PROSPECTUS FILING

Years of

Investment

Experience

Relevant Investment Experience

Bruce Robertson

President — Brookfield Sub-Advisor. Mr. Robertson, Managing Partner of Public Securities for Brookfield Asset Management Inc. since 2002, has primary responsibility for management and growth of Brookfield’s public securities management business. Mr. Robertson also serves as Director, President and Chief Executive Officer of the management companies for Brookfield’s Canadian closed-end exchange-traded mutual funds. Between 1996 and 2002, Mr. Robertson served in a number of capacities with Brookfield’s affiliates, including as Chief Financial Officer of a predecessor to Brookfield, corporate development within Brookfield Power, merchant banking origination and management, and as Vice President of Investment Banking at Trilon Securities Corporation. Prior to joining Brookfield, Mr. Robertson spent over seven years with Deloitte & Touche, including five years in its insolvency and restructuring practice. Mr. Robertson is a Chartered Accountant. Mr. Robertson also served as a director of Criimi Mae Inc. until its sale in January 2006.

424B3 1 y15555b3e424b3.htm PROSPECTUS FILING PROSPECTUS FILING

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-130257

17,400,000 Shares

Common Stock

________________________________________________________________________________


	Crystal River Capital, Inc. is a Maryland corporation that invests in real estate-related securities, real estate loans and instruments and various other asset classes. We are externally managed and advised by Hyperion Brookfield Crystal River Capital Advisors, LLC, a wholly-owned subsidiary of Hyperion Brookfield Asset Management, Inc., and have retained Brookfield Crystal River Capital L.P. and Ranieri & Co., Inc. as sub-advisors.

	We expect to qualify as a real estate investment trust, or REIT, for federal income tax purposes and have elected and qualified to be taxed as a REIT under the federal income tax laws for the taxable year ended December 31, 2005.

	Shares of our common stock are subject to ownership limitations that we must impose in order to qualify and maintain our status as a REIT. Generally, no person may own more than 9.8% in value or in number of shares, whichever is more restrictive, of any class or series of the outstanding shares of our capital stock.

	This prospectus relates to resales of shares of common stock that have been issued to the selling stockholders in transactions exempt from the registration requirements of the Securities Act of 1933, as amended, including shares of our common stock issued to the selling stockholders upon exercise of outstanding options to purchase our common stock.

	The prices at which the selling stockholders may sell the shares will be determined by prevailing market prices or through privately-negotiated transactions. We will not receive any proceeds from the sale of any of the shares. We have agreed to bear the expenses of registering the shares covered by this prospectus under federal and state securities laws.

	The shares are being registered to permit the selling stockholders to sell the shares from time to time in the public market. The selling stockholders may sell the shares through ordinary brokerage transactions or through any other means described in the section titled “Plan of Distribution.” We do not know when or in what amount the selling stockholders may offer the shares for sale. The selling stockholders may sell any, all or none of the shares offered by this prospectus.


	Our common stock is listed on the New York Stock Exchange under the symbol “CRZ.” On October 23, 2006, the last reported sale price of our common stock on the New York Stock Exchange was $23.05 per share.


	Investing in our common stock involves risks. See “Risk Factors” beginning on page 20 for a discussion of the following and other risks:


•	There are various conflicts of interest resulting from relationships among us, our manager, our sub-advisors and other parties, including those relating to the structure of the management agreement with our manager and other transactions with affiliated parties. Under the management agreement with our manager, our manager is entitled to receive a base management fee, which is not tied to the performance of our portfolio, and incentive compensation based on our portfolio’s performance, which may lead it to place emphasis on the short-term maximization of net income. This could result in increased risk to the value of our investment portfolio and decreased cash available for distributions to our stockholders.

•	If we fail to remain qualified as a REIT, we will be subject to income tax at regular corporate rates and could face substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders and adversely affect the value of our common stock.

•	We have a limited operating history and our manager has no prior experience operating a REIT or a public company; therefore, our manager may not operate us successfully.


	Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is October 23, 2006.

TABLE OF CONTENTS


		Page

PROSPECTUS SUMMARY			1
	Our Company		1
	Summary Risk Factors		4
	Our Formation and Structure		6
	Our Manager		8
	Our Business Strengths		10
	Hyperion Brookfield’s Historical Performance		10
	Management Agreement		11
	Our Distribution Policy		13
	Operating and Regulatory Structure		14
	Exclusion from Regulation Under the Investment Company Act		14
	Restrictions on Ownership of Our Common Stock		15
	The Offering		16
	Our Corporate Information		17
	Summary Historical Consolidated Financial Information		18
RISK FACTORS			20
	Risks Related to Our Business and Investment Strategy		20
	Risks Related to Our Investments		32
	Risks Related to This Offering		42
	Risks Related to Our Organization and Structure		44
	Tax Risks		47
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			52
USE OF PROCEEDS			53
PUBLIC MARKET FOR OUR COMMON STOCK			54
DISTRIBUTION POLICY			55
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION			57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			59
	Overview		59
	Our Business Model		60
	Trends		61
	Critical Accounting Policies		62
	Financial Condition		69
	Results of Operations for the Period March 15, 2005 (commencement of operations) to December 31, 2005		74
	Results of Operations for the Six Months Ended June 30, 2006		75
	Results of Operations for the Period March 15, 2005 (commencement of operations) to June 30, 2005		75
	Results of Operations for the Three Months Ended June 30, 2006 compared to the Three Months Ended June 30, 2005		76
	Liquidity and Capital Resources		77
	Risk Management		88
BUSINESS			89
	Our Company		89
	Our Manager		89
	Our Portfolio		92
	Our Business Strengths		93
	Our Formation and Structure		96
	Our Investment Strategy		97
	Investment Sourcing		106
	Investment Process		107


		Page

	Hyperion Brookfield’s Historical Performance		108
	Hyperion Brookfield Crystal River Portfolio Management Resources		111
	Portfolio Management Infrastructure		114
	Risk Management		114
	Our Financing Strategy		114
	Our Hedging and Interest Rate Risk Management Strategy		119
	Resolution of Potential Conflicts of Interest in Allocation of Investment Opportunities		121
	Policies with Respect to Certain Other Activities		122
	Operating and Regulatory Structure		123
	Exclusion from Regulation Under the Investment Company Act		124
	Competition		125
	Staffing		126
	Legal Proceedings		126
	Place of Business		126
MANAGEMENT			127
	Directors and Executive Officers		127
	Biographical Information		128
	Board Committees		131
	Director Compensation		132
	Executive Compensation		133
	2005 Long-Term Incentive Plan		133
	Equity Compensation Plan Information		138
	Indemnification and Limitation on Liability; Insurance		138
	Management Agreement		139
	Sub-Advisory Agreements		143
	Base Management Fees and Incentive Management Fees; Sub-Advisor Compensation		144
	Restricted Stock and Option Grant		148
	Conflicts of Interest In Our Relationship With Hyperion Brookfield Crystal River and Hyperion Brookfield		148
PRINCIPAL STOCKHOLDERS			152
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS			154
SELLING STOCKHOLDERS			157
DESCRIPTION OF CAPITAL STOCK			181
	General		181
	Common Stock		181
	Power to Reclassify Shares of Our Stock		181
	Power to Issue Additional Shares of Common Stock and Preferred Stock		182
	Restrictions on Ownership and Transfer		182
	Transfer Agent and Registrar		184
	Registration Rights		184
COMMON STOCK ELIGIBLE FOR FUTURE SALE			187
	Rule 144		187
	Rule 144(k)		187
	Registration Rights		187
CERTAIN PROVISIONS OF THE MARYLAND GENERAL CORPORATION LAW AND OUR CHARTER AND BYLAWS			189
	Classification of Board of Directors		189
	Number of Directors; Vacancies; Removal		189
	Action by Stockholders		190
	Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals		190
	Calling of Special Meetings of Stockholders		190


		Page

	Approval of Extraordinary Corporate Action; Amendment of Charter and Bylaws		191
	No Appraisal Rights		191
	Control Share Acquisitions		191
	Certain Restrictions on Ownership and Transfer of Our Capital Stock		192
	Business Combinations		193
	Subtitle 8		194
	Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses		194
FEDERAL INCOME TAX CONSEQUENCES OF OUR QUALIFICATION AS A REIT			196
	Taxation of Our Company		196
	Requirements for Qualification		199
	Gross Income Tests		202
	Asset Tests		206
	Distribution Requirements		209
	Recordkeeping Requirements		210
	Failure to Qualify		210
	Taxable REIT Subsidiaries		211
	Taxation of Taxable U.S. Stockholders		211
	Taxation of U.S. Stockholders on the Disposition of Common Stock		213
	Capital Gains and Losses		213
	Information Reporting Requirements and Backup Withholding		213
	Taxation of Tax-Exempt Stockholders		214
	Taxation of Non-U.S. Stockholders		214
	Sunset of Reduced Tax Rate Provisions		216
	State and Local Taxes		216
PLAN OF DISTRIBUTION			217
LEGAL MATTERS			220
EXPERTS			220
WHERE YOU CAN FIND MORE INFORMATION			220
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS			F-1

iii

No dealer, salesperson or other individual has been authorized to give any information or make any representations not contained in this prospectus in connection with the offering made by this prospectus. If given or made, such information or representations must not be relied upon as having been authorized by us or any of the underwriters. This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any of our securities in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has not been any change in the facts set forth in this prospectus or in the affairs of our company since the date hereof.

PROSPECTUS SUMMARY

This summary highlights the key aspects of this offering. It is not complete and may not contain all of the information that you should consider before making an investment in our common stock. You should read carefully the more detailed information set forth under “Risk Factors” and the other information included in this prospectus. Except where the context suggests otherwise, the terms “Crystal River,” “we,” “us” and “our” refer to Crystal River Capital, Inc. and its subsidiaries; “Hyperion Brookfield Crystal River” and “our Manager” refer to our external manager, Hyperion Brookfield Crystal River Capital Advisors, LLC; “Hyperion Brookfield” refers to Hyperion Brookfield Asset Management, Inc., the parent company of Hyperion Brookfield Crystal River; “Brookfield Sub-Advisor” refers to Brookfield Crystal River Capital L.P., a sub-advisor that has been retained by us and Hyperion Brookfield Crystal River; “Brookfield” refers to Brookfield Asset Management Inc., formerly known as Brascan Corporation, the indirect parent company of Hyperion Brookfield and Brookfield Sub-Advisor, together with its subsidiaries; and “Ranieri & Co.” refers to Ranieri & Co., Inc., another sub-advisor that has been retained by us and Hyperion Brookfield Crystal River.

Our Company

We are a specialty finance company that was formed on January 25, 2005 by Hyperion Brookfield to invest in real estate-related securities, real estate loans and instruments and various other asset classes. We have elected and qualified to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005 and expect to qualify as a REIT in subsequent tax years. Our objective is to provide attractive returns to our investors through a combination of dividends and capital appreciation. To achieve this objective, we currently are investing primarily in residential mortgage-backed securities, or RMBS, and commercial mortgage-backed securities, or CMBS, whole mortgage loans, bridge loans, junior interests in mortgage loans known as B Notes and mezzanine loans. We also are investing in and intend to continue to invest in direct real estate interests and preferred equity interests in entities that own real estate, diversified asset-backed securities, or ABS, including aircraft and consumer obligations, and collateralized debt obligations, or CDOs. Finally, we intend to make selective debt and/or equity investments in certain alternative assets, which may include power generating facilities, timber and private equity funds managed by certain of our affiliates that invest in such assets, to diversify our portfolio and enhance our risk adjusted returns. We are externally managed and advised by Hyperion Brookfield Crystal River, a wholly-owned subsidiary of Hyperion Brookfield.

We currently target and expect to continue to target asset classes that provide consistent, stable risk-adjusted returns. We expect to continue to leverage our investments to enhance returns on our investments. We make portfolio allocation decisions based on various factors, including expected cash yield, relative value, risk-adjusted returns, current and projected credit fundamentals, current and projected macroeconomic considerations, current and projected supply and demand, credit and market risk concentration limits, liquidity, cost and availability of financing and hedging activities, as well as maintaining our REIT qualification and our exclusion from regulation under the Investment Company Act of 1940, which we refer to as the Investment Company Act. These factors place significant limits on the amount of certain of our targeted investments such as aircraft and consumer ABS, non-real estate-related CDOs and other equity investments that we may include in our portfolio.

We intend to identify and invest in a diversified portfolio of assets that will compensate us appropriately for the credit risk associated with them. Our targeted asset classes and the principal investments we expect to make in each are as follows:


Asset Class		Principal Investments

Mortgage-Backed Securities, or MBS

	— RMBS	• Agency Adjustable Rate RMBS, or ARMS
		• Non-Agency ARMS
		• Non-Conforming Loans
		• Other RMBS

	— CMBS	• Investment Grade CMBS (Senior and Subordinated)
		• Below-Investment Grade CMBS (Rated and Non-Rated)
Mortgages and Other Real Estate Debt		• Whole Mortgage Loans
		• Bridge Loans
		• B Notes
		• Mezzanine Loans
		• Land Loans
		• Construction Loans
		• Construction Mezzanine Loans
Commercial Real Estate		• Direct Property Ownership
		• REIT Common and Preferred Stock Investments
		• Preferred Equity Investments
		• Joint Ventures
Other ABS		• CDOs
		• Net Interest Margin Securities, or NIMs
		• Consumer ABS
		• Aircraft ABS
Alternative Assets		• Hydroelectric, Gas- and Coal-Fired Power Generating Facilities
		• Timber
		• Other Equity Investments

In addition, subject to maintaining our qualification as a REIT and the exclusion from regulation under the Investment Company Act, we may invest opportunistically in other types of investments within Hyperion Brookfield Crystal River’s core competencies, including investment grade corporate bonds and related derivatives, government bonds and related derivatives and other fixed income related instruments.

prepayment expectations, market volatility and investor trends. We and our Manager believe that, on a long-term basis, this investment approach will provide attractive risk-adjusted returns.

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

As of June 30, 2006, we had a portfolio of approximately $2.8 billion consisting primarily of RMBS, as shown in the following chart:


								Weighted Average

			Estimated		Percent of						Months					Constant
			Asset		Total						to		Yield to			Prepayment
Security Description			Value(1)		Investments			Coupon			Reset(2)		Maturity			Rate(3)

			(In thousands)
Commercial Real Estate Debt:
	Below investment grade CMBS		$	303,064		10.7	%		5.06	%				9.84	%
	Real estate loans			135,361		4.8			7.34					7.55

	Total Commercial Real Estate Debt			438,425		15.5			5.58					9.13
RMBS:
	Non-Agency:
		Senior prime 5/1 adjustable rate		222,988		7.9			5.27			45.00		6.43			21.66	%
		Junior prime		157,095		5.6			6.81			23.55		16.89			24.70
		Subprime		162,204		5.7			7.34			10.51		9.30			31.28
	Agency:
		3/1 hybrid adjustable rate		642,086		22.7			4.99			28.83		6.23			28.19
		5/1 hybrid adjustable rate		1,150,529		40.7			5.05			48.20		6.10			24.25

	Total RMBS			2,334,902		82.6			5.38			37.81		7.11			25.59
CDO Preferred Stock				4,634		0.1
Other ABS:
	Aircraft ABS			50,328		1.8			5.66					7.54

		Total Investments	$	2,828,289		100.0	%		5.41	%				7.42	%


(1)	All securities listed in this chart are carried at their estimated fair value other than real estate loans, which are carried at their cost. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition”.

(2)	Represents number of months before conversion to floating rate.

(3)	Represents the estimated percentage of principal that will be prepaid over the next 12 months based on historical principal paydowns.

allocation. Future dividends and capital appreciation are not guaranteed. Our investments will depend on prevailing market conditions and trends. We have not adopted any policy that establishes specific asset allocations among our targeted asset classes, and our targeted allocations will vary from time to time. As a result, we cannot predict the percentage of our assets that will be invested in each asset class or whether we will invest in other classes or investments. We generally expect to incur total leverage of up to five times the amount of our equity for most investments other than Agency Adjustable Rate RMBS, which we anticipate we generally will lever up to 15 times the amount of our equity allocated to this asset class. We currently expect our overall long-term average portfolio leverage to be three to five times the amount of our equity. We may change our investment strategy and policies and the percentage of assets that may be invested in each asset class, or in the case of securities, in a single issuer, without a vote of our stockholders.

Because we have elected and qualified for the tax year ended December 31, 2005 and intend in future tax years to qualify to be taxed as a REIT and to operate our business so as to be exempt from regulation under the Investment Company Act, we are required to invest a substantial majority of our assets in qualifying real estate assets, such as agency RMBS, mortgage loans and other liens on and interests in real estate. Therefore, the percentage of our assets we may invest in other MBS, ABS, alternative assets and other types of instruments is limited, unless those investments comply with various federal income tax requirements for REIT qualification and the requirements for exclusion from Investment Company Act regulation.

As of June 30, 2006, we had entered into master repurchase agreements with 17 counterparties and as of such date, we had outstanding obligations under repurchase agreements with 13 counterparties totaling approximately $2,496.7 million with a weighted average borrowing rate of 5.24%. In addition to repurchase agreements, we rely on credit facilities with multiple counterparties for capital needed to fund our other investments, including a $31.0 million unsecured revolving credit facility with Signature Bank, as administrative agent, that we entered into on March 1, 2006. On November 30, 2005, we closed our first CDO financing transaction. See “Business — Our Financing Strategy — Term Financing-CDOs.” We have no restriction on the amount of leverage that we may use.

As of June 30, 2006, we had hedged a portion of the liabilities financing our investment portfolio by entering into a combination of one-, two-, three-, five- and ten-year interest rate swaps. The total notional par value of such swaps was approximately $1,448.5 million.

Summary Risk Factors

An investment in shares of our common stock involves various risks. You should consider carefully the risks discussed below and under “Risk Factors” before purchasing our common stock.


	•	We have a limited operating history and our Manager, Hyperion Brookfield Crystal River, has no prior experience operating a REIT or a public company; therefore, our Manager may not operate us successfully.

	•	Our ability to achieve attractive risk-adjusted returns is dependent on our ability both to generate sufficient cash flow to pay an attractive dividend and to achieve capital appreciation, and we cannot assure you we will do either.

	•	We are dependent upon Hyperion Brookfield Crystal River and certain key personnel of Hyperion Brookfield Crystal River and may not find a suitable replacement if Hyperion Brookfield Crystal River terminates the management agreement or such key personnel are no longer available to us. We also rely on our sub-advisors and may not find suitable replacements if we or they terminate the sub-advisory agreements.


	•	There are conflicts of interest in our relationship with Hyperion Brookfield Crystal River, which could result in decisions that are not in the best interests of our stockholders. Our management agreement with Hyperion Brookfield Crystal River was negotiated between related parties and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party. In addition, affiliates of Hyperion Brookfield Crystal River may sponsor or manage other investment vehicles in the future with an investment focus similar to our focus, which could result in us competing for access to the benefits that our relationship with Hyperion Brookfield Crystal River provides to us, including access to the senior management of Hyperion Brookfield Crystal River.

	•	Hyperion Brookfield and our sub-advisors are not contractually obligated to dedicate their time to us and may engage in other activities that compete with us, which may result in conflicts of interest that could cause our results of operations to be lower or result in increased risk to the value of our investment portfolio.

	•	Through our relationship with Brookfield Sub-Advisor, we expect to pursue and acquire investments from, and make investments in private equity funds advised by, Brookfield and its affiliates, which will result in conflicts of interest between us and Brookfield Sub-Advisor. Brookfield Sub-Advisor is not obligated to offer to us such investment opportunities and any decision to do so will be entirely within its discretion.

	•	Hyperion Brookfield Crystal River is entitled to receive a base management fee, which is not tied to the performance of our portfolio.

	•	Hyperion Brookfield Crystal River is entitled to incentive compensation based on our portfolio’s performance, which may lead it to place emphasis on the short-term maximization of net income. This could result in increased risk to the value of our investment portfolio and decreased cash available for distributions to our stockholders.

	•	We may not terminate the management agreement between us and Hyperion Brookfield Crystal River without cause until after December 31, 2008. Upon termination without cause after this initial term or upon a failure to renew the management agreement, we would be required to pay Hyperion Brookfield Crystal River a substantial termination fee. These and other provisions in our management agreement make termination without cause or non-renewal difficult and costly.

	•	As of June 30, 2006, greater than 63.0% of our investment portfolio consisted of Agency Adjustable Rate RMBS and greater than 19.0% of our investment portfolio consisted of Non-Agency RMBS, and we cannot assure you that we will be successful in achieving a more diversified portfolio that generates comparable or better returns. Even if we are successful in achieving a more diversified portfolio, it is likely that RMBS will remain a significant component of our portfolio.

	•	We may, consistent with our intention to continue to qualify as a REIT and to maintain our exclusion from regulation under the Investment Company Act, change our investment strategy without stockholder consent, which could result in investments that are different, and possibly more risky, than the proposed investments and current portfolio we describe in this prospectus. Because we intend to continue to operate in such a manner to be excluded from regulation as an investment company under the Investment Company Act, the assets that we may acquire are limited by the provisions of the Investment Company Act and the rules and regulations promulgated thereunder. If we fail to acquire and maintain assets meeting the requirements to be excluded from regulation as an investment company under the Investment Company Act, we would have to register as an investment company, which would adversely affect our business.


	•	We seek to enhance our potential returns by leveraging our investments, which may enhance returns but also may compound losses. We are not limited in the amount of leverage we may use. Our use of leverage may adversely affect our return on investments and may reduce cash available for distribution.

	•	Interest rate fluctuations may cause losses. The yields on our investments and the costs of our borrowings may be sensitive to changes in prevailing interest rates and changes in prepayment rates. Mismatches between the repricing or maturity dates of our assets and those of our financings may reduce or eliminate income derived from our investments or result in losses.

	•	Changes in prevailing interest rates will impact the value of our portfolio, which may not be mitigated by our hedging strategy. We do not hedge all of our exposure to changes in interest rates and prepayment rates, as there are practical limitations to our ability to insulate the portfolio from all of the negative consequences associated with changes in short-term interest rates while still seeking to provide an attractive net spread on our portfolio.

	•	Many of the assets in which we invest, such as MBS and interests in CDOs, are subject to the credit risk associated with the underlying loans and in the event of default of the borrower under such loans, the collateral securing the loans and any underlying or additional credit support may not be adequate to enable us to recover our full investment.

	•	Our charter and bylaws contain provisions that may inhibit potential takeover bids that you and other stockholders may consider favorable. The stock ownership limits that apply to REITs, as prescribed by the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and that are contained in our charter, may restrict our business combination opportunities.

