maturity based on collateral receipts and have a weighted average maturity of 2.20 years. These bonds were valued by discounting expected future cash flows by a rate calculated based on current market conditions for comparable financial instruments, including market interest rates and credit spreads.

(8)	The residential mortgage loan financing has a weighted average maturity of 0.16 years and is subject to adjustment monthly based on the market value of the loan portfolio. The carrying amount is believed to approximate fair value as the financing will mature in the near term.

(9)	These agreements bear floating rates of interest, which reset monthly, quarterly or semi-annually to a market credit spread. These financings were valued by reference to current market interest rates and credit spreads.

(10)	The credit facility has a weighted average maturity of 1.69 years.

(11)	These notes have a weighted average maturity of 28.5 years. These notes were valued by discounting expected future cash flows by a rate calculated based on current market conditions for comparable financial instruments, including market interest rates and credit spreads.

(12)	Represents current swap agreements as follows:


Year of Maturity	Weighted Average Maturity	Aggregate Notional Amount				Weighted Average Fixed Pay Rate	Aggregate Fair Value
Agreements which receive 1-Month LIBOR:
2009	Apr 2009			250,281	*	3.187%			(3,655	)
2010	Jun 2010			310,648		4.407%			(1,240	)
2011	Jul 2011			504,995		5.183%			6,180
2012	Mar 2012			222,780		5.063%			1,943
2014	Oct 2014			17,700		5.100%			128
2015	Oct 2015			1,379,895		5.256%			20,253
2016	Apr 2016			667,381		5.167%			5,982
2017	Jul 2017			134,434		5.373%			2,492

Agreements which receive 3-Month LIBOR:
2011	Feb 2011			32,000		5.078%			373
2014	Jun 2014			354,323		4.196%			(13,311	)
			$	3,874,437				$	19,145

$229,926 of this notional receives 1-Month LIBOR only up to 6.50%

The fair value of these agreements is estimated by obtaining counterparty quotations. A positive fair value represents a liability. We have recorded $20.9 million of gross interest rate swap assets and $40.0 million of liabilities.

(13)

Represents total rate of return swaps which are treated as non-hedge derivatives. The fair value of these agreements, which is included in Derivative Liabilities, is estimated by obtaining counterparty quotations. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources’’ for a further discussion of these swaps.

(14)

These are two essentially offsetting interest rate caps and two essentially offsetting interest rate swaps, each with notional amounts of $32.5 million, an interest rate cap with a notional balance of $17.5 million. The maturity date of the purchased swap is July 2009; the maturity date of the sold swap is July 2014, the maturity date of the $32.5 million caps is July 2038, the maturity date of the $17.5 million cap is July 2009. The fair value of these agreements is estimated by obtaining counterparty quotations. A positive fair value represents a liability; therefore, we have a net non-hedge derivative liability.

ITEM 4. CONTROLS AND PROCEDURES


	(a)	Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’)) as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information is recorded, processed, summarized and reported accurately and on a timely basis. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.


	(b)	Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not party to any material legal proceedings.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the registrant’s Form 10-K for the year ended December 31, 2006.

CAUTIONARY STATEMENTS

The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our company. We urge you to carefully review and consider the various disclosures made by us in this report and in our other filings with the Securities and Exchange Commission (‘‘SEC’’), including our annual report on Form 10-K for the year ended December 31, 2006, that discuss our business in greater detail.

This report contains certain ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments, the stability of our earnings, and our financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘potential,’’ ‘‘intend,’’ ‘‘expect,’’ ‘‘endeavor,’’ ‘‘seek,’’ ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘overestimate,’’ ‘‘underestimate,’’ ‘‘believe,’’ ‘‘could,’’ ‘‘project,’& rsquo; ‘‘predict,’’ ‘‘continue’’ or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, our ability t o take advantage of opportunities in additional asset classes at attractive risk-adjusted prices, our ability to deploy capital accretively, the risks that default and recovery rates on our loan portfolios exceed our underwriting estimates, the relationship between yields on assets which are paid off and yields on assets in which such monies can be reinvested, the relative spreads between the yield on the assets we invest in and the cost of financing, changes in economic conditions generally and the real estate and bond markets specifically; adverse changes in the financing markets we access affecting our ability to finance our real estate securities portfolios in general or particular real estate related assets, or in a manner that maintains our historic net spreads; changes in interest rates and/or credit spreads, as well as the success of our hedging strategy in relation to such changes; the quality and size of the investment pipeline and the rate at which we can invest our cash, including cash inside our CBOs; impairments in the value of the collateral underlying our real estate securities, real estate related loans and residential mortgage loans and the relation of any such impairments to our judgments as to whether changes in the market value of our securities, loans or real estate are temporary or not and whether circumstances bearing on the value of such assets warrant changes in carrying values; legislative/regulatory changes; completion of pending investments; the availability and cost of capital for future investments; competition within the finance and real estate industries; and other risks detailed from time to time in our SEC reports. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views as of the date of this report. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement. For a discussion of our critical accounting policies, see ‘& lsquo;Management’s Discussion and Analysis of Financial Condition and Results of Operations — Application of Critical Accounting Policies.’’

