1)	Real Estate Securities:	We underwrite and acquire a diversified portfolio of moderately credit sensitive real estate securities, including commercial mortgage backed securities (CMBS), senior unsecured REIT debt issued by property REITs, real estate related asset backed securities (ABS) and agency residential mortgage backed securities (RMBS). We generally target investments rated A through BB, except for our agency RMBS which are generally considered AAA rated. As of December 31, 2005, our investments in real estate securities represented 80% of our assets.

2)	Real Estate Related Loans:	We acquire and originate loans to well capitalized real estate owners with strong track records and compelling business plans, including B-notes, mezzanine loans, bank loans, and real estate loans. As of December 31, 2005, our investments in real estate related loans represented 9% of our assets.

3)	Residential Mortgage Loans:	We acquire residential mortgage loans, including manufactured housing loans and subprime residential loans, that we believe will produce attractive risk-adjusted returns. As of December 31, 2005, our investments in residential mortgage loans represented 10% of our assets. In addition, we acquired a $1.5 billion portfolio of subprime residential loans subsequent to year end, as described in “Our Investing Activities- Residential Mortgage Loans” below.

4)	Operating Real Estate:	We acquire direct and indirect interests in operating real estate. As of December 31, 2005, our investments in operating real estate represented 1% of our assets.

Underpinning our investment activities is a disciplined approach to acquiring, financing and actively managing our assets. Our principal objective is to acquire a highly diversified portfolio of debt investments secured by real estate that has moderate credit risk and sufficient liquidity. Newcastle primarily utilizes a match funded financing strategy in order to minimize refinancing and interest rate risks. This means that we seek both to match the maturities of our debt obligations with the maturities of our investments, in order to minimize the risk that we have to refinance our liabilities prior to the maturities of our assets, and to match the interest rates on our investments with like-kind debt (i.e. floating or fixed), in order to reduce the impact of changing interest rates on our earnings. Finally, we actively manage credit exposure through portfolio diversification and ongoing asset selection and surveillance. Newcastle, through its manager, has a dedicated team of senior investment professionals experienced in real estate capital markets, structured finance and asset management. We believe that these critical skills position us well not only to make prudent investment decisions but also to monitor and manage the credit profile of our investments.

Newcastle’s stock is traded on the New York Stock Exchange under the symbol “NCT”. Newcastle is a real estate investment trust for federal income tax purposes and is externally managed and advised by its manager, Fortress Investment Group LLC. Fortress is a global alternative investment and asset management firm with approximately $19 billion of capital under management as of March 6, 2006. Fortress was founded in 1998 and today employs over 400 people. We believe that our manager’s expertise and significant business relationships with participants in the fixed income, structured finance and real estate industries has enhanced our access to investment opportunities which may not be broadly marketed. For its services, our manager receives a management fee and incentive compensation pursuant to a management agreement. Our manager, through its affiliates, and its principals owned 2.9 million shares of our common stock and had options to purchase an additional 1.2 million shares of our common stock, which were issued in connection with our equity offerings, representing approximately 9.1% of our common stock on a fully diluted basis, as of March 6, 2006.

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 December 31, 2005, our debt to equity ratio was approximately 5.7 to 1. We 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), which represent 68% of our debt obligations, other securitizations, and term loans, as well as short term financing in the form of repurchase agreements and our credit facility. Our manager may elect for us to bear a level of refinancing risk on a short term or longer term basis, such as is the case with investments financed with repurchase agreements, when based on all of the relevant factors, bearing such risk is advisable. As of December 31, 2005, approximately 20% of our debt obligations were in the form of repurchase agreements. We utilize leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates.

We attempt to reduce interim refinancing risk and to minimize exposure to interest rate fluctuations through the use of match funded financing structures whereby we seek (i) to match the maturities of our debt obligations with the maturities of our assets and (ii) to match the interest rates on our investments with like-kind debt (i.e., floating rate assets are financed with floating rate debt and fixed rate assets are financed with fixed rate debt), directly or through the use of interest rate swaps, caps or other financial instruments, or through a combination of these strategies. This allows us 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. Our entire portfolio of assets and related liabilities had weighted average lives of 5.10 years and 4.59 years, respectively, as of December 31, 2005. In addition, as of December 31, 2005, a 100 basis point increase in short term interest rates would decrease our earnings by approximately $0.2 million per annum.

We were formed in June 2002 as a subsidiary of Newcastle Investment Holdings Corp. Prior to our initial public offering, Newcastle Investment Holdings contributed to us certain assets and related liabilities in exchange for approximately 16.5 million shares of our common stock. For accounting purposes, this transaction is presented as a reverse spin-off, whereby Newcastle Investment Corp. is treated as the continuing entity and the assets that were retained by Newcastle Investment Holdings and not contributed to us are accounted for as if they were distributed at their historical book basis through a spin-off to Newcastle Investment Holdings. Our operations commenced in July 2002. In May 2003, Newcastle Investment Holdings distributed to its stockholders all of the shares of our common stock that it owned, and it no longer owns any of our equity.

We enter into short term warehouse agreements pursuant to which we make deposits with major investment banks for the right to purchase commercial mortgage backed securities, unsecured REIT debt, real estate loans and real estate related asset backed securities for our real estate securities portfolios, prior to their being financed with CBOs. These agreements are treated as non-hedge derivatives for accounting purposes and are therefore marked to market through current income. The cost to us if the related CBO is not consummated is limited, except where the non-consummation results from our gross negligence, willful misconduct or breach of contract, to payment of the Net Loss, if any, as defined, up to the related deposit, less any Excess Carry Amount, as defined, earned on such deposit. The income recorded on these agreements was approximately $2.4 million, $3.1 million, and $3.6 million in 2005, 2004 and 2003, respectively.

We have entered into arrangements with a major investment bank 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 Assets and treated as non-hedge derivatives for accounting purposes and are therefore mark 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. The following table presents information on these instruments as of December 31, 2005.

We own operating real estate located in Canada which is subject, in addition to all risks inherent in real estate investments generally, to fluctuations in foreign currency exchange rates, unexpected changes in regulatory requirements, political and economic instability in certain geographic locations, difficulties in managing international operations, potentially adverse tax consequences, enhanced accounting and control expenses and the burden of complying with a wide variety of foreign laws. A change in foreign currency exchange rates may adversely impact returns on our non-dollar denominated investments. Our only currency exposures are to the Canadian Dollar. Changes in the currency rates can adversely impact the fair values and earnings streams of our international holdings. We generally do not directly hedge our foreign currency risk through the use of derivatives, due to, among other things, REIT qualification issues.


Property Address	City / Submarket			State/ Province		Net Rentable Sq Ft		Year Built/ Renovated			Use
100 Dundas St.	London (Central business district)			ON		323,411		1980			Office

Tenant	% of Total Sq Ft Leased			Tenant Net Rentable Sq Ft		Lease Start Date		Lease End Date			Annual Rent (1) (2)		Current Rent per Sq Ft (1)		Annual Real Estate Taxes (1)		Tenant Credit Rating
Bell Canada - Office		89.89	%		290,706		03/26/98		3/31/06 (4	)	$	1,751	$	6.02	$	1,146		A
Bell Canada - Storage		3.99	%		12,890		03/26/98		03/31/06			55		4.30				A
Bell Canada - Communication		0.52	%		1,686		03/26/98		03/31/47			29		17.21				A
Mactel		0.16	%		519		03/01/03		(3)			4		6.88
Tony & Fay Gardiner		0.15	%		475		09/01/02		08/31/07			4		9.04
O&Y Enterprise Office		0.46	%		1,478		03/26/98		03/31/06			13		9.04
COMTECH		0.03	%		96		01/01/00		(3)			1		6.88
Vacant		N/A			15,561		N/A		N/A			N/A		N/A
Total		95.20	%		323,411						$	1,857			$	1,146

In March 2004, we purchased a 49% interest in a portfolio of convenience and retail gas stores located throughout the southeastern and southwestern regions of the U.S. The properties are subject to a sale-leaseback arrangement under long term triple net leases with a 15 year minimum term. Circle K Stores Inc. (“Tenant”), an indirect wholly owned subsidiary of Alimentation Couche-Tard Inc. (“ACT”), is the counterparty under the leases. ACT guarantees the obligations of Tenant under the leases. We structured this transaction through a joint venture in two limited liability companies with a private investment fund managed by an affiliate of our manager, pursuant to which it co-invested on equal terms. One company held assets available for sale, the last of which was sold in September 2005, and one holds assets for investment. In October 2004, the investment’s initial financing was refinanced with a non-recourse term loan ($53.0 million outstanding at December 31, 2005), which bears interest at a fixed rate of 6.04%. The required payments under the loan consist of interest only during the first two years, followed by a 25-year amortization schedule with a balloon payment due in October 2014. At December 31, 2005, we had a $12.2 million investment in this entity.

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 December 31, 2005, our debt to equity ratio was approximately 5.7 to 1. We 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, and term loans, as well as short term financing in the form of repurchase agreements and our credit facility. Our manager may elect for us to bear a level of refinancing risk on a short term or longer term basis, such as is the case with investments financed with repurchase agreements, when, based on all of the relevant factors, bearing such risk is advisable. We utilize leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates.

We enter into hedging transactions to protect our positions from interest rate fluctuations and other changes in market conditions. These transactions may include interest rate swaps, the purchase or sale of interest rate collars, caps or floors, options, mortgage derivatives and other hedging instruments. These instruments may be used to hedge as much of the interest rate risk as our manager determines is in the best interest of our stockholders, given the cost of such hedges and the need to maintain our status as a REIT. Our manager elects to have us bear a level of interest rate risk that could otherwise be hedged when our manager believes, based on all relevant facts, that bearing such risks is advisable. We have extensive experience in hedging with these types of instruments. We engage in hedging for the purpose of protecting against interest rate risk and not for the purpose of speculating on changes in interest rates.

Debt Obligation	Current Face Amount		Carrying Value		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	$	3,560,953	$	3,530,384		5.27	%		6.55	$	3,275,603	$	4,002,158		5.86	$	1,107,164	$	1,960,808
Other Bonds Payable		353,330		353,330		5.94	%		0.63		215,624		428,744		4.23		9,961		227,576
Notes Payable		260,441		260,441		4.70	%		1.21		260,441		288,683		2.69		282,589		—
Repurchase Agreements		1,048,203		1,048,203		4.68	%		0.10		1,048,203		1,170,435		4.29		341,591		755,368
Credit Facility		20,000		20,000		6.86	%		2.55		20,000		—		—		—		—
Total debt obligations	$	5,242,927	$	5,212,358		5.17	%		4.59	$	4,819,871	$	5,890,020		5.27	$	1,741,305	$	2,943,752

(1)	Including the effect of applicable hedges.

The management agreement requires our manager to manage our business affairs in conformity with the policies and the investment guidelines that are approved and monitored by our board of directors. Our manager’s management is under the direction of our board of directors. The manager is responsible for (i) the purchase and sale of real estate securities and other real estate related assets, (ii) the financing of our real estate securities and other real estate related assets, (iii) management of our real estate, including arranging for purchases, sales, leases, maintenance and insurance, (iv) the purchase, sale and servicing of loans for us, and (v) investment advisory services. Our manager is responsible for our day-to-day operations and performs (or causes to be performed) such services and activities relating to our assets and operations as may be appropriate.

To provide an incentive for our manager to enhance the value of our common stock, our manager is entitled to receive an incentive return (the “Incentive Compensation”) on a cumulative, but not compounding, basis in an amount equal to the product of (A) 25% of the dollar amount by which (1) (a) our funds from operations, as defined (before the Incentive Compensation) per share of common stock (based on the weighted average number of shares of common stock outstanding) plus (b) gains (or losses) from debt restructuring and from sales of property and other assets per share of common stock (based on the weighted average number of shares of common stock outstanding), exceed (2) an amount equal to (a) the weighted average of the price per share of common stock in our initial public offering and the value attributed to the net assets transferred to us by Newcastle Investment Holdings, and in any of our subsequent offerings (adjusted for prior capital dividends or capital distributions) multiplied by (b) a simple interest rate of 10% per annum (divided by four to adjust for quarterly calculations) multiplied by (B) the weighted average number of shares of common stock outstanding.

The management agreement provides for automatic one year extensions. Our independent directors review our manager’s performance annually and the management agreement may be terminated annually upon the affirmative vote of at least two-thirds of our independent directors, or by a vote of the holders of a majority of the outstanding shares of our common stock, based upon unsatisfactory performance that is materially detrimental to us or a determination by our independent directors that the management fee earned by our manager is not fair, subject to our manager’s right to prevent such a management fee compensation termination by accepting a mutually acceptable reduction of fees. Our manager will be provided with 60 days’ prior notice of any such termination and will be paid a termination fee equal to the amount of the management fee earned by our manager during the twelve month period preceding such termination which may make it more difficult for us to terminate the management agreement. Following any termination of the management agreement, we shall be entitled to purchase our manager’s right to receive the Incentive Compensation at a price determined as if our assets were sold for cash at their then current fair market value (as determined by an appraisal, taking into account, among other things, the expected future value of the underlying investments) or otherwise we may continue to pay the Incentive Compensation to our manager. In addition, if we do not purchase our manager’s Incentive Compensation, our manager may require us to purchase the same at the price discussed above. In addition, the management agreement may be terminated by us at any time for cause.

We have financed our assets with the net proceeds of our initial public offering, follow-on offerings, the issuance of preferred stock, long term secured borrowings and short term borrowings under repurchase agreements and our credit facility. In the future, operations may be financed by future offerings of equity securities, as well as short term and long term unsecured and secured borrowings. We expect that, in general, we will employ leverage consistent with the type of assets acquired and the desired level of risk in various investment environments. Our governing documents do not explicitly limit the amount of leverage that we may employ. Instead, the general investment guidelines adopted by our board of directors limits total leverage to a maximum 9.0 to 1 debt to equity ratio. At December 31, 2005, 2004 and 2003, our debt to equity ratio was approximately 5.7 to 1, 5.0 to 1 and 5.4 to 1, respectively. Our policy relating to the maximum leverage we may utilize may be changed by our board of directors at any time in the future.

Properties we own or may acquire are or would be subject to various foreign, federal, state and local environmental laws, ordinances and regulations. Under these laws, ordinances and regulations, a current or previous owner of real estate (including, in certain circumstances, a secured lender that succeeds to ownership or control of a property) may become liable for the costs of removal or remediation of certain hazardous or toxic substances or petroleum product releases at, on, under or in its property. These laws typically impose cleanup responsibility and liability without regard to whether the owner or control party knew of or was responsible for the release or presence of the hazardous or toxic substances. The costs of investigation, remediation or removal of these substances may be substantial and could exceed the value of the property. An owner or control party of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners of real properties for personal injuries associated with asbestos-containing materials. Our operating costs and values of these assets may be adversely affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation, and our income and ability to make distributions to our stockholders could be affected adversely by the existence of an environmental liability with respect to our properties. We endeavor to ensure that properties we own or acquire will be in compliance in all material respects with all foreign, federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products.

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,” “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 to take advantage of opportunities in additional asset classes at attractive risk-adjusted prices, our ability to deploy capital accretively, 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 below and in our other SEC reports.

There are conflicts of interest inherent in our relationship with our manager insofar as our manager and its affiliates manage and invest in other 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. Certain investments appropriate for Newcastle may also be appropriate for one or more of these other investment vehicles. Members of our board of directors and employees of our manager who are our officers may serve as officers and/or directors of these other entities. In addition, our manager or its affiliates may have investments in and/or earn fees from such other investment vehicles which are larger than their economic interests in Newcastle and which may therefore create an incentive to allocate investments to such other investment vehicles. Our manager or its affiliates may determine, in their discretion, 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.

Our management agreement with our manager generally does not limit or restrict our manager or its affiliates from engaging in any business or managing other pooled investment vehicles that invest in investments that meet our investment objectives, except that under our management agreement neither our manager nor any entity controlled by or under common control with our manager is permitted to raise or sponsor any new pooled investment vehicle whose investment policies, guidelines or plan targets as its primary investment category investment in United States dollar-denominated credit sensitive real estate related securities reflecting primarily United States loans or assets. Our manager intends to engage in additional real estate related management and investment opportunities in the future which may compete with us for investments.

The management compensation structure that we have agreed to with our manager may cause our manager to invest in high risk investments. In addition to its management fee, our manager is entitled to receive incentive compensation based in part upon our achievement of targeted levels of funds from operations. In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on funds from operations may lead our manager to place undue emphasis on the maximization of funds from operations at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our investment portfolio.