	•	The REIT qualification rules impose limitations on the types of investments and activities that we may undertake, including limitations on our use of hedging transactions and derivatives, and these limitations may, in some cases, preclude us from pursuing the most economically beneficial investment alternatives.

	•	If we fail to continue to qualify as a REIT, we will be subject to income tax at regular corporate rates, which would reduce the amount of cash available for distribution to our stockholders and adversely affect the value of our stock.

	•	There may not be an active market for our common stock, which may cause our common stock to trade at a discount and make it difficult for you to sell our common stock.

	•	The market price and trading volume of our common stock may be volatile following this offering.

Our Formation and Structure

certain of our executive officers, directors and members of our strategic advisory committee, and certain executive officers of Hyperion Brookfield Crystal River and Hyperion Brookfield that provide services to us collectively purchased 183,800 shares, or 0.7% (assuming all outstanding options have vested and are exercised), of our common stock. In addition, upon completion of our March 2005 private offering, we issued to Hyperion Brookfield Crystal River, and it subsequently transferred to certain of its officers and employees, certain of our directors and other individuals associated with Hyperion Brookfield or Brookfield and their respective affiliates who provide services to us, 84,000 shares of restricted stock and we granted to Hyperion Brookfield Crystal River, and it subsequently transferred to certain of its officers and employees, certain of our directors and other individuals associated with Hyperion Brookfield or Brookfield and their respective affiliates who provide services to us, options to purchase 126,000 shares of our common stock with an exercise price of $25.00 per share, representing in the aggregate approximately 0.8% of the outstanding shares of our common stock as of the date of this prospectus, assuming all outstanding options have vested and are exercised. Following completion of our initial public offering in August 2006, Hyperion Brookfield, Brookfield, Hyperion Brookfield Crystal River and their respective affiliates and employees who provide services to us, including our executive officers, members of our strategic advisory committee and certain of our directors, as well as our independent directors, collectively own 2,105,800 shares of our common stock, including 1,105,800 shares that may be sold by selling stockholders listed in this prospectus, representing 8.4% of our outstanding shares of common stock, and have options to purchase an additional 130,000 shares of our common stock representing an additional 0.5% of our outstanding shares of common stock, in each case, assuming all outstanding options have vested and are exercised.

The following chart illustrates the organizational structure of our company.

On April 28, 2005, an indirect wholly-owned subsidiary of Brookfield acquired all of the capital stock in Hyperion Brookfield’s parent. As a result of such acquisition, an affiliate of Ranieri & Co. will share in additional payments, for a period of 15 years following the closing of that acquisition, totaling 20% of the base and incentive management fees and termination fees we pay to our Manager, net of sub-advisor fees.

Our Manager

Hyperion Brookfield Crystal River had no employees and we and Hyperion Brookfield Crystal River had no independent officers and were entirely dependent on Hyperion Brookfield for the day-to-day management of our operations. While our directors periodically review our investment guidelines and our investment portfolio, other than any investments involving our affiliates or our sub-advisors’ affiliates or investments proposed by Brookfield Sub-Advisor, which they are required to review and approve prior to such investments being made, they do not review all of our proposed investments. Our officers, as employees of Hyperion Brookfield or one of its affiliates, have been delegated the responsibility to review and make investments consistent with our investment strategy as articulated by our strategic advisory committee. Hyperion Brookfield Crystal River did not have any experience managing a REIT prior to its entering into a management agreement with us and it currently does not provide management or other services to entities other than us. Prior to our formation, Hyperion Brookfield had no prior experience managing a REIT. However, Hyperion Brookfield has a successful 17-year history of acquiring and managing MBS and ABS through an investment philosophy predicated on the concept of relative value. Hyperion Brookfield was founded in 1989 by Lewis Ranieri, an MBS market pioneer and former Vice Chairman of Salomon Brothers, Inc. Today, Hyperion Brookfield employs approximately 85 professionals and is dedicated to providing investment management services for institutional clients and mutual funds through the management of core fixed income portfolios as well as separately managed portfolios of RMBS, CMBS and ABS. As of June 30, 2006, Hyperion Brookfield and its affiliates managed approximately $19.7 billion in assets for institutional clients, closed-end investment companies and CDOs.


	•	Investment sourcing;

	•	Investment process;

	•	Portfolio management resources;

	•	Portfolio management infrastructure; and

	•	Risk management.

As the parent company of our Manager, Hyperion Brookfield has an economic incentive to provide us with these services to the extent that their provision will increase the management fees that we pay to our Manager through our improved performance. However, Hyperion Brookfield is not contractually obligated to provide us with any of these services.

We are able to draw upon the unique resources of two sub-advisors to enhance the management of our portfolio:


	•	Brookfield Sub-Advisor. For investments in mortgages and other real estate debt, real estate, hydroelectric, gas-and coal-fired power generating facilities and timber assets, we are able to draw upon a sub-advisory relationship with Brookfield Sub-Advisor. Through this relationship, we are able to access the resources of Brookfield, an asset manager focused on property, power and infrastructure assets with approximately $56.7 billion of assets under management as of June 30, 2006. Brookfield’s portfolio of high quality assets includes interests in approximately 75 commercial properties and 140 power generating plants.


	•	Ranieri & Co. Our Manager utilizes Ranieri & Co. to provide guidance on macroeconomic trends, market trends in MBS and overall portfolio strategy. We expect that our relationship with Ranieri & Co. will continue to provide us with access to its relationships for investment and financing opportunities. Ranieri & Co is managed by Lewis Ranieri, whose leading role in the development of MBS has earned him recognition as a pioneer of the securitized mortgage market in the U.S.

Our Manager and our sub-advisors have senior management teams with extensive experience in identifying and financing, hedging and managing RMBS, ABS, CMBS, real estate equity and mezzanine investments. Mr. Clifford Lai, our president and chief executive officer, is also the chief executive officer of Hyperion Brookfield, and leads Hyperion Brookfield’s CMBS team. Mr. John Dolan, our chief investment officer, is also the chief investment officer of Hyperion Brookfield and the leader of its RMBS/ABS team. Each has over 25 years of investment experience.

Our board of directors has formed a strategic advisory committee to advise and consult with our board and our senior management team with respect to our investment policies, investment portfolio holdings, financing and leveraging strategies and investment guidelines. The members of the strategic advisory committee are Lewis Ranieri, who serves as chairman of the committee, Clifford Lai and John Dolan of Hyperion Brookfield and Bruce Flatt and Bruce Robertson of Brookfield. The committee reviews, discusses and makes recommendations on our overall investment strategy but does not approve individual investment opportunities or present investment opportunities to us or our Manager.

Our Business Strengths

We have the following business strengths:


	•	Access to a top-ranked investment advisor with a superior track record;

	•	Access to complementary investment skills of leading sub-advisors;

	•	Experienced professionals and senior management team;

	•	Diversified investment strategy;

	•	Access to Hyperion Brookfield’s infrastructure;

	•	Relationships and deal flow of Hyperion Brookfield and our sub-advisors; and

	•	Alignment of interests of Hyperion Brookfield Crystal River and our stockholders.

Hyperion Brookfield’s Historical Performance

The following table sets forth Hyperion Brookfield’s historical investment performance with respect to its assets under management in its Enhanced MBS and high yield CMBS categories. These asset classes are those in which Hyperion Brookfield invests that are similar in nature to the assets in which we currently invest and intend to continue to invest. However, the investment returns shown below generally were obtained using much lower levels of financial leverage than what we intend to use. Past performance is not indicative of future results. In addition, this information is a reflection of Hyperion Brookfield’s historical performance and not a guarantee or prediction of the return that Hyperion Brookfield or Hyperion Brookfield Crystal River will achieve for us. The percentile rankings noted below reflect the performance of Hyperion Brookfield against other asset managers for the same period. For example, performance that is reflected in the 46th percentile means that Hyperion Brookfield’s

performance ranked in the top 46% of all asset managers with that investment strategy for the period noted.

PSN Mortgage-Backed Universe — percentile rankings (as of 6/30/2006)


	Hyperion Enhanced					Hyperion High Yield
	MBS					CMBS

	Gross					Gross
	Return			Percentile		Return			Percentile

1 year		0.69	%		46		7.29	%		1
3 year		3.91	%		1		10.54	%		1
5 year		6.24	%		1		13.69	%		1
10 year		7.97	%		1

Hyperion Brookfield obtained this information from Plan Sponsor Network, or PSN, which is a third-party investment manager database and is a division of Informa Investment Solutions. We and Hyperion Brookfield have not verified the accuracy of the information provided by PSN. All rates of return are annualized. Performance figures shown are gross of fees and do not take into account advisory fees or transaction costs. These costs reduced actual returns. Index returns do not reflect any management fees, transaction costs or expenses.

Management Agreement

We have entered into a management agreement with Hyperion Brookfield Crystal River that provides for the day-to-day management of our operations in conformity with the policies and the investment guidelines that are approved and monitored by our board of directors. Hyperion Brookfield Crystal River’s role as manager is under the supervision and direction of our board of directors.

The initial term of the management agreement expires on December 31, 2008 and will be automatically renewed for a one-year term each anniversary date thereafter. After the initial term, our independent directors will 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 the affirmative vote of the holders of at least a majority of the outstanding shares of our common stock, based upon unsatisfactory performance that is materially detrimental to us. A termination fee will be paid to our Manager upon such termination. We may also terminate the management agreement with 30 days’ prior written notice from our board of directors, without payment of a termination fee, for cause, as defined in the management agreement.

Our Manager is not obligated to dedicate certain of its employees exclusively to us nor is it obligated to dedicate any specific portion of its time to our business. Moreover, none of our Manager’s employees are contractually dedicated to our Manager’s obligations to us under our management agreement.

Our Manager is entitled to receive a base management fee from us, incentive compensation based on certain performance criteria, reimbursement of certain expenses and a termination fee if we decide to terminate the management agreement without cause. We believe that the base management fee and incentive compensation that our Manager is entitled to receive are comparable to the base management fee and incentive compensation received by managers of

comparable externally managed REITs. The following table summarizes the fees payable to our Manager pursuant to the management agreement:


Type	Description

Base management fee	1.50% per annum of our stockholders equity, defined as the aggregate net proceeds from sales of our equity securities plus retained earnings as of the end of the measurement period (without taking into account any non-cash equity compensation expense incurred in the current or prior periods), less amounts paid for repurchases of our capital stock. Payable monthly in arrears in cash.

Incentive management fee	Quarterly fee equal to 25% of:

		• the amount by which our net income (before non-cash compensation expense and the incentive management fee) per share for such quarter exceeds an amount equal to:

			• the product of the weighted average price per share in our March 2005 private offering, our August 2006 initial public offering and any subsequent offerings of our common stock multiplied by the higher of:

				• 2.4375% and

				• 25% of the then applicable 10-year treasury note rate plus 0.50%,

		• multiplied by the weighted average number of shares of common stock outstanding during the quarter.

	The calculation is subject to adjustment for certain one-time charges and, with the approval of a majority of our independent directors, certain non-cash items.

	Payable quarterly in a combination of stock and cash, provided that at least 10% of any quarterly payment may be made in stock, subject to compliance with the REIT qualification rules.

Termination fee	If we terminate the management agreement for cause, no termination fee is payable. If we terminate or fail to renew without cause, we will be required to pay a termination fee equal to two times the sum of the average annual base management fee and the average annual incentive management fee earned during the two 12-month periods immediately preceding the date of termination.

In addition to the fees payable to our Manager discussed above, we will incur management fee expense related to the amortization of restricted stock and stock options issued or granted under our long term incentive plan. From March 15, 2005, the date we commenced operations, through December 31, 2005 and for the six months ended June 30, 2006, our Manager earned base management fees of approximately $4.8 million and $2.8 million, respectively. From March 15, 2005 to June 30, 2006, our Manager has not earned any incentive fees. There are no contractual limitations on our obligation to reimburse our Manager for third party expenses and our Manager may incur such expenses consistent with the grant of authority provided to it pursuant to the management agreement without any additional approval of our board of directors being required. Our Manager has waived its right to request reimbursement from us of third-party expenses that it incurs through December 31, 2006. We and our Manager have

entered into sub-advisory agreements with each of Brookfield Sub-Advisor and Ranieri & Co., pursuant to which they provide advisory services to us in conjunction with our Manager’s service to us as our external manager. Our manager pays Brookfield Sub-Advisor an annual sub-advisory fee equal to 20% of the base management fee and incentive management fee that it receives from us and our manager pays Ranieri & Co. an annual sub-advisory fee of $100,000.

Our Distribution Policy

Federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. For more information, please see “Federal Income Tax Consequences of Our Qualification as a REIT.”

We anticipate that our distributions generally will be taxable as ordinary income to our stockholders, although a portion of the distributions may constitute a return of capital. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain.

On June 21, 2005, we declared a quarterly distribution of $0.25 per share of our common stock, payable on July 13, 2005, to stockholders of record as of June 30, 2005. We distributed total dividends of approximately $4.4 million from uninvested cash. In addition, on September 28, 2005, we declared a quarterly distribution of $0.575 per share of our common stock, payable on October 13, 2005, to stockholders of record as of September 30, 2005. In connection with such distribution, we distributed an aggregate of approximately $10.1 million. On December 23, 2005, we declared a quarterly distribution of $0.725 per share of our common stock, payable on December 30, 2005, to stockholders of record as of December 23, 2005. In connection with such distribution, we distributed an aggregate of approximately $12.7 million. On March 31, 2006, we declared a quarterly distribution of $0.725 per share of our common stock, payable on April 17, 2006, to stockholders of record as of March 31, 2006. In connection with such distribution, we distributed an aggregate of approximately $12.7 million. On June 23, 2006, we declared a quarterly distribution of $0.725 per share of our common stock, payable on July 21, 2006, to stockholders of record as of June 30, 2006. In connection with such distribution, we distributed an aggregate of approximately $12.7 million. On September 22, 2006, we declared a quarterly distribution of $0.60 per share of our common stock, payable on October 27, 2006 to stockholders of record as of October 4, 2006. All distributions through December 31, 2005 represented distributions of taxable earnings and profits; none represented a return of capital, and all distributions from and including October 13, 2005 were funded primarily from operating cash flows, and as necessary, to a lesser extent from the sale or repayment of our investments or from borrowings under our credit facilities or master repurchase agreements, and were not funded out of the offering proceeds from our March 2005 private offering. We cannot assure you that we will have sufficient cash available for future quarterly distributions at this level, or at all.

Operating and Regulatory Structure

We have elected and qualified to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended on December 31, 2005 and expect to qualify as a REIT in subsequent tax years. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. We believe that we were organized and have operated in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and that our intended manner of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT.

As a REIT, we generally will not be subject to federal income tax on the REIT taxable income that we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates. Even if we qualify for federal taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property. Crystal River Capital TRS Holdings, Inc., our taxable REIT subsidiary, or TRS, will be a regular taxable corporation that will be subject to federal, state and local income tax on its income.

In order to implement our investment strategy, subject to the limitations in the Internal Revenue Code on the total value of investments in TRSs and the amount of dividend income from TRSs, we will utilize TRSs in order to conduct any active businesses or make sales of assets which would not be appropriate for a REIT, hold assets that do not qualify as real estate assets under the Internal Revenue Code and engage in activities or make investments that would produce income that would not qualify as income from real estate assets.

Exclusion from Regulation Under the Investment Company Act

We intend to continue to operate our business so as to be excluded from regulation under the Investment Company Act, as administered by the Securities and Exchange Commission, referred to as the Commission, and its Division of Investment Management, referred to as the Division. Because we conduct our business directly and through wholly-owned subsidiaries, we must ensure not only that we, but also each of our subsidiaries, qualify for an exclusion from regulation under the Investment Company Act.

We are excluded from regulation under Section 3(c)(5)(C) of the Investment Company Act, a provision designed for companies that do not issue redeemable securities and are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. To qualify for this exemption, we will need to ensure that at least 55% of our assets consist of mortgage loans and other assets that are considered the functional equivalent of mortgage loans for purposes of the Investment Company Act, which we refer to as qualifying real estate assets, and that at least 80% of our assets consist of qualifying real estate assets and real estate-related assets. We do not intend to issue redeemable securities. We also may rely on an exclusion under Section 3(c)(6) of the Investment Company Act if, from time to time, we engage in our business through one or more majority-owned subsidiaries.

treatment is consistent with Division or Commission guidance. Instead, these investments generally will be classified as real estate-related assets for purposes of the 80% test. We do not expect that our investments in CDOs, ABS, credit default swaps and total return swaps will constitute qualifying real estate assets, although we may treat our interests in a CDO issuer that we determine is a “majority-owned subsidiary” and is excluded from Investment Company Act regulation under Section 3(c)(5)(C) of the Investment Company Act as qualifying real estate assets, consistent with Division or Commission guidance. Moreover, to the extent that these investments are not backed by mortgage loans or other interests in real estate, they will constitute miscellaneous assets, which can comprise no more than 20% of our assets. We treat our interests in an existing CDO, which is relying on the exclusion in Section 3(c)(7) of the Investment Company Act, as miscellaneous assets. See “Business — Exclusion from Regulation Under the Investment Company Act” for further information concerning our reliance on the Section 3(c)(5)(C) exclusion from Investment Company Act regulation. For purposes of the foregoing discussion “we” and “our” refer to Crystal River Capital, Inc. alone and not its subsidiaries.

Restrictions on Ownership of Our Common Stock

In order to assist us in complying with the limitations on the concentration of ownership of REIT shares imposed by the Internal Revenue Code, our charter generally prohibits any stockholder from beneficially or constructively owning, applying certain attribution rules under the Internal Revenue Code, more than 9.8% in value or in number of shares, whichever is more restrictive, of any class or series of our capital stock. Our board of directors may, in its sole discretion, waive the 9.8% ownership limit with respect to a particular stockholder if it is presented with evidence satisfactory to it that such ownership will not then or in the future jeopardize our qualification as a REIT. Our charter also prohibits any person from, among other things:


	•	beneficially or constructively owning shares of our capital stock that would result in our being “closely held” under Section 856(h) of the Internal Revenue Code or otherwise cause us to fail to qualify as a REIT; and

	•	transferring shares of our capital stock if such transfer would result in our capital stock being owned by fewer than 100 persons.

Our charter provides that any ownership or purported transfer of our capital stock in violation of the foregoing restrictions will result in the shares owned or transferred in such violation being automatically transferred to a charitable trust for the benefit of a charitable beneficiary, and the purported owner or transferee acquiring no rights in such shares. If a transfer to a charitable trust would be ineffective for any reason to prevent a violation of the restriction, the transfer that would have resulted in such violation will be void ab initio.

THE OFFERING


Common stock offered by selling stockholders		17,400,000 shares

Use of proceeds		The selling stockholders will receive all of the proceeds from the sale of the common stock offered by this prospectus. We will not receive any proceeds from the sale of shares of common stock offered by this prospectus.

Trading		Our common stock is listed on the New York Stock Exchange under the symbol “CRZ.”

Ownership and transfer restrictions		In order to assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Internal Revenue Code, our charter generally prohibits any stockholder from beneficially or constructively owning more than 9.8% in value or in number of shares, whichever is more restrictive, of any class or series of the outstanding shares of our capital stock, subject to important exceptions.

Unless we specifically state otherwise, all information in this prospectus with respect to the number of outstanding shares of our common stock is based on 25,019,500 shares outstanding as of August 31, 2006 and excludes approximately 1,629,250 shares of common stock that were reserved for issuance under our 2005 Long Term Incentive Plan as of August 31, 2006, including 130,000 shares of common stock issuable upon the exercise of outstanding stock options at an exercise price of $25.00 per share, 43,328 of which are currently vested, and including 10,160 shares of common stock to be issued in respect of deferred stock units and restricted stock units issued to certain of our independent directors.

Our Corporate Information

Our offices, Hyperion Brookfield’s offices and Hyperion Brookfield Crystal River’s offices are located at Three World Financial Center, 200 Vesey Street, Tenth Floor, New York, New York 10281-1010, and our telephone number is 212-549-8400. We maintain an internet site at http://www.crystalriverreit.com which contains information concerning us and our subsidiaries. Information included or referred to on our website is not incorporated by reference or otherwise a part of this prospectus. Our website address is included in this prospectus as an inactive textual reference only.

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

In the table below, we provide you with summary historical consolidated financial information of Crystal River Capital, Inc. We have prepared this information as of and for the period ended December 31, 2005 using our consolidated financial statements for the period ended December 31, 2005, which have been audited by Ernst & Young LLP, independent registered public accounting firm. We have prepared this information for the period ended June 30, 2005 and as of and for the three and six months ended June 30, 2006 using our unaudited consolidated financial statements for such periods. The financial statements for the periods ended June 30, 2005 and as of and for the three and six months ended June 30, 2006 have not been audited. In the opinion of management, such financial statements have been prepared on the same basis as our audited consolidated financial statements and reflect all adjustments, consisting of normal accruals, necessary for a fair presentation of the data for such periods. Results for the periods ended June 30, 2005 and for the three and six months ended June 30, 2006 are not necessarily indicative of results that may be expected for the entire year.

When you read this summary historical consolidated financial information, it is important that you read along with it the historical consolidated financial statements and related notes, as well as the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included in this prospectus.


			Period from
			March 15, 2005			Period from
			(commencement			March 15, 2005						Three Months
			of operations) to			(commencement			Six Months			Ended June 30,
			December 31,			of operations) to			Ended June 30,
			2005			June 30, 2005			2006			2005			2006

			(In thousands, except share and per share data)
Consolidated Income Statement Data:
Net interest income:
	Interest income		$	79,594		$	15,808		$	86,263		$	15,095		$	45,293
	Interest expense			48,425			7,645			60,276			7,542			31,425

		Net interest income		31,169			8,163			25,987			7,553			13,868

Expenses:
	Management fees, related party(1)			5,448			2,069			3,312			1,749			1,635
	Professional fees			2,205			723			1,514			682			753
	Insurance expense			250			90			190			77			99
	Other general and administrative expenses(2)			533			457			485			148			249

		Total expenses		8,436			3,339			5,501			2,656			2,736

	Income before other revenues (expenses)			22,733			4,824			20,486			4,897			11,132
Other revenues (expenses):
	Realized net loss on sale of real estate loans and securities available for sale			(521	)		—			(1,668	)		—			(1,100	)
	Realized and unrealized gain (loss) on derivatives			(2,497	)		(4,370	)		7,449			(4,565	)		(481	)
	Loss on impairment of available for sale securities			(5,782	)		—			(6,924	)		—			(5,666	)
	Foreign currency exchange gain			—			—			1,875			—			2,066
	Other			15			(17	)		234			(17	)		57

		Total other revenues (expenses)		(8,785	)		(4,387	)		966			(4,582	)		(5,124	)

Net income			$	13,948		$	437		$	21,452		$	315		$	6,008

Net income per share — basic and diluted			$	0.80		$	0.02		$	1.22		$	0.02		$	0.34
Weighted-average number of shares outstanding — basic and diluted				17,487,500			17,487,500			17,511,937			17,487,500			17,528,607
Cash dividends declared per common share			$	1.55		$	0.25		$	1.45		$	0.25		$	0.725


(1)	Includes $627, $232, $475, $199 and $253, respectively, of stock based compensation.