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

In addition, risks relating to our management and business, which are described in our SEC reports include, specifically, (1) the following risks relating to our management: (i) We are dependent on our manager and may not find a suitable replacement if our manager terminates the management agreement. Furthermore, we are dependent on the services of certain key employees of our manager and the loss of such services could temporarily adversely affect our operations; (ii) There are conflicts of interest inherent in our relationship with our manager insofar as our manager and its affiliates manage and invest in other pooled investment vehicles (investment funds, private investment funds, or businesses) that invest in real estate securities, real estate related loans and operating real estate and whose investment objectives overlap with our investment objectives. Our management agreement with our manager does not limit or restrict our manager or its affiliates from m anaging other investment vehicles that invest in investments which meet our investment objectives. Certain investments appropriate for Newcastle may also be appropriate for one or more of these other investment vehicles and our manager or its affiliates may determine to make a particular investment through another investment vehicle rather than through Newcastle. It is possible that we may not be given the opportunity to participate at all in certain investments made by our affiliates that meet our investment objectives; and (iii) Our investment strategy may evolve, in light of existing market conditions and investment opportunities, to continue to take advantage of opportunistic investments in real estate related assets, which may involve additional risks depending upon the nature of such assets and our ability to finance such assets on a short or long term basis; and (2) the following risks relating to our business: (i) Although we seek to match fund our investments to limit refinance risk, in particular w ith respect to a substantial portion of our investments in real estate securities and loans, we do not employ this strategy with respect to certain of our investments, which increases refinance risks for and, therefore, the yield of these investments; (ii) We may not be able to match fund our investments with respect to maturities and interest rates, which exposes us to the risk that we may not be able to finance or refinance our investments on economically favorable terms; (iii) Prepayment rates can increase, adversely affecting yields on certain of our loans; (iv) The real estate related loans and other direct and indirect interests in pools of real estate properties or loans that we invest in may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us; and (v) We finance certain of our investments with debt subject to margin calls based on a decrease in the value of such investments, which could adversely impact our liqui dity.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits


3	.1	Articles of Amendment and Restatement (incorporated by reference to the Registrant’s Registration Statement on Form S-11 (File No. 333-90578), Exhibit 3.1).
3	.2	Articles Supplementary Relating to the Series B Preferred Stock (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2003, Exhibit 3.3).
3	.3	Articles Supplementary Relating to the Series C Preferred Stock (incorporated by reference to the Registrant’s Report on Form 8-K, Exhibit 3.3, filed on October 25, 2005).
3	.4	Articles Supplementary Relating to the Series D Preferred Stock (incorporated by reference to the Registrant’s Report on Form 8-A, Exhibit 3.1, filed on March 14, 2007).
3	.5	Amended and Restated By-laws (incorporated by reference to the Registrant’s Registration Statement on Form 8-K, Exhibit 3.1, filed on May 5, 2006).
4	.1	Rights Agreement between the Registrant and American Stock Transfer and Trust Company, as Rights Agent, dated October 16, 2002 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2002, Exhibit 4.1).
10	.1	Amended and Restated Management and Advisory Agreement by and among the Registrant and Fortress Investment Group LLC, dated June 23, 2003 (incorporated by reference to the Registrant’s Registration Statement on Form S-11 (File No. 333-106135), Exhibit 10.1).
10	.2	Newcastle Investment Corp. Nonqualified Stock Option and Incentive Award Plan Amended and Restated Effective as of February 11, 2004 (incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005, Exhibit 10.2).
31	.1	Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31	.2	Certification of Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32	.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of 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:

NEWCASTLE INVESTMENT CORP.
(Registrant)


			/s/ Kenneth M. Riis
			Name: Kenneth M. Riis Title: Chief Executive Officer and President Date: November 7, 2007
			/s/ Debra A. Hess
			Name: Debra A. Hess Title: Chief Financial Officer Date: November 7, 2007

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Held by the Manager

Issued to the Manager and subsequently transferred to certain of the Manager’s employees

Held by the independent directors