Termination of the management agreement with our manager is difficult and costly. The management agreement may only be terminated annually upon the affirmative vote of at least two-thirds of our independent directors, or by a vote of the holders of a majority of the outstanding shares of our common stock, based upon (1) unsatisfactory performance by our manager that is materially detrimental to us or (2) a determination that the management fee payable to our manager is not fair, subject to our manager's right to prevent such a compensation termination by accepting a mutually acceptable reduction of fees. Our manager will be provided 60 days' prior notice of any termination and will be paid a termination fee equal to the amount of the management fee earned by the manager during the twelve-month period preceding such termination. In addition, following any termination of the management agreement, the manager may require us to purchase its right to receive incentive compensation at a price determined as if our assets were sold for their fair market value (as determined by an appraisal, taking into account, among other things, the expected future value of the underlying investments) or otherwise we may continue to pay the incentive compensation to our manager. These provisions may increase the effective cost to us of terminating the management agreement, thereby adversely affecting our ability to terminate our manager without cause.

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. Investment opportunities that present unattractive risk-return profiles relative to other available investment opportunities under particular market conditions may become relatively attractive under changed market conditions and changes in market conditions may therefore result in changes in the investments we target. Our failure to accurately assess the risks inherent in new asset categories or the financing risks associated with such assets could adversely affect our results of operations and our financial condition.

We leverage our portfolio through borrowings, generally through the use of credit facilities, warehouse facilities, repurchase agreements, mortgage loans on real estate, securitizations, including the issuance of CBOs, private or public offerings of debt by subsidiaries, loans to entities in which we hold, directly or indirectly, interests in pools of properties or loans, and other borrowings. Our investment policies do not limit the amount of leverage we may incur with respect to any specific asset or pool of assets, subject to an overall limit on our use of leverage to 90% of the value of our assets on an aggregate basis. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that can be derived from the assets acquired.

Commercial mortgage loans are secured by multifamily or commercial property and are subject to risks of delinquency and foreclosure, and risks of loss. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things: tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expense or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances.

Subprime mortgage loans are generally loans to credit impaired borrowers and borrowers that are ineligible to qualify for loans from conventional mortgage sources due to loan size, credit characteristics or documentation standards. Loans to lower credit grade borrowers generally experience higher-than-average default and loss rates than do conforming mortgage loans. Material differences in the defaults, loss severities and/or prepayments on the subprime mortgage loans we acquire (or on the manufactured housing loans we acquire) from what we estimate in connection with our underwriting of the acquisition of such loans would cause reductions in our income and adversely affect our operating results, both with respect to unsecuritized loans and loans that we have securitized or otherwise financed on a long term match funded basis. We cannot assure you that our underwriting criteria will afford adequate protection against the higher risks associated with loans made to lower credit grade borrowers. If we underestimate the extent of losses that our loans will incur, then our business, financial condition, liquidity and results of operations will be adversely impacted.

A key to our investment strategy is to finance our investments using match funded financing structures, which match assets and liabilities with respect to maturities and interest rates. This limits our refinance risk, including the risk of being able to refinance an investment or refinance on favorable terms. We generally use match funded financing structures, such as CBOs, to finance our investments in real estate securities and loans. However, our manager may elect for us to bear a level of refinancing risk on a short term or longer term basis, such as is the case with investments financed with repurchase agreements, when, based on all of the relevant factors, bearing such risk is advisable. This is generally the case with respect to the residential mortgage loans and agency RMBS we invest in. The decision not to match fund certain investments exposes us to additional refinancing risks that may not apply to our other investments.

We acquire real estate securities and loans and finance them on a long term basis, typically through the issuance of collateralized bond obligations. We use short term warehouse lines of credit to finance the acquisition of real estate securities and loans until a sufficient quantity of securities and loans is accumulated, at which time we may refinance these lines through a securitization, such as a CBO financing, or other long term financing. As a result, we are subject to the risk that we will not be able to acquire, during the period that our warehouse facility is available, a sufficient amount of eligible securities to maximize the efficiency of a collateralized bond obligation financing. In addition, conditions in the capital markets may make the issuance of a collateralized bond obligation less attractive to us when we do have a sufficient pool of collateral. If we are unable to issue a collateralized bond obligation to finance these assets, we may be required to seek other forms of potentially less attractive financing or otherwise to liquidate the assets.

REIT securities are generally unsecured and may also be subordinated to other obligations of the issuer. We may also invest in REIT securities that are rated below investment grade. As a result, investments in REIT securities are also subject to risks of: (i) limited liquidity in the secondary trading market, (ii) substantial market price volatility resulting from changes in prevailing interest rates, (iii) subordination to the prior claims of banks and other senior lenders to the issuer, (iv) the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest premature redemption proceeds in lower yielding assets, (v) the possibility that earnings of the REIT issuer may be insufficient to meet its debt service and dividend obligations and (vi) the declining creditworthiness and potential for insolvency of the issuer of such REIT securities during periods of rising interest rates and economic downturn. These risks may adversely affect the value of outstanding REIT securities and the ability of the issuers thereof to repay principal and interest or make dividend payments.

We invest in mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying real property or other business assets or revenue streams or loans secured by a pledge of the ownership interests of the entity owning real property or other business assets or revenue streams (or the ownership interest of the parent of such entity). These types of investments involve a higher degree of risk than long term senior lending secured by business assets or income producing real property because the investment may become unsecured as a result of foreclosure by a senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment. In addition, mezzanine loans may have higher loan to value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal.

We also invest in mortgage loans (“B” Notes) that while secured by a first mortgage on a single large commercial property or group of related properties are subordinated to an "A Note" secured by the same first mortgage on the same collateral. As a result, if an issuer defaults, there may not be sufficient funds remaining for B Note holders. B Notes reflect similar credit risks to comparably rated commercial mortgage backed securities. We also invest, directly or indirectly, in pools of real estate properties or loans. However, since each transaction is privately negotiated, these investments can vary in their structural characteristics and risks. For example, the rights of holders of B Notes to control the process following a borrower default may vary from transaction to transaction, while investments in pools of real estate properties or loans may be subject to varying contractual arrangements with third party co-investors in such pools. Further, B Notes typically are secured by a single property, and so reflect the risks associated with significant concentration. These investments also are less liquid than commercial mortgage backed securities.

There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations, and other factors, including terrorism or acts of war, also might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore our economic position with respect to the affected real property. As a result of the events of September 11, 2001, insurance companies are limiting and/or excluding coverage for acts of terrorism in insurance policies. As a result, we may suffer losses from acts of terrorism that are not covered by insurance.

Our operating costs may be affected by our obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation with respect to the assets, or loans secured by assets, with environmental problems that materially impair the value of the assets. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under, or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of hazardous or toxic substances, or the failure to remediate properly, may adversely affect the owner's ability to borrow by using such real property as collateral. Certain environmental laws and common law principles could be used to impose liability for releases of hazardous materials, including asbestos-containing materials, into the environment, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released asbestos-containing materials or other hazardous materials. Environmental laws may also impose restrictions on the manner in which a property may be used or transferred or in which businesses it may be operated, and these restrictions may require expenditures. In connection with the direct or indirect ownership and operation of properties, we may be potentially liable for any such costs. The cost of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could adversely affect our results of operations and financial condition.

Real estate securities are subject to changes in credit spreads. Fixed rate securities are valued based on a market credit spread over the rate payable on fixed rate U.S. Treasuries of like maturity. The value of these securities is dependent on the yield demanded on these securities by the market based on their credit relative to U.S. Treasuries. Excessive supply of these securities combined with reduced demand will generally cause the market to require a higher yield on these securities, resulting in the use of a higher, or "wider," spread over the benchmark rate (usually the applicable U.S. Treasury security yield) to value such securities. Under such conditions, the value of our real estate securities portfolio would tend to decline. Conversely, if the spread used to value such securities were to decrease, or "tighten," the value of our real estate securities portfolio would tend to increase. Our floating rate securities are valued based on a market credit spread over LIBOR and are affected similarly by changes in LIBOR spreads. Such changes in the market value of our real estate securities portfolio may affect our net equity, net income or cash flow directly through their impact on unrealized gains or losses on available for sale securities, and therefore our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital.

Our loan portfolios are also subject to changes in credit spreads. Our floating rate loans are valued based on a market credit spread to LIBOR. The value of these loans is dependent on the yield demanded by the market based on their credit relative to LIBOR. The value of our floating rate loans would tend to decline should the market require a higher yield on such loans, resulting in the use of a higher spread over the benchmark rate (usually the applicable LIBOR yield). Our fixed rate loans are valued based on a market credit spread over U.S. Treasuries and are affected similarly by changes in U.S. Treasury spreads. If the value of our loans subject to repurchase agreements were to decline, it could affect our ability to refinance such loans upon the maturity of the related repurchase agreements. Any credit or spread related losses incurred with respect to our loans would affect us in the same way as similar losses on our real estate securities portfolio as described above, except that our loans are not marked to market.

We use derivatives to hedge our interest rate exposure and this has certain risks, including the risk that losses on a hedge position will reduce the cash available for distribution to stockholders and that such losses may exceed the amount invested in such instruments. Our board of directors has adopted a general policy with respect to the use of derivatives, which generally allows us to use derivatives where appropriate, but does not set forth specific policies and procedures. We use derivative instruments, including forwards, futures, swaps and options, in our risk management strategy to limit the effects of changes in interest rates on our operations. A hedge may not be effective in eliminating all of the risks inherent in any particular position. Our profitability may be adversely affected during any period as a result of the use of derivatives.

The value of our assets may be affected by prepayment rates on our residential mortgage loans and other floating rate assets. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. In periods of declining mortgage interest rates, prepayments on loans generally increase. If general interest rates decline as well, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the assets that were prepaid. In addition, the market value of floating rate assets may, because of the risk of prepayment, benefit less than fixed rate assets from declining interest rates. Conversely, in periods of rising interest rates, prepayments on loans generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain investments.

We operate in a manner so as to qualify as a REIT for federal income tax purposes. Our ability to satisfy the asset tests depends upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Moreover, the proper classification of an instrument as debt or equity for federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements as described below. Accordingly, there can be no assurance that the IRS will not contend that our interests in subsidiaries or other issuers will not cause a violation of the REIT requirements. If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and trading prices for, our stock. Unless entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. The rule against re-electing REIT status following a loss of such status could also apply to us if Newcastle Investment Holdings Corp., a former stockholder of the Company, failed to qualify as a REIT, and we are treated as a successor to Newcastle Investment Holdings for federal income tax purposes.

We generally must distribute annually at least 90% of our net taxable income, excluding any net capital gain, in order for corporate income tax not to apply to earnings that we distribute. We intend to make distributions to our stockholders to comply with the requirements of the Internal Revenue Code. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short term or long term basis to meet the 90% distribution requirement of the Internal Revenue Code. Certain of our assets generate substantial mismatches between taxable income and available cash. As a result, the requirement to distribute a substantial portion of our net taxable income could cause us to: (a) sell assets in adverse market conditions, (b) borrow on unfavorable terms, or (c) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, in order to comply with REIT requirements.

Tax law changes in 2003 reduced the maximum tax rate for dividends payable to individuals from 35% to 15% (through 2008). Dividends payable by REITs, however, are generally not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock. In addition, the relative attractiveness of real estate in general may be adversely affected by the newly favorable tax treatment given to corporate dividends, which could affect the value of our real estate assets negatively.

In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year after our first year. Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 8% of the aggregate value of all outstanding shares of our capital stock, treating classes and series of our stock in the aggregate, or more than 25% of the outstanding shares of our Series B Preferred Stock or Series C Preferred Stock. Our board may grant such an exemption, subject to such conditions, representations and undertakings as it may determine in its sole discretion. These ownership limits could delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders. Our board of directors has granted limited exemptions to Fortress Principal Investment Holdings II LLC, our manager, a third party group of funds managed by Cohen & Steers, and certain affiliates of these entities.

We have adopted a stockholder rights agreement. Under the terms of the rights agreement, in general, if a person or group acquires more than 15% of the outstanding shares of our common stock, all of our other common stockholders will have the right to purchase securities from us at a discount to such securities' fair market value, thus causing substantial dilution to the acquiring person. The rights agreement may have the effect of inhibiting or impeding a change in control not approved by our board of directors and, therefore, could adversely affect our stockholders' ability to realize a premium over the then-prevailing market price for our common stock in connection with such a transaction. In addition, since our board of directors can prevent the rights agreement from operating, in the event our board approves of an acquiring person, the rights agreement gives our board of directors significant discretion over whether a potential acquirer's efforts to acquire a large interest in us will be successful. Because the rights agreement contains provisions that are designed to assure that the executive officers, our manager and its affiliates will never, alone, be considered a group that is an acquiring person, the rights agreement provides the executive officers, our manager and its affiliates with certain advantages under the rights agreement that are not available to other stockholders.


	Year Ended December 31,
	2005			2004			2003			2002			2001
Operating Data										(2)			(1)
Revenues
Interest income	$	348,516		$	225,761		$	133,183		$	73,620		$	48,729
Other income		29,697			23,908			18,901			18,716			50,348
		378,213			249,669			152,084			92,336			99,077
Expenses
Interest expense		226,446			136,398			76,877			44,238			30,495
Other expense		42,529			29,259			20,828			18,197			36,865
		268,975			165,657			97,705			62,435			67,360

Equity in earnings of unconsolidated subsidiaries		5,930			12,465			862			362			2,807
Income taxes on related taxable subsidiaries		(321	)		(2,508	)		—			—			—
		5,609			9,957			862			362			2,807

Income from continuing operations		114,847			93,969			55,241			30,263			34,524
Income from discontinued operations		2,108			4,446			877			1,232			9,147
Net income		116,955			98,415			56,118			31,495			43,671
Preferred dividends and related accretion		(6,684	)		(6,094	)		(4,773	)		(1,162	)		(2,540	)
Income available for common stockholders	$	110,271		$	92,321		$	51,345		$	30,333		$	41,131
Net income per share of common stock, diluted	$	2.51		$	2.46		$	1.96		$	1.68		$	2.49
Income from continuing operations per share of common
stock, after preferred dividends and related accretion, diluted	$	2.46		$	2.34		$	1.93		$	1.61		$	1.94
Weighted average number of shares of common stock
outstanding, diluted		43,986			37,558			26,141			18,090			16,493
Dividends declared per share of common stock	$	2.500		$	2.425		$	1.950		$	2.050		$	2.000

	As Of December 31,
	2005		2004		2003		2002		2001 (1)
Balance Sheet Data
Real estate securities, available for sale	$	4,554,519	$	3,369,496	$	2,192,727	$	1,025,010	$	501,509
Real estate related loans, net		615,551		591,890		402,784		26,417		20,662
Residential mortgage loans, net		600,682		654,784		586,237		258,198		—
Operating real estate, net		16,673		57,193		102,995		113,652		524,834
Cash and cash equivalents		21,275		37,911		60,403		45,463		31,360
Total assets		6,209,699		4,932,720		3,550,299		1,574,828		1,262,509
Debt		5,212,358		4,021,396		2,924,552		1,217,007		897,390
Total liabilities		5,291,696		4,136,005		3,010,936		1,288,326		928,637
Common stockholders' equity		815,503		734,215		476,863		284,241		310,545
Preferred stock		102,500		62,500		62,500		—		—

Supplemental Balance Sheet Data
Common shares outstanding		43,913		39,859		31,375		23,489		16,489
Book value per share of common stock, subsequent to
initial public offering	$	18.57	$	18.42	$	15.20	$	12.10		N/A

(1)	Represents the operations and financial position of our predecessor.

(2)	Includes the operations of our predecessor through the date of commencement of our operations, July 12, 2002.

(1)

We believe FFO is one appropriate measure of the operating performance of real estate companies because it provides investors with information regarding our ability to service debt and make capital expenditures. 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 our manager. FFO, for our purposes, represents net income available for common stockholders (computed in accordance with GAAP), excluding extraordinary items, plus depreciation of our 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 our 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.

Newcastle Investment Corp. is a real estate investment and finance company. We invest in 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, 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 asset quality, diversification, match funded financing and credit risk 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 agency residential mortgage backed securities (RMBS). 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 agency RMBS 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 residential loans. We also own, directly and indirectly, interests in operating real estate.