(2)	Includes $81, $35, $179, $30 and $63, respectively, of stock based compensation.


	December 31, 2005		June 30, 2006

	(In thousands)
Consolidated Balance Sheet Data:
Total assets	$	2,669,769	$	3,148,945
Debt — Repurchase agreements		1,994,287		2,496,730
Debt — Collateralized debt obligations		227,500		210,903
Debt — Notes payable, related party		35,000		—
Stockholders’ equity		381,429		373,602

RISK FACTORS

An investment in our common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the price of our common stock could decline significantly and you could lose all or a part of your investment.

Risks Related to Our Business and Investment Strategy

We have a limited operating history and limited experience as a REIT and we may not be able to successfully operate our business or generate sufficient revenue to make or sustain dividends to stockholders.

We were recently organized and have a limited operating history and limited experience operating as a REIT. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives and that the value of your investment could decline substantially. Our ability to achieve attractive risk-adjusted returns is dependent on our ability both to generate sufficient cash flow to pay an attractive dividend and to achieve capital appreciation, and we cannot assure you we will do either. There can be no assurance that we will be able to generate sufficient revenue from operations to pay our operating expenses and make or sustain dividends to stockholders.

We are dependent on Hyperion Brookfield Crystal River and our sub-advisors and may not find suitable replacements if Hyperion Brookfield Crystal River terminates the management agreement.

We are externally managed by Hyperion Brookfield Crystal River. Most of our officers are employees of Hyperion Brookfield or certain of its affiliates. We have no separate facilities and are completely reliant on Hyperion Brookfield Crystal River, which has significant discretion as to the implementation of our operating policies and strategies. We are subject to the risk that Hyperion Brookfield Crystal River will terminate the management agreement, thereby triggering a termination of our sub-advisors, and that no suitable replacements will be found to manage us. We believe that our success depends to a significant extent upon the experience of Hyperion Brookfield Crystal River’s executive officers, whose continued service is not guaranteed. If Hyperion Brookfield Crystal River terminates the management agreement, we may not be able to execute our business plan and may suffer losses, which could materially decrease cash available for distribution to our stockholders.

Hyperion Brookfield Crystal River has limited prior experience managing a REIT and we cannot assure you that Hyperion Brookfield Crystal River’s past experience will be sufficient to successfully manage our business as a REIT.

The federal income tax laws impose numerous constraints on the operations of REITs. Our Manager’s and its employees’ limited experience in managing a portfolio of assets under REIT and Investment Company Act constraints may hinder their ability to achieve our investment objective. In addition, maintaining our REIT qualification limits the types of investments we are able to make. Our investors are not acquiring an interest in any of Hyperion Brookfield’s other managed entities or Hyperion Brookfield Crystal River or their respective subsidiaries through this offering. We can offer no assurance that Hyperion Brookfield through Hyperion Brookfield Crystal River will replicate its historical success or its management team’s success in its previous endeavors, and we caution you that our investment returns could be substantially lower than the returns achieved by funds managed by Hyperion Brookfield or Hyperion Brookfield’s other endeavors.

We are dependent upon Hyperion Brookfield’s key personnel and the resources of our sub-advisors for our success and the departure of any of these key personnel or the elimination of resources of our sub-advisors could negatively impact our performance.

We depend on the diligence, skill and network of business contacts of the senior management of Hyperion Brookfield, who direct the management activities of Hyperion Brookfield Crystal River, including Clifford Lai, John Dolan and John Feeney. The senior management of Hyperion Brookfield evaluates, negotiates, structures, closes and monitors our investments. Our continued success will depend on the continued service of the senior management team of Hyperion Brookfield. The departure of any of the senior managers of Hyperion Brookfield, or of a significant number of the investment professionals or principals of Hyperion Brookfield or Hyperion Brookfield Crystal River, could have a material adverse effect on our performance. In addition, we can offer no assurance that Hyperion Brookfield Crystal River will remain as our manager or that we will continue to have access to Hyperion Brookfield’s principals and professionals or their information and deal flow. We also depend on the resources of our sub-advisors in connection with sourcing and managing our investments and executing our investment strategy.

Our base management fee is payable regardless of our performance, which could lead to conflicts of interest with our Manager.

Hyperion Brookfield Crystal River is entitled to receive a base management fee that is based on the amount of our equity (as defined in the management agreement), regardless of the performance of our portfolio. Hyperion Brookfield Crystal River’s entitlement to substantial non-performance based compensation might reduce its incentive to devote its time and effort to seeking investments that provide attractive risk-adjusted returns for our portfolio. This in turn could hurt our ability to make distributions to our stockholders.

Hyperion Brookfield Crystal River’s incentive fee may induce it to make certain investments, including speculative investments, that increase the risk of our investment portfolio.

Hyperion Brookfield Crystal River’s entitlement to an incentive fee may cause it to invest in high risk investments. In addition to its base management fee, Hyperion Brookfield Crystal River is entitled to receive incentive compensation based entirely upon our achievement of targeted levels of net income. In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on net income may lead Hyperion Brookfield Crystal River to place undue emphasis on the maximization of net income at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential generally are riskier or more speculative. This could result in increased risk to the value of our investment portfolio.

Hyperion Brookfield Crystal River manages our portfolio pursuant to very broad investment guidelines and our board of directors does not approve each investment decision made by Hyperion Brookfield Crystal River, which may result in our making riskier investments with which you do not agree and which could cause our operating results and the value of our common stock to decline.

Hyperion Brookfield Crystal River is authorized to follow very broad investment guidelines. While our directors periodically review our investment guidelines and our investment portfolio, other than any investments involving our affiliates or our sub-advisors’ affiliates or investments proposed by Brookfield Sub-Advisor, which they are required to review and approve prior to such investment being made, they do not review all of our proposed investments. In addition, in conducting periodic reviews, our directors may rely primarily on information provided to them by Hyperion Brookfield Crystal River or Brookfield Sub-Advisor. Furthermore, Hyperion

Brookfield Crystal River and Brookfield Sub-Advisor may use complex strategies in structuring transactions for us and those transactions may be difficult or impossible to unwind. Subject to maintaining our REIT qualification and our exemption from regulation under the Investment Company Act, Hyperion Brookfield Crystal River has great latitude within the broad investment guidelines in determining the types of investments it makes for us.

The failure of our management to apply these proceeds effectively could result in unfavorable returns, could have a material negative impact on our business, financial condition, liquidity and results of operations, could materially decrease cash available for distribution to our stockholders and could cause the value of our common stock to decline.

We may change our investment strategy and asset allocation without stockholder consent, which may result in riskier investments.

We have not adopted a policy as to the amounts to be invested in each of our intended investments, including securities rated below investment grade. Subject to our intention to invest in a portfolio that allows us to qualify as a REIT and remain eligible for an exclusion from regulation as an investment company under the Investment Company Act, we may change our investment strategy or asset allocation, including the percentage of assets that may be invested in each class, or in the case of securities, in a single issuer, at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in this prospectus. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could negatively affect the market price of our common stock and our ability to make distributions to you.

There are conflicts of interest in our relationship with Hyperion Brookfield Crystal River, which could result in decisions that are not in the best interests of our stockholders.

We are entirely dependent on Hyperion Brookfield Crystal River for our day-to-day management and have no independent officers. Our chairman of the board, chief executive officer and president, chief financial officer, chief investment officer and executive vice president also serve as officers and/or directors of Hyperion Brookfield or certain of its affiliates. As a result, our management agreement with Hyperion Brookfield Crystal River was negotiated between related parties and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.


	•	unsatisfactory performance by Hyperion Brookfield Crystal River that is materially detrimental to us or

	•	a determination that the management fee payable to Hyperion Brookfield Crystal River is not fair, subject to Hyperion Brookfield Crystal River’s right to prevent such a termination by accepting a mutually acceptable reduction of management fees.

Hyperion Brookfield Crystal River will be provided 180 days’ prior notice of any such termination and will be paid a termination fee equal to the amount of two times the sum of the average annual base management fee and the average annual incentive compensation earned by Hyperion Brookfield Crystal River during the two 12-month periods immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. These provisions may increase the effective cost to us of terminating

the management agreement, thereby restricting our ability to terminate Hyperion Brookfield Crystal River without cause.

The ability of Hyperion Brookfield and its officers and employees to engage in other business activities may reduce the time Hyperion Brookfield Crystal River spends managing us.

The management compensation structure that we have agreed to with Hyperion Brookfield Crystal River may cause Hyperion Brookfield Crystal River to invest in potentially higher yielding investments. Investments with higher yield potential generally are riskier or more speculative. The compensation we pay Hyperion Brookfield Crystal River consists of both a base management fee that is not tied to our performance and an incentive management fee that is based entirely on our performance. The risk of the base management fee component is that it may not sufficiently incentivize Hyperion Brookfield Crystal River to generate attractive risk-adjusted returns for us. The risk of the incentive fee component is that it may cause Hyperion Brookfield Crystal River to place undue emphasis on the maximization of GAAP net income at the expense of other criteria, such as preservation of capital, in order to achieve a higher incentive fee. This could result in increased risk to the value of our investment portfolio. Subject to certain limitations, Hyperion Brookfield Crystal River will receive at least 10% of its incentive fee in the form of shares of our common stock, and, at Hyperion Brookfield Crystal River’s option, may receive up to 100% of its incentive fee in the form of shares of our common stock. Hyperion Brookfield Crystal River has agreed not to sell such shares prior to one year after the date such shares are issued. Hyperion Brookfield Crystal River has the right in its discretion to allocate these shares to its officers, employees and other individuals who provide services to us. However, any of these shares that Hyperion Brookfield Crystal River allocates will be subject to the same one-year restriction on sale. Any such shares received would have the benefit of registration rights.

Hyperion Brookfield and our sub-advisors are not contractually obligated to dedicate their time to us and may engage in other activities that compete with us, which may result in conflicts of interest that could cause our results of operations to be lower or result in increased risk to the value of our investment portfolio.

The ability of Hyperion Brookfield, Brookfield Sub-Advisor and Ranieri & Co. and their respective officers and employees to engage in other business activities may result in conflicts of interest and, with respect to Brookfield Sub-Advisor and Ranieri & Co., may reduce the time they spend acting as a sub-advisor to us. In addition, the management compensation structure that we and our Manager have agreed to with Brookfield Sub-Advisor may cause Brookfield Sub-Advisor to source potentially higher yielding investments. Investments with higher yield potential generally are riskier or more speculative. The compensation our Manager pays Brookfield Sub-Advisor is equal to 20% of the base management fee and incentive management fees we pay to our Manager. In addition, for a 15 year period ending in April 2020, an affiliate of Ranieri & Co. will receive 20% of the base and incentive management fees and termination fees we pay to our Manager, net of sub-advisor fees. The base management fee is not tied to our performance and the incentive management fee is based entirely on our performance. The risk of the base management fee component is that it may not sufficiently incentivize Brookfield Sub-Advisor or Ranieri & Co. to generate attractive risk-adjusted returns for us in the investments that they source for us. The risk of the incentive fee component is that it may cause Brookfield Sub-Advisor or Ranieri & Co. to place undue emphasis on the maximization of GAAP net income at the expense of other criteria, such as preservation of capital, in order to achieve a higher incentive fee. This could result in increased risk to the value of our investment portfolio.

We may compete with existing and future investment vehicles for access to Hyperion Brookfield and our sub-advisors and their affiliates, which may reduce investment opportunities available to us.

Brookfield currently sponsors one investment vehicle, Brascan Real Estate Finance Fund, and Hyperion Brookfield manages one investment vehicle, Brascan Adjustable Rate Trust, and at June 30, 2006, managed 19 client accounts with investment focuses that overlap our investment focus, and each may in the future sponsor or manage other investment vehicles that have overlapping focuses with our investment focus. Accordingly, we compete for access to the benefits that we expect our relationship with Hyperion Brookfield Crystal River and our sub-advisors and their affiliates to provide and to the time of their investment professionals to carry out and facilitate our investment activities. Our rights to participate in investment opportunities are subject to Hyperion Brookfield’s conflict of interest policy. Brookfield is not subject to Hyperion Brookfield’s conflict of interest policy and is not obligated to offer us any investment opportunities and any decision to do so will be entirely within its discretion. In addition, we may make investments that are senior or junior to participations in, or have rights and interests different from or adverse to, the investments made by other vehicles or accounts managed by Hyperion Brookfield or Brookfield. Our interests in such investments may conflict with the interests of such other vehicles or accounts in related investments at the time of origination or in the event of a default or restructuring of the investment. If a default occurs with respect to such an investment, Hyperion Brookfield Crystal River will advise our independent directors who will direct Hyperion Brookfield Crystal River with respect to the resolution or disposition of the investment.

Our investment portfolio is heavily concentrated in agency adjustable-rate RMBS and we cannot assure you that we will be successful in achieving a more diversified portfolio.

As of June 30, 2006, more than 63.0% of our investment portfolio consisted of Agency Adjustable Rate RMBS. One of our key strategic objectives is to achieve a more diversified portfolio of investments that delivers attractive risk-adjusted returns. We cannot assure you that we will be successful in diversifying our investment portfolio and even if we are successful in diversifying our investment portfolio it is likely that approximately 70.0% of our fully leveraged assets will be MBS. If we are unable to achieve a more diversified portfolio, we will be particularly exposed to the investment risks that relate to investments in adjustable-rate MBS and we may suffer losses if investments in adjustable-rate MBS decline in value.

We leverage our investments, which may negatively affect our return on our investments and may reduce cash available for distribution.

We intend to continue to leverage our investments through borrowings, generally through the use of warehouse facilities, bank credit facilities, repurchase agreements, secured loans, securitizations, including the issuance of CDOs, loans to entities in which we hold, directly or indirectly, interests in pools of assets, and other borrowings. We are not limited in the amount of leverage we may use. The percentage of leverage varies depending on our ability to obtain credit facilities and the lender’s and rating agencies’ estimate of the stability of the investments’ cash flow. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions increase the cost of our financing relative to the income that can be derived from the assets acquired. Our debt service payments will reduce cash flow available for distributions to stockholders. We may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or sale to satisfy the obligations. We leverage certain of our assets through repurchase agreements. A decrease in the value of these assets may lead to margin calls which we will have to satisfy. We may not have the funds available to satisfy any

such margin calls and may have to sell assets at a time when we might not otherwise choose to do so.

Further, credit facility providers and warehouse facility providers may require us to maintain a certain amount of uninvested cash or to set aside unlevered assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on assets. In the event that we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.

Our failure to manage future growth effectively may have a material negative impact on our business, financial condition and results of operations.

Our ability to achieve our investment objective depends on our ability to grow, which depends, in turn, on the senior management team of Hyperion Brookfield and its ability to identify and invest in securities that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of Hyperion Brookfield’s structuring of our investment process, its ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms. Our ability to grow is also dependent upon Hyperion Brookfield’s ability to successfully hire, train, supervise and manage new employees. We may not be able to manage growth effectively or to achieve growth at all. Any failure to manage our future growth effectively could have a material negative impact on our business, financial condition and results of operations.

When we obtain financing, lenders can impose restrictions on us that affect our ability to incur additional debt, our capability to make distributions to stockholders and our flexibility to determine our operating policies. Loan documents we have executed contain, and loan documents we may execute in the future may contain, negative covenants that limit, among other things, our ability to repurchase stock, distribute more than a certain amount of our funds from operations, and employ leverage beyond certain amounts. Some of our master repurchase agreements in effect as of October 23, 2006 contain negative covenants requiring us to maintain certain levels of net asset value, tangible net worth and available funds and comply with interest coverage ratios, leverage ratios and distribution limitations.

We may acquire investments from Hyperion Brookfield and Brookfield or their affiliates or otherwise participate in investments in which they have an interest or for which they have a related investment, which could result in conflicts of interest.

We expect that we will continue to acquire investments from Hyperion Brookfield and Brookfield or their affiliates, make investments that finance their investments or make co-investments with them. These transactions are not and will not be the result of arm’s length negotiations and involve conflicts between our interests and the interest of Hyperion Brookfield and Brookfield and their affiliates in obtaining favorable terms and conditions. There can be no assurance that any procedural protections, such as obtaining market prices, other reliable indicators of fair market value and independent valuations or appraisals and the prior approval of our independent directors, will be sufficient to assure that the consideration we pay for these investments will not exceed their fair market value.

We operate in a highly competitive market for investment opportunities and we may not be able to identify and make investments that are consistent with our investment objectives.

A number of entities compete with us to make the types of investments that we plan to make. We compete with other REITs, public and private funds, commercial and investment banks and commercial finance companies. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Several other

REITs have recently raised, or are expected to raise, significant amounts of capital, and may have investment objectives that overlap with ours, which may create competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. We cannot assure you that the competitive pressures we face will not have a material negative impact on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

Failure to procure adequate capital and funding would negatively impact our results and may, in turn, negatively affect the market price of shares of our common stock and our ability to distribute dividends.

We depend upon the availability of adequate funding and capital for our operations. As a REIT, we are required to distribute annually at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, to our stockholders and are therefore not able to retain significant amounts of our earnings for new investments. However, Crystal River Capital TRS Holdings, Inc., our TRS, is able to retain earnings for investment in new capital, subject to the REIT requirements which place a limitation on the relative value of TRS stock and securities owned by a REIT. The failure to secure acceptable financing could reduce our taxable income, as our investments would no longer generate the same level of net interest income due to the lack of funding or increase in funding costs. A reduction in our net income would reduce our liquidity and our ability to make distributions to our stockholders. We cannot assure you that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us. Therefore, in the event that we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the market price of our common stock and our ability to make distributions.

If we issue senior securities we will be subject to additional restrictive covenants and limitations on our operating flexibility, which could materially decrease cash available for distribution to our stockholders.

If we decide to issue senior securities in the future, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Holders of senior securities may be granted specific rights, including but not limited to: the right to hold a perfected security interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to require approval to sell assets. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock. We, and indirectly our stockholders, will bear the cost of issuing and servicing such securities.

We may not be able to successfully complete securitization transactions, which could inhibit our ability to grow our business and could negatively impact our results of operations.

In addition to issuing senior securities to raise capital as described above, we may, to the extent consistent with the REIT requirements, seek to securitize certain of our portfolio investments to generate cash for funding new investments. This would involve creating a special-purpose vehicle, contributing a pool of our assets to the entity, and selling interests in the entity on a non-recourse basis to purchasers (whom we would expect to be willing to accept a lower interest rate to invest in investment grade loan pools). We would retain all or a

portion of the equity in the securitized pool of portfolio investments. We have initially financed our investments with relatively short-term credit facilities and reverse repurchase arrangements. We use these short-term facilities to finance the acquisition of securities until a sufficient quantity of securities is accumulated, at which time we intend to refinance these facilities through a securitization, such as a CDO issuance, or other long-term financing. As a result, we are subject to the risk that we may not be able to acquire, during the period that our short-term facilities are available, a sufficient amount of eligible securities to maximize the efficiency of a CDO issuance. We also bear the risk that we may not be able to obtain short-term credit facilities or may not be able to renew any short-term credit facilities after they expire should we find it necessary to extend our short-term credit facilities to allow more time to seek and acquire the necessary eligible securities for a long-term financing. The inability to renew our short-term credit facilities may require us to seek more costly financing for our investments or to liquidate assets. In addition, conditions in the capital markets may make the issuance of a CDO impractical when we do have a sufficient pool of collateral. The inability to securitize our portfolio could hurt our performance and ability to grow our business. At the same time, the securitization of our portfolio investments might expose us to losses, as the residual portfolio investments in which we do not sell interests will tend to be riskier and more likely to generate losses.

We expect that the use of CDO financings with over-collateralization requirements may have a negative impact on our cash flow.

The terms of our initial CDO financing, CDO 2005-1, required that the principal amount of assets must exceed the principal balance of the related bonds by a certain amount, which is commonly referred to as “over-collateralization.” We expect that the terms of CDOs that we may issue in the future generally will provide for over-collateralization and that, if certain delinquencies and/or losses exceed specified levels, which we will establish based on the analysis by the rating agencies (or any financial guaranty insurer) of the characteristics of the assets collateralizing the bonds, the required level of over-collateralization may be increased or may be prevented from decreasing as would otherwise be permitted if losses or delinquencies did not exceed those levels. Other tests (based on delinquency levels or other criteria) may restrict our ability to receive net income from assets collateralizing the obligations. We cannot assure you that the performance tests will be satisfied. In advance of completing negotiations with the rating agencies or other key transaction parties on our future CDO financings, we cannot assure you of the actual terms of the CDO delinquency tests, over-collateralization terms, cash flow release mechanisms or other significant factors regarding the calculation of net income to us. Failure to obtain favorable terms with regard to these matters may materially and adversely affect the availability of net income to us. If our assets fail to perform as anticipated, our over-collateralization or other credit enhancement expense associated with our CDO financings will increase.

An increase in our borrowing costs relative to the interest we receive on our assets may negatively affect our profitability, and thus our cash available for distribution to our stockholders.

As our repurchase agreements and other short-term borrowings mature, we will be required either to enter into new borrowings or to sell certain of our investments at times when we might not otherwise choose to do so. An increase in short-term interest rates at the time that we seek to enter into new borrowings would reduce the spread between our returns on our assets and the cost of our borrowings. This would negatively affect our returns on our assets that are subject to prepayment risk, including our MBS, which might reduce earnings and, in turn, cash available for distribution to our stockholders.

We may not be able to renew the total return swaps that we enter into, which could adversely impact our leveraging strategy.

In the future, we may leverage certain of our investments through the use of total return swaps, which are swaps in which the non-floating rate side is based on the total return of an equity or fixed income instrument with a life longer than the swap. We may wish to renew many of the swaps, which are for specified terms, as they mature. However, there is a limited number of providers of such swaps, and there is no assurance the initial swap providers will choose to renew the swaps, and, if they do not renew, that we would be able to obtain suitable replacement providers. Providers may choose not to renew our total return swaps for a number of reasons, including:


	•	increases in the provider’s cost of funding;

	•	insufficient volume of business with a particular provider;

	•	our desire to invest in a type of swap that the provider does not view as economically attractive due to changes in interest rates or other market factors; or

	•	our inability to agree with a provider on terms.