Since the tightening of spreads was more pronounced in fixed rate investments than in floating rate investments, we increased our investment in floating rate assets. Recently rising interest rates and increasing property values have contributed to a high prepayment rate on our floating rate investments. These asset prepayments, coupled with the proceeds from sales of investments, increase our uninvested cash. Tightened credit spreads and the resulting scarcity of attractive investments have caused us to be more selective in our investment process, which in turn has caused delays in the investment or reinvestment of our cash, leading to a reduction in our overall return on equity. Furthermore, the reinvestment of proceeds from investments that prepaid or were sold has generally been at lower yields than the yields earned on such prepaid or sold investments due to the environment of tighter spreads.

If, in any taxable year, we fail to satisfy one or more of the various tax law requirements, we could fail to qualify as a REIT. In addition, if Newcastle Investment Holdings failed to qualify as a REIT and we are treated as a successor to Newcastle Investment Holdings, this could cause us to likewise fail to qualify as a REIT. If we fail to qualify as a REIT for a particular tax year, our income in that year would be subject to U.S. federal corporate income tax (including any applicable alternative minimum tax), and we may need to borrow funds or liquidate certain investments in order to pay the applicable tax, and we would not be compelled by the Code to make distributions. Unless entitled to relief under certain statutory provisions, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost.

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. A summary of our significant accounting policies is presented in Note 2 to our consolidated financial statements, which appear in “Financial Statements and Supplementary Data.” The following is a summary of our accounting policies that are most effected by judgments, estimates and assumptions.

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, which became effective in the first quarter of 2004, 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 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 holding variable interests.

To date, we have 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 will 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.” 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 estimated 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.

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. 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. 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 factors, 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, if necessary, 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. To date, no such write-downs have been made.

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 quality, 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 would be 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. A rollforward of the provision, if any, is included in Note 4 to our consolidated financial statements in “Financial Statements and Supplementary Data.”

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.

We purchase, directly and indirectly, real estate related, commercial mortgage and residential mortgage loans, including manufactured housing 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, delinquencies and loss severities for the type and seasoning of loans being 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. We have recorded approximately $2.9 million of impairment with respect to the ICH loans in 2005, primarily related to a single borrower who defaulted on a number of cross-collateralized loans. In 2006, we transferred those loans out of the securitization trust, and foreclosed on the related properties. To date, no other impairments have been recorded.

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 loans acquired at a discount for credit quality, 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. We have recorded approximately $5.5 million of provision related to our residential mortgage loan segment in 2005. A rollforward of the provision is included in Note 5 to our consolidated financial statements in “Financial Statements and Supplementary Data.”

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. In December 2003, we classified five properties as held for sale and recorded a loss of $1.5 million; these properties were sold in June 2004. In March 2004, we classified one property as held for sale, which did not result in a loss; this property was sold in June 2005 at a net loss of $0.7 million, primarily due to costs associated with the sale. No other losses have been recorded with respect to operating real estate subsequent to our initial public offering.

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. We understand that this issue has been submitted to accounting standard setters for resolution. If we were to change our current accounting treatment for these transactions, our total assets and total liabilities would each be reduced by $287.9 million and $240.4 million at December 31, 2005 and 2004, respectively.

	Year-to-Year Increase (Decrease)						Year-to-Year Percent Change						Explanation
	2005/2004			2004/2003			2005/2004			2004/2003			2005/2004			2004/2003
Interest income	$	122,755		$	92,578			54.4	%		69.5	%		(1	)		(1	)
Rental and escalation income		1,903			506			40.1	%		11.9	%		(2	)		(2	)
Gain on sale of investments		1,991			5,135			10.9	%		39.0	%		(3	)		(3	)
Other income		1,895			(634	)		222.9	%		(42.7	%)		(4	)
Interest expense		90,048			59,521			66.0	%		77.4	%		(1	)		(1	)
Property operating expense		(212	)		148			(8.2	%)		6.1	%		(2	)		(2	)
Loan and security servicing expense		2,936			903			96.0	%		41.9	%		(1	)		(1	)
Provision for credit losses		8,421			-			N/A			N/A			(5	)
General and administrative expense		(438	)		1,449			(9.5	%)		46.0	%		(6	)		(6	)
Management fee to affiliate		2,705			4,152			25.5	%		64.2	%		(7	)		(7	)
Incentive compensation to affiliate		(332	)		1,733			(4.2	%)		27.8	%		(7	)		(7	)
Depreciation and amortization		190			46			42.1	%		11.4	%		(8	)		(8	)
Equity in earnings of
unconsolidated subsidiaries, net of taxes on related taxable subsidiaries		(4,348	)		9,095			(43.7	%)		1,055.1	%		(9	)		(9	)
Income from continuing operations	$	20,878		$	38,728			22.2	%		70.1	%

	Year-to-Year Increase
	Interest Income			Interest Expense
	2005/2004			2005/2004
Real estate security and loan portfolios (A)	$	61,251		$	48,213
Agency RMBS		18,350			16,981
Residential mortgage loan portfolio		1,147			5,727
Manufactured housing loan portfolio		27,717			13,164
Other real estate related loans		20,878			3,809
Other (B)		3,181			7,023
ABS - manufactured housing portfolio (C)		(2,777	)		(426	)
ICH loan portfolio (C)		(3,963	)		(3,655	)
Other real estate related loans (C)		(3,029	)		(788	)
	$	122,755		$	90,048
(A) Represents our third through our eighth CBO financings and the acquisition of the
related collateral.
(B) Primarily due to increasing interest rates on floating rate assets and liabilities owned
during the entire period.
(C) These loans received paydowns during the period which served to offset the
amounts listed above.

	Year-to-Year Increase
	Interest Income		Interest Expense
	2004/2003		2004/2003
Real estate security and loan portfolios (A)	$	43,682	$	31,856
ABS - manufactured housing portfolio		14,211		4,824
Residential mortgage loan portfolio		7,113		4,701
ICH loan portfolio		13,870		11,878
Other real estate related loans		9,332		3,528
Other (B)		4,370		2,734
	$	92,578	$	59,521
(A) Represents our second through our seventh CBO financings and the acquisition of the
related collateral.
(B) Primarily due to increasing interest rates on floating rate assets and liabilities owned
during the entire period.

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. 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’ policies and rates applicable thereto, and the relative attractiveness of alternative investment or lending opportunities. We 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 expect to meet our short term liquidity requirements generally through our cash flow provided by operations and our credit facility, as well as investment specific borrowings. In addition, at December 31, 2005, we had an unrestricted cash balance of $21.3 million and an undrawn balance of $55.0 million on our credit facility. Our cash flow provided by operations differs from our net income due to five 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, and (v) unrealized gains or losses on our non-hedge derivatives, particularly our total return swaps and our warehouse agreements, as described below. 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.

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	$	426,653	$	423,191	5.67% (2)	Jul 2038	4.89	%	3.18	$	331,653	$	562,803	5.01	$	-	$	262,732
Real estate securities and loans	Apr 2002		444,000		441,054	5.43% (2)	Apr 2037	6.56	%	4.46		372,000		498,998	5.61		56,526		290,000
Real estate securities and loans	Mar 2003		472,000		468,413	5.46% (2	Mar 2038	5.08	%	6.30		427,800		516,042	5.25		142,775		276,060
Real estate securities and loans	Sep 2003		460,000		455,657	5.16% (2)	Sep 2038	5.38	%	6.85		442,500		506,290	4.71		180,598		192,500
Real estate securities and loans	Mar 2004		414,000		410,511	5.15% (2)	Mar 2039	4.94	%	6.61		382,750		444,037	5.27		214,876		165,300
Real estate securities and loans	Sep 2004		454,500		450,639	5.09% (2)	Sep 2039	5.03	%	7.19		442,500		494,099	5.80		221,569		189,373
Real estate securities and loans	Apr 2005		447,000		442,379	4.85% (2)	Apr 2040	5.10	%	8.17		439,600		481,954	6.54		193,471		243,337
Real estate securities	Dec 2005		442,800		438,540	4.83% (2)	Dec 2050	5.14	%	9.53		436,800		497,935	8.49		97,349		341,506
			3,560,953		3,530,384			5.27	%	6.55		3,275,603		4,002,158	5.86		1,107,164		1,960,808
Other Bonds Payable
ICH loans (3)	(3)		141,311		141,311	6.68% (2)	Aug 2030	6.68	%	1.46		3,605		161,288	1.55		3,605		-
Manufactured housing loans (4)	Jan 2005		212,019		212,019	LIBOR +1.25%	Jan 2006(7)	5.45	%	0.08		212,019		267,456	5.78		6,356		227,576
			353,330		353,330			5.94	%	0.63		215,624		428,744	4.23		9,961		227,576
Notes Payable
Residential mortgage loans (4)	Nov 2004		260,441		260,441	LIBOR+0.16%	Nov 2007	4.70	%	1.21		260,441		288,683	2.69		282,589		-
			260,441		260,441			4.70	%	1.21		260,441		288,683	2.69		282,589		-
Repurchase Agreements (4) (10)
Residential mortgage loans	Rolling		41,853		41,853	LIBOR + 0.43%	Mar 2006	4.95	%	0.25		41,853		44,543	2.98		43,511		-
Agency RMBS (5)	Rolling		671,526		671,526	LIBOR + 0.13%	Jan 2006	4.48	%	0.08		671,526		692,486	4.90		-		665,965
Real estate securities	Rolling		149,546		149,546	LIBOR + 0.58%	Various (8)	4.65	%	0.16		149,546		166,737	5.86		31,450		89,403
Real estate related loans	Rolling		185,278		185,278	LIBOR + 1.01%	Various (8)	5.38	%	0.08		185,278		266,669	1.82		266,630		-
			1,048,203		1,048,203			4.68	%	0.10		1,048,203		1,170,435	4.29		341,591		755,368
Credit facility (6)			20,000		20,000	LIBOR +2.50% (9)	Jul 2008	6.86	%	2.55		20,000		-	-		-		-
Total debt obligations		$	5,242,927	$	5,212,358			5.17	%	4.59	$	4,819,871	$	5,890,020	5.27	$	1,741,305	$	2,943,752

(1) Including the effect of applicable hedges.

(2) Weighted average, including floating and fixed rate classes.

(3) See "Business-Our Investing Activities-Real Estate Related Loans" above.

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

(5) A maximum of $1 billion is available until November 2006.

(6) A maximum of $100 million can be drawn (increased from $75 million in February 2006).

(7) This financing was replaced with a new term financing in January 2006; the new maturity date is January 2009.

(8) The longest maturity is March 2006.

(9) In addition, unused commitment fees of between 0.125% and 0.250% are paid.

(10) The counterparties on our repurchase agreements include: Bank of America Securities LLC ($693.4 million), Bear Stearns Mortgage Capital Corporation ($181.1 million), Greenwich Capital Markets Inc ($72.2 million), Deutsche Bank AG ($58.1 million), and other ($43.4 million).

We have entered into arrangements with a major investment bank 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 Assets 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, 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, less any negative change in value amounts, will be returned to us upon termination of the contract. The following table presents information on these instruments as of December 31, 2005.

We enter into short term warehouse agreements pursuant to which we make deposits with major investment banks for the right to purchase commercial mortgage backed securities, unsecured REIT debt, real estate related loans and real estate related asset backed securities for our real estate securities portfolios, prior to their being financed with CBOs. These agreements are treated as non-hedge derivatives for accounting purposes and are therefore marked to market through current income. The cost to us if the related CBO is not consummated is limited, except where the non-consummation results from our gross negligence, willful misconduct or breach of contract, to payment of the Net Loss, if any, as defined, up to the related deposit, less any Excess Carry Amount, as defined, earned on such deposit. The income recorded on these agreements was approximately $2.4 million, $3.1 million and $3.6 million in 2005, 2004 and 2003, respectively.

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 year, the combination of widening credit spreads and increasing interest rates has resulted in a net decrease in unrealized gains on our real estate securities portfolio. We believe that our ongoing investment activities benefit in general from an environment of widening credit spreads and increasing interest rates. While such an environment will likely result in a decrease in the fair value of our existing securities portfolio and therefore reduce our book equity and ability to realize gains on such existing securities, it would not directly affect our earnings or our cash flow or our ability to pay dividends.

Interest rate changes may also impact our net book value as our real estate securities and related hedge derivatives are marked to market each quarter. Our loan investments and debt obligations are not marked to market. Generally, as interest rates increase, the value of our fixed rate securities decreases, and as interest rates decrease, the value of such securities will increase. In general, we would expect that over time, decreases in the value of our real estate securities portfolio attributable to interest rate changes will be offset to some degree by increases in the value of our swaps, and vice versa. However, the relationship between spreads on securities and spreads on swaps may vary from time to time, resulting in a net aggregate book value increase or decline. Our real estate securities portfolio is largely financed to maturity through long term CBO financings that are not redeemable as a result of book value changes. Accordingly, unless there is a material impairment in value that would result in a payment not being received on a security, changes in the book value of our securities portfolio will not directly affect our recurring earnings or our ability to pay dividends.

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 within a securitization transaction. The senior unsecured REIT debt securities we invest in reflect comparable credit risk. Credit risk refers to each individual borrower’s ability to make required interest and principal payments on the scheduled due dates. We believe, based on our due diligence process, that these securities offer attractive risk-adjusted returns with long term principal protection under a variety of default and loss scenarios. While the expected yield on these securities is sensitive to the performance of the underlying assets, the more subordinated securities or other features of the securitization transaction, in the case of commercial mortgage and asset backed securities, and the issuer’s underlying equity and subordinated debt, in the case of senior unsecured REIT debt securities, are designed to bear the first risk of default and loss. We further minimize credit risk by actively monitoring our real estate securities and loan portfolio and the underlying credit quality of our holdings and, where appropriate, repositioning our investments to upgrade the credit quality on our investments. While we have not experienced any significant credit losses, 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.

Our real estate securities are also subject to spread risk. Our fixed rate securities are valued based on a market credit spread over the rate payable on fixed rate U.S. Treasuries of like maturity. In other words, their value is dependent on the yield demanded on such securities by the market based on their credit relative to U.S. Treasuries. Excessive supply of such securities combined with reduced demand will generally cause the market to require a higher yield on such securities, resulting in the use of a higher (or “wider”) spread over the benchmark rate (usually the applicable U.S. Treasury security yield) to value such securities. Under such conditions, the value of our real estate securities portfolio would tend to decline. Conversely, if the spread used to value such securities were to decrease (or “tighten”), the value of our real estate securities portfolio would tend to increase. Our floating rate securities are valued based on a market credit spread over LIBOR and are effected similarly by changes in LIBOR spreads. Such changes in the market value of our real estate securities portfolio may effect our net equity, net income or cash flow directly through their impact on the amount of unrealized gains or losses on available-for-sale securities, and therefore on our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital. If the value of our securities subject to repurchase agreements were to decline, it could affect our ability to refinance such securities upon the maturity of the related repurchase agreements, adversely impacting our rate of return on such securities. See “Quantitative and Qualitative Disclosures About Market Risk-Credit Spread Exposure” below.

Our real estate securities and loan portfolios are diversified by asset type, industry, location and issuer. At December 31, 2005, our core investment portfolio (as defined above) had 534 real estate securities and loans. The largest investment in our core investment portfolio was $138.8 million and its average investment size was $9.0 million at December 31, 2005. The weighted average credit spread on this portfolio (i.e. the yield premium on our investments over the comparable U.S. Treasury rate or LIBOR) was 2.61% as of December 31, 2005. Furthermore, our real estate securities are supported by pools of underlying loans. For instance, our CMBS investments had over 21,000 underlying loans at December 31, 2005. We expect that this diversification helps to minimize the risk of capital loss, and will also enhance the terms of our financing structures.

Contract		Terms
CBO bonds payable		Described under “Quantitative and Qualitative Disclosures About Market Risk”
Other bonds payable		Described under “Quantitative and Qualitative Disclosures About Market Risk”
Notes payable		Described under “Quantitative and Qualitative Disclosures About Market Risk”
Repurchase agreements		Described under “Quantitative and Qualitative Disclosures About Market Risk”
Credit facility		Described under “Quantitative and Qualitative Disclosures About Market Risk”
Interest rate swaps, treated as hedges		Described under “Quantitative and Qualitative Disclosures About Market Risk”
Non-hedge derivative obligations		Described under “Quantitative and Qualitative Disclosures About Market Risk”
CBO wrap agreement		Two classes of our CBO bonds, with an aggregate $718.0 million face amount, were issued subject to remarketing procedures and related agreements whereby such bonds are remarketed and sold on a periodic basis. $395.0 million of these bonds are fully insured by a third party with respect to the timely payment of interest and principal thereon, pursuant to a financial guaranty insurance policy (“wrap”). We pay annual fees of 0.12% of the outstanding face amount of the bonds under this agreement.
CBO backstop agreements		In connection with the remarketing procedures described above, backstop agreements have been created whereby a third party financial institution is required to purchase the $718.0 million face amount of bonds at the end of any remarketing period if such bonds could not be resold in the market by the remarketing agent. We pay annual fees between 0.15% and 0.20% of the outstanding face amount of such bonds under these agreements.
CBO remarketing agreements		In connection with the remarketing procedures described above, the remarketing agent is paid an annual fee of 0.05% of the outstanding face amount of the bonds under the remarketing agreements.
Loan servicing agreements		We are a party to servicing agreements with respect to our residential mortgage loans, including manufactured housing loans, and our ICH loans. We pay annual fees generally equal to 0.38% of the outstanding face amount of the residential mortgage loans, 1.00% of the outstanding face amount of the manufactured housing loans, and approximately 0.11% of the outstanding face amount of the ICH loans under these agreements.
Contract		Terms
Trustee agreements		We have entered into trustee agreements in connection with our securitized investments, primarily our CBOs. We pay annual fees of between 0.015% and 0.020% of the outstanding face amount of the CBO bonds under these agreements.
Management agreement		Our manager is paid an annual management fee of 1.5% of our gross equity, as defined, an expense reimbursement, and incentive compensation equal to 25% of our FFO above a certain threshold. For more information on this agreement, as well as historical amounts earned, see Note 10 to our audited consolidated financial statements under “Financial Statements and Supplementary Data.”

	Actual Payments		Fixed and Determinable Payments Due by Period (2)
Contract	2005 (1)		2006			2007-2008			2009-2010			Thereafter			Total

CBO bonds payable	$	130,722	$	-		$	-		$	-		$	3,560,953		$	3,560,953
Other bonds payable		138,380		212,019			-			-			141,311			353,330
Notes payable		408,283		-			260,441			-			-			260,441
Repurchase agreements		284,073		1,048,203			-			-			-			1,048,203
Credit facility		42,204		-			20,000			-			-			20,000
Interest rate swaps, treated as hedges		25,749		(3	)		(3	)		(3	)		(3	)		(3	)
Non-hedge derivative obligations		907		(3	)		(3	)		(3	)		(3	)		(3	)
CBO wrap agreement		481		(3	)		(3	)		(3	)		(3	)		(3	)
CBO backstop agreements		1,147		(3	)		(3	)		(3	)		(3	)		(3	)
CBO remarketing agreements		316		(3	)		(3	)		(3	)		(3	)		(3	)
Loan servicing agreements		4,851		(3	)		(3	)		(3	)		(3	)		(3	)
Trustee agreements		747		(3	)		(3	)		(3	)		(3	)		(3	)
Management agreement		21,132		(3	)		(3	)		(3	)		(3	)		(3	)
Total	$	1,058,992	$	1,260,222		$	280,441		$	-		$	3,702,264		$	5,242,927

(1)	Includes all payments made under the respective agreements. The management agreement payments shown include $13.1 million of management fees and expense reimbursements and $8.0 million of incentive compensation.

(2)	Represents debt principal due based on contractual maturities.

(3)	These contracts do not have fixed and determinable payments.

We believe Funds from Operations (FFO) is one appropriate measure of the operating performance of real estate companies because it provides investors with information regarding our ability to service debt and make capital expenditures. 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 our manager. FFO, for our purposes, represents net income available for common stockholders (computed in accordance with GAAP), excluding extraordinary items, plus depreciation of our 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.

	Book Equity December 31, 2005 (1)			Average Invested Common Equity for the Year Ended December 31, 2005 (2)			FFO for the Year Ended December 31, 2005			Return on Invested Common Equity (ROE) for the Year Ended December 31, 2005 (3)			ROE for the Year Ended December 31, 2004 (3)			ROE for the Year Ended December 31, 2003 (3)

Real estate securities and real estate related loans	$	790,990		$	700,146		$	125,028			17.9	%		20.5	%		23.2	%
Residential mortgage loans		86,024			95,148			8,706			9.1	%		16.7	%		25.7	%
Operating real estate		35,976			47,579			1,686			3.5	%		9.2	%		12.2	%
Unallocated (1)		(139,515	)		(66,508	)		(31,389	)		N/A			N/A			N/A
Total (2)		773,475		$	776,365		$	104,031			13.4	%		14.5	%		16.4	%
Preferred stock		102,500
Accumulated depreciation		(3,536	)
Accumulated other comprehensive income		45,564
Net book equity	$	918,003

As of December 31, 2005, we owned an aggregate of approximately $48.5 million of securities of Global Signal Trust I and II, special purpose vehicles established by Global Signal Inc., which were purchased in private placements from underwriters in January 2004 and April 2005. One of our directors is the CEO, chairman of the board, and President of Global Signal, Inc. and private equity funds managed by an affiliate of our manager own a significant portion of Global Signal Inc.’s common stock. In February 2006, we purchased from an underwriter $91.0 million face amount of BBB- and BB+ rated securities of Global Signal Trust III, a special purpose vehicle established by Global Signal, Inc. Pursuant to an underwritten 144A offering, approximately $1,550.0 million of Global Signal Trust III securities were issued in 8 classes, rated AAA through BB+, of which the BBB- and BB+ classes aggregated $188.3 million. The balance of the BBB- and BB+ securities were sold on identical terms to third parties. A portion of the proceeds were used to repay $402.7 million of indebtedness of Global Signal, Inc., of which we owned $31.5 million, and to fund the prepayment penalty associated with this debt.

In March 2004, we and a private investment fund managed by an affiliate of our manager co-invested and each indirectly own an approximately 49% interest in two limited liability companies that have acquired, in a sale-leaseback transaction, a portfolio of convenience and retail gas stores from a public company. The properties are subject to a number of master leases, the initial term of which in each case is a minimum of 15 years. This investment was financed with nonrecourse debt at the limited liability company level and our investment in this entity, reflected as an investment in an unconsolidated subsidiary on our consolidated balance sheet, was approximately $12.2 million at December 31, 2005. In March 2005, the property management agreement related to these properties was transferred to an affiliate of our manager from a third party servicer; our allocable portion of the related fees, approximately $20,000 per year for three years, was not changed.

In December 2004, we and a private investment fund managed by an affiliate of our manager each made an initial investment in a new real estate related loan with a maximum loan amount of $128 million, subject to being drawn down under certain conditions. The loan is secured by a mezzanine loan on one of the phases and a first mortgage on the remaining phases of a large development project and related assets. We own a 27.3% interest in the loan and the private investment fund owns a 72.7% interest in the loan. Major decisions require the unanimous approval of holders of interests in the loan, while other decisions require the approval of a majority of holders of interests in the loan, based on their percentage interests therein. We and our affiliated investment fund are each entitled to transfer all or any portion of our respective interests in the loan to third parties. Our investment in this loan was approximately $22.4 million at December 31, 2005.

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 effect our financial position or operating results, please refer to the “Application of Critical Accounting Policies” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Our primary interest rate exposures relate to our real estate securities, loans, floating rate debt obligations, interest rate swaps, and interest rate caps. Changes in the general level of interest rates can effect our net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities and hedges. Changes in the level of interest rates also can effect, among other things, our ability to acquire real estate securities and loans at attractive prices, the value of our real estate securities, loans and derivatives, and our ability to realize gains from the sale of such assets. While our strategy is to utilize interest rate swaps, caps and match funded financings in order to limit the effects of changes in interest rates on our operations, there can be no assurance that our profitability will not be adversely affected during any period as a result of changing interest rates. 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 of December 31, 2005, a 100 basis point increase in short term interest rates would decrease our earnings by approximately $0.2 million per annum.

Interest rate changes may also impact our net book value as our real estate securities and related hedge derivatives are marked to market each quarter. Our loan investments and debt obligations are not marked to market. Generally, as interest rates increase, the value of our fixed rate securities decreases, and as interest rates decrease, the value of such securities will increase. In general, we would expect that over time, decreases in the value of our real estate securities portfolio attributable to interest rate changes will be offset to some degree by increases in the value of our swaps, and vice versa. However, the relationship between spreads on securities and spreads on swaps may vary from time to time, resulting in a net aggregate book value increase or decline. Our real estate securities portfolio is largely financed to maturity through long term CBO financings that are not redeemable as a result of book value changes. Accordingly, unless there is a material impairment in value that would result in a payment not being received on a security, changes in the book value of our portfolio will not directly affect our recurring earnings or our ability to pay dividends. As of December 31, 2005, a 100 basis point change in short term interest rates would impact our net book value by approximately $58.4 million.

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 investments 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 investments 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 allows us to reduce the impact of changing interest rates on our earnings. Our entire portfolio of assets and the related liabilities had a weighted average lives of 5.10 years and 4.59 years, respectively, as of December 31, 2005. 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. If spreads for such liabilities widen or if demand for such liabilities ceases to exist, then our ability to execute future financings will be severely restricted.

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 upfront 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.

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.

Our real estate securities are also subject to spread risk. Our fixed rate securities are valued based on a market credit spread over the rate payable on fixed rate U.S. Treasuries of like maturity. In other words, their value is dependent on the yield demanded on such securities by the market based on their credit relative to U.S. Treasuries. Excessive supply of such securities combined with reduced demand will generally cause the market to require a higher yield on such securities, resulting in the use of a higher (or “wider”) spread over the benchmark rate (usually the applicable U.S. Treasury security yield) to value such securities. Under such conditions, the value of our real estate securities portfolio would tend to decline. Conversely, if the spread used to value such securities were to decrease (or “tighten”), the value of our real estate securities portfolio would tend to increase. Our floating rate securities are valued based on a market credit spread over LIBOR and are effected similarly by changes in LIBOR spreads. Such changes in the market value of our real estate securities portfolio may effect our net equity, net income or cash flow directly through their impact on unrealized gains or losses on available-for-sale securities, and therefore our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital.

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. 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 December 31, 2005 and do not take into consideration the effects of subsequent interest rate or credit spread fluctuations.

	Carrying Value December 31, 2005					December 31, 2005								Fair Value December 31, 2005
	2005			2004		Principal Balance or Notional Amount			Weighted Average Yield/ Funding Cost			Maturity Date		2005			2004
Assets:
Real estate securities,
available for sale (1)	$	4,554,519		$	3,369,496	$	4,603,217			6.25	%		(1)	$	4,554,519		$	3,369,496
Real estate securities
portfolio deposit (2)		-			25,411		-			N/A			N/A		-			25,411
Real estate related loans (3)		615,551			591,890		619,783			8.74	%		(3)		615,865			600,528
Residential mortgage loans (4)		600,682			654,784		610,970			6.15	%		(4)		609,486			654,784
Interest rate caps, treated as hedges (5)		2,145			3,554		342,351			N/A			(5)		2,145			3,554
Total return swaps (6)		3,096			399		414,034			N/A			(6)		3,096			399
Liabilities:
CBO bonds payable (7)		3,530,384			2,656,510		3,560,953			5.27	%		(7)		3,594,638			2,720,704
Other bonds payable (8)		353,330			222,266		353,330			5.94	%		(8)		356,294			227,510
Notes payable (9)		260,441			652,000		260,441			4.70	%		(9)		260,441			652,000
Repurchase agreements (10)		1,048,203			490,620		1,048,203			4.68	%		(10)		1,048,203			490,620
Credit facility (11)		20,000			-		20,000			6.86	%		(11)		20,000			-
Interest rate swaps, treated as hedges (12)		(41,170	)		13,239		2,943,752			N/A			(12)		(41,170	)		13,239
Non-hedge derivative obligations (13)		90			796		(13	)		N/A			(13)		90			796

Notional Balance	Maturity Date	Swapped Rate	Fixed Rate	Fair Value
$ 262,732	March 2009	1-Month LIBOR*	3.1250%	$ (10,106)
290,000	April 2011	3-Month LIBOR	5.9325%	12,628
276,060	March 2013	3-Month LIBOR	3.8650%	(14,599)
192,500	March 2015	1-Month LIBOR	4.8880%	478
165,300	March 2014	3-Month LIBOR	3.9945%	(8,492)
189,373	September 2014	3-Month LIBOR	4.3731%	(6,566)
243,337	March 2015	1-Month LIBOR	4.8495%	(331)
307,355	December 2015	1-Month LIBOR	4.9885%	2,179
34,151	December 2015	1-Month LIBOR	5.0098%	335
227,576	February 2014	1-Month LIBOR	4.2070%	(5,010)
5,000	November 2008	1-Month LIBOR	3.5400%	(165)
4,500	November 2018	1-Month LIBOR	4.4800%	(88)
45,600	January 2009	1-Month LIBOR	3.6500%	(1,467)
12,000	January 2015	1-Month LIBOR	4.5100%	(334)
68,606	October 2009	1-Month LIBOR	3.7150%	(1,763)
65,257	September 2009	1-Month LIBOR	3.7090%	(1,665)
22,465	December 2009	1-Month LIBOR	3.8290%	(534)
7,614	August 2009	1-Month LIBOR	4.0690%	(128)
22,091	February 2010	1-Month LIBOR	4.1030%	(386)
34,692	April 2010	1-Month LIBOR	4.5310%	(245)
30,062	March 2010	1-Month LIBOR	4.5260%	(212)
25,328	April 2010	1-Month LIBOR	4.1640%	(413)
42,954	March 2010	1-Month LIBOR	4.0910%	(760)
44,113	May 2010	1-Month LIBOR	3.9900%	(925)
22,037	April 2010	1-Month LIBOR	3.9880%	(457)
38,293	September 2010	1-Month LIBOR	4.3980%	(421)
18,698	September 2010	1-Month LIBOR	4.4300%	(190)
45,174	August 2010	1-Month LIBOR	4.4865%	(378)
28,336	August 2010	1-Month LIBOR	4.4210%	(290)
21,666	June 2010	1-Month LIBOR	4.4870%	(180)
22,818	August 2010	1-Month LIBOR	4.4900%	(192)
44,776	July 2010	1-Month LIBOR	4.4290%	(455)
60,985	December 2010	1-Month LIBOR	4.7710%	(78)
5,433	December 2015	3-Month LIBOR	4.9618%	8
16,870	December 2015	3-Month LIBOR	4.9670%	32
$ 2,943,752				$ (41,170)

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Newcastle Investment Corporation and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


	December 31,
	2005			2004
Assets
Real estate securities, available for sale - Note 4	$	4,554,519		$	3,369,496
Real estate securities portfolio deposit - Note 4		—			25,411
Real estate related loans, net - Note 5		615,551			591,890
Residential mortgage loans, net - Note 5		600,682			654,784
Investments in unconsolidated subsidiaries - Note 3		29,953			41,230
Operating real estate, net - Note 6		16,673			57,193
Real estate held for sale - Note 6		—			12,376
Cash and cash equivalents		21,275			37,911
Restricted cash		268,910			77,974
Derivative assets - Note 7		63,834			27,122
Receivables and other assets		38,302			37,333
	$	6,209,699		$	4,932,720

Liabilities and Stockholders' Equity

Liabilities
CBO bonds payable - Note 8	$	3,530,384		$	2,656,510
Other bonds payable - Note 8		353,330			222,266
Notes payable - Note 8		260,441			652,000
Repurchase agreements - Note 8		1,048,203			490,620
Credit facility - Note 8		20,000			—
Derivative liabilities - Note 7		18,392			39,661
Dividends payable		29,052			25,928
Due to affiliates - Note 10		8,783			8,963
Accrued expenses and other liabilities		23,111			40,057
		5,291,696			4,136,005

Commitments and contingencies - Notes 9, 10 and 11		—			—
Stockholders' Equity
Preferred stock, $0.01 par value, 100,000,000 shares authorized, 2,500,000
Redeemable preferred stock, $.01 par value, 100,000,000 shares authorized,
shares of 9.75% Series B Cumulative Redeemable Preferred Stock
and 1,600,000 shares of 8.05% Series C Cumulative Redeemable Preferred Stock,
liquidation preference $25.00 per share, issued and outstanding		102,500			62,500
(Series C issued in 2005)
Common stock, $0.01 par value, 500,000,000 shares authorized, 43,913,409
and 39,859,481 shares issued and outstanding at
December 31, 2005 and 2004, respectively		439			399
Additional paid-in capital		782,735			676,015
Dividends in excess of earnings - Note 2		(13,235	)		(13,969	)
Accumulated other comprehensive income - Note 2		45,564			71,770
		918,003			796,715

	$	6,209,699		$	4,932,720

See notes to consolidated financial statements.