Furthermore, our ability to invest in total return swaps, other than through a TRS, may be severely limited by the REIT qualification requirements because total return swaps are not qualifying assets and do not produce qualifying income for purposes of the REIT asset and income tests.

Hedging against interest rate exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.

Subject to maintaining our qualification as a REIT and our exemption from regulation under the Investment Company Act, we often pursue various hedging strategies to seek to reduce our exposure to losses from adverse changes in interest rates. Our hedging activity varies in scope based on the level and volatility of interest rates, the type of assets held, and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:


	•	interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

	•	available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;

	•	the duration of the hedge may not match the duration of the related liability;

	•	the amount of income that a REIT may earn from hedging transactions (other than through TRSs) to offset interest rate losses is limited by federal tax provisions governing REITs;

	•	the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

	•	the party owing money in the hedging transaction may default on its obligation to pay.

Our hedging activity may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders. We may utilize instruments such as forward contracts and interest rate swaps, caps, collars and floors and credit default swaps to seek to hedge against mismatches between the cash flows on our assets and the interest payments on our liabilities or fluctuations in the relative values of our portfolio positions, in each case resulting from changes in market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such

positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against an interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.

The success of our hedging transactions will depend on Hyperion Brookfield Crystal River’s ability to correctly predict movements of interest rates. Therefore, while we may enter into such transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.

In addition, by entering into derivative contracts in connection with hedging transactions, we could be required to fund cash payments in certain circumstances. These potential payments will be contingent liabilities and therefore may not appear on our balance sheet. Our ability to fund these contingent liabilities will depend on the liquidity of our assets and access to capital at the time, and the need to fund these contingent liabilities could adversely impact our financial condition.

Our failure to achieve adequate operating cash flow could reduce our cash available for distribution to our stockholders.

As a REIT, we must distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding net capital gain. Our ability to make and sustain cash distributions is based on many factors, including the return on our investments, operating expense levels and certain restrictions imposed by Maryland law. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay future dividends, which may also have a negative impact on our stock price. No assurance can be given as to our ability to pay distributions.

Loss of Investment Company Act exclusion would adversely affect us and could cause a decline in the market price of our common stock and limit our ability to distribute dividends.

Because registration as an investment company would significantly affect our ability to engage in certain transactions or to organize ourselves in the manner we are currently organized, we intend to maintain our qualification for certain exclusions from registration under the Investment Company Act. Since we conduct our business directly and through wholly-owned subsidiaries, we must ensure not only that we, but also that each of our subsidiaries, qualify for an exclusion or exemption from regulation under the Investment Company Act.

For purposes of the ensuing discussion “we” and “our” refer to Crystal River Capital, Inc. alone and not its subsidiaries.

We rely on the exclusion provided by Section 3(c)(5)(C) of the Investment Company Act (and potentially Section 3(c)(6) if, from time to time, we engage in business through one or more majority-owned subsidiaries).

Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires us to invest at least 55% of our assets in “mortgages and other liens on and interests in real estate”, referred to as

qualifying real estate assets, and at least 80% of our assets in qualifying real estate assets plus real estate-related assets. We will treat our direct ownership interests in real property (held in the form of fee interests) and our whole mortgage loans as qualifying real estate assets. In addition, we will treat our ownership interest in pools of whole loan RMBS, in cases in which we acquire the entire beneficial interest in a particular pool, as qualifying real estate assets based on no-action positions of the Division.

We also invest in other types of RMBS, CMBS, B Notes and mezzanine loans, which we will not treat as qualifying real estate assets for purposes of determining our eligibility for the exclusion provided by Section 3(c)(5)(C) unless such treatment is consistent with guidance provided by the Commission or the Division. We have not requested no-action or other interpretative guidance or applied for an exemptive order with respect to the treatment of such assets. In the absence of guidance of the Commission or the Division that otherwise supports the treatment of such investments as qualifying real estate assets, we will treat them, for purposes of determining our eligibility for the exclusion provided by Section 3(c)(5)(C), as real estate-related assets or miscellaneous assets, as appropriate.

As of June 30, 2006, our investments in RMBS whole pool certificates comprise in excess of 61.0% of our assets, and coupled with our whole mortgage loan investments, comprise in excess of 64.0% of our assets. Such qualifying real estate assets, coupled with our real estate-related assets, comprise in excess of 84.0% of our assets as of June 30, 2006. We monitor our assets to ensure that at least 55% of our assets consist of qualifying real estate assets, and that at least 80% of our assets consist of qualifying real estate assets and real estate-related assets. We expect, when required due to the mix of our investments, to acquire pools of whole loan RMBS for compliance purposes. Investments in such pools may not represent an optimum use of our investable capital when compared to the available investments we target pursuant to our investment strategy.

If we fail to satisfy the requirements provided in the Investment Company Act to preserve our exclusion from regulation under the Investment Company Act, we could be required to materially restructure our activities and to register as an investment company under the Investment Company Act, which could have a material adverse effect on our operating results. Further, if it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the Commission, that we would be unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company.

Rapid changes in the values of our MBS and other real estate related investments may make it more difficult for us to maintain our qualification as a REIT or exclusion from regulation under the Investment Company Act, which may cause us to change our mix of portfolio investments which may not produce optimal returns consistent with our investment strategy.

If the market value or income potential of our MBS and other real estate related investments declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income and/or liquidate our non-qualifying assets in order to maintain our REIT qualification or exclusion from regulation under the Investment Company Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated if the assets that we need to sell in order to comply with the requirements for qualification as a REIT or to qualify for an exclusion from regulations under the Investment Company Act have no pre-existing trading market and cannot easily be sold. To the extent that the assets we need to sell are comprised of subordinated MBS, individually-negotiated loans, loan participations or mezzanine loans where there is no established trading market, we may have difficulty selling such investments

quickly for their fair value. Accordingly, we may have to make investment decisions that we otherwise would not make absent the REIT and Investment Company Act considerations.

We are highly dependent on communications and information systems operated by Hyperion Brookfield or by third parties, and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.

Our business is highly dependent on communications and information systems, including all of Hyperion Brookfield’s proprietary analytical systems and models and certain third-party systems and models. Any failure or interruption of our systems or the systems operated by Hyperion Brookfield or by third parties on which we rely, as we experienced as part of system-wide interruptions following the September 11, 2001 terrorist attacks and the East Coast electrical power black-out in August 2003, could cause delays or other problems in our securities trading activities, including MBS trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends.


	*We will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and furnish a report on our internal control over financial reporting as of the end of 2007.*

Based on current laws and regulations, we will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) in 2007. Section 404 requires us to assess and attest to the effectiveness of our internal control over financial reporting and requires our independent registered public accounting firm to opine as to the adequacy of our assessment and effectiveness of our internal control over financial reporting. Our efforts to comply with Section 404 will result in us incurring significant expenses through 2007 that we estimate will exceed $500,000.

Even with those expenditures, we may not receive an unqualified opinion from our independent registered public accounting firm in regards to our internal control over financial reporting. In connection with our financial statement audit for the period ended June 30, 2005, our independent registered public accounting firm identified four material weaknesses involving our internal control over financial reporting for the period March 15, 2005 (commencement of operations) to June 30, 2005. While we have remediated those material weaknesses as of December 31, 2005, we cannot assure you that we will not have material weaknesses in our internal control over financial reporting in the future. The existence of a material weakness in our internal control over financial reporting could result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, all of which could lead to a decline in the trading price of our common stock.

Terrorist attacks and other acts of violence or war may affect the market for our common stock, the industry in which we conduct our operations and our profitability.

The terrorist attacks on September 11, 2001 disrupted the U.S. financial markets, including the real estate capital markets, and negatively impacted the U.S. economy in general. Any future terrorist attacks, the anticipation of any such attacks, the consequences of any military or other response by the U.S. and its allies, and other armed conflicts could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. The economic impact of these events could also adversely affect the credit quality of some of our loans and investments and the property underlying our ABS securities. Some of our loans and investments are more susceptible to the adverse effects discussed above than others, such as hotel loans, which may experience a significant reduction in occupancy rates following any future attacks. We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact our

performance and revenues and may result in volatility of the value of our securities. A prolonged economic slowdown, a recession or declining real estate values could impair the performance of our investments and harm our financial condition, increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We cannot assure you that there will not be further terrorist attacks against the United States or U.S. businesses, and we cannot predict the severity of the effect that such future events would have on the U.S. financial markets, the economy or our business. Losses resulting from these types of events are uninsurable.

In addition, the events of September 11 created significant uncertainty regarding the ability of real estate owners of high profile assets to obtain insurance coverage protecting against terrorist attacks at commercially reasonable rates, if at all. With the enactment of the Terrorism Risk Insurance Act of 2002 (TRIA), and the subsequent enactment of the Terrorism Risk Insurance Extension Act of 2005, which extended TRIA through the end of 2007, insurers must make terrorism insurance available under their property and casualty insurance policies, but this legislation does not regulate the pricing of such insurance. The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties in which we invest are unable to obtain affordable insurance coverage, the value of those investments could decline and in the event of an uninsured loss, we could lose all or a portion of our investment.

Risks Related to Our Investments

Our real estate investments are subject to risks particular to real property, any of which could reduce our returns on such investments and limit our cash available for distribution to our stockholders.

We own assets secured by real estate and may own real estate directly. Real estate investments will be subject to various risks, including:


	•	acts of God, including hurricanes, earthquakes, floods and other natural disasters, which may result in uninsured losses;

	•	acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;

	•	adverse changes in national and local economic and market conditions;

	•	changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

	•	costs of remediation and liabilities associated with environmental conditions such as indoor mold; and

	•	the potential for uninsured or under-insured property losses.

If any of these or similar events occurs, it may reduce our return from an affected property or investment and reduce or eliminate our ability to make distributions to stockholders.

The mortgage loans we invest in and the mortgage loans underlying the MBS and asset-backed securities we invest in are subject to delinquency, foreclosure and loss, which could result in losses to us.

Commercial mortgage loans are secured by multifamily or commercial property and are subject to risks of delinquency and foreclosure, and risks of loss that are greater than similar risks associated with loans made on the security of single-family residential property. 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.

Residential mortgage loans are secured by single-family residential 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 a residential property is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn, acts of God, terrorism, social unrest and civil disturbances, may impair a borrower’s ability to repay its loans. ABS are bonds or notes backed by loans and/or other financial assets. The ability to repay these loans or other financial assets is dependant upon the income or assets of the borrower.

In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.

Foreclosure of a mortgage loan can be an expensive and lengthy process which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. RMBS evidence interests in or are secured by pools of residential mortgage loans and CMBS evidence interests in or are secured by a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, the MBS we invest in are subject to all of the risks of the underlying mortgage loans.

We may not be able to identify satisfactory alternative investments to successfully balance the interest rate or mark-to-market risk inherent in our RMBS investments, which could result in losses to us.

As of June 30, 2006, greater than 63.0% of our investment portfolio consisted of Agency Adjustable Rate RMBS and greater than 19.0% of our investment portfolio consisted of Non-Agency RMBS. If we are not able to identify and acquire satisfactory alternative investments, our portfolio will be concentrated in a less diversified portfolio of RMBS investments. This would increase our dependence on these investments and increase our interest rate and mark-to-market risk inherent in RMBS investments, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends.

An increase in the yield spread of our assets may cause the market price of our common stock to drop.

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is the relative yield spread differential between the assets that we own and their valuation relative to comparable duration Treasuries. An increase in the yield spread differential could lower the book value of the assets which could lower the value of the common stock.

Our investments in CMBS generally are subordinated and could subject us to increased risk of losses.

In general, losses on an asset securing a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit provided by the borrower, if any, and then by the “first loss” subordinated security holder and then by the “second loss” subordinated security holder. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in which we invest, we may not be able to recover all of our investment in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related MBS, the securities in which we invest may effectively become the “first loss” position behind the more senior securities, which may result in significant losses to us.

The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying MBS to make principal and interest payments or to refinance may be impaired. In this case, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities.

Our assets may include high yield and subordinated corporate securities that have greater risks of loss than secured senior loans and if those losses are realized, it could negatively impact our earnings, which could materially decrease cash available for distribution to our stockholders.

Our assets may include high yield and subordinated securities that involve a higher degree of risk than long-term senior secured loans. First, the high yield securities may not be secured by mortgages or liens on assets. Even if secured, these high yield securities may have higher loan-to-value ratios than a senior secured loan. Furthermore, our right to payment and the security interest may be subordinated to the payment rights and security interests of the senior lender. Therefore, we may be limited in our ability to enforce our rights to collect these loans and to recover any of the loan balance through a foreclosure of collateral.

Certain of these high yield and subordinated securities may have an interest only payment schedule, with the principal amount remaining outstanding and at risk until the maturity of the obligation. In this case, a borrower’s ability to repay its obligation may be dependent upon a liquidity event that will enable the repayment of the obligation.

In addition to the above, numerous other factors may affect a company’s ability to repay its obligation, including the failure to meet its business plan, a downturn in its industry or negative economic conditions. A deterioration in a company’s financial condition and prospects may be accompanied by deterioration in the collateral for the obligation. Losses in our high yield and subordinated securities could negatively impact our earnings, which could materially decrease cash available for distribution to our stockholders.

High yield and subordinated securities from highly leveraged companies may have a greater risk of loss which, in turn, could materially decrease cash available for distribution to our stockholders.

Leverage may have material adverse consequences to the companies in which we will hold investments. These companies may be subject to restrictive financial and operating covenants. The leverage may impair these companies’ ability to finance their future operations and capital needs. As a result, these companies’ flexibility to respond to changing business and economic conditions and to business opportunities may be limited. A leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used. As a result, leveraged companies have a greater risk of loss. Losses on our investments could negatively impact our earnings, which could materially decrease cash available for distribution to our stockholders.

We may continue to invest in the equity securities of CDOs and such investments involve various significant risks, including that CDO equity receives distributions from the CDO only if the CDO generates enough income to first pay the holders of its debt securities and its expenses.

We may continue to invest in the equity securities of CDOs. A CDO is a special purpose vehicle that purchases collateral (such as ABS) that is expected to generate a stream of interest or other income. The CDO issues various classes of securities that participate in that income stream, typically one or more classes of debt instruments and a class of equity securities. The equity is usually entitled to all of the income generated by the CDO after the CDO pays all of the interest due on the debt securities and its expenses. However, there will be little or no income available to the CDO equity if there are defaults by the issuers of the underlying collateral and those defaults exceed a certain amount. In that event, the value of our investment in the CDOs equity could decrease substantially. In addition, the equity securities of CDOs are generally illiquid, and because they represent a leveraged investment in the CDO’s assets, the value of the equity securities will generally have greater fluctuations than the values of the underlying collateral.

We may enter into warehouse agreements in connection with investments in the equity securities of CDOs structured for us and, if the investment in a CDO is not consummated, the warehoused collateral will be sold and we must bear any loss resulting from the purchase price of the collateral exceeding the sale price.

In connection with future investment in CDOs that Hyperion Brookfield structures for us, we expect to enter into warehouse agreements with investment banks or other financial institutions, pursuant to which the institution initially will finance the purchase of the collateral that will be transferred to the CDO. Hyperion Brookfield will select the collateral. If the CDO transaction is not consummated, the institution would liquidate the warehoused collateral and we would have to pay any amount by which the original purchase price of the collateral exceeds its sale price, subject to negotiated caps, if any, on our exposure. In addition, regardless of whether the CDO transaction is consummated, if any of the warehoused collateral is sold before the consummation, we will have to bear any resulting loss on the sale. The amount at risk in connection with the warehouse agreements supporting our investments in CDOs generally is the amount that we have agreed to invest in the equity securities of the CDOs. Although we would expect to complete the CDO transaction within about three to nine months after the warehouse agreement is signed, we cannot assure you that we would in fact be able to complete any such transaction, or complete it within the expected time period.

We will lose money on our repurchase transactions if the counterparty to the transaction defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if the value of the underlying security has declined as of the end of that term or if we default on our obligations under the repurchase agreement.

When we engage in a repurchase transaction, we generally sell securities to the transaction counterparty and receive cash from the counterparty. The counterparty is obligated to resell the securities back to us at the end of the term of the transaction, which is typically 30-90 days. Because the cash we receive from the counterparty when we initially sell the securities to the counterparty is less than the value of those securities (typically up to about 97% of that value), if the counterparty defaults on its obligation to resell the securities back to us we would incur a loss on the transaction equal to about 3% of the value of the securities (assuming there was no change in the value of the securities). We would also lose money on a repurchase transaction if the value of the underlying securities has declined as of the end of the transaction term, as we would have to repurchase the securities for their initial value but would receive securities worth less than that amount. Any losses we incur on our repurchase transactions could negatively impact our earnings, and thus decrease our cash available for distribution to our stockholders.

If we default on one of our obligations under a repurchase transaction, the counterparty can terminate the transaction and cease entering into any other repurchase transactions with us. In that case, we would likely need to establish a replacement repurchase facility with another repurchase dealer in order to continue to leverage our portfolio and carry out our investment strategy. There is no assurance we would be able to establish a suitable replacement facility.

Investments in mezzanine loans involve greater risks of loss than senior loans secured by income producing properties.

Investments in mezzanine loans take the form of subordinated loans secured by second mortgages on the underlying property or loans secured by a pledge of the ownership interests in the entity that directly or indirectly owns the property. These types of investments involve a higher degree of risk than a senior mortgage loan because the investment may become unsecured as a result of foreclosure by the 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 the property owning 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 is paid in full. As a result, we may not recover some or all of our investment, which could result in losses. 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.

Increases in interest rates could negatively affect the value of our investments, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our stockholders.

We invest indirectly in mortgage loans by purchasing MBS. Under a normal yield curve, an investment in MBS will decline in value if long-term interest rates increase. Despite Fannie Mae, Freddie Mac or Ginnie Mae guarantees of certain of the MBS we own, those guarantees do not protect us from declines in market value caused by changes in interest rates. Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our stockholders.

A significant risk associated with our investment in MBS is the risk that both long-term and short-term interest rates will increase significantly. If long-term rates increase significantly, the market value of these MBS would decline and the duration and weighted average life of the

investments would increase. We could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on the repurchase agreements we may enter into in order to finance the purchase of MBS.

Market values of our investments may decline without any general increase in interest rates for a number of reasons, such as increases in defaults, increases in voluntary prepayments for those investments that are subject to prepayment risk, and widening of credit spreads.

We remain subject to losses on our mortgage portfolio despite the significant concentration of highly-rated MBS in our portfolio.

A significant portion of our current assets are invested in MBS that either are agency-backed or are rated investment grade by at least one rating agency. While highly-rated MBS generally are subject to a lower risk of default than lower credit quality MBS and may benefit from third-party credit enhancements such as insurance or corporate guarantees, there is no assurance that such MBS will not be subject to credit losses. Furthermore, ratings are subject to change over time as a result of a number of factors, including greater than expected delinquencies, defaults or credit losses, or a deterioration in the financial strength of corporate guarantors, any of which may reduce the market value of such securities. Furthermore, ratings do not take into account the reasonableness of the issue price, interest rate risk, prepayment risk, extension risk or other risks associated with such MBS. As a result, while we attempt to mitigate our exposure to credit risk in our mortgage portfolio on a relative basis by focusing on highly-rated MBS, we cannot completely eliminate credit risk and remain subject to other risks to our investment portfolio that could cause us to suffer losses, which may harm the market price of our common stock.

Some of our portfolio investments are recorded at fair value as estimated by management and reviewed by our board of directors and, as a result, there is uncertainty as to the value of these investments.

Some of our portfolio investments are in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded is not readily determinable. We value these investments quarterly at fair value as determined under policies approved by our board of directors. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. The value of our common stock could be adversely affected if our determinations regarding the fair value of these investments is materially higher than the values that we ultimately realize upon their disposal.

The value of investments denominated or quoted in international currencies may decrease due to fluctuations in the relative rates of exchange between the currencies of different nations and by exchange control regulations.

If we make investments denominated or quoted in foreign currencies, our investment performance may be negatively affected by a devaluation of that currency. Further, our investment performance may be negatively affected by currency exchange rates because the U.S. Dollar value of investments denominated or quoted in another currency may increase or decrease in response to changes in the value of the currency in relation to the U.S. Dollar.

Declines in the market values of our investments may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders.

A substantial portion of our assets are classified for accounting purposes as “available-for-sale.” Changes in the market values of those assets are directly charged or credited to stockholders’ equity. As a result, a decline in values may reduce the book value of our assets. Moreover, if the decline in value of an available-for-sale security is other than temporary, such decline will reduce earnings.

All of our repurchase agreements are subject to bilateral margin calls in the event that the collateral securing our obligations under those facilities exceeds or does not meet our collateralization requirements. The analysis of sufficiency of collateralization is undertaken daily and the thresholds for adjustment range from $100,000 to $500,000. As of June 30, 2006, on a net basis, the fair value of the collateral, including restricted cash, securing our obligations under repurchase agreements exceeded the amount of such obligations by approximately $148.7 million.

A decline in the market value of our assets may adversely affect us particularly in instances where we have borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan. If we were unable to post the additional collateral, we would have to sell the assets at a time when we might not otherwise choose to do so. A reduction in credit available may reduce our earnings and, in turn, cash available for distribution to stockholders.

The lack of liquidity in our investments may harm our business.

We have made investments and, subject to maintaining our REIT qualification and our exemption from regulation under the Investment Company Act, expect to make additional investments, in securities that are not publicly traded. A portion of these securities may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments, such as subordinated MBS or investments in timber or power generating assets, may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. Moreover, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or Hyperion Brookfield Crystal River has or could be attributed with material non-public information regarding such business entity.

Failure to comply with negative covenants contained in our repurchase facilities agreements will limit available financing under these agreements.

We obtain a significant portion of our funding through the use of repurchase facilities. Certain of our repurchase facility agreements include negative covenants, that if breached, may cause transactions to be terminated early. Except as noted below, the repurchase facility agreements do not include negative covenants other than those contained in the standard master repurchase agreement as published by the Bond Market Association. One of our master repurchase agreements provides that it may be terminated if, among other things, certain material decreases in net asset value occur, our chief executive officer ceases to be involved in the day-to-day operations of our Manager, we lose our REIT status or our Manager is terminated. An event of default or termination event under the standard master repurchase agreement or the additional provisions explained above would give our counterparty the option to terminate all repurchase transactions existing with us and make any amount due by us to the counterparty payable immediately. If we are required to terminate outstanding repurchase transactions and are unable to negotiate favorable terms of replacement financing, cash will be

negatively impacted. This may reduce the amount of capital available for investing and/or may negatively impact our ability to distribute dividends. In addition, we may have to sell assets at a time when we might not otherwise choose to do so.