	Year Ended December 31,
	2005			2004			2003
Revenues
Interest income	$	348,516		$	225,761		$	133,183
Rental and escalation income		6,647			4,744			4,238
Gain on sale of investments, net		20,305			18,314			13,179
Other income		2,745			850			1,484
		378,213			249,669			152,084
Expenses
Interest expense		226,446			136,398			76,877
Property operating expense		2,363			2,575			2,427
Loan and security servicing expense		5,993			3,057			2,154
Provision for credit losses		8,421			-			-
General and administrative expense		4,159			4,597			3,148
Management fee to affiliate - Note 10		13,325			10,620			6,468
Incentive compensation to affiliate - Note 10		7,627			7,959			6,226
Depreciation and amortization		641			451			405
		268,975			165,657			97,705

Income before equity in earnings of unconsolidated subsidiaries		109,238			84,012			54,379
Equity in earnings of unconsolidated subsidiaries - Note 3		5,930			12,465			862
Income taxes on related taxable subsidiaries - Note 12		(321	)		(2,508	)		-

Income from continuing operations		114,847			93,969			55,241
Income from discontinued operations - Note 6		2,108			4,446			877
Net Income		116,955			98,415			56,118
Preferred dividends		(6,684	)		(6,094	)		(4,773	)
Income available for common stockholders	$	110,271		$	92,321		$	51,345

Net Income Per Share of Common Stock
Basic	$	2.53		$	2.50		$	1.98
Diluted	$	2.51		$	2.46		$	1.96

Income from continuing operations per share of common stock, after preferred dividends
Basic	$	2.48		$	2.38		$	1.95
Diluted	$	2.46		$	2.34		$	1.93
Income (loss) from discontinued operations per share of common stock
Basic	$	0.05		$	0.12		$	0.03
Diluted	$	0.05		$	0.12		$	0.03
Weighted Average Number of Shares of Common Stock
Outstanding
Basic		43,671,517			36,943,752			25,898,288
Diluted		43,985,642			37,557,790			26,140,777

Dividends Declared per Share of Common Stock	$	2.500		$	2.425		$	1.950

	Preferred Stock				Common Stock
	Shares		Amount		Shares		Amount		Additional Pd. in Capital			Dividends in Excess of Earnings			Accum. Other Comp. Income			Total Stock-Holders' Equity
Stockholders' equity - December 31, 2004		2,500,000	$	62,500		39,859,481	$	399	$	676,015		$	(13,969	)	$	71,770		$	796,715
Dividends declared		-		-		-		-		-			(116,221	)		-			(116,221	)
Issuance of common stock		-		-		3,300,000		33		96,449			-			-			96,482
Issuance of common stock to directors		-		-		2,008		-		67			-			-			67
Exercise of common stock options		-		-		751,920		7		11,687			-			-			11,694
Issuance of preferred stock		1,600,000		40,000		-		-		(1,483	)		-			-			38,517
Comprehensive income:
Net income		-		-		-		-		-			116,955			-			116,955
Net unrealized (loss) on securities		-		-		-		-		-			-			(67,077	)		(67,077	)
Reclassification of net realized (gain) on securities into earnings		-		-		-		-		-			-			(16,015	)		(16,015	)
Foreign currency translation		-		-		-		-		-			-			(1,089	)		(1,089	)
Reclassification of net realized foreign currency translation into earnings		-		-		-		-		-			-			(626	)		(626	)
Net unrealized gain on derivatives designated as cash flow hedges		-		-		-		-		-			-			56,426			56,426
Reclassification of net realized loss on derivatives designated cash flow hedges into earnings		-		-		-		-		-			-			2,175			2,175
Total comprehensive income																			90,749
Stockholders' equity - December 31, 2005		4,100,000	$	102,500		43,913,409	$	439	$	782,735		$	(13,235	)	$	45,564		$	918,003

Stockholders' equity - December 31, 2003		2,500,000	$	62,500		31,374,833	$	314	$	451,806		$	(14,670	)	$	39,413		$	539,363
Dividends declared		-		-		-		-		-			(97,714	)		-			(97,714	)
Issuance of common stock		-		-		8,375,000		84		222,721			-			-			222,805
Issuance of common stock to directors		-		-		2,148		-		60			-			-			60
Exercise of common stock options		-		-		107,500		1		1,428			-			-			1,429
Comprehensive income:
Net income		-		-		-		-		-			98,415			-			98,415
Net unrealized gain on securities		-		-		-		-		-			-			34,088			34,088
Reclassification of net realized (gain) on securities into earnings		-		-		-		-		-			-			(14,574	)		(14,574	)
Foreign currency translation		-		-		-		-		-			-			1,984			1,984
Reclassification of net realized foreign currency translation into earnings		-		-		-		-		-			-			(1,478	)		(1,478	)
Net unrealized gain on derivatives designated as cash flow hedges		-		-		-		-		-			-			11,973			11,973
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings		-		-		-		-		-			-			364			364
Total comprehensive income																			130,772
Stockholders' equity - December 31, 2004		2,500,000	$	62,500		39,859,481	$	399	$	676,015		$	(13,969	)	$	71,770		$	796,715

Continued on next page.

-56-

(dollars in thousands)

	Preferred Stock				Common Stock				Additional Pd. in			Dividends in Excess of			Accum. Other Comp.			Total Stock-Holders'
	Shares		Amount		Shares		Amount		Capital			Earnings			Income			Equity
Stockholders' equity - December 31, 2002		-	$	-		23,488,517	$	235	$	290,935		$	(13,966	)	$	7,037		$	284,241
Dividends declared		-		-		-		-		-			(56,822	)		-			(56,822	)
Issuance of preferred stock		2,500,000		62,500		-		-		(2,436	)		-			-			60,064
Issuance of common stock		-		-		7,882,276		79		163,242			-			-			163,321
Issuance of common stock to directors		-		-		1,540		-		30			-			-			30
Exercise of common stock options		-		-		2,500		-		35			-			-			35
Comprehensive income:
Net income		-		-		-		-		-			56,118			-			56,118
Net unrealized gain on securities		-		-		-		-		-			-			23,670			23,670
Reclassification of net realized (gain) on securities into earnings		-		-		-		-		-			-			(13,185	)		(13,185	)
Foreign currency translation		-		-		-		-		-			-			4,653			4,653
Reclassification of net realized foreign currency translation into earnings		-		-		-		-		-			-			396			396
Net unrealized (loss) on derivatives designated as cash flow hedges		-		-		-		-		-			-			16,842			16,842
Total comprehensive income																			88,494
Stockholders' equity - December 31, 2003		2,500,000	$	62,500		31,374,833	$	314	$	451,806		$	(14,670	)	$	39,413		$	539,363

	Year Ended December 31,
	2005			2004			2003
Cash Flows From Operating Activities
Net income	$	116,955		$	98,415		$	56,118
Adjustments to reconcile net income to net cash provided by operating activities (inclusive of amounts related to discontinued operations):
Depreciation and amortization		818			2,253			3,085
Accretion of discount and other amortization		(2,645	)		1,898			(3,761	)
Equity in earnings of unconsolidated subsidiaries		(5,930	)		(12,465	)		(862	)
Distributions of earnings from unconsolidated subsidiaries		5,930			12,465			862
Deferred rent		(2,539	)		(1,380	)		(1,853	)
Gain on sale of investments		(20,811	)		(22,029	)		(11,789	)
Unrealized gain on non-hedge derivatives		(2,839	)		(3,332	)		(3,696	)
Provision for credit losses		8,421			-			-
Non-cash directors' compensation		67			60			30
Change in
Restricted cash		(7,980	)		(8,137	)		(2,564	)
Receivables and other assets		218			(5,431	)		(9,403	)
Due to affiliates		(180	)		6,518			1,110
Accrued expenses and other liabilities		9,278			21,520			11,177
Net cash provided by operating activities:		98,763			90,355			38,454
Cash Flows From Investing Activities
Purchase of real estate securities		(1,463,581	)		(1,426,762	)		(1,407,948	)
Proceeds from sale of real estate securities		60,254			193,246			255,030
Deposit on real estate securities (treated as a derivative)		(57,149	)		(80,311	)		(59,676	)
Purchase of and advances on loans		(584,270	)		(631,728	)		(685,311	)
Proceeds from settlement of loans		1,901			124,440			164,404
Repayments of loan and security principal		698,002			428,091			105,848
Purchase of derivative instruments		-			-			(5,482	)
Margin deposit on derivative instruments		(53,518	)		-			-
Proceeds from sale of derivative instruments		1,338			-			-
Payments on settlement of derivative instruments		(1,112	)		-			-
Purchase and improvement of operating real estate		(182	)		(141	)		(576	)
Proceeds from sale of operating real estate		52,333			71,871			5,331
Contributions to unconsolidated subsidiaries		-			(26,789	)		(30,871	)
Distributions of capital from unconsolidated subsidiaries		11,277			16,199			225
Payment of deferred transaction costs		(39	)		(280	)		-
Net cash used in investing activities		(1,334,746	)		(1,332,164	)		(1,659,026	)

	Year Ended December 31,
	2005			2004			2003
Cash Flows From Financing Activities
Issuance of CBO bonds payable		880,570			859,719			921,503
Repayments of CBO bonds payable		(10,241	)		(604	)		-
Issuance of other bonds payable		246,547			-			-
Repayments of other bonds payable		(114,780	)		(41,759	)		(6,413	)
Borrowings under notes payable		-			614,106			80,000
Repayments of notes payable		(391,559	)		(119,407	)		(906	)
Borrowings under repurchase agreements		815,840			654,254			663,120
Repayments of repurchase agreements		(258,257	)		(879,417	)		(195,506	)
Draws under credit facility		62,000			-			-
Repayments of credit facility		(42,000	)		-			-
Issuance of common stock		97,680			222,805			168,610
Costs related to issuance of common stock		(1,198	)		-			(5,289	)
Exercise of common stock options		11,694			1,429			35
Issuance of preferred stock		40,000			-			62,500
Costs related to issuance of preferred stock		(1,483	)		-			(2,436	)
Dividends paid		(113,097	)		(88,489	)		(49,280	)
Payment of deferred financing costs		(2,369	)		(3,320	)		(426	)
Net cash provided by financing activities		1,219,347			1,219,317			1,635,512
Net Increase (Decrease) in Cash and Cash Equivalents		(16,636	)		(22,492	)		14,940
Cash and Cash Equivalents, Beginning of Period		37,911			60,403			45,463
Cash and Cash Equivalents, End of Period	$	21,275		$	37,911		$	60,403
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest expense	$	213,070		$	135,172		$	80,522
Cash paid during the period for income taxes	$	448		$	2,639		$	-
Supplemental Schedule of Non-cash Investing and Financing Activities
Common stock dividends declared but not paid	$	27,446		$	24,912		$	15,687
Preferred stock dividends declared but not paid	$	1,606		$	1,016		$	1,016
Deposits used in acquisiton of real estate securities (treated as derivatives)	$	82,334		$	75,824		$	81,492
Consolidation of ICH CMO	$	-		$	-		$	221,773

In December 2003, FIN No. 46R “Consolidation of Variable Interest Entities” was issued as a modification of FIN 46. FIN 46R, which became effective in the first quarter of 2004, 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 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 holding variable interests. The application of FIN 46R did not result in a change in our accounting for any entities. Our CBO subsidiaries are considered VIEs of which we are the primary beneficiary.

Risks and Uncertainties ¾ In the normal course of business, Newcastle encounters primarily two significant types of economic risk: credit and market. Credit risk is the risk of default on Newcastle’s securities, loans, derivatives, and leases that results from a borrower's, derivative counterparty's or lessee's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of investments in securities, loans and derivatives or in real estate due to changes in interest rates, spreads or other market factors, including the value of the collateral underlying loans and securities and the valuation of real estate held by Newcastle. Management believes that the carrying values of its investments are reasonable taking into consideration these risks along with estimated collateral values, payment histories, and other borrower information.

Real Estate Securities and Loans Receivable ¾ Newcastle invests in securities, including commercial mortgage backed securities, senior unsecured debt issued by property REITS, real estate related asset backed securities and agency residential mortgage backed securities. Newcastle also invests in loans, including real estate related loans, commercial mortgage loans, residential mortgage loans and manufactured housing loans. Newcastle determines at acquisition whether loans will be aggregated into pools based on common risk characteristics (credit quality, loan type, and date of origination or acquisition); loans aggregated into pools are accounted for as if each pool were a single loan. Loans receivable are presented in the consolidated balance sheet net of any unamortized discount (or gross of any unamortized premium) and an allowance for loan losses. Discounts or premiums are accreted into interest income on an effective yield or “interest” method, based upon a comparison of actual and expected cash flows, through the expected maturity date of the security or loan. Depending on the nature of the investment, changes to expected cash flows may result in a prospective change to yield or a retrospective change which would include a catch up adjustment. For loans acquired at a discount for credit quality, the difference between contractual cash flows and expected cash flows at acquisition is not accreted (nonaccretable difference). Income is not accrued on non-performing securities or loans; cash received on such securities or loans is treated as income to the extent of interest previously accrued. Interest income with respect to non-discounted securities or loans is recognized on an accrual basis. Deferred fees and costs, if any, are recognized as interest income over the terms of the securities or loans using the interest method. Upon settlement of securities and loans, the excess (or deficiency) of net proceeds over the net carrying value of such security or loan is recognized as a gain (or loss) in the period of settlement. Interest income includes prepayment penalties received of $3.2 million, $0.6 million and $0.4 million in 2005, 2004 and 2003, respectively.

Impairment of Securities and Loans ¾ Newcastle continually evaluates securities and loans for impairment. This evaluation includes the following, as applicable: (i) review of the credit of the issuer or the borrower, (ii) review of the credit rating of the security, (iii) review of the key terms of the security or loan, (iv) review of the performance of the loan or underlying loans, including debt service coverage and loan to value ratios, (v) analysis of the value of the collateral for the loan or underlying loans, (vi) analysis of the effect of local, industry and broader economic factors, and (vii) analysis of trends in defaults and loss severities for similar loans. Securities and loans are considered to be impaired, for financial reporting purposes, when it is probable that Newcastle will be unable to collect all principal or interest when due according to the contractual terms of the original agreements, or, for securities or loans purchased at a discount for credit quality or that represent beneficial interests in securitizations, when Newcastle determines that it is probable that it will be unable to collect as anticipated. For loans purchased at a discount for credit quality, if Newcastle determines that it is probable that it will collect more than previously anticipated, the yield accrued on such loan or security is adjusted upward, on a prospective basis. Upon determination of impairment, Newcastle establishes specific valuation allowances for loans or records a direct write down for securities, through provisions for losses, based on the estimated fair value of the underlying collateral using a discounted cash flow analysis or based on observable market value. Newcastle also establishes allowances for estimated unidentified incurred losses on pools of loans. The allowance for each security or loan is maintained at a level believed adequate by management to absorb probable losses, based on periodic reviews of actual and expected losses. It is Newcastle’s policy to establish an allowance for uncollectible interest on performing securities or loans that are past due more than 90 days or sooner when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. Upon such a determination, those loans are deemed to be non-performing. Actual losses may differ from Newcastle’s estimate.

Derivative transactions are entered into by Newcastle solely for risk management purposes, except for real estate securities portfolio deposits as described in Note 4 and the total return swaps described in Note 5. Such total return swaps are essentially financings of certain reference assets which are treated as derivatives for accounting purposes. The decision of whether or not a given transaction/position (or portion thereof) is hedged is made on a case-by-case basis, based on the risks involved and other factors as determined by senior management, including restrictions imposed by the Code among others. In determining whether to hedge a risk, Newcastle may consider whether other assets, liabilities, firm commitments and anticipated transactions already offset or reduce the risk. All transactions undertaken as hedges are entered into with a view towards minimizing the potential for economic losses that could be incurred by Newcastle. Generally, all derivatives entered into are intended to qualify as hedges under GAAP, unless specifically stated otherwise. To this end, terms of hedges are matched closely to the terms of hedged items.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss, and net payments received or made, on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. Ineffectiveness of approximately $0.2 million and ($0.1 million) of gain (loss) was recorded in 2005 and 2004, respectively, to Other Income. No material ineffectiveness was recorded during the year ended December 31, 2003. The premiums paid for interest rate caps, treated as cash flow hedges, are amortized into interest expense based on the estimated value of such cap for each period covered by such cap.