We may not be able to acquire eligible investments for a CDO issuance, or may not be able to issue CDO securities on attractive terms, which may require us to seek more costly financing for our investments or to liquidate assets.

We intend to continue to acquire debt instruments and finance them on a non-recourse long-term basis, such as through the issuance of CDOs. During the period that we are acquiring these assets, we intend to finance our purchases through relatively short-term credit facilities. We use short-term warehouse lines of credit to finance the acquisition of instruments until a sufficient quantity is accumulated, at which time we may refinance these lines through a securitization, such as a CDO issuance, 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 assets to maximize the efficiency of a CDO issuance. In addition, conditions in the capital markets may make the issuance of CDOs less attractive to us when we do have a sufficient pool of collateral. If we are unable to issue a CDO to finance these assets, we may be required to seek other forms of potentially less attractive financing or otherwise to liquidate the assets.

A prolonged economic slowdown, a recession or declining real estate values could impair the performance of our investments and harm our operating results.

Many of our investments may be susceptible to economic slowdowns or recessions, which could lead to financial losses in our investments and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and have a negative impact on our operating results.


	*We may be exposed to environmental liabilities with respect to properties to which we take title, which could impair the performance of our investments and harm our operating results.*

In the course of our business, we may take title to real estate, and, if we do take title, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.


	*Our hedging transactions may not completely insulate us from interest rate risk.*

Subject to maintaining our qualification as a REIT, from time to time we engage in certain hedging transactions to limit our exposure to changes in interest rates and therefore may expose ourselves to risks associated with such transactions. We utilize instruments such as forward contracts and interest rate swaps, caps, collars and floors to seek to hedge against mismatches between the cash flows on our assets and the interest payments on our liabilities or fluctuations in the relative values of our portfolio positions, in each case resulting from changes in market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or

prevent losses if the values of such positions decline. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against an interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.


	Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs that could expose us to unexpected economic losses in the future.

The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased. We expect that from time to time, in addition to the interest rate swaps, credit default swaps and currency swaps into which we had entered as of June 30, 2006, we may in the future enter into forward contracts and cash flow swaps as part of our hedging strategy.

In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

Subject to maintaining our qualification as a REIT, part of our investment strategy involves entering into derivative contracts that could require us to fund cash payments in the future under certain circumstances, e.g., the early termination of the derivative agreement caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the derivative contract. The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our financial results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could negatively impact our financial condition.


	Prepayment rates could negatively affect the value of our MBS, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our stockholders.

In the case of residential mortgage loans, there are seldom any restrictions on borrowers’ abilities to prepay their loans. Homeowners tend to prepay mortgage loans faster when interest rates decline. Consequently, owners of the loans have to reinvest the money received from the prepayments at the lower prevailing interest rates. Conversely, homeowners tend not to prepay mortgage loans when interest rates increase. Consequently, owners of the loans are unable to reinvest money that would have otherwise been received from prepayments at the higher prevailing interest rates. This volatility in prepayment rates may affect our ability to maintain targeted amounts of leverage on our mortgage-backed securities portfolio and may result in reduced earnings or losses for us and negatively affect the cash available for distribution to our stockholders.

Despite Fannie Mae, Freddie Mac or Ginnie Mae guarantees of principal and interest related to certain of the MBS we own, those guarantees do not protect investors against prepayment risks.


	*Our Manager’s due diligence may not reveal all of an entity’s liabilities and may not reveal other weaknesses in its business, which could lead to investment losses.*

Before investing in a company, our Manager assesses the strength and skills of the company’s management and other factors that our Manager believes are material to the performance of the investment. In making the assessment and otherwise conducting customary due diligence, our Manager relies on the resources available to it and, in some cases, an investigation by third parties. This process is particularly important and subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. There can be no assurance that our Manager’s due diligence processes will uncover all relevant facts or that any current or future investment will be successful and not result in investment losses.


	*We may not be able to relet or renew leases of properties held by us on terms favorable to us.*

We are subject to the risk that upon expiration of leases for space located at any income-producing property, the space may not be relet or, if relet, the terms of the renewal or reletting (including the cost of required renovations or concessions to tenants) may be less favorable than the expiring lease terms. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by a property. If we are unable to relet or renew leases for all or substantially all of the space at any such properties, if the rental rates upon such renewal or reletting are significantly lower than expected, or if reserves for these purposes prove inadequate, we may be required to reduce or eliminate distributions to our stockholders.


	*Our insurance on our commercial real estate may not cover all losses.*

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. Any uninsured loss could result in both loss of cash flow from and the asset value of the affected property.


	*Any investments in timber assets will expose us to special risks.*

We may invest in timber assets. The demand for and supply of standing timber continually fluctuates, which leads to significant volatility in timber prices. Availability of timber supplies is influenced by many factors, including changes in weather patterns and harvest strategies of industry participants, pest infestations and forest fires. Such factors will impact the volume of any timber assets we may harvest and, as is typical in the industry, we will not maintain insurance for any loss of standing timber as a result of natural disasters. The timber industry is subject to extensive environmental regulation, including protected species regulation, which may restrict timber harvesting from time to time and may lead to increased costs of harvesting, all of which will impact the performance of any timber assets in which we invest.


	*Any investments in power generation assets will expose us to special risks.*

We may invest in power generation assets. The demand for and supply of electricity continually fluctuates, which leads to significant volatility in electricity prices both intra-day and seasonally. Availability of electricity is influenced by many factors, including production strategies of industry participants that take into account the cost and volume of energy inputs such as coal, uranium or gas required to generate electricity relative to the market price of electricity, adverse weather variations which affect primarily hydroelectric facilities, equipment failures, the current regulatory environment and availability of transmission, all of which will impact the performance of any power generation assets in which we invest.

Risks Related to This Offering


	*There may not be an active market for our common stock, which may cause our common stock to trade at a discount and make it difficult to sell the common stock you purchase.*

Our common stock is listed on the New York Stock Exchange under the symbol “CRZ.” However, no assurance can be given as to:


	•	the likelihood that an actual market for our common stock will develop;

	•	the liquidity of any such market;

	•	the ability of any holder to sell shares of our common stock; or

	•	the prices that may be obtained for our common stock.


	*The market price and trading volume of our common stock may be volatile following this offering.*

Even if an active trading market develops for our common stock, the market price of our common stock may be highly volatile and be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above the initial public offering price. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future.

Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:


	•	actual or anticipated variations in our quarterly operating results or distributions;

	•	changes in our earnings estimates or publication of research reports about us or the real estate or specialty finance industry;

	•	increases in market interest rates that lead purchasers of shares of our common stock to demand a higher yield;


	•	changes in market valuations of similar companies;

	•	adverse market reaction to any increased indebtedness we incur in the future;

	•	additions to, or departures of, Hyperion Brookfield’s key management personnel;

	•	actions by institutional stockholders;

	•	speculation in the press or investment community; and

	•	general market and economic conditions.


	*Broad market fluctuations could negatively impact the market price of our common stock.*

The stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies in industries similar or related to ours and that have been unrelated to these companies’ operating performances. These broad market fluctuations could reduce the market price of our common stock. Furthermore, our operating results and prospects may be below the expectations of public market analysts and investors or may be lower than those of companies with comparable market capitalizations, which could lead to a material decline in the market price of our common stock.


	Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may cause a decline in the market price of our common stock.

In the future, we may attempt to increase our capital resources by making offerings of debt or additional offerings of equity securities. Upon liquidation, holders of our debt securities and shares of preferred stock, if any, and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of our common stock.

Sales of substantial amounts of our common stock (including shares of our common stock issued pursuant to our incentive plan), or the perception that these sales could occur, could cause a material decline in the price of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.

Shares eligible for future sale could depress the market price of our common stock.

Sales of substantial amounts of our common stock into the public market, through this shelf registration or otherwise, or the perception that such sales could occur, could adversely affect the market price of our common stock. As of August 31, 2006, we had outstanding 25,019,500 shares of our common stock. Of those shares, 7,500,000 were sold in our IPO and are freely transferable. Of the remaining shares, 17,400,000 shares covered by this shelf registration will be immediately eligible for future sale into the public market, which could depress the market price of our common stock

With respect to the remaining 119,500 shares of our common stock outstanding, we, certain affiliates of Brookfield, our Manager, our officers and directors and the officers of our Manager have agreed with each of Deutsche Bank Securities, Inc. and Wachovia Capital Markets, LLC (the managing underwriters of our IPO) that we and they will not dispose of or

hedge any shares of our common stock or any securities convertible into or exchangeable or exercisable for our common stock until January 24, 2007, 180 days after the effective date of our IPO, subject to possible extension of such restrictions by up to 34 additional days under specified circumstances. In addition, Deutsche Bank Securities, Inc., in its sole discretion may release any of the securities subject to these resale restrictions at any time without notice. Upon the expiration or, if applicable, release of the foregoing resale restrictions, a significant number of shares will become immediately eligible for sale in the public markets pursuant to this shelf registration or otherwise, which could depress the market price of our common stock.

An increase in market interest rates may cause a material decrease in the market price of our common stock.

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution rate as a percentage of our share price relative to market interest rates. If the market price of our common stock is based primarily on the earnings and return that we derive from our investments and income with respect to our investments and our related distributions to stockholders, and not from the market value or underlying appraised value of the properties or investments themselves, then interest rate fluctuations and capital market conditions will likely affect the market price of our common stock. For instance, if market rates rise without an increase in our distribution rate, the market price of our common stock could decrease as potential investors may require a higher distribution yield on our common stock or seek other securities paying higher distributions or interest. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby reducing cash flow and our ability to service our indebtedness and pay distributions.


	*Investing in our shares may involve an above average degree of risk.*

The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments may be highly speculative and aggressive, and therefore, an investment in our shares may not be suitable for someone with lower risk tolerance.

Risks Related to Our Organization and Structure


	Our charter and bylaws contain provisions that may inhibit potential takeover bids that you and other stockholders may consider favorable, and the market price of our common stock may be lower as a result.

Our charter and bylaws contain provisions that may have an anti-takeover effect and inhibit a change in our board of directors. These provisions include the following:


	•	There are ownership limits and restrictions on transferability and ownership in our charter. In order to qualify as a REIT for each taxable year after 2005, not more than 50% of the value of our outstanding stock may be owned, directly or constructively, by five or fewer individuals during the second half of any calendar year and our shares must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. To assist us in satisfying these tests, our charter generally prohibits any person from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of any class or series of our outstanding capital stock, subject to important exceptions. These restrictions may:


	•	discourage a tender offer or other transactions or a change in the composition of our board of directors or control that might involve a premium price for our shares or otherwise be in the best interests of our stockholders; or


	•	result in shares issued or transferred in violation of such restrictions being automatically transferred to a trust for a charitable beneficiary and thereby resulting in a forfeiture of ownership of the additional shares.


	•	Our charter permits our board of directors to issue stock with terms that may discourage a third party from acquiring us. Our charter permits our board of directors to amend the charter without stockholder approval to increase the total number of authorized shares of stock or the number of shares of any class or series and to issue common or preferred stock having preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms or conditions of redemption as determined by our board of directors. Thus, our board of directors could authorize the issuance of stock with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of our shares might receive a premium for their shares over the then-prevailing market price of our shares.

	•	Maryland Control Share Acquisition Act. Maryland law provides that “control shares” of a corporation acquired in a “control share acquisition” will have no voting rights except to the extent approved by a vote of two-thirds of the votes eligible to be cast on the matter under the Maryland Control Share Acquisition Act. “Control shares” means voting shares of stock that, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: one-tenth or more but less than one-third, one-third or more but less than a majority, or a majority or more of all voting power. A “control share acquisition” means the acquisition of control shares, subject to certain exceptions.

		If voting rights or control shares acquired in a control share acquisition are not approved at a stockholders’ meeting or if the acquiring person does not deliver an acquiring person statement as required by the Maryland Control Share Acquisition Act, then subject to certain conditions and limitations, the issuer may redeem any or all of the control shares for fair value. If voting rights of such control shares are approved at a stockholders’ meeting and the acquiror becomes entitled to vote a majority of the shares of stock entitled to vote, all other stockholders may exercise appraisal rights. Our bylaws contain a provision exempting acquisitions of our shares from the Maryland Control Share Acquisition Act. However, our board of directors may amend our bylaws in the future to repeal or modify this exemption, in which case any control shares of our company acquired in a control share acquisition will be subject to the Maryland Control Share Acquisition Act.

	•	Business Combinations. Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:


	•	any person who beneficially owns ten percent or more of the voting power of the corporation’s shares; or

	•	an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the then outstanding voting stock of the corporation.


		A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which such person otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by our board of directors.

		After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

	•	eighty percent of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

	•	two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

		These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

		The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Our board of directors has adopted a resolution which provides that any business combination between us and any other person is exempted from the provisions of the Act, provided that the business combination is first approved by the board of directors. This resolution, however, may be altered or repealed in whole or in part at any time. If this resolution is repealed, or the board of directors does not otherwise approve a business combination, this statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.


	•	Staggered board. Our board of directors is divided into three classes of directors. The current terms of the directors expire in 2006, 2007 and 2008. Directors of each class are chosen for three-year terms upon the expiration of their current terms, and each year one class of directors is elected by the stockholders. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interests of our stockholders.

	•	Our charter and bylaws contain other possible anti-takeover provisions. Our charter and bylaws contain other provisions that may have the effect of delaying, deferring or preventing a change in control of us or the removal of existing directors and, as a result, could prevent our stockholders from being paid a premium for their common stock over the then-prevailing market price.


	Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:


	•	actual receipt of an improper benefit or profit in money, property or services; or

	•	a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

In addition, our charter permits us to agree to indemnify our present and former directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each present or former director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.


	Our access to confidential information may restrict our ability to take action with respect to some investments, which, in turn, may negatively affect the potential return to stockholders.

We, directly or through Hyperion Brookfield, Hyperion Brookfield Crystal River or Brookfield may obtain confidential information about the companies in which we have invested or may invest. If we do possess confidential information about such companies, there may be restrictions on our ability to dispose of, increase the amount of, or otherwise take action with respect to an investment in those companies. Our management of investment funds could create a conflict of interest to the extent Hyperion Brookfield Crystal River is aware of inside information concerning potential investment targets. We have implemented compliance procedures and practices designed to ensure that inside information is not used for making investment decisions on behalf of the funds and to monitor funds invested. We cannot assure you, however, that these procedures and practices will be effective. In addition, this conflict and these procedures and practices may limit the freedom of Hyperion Brookfield Crystal River to make potentially profitable investments, which could negatively impact our operations. These limitations imposed by access to confidential information could therefore negatively affect the potential market price of our common stock and the ability to distribute dividends.

Tax Risks


	*Complying with REIT requirements may cause us to forego otherwise attractive opportunities.*

To qualify as a REIT for federal income tax purposes, we must continually satisfy various tests regarding the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, we may be required to forego investments we might otherwise make. This difficulty may be exacerbated by the illiquid nature of many of our non-real estate assets. Thus, compliance with the REIT requirements may hinder our investment performance.


	*Certain financing activities may subject us to U.S. federal income tax.*

We have not and currently do not intend to enter into any transactions that could result in us or a portion of our assets being treated as a “taxable mortgage pool” for federal income tax purposes. However, it is possible that in the future we may enter into transactions that will have that effect. If we enter into such a transaction at the REIT level, although the law on the matter is unclear, we might be taxable at the highest corporate income tax rate on a portion of the

income arising from a taxable mortgage pool that is allocable to the percentage of our stock held by “disqualified organizations,” which are generally certain cooperatives, governmental entities and tax-exempt organizations that are exempt from unrelated business taxable income. Disqualified organizations are permitted to own our stock. Because this tax would be imposed on us, all of our investors, including investors that are not disqualified organizations, would bear a portion of the tax cost associated with the classification of us or a portion of our assets as a taxable mortgage pool.

In addition, if we realize excess inclusion income and allocate it to stockholders, this income cannot be offset by losses of our stockholders. If the stockholder is a tax-exempt entity and not a disqualified organization, then this income would be fully taxable as unrelated business taxable income under Section 512 of the Internal Revenue Code. If the stockholder is a foreign person, it would be subject to U.S. federal income tax withholding on this income without reduction or exemption pursuant to any otherwise applicable income tax treaty.


	*Failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce the cash available for distribution to our stockholders.*

We operate in a manner that is intended to cause us to qualify as a REIT for federal income tax purposes. However, the federal income tax laws governing REITs are extremely complex, and administrative interpretations of the federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. While we operate in such a manner so as to qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year.

If we fail to qualify as a REIT in any calendar year and we do not qualify for certain statutory relief provisions, we would be required to pay federal income tax on our taxable income. We might need to borrow money or sell assets in order to pay that tax. Our payment of income tax would decrease the amount of our income available for distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT and we do not qualify for certain statutory relief provisions, we no longer would be required to distribute substantially all of our REIT taxable income to our stockholders. Unless our failure to qualify as a REIT were excused under federal tax laws, we could not re-elect REIT status until the fifth calendar year following the year in which we failed to qualify.


	*Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders.*

In order to qualify as a REIT, we must distribute to our stockholders, each calendar year, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of:


	•	85% of our ordinary taxable income for that year;

	•	95% of our capital gain net income for that year; and

	•	100% our undistributed taxable income from prior years.

We intend to continue to distribute our net taxable income to our stockholders in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax

and the 4% nondeductible excise tax. However, there is no requirement that domestic TRSs distribute their after-tax net income to their parent REIT or their stockholders and Crystal River Capital TRS Holdings, Inc., our TRS, may determine not to make any distributions to us.

Our taxable income may substantially differ from our net income as determined based on generally accepted accounting principles, or GAAP, because, for example, realized capital losses will be deducted in determining our GAAP net income, but may not be deductible in computing our taxable income. In addition, we may invest in assets that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets, referred to as phantom income. Although some types of phantom income are excluded to the extent they exceed 5% of our REIT taxable income in determining the 90% distribution requirement, we will incur corporate income tax and the 4% nondeductible excise tax with respect to any phantom income items if we do not distribute those items on an annual basis. As a result of the foregoing, we may generate less cash flow than taxable income in a particular year. In that event, we may be required to use cash reserves, incur debt, or liquidate non-cash assets at rates or times that we regard as unfavorable in order to satisfy the distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax in that year.


	*Dividends payable by REITs do not qualify for reduced tax rates.*

Legislation enacted in 2003 generally reduces the maximum tax rate for dividends payable to domestic stockholders that are individuals, trusts and estates 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, trusts and estates 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.


	*Ownership limitation may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares.*

In order for us to qualify as a REIT for each taxable year after our 2005 taxable year, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. “Individuals” for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. In order to preserve our REIT qualification, our charter generally prohibits any person from directly or indirectly owning more than 9.8% in value or in number of shares, whichever is more restrictive, of any class or series of the outstanding shares of our capital stock.

This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.


	Our ownership of and relationship with our TRS will be limited and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT’s assets

may consist of stock or securities of one or more TRSs. A TRS will pay federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s length basis.

Our TRS, Crystal River Capital TRS Holdings, Inc., as a domestic TRS, will pay federal, state and local income tax on its taxable income, and its after-tax net income is available for distribution to us but is not required to be distributed to us. The aggregate value of the TRS stock and securities owned by us should be less than 20% of the value of our total assets (including the TRS stock and securities). Furthermore, we monitor the value of our investments in TRSs for the purpose of ensuring compliance with the rule that no more than 20% of the value of our assets may consist of TRS stock and securities (which is applied at the end of each calendar quarter). In addition, we scrutinize all of our transactions with TRSs for the purpose of ensuring that they are entered into on arm’s length terms in order to avoid incurring the 100% excise tax described above. There can be no complete assurance, however, that we will be able to comply with the 20% limitation discussed above or to avoid application of the 100% excise tax discussed above.


	*Complying with REIT requirements may limit our ability to hedge effectively.*

The REIT provisions of the Internal Revenue Code substantially limit our ability to hedge MBS and related borrowings. Under these provisions, our annual gross income from qualifying and non-qualifying hedges, together with any other income not generated from qualifying real estate assets, cannot exceed 25% of our gross income. In addition, our aggregate gross income from non-qualifying hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through Crystal River Capital TRS Holdings, Inc. This could increase the cost of our hedging activities or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.


	The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales for federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we were able to sell or securitize loans in a manner that was treated as a sale of the loans for federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans and may limit the structures we utilize for our securitization transactions even though such sales or structures might otherwise be beneficial to us.

It may be possible to reduce the impact of the prohibited transaction tax and the holding of assets not qualifying as real estate assets for purposes of the REIT asset tests by conducting certain activities, holding non-qualifying REIT assets or engaging in CDO transactions through our TRSs, subject to certain limitations as described below. To the extent that we engage in such activities through TRSs, the income associated with such activities may be subject to full corporate income tax.


	*We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.*

At any time, the federal, state or local income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. We cannot predict when or if any new tax law, regulation or administrative interpretation, or any amendment to any existing tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, tax law, regulation or administrative interpretation.


	If we make distributions in excess of our current and accumulated earnings and profits, those distributions will be treated as a return of capital, which will reduce the adjusted basis of your stock, and to the extent such distributions exceed your adjusted basis, you may recognize a capital gain.

Unless you are a tax-exempt entity, distributions that we make to you generally will be subject to tax as ordinary income to the extent of our current and accumulated earnings and profits as determined for federal income tax purposes. If the amount we distribute to you exceeds your allocable share of our current and accumulated earnings and profits, the excess will be treated as a return of capital to the extent of your adjusted basis in your stock, which will reduce your basis in your stock but will not be subject to tax. To the extent the amount we distribute to you exceeds both your allocable share of our current and accumulated earnings and profits and your adjusted basis, this excess amount will be treated as a gain from the sale or exchange of a capital asset.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Prospectus Summary,” “Risk Factors,” “Distribution Policy,” “Business” and elsewhere in this prospectus constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “goal,” “objective,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, the performance of our portfolio and our business, financial condition, liquidity and results of operations may vary materially from those expressed, anticipated or contemplated in our forward-looking statements. You should carefully consider these risks before you invest in our common stock, along with the following factors that could cause actual results to vary from our forward-looking statements:


	•	the factors referenced in this prospectus, including those set forth under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business;”

	•	general volatility of the securities markets in which we invest and the market price of our common stock;

	•	changes in our business strategy;

	•	availability, terms and deployment of capital;

	•	availability of qualified personnel;

	•	changes in our industry, interest rates, the debt securities markets or the general economy;

	•	increased rates of default and/or decreased recovery rates on our investments;

	•	increased prepayments of the mortgage and other loans underlying our mortgage-backed or other asset-backed securities;

	•	changes in governmental regulations, tax law and rates and similar matters;

	•	our expected financings and investments;

	•	the adequacy of our cash resources and working capital;

	•	changes in generally accepted accounting principles by standard-setting bodies;

	•	availability of investment opportunities in real estate-related and other securities; and

	•	the degree and nature of our competition.

USE OF PROCEEDS

The selling stockholders will receive all of the proceeds from the sale of the common stock offered by this prospectus. We will not receive any proceeds from the sale of shares of common stock offered by this prospectus.

We will pay all expenses incurred by the selling stockholders in disposing of the shares, including the fees and expenses of counsel or other advisors to the selling stockholders, but not including underwriting discounts, concessions, commissions or fees of the selling stockholders. We also will bear all other costs, fees and expenses incurred in effecting the registration of the shares covered by this prospectus, including, without limitation, all registration and filing fees and fees and expenses of our counsel and our independent accountants.

PUBLIC MARKET FOR OUR COMMON STOCK

Our common stock is traded on the NYSE under the symbol “CRZ.” On October 23, 2006, the closing price of our common stock, as reported on the NYSE, was $23.05. The following table sets forth the high and low sale prices for our common stock for the period indicated as reported on the NYSE:


	High Sales		Low Sales
	Price		Price

2006
Third quarter (from July 28, 2006)		23.00		21.30
Fourth quarter (through October 23, 2006)		23.28		22.01

As of October 23, 2006, we had 25,019,500 shares of our common stock issued and outstanding which were held by 16 holders of record. Cede & Co. is the holder of record for 24,900,000 of such shares and it holds such shares as nominee for The Depository Trust Company.

DISTRIBUTION POLICY

We have elected and qualified to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005 and expect to qualify as a REIT in subsequent tax years. Federal income tax law requires that a REIT distribute with respect to each year at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. If our cash available for distribution is less than 90% of our REIT taxable income, we could be required to sell assets or borrow funds in order to make distributions. Up to 20% of the value of a REIT’s assets may consist of investments in the securities of one or more TRSs. A domestic TRS, such as Crystal River Capital TRS Holdings, Inc., may retain its net income, and its earnings are subject to the 90% distribution requirement only to the extent the TRS actually distributes its earnings to the REIT. However, a foreign TRS generally is deemed to distribute its earnings to the REIT on an annual basis for federal income tax purposes, regardless of whether it actually distributes its earnings. For more information, please see “Federal Income Tax Consequences of Our Qualification as a REIT — Taxation of Our Company.”

To satisfy the requirements to qualify as a REIT and generally not be subject to federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock out of assets legally available therefor. Any future distributions we make will be at the discretion of our board of directors out of legally available funds and will depend upon, among other things, our earnings and financial condition, maintenance of REIT status, applicable provisions of the MGCL and such other factors as our board of directors deems relevant. These results and our ability to pay distributions will be affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditures. Although we do not anticipate earning a significant level of taxable income through our TRSs in comparison to our consolidated results of operations, if our TRSs generate taxable income, from time to time, in the discretion of management, such amounts, net of tax, may be distributed to us and, by extension, to our stockholders. For more information regarding risk factors that could materially adversely affect our earnings and financial condition, please see “Risk Factors” beginning on page 20.

We anticipate that our distributions generally will be taxable as ordinary income to our stockholders, although a portion of the distributions may be designated by us as qualified dividend income or capital gain or may constitute a return of capital. To the extent that we decide to make distributions in excess of our current and accumulated earnings and profits for federal income tax purposes, such distributions would generally be considered a return of capital for federal income tax purposes. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain. Income as computed for purposes of the foregoing tax rules will not necessarily correspond to our income as determined for financial reporting purposes.

On June 21, 2005, we declared a quarterly distribution of $0.25 per share of our common stock, payable on July 13, 2005, to stockholders of record as of June 30, 2005. In connection with that distribution, we distributed an aggregate of approximately $4.4 million from uninvested cash. In addition, on September 28, 2005, we declared a quarterly distribution of $0.575 per share of our common stock, payable on October 13, 2005, to stockholders of record as of September 30, 2005. In connection with that distribution, we distributed an aggregate of approximately $10.1 million. On December 23, 2005, we declared a quarterly distribution of $0.725 per share of our common stock, payable on December 30, 2005, to stockholders of record as of December 23, 2005. In connection with that distribution, we distributed an aggregate of approximately $12.7 million. On March 31, 2006, we declared a quarterly distribution of $0.725 per share of our common stock, payable on April 17, 2006, to

stockholders of record as of March 31, 2006. In connection with that distribution, we distributed an aggregate of approximately $12.7 million. On June 23, 2006, we declared a quarterly distribution of $0.725 per share of our common stock, payable on July 21, 2006, to stockholders of record as of June 30, 2006. In connection with that distribution, we distributed an aggregate of approximately $12.7 million. On September 22, 2006, we declared a quarterly distribution of $0.60 per share of our common stock, payable on October 27, 2006 to stockholders of record as of October 4, 2006. All distributions through December 31, 2005 represented distributions of taxable earnings and profits; none represented a return of capital, and all distributions from and including October 13, 2005 were funded primarily from operating cash flows, and as necessary, to a lesser extent from the sale or repayment of our investments or from borrowings under our credit facilities or master repurchase agreements, and were not funded out of the offering proceeds from our March 2005 private offering. We believe that REIT taxable income for the 2006 year will be sufficient for our April 17, 2006, July 21, 2006 and October 27, 2006 distributions to be taxable as a dividend and not a return of capital. We cannot assure you that we will have sufficient cash available for future quarterly distributions at this level, or at all. See “Risk Factors.”

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

In the table below, we provide you with selected historical consolidated financial information of Crystal River Capital, Inc. We have prepared this information as of and for the period ended December 31, 2005 using our consolidated financial statements for the period ended December 31, 2005, which have been audited by Ernst & Young LLP, independent registered public accounting firm. We have prepared this information for the period ended June 30, 2005 and as of and for the three and six months ended June 30, 2006 using our unaudited consolidated financial statements for such periods. The financial statements for the periods ended June 30, 2005 and as of and for the three and six months ended June 30, 2006 have not been audited. In the opinion of management, such financial statements have been prepared on the same basis as our audited consolidated financial statements and reflect all adjustments, consisting of normal accruals, necessary for a fair presentation of the data for such periods. Results for the periods ended June 30, 2005 and for the three and six months ended June 30, 2006 are not necessarily indicative of results that may be expected for the entire year.

When you read this selected historical consolidated financial information, it is important that you read along with it the historical consolidated financial statements and related notes, as well as the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included in this prospectus.


			Period from
			March 15, 2005			Period from
			(commencement			March 15, 2005						Three Months
			of operations) to			(commencement			Six Months			Ended June 30,
			December 31,			of operations) to			Ended June 30,
			2005			June 30, 2005			2006			2005			2006

			(In thousands, except share and per share data)
Consolidated Income Statement Data:
Net interest income:
	Interest income		$	79,594		$	15,808		$	86,263		$	15,095		$	45,293
	Interest expense			48,425			7,645			60,276			7,542			31,425

		Net interest income		31,169			8,163			25,987			7,553			13,868

Expenses:
	Management fees, related party(1)			5,448			2,069			3,312			1,749			1,635
	Professional fees			2,205			723			1,514			682			753
	Insurance expense			250			90			190			77			99
	Other general and administrative expenses(2)			533			457			485			148			249

		Total expenses		8,436			3,339			5,501			2,656			2,736

	Income before other revenues (expenses)			22,733			4,824			20,486			4,897			11,132
Other revenues (expenses):
	Realized net loss on sale of real estate loans and securities available for sale			(521	)		—			(1,668	)		—			(1,100	)
	Realized and unrealized gain (loss) on derivatives			(2,497	)		(4,370	)		7,449			(4,565	)		(481	)
	Loss on impairment of available for sale securities			(5,782	)		—			(6,924	)		—			(5,666	)
	Foreign currency exchange gain			—			—			1,875			—			2,066
	Other			15			(17	)		234			(17	)		57

		Total other revenues (expenses)		(8,785	)		(4,387	)		966			(4,582	)		(5,124	)

Net income			$	13,948		$	437		$	21,452		$	315		$	6,008

Net income per share — basic and diluted			$	0.80		$	0.02		$	1.22		$	0.02		$	0.34
Weighted-average number of shares outstanding — basic and diluted				17,487,500			17,487,500			17,511,937			17,487,500			17,528,607
Cash dividends declared per common share			$	1.55		$	0.25		$	1.45		$	0.25		$	0.725


(1)	Includes $627, $232, $475, $199 and $253, respectively, of stock based compensation.

(2)	Includes $81, $35, $179, $30 and $63, respectively, of stock based compensation.


	December 31, 2005		June 30, 2006

	(In thousands)
Consolidated Balance Sheet Data:
Total assets	$	2,669,769	$	3,148,945
Debt — Repurchase agreements		1,994,287		2,496,730
Debt — Collateralized debt obligations		227,500		210,903
Debt — Notes payable, related party		35,000		—
Stockholders’ equity		381,429		373,602

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included elsewhere in this prospectus. Historical results set forth are not necessarily indicative of our future financial position and results of operations.

Overview

We are a specialty finance company formed on January 25, 2005 by Hyperion Brookfield to invest in real estate-related securities and various other asset classes. We commenced operations in March 2005. We have elected and qualified to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005 and expect to qualify as a REIT in subsequent tax years. We invest in financial assets and intend to construct an investment portfolio that is leveraged where appropriate to seek to achieve attractive risk-adjusted returns and that is structured to comply with the various federal income tax requirements for REIT status and to qualify for an exclusion from regulation under the Investment Company Act. Our current focus is on the following asset classes:


	•	Real estate-related securities, principally RMBS and CMBS;

	•	Whole mortgage loans, bridge loans, B Notes and mezzanine loans; and

	•	Other ABS, including CDOs, and consumer ABS.

We completed a private offering of 17,400,000 shares of our common stock in March 2005 in which we raised net proceeds of approximately $405.6 million. We have fully invested the proceeds from the March 2005 private offering and, as of June 30, 2006, have a portfolio of RMBS and other alternative investments of approximately $2.8 billion. In addition, we completed our initial public offering, which we refer to as our IPO, on August 2, 2006. In our IPO, we sold 7,500,000 shares of our common stock and raised net proceeds of approximately $162.4 million after commissions but before other offering expenses. We have fully invested the proceeds from our IPO. We are externally managed by Hyperion Brookfield Crystal River. Hyperion Brookfield Crystal River is a wholly-owned subsidiary of Hyperion Brookfield.

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

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


	•	interest rate trends,

	•	rates of prepayment on mortgages underlying our MBS,

	•	credit trends in RMBS and our commercial real estate investments,

	•	competition, and

	•	other market developments.

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


	•	our leverage,

	•	our access to funding and borrowing capacity,

	•	our borrowing costs,

	•	our hedging activities,

	•	the market value of our investments, and

	•	REIT requirements and the requirements to qualify for an exemption from regulation under the Investment Company Act.

Our Business Model

Our net interest income is generated primarily from the net spread, or difference, between the interest income we earn on our investment portfolio and the cost of our borrowings and hedging activities. Our net interest income will vary based upon, among other things, the difference between the interest rates earned on our various interest-earning assets and the borrowing costs of the liabilities used to finance those investments. Other than our investments in RMBS, we generally attempt to match fund our assets in order to match the maturity of the investments with the maturity of the financing sources used to make such investments. Although we do not match fund Agency ARMS due to their average 30 year maturities, we utilize interest rate swaps to hedge much of our interest rate exposure in our other MBS investments. In CDO financings, match funding is more likely as the cash flows from the collateral pool pays the interest on the debt securities issued by the CDO and interest rate swaps are utilized to convert fixed interest obligations to floating rate obligations inherent in the instruments comprising the collateral pool.

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

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

In periods of declining interest rates, prepayments on our investments, including our RMBS, will likely increase. If we are unable to reinvest the proceeds of such prepayments at comparable yields, our net interest income may suffer. In periods of rising interest rates, prepayment rates on our investments, including our RMBS, will likely slow, causing the expected lives of these investments to increase. This may cause our net interest income to decrease as our borrowing and hedging costs rise while our interest income on those assets remain constant.

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

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

Hyperion Brookfield Crystal River is entitled to receive a base management fee that is based on the amount of our equity (as defined in the management agreement), regardless of the performance of our portfolio. Accordingly, the payment of our management fee is a fixed cost and will not decline in the event of a decline in our profitability and may lead us to incur losses.

Trends

We believe the following trends may also affect our business:


	Rising interest rate environment — interest rates have recently increased and could continue to do so in the future. With respect to our existing MBS portfolio, which is heavily concentrated in 3/1 and 5/1 hybrid adjustable rate RMBS, we believe that such interest rate increases could result in decreases in our net interest income, as there is a timing mismatch between the reset dates on our MBS portfolio and the financing of these investments. We currently have invested and intend to continue to invest in hybrid adjustable-rate RMBS which are based on mortgages with interest rate caps. The financing of these RMBS is short term in nature and does not include the benefit of an interest rate cap. This mismatch could result in a decrease in our net interest income if rates increase sharply after the initial fixed rate period and our interest cost increases more than the interest rate earned on our RMBS due to the related interest rate caps. With respect to our existing and future floating rate investments, we believe such interest rate increases could result in increases in our net interest income because our floating rate assets are greater in amount than the related liabilities. Similarly, we believe such an increase in interest rates could generally result in an increase in our net interest income on future fixed rate investments made by us because our fixed rate assets would be greater in amount than our liabilities. However, we would expect that our fixed rate assets would decline in value in a rising interest rate environment and our net interest spreads on fixed rate assets could decline in a rising interest rate environment to the extent they are financed with floating rate debt. We have engaged in interest rate swaps to hedge a significant portion of the risk associated with increases in interest rates. However, because we do not hedge 100% of the amount of short-term financing outstanding, increases in interest rates could result in a decline in the value of our portfolio, net of hedges. Similarly, decreases in interest rates could result in an increase in the value of our portfolio.

	Flattening yield curve — short term interest rates have been increasing at a greater rate than longer term interest rates. For example, between June 30, 2005 and June 30, 2006, the yield on the three-month U.S. treasury bill increased by 186 basis points, while the yield on the three-year U.S. treasury note increased by only 148 basis points. With respect to our MBS portfolio, we believe that a continued flattening of the shape of the yield curve should result in decreases in our net interest income, as the financing of our MBS investments is usually shorter in term than the fixed rate period of our MBS portfolio, which is heavily weighted towards 3/1 and 5/1 hybrid adjustable rate RMBS. Similarly, we believe that a steepening of the shape of the yield curve should result in increases in our net interest income. A flattening of the shape of the yield curve results in a smaller gap

between the rate we pay on the swaps and rate we receive. Furthermore, a continued flattening of the shape of the yield curve should result in a decrease in our hedging costs, since we pay a fixed rate and receive a floating rate under the terms of our swap agreements. Similarly, a steepening of the shape of the yield curve should result in an increase in our hedging costs.

Prepayment rates — as interest rates increase, we believe that prepayment rates are likely to fall. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayment rates also may be affected by other factors, including, without limitation, conditions in the housing and financial markets, general economic conditions and the relative interest rates on adjustable-rate and fixed-rate mortgage loans. If interest rates continue to increase, we believe that MBS prepayment rates would be likely to fall. If interest rates begin to fall, triggering an increase in prepayment rates, our current portfolio, which is heavily weighted towards hybrid adjustable-rate mortgages, would cause decreases in our net interest income relating to our MBS portfolio.

Competition — we expect to face increased competition for our targeted investments. However, we expect that the size and growth of the market for these investments will continue to provide us with a variety of investment opportunities. In addition, we believe that bank lenders will continue their historical lending practices, requiring low loan-to-value ratios and high debt service coverages, which will provide opportunities to lenders like us to provide corporate mezzanine financing.

For a discussion of additional risks relating to our business see “Risk Factors” and “— Quantitative and Qualitative Disclosures About Risk.”

Critical Accounting Policies

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. These accounting principles require us to make some complex and subjective decisions and assessments. Our most critical accounting policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made based upon information available to us at that time. We rely on the experience of Hyperion Brookfield Crystal River’s management and its analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates. See Note 2 to our consolidated financial statements contained elsewhere herein for a complete discussion of our accounting policies. Under different conditions, we could report materially different amounts arising under these critical accounting policies. We have identified our most critical accounting policies to be the following:


	*Investment Consolidation*

For each investment we make we evaluate the underlying entity that issued the securities we acquired or to which we made a loan in order to determine the appropriate accounting. We refer to guidance in Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”), and FASB Interpretation No. (FIN) 46R, Consolidation of Variable Interest Entities, in performing our analysis. FIN 46R addresses the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which voting rights are not effective in identifying an investor with a controlling financial interest. An entity is subject to consolidation under FIN 46R if the investors either do not have sufficient equity at risk for the entity to finance

its activities without additional subordinated financial support, are unable to direct the entity’s activities, or are not exposed to the entity’s losses or entitled to its residual returns (“variable interest entities” or “VIEs”). Variable interest entities within the scope of FIN 46R are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is determined to be the party that absorbs a majority of the VIE’s expected losses, receives the majority of the VIE’s expected returns, or both.

Our ownership of the subordinated classes of CMBS and RMBS from a single issuer may provide us with the right to control the foreclosure/workout process on the underlying loans, which we refer to as the Controlling Class CMBS and RMBS. There are certain exceptions to the scope of FIN 46R, one of which provides that an investor that holds a variable interest in a qualifying special-purpose entity (“QSPE”) is not required to consolidate that entity unless the investor has the unilateral ability to cause the entity to liquidate. SFAS 140 sets forth the requirements for an entity to qualify as a QSPE. To maintain the QSPE exception, the special-purpose entity must initially meet the QSPE criteria and must continue to satisfy such criteria in subsequent periods. A special-purpose entity’s QSPE status can be impacted in future periods by activities undertaken by its transferor(s) or other involved parties, including the manner in which certain servicing activities are performed. To the extent that our CMBS or RMBS investments were issued by a special-purpose entity that meets the QSPE requirements, we record those investments at the purchase price paid. To the extent the underlying special-purpose entities do not satisfy the QSPE requirements, we follow the guidance set forth in FIN 46R as the special-purpose entities would be determined to be VIEs.

We have analyzed the pooling and servicing agreements governing each of our Controlling Class CMBS and RMBS investments and we believe that the terms of those agreements are industry standard and are consistent with the QSPE criteria. However, there is uncertainty with respect to QSPE treatment for those special-purpose entities due to ongoing review by regulators and accounting standard setters (including the FASB’s project to amend SFAS 140 and the recently added FASB project on servicer discretion in a QSPE), potential actions by various parties involved with the QSPE (discussed in the paragraph above) and varying and evolving interpretations of the QSPE criteria under SFAS 140. We also have evaluated each of our Controlling Class CMBS and RMBS investments as if the special-purpose entities that issued such securities are not QSPEs. Using the fair value approach to calculate expected losses or residual returns, we have concluded that we would not be the primary beneficiary of any of the underlying special-purpose entities. Additionally, the standard setters continue to review the FIN 46R provisions related to the computations used to determine the primary beneficiary of VIEs. Future guidance from regulators and standard setters may require us to consolidate the special-purpose entities that issued the CMBS and RMBS in which we have invested as described in the section titled “Recently Issued Accounting Pronouncements Not Yet Adopted” in Note 2 to our June 30, 2006 consolidated financial statements included elsewhere herein.

Our maximum exposure to loss as a result of our investment in these QSPEs totaled $325,196 as of June 30, 2006.


	*Revenue Recognition*

The most significant source of our revenue comes from interest income on our securities and loan investments. Interest income on loans and securities investments is recognized over the life of the investment using the effective interest method. Mortgage loans will generally be originated or purchased at or near par value and interest income will be recognized based on the contractual terms of the debt instrument. Any loan fees or acquisition costs on originated loans will be deferred and recognized over the term of the loan as an adjustment to the yield. Interest income on MBS is recognized on the effective interest method as required by EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in

Securitized Financial Assets. Under EITF 99-20, management estimates, at the time of purchase, the future expected cash flows and determines the effective interest rate based on these estimated cash flows and our purchase prices. Subsequent to the purchase and on a quarterly basis, these estimated cash flows are updated and a revised yield is calculated based on the current amortized cost of the investment. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties and contingencies. These include the rate and timing of principal payments (including prepayments, repurchases, defaults and liquidations), the pass through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls have to be estimated due to delinquencies on the underlying mortgage loans and the timing and magnitude of credit losses on the mortgage loans underlying the securities. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact management’s estimates and our interest income. When current period cash flow estimates are lower than the previous period and fair value is less than an asset’s carrying value, we will write down the asset to fair market value and record an impairment charge in current period earnings.

Through its extensive experience in investing in MBS, Hyperion Brookfield has developed models based on historical data in order to estimate the lifetime prepayment speeds and lifetime credit losses for pools of mortgage loans. The models are based primarily on loan characteristics, such as loan-to-value ratios (LTV), credit scores, loan type, loan rate, property type, etc., and also include other qualitative factors such as the loan originator and servicer. For credit losses, the models also assume a certain level of stress to prevailing employment rates and housing prices. Once the models have been used to project the base case prepayment speeds and to project the base case cumulative loss, those outputs are used to create yield estimates and to project cash flows.

Since mortgage assets amortize over long periods of time (i.e., 30 years in the case of RMBS assets or 10 years in the case of CMBS assets), the expected lifetime prepayment experience and the expected lifetime credit losses projected by the models are subject to modification in light of actual experience assessed from time to time. For each of the purchased mortgage pools, our Manager tracks the actual monthly prepayment experience and the monthly loss experience, if any. To the extent that the actual performance trend over a 6-12 month period of time does not reasonably approximate the expected lifetime trend, in consideration of the seasoning of the asset, our Manager will make adjustments to the assumptions and revise yield estimates and projected cash flows.