Investment in Real Estate Securities ¾ Newcastle has classified its investments in securities as available for sale. Securities available for sale are carried at market value with the net unrealized gains or losses reported as a separate component of accumulated other comprehensive income. At disposition, the net realized gain or loss is determined on the basis of the cost of the specific investments and is included in earnings. Unrealized losses on securities are charged to earnings if they reflect a decline in value that is other than temporary. A decline in value is considered other than temporary if either (a) it is deemed probable that Newcastle will be unable to collect all amounts anticipated to be collected at acquisition, or (b) Newcastle does not have the ability and intent to hold such investment until a forecasted market price recovery.

Investment in Operating Real Estate ¾ Operating real estate is recorded at cost less accumulated depreciation. Depreciation is computed on a straight-line basis. Buildings are depreciated over 40 years. Major improvements are capitalized and depreciated over their estimated useful lives. Fees and costs incurred in the successful negotiation of leases are deferred and amortized on a straight-line basis over the terms of the respective leases. Expenditures for repairs and maintenance are expensed as incurred. Newcastle reviews its real estate assets for impairment annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Long-lived assets to be disposed of by sale, which meet certain criteria, are reclassified to Real Estate Held for Sale and measured at the lower of their carrying amount or fair value less costs of sale. The results of operations for such an asset, assuming such asset qualifies as a “component of an entity” as defined, are retroactively reclassified to Income (Loss) from Discontinued Operations for all periods presented.

This potential change in accounting treatment does not affect the economics of the transactions but does affect how the transactions are reported in Newcastle’s financial statements. Newcastle’s cash flows, its liquidity and its ability to pay a dividend would be unchanged, and Newcastle does not believe its taxable income would be affected. Newcastle’s 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. Management understands that this issue has been submitted to accounting standard setters for resolution. If Newcastle were to change its current accounting treatment for these transactions, its total assets and total liabilities would each be reduced by $287.9 million and $240.4 million at December 31, 2005 and 2004, respectively.

	Real Estate Securities and Real Estate Related Loans			Residential Mortgage Loans			Operating Real Estate			Unallocated			Total
December 31, 2005 and the Year then Ended
Gross revenues	$	321,889		$	48,844		$	6,772		$	708		$	378,213
Operating expenses		(4,163	)		(10,384	)		(2,456	)		(24,885	)		(41,888	)
Operating income (loss)		317,726			38,460			4,316			(24,177	)		336,325
Interest expense		(196,026	)		(29,754	)		(251	)		(415	)		(226,446	)
Depreciation and amortization		-			-			(528	)		(113	)		(641	)
Equity in earnings of unconsolidated subsidiaries (A)		3,328			-			2,281			-			5,609
Income (loss) from continuing operations		125,028			8,706			5,818			(24,705	)		114,847
Income (loss) from discontinued operations		-			-			2,108			-			2,108
Net income (loss)	$	125,028		$	8,706		$	7,926		$	(24,705	)	$	116,955
Revenue derived from non-US sources:
Canada	$	-		$	-		$	12,157		$	-		$	12,157
Belgium	$	-		$	-		$	125		$	-		$	125
Total assets	$	5,544,818		$	606,320		$	36,306		$	22,255		$	6,209,699
Long-lived assets outside the US:
Canada	$	-		$	-		$	16,673		$	-		$	16,673
December 31, 2004 and the Year then Ended
Gross revenues	$	225,236		$	19,135		$	4,745		$	553		$	249,669
Operating expenses		(828	)		(2,319	)		(2,678	)		(22,983	)		(28,808	)
Operating income (loss)		224,408			16,816			2,067			(22,430	)		220,861
Interest expense		(124,930	)		(10,863	)		(605	)		-			(136,398	)
Depreciation and amortization		-			-			(445	)		(6	)		(451	)
Equity in earnings of unconsolidated subsidiaries (A)		3,767			-			6,190			-			9,957
Income (loss) from continuing operations		103,245			5,953			7,207			(22,436	)		93,969
Income (loss) from discontinued operations		-			-			4,446			-			4,446
Net income (loss)	$	103,245		$	5,953		$	11,653		$	(22,436	)	$	98,415
Revenue derived from non-US sources:
Canada	$	-		$	-		$	13,203		$	-		$	13,203
Belgium	$	-		$	-		$	10,602		$	-		$	10,602
Total assets	$	4,136,203		$	658,643		$	108,322		$	29,552		$	4,932,720
Long-lived assets outside the US:
Canada	$	-		$	-		$	57,193		$	-		$	57,193
Belgium	$	-		$	-		$	12,376		$	-		$	12,376

	Real Estate Securities and Real Estate Related Loans			Residential Mortgage Loans			Operating Real Estate			Unallocated			Total
December 31, 2003 and the Year then Ended
Gross revenues	$	134,348		$	12,892		$	4,264		$	580		$	152,084
Operating expenses		(821	)		(1,506	)		(2,493	)		(15,603	)		(20,423	)
Operating income (loss)		133,527			11,386			1,771			(15,023	)		131,661
Interest expense		(70,192	)		(6,162	)		(523	)		-			(76,877	)
Depreciation and amortization		-			-			(405	)		-			(405	)
Equity in earnings of unconsolidated subsidiaries (A)		861			-			-			1			862
Income (loss) from continuing operations		64,196			5,224			843			(15,022	)		55,241
Income (loss) from discontinued operations		-			-			877			-			877
Net income (loss)	$	64,196		$	5,224		$	1,720		$	(15,022	)	$	56,118
Revenue derived from non-US sources:
Canada	$	-		$	-		$	16,940		$	-		$	16,940
Belgium	$	-		$	-		$	5,999		$	-		$	5,999
Total assets	$	2,756,262		$	587,831		$	146,635		$	59,571		$	3,550,299
Long-lived assets outside the US:
Canada	$	-		$	-		$	54,250		$	-		$	54,250
Belgium	$	-		$	-		$	78,149		$	-		$	78,149

	Operating Real Estate Subsidiary (A) (B)						Real Estate Loan Subsidiary (A) (C)
	December 31,						December 31,
	2005			2004			2005			2004			2003
Assets	$	77,758		$	89,222		$	35,806		$	47,170		$	61,628
Liabilities		(53,000	)		(53,000	)		-			-			-
Minority interest		(455	)		(666	)		(202	)		(266	)		(348	)
Equity	$	24,303		$	35,556		$	35,604		$	46,904		$	61,280
Equity held by Newcastle (D)	$	12,151		$	17,778		$	17,802		$	23,452		$	30,640

		2005			2004			2005			2004			2003
Revenues	$	10,196		$	25,011		$	6,738		$	7,852		$	1,885
Expenses		(4,896	)		(7,159	)		(42	)		(111	)		(152	)
Minority interest		(97	)		(328	)		(39	)		(44	)		(10	)
Net income	$	5,203		$	17,524		$	6,657		$	7,697		$	1,723
Newcastle's equity in net income (D)	$	2,602		$	8,698		$	3,328		$	3,767		$	862

In March 2004 Newcastle purchased a 49% interest in a portfolio of convenience and retail gas stores located throughout the southeastern and southwestern regions of the U.S. The properties are subject to a sale-leaseback arrangement under long term triple net leases with a 15 year minimum term. Circle K Stores Inc. (“Tenant”), an indirect wholly owned subsidiary of Alimentation Couche-Tard Inc. (“ACT”), is the counterparty under the leases. ACT guarantees the obligations of Tenant under the leases. Newcastle structured this transaction through a joint venture in two limited liability companies with a private investment fund managed by an affiliate of its manager, pursuant to which such affiliate co-invested on equal terms. One company held assets available for sale, the last of which was sold in September 2005, and one holds assets for investment. In October 2004, the investment’s initial financing was refinanced with a nonrecourse term loan ($53.0 million outstanding at December 31, 2005), which bears interest at a fixed rate of 6.04%. The required payments under the loan consist of interest only during the first two years, followed by a 25-year amortization schedule with a balloon payment due in October 2014. Newcastle has no additional capital commitment to the limited liability companies.

					Gross Unrealized									Weighted Average
Asset Type	Current Face Amount		Amortized Cost Basis		Gains		Losses			Carrying Value		Number of Securities		S&P Equivalent Rating		Coupon			Yield			Maturity (Years)
CMBS-Conduit	$	1,455,345	$	1,397,868	$	26,367	$	(26,906	)	$	1,397,329		197		BBB-		5.84	%		6.61	%		7.87
CMBS-Large Loan		578,331		575,444		9,096		(377	)		584,163		61		BBB-		6.64	%		6.75	%		2.10
CMBS- B-Note		180,201		176,228		4,732		(329	)		180,631		32		BBB-		6.62	%		6.95	%		5.97
Unsecured REIT Debt		916,262		931,777		20,804		(9,835	)		942,746		99		BBB-		6.34	%		5.96	%		6.95
ABS-Manufactured Housing		178,915		162,410		2,422		(1,766	)		163,066		10		A-		7.12	%		8.65	%		6.64
ABS-Home Equity		525,004		523,363		3,429		(2,315	)		524,477		89		B		6.03	%		6.10	%		3.16
ABS-Franchise		70,837		69,732		1,113		(1,223	)		69,622		18		BBB+		6.66	%		8.12	%		5.14
Agency RMBS		698,322		700,912		145		(8,572	)		692,485		19		AAA		4.76	%		4.67	%		4.90
Total/Average (A)	$	4,603,217	$	4,537,734	$	68,108	$	(51,323	)	$	4,554,519		525		BBB+		5.99	%		6.25	%		5.81

(A)	The total current face amount of fixed rate securities was $3,584.4 million, and of floating rate securities was $1,018.8 million.

Unrealized losses that are considered other than temporary are recognized currently in income. There were no such losses incurred during the years ended December 31, 2005, 2004, or 2003. The unrealized losses on Newcastle’s securities are primarily the result of market factors, rather than credit impairment, and Newcastle believes their carrying values are fully recoverable over their expected holding period. None of the securities were in default or delinquent as of December 31, 2005. Newcastle has performed credit analyses (described in Note 2) in relation to such securities which support its belief that the carrying values of such securities are fully recoverable over their expected holding 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
Asset Type	Current Face Amount		Amortized Cost Basis		Gains		Losses			Carrying Value		Number of Securities		S&P Equivalent Rating		Coupon		Yield		Maturity (Years)
CMBS-Conduit	$	1,024,762	$	995,194	$	54,506	$	(7,240	)	$	1,042,460		162		BBB-	6.17	%	6.80	%	7.53
CMBS-Large Loan		583,758		580,383		9,781		(168	)		589,996		68		BBB	5.16	%	5.41	%	2.35
CMBS- B-Note		173,587		170,884		2,614		(379	)		173,119		28		BB+	6.31	%	6.58	%	6.12
Unsecured REIT Debt		735,402		750,489		38,433		(3,200	)		785,722		90		BBB-	6.51	%	6.15	%	7.34
ABS-Manufactured Housing		221,803		198,181		5,328		(4,494	)		199,015		11		B	7.10	%	8.83	%	5.67
ABS-Home Equity		298,934		297,083		3,072		(83	)		300,072		44		A-	4.16	%	4.29	%	4.06
ABS-Franchise		77,825		75,631		2,493		(540	)		77,584		17		BBB+	7.13	%	8.79	%	5.25
Agency RMBS		199,182		201,803		-		(275	)		201,528		3		AAA	4.69	%	4.41	%	3.35
Total/Average (A)	$	3,315,253	$	3,269,648	$	116,227	$	(16,379	)	$	3,369,496		423		BBB	5.89	%	6.19	%	5.76

Newcastle enters into short term warehouse agreements pursuant to which it makes deposits with major investment banks for the right to purchase commercial mortgage backed securities, unsecured REIT debt, real estate related loans and real estate related asset backed securities for its real estate securities portfolios, prior to their being financed with CBOs. These agreements are treated as non-hedge derivatives for accounting purposes and are therefore marked to market through current income. The cost to Newcastle if the related CBO is not consummated is limited, except where the non-consummation results from Newcastle’s gross negligence, willful misconduct or breach of contract, to payment of the Net Loss, if any, as defined, up to the related deposit, less any Excess Carry Amount, as defined, earned on such deposit. The income recorded on these agreements was approximately $2.4 million, $3.1 million, and $3.6 million in 2005, 2004 and 2003, respectively.

	December 31,								December 31, 2005
	2005		2004		2005		2004
Loan Type	Current Face Amount				Carrying Value (C)				Loan Count		Wtd. Avg. Yield			Weighted Average Maturity (Years) (D)		Delinquent Carrying Amount (E)
B-Notes	$	72,173	$	132,777	$	72,520	$	133,344		13		8.46	%		2.40	$	-
Mezzanine Loans (A)		302,740		80,000		302,816		80,052		8		8.44	%		1.94		-
Bank Loans		56,274		146,909		56,563		146,909		3		6.58	%		2.51		-
Real Estate Loans		23,082		29,555		22,364		28,911		1		20.02	%		2.00		-
ICH Loans (B)		165,514		205,147		161,288		202,674		96		8.64	%		1.55		22,136
Total Real Estate
Related Loans	$	619,783	$	594,388	$	615,551	$	591,890		121		8.74	%		1.94	$	22,136

Residential Loans	$	326,100	$	645,381	$	333,226	$	654,784		919		4.79	%		2.73	$	3,699
Manufactured
Housing Loans		284,870		-		267,456		-		7,067		7.84	%		5.78		2,927
Total Residential
Mortgage Loans	$	610,970	$	645,381	$	600,682	$	654,784		7,986		6.15	%		4.15	$	6,626


	Real Estate Related Loans												Residential Mortgage Loans
	Current Face Amount			Market (Discount)/ Premium			Loss Allowance			Carrying Value			Current Face Amount			Market (Discount)/ Premium			Loss Allowance			Carrying Value
Balance at December 31, 2003	$	405,308		$	(49	)	$	(2,475	)	$	402,784		$	578,330		$	8,007		$	(100	)	$	586,237
Purchases/advances		281,340			15			-			281,355			347,318			3,055			-			350,373
Collections of principal		(92,425	)		-			2			(92,423	)		(154,660	)		-			-			(154,660	)
Cost of loans sold		-			-			-			-			(125,607	)		874			-			(124,733	)
Accretion		165			9			-			174			-			(2,533	)		-			(2,533	)
Loss allowance		-			-			-			-			-			-			100			100
Balance at December 31, 2004	$	594,388		$	(25	)	$	(2,473	)	$	591,890		$	645,381		$	9,403		$	-		$	654,784
Purchases/advances		341,676			(505	)		-			341,171			327,855			(18,150	)		-			309,705
Collections of principal		(319,830	)		-			-			(319,830	)		(359,905	)		-			-			(359,905	)
Accretion		-			524			-			524			-			1,666			-			1,666
Paid-in-kind interest		4,648			-			-			4,648			-			-			-			-
Loss allowance		-			-			(2,852	)		(2,852	)		-			-			(5,568	)		(5,568	)
Realized losses		(1,099	)		-			1,099			-			(2,361	)		-			2,361			-
Balance at December 31, 2005	$	619,783		$	(6	)	$	(4,226	)	$	615,551		$	610,970		$	(7,081	)	$	(3,207	)	$	600,682

Newcastle has entered into arrangements with a major investment bank 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 Assets 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 (recorded in Restricted Cash), less any negative change in value amounts, will be returned to Newcastle upon termination of the contract. The following table presents information on these instruments as of December 31, 2005.

Operating Real Estate		Gross			Accumulated Depreciation			Net
Balance at December 31, 2003	$	114,330		$	(11,335	)	$	102,995
Improvements		148			-			148
Foreign currency translation		8,899			(1,094	)		7,805
Depreciation		-			(2,137	)		(2,137	)
Transferred to Real Estate Held for Sale		(57,686	)		6,068			(51,618	)
Balance at December 31, 2004	$	65,691		$	(8,498	)	$	57,193
Improvements		-			-			-
Foreign currency translation		(422	)		(28	)		(450	)
Depreciation		-			(704	)		(704	)
Transferred to Real Estate Held for Sale		(45,060	)		5,694			(39,366	)
Balance at December 31, 2005	$	20,209		$	(3,536	)	$	16,673

Real Estate Held for Sale
Balance at December 31, 2003							$	29,404
Improvements								73
Foreign currency translation								(735	)
Sold								(67,984	)
Transferred from Operating Real Estate								51,618
Balance at December 31, 2004							$	12,376
Improvements								182
Foreign currency translation								(1,620	)
Sold								(50,304	)
Transferred from Operating Real Estate								39,366
Balance at December 31, 2005							$	-

Fair values for a majority of Newcastle’s investments are readily obtainable through broker quotations. For certain of Newcastle’s financial instruments, fair values are not readily available since there are no active trading markets as characterized by current exchanges between willing parties. 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. It should be noted 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 December 31, 2005 and do not take into consideration the effects of subsequent interest rate or credit spread fluctuations.

	Carrying Value					Principal Balance or Notional Amount		Estimated Fair Value
	December 31,					December 31,		December 31,
	2005			2004		2005		2005			2004
Assets:
Real estate securities, available for sale	$	4,554,519		$	3,369,496	$	4,603,217	$	4,554,519		$	3,369,496
Real estate securities portfolio deposit		-			25,411		-		-			25,411
Real estate related loans		615,551			591,890		619,783		615,865			600,528
Residential mortgage loans		600,682			654,784		610,970		609,486			654,784
Interest rate caps, treated as hedges (A)		2,145			3,554		342,351		2,145			3,554
Total return swaps (A)		3,096			399		414,034		3,096			399
Liabilities:
CBO bonds payable		3,530,384			2,656,510		3,560,953		3,594,638			2,720,704
Other bonds payable		353,330			222,266		353,330		356,294			227,510
Notes payable		260,441			652,000		260,441		260,441			652,000
Repurchase agreements		1,048,203			490,620		1,048,203		1,048,203			490,620
Credit facility		20,000			-		20,000		20,000			-
Interest rate swaps, treated as hedges (B)		(41,170	)		13,239		2,943,752		(41,170	)		13,239
Non-hedge derivative obligations (C)		90			796		See below		90			796

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
			December 31,				December 31,				December 31, 2005
CBO Bonds Payable			2005		2004		2005		2004
Real estate securities		Jul 1999	$	426,653	$	436,895	$	423,191	$	432,893		5.67% (2)		Jul 2038		4.89	%		3.18	$	331,653	$	562,803		5.01	$	-	$	262,732
Real estate securities and loans		Apr 2002		444,000		444,000		441,054		440,427		5.43% (2)		Apr 2037		6.56	%		4.46		372,000		498,998		5.61		56,526		290,000
Real estate securities and loans		Mar 2003		472,000		472,000		468,413		467,905		5.46% (2)		Mar 2038		5.08	%		6.30		427,800		516,042		5.25		142,775		276,060
Real estate securities and loans		Sep 2003		460,000		460,000		455,657		455,115		5.16% (2)		Sep 2038		5.38	%		6.85		442,500		506,290		4.71		180,598		192,500
Real estate securities and loans		Mar 2004		414,000		414,000		410,511		410,018		5.15% (2)		Mar 2039		4.94	%		6.61		382,750		444,037		5.27		214,876		165,300
Real estate securities and loans		Sep 2004		454,500		454,500		450,639		450,152		5.09% (2)		Sep 2039		5.03	%		7.19		442,500		494,099		5.80		221,569		189,373
Real estate securities and loans		Apr 2005		447,000		-		442,379		-		4.85% (2)		Apr 2040		5.10	%		8.17		439,600		481,954		6.54		193,471		243,337
Real estate securities and loans		Dec 2005		442,800		-		438,540		-		4.82% (2)		Dec 2050		5.14	%		9.53		436,800		497,935		8.49		97,349		341,506
				3,560,953		2,681,395		3,530,384		2,656,510						5.27	%		6.55		3,275,603		4,002,158		5.86		1,107,164		1,960,808
Other Bonds Payable
Bell Canada portfolio		Apr 2002		-		42,885		-		42,422		7.02%		Repaid		-			-		-		-		-		-		-
ICH loans (3)		(3)		141,311		179,844		141,311		179,844		6.68% (2)		Aug 2030		6.68	%		1.46		3,605		161,288		1.55		3,605		-
Manufactured housing loans (4)		Jan 2005		212,019		-		212,019		-		LIBOR +1.25%		Jan 2006(7)		5.45	%		0.08		212,019		267,456		5.78		6,356		227,576
				353,330		222,729		353,330		222,266						5.94	%		0.63		215,624		428,744		4.23		9,961		227,576
Notes Payable
Real estate related loan		Nov 2003		-		67,523		-		67,523		LIBOR +1.50%		Repaid		-			-		-		-		-		-		-
Real estate related loan		Feb 2004		-		40,000		-		40,000		LIBOR +1.50%		Repaid		-			-		-		-		-		-		-
Residential mortgage loans (4)		Nov 2004		260,441		544,477		260,441		544,477		LIBOR +0.15%		Nov 2007		4.70	%		1.21		260,441		288,683		2.69		282,589		-
				260,441		652,000		260,441		652,000						4.70	%		1.21		260,441		288,683		2.69		282,589		-
Repurchase Agreements (4) (10)
Residential mortgage loans		Rolling		41,853		67,382		41,853		67,382		LIBOR + 0.43%		Mar 2006		4.95	%		0.25		41,853		44,543		2.81		43,511		-
Agency RMBS (5)		Rolling		671,526		195,754		671,526		195,754		LIBOR + 0.13%		Jan 2006		4.48	%		0.08		671,526		692,486		4.90		-		665,965
Real estate securities		Rolling		149,546		171,209		149,546		171,209		LIBOR + 0.39%		Various (8)		4.65	%		0.16		149,546		166,737		5.84		31,450		89,403
Real estate related loans		Rolling		185,278		56,275		185,278		56,275		LIBOR + 1.01%		Various (8)		5.38	%		0.08		185,278		266,669		1.82		266,630		-
				1,048,203		490,620		1,048,203		490,620						4.68	%		0.10		1,048,203		1,170,435		4.29		341,591		755,368
Credit facility (6)				20,000		-		20,000		-		LIBOR + 2.50% (9)		Jul 2008		6.86	%		2.55		20,000		-		-		-		-
Total debt obligations			$	5,242,927	$	4,046,744	$	5,212,358	$	4,021,396						5.17	%		4.59	$	4,819,871	$	5,890,020		5.25	$	1,741,305	$	2,943,752

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 stock options. During 2005, 2004 and 2003, based on the treasury stock method, Newcastle had 314,125, 614,038 and 242,489 dilutive common stock equivalents, respectively, resulting from its outstanding options. Net income available for common stockholders is equal to net income less preferred dividends.

Through December 31, 2005, for the purpose of compensating the Manager for its successful efforts in raising capital for Newcastle, the Manager has been granted options representing the right to acquire 2,655,727 shares of common stock, with strike prices subject to adjustment as necessary to preserve the value of such options in connection with the occurrence of certain events (including capital dividends and capital distributions made by Newcastle). The Manager options represented an amount equal to 10% of the shares of common stock of Newcastle sold in its public offerings and the value of such options was recorded as an increase in stockholders’ equity with an offsetting reduction of capital proceeds received. The options granted to the Manager, which may be assigned by the Manager to its employees, were fully vested on the date of grant and one thirtieth of the options become exercisable on the first day of each of the following thirty calendar months, or earlier upon the occurrence of certain events, such as a change in control of Newcastle or the termination of the Management Agreement. The options expire ten years from the date of issuance.

Newcastle entered into the Management Agreement with the Manager in June 2002, which provided for an initial term of one year with automatic one year extensions, subject to certain termination rights. After the initial one year term, the Manager's performance is reviewed annually and the Management Agreement may be terminated by Newcastle by payment of a termination fee, as defined in the Management Agreement, equal to the amount of management fees earned by the Manager during the twelve consecutive calendar months immediately preceding the termination, upon the affirmative vote of at least two-thirds of the independent directors, or by a majority vote of the holders of common stock. Pursuant to the Management Agreement, the Manager, under the supervision of Newcastle’s board of directors, formulates investment strategies, arranges for the acquisition of assets, arranges for financing, monitors the performance of Newcastle's assets and provides certain advisory, administrative and managerial services in connection with the operations of Newcastle. For performing these services, Newcastle pays the Manager an annual management fee equal to 1.5% of the gross equity of Newcastle, as defined.

To provide an incentive for the Manager to enhance the value of the common stock, the Manager is entitled to receive an incentive return (the "Incentive Compensation'') on a cumulative, but not compounding, basis in an amount equal to the product of (A) 25% of the dollar amount by which (1) (a) the Funds from Operations, as defined (before the Incentive Compensation) of Newcastle per share of common stock (based on the weighted average number of shares of common stock outstanding) plus (b) gains (or losses) from debt restructuring and from sales of property and other assets per share of common stock (based on the weighted average number of shares of common stock outstanding), exceed (2) an amount equal to (a) the weighted average of the price per share of common stock in the IPO and the value attributed to the net assets transferred to us by our predecessor, and in any subsequent offerings by Newcastle (adjusted for prior capital dividends or capital distributions) multiplied by (b) a simple interest rate of 10% per annum (divided by four to adjust for quarterly calculations) multiplied by (B) the weighted average number of shares of common stock outstanding.

As of December 31, 2005, Newcastle owned an aggregate of approximately $48.5 million of securities of Global Signal Trust I and II , special purpose vehicles established by Global Signal Inc., which were purchased in private placements from underwriters in January 2004 and April 2005. One of Newcastle’s directors is the CEO, chairman of the board, and President of Global Signal, Inc. and private equity funds managed by an affiliate of Newcastle’s manager own a significant portion of Global Signal Inc.’s common stock. In February 2006, Newcastle purchased from an underwriter $91.0 million face amount of BBB- and BB+ rated securities of Global Signal Trust III, a special purpose vehicle established by Global Signal, Inc. Pursuant to an underwritten 144A offering, approximately $1,550.0 million of Global Signal Trust III securities were issued in 8 classes, rated AAA through BB+, of which the BBB- and BB+ classes aggregated $188.3 million. The balance of the BBB- and BB+ securities were sold on identical terms to third parties. A portion of the proceeds were used to repay $402.7 million of indebtedness of Global Signal, Inc., of which Newcastle owned $31.5 million, and to fund the prepayment penalty associated with this debt.

In March 2004, Newcastle and a private investment fund managed by an affiliate of Newcastle’s manager co-invested and each indirectly own an approximately 49% interest in two limited liability companies (Note 3) that have acquired, in a sale-leaseback transaction, a portfolio of convenience and retail gas stores from a public company. The properties are subject to a number of master leases, the initial term of which in each case is a minimum of 15 years. This investment was financed with nonrecourse debt at the limited liability company level and Newcastle’s investment in this entity, reflected as an investment in an unconsolidated subsidiary on Newcastle’s consolidated balance sheet, was approximately $12.2 million at December 31, 2005. In March 2005, the property management agreement related to these properties was transferred to an affiliate of Newcastle’s manager from a third party servicer; Newcastle’s allocable portion of the related fees, approximately $20,000 per year for three years, was not changed.

In December 2004, Newcastle and a private investment fund managed by an affiliate of Newcastle’s manager each made an initial investment in a new real estate related loan (Note 5) with a maximum loan amount of $128 million, subject to being drawn down under certain conditions. The loan is secured by a mezzanine loan on one of the phases and a first mortgage on the remaining phases of a large development project and related assets. Newcastle owns a 27.3% interest in the loan and the private investment fund owns a 72.7% interest in the loan. Major decisions require the unanimous approval of holders of interests in the loan, while other decisions require the approval of a majority of holders of interests in the loan, based on their percentage interests therein. Newcastle and our affiliated investment fund are each entitled to transfer all or any portion of their respective interests in the loan to third parties. Newcastle’s investment in this loan was approximately $22.4 million at December 31, 2005.

Stockholder Rights Agreement ¾ Newcastle has adopted a stockholder rights agreement (the "Rights Agreement''). Pursuant to the terms of the Rights Agreement, Newcastle will attach to each share of common stock one preferred stock purchase right (a "Right''). Each Right entitles the registered holder to purchase from Newcastle a unit consisting of one one-hundredth of a share of Series A Junior Participation Preferred Stock, par value $0.01 per share, at a purchase price of $70 per unit. Initially, the Rights are not exercisable and are attached to and transfer and trade with the outstanding shares of common stock. The Rights will separate from the common stock and will become exercisable upon the acquisition or tender offer to acquire a 15% beneficial ownership interest by an acquiring person, as defined. The effect of the Rights Agreement will be to dilute the acquiring party's beneficial interest. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of Newcastle.

Newcastle has elected to treat NC Circle Holdings II LLC as a taxable REIT subsidiary (“TRS”), effective February 27, 2004. NC Circle Holdings II LLC owned a portion of Newcastle’s investment in a portfolio of convenience and retail gas stores as described in Note 3. For taxable income generated by NC Circle Holdings II LLC, Newcastle has provided for relevant income taxes based on a blended statutory rate of 40%. Newcastle accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. No such material differences have been recognized through December 31, 2005.

	2005
	Quarter Ended
	March 31 (A)			June 30 (A)			September 30 (A)			December 31			Year Ended December 31
Gross Revenues	$	83,663		$	92,065		$	99,850		$	102,635		$	378,213
Operating expenses		(9,114	)		(8,832	)		(12,934	)		(11,008	)		(41,888	)
Operating income		74,549			83,233			86,916			91,627			336,325
Interest expense		(48,766	)		(55,791	)		(58,681	)		(63,208	)		(226,446	)
Depreciation and amortization		(136	)		(135	)		(182	)		(188	)		(641	)
Equity in earnings of unconsolidated subsidiaries (B)		1,853			1,393			1,061			1,302			5,609
Income from continuing operations		27,500			28,700			29,114			29,533			114,847
Income (loss) from discontinued operations		1,184			781			86			57			2,108
Preferred dividends		(1,523	)		(1,524	)		(1,523	)		(2,114	)		(6,684	)
Income available for common stockholders	$	27,161		$	27,957		$	27,677		$	27,476		$	110,271
Net Income per share of common stock
Basic	$	0.63		$	0.64		$	0.63		$	0.63		$	2.53
Diluted	$	0.62		$	0.63		$	0.63		$	0.63		$	2.51
Income from continuing operations per share of common
stock, after preferred dividends and related accretion
Basic	$	0.60		$	0.62		$	0.63		$	0.63		$	2.48
Diluted	$	0.59		$	0.61		$	0.63		$	0.63		$	2.46
Income (loss) from discontinued operations per share of common
stock
Basic	$	0.03		$	0.02		$	0.00		$	0.00		$	0.05
Diluted	$	0.03		$	0.02		$	0.00		$	0.00		$	0.05
Weighted average number of shares of common stock
outstanding
Basic		43,222			43,768			43,790			43,897			43,672
Diluted		43,629			44,127			44,121			44,059			43,986

	2004
	Quarter Ended
	March 31 (A)			June 30 (A)			September 30 (A)			December 31			Year Ended December 31
Gross Revenues	$	55,309		$	61,612		$	63,146		$	69,602		$	249,669
Operating expenses		(7,333	)		(6,354	)		(7,822	)		(7,299	)		(28,808	)
Operating income		47,976			55,258			55,324			62,303			220,861
Interest expense		(28,091	)		(32,615	)		(33,612	)		(42,080	)		(136,398	)
Depreciation and amortization		(113	)		(95	)		(108	)		(135	)		(451	)
Equity in earnings of unconsolidated subsidiaries (B)		1,223			2,218			3,179			3,337			9,957
Income from continuing operations		20,995			24,766			24,783			23,425			93,969
Income (loss) from discontinued operations		856			(1,591	)		185			4,996			4,446
Preferred dividends		(1,523	)		(1,524	)		(1,523	)		(1,524	)		(6,094	)
Income available for common stockholders	$	20,328		$	21,651		$	23,445		$	26,897		$	92,321
Net Income per share of common stock
Basic	$	0.59		$	0.60		$	0.61		$	0.70		$	2.50
Diluted	$	0.58		$	0.59		$	0.60		$	0.69		$	2.46
Income from continuing operations per share of common
stock, after preferred dividends and related accretion
Basic	$	0.57		$	0.64		$	0.61		$	0.56		$	2.38
Diluted	$	0.56		$	0.63		$	0.60		$	0.55		$	2.34
Income (loss) from discontinued operations per share of common
stock
Basic	$	0.02		$	(0.04	)	$	0.00		$	0.14		$	0.12
Diluted	$	0.02		$	(0.04	)	$	0.00		$	0.14		$	0.12
Weighted average number of shares of common stock
outstanding
Basic		34,402			36,161			38,234			38,941			36,944
Diluted		34,976			36,671			38,883			39,663			37,558

	2003
	Quarter Ended
	March 31 (A)			June 30 (A)			September 30 (A)			December 31			Year Ended December 31
Gross Revenues	$	28,429		$	35,577		$	37,905		$	50,173		$	152,084
Operating expenses		(4,231	)		(4,880	)		(5,004	)		(6,308	)		(20,423	)
Operating income		24,198			30,697			32,901			43,865			131,661
Interest expense		(13,336	)		(18,348	)		(18,693	)		(26,500	)		(76,877	)
Depreciation and amortization		(80	)		(101	)		(105	)		(119	)		(405	)
Equity in earnings of unconsolidated subsidiaries (B)		-			-			-			862			862
Income from continuing operations		10,782			12,248			14,103			18,108			55,241
Income (loss) from discontinued operations		321			1,169			603			(1,216	)		877
Preferred dividends		(203	)		(1,524	)		(1,523	)		(1,523	)		(4,773	)
Income available for common stockholders	$	10,900		$	11,893		$	13,183		$	15,369		$	51,345
Net Income per share of common stock
Basic	$	0.46		$	0.51		$	0.48		$	0.53		$	1.98
Diluted	$	0.46		$	0.50		$	0.48		$	0.52		$	1.96
Income from continuing operations per share of common
stock, after preferred dividends and related accretion
Basic	$	0.45		$	0.46		$	0.46		$	0.57		$	1.94
Diluted	$	0.45		$	0.45		$	0.46		$	0.56		$	1.92
Income (loss) from discontinued operations per share of common
stock
Basic	$	0.01		$	0.05		$	0.02		$	(0.04	)	$	0.04
Diluted	$	0.01		$	0.05		$	0.02		$	(0.04	)	$	0.04
Weighted average number of shares of common stock
outstanding
Basic		23,489			23,489			27,340			29,197			25,898
Diluted		23,620			23,679			27,620			29,563			26,141

(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.