The following hypothetical example reflects the impact of a change in the historical prepayment experience:

Assumptions:

Price = 101.75% of par

Current Face = $1,000,000

Investment at cost =$1,017,500


Constant
Prepayment			Annual		Percent
Rate	Yield		Income		Difference

6%		5.54%	$	57,129.30		14	%
15%		5.09%	$	52,481.09		5	%
20%		4.85%	$	49,978.37		0	%
40%		3.97%	$	40,754.16		(18	)%
60%		3.06%	$	31,394.35		(37	)%


	*Loan Loss Provisions*

We purchase and originate mezzanine loans and commercial mortgage loans to be held as long-term investments. We evaluate each of these loans for possible impairment on a quarterly basis. Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. Upon determination of impairment, we will establish a reserve for loan losses and a corresponding charge to earnings through the provision for loan losses. Significant judgments are required in determining impairment, which include assumptions regarding the value of the real estate or partnership interests that secure the mortgage loans.


	*Valuations of MBS and ABS*

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

When the fair value of an available-for-sale security is less than its amortized cost for an extended period, we consider whether there is an other-than-temporary impairment in the value of the security. If, in our judgment, an other-than-temporary impairment exists, the cost basis of the security is written down to the then-current fair value, and the unrealized loss is transferred from accumulated other comprehensive loss as an immediate reduction of current earnings (as if the loss had been realized in the period of other-than-temporary impairment). The determination of other-than-temporary impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization.

We consider the following factors when determining an other-than-temporary impairment for a security or investment:


	•	The length of time and the extent to which the market value has been less than the amortized cost;

	•	Whether the security has been downgraded by a rating agency; and

	•	Our intent to hold the security for a period of time sufficient to allow for any anticipated recovery in market value.

Periodically, all available for sale securities are evaluated for other than temporary impairment in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”), and Emerging Issues Task Force No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financial Assets (“EITF 99-20”). An impairment that is an “other than temporary impairment” is a decline in the fair value of an investment below its amortized cost attributable to factors that indicate the decline will not be recovered over the investment’s remaining life. Other than temporary impairments result in reducing the security’s carrying value to its fair value through the statement of income, which also creates a new carrying value for the investment. We compute a revised yield based on the future estimated cash flows as described in “ — Revenue Recognition” above. Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the changes in interest rates.

The determination of other than temporary impairment is made at least quarterly. If we determine an impairment to be other than temporary we will need to realize a loss that would have an impact on future income. At June 30, 2006, our overall intent was to replace lower-coupon or

lower-yielding Agency ARMS with higher yielding securities. In evaluating which securities were to be sold, we considered:


	•	the length of the time to reset;

	•	securities whose value had declined by more than an immaterial amount;

	•	the coupon rate of the security; and

	•	the book yield of the security.

In our analysis at June 30, 2006, we established as thresholds:


	•	45 or fewer months remaining to rate reset;

	•	market price declines in excess of 1.50%;

	•	securities bearing a coupon rate under 4.80%; and

	•	securities with book yields less than 4.30%.

These criteria were established based on our Manager’s review of our investment portfolio and its determination that these criteria provided a pool of securities to be sold that would produce an acceptable proportionate increase in income yield for our portfolio. Two mitigating factors that we considered in evaluating the foregoing criteria were whether a security was subject to a reverse repurchase agreement with a sufficiently distant settlement date that would preclude such a sale in the near term, for practical, hedging and economic reasons, and whether we agreed with the quoted market value for such securities. With the passage of time, as we periodically review the performance of our portfolio, our investment strategy in light of market conditions and our liquidity requirements and available sources of liquidity, the criteria we utilize to determine impairment under SFAS 115 may change. At any measurement date, securities that satisfy all of our impairment criteria that we do not intend to hold until we recover their amortized cost or until maturity would be deemed to be other than temporarily impaired.

Under the guidance provided by SFAS 115, a security is impaired when its fair value is less than its amortized cost and we do not intend to hold that security until we recover its amortized cost or until its maturity. Based on the parameters we utilized in our June 30, 2006 analysis, we identified eight individual securities that were determined to be impaired under the guidance provided by SFAS 115. In connection with the impairment of these eight securities, we recorded impairment charges of $4.7 million and $6.0 million in our statement of income for the three months ended June 30, 2006 and the six months ended June 30, 2006, respectively, that was other than temporary as we expect to sell these securities in the near future at a loss. Through October 23, 2006, we have sold the six Agency ARMS and the two CMBS securities that were so impaired. As of June 30, 2006, as part of our periodic surveillance of the underlying value of the collateral securing our CMBS investments, we revalued two of the underlying loans in the collateral securing a CMBS security that resulted in a credit impairment charge for the three months and six months ended June 30, 2006 in the amount of $0.9 million and $0.9 million, respectively.


	*Repurchase Agreements*

other comprehensive income in stockholders’ equity. Interest income earned on the securities and interest expense incurred on the repurchase obligations are reported separately on our consolidated income statement. As of June 30, 2006 we had three such transactions that were outstanding, and our June 30, 2006 balance sheet included approximately $13.1 million of such securities and approximately $10.7 million of such repurchase agreement liabilities.

It has come to our attention and to the attention of other market participants, as well as our repurchase agreement counterparties, that SFAS 140 may require a different accounting treatment for such transactions. Under SFAS 140, transactions in which we acquire securities from a counterparty that are financed through a repurchase agreement with the same counterparty will not qualify as a purchase by us if we are not able to conclude that the securities purchased have been legally isolated from the counterparty. If the acquisitions do not qualify as a purchase of securities under SFAS 140, we would not be permitted to include the securities purchased and repurchase agreements on a gross basis on our balance sheet. Additionally, we would not be able to report on a gross basis on our income statement the related interest income earned and interest expense incurred. Instead, we would be required to present the net investment on our balance sheet together with an embedded derivative with the corresponding change in fair value of the derivative being recorded in our income statement. The value of the derivative would reflect not only changes in the value of the underlying securities, but also changes in the value of the underlying credit provided by the counterparty. Although we believe our accounting for these transactions is appropriate, we will continue to evaluate our position as the interpretation of this issue among industry participants and standard setters evolves.


	*Accounting For Derivative Financial Instruments and Hedging Activities*

Our policies permit us to enter into derivative contracts, including interest rate swaps and interest rate swap forwards, as a means of mitigating our interest rate risk on forecasted interest expense associated with the benchmark rate on forecasted rollover/reissuance of repurchase agreements, or hedged items, for a specified future time period. We currently intend to use interest rate derivative instruments to mitigate interest rate risk rather than to enhance returns.

At June 30, 2006, we were a party to 45 interest rate swaps with a notional par value of approximately $1,448.5 million and an intrinsic gain of approximately $34.5 million. We entered into these interest rate swaps to seek to mitigate our interest rate risk for the specified future time period, which is defined as the term of the swap contracts. Based upon the market value of these interest rate swap contracts, our counterparties may request additional margin collateral or we may request additional collateral from our counterparties to ensure that an appropriate margin account balance is maintained at all times through the expiration of the contracts.

At June 30, 2006, we were a party to one currency swap with a notional par value of approximately Can$50.0 million and an intrinsic loss of approximately $0.3 million. We entered into this currency swap to seek to mitigate our currency risk for the specified future time period, which is defined as the term of the swap contract. Based upon the market value of this currency swap contract, our counterparty may request additional margin collateral or we may request additional collateral from our counterparty to ensure that an appropriate margin account balance is maintained at all times through the expiration of the contract.

As of June 30, 2006, we had 11 credit default swaps, or CDS, with a notional par value of $105.0 million and an intrinsic gain of approximately $1.4 million. The fair value of the CDS depends on a number of factors, primarily premium levels, which are dependent on interest rate spreads. The CDS contracts are valued using internally developed and tested market-standard

pricing models which calculate the net present value of differences between future premiums on currently quoted market CDS and the contractual future premiums on our CDS contracts.

We account for derivative and hedging activities in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, or SFAS 133. SFAS 133 requires recognizing all derivative instruments as either asset or liabilities in the balance sheet at fair value. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivatives instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. We have no fair value hedges or hedges of a net investment in foreign operations.

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 on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (for example, in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate debt). The remaining gain (loss) on the derivative instrument in excess of the cumulative changes in the present value of future cash flows of the hedged item, if any, is recognized in the realized and unrealized gain (loss) on derivatives in current earnings during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in realized and unrealized gain (loss) on derivatives in the current earnings during the period of change. Income and/or expense from interest rate swaps are recognized as a net adjustment to interest expense. We account for income and expense from interest rate swaps on an accrual basis over the period to which the payment and/or receipt relates.


	*Share-Based Payment*

We account for share-based compensation issued to members of our board of directors, our Manager and certain of our senior executives using the fair value based methodology in accordance with SFAS No. 123R, Accounting for Stock Based Compensation (“SFAS 123R”). We do not have any employees, although we believe that members of our Board of Directors are deemed to be employees for purposes of interpreting and applying accounting principles relating to share-based compensation. We record as compensation costs the restricted common stock that we issued to members of our board of directors at fair value as of the grant date and we amortize the cost into expense over the three-year vesting period using the straight-line method. We recorded compensation costs for restricted common stock and common stock options that we issued to our Manager and that were reallocated to employees of our Manager and its affiliates that provide services to us at fair value as of the grant date and we remeasure the amount on subsequent reporting dates to the extent that the restricted common stock and/or common stock options are unvested. Unvested restricted common stock is valued using appraised value. Unvested common stock options are valued using a Binomial pricing model and assumptions based on observable market data for comparable companies. We amortize compensation expense related to the restricted common stock and common stock options that we granted to our Manager using the graded vesting attribution method in accordance with SFAS 123R.

Because we remeasure the amount of compensation costs associated with the unvested restricted common stock and unvested common stock options that we issued to our Manager and certain of our senior executives as of each reporting period, our share-based compensation

expense reported in our statements of operations will change based on the fair value of our common stock and this may result in earnings volatility.


	*Income Taxes*

We operate in a manner that we believe will allow us to be taxed as a REIT and, as a result, we do not expect to pay substantial corporate-level income taxes. Many of the requirements for REIT qualification, however, are highly technical and complex. If we were to fail to meet these requirements and do not qualify for certain statutory relief provisions, we would be subject to federal income tax, which could have a material adverse impact on our results of operations and amounts available for distributions to our stockholders. In addition, Crystal River TRS Holdings, Inc., our TRS, is subject to corporate-level income taxes.

Financial Condition

All of our assets at June 30, 2006 were acquired with the net proceeds of approximately $405.6 million from our March 2005 private offering of 17,400,000 shares of our common stock and our use of leverage.


	*Mortgage-Backed Securities*

Some of our mortgage investment strategy involves buying higher coupon, higher premium bonds, which takes on more prepayment risk (particularly call or shortening risk) than lower dollar-priced strategies. However, we believe that the potential benefits of this strategy include higher income, wider spreads, and lower hedging costs due to the shorter option-adjusted duration of the higher coupon security.

The table below summarizes our MBS investments at June 30, 2006:


	RMBS			CMBS

	(In thousands)
Amortized cost	$	2,374,207		$	312,594
Unrealized gains		3,859			1,219
Unrealized losses		(43,164	)		(10,749	)

Fair value	$	2,334,902		$	303,064

As of June 30, 2006, the RMBS and CMBS in our portfolio were purchased at a net discount to their par value and our portfolio had a weighted-average amortized cost of 97.1% and 65.1% of face amount, respectively. The RMBS and CMBS were valued below par at June 30, 2006 because we are investing in lower-rated bonds in the credit structure. Certain of the securities held at June 30, 2006 are valued below cost. Other than the eight securities noted above under “— Critical Accounting Policies — Valuation of MBS and ABS,” we do not believe any of our securities are other than temporarily impaired at June 30, 2006.

Our MBS holdings were as follows at June 30, 2006:


								Weighted Average

			Estimated		Percent of						Months					Constant
			Asset		Total						to		Yield to			Prepayment
			Value⁽¹⁾		Investments			Coupon			Reset⁽²⁾		Maturity			Rate⁽³⁾

			(In thousands)
RMBS:
	Non-Agency:
		Senior prime 5/1 adjustable rate	$	222,988		7.9	%		5.27	%		45.00		6.43	%		21.66	%
		Junior prime		157,095		5.6			6.81			23.55		16.89			24.70
		Subprime		162,204		5.7			7.34			10.51		9.30			31.28
	Agency:
		3/1 hybrid adjustable rate		642,086		22.7			4.99			28.83		6.23			28.19
		5/1 hybrid adjustable rate		1,150,529		40.7			5.05			48.20		6.10			24.25

	Total RMBS			2,334,902		82.6			5.38			37.81		7.11			25.59
CMBS:
	Below investment grade CMBS			303,064		10.7			5.06					9.84


(1)	All securities listed in this chart are carried at their estimated fair value.

(2)	Represents number of months before conversion to floating rate.

(3)	Represents the estimated percentage of principal that will be prepaid over the next 12 months based on historical principal paydowns.

The table below summarizes the credit ratings of our MBS investments at June 30, 2006:


	RMBS		CMBS

	(In thousands)
AAA	$	2,015,604	$	—
AA		—		—
A		49,364		—
BBB		81,634		128,502
BB		102,301		90,009
B		66,798		47,406
Not rated		19,201		37,147

Total	$	2,334,902	$	303,064

Actual maturities of RMBS are generally shorter than stated contractual maturities, as they are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal. The stated contractual final maturity of the mortgage loans underlying our portfolio of RMBS ranges up to 30 years, but the expected maturity is subject to change based on the prepayments of the underlying loans. As of June 30, 2006, the average final contractual maturity of the mortgage portfolio is 2035.

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

As of June 30, 2006, some of the mortgages underlying our RMBS had fixed interest rates for the weighted-average lives of approximately 37.8 months, after which time the interest rates reset and become adjustable. The average length of time until contractual maturity of those mortgages as of June 30, 2006 was 29 years.

After the reset date, interest rates on our hybrid adjustable rate RMBS securities float based on spreads over various LIBOR indices. These interest rates are subject to caps that limit the amount the applicable interest rate can increase during any year, known as an annual cap, and through the maturity of the applicable security, known as a lifetime cap. The weighted average lifetime cap for the portfolio is an increase of 4.32%; the weighted average maximum increases and decreases are 1.67%. Additionally, the weighted average maximum increases and decreases for agency hybrid RMBS in the first year that the rates are adjustable are 2.60%.

The following table summarizes our RMBS and our CMBS according to their estimated weighted average life classifications as of June 30, 2006:


		RMBS				CMBS

Weighted Average Life		Fair Value		Amortized Cost		Fair Value		Amortized Cost

		(In thousands)
Less than one year		$	3,656	$	3,837	$	—	$	—
Greater than one year and less than five years			1,768,742		1,799,061		—		—
Greater than five years			562,504		571,309		303,064		312,594

	Total	$	2,334,902	$	2,374,207	$	303,064	$	312,594

The estimated weighted-average lives of the MBS in the tables above are based upon prepayment models obtained through subscription-based financial information service providers.

The prepayment model considers current yield, forward yield, steepness of the yield curve, current mortgage rates, the mortgage rate of the outstanding loan, loan age, margin and volatility.

The actual weighted-average lives of the MBS in our investment portfolio could be longer or shorter than the estimates in the table above depending on the actual prepayment rates experienced over the lives of the applicable securities and are sensitive to changes in both prepayment rates and interest rates.


	*Other Fixed Income Securities*

At June 30, 2006, we classified certain short-term non-MBS as available-for-sale. These investments were reported at fair value. These investments are periodically reviewed for other-than-temporary impairment, but their contractual lives are short term in nature.


	*Equity Securities*

Our investment policies allow us to acquire equity securities, including common and preferred shares issued by other real estate investment trusts. At June 30, 2006, we held two investments in equity securities.

These investments above are classified as available for sale and thus carried at fair value on our balance sheet with changes in fair value recognized in accumulated other comprehensive income until realized.


	*Real Estate Loans*

At June 30, 2006, our real estate loans are reported at cost. These investments are periodically reviewed for impairment. As of June 30, 2006, there was no impairment in our real estate loans.


	*Interest and Principal Paydown Receivable*

At June 30, 2006, we had interest and principal paydown receivable of approximately $138.0 million, none of which related to interest that had accrued on securities prior to our purchase of such securities. The total interest and principal paydown receivable amount consisted of approximately $135.8 million relating to our MBS, including $114.4 million due from brokers for securities sold, and approximately $2.2 million relating to other investments.


	*Hedging Instruments and Derivative Activities*

There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Moreover, no hedging activity can completely insulate us from the risks associated with changes in interest rates and prepayment rates. We generally intend to hedge as much of the interest rate risk as Hyperion Brookfield Crystal River determines is in the best interests of our stockholders, after considering the cost of such hedging transactions and our desire to maintain our status as a REIT. Our policies do not contain specific requirements as to the percentages or amount of interest rate risk that our manager is required to hedge.

As of June 30, 2006, we had engaged in interest rate swaps and interest rate swap forwards as a means of mitigating our interest rate risk on forecasted interest expense associated with repurchase agreements for a specified future time period, which is the term of the swap contract. An interest rate swap is a contractual agreement entered into by two counterparties under which each agrees to make periodic payments to the other for an agreed period of time based upon a notional amount of principal. Under the most common form of interest rate swap, a series of payments calculated by applying a fixed rate of interest to a notional amount of principal is exchanged for a stream of payments similarly calculated but using a floating rate of interest. This is a fixed-floating interest rate swap. We hedge our floating rate debt by entering into fixed-floating interest rate swap agreements whereby we swap the floating rate of interest on the liability we are hedging for a fixed rate of interest. An interest rate swap forward is an interest rate swap based on an interest rate to be set at an agreed future date. As of June 30, 2006, we were a party to interest rate swaps with maturities ranging from October 2006 to July 2021 with a notional par amount of approximately $1,448.5 million. Under the swap agreements in place at June 30, 2006, we receive interest at rates that reset periodically, generally every three months, and pay a rate fixed at the initiation of and for the life of the swap agreements. The current market value of interest rate swaps is heavily dependent on the current market fixed rate, the corresponding term structure of floating rates (known as the yield curve) as well as the expectation of changes in future floating rates. As expectations of future floating rates change, the market value of interest rate swaps changes. Based on the daily market value of those interest rate swaps and interest rate swap forward contracts, our counterparties may request additional margin collateral or we may request additional collateral from our counterparties to ensure that an appropriate margin account balance is maintained at all times through the maturity of the contracts. At June 30, 2006, the unrealized gain on interest rate swap contracts was $34.5 million due to an increase in prevailing market interest rates.

As of June 30, 2006, we had engaged in credit default swaps, or CDS, which are accounted for as derivatives. CDSs are similar to insurance on the default risk of a particular

investment as we will enter into a contract with a counterparty as the “protection seller” and agree to pay par for the counterparty’s bonds in the event a credit default occurs in exchange for receiving periodic payments (similar to an insurance premium) from the “protection buyer.” As a result, the economic returns on our CDSs depend substantially on the performance of the underlying investments held by the protection buyer and we are subject to the credit risk of the protection buyer as well as the related investments. We enter into CDS transactions because they offer a more attractive leveraged return than the underlying cash instruments, in exchange for the added credit exposure.

While so far we have only taken synthetic long positions (by writing protection) we may find it attractive to hedge our credit exposure by entering into synthetic short positions (by buying protection) at some point in the future.

As of June 30, 2006, we were a party to 11 credit default swaps with maturities ranging from February 2035 to July 2043 with a notional par amount of $105.0 million. At June 30, 2006, the unrealized gain on credit default swap contracts was $1.4 million due to an increase in the creditworthiness of the underlying securities.

As of June 30, 2006, we had engaged in currency swaps as a means of mitigating our currency risk under one of our real estate loans that was denominated in Canadian dollars. As of June 30, 2006, we were a party to one currency swap with a maturity of July 2016 with a notional par amount of Can$50.0 million. The current market value of currency swaps is heavily dependent on the current currency exchange rate and the expectation of changes in future currency exchange rates. As expectations of future currency exchange rates change, the market value of currency swaps changes. Based on the daily market value of those currency swaps, our counterparties may request additional margin collateral or we may request additional collateral from our counterparties to ensure that an appropriate margin account balance is maintained at all times through the maturity of the contracts. At June 30, 2006, the unrealized loss on currency swap contracts was $0.3 million due to a strengthening of the Canadian dollar versus the United States dollar.


	*Liabilities*

We have entered into repurchase agreements to finance some of our purchases of RMBS. These agreements are secured by our RMBS and bear interest rates that have historically moved in close relationship to LIBOR. As of June 30, 2006, we had established 17 borrowing arrangements with various investment banking firms and other lenders. As of June 30, 2006, we were utilizing 14 of those arrangements.

At June 30, 2006, we had outstanding obligations under repurchase agreements with 13 counterparties totaling approximately $2,496.7 million with weighted-average current borrowing rates of 5.24% all of which have maturities of between seven and 413 days. We intend to seek to renew these repurchase agreements as they mature under the then-applicable borrowing terms of the counterparties to the repurchase agreements. At June 30, 2006, the repurchase agreements were secured by MBS and real estate loans and cash with an estimated fair value of approximately $2,662.8 million and had weighted-average maturities of 55 days. The net amount at risk, defined as fair value of the collateral, including restricted cash, minus repurchase agreement liabilities and accrued interest expense, with all counterparties was approximately $148.7 million at June 30, 2006. One of the repurchase agreements is a $275.0 million master repurchase agreement with Wachovia Bank that has a two year term with a one year renewal option. The Wachovia Bank master repurchase agreement provides for the purchase, sale and repurchase of commercial and residential mortgage loans, commercial mezzanine loans, B Notes, participation interests in the foregoing, commercial mortgage-backed securities and other

mutually agreed upon collateral and bears interest at varying rates over LIBOR based upon the type of asset included in the repurchase obligation.


	*Stockholders’ Equity*

Stockholders’ equity at June 30, 2006 was approximately $373.6 million and included $46.8 million of unrealized losses on securities available for sale and $31.2 million of unrealized and realized gains on cash flow hedges presented as a component of accumulated other comprehensive loss.

Results of Operations For the Period March 15, 2005 (commencement of operations) to December 31, 2005


	*Summary*

Our net income for the period was $13.9 million or $0.80 per weighted-average basic and diluted share outstanding.


	*Net Interest Income*

Net interest income for the period was $31.2 million. Gross interest income of $79.6 million primarily consisted of $71.9 million of interest income from MBS, $3.6 million of interest income from real estate loans and $2.3 million of interest income from ABS. Interest expense of $48.4 million consisted primarily of $43.2 million related to repurchase agreements and $3.2 million related to interest rate swaps.


	*Expenses*

Expenses for the period totaled $8.4 million, which consisted primarily of base management fees of approximately $4.8 million, amortization of approximately $0.6 million related to restricted stock and options granted to our Manager, professional fees of $2.2 million and start-up costs of $0.3 million.