Maryland		81-0559116
(State or other jurisdiction of incorporation		(I.R.S. Employer Identification No.)
or organization)

1345 Avenue of the Americas, New York, NY	10105
(Address of principal executive offices)	(Zip Code)

Title of each class:		Name of exchange on which registered:
Common Stock, $0.01 par value per share		New York Stock Exchange (NYSE)
9.75% Series B Cumulative Redeemable Preferred Stock, $0.01 par value per share		New York Stock Exchange (NYSE)
8.05% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share		New York Stock Exchange (NYSE)

		Page
	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	22
Item 2.	Properties	22
Item 3.	Legal Proceedings	22
Item 4.	Submission of Matters to a Vote of Security Holders	22

	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6.	Selected Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 8.	Financial Statements and Supplementary Data	51
	Report of Independent Registered Public Accounting Firm	52
	Report on Internal Control over Financial Reporting of Independent Registered Public Accounting Firm	53
	Consolidated Balance Sheets as of December 31, 2005 and December 31, 2004	54
	Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003	55
	Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2005, 2004 and 2003	56
	Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003	58
	Notes to Consolidated Financial Statements	60
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	91
Item 9A.	Controls and Procedures	91
	Management’s Report on Internal Control over Financial Reporting	91
Item 9B.	Other Information	91

	PART III
Item 10.	Directors and Executive Officers of the Registrant	92
Item 11.	Executive Compensation	92
Item 12.	Security Ownership of Certain Beneficial Owners and Management	92
Item 13.	Certain Relationships and Related Transactions	92
Item 14.	Principal Accountant Fees and Services	92

	PART IV
Item 15.	Exhibits; Financial Statement Schedules	93
	Signatures	94

	Total Portfolio (1)						Core Investment Portfolio (2)
	December 31,						December 31,
	2005			2004			2005			2004
Face amount	$	6,111,464		$	4,493,274		$	5,413,142		$	4,294,092
Percentage of total assets		99	%		91	%		87	%		87	%
Weighted average asset yield		6.59	%		5.91	%		6.85	%		5.98	%
Weighted average liability cost		5.12	%		4.15	%		5.22	%		4.17	%
Weighted average net spread		1.47	%		1.76	%		1.63	%		1.81	%

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
December 31, 2005		43,913,409


Industry	% of Face Amount
Residential		40.42	%
Retail		21.03	%
Office		18.73	%
Lodging		5.70	%
Health Care		4.73	%
Industrial		3.63	%
Other		5.76	%

Current Face Amount		Carrying Value			Loan Count			Weighted Avg. Yield
$ 28,974		$	17,802			91			16.08	%

Reference Asset	Notional Amount		Margin Amount		Receive Interest Rate		Pay Interest Rate		Maturity Date		Fair Value
Term loan to a retail mall REIT	$	106,083	$	18,149		LIBOR + 2.000%		LIBOR + 0.500%		Nov 2008	$	1,008
Term loan to a diversified real estate and finance company		97,997		19,599		LIBOR + 3.000%		LIBOR + 0.625%		Feb 2008		877
Mezzanine loan to a hotel company		15,000		5,224		LIBOR +4.985%		LIBOR + 1.350%		Jun 2007		101
Term loan to a diversified real estate company		94,954		9,495		LIBOR +1.750%		LIBOR + 0.500%		Aug 2007		904
Term loan to a retail company		100,000		19,960		LIBOR +3.000%		LIBOR + 0.500%		Dec 2008		206
	$	414,034	$	72,427							$	3,096

Year	Number of Tenant Leases Expiring		Square Feet of Expiring Leases		Annual Rent of Expiring Leases (1)		% of Gross Annual Rent Represented by Expiring Leases

Vacant		N/A		15,561		N/A		N/A
2006 (4)		5		305,689	$	1,824		98.2	%
2007		1		475		4		0.2	%
2047		1		1,686		29		1.6	%
Total		7		323,411	$	1,857		100.0	%

2005	High		Low		Last Sale		Distributions Declared
First Quarter	$	31.95	$	29.27	$	29.60	$	0.625
Second Quarter	$	32.31	$	28.25	$	30.15	$	0.625
Third Quarter	$	31.25	$	27.00	$	27.90	$	0.625
Fourth Quarter	$	27.96	$	24.74	$	24.85	$	0.625

2004		High		Low		Last Sale		Distributions Declared
First Quarter	$	33.89	$	25.51	$	33.70	$	0.600
Second Quarter	$	33.40	$	24.51	$	29.95	$	0.600
Third Quarter	$	31.74	$	27.97	$	30.70	$	0.600
Fourth Quarter	$	32.87	$	29.84	$	31.78	$	0.625

Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options			Weighted Average Exercise Price of Outstanding Options		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity Compensation Plans Approved
by Security Holders:
Newcastle Investment Corp. Nonqualified
Stock Option and Incentive Award Plan		1,811,807 (1	)	$	25.14		7,320,577 (2	)
Equity Compensation Plans Not Approved
by Security Holders:
None		N/A			N/A		N/A

Year	Shares Issued		Range of Issue Prices per Share (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
December 31, 2005		43,913,409

For the Year Ended	Real Estate Securities and Real Estate Related Loans		Residential Mortgage Loans		Operating Real Estate		Unallocated		Total
December 31, 2005	$	321,889	$	48,844	$	6,772	$	708	$	378,213
December 31, 2004	$	225,236	$	19,135	$	4,745	$	553	$	249,669
December 31, 2003	$	134,348	$	12,892	$	4,264	$	580	$	152,084

Reference Asset	Notional Amount		Margin Amount		Receive Interest Rate		Pay Interest Rate		Maturity Date		Fair Value
Term loan to a retail mall REIT	$	106,083	$	18,149		LIBOR + 2.000%		LIBOR + 0.500%		Nov 2008	$	1,008
Term loan to a diversified real estate and finance company		97,997		19,599		LIBOR + 3.000%		LIBOR + 0.625%		Feb 2008		877
Mezzanine loan to a hotel company		15,000		5,224		LIBOR + 4.985%		LIBOR + 1.350%		Jun 2007		101
Term loan to a diversified real estate company		94,954		9,495		LIBOR + 1.750%		LIBOR + 0.500%		Aug 2007		904
Term loan to a retail company		100,000		19,960		LIBOR + 3.000%		LIBOR + 0.500%		Dec 2008		206
	$	414,034	$	72,427							$	3,096

Held by our manager			1,170,317
Issued to our manager and subsequently assigned to certain of our manager's employees			627,490
Held by directors and former directors			14,000
Total			1,811,807

Accumulated other comprehensive income, December 31, 2004	$	71,770
Net unrealized (loss) on securities		(67,077	)
Reclassification of net realized (gain) on securities into earnings		(16,015	)
Foreign currency translation		(1,089	)
Reclassification of net realized foreign currency translation into earnings		(626	)
Net unrealized gain on derivatives designated as cash flow hedges		56,426
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings		2,175
Accumulated other comprehensive income, December 31, 2005	$	45,564

Declared for the Period Ended	Paid	Amount Per Share
March 31, 2003	April 2003	$0.450
June 30, 2003	July 2003	$0.500
September 30, 2003	October 2003	$0.500
December 31, 2003	January 2004	$0.500
March 31, 2004	April 2004	$0.600
June 30, 2004	July 2004	$0.600
September 30, 2004	October 2004	$0.600
December 31, 2004	January 2005	$0.625
March 31, 2005	April 2005	$0.625
June 30, 2005	July 2005	$0.625
September 30, 2005	October 2005	$0.625
December 31, 2005	January 2006	$0.625

(1) Excluding the ICH loans, as described in "Business - Our Strategy."
(2) Excluding the ICH loans and Agency RMBS, as described in "Business - Our Strategy."

	For the Year Ended December 31,
	2005			2004			2003
Income available for common stockholders	$	110,271		$	92,321		$	51,345
Operating real estate depreciation		702			2,199			3,035
Accumulated depreciation on operating real estate sold		(6,942	)		(8,319	)		-
Funds from operations (FFO)	$	104,031		$	86,201		$	54,380

Notional Balance	Effective Date	Maturity Date	Capped Rate	Strike Rate	Fair Value
$ 262,732	Current	March 2009	1-Month LIBOR	6.50%	$ 184
18,000	January 2010	October 2015	3-Month LIBOR	8.00%	342
8,619	December 2010	June 2015	3-Month LIBOR	7.00%	567
53,000	May 2011	September 2015	1-Month LIBOR	7.50%	1,052
$ 342,351					$ 2,145

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
December 31, 2005	43,913,409

Derivative Assets	2005		2004
Interest rate caps (A)	$	2,145	$	3,554
Interest rate swaps (A)		56,829		21,001
Total return swaps		3,096		399
Non-hedge derivatives (B)		1,764		2,168
	$	63,834	$	27,122

Derivative Liabilities
Interest rate swaps (A)	$	15,659	$	34,240
Interest payable		1,059		2,457
Non-hedge derivatives (B)		1,674		2,964
	$	18,392	$	39,661

	Operating Real Estate Subsidiary			Real Estate Loan Subsidiary
Balance at December 31, 2003	$	-		$	30,640
Contributions to unconsolidated subsidiaries		26,789			-
Distributions from unconsolidated subsidiaries		(17,709	)		(10,955	)
Equity in earnings of unconsolidated subsidiaries		8,698			3,767
Balance at December 31, 2004	$	17,778		$	23,452
Contributions to unconsolidated subsidiaries		-			-
Distributions from unconsolidated subsidiaries		(8,229	)		(8,978	)
Equity in earnings of unconsolidated subsidiaries		2,602			3,328
Balance at December 31, 2005	$	12,151		$	17,802

		Current Face Amount			Market (Discount) / Premium			Loss Allowance		Amortized Cost Basis
December 31, 2003	$	2,173,538		$	(61,173	)	$	-	$	2,112,365
Purchases		1,500,549			4,084			-		1,504,633
Collection of principal		(181,008	)		-			-		(181,008	)
Cost of securities sold		(177,826	)		4,677			-		(173,149	)
Accretion		-			6,807			-		6,807
December 31, 2004	$	3,315,253		$	(45,605	)	$	-	$	3,269,648
Purchases		1,895,580			(45,385	)		-		1,850,195
Collection of principal		(382,872	)		-			-		(382,872	)
Cost of securities sold		(224,744	)		18,912			-		(205,832	)
Accretion		-			6,595			-		6,595
December 31, 2005	$	4,603,217		$	(65,483	)	$	-	$	4,537,734


$ 50,000	$	50,000	$	50,003	$	50,008	1	7.10	%	0.71	$	-
38,000		-		38,016		-	1	8.51	%	1.81		-
100,000		-		100,052		-	1	7.60	%	2.53		-
58,630		-		58,662		-	1	8.87	%	1.70		-
56,110		30,000		56,083		30,044	4	10.64	%	2.32		-
$ 302,740	$	80,000	$	302,816	$	80,052	8	8.44	%	1.94	$	-


Type of Property	Location	Net Rentable Sq. Ft. (A)	Acq'n Date (A)	Year Built/ Renovated (A)

Off. Bldg.	London, ON	323,411	10/98	1980

			December 31, 2005
Initial Cost (B)	Costs Capitalized Subseq. to Acq'n (B)		Gross Carrying Amount		Accum. Depr.			Net Carrying Value (C)		Encumb.		Occ. (A)

$ 19,790	$	419	$	20,209	$	(3,536	)	$	16,673	$	-		95.2	%

Recipient	Date of Grant/ Exercise		Number of Options			Weighted Average Exercise Price		Fair Value At Grant Date (millions)
Directors		Various		18,000		$	17.38		Not Material
Manager (B)		October 2002		700,000		$	13.00	$	0.4 (A	)
Manager (B)		July 2003		460,000		$	20.35	$	0.8 (A	)
Manager (B)		December 2003		328,227		$	22.85	$	0.4 (A	)
Manager (B)		January 2004		330,000		$	26.30	$	0.6 (A	)
Manager (B)		May 2004		345,000		$	25.75	$	0.5 (A	)
Manager (B)		November 2004		162,500		$	31.40	$	0.5 (A	)
Manager (B)		January 2005		330,000		$	29.60	$	1.1 (A	)
Exercised (B)		Prior to 2005		(110,000	)	$	13.31
Exercised (B)		2005		(751,920	)	$	15.55
Outstanding				1,811,807		$	25.14

Date of Grant	Volatility			Dividend Yield			Expected Life (Years)		Risk-Free Rate
October 2002		15	%		13.85	%		10		4.05	%
July 2003		15	%		9.83	%		10		3.63	%
December 2003		15	%		8.75	%		10		4.23	%
January 2004		15	%		7.60	%		10		4.23	%
May 2004		15	%		9.32	%		10		4.77	%
November 2004		18	%		7.64	%		10		4.21	%
January 2005		21	%		8.45	%		10		4.27	%

			Year Assigned

Strike Price	2004		2003		Total Inception to Date
$13.00		267,750		1,750		269,500
$20.35		192,050		1,150		193,200
$22.85		139,355		-		139,355
$26.30		127,050		-		127,050
$31.40		62,563		-		62,563
Total		788,768		2,900		791,668

	Amounts Incurred (in millions)
	2005		2004		2003
Management Fee	$	12.8	$	10.1	$	6.0
Expense Reimbursement		0.5		0.5		0.5
Incentive Compensation		7.6		8.0		6.2

		Book Basis Dividends Per Share (A)		Tax Basis Dividends Per Share (A)	Ordinary/ Qualified Income		Captial Gains		Return of Capital
2005	$	2.500	$	2.540	86.41	%	13.59	%	None

2004	$	2.425	$	2.432	76.60	%	23.40	%	None

2003	$	1.950	$	1.843	77.66	%	22.34	%	None


By: /s/ Wesley R. Edens
Wesley R. Edens
Chairman of the Board


By: /s/ Debra A. Hess
Debra A. Hess
Chief Financial Officer


	NEWCASTLE INVESTMENT CORP.

	March 15, 2006

	By:	/s/ Wesley R. Edens
		Wesley R. Edens
		Chairman of the Board