Our Manager has waived its right to request reimbursement from us of third-party expenses that it incurs through December 31, 2006, which amount otherwise would have been required to be reimbursed. The management agreement with Hyperion Brookfield Crystal River, which was negotiated before our business model was implemented, provides that we will reimburse our Manager for certain third party expenses that it incurs on our behalf, including rent and utilities. Hyperion Brookfield incurs such costs and did not allocate any such expenses to our Manager in 2005 or in the first quarter or second quarter of 2006 as our Manager’s use of such services were deemed to be immaterial. In 2007, Hyperion Brookfield will reevaluate whether any such rent and utility costs will be allocated to our Manager and if so, we will be responsible for reimbursing such costs allocable to our operations absent any further waiver of reimbursement by our Manager. There are no contractual limitations on our obligation to reimburse our Manager for third party expenses and our Manager may incur such expenses consistent with the grant of authority provided to it pursuant to the management agreement without any additional approval of our board of directors being required. In addition, our Manager may defer our reimbursement obligation from any quarter to a future period; provided, however, that we will record any necessary accrual for any such reimbursement obligations when required by generally accepted accounting principles and our Manager has advised us that it will promptly invoice us for such reimbursements consistent with sound financial accounting policies.


	*Other Revenues (Expenses)*

Other revenues (expenses) for the period totaled approximately $(8.8) million, which consisted primarily of $2.5 million of realized and unrealized losses on derivatives, $0.5 million of realized net losses on the sale of real estate loans and securities available for sale and $5.8 million of losses on impairment of securities available for sale.

Results of Operations For the Six Months Ended June 30, 2006


	*Summary*

Our net income for the period was $21.5 million or $1.22 per weighted-average basic and diluted share outstanding.


	*Net Interest Income*

Net interest income for the period was $26.0 million. Gross interest income of $86.3 million primarily consisted of $76.9 million of interest income from MBS, $5.1 million of interest income from real estate loans and $2.0 million of interest income from ABS. Interest expense of $60.3 million consisted primarily of $56.3 million related to repurchase agreements, $5.9 million related to CDOs and amortization of deferred financing costs of $1.0 million, which was partially offset by $3.7 million of interest income from interest rate swaps.


	*Expenses*

Expenses for the period totaled $5.5 million, which consisted primarily of base management fees of approximately $2.8 million, amortization of approximately $0.5 million related to restricted stock and options granted to our Manager and professional fees of $1.5 million.


	*Other Revenues*

Other revenues for the period totaled approximately $1.0 million, which consisted primarily of $7.4 million of realized and unrealized gains on derivatives (including a $0.9 million loss related to foreign currency swaps) and $1.9 million in foreign currency exchange gain, which was offset in part by $1.7 million of realized net losses on the sale of securities available for sale and a $6.9 million loss on impairment of securities available for sale.

Results of Operations For the Period March 15, 2005 (commencement of operations) to June 30, 2005


	*Summary*

Our net income for the period was $0.4 million or $0.02 per weighted-average basic and diluted share outstanding.


	*Net Interest Income*

Net interest income for the period was $8.2 million. Gross interest income of $15.8 million primarily consisted of $14.6 million of interest income from MBS, $0.6 million of interest income from ABS and $0.3 million of interest income from real estate loans. Interest expense of $7.6 million consisted primarily of $6.2 million related to repurchase agreements and $1.4 million related to interest rate swaps.


	*Expenses*

Expenses for the period totaled $3.3 million, which consisted primarily of base management fees of approximately $1.8 million, amortization of approximately $0.2 million related to restricted stock and options granted to our Manager, professional fees of $0.7 million and start-up costs of $0.3 million.


	*Other Expenses*

Other expenses for the period totaled approximately $4.4 million, which consisted substantially of realized and unrealized losses on derivatives.

Results of Operations For the Three Months Ended June 30, 2006 compared to the Three Months Ended June 30, 2005


	*Summary*

Our net income for the three months ended June 30, 2006 period was $6.0 million, or $0.34 per weighted-average basic and diluted share outstanding, compared with net income of $0.3 million, or $0.02 per weighted-average basic and diluted share outstanding for the same period in 2005.


	*Net Interest Income*

Net interest income for the three months ended June 30, 2006 was $13.9 million, an increase of $6.3 million, or 83.6%, over net interest income of $7.6 million for the same period in 2005. Gross interest income for the second quarter of 2006 of $45.3 million primarily consisted of $39.9 million of interest income from MBS, $2.5 million of interest income from real estate loans and $0.9 million of interest income from ABS. Gross interest income for the same period in 2005 of $15.1 million primarily consisted of $14.1 million of interest income from MBS, $0.3 million of interest income from real estate loans and $0.6 million of interest income from ABS. This increase was due to an increase in the size of our investment portfolio and the diversification of our investment portfolio from Agency ARMs into higher yielding securities. Interest expense of $31.4 million for the three months ended June 30, 2006 consisted primarily of $30.6 million related to repurchase agreements and $3.0 million related to CDOs, which was partially offset by $3.1 million of interest income from interest rate swaps. Interest expense of $7.5 million for the same period in 2005 consisted primarily of $6.2 million related to repurchase agreements and $1.4 million of interest expense on interest rate swaps. The increase in interest expense was due to an increase in our leverage and general market increases in financing costs.


	*Expenses*

Expenses for the second quarter of 2006 totaled $2.7 million, which consisted primarily of base management fees of approximately $1.3 million, amortization of approximately
$0.3 million related to restricted stock and options granted to our Manager and professional fees of $0.8 million. Expenses for the same period in 2005 totaled $2.7 million, which consisted primarily of base management fees of approximately $1.6 million, amortization of approximately $0.2 million relating to restricted stock and options granted to our Manager and professional fees of $0.7 million.


	*Other Expenses*

Other expenses for the three months ended June 30, 2006 totaled approximately $5.1 million, which consisted primarily of $1.1 million of realized losses on the sale of securities available for sale, a $5.7 million loss on impairment of securities available for sale and $0.5 million of realized and unrealized losses on derivatives (including a loss of $2.1 million related to foreign currency swaps), which was offset in part by $2.0 million of foreign currency exchange gain. Other expenses for the same period in 2005 totaled approximately $4.6 million, which consisted substantially of realized and unrealized losses on derivatives.

Liquidity and Capital Resources

We held cash and cash equivalents of approximately $56.2 million at June 30, 2006, which excludes restricted cash of approximately $82.5 million that is used to collateralize certain of our repurchase facilities and certain other obligations.

Our operating activities provided net cash of approximately $18.7 million for the six months ended June 30, 2006 primarily as a result of net income of $21.5 million, non-cash impairment charges relating to available for sale securities of $6.9 million, and a net increase in accounts payable and accrued liabilities, due to Manager and interest payable of approximately $5.8 million, offset in part by non-cash unrealized gains on derivatives of $7.8 million, non-cash accretion of discount on assets of $4.1 million, non-cash foreign currency exchange gain of $1.8 million and increases in interest receivable and prepaid expenses and other assets of $4.6 million.

Our operating activities provided net cash of approximately $4.8 million during the period March 15, 2005 (commencement of operations) to June 30, 2005 primarily as a result of net income of $0.4 million, unrealized loss on derivatives of $4.3 million and the excess of interest expense payments that were recognized but not yet paid over interest income receipts that were recognized but not yet received.

Our investing activities used net cash of $383.4 million for the six months ended June 30, 2006 primarily from the purchase of securities available for sale of $828.5 million and the funding or purchase of real estate loans totaling $6.9 million, partially offset by receipt of principal paydowns on securities available for sale and real estate loans of approximately $254.1 million, redemptions of real estate loans of approximately $15.8 million and $182.5 million of proceeds from the sale of securities available for sale and real estate loans.

Our investing activities used net cash of $1,823.1 million during the period March 15, 2005 (commencement of operations) to June 30, 2005 primarily from the purchase of securities available for sale of $1,824.5 million and the funding or purchase of real estate loans totaling $38.2 million, partially offset by receipt of principal paydowns on securities available for sale of approximately $41.6 million.

Our financing activities provided net cash of $399.5 million for the six months ended June 30, 2006 primarily from the net proceeds from borrowings under repurchase agreements, including with related parties, of $502.4 million and cash collateral received of approximately $25.5 million, partially offset by principal repayments on CDOs of $16.6 million, repayment of a note payable to a related party of $35.0 million, dividend payments of approximately $12.7 million and the deposit of $64.0 million of restricted cash used to collateralize certain financings.

Our financing activities provided net cash of $1,838.5 million during the period March 15, 2005 (commencement of operations) to June 30, 2005 primarily from the issuance of common stock, net of offering costs, of $405.6 million and net proceeds from borrowings

under repurchase agreements of $1,436.5 million, partially offset by the deposit of $3.7 million of restricted cash used to collateralize certain financings.

Our source of funds as of June 30, 2006, excluding our March 2005 private offering, consisted of net proceeds from repurchase agreements totaling approximately $2,496.7 million with a weighted-average current borrowing rate of 5.24%, which we used to finance the acquisition of securities available for sale. We expect to continue to borrow funds in the form of repurchase agreements. As of June 30, 2006 we had established 17 borrowing arrangements with various investment banking firms and other lenders, 14 of which were in use on June 30, 2006. Increases in short-term interest rates could negatively impact the valuation of our mortgage-related assets, which could limit our borrowing ability or cause our lenders to initiate margin calls. Amounts due upon maturity of our repurchase agreements will be funded primarily through the rollover/reissuance of repurchase agreements and monthly principal and interest payments received on our mortgage-backed securities.


	*Off-Balance Sheet Arrangements*

As of June 30, 2006, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of June 30, 2006, we had outstanding commitments to fund real estate construction loans of $24.1 million, and as of such date, advances of $21.4 million had been made under these commitments.


	*Contractual Obligations and Commitments*

As of March 15, 2005, we had entered into a management agreement with Hyperion Brookfield Crystal River. Hyperion Brookfield Crystal River is entitled to receive a base management fee, incentive compensation, reimbursement of certain expenses and, in certain circumstances, a termination fee, all as described in the management agreement. Such fees and expenses do not have fixed and determinable payments. The base management fee is payable monthly in arrears in an amount equal to 1/12 of our equity (as defined in the management agreement) times 1.50%. Hyperion Brookfield Crystal River uses the proceeds from its management fee in part to pay compensation to its officers and employees who, notwithstanding that certain of them also are our officers, receive no cash compensation directly from us. Hyperion Brookfield Crystal River will receive quarterly incentive compensation in an amount equal to the product of: (a) 25% of the dollar amount by which (i) our net income (determined in accordance with GAAP) and before non-cash equity compensation expense and before incentive compensation, for the quarter per common share (based on the weighted average number of common shares outstanding for the quarter) exceeds (ii) an amount equal to (A) the weighted average of the price per share of the common shares in the March 2005 private offering, the price per share in our 2006 initial public offering and the prices per common shares in any subsequent offerings by us (including this offering), in each case at the time of issuance thereof, multiplied by (B) the greater of (1) 2.4375% and (2) 0.50% plus one-fourth of the Ten Year Treasury Rate for such quarter, multiplied by (b) the weighted average number of shares of common stock outstanding during the quarter; provided, that the foregoing calculation of incentive compensation shall be adjusted to exclude one-time events pursuant to changes in GAAP, as well as non-cash charges after discussion between Hyperion Brookfield Crystal River and our independent directors and approval by a majority of our independent directors in the case of non-cash charges. In accordance with the management agreement, our Manager and the independent members of our board of directors have agreed to adjust the calculation of the Manager’s incentive fee to exclude non-cash adjustments required by SFAS 133 relating to the valuation of interest rate swaps, currency swaps and

credit default swaps. See note 10 to our June 30, 2006 unaudited consolidated financial statements included elsewhere herein.

As of June 30, 2006, we had outstanding commitments to fund real estate construction loans of $24.1 million, and as of such date, advances of $21.4 million had been made under these commitments.

The following table presents certain information regarding our debt obligations as of June 30, 2006:


				Weighted-Average
				Maturity of Repurchase
Repurchase Agreement Counterparties		Amount at Risk(1)		Agreement in Days

		(In thousands)
Banc of America Securities LLC		$	5,951		36
Bear, Stearns & Co. Inc.			15,587		27
Citigroup Global Markets Inc.			4,460		62
Credit Suisse First Boston LLC			22,936		35
Deutsche Bank Securities Inc.			7,288		31
Greenwich Capital Markets, Inc.			5,138		58
Lehman Brothers Inc.			12,149		12
Merrill Lynch, Pierce, Fenner & Smith Incorporated			8,504		41
Morgan Stanley & Co. Incorporated			4,448		30
Trilon International, Inc.			4,448		27
Wachovia Bank, National Association			49,847		413
Wachovia Capital Markets, LLC			3,580		53
WaMu Capital Corp.			4,409		47

	Total	$	148,745		55


(1)	Equal to the fair value of collateral, including restricted cash, minus repurchase agreement liabilities and accrued interest expense.

We purchase securities on a trade date that is prior to the related settlement date. As of June 30, 2006, we were owed approximately $114.4 million for our sale of securities on or prior to June 30, 2006 that settled after June 30, 2006.

The repurchase agreements for our repurchase facilities generally do not include substantive provisions other than those contained in the standard master repurchase agreement as published by the Bond Market Association. As noted below, some of our master repurchase agreements that were in effect as of October 23, 2006 contain negative covenants requiring us to maintain certain levels of net asset value, tangible net worth and available funds and comply with interest coverage ratios, leverage ratios and distribution limitations. One of our master repurchase agreements provides that it may be terminated if, among other things, certain material decreases in net asset value occur, our chief executive officer ceases to be involved in the day-to-day operations of our Manager, we lose our REIT status or our Manager is terminated. Generally, if we violate one of these covenants, the counterparty to the master repurchase agreement has the option to declare an event of default, which would accelerate the repurchase date. If such option is exercised, then all of our obligations would come due, including either purchasing the securities or selling the securities, as the case may be. The counterparty to the master repurchase agreement, if the buyer in such transaction, for example,

will be entitled to keep all income paid after the exercise, which will be applied to the aggregate unpaid repurchase price and any other amounts owed by us, and we are required to deliver any purchased securities to the counterparty.

Our master repurchase agreement with Banc of America Securities LLC contains a restrictive covenant that requires our net asset value to be no less than the higher of


	•	the NAV Floor (defined below) and

	•	50% of our net asset value as of December 31 of the prior year.

For 2006, the “NAV Floor” is $250.0 million. For all future periods, the NAV Floor is equal to the higher of


	•	the NAV Floor and

	•	50% of our net asset value,

in each case as of December 31 of the prior year.

Our master repurchase agreements with Credit Suisse First Boston, LLC and Credit Suisse First Boston, (Europe) Limited each contain a restrictive covenant that would trigger an event of default if our net asset value declines:


	•	by 30% or more from the highest net asset value in the preceding 12-month period then ending,

	•	by 20% or more from the highest net asset value in the preceding three-month period then ending,

	•	by 15% or more from the highest net asset value in the preceding one-month period then ending, or

	•	by 50% or more from the highest net asset value since the date of the master repurchase agreement

or, if we or our Manager receive redemption notices that will result in an net asset value drop to the foregoing levels or below $175.0 million.

Our master repurchase agreement with Wachovia Bank, National Association contains the following restrictive covenants:


	•	We may not permit the ratio of the sum of adjusted EBITDA (as defined in the master repurchase agreement) to interest expense to be less than 1.25 to 1.00.

	•	We may not permit our debt to equity ratio to be greater than 10:1.

	•	We may not declare or make any payment on account of, or set apart assets for, a sinking or other analogous fund for the purchase, redemption, defeasance, retirement or other acquisition of any of our equity interests, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in our obligations, except, so long as there is no default, event of default or “Margin Deficit” that has occurred and is continuing. We may (i) make such payments solely to the extent necessary to preserve our status as a REIT and (ii) make additional payments in an amount equal to 100% of funds from operations. A Margin Deficit occurs when the aggregate market value of all the purchased securities subject to all repurchase transactions in which a party is acting as buyer is less than the buyer’s margin amount for all transactions, which is the amount obtained by application of the buyer’s margin

percentage to the repurchase price. The margin percentage is a percentage agreed to by the buyer and seller or the percentage obtained by dividing the market value of the purchased securities on the purchase date by the purchase price on the purchase date.

• Our tangible net worth may not be less than the sum of $300.0 million plus the proceeds from all equity issuances, net of investment banking fees, legal fees, accountants’ fees, underwriting discounts and commissions and other customary fees and expenses that we actually incur.

• We may not permit the amount of our cash and cash equivalents at any time to be less than $10.0 million during the first year following the closing date of the master repurchase agreement or less than $15.0 million after the first year following the closing date, in either case after giving effect to any requested repurchase transaction.

Certain of our repurchase agreements and our revolving credit facility contain financial covenants, including maintaining our REIT status and maintaining a specific net asset value or worth. As of June 30, 2006, with respect to two debt obligations, we failed to meet certain financial covenants, including an interest expense coverage ratio. We obtained waivers with respect to all financial covenants which were not met. As a result, we were in compliance with or have obtained the necessary waivers with respect to all our financial covenants as of June 30, 2006.

We intend to continue to make regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock. In order to maintain our qualification as a REIT and to avoid corporate-level income tax on the income we distribute to our stockholders, we are required to distribute at least 90% of our REIT taxable income (which includes net short-term capital gains) on an annual basis. This requirement can impact our liquidity and capital resources.

For our short-term (one year or less) and long-term liquidity, which includes investing and compliance with collateralization requirements under our repurchase agreements (if the pledged collateral decreases in value or in the event of margin calls created by prepayments of the pledged collateral), we also rely on the cash flow from operations, primarily monthly principal and interest payments to be received on our mortgage-backed securities, cash flow from the sale of securities as well as any primary securities offerings authorized by our board of directors.

Based on our current portfolio, leverage rate and available borrowing arrangements, including our $275.0 million master repurchase facility with Wachovia Bank, we believe that the net proceeds of our initial public offering, which closed in August 2006, together with existing equity capital, combined with the cash flow from operations and the utilization of borrowings, will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements such as to fund our investment activities, pay fees under our management agreement, fund our distributions to stockholders and for general corporate expenses. However, an increase in prepayment rates substantially above our expectations could cause a temporary liquidity shortfall due to the timing of the necessary margin calls on the financing arrangements and the actual receipt of the cash related to principal paydowns. If our cash resources are at any time insufficient to satisfy our liquidity requirements, we may have to sell debt or additional equity securities. If required, the sale of MBS or real estate loans at prices lower than their carrying value would result in losses and reduced income. Although we have achieved a leverage rate within our targeted leverage range as of June 30, 2006, we have additional capacity to leverage our equity further should the need for additional short-term (one year or less) liquidity arise.

Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements in excess of our borrowing capacity under our $275.0 million master repurchase facility with Wachovia Bank will be subject to obtaining additional debt financing and equity capital. We may increase our capital resources by making public offerings of equity securities, possibly including classes of preferred stock, common stock, commercial paper, medium-term notes, CDOs, collateralized mortgage obligations and senior or subordinated notes. Such financing will depend on market conditions for capital raises and for the investment of any proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock.

We generally seek to borrow between four and eight times the amount of our equity. At June 30, 2006, our total debt was approximately $2,707.6 million, which represented a leverage ratio of approximately 7.25 times. If our leverage ratio at June 30, 2006 were eight times our equity, our total debt would have been approximately $2,988.8 million, which represents an additional $281.2 million of borrowing.


	*REIT Taxable Income*

REIT taxable income is calculated according to the requirements of the Internal Revenue Code, rather than GAAP. The following table reconciles GAAP net income to estimated REIT taxable income for the six months ended June 30, 2006:


			(In
			thousands)
GAAP net income			$	21,452
Adjustments to GAAP net income:
	Net tax adjustments related to organization costs			(11	)
	Net tax adjustments related to grant of restricted stock and options			(75	)
	Net tax adjustments related to discount accretion and premium amortization			3,225
	Book derivative income in excess of tax income			(7,259	)
	Capital loss limitations			4,301
	Impairment losses not deductible for tax purposes			6,924

		Net adjustments to GAAP net income		7,105

Estimated REIT taxable income			$	28,557

The following table reconciles GAAP net income to REIT taxable income for the period March 15, 2005 (commencement of operations) to December 31, 2005:


			(In
			thousands)
GAAP net income			$	13,948
Adjustments to GAAP net income:
	Net tax adjustments related to organization costs			319
	Net tax adjustments related to grant of restricted stock			554
	Net tax adjustments related to grant of options			73
	Net tax adjustments related to discount accretion and premium amortization			2,342
	Book derivative income in excess of tax income			2,796
	Capital loss limitations			2,168
	Impairment losses not deductible for tax purposes			5,782
	Other			(24	)

		Net adjustments to GAAP net income		14,010

REIT taxable income			$	27,958

We believe that the presentation of our REIT taxable income is useful to investors because it demonstrates to investors the minimum amount of distributions we must make in order to maintain our qualification as a REIT and not be obligated to pay federal and state income taxes. However, beyond our intent to distribute to our stockholders at least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification, we do not expect that the amount of distributions we make will necessarily correlate to our REIT taxable income. Rather, we expect to determine the amount of distributions we make based on our cash flow and what we believe to be an appropriate and competitive dividend yield relative to other specialty finance companies and mortgage REITs. REIT taxable income will not necessarily bear any close relation to cash flow. Accordingly, we do not consider REIT taxable income to be a reliable measure of our liquidity although the related distribution requirement can impact our liquidity and capital resources. Moreover, there are limitations associated with REIT taxable income as a measure of our financial performance over any period. As a result, REIT taxable income should not be considered as a substitute for our GAAP net income as a measure of our financial performance.


	*Inflation*

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors consistent with our obligation to distribute to our stockholders at least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and or fair market value without considering inflation.


	*Quantitative and Qualitative Disclosures About Market Risk*

As of June 30, 2006, the primary component of our market risk was interest rate risk, as described below. While we do not seek to avoid risk completely, we do believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient

compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.


	Interest Rate Risk

We are subject to interest rate risk in connection with most of our investments and our related debt obligations, which are generally repurchase agreements of limited duration that are periodically refinanced at current market rates. We mitigate this risk through utilization of derivative contracts, primarily interest rate swap agreements.


	Yield Spread Risk

Most of our investments are also subject to yield spread risk. The majority of these securities are fixed rate securities, which 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, as based on their credit relative to U.S. Treasuries. An 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 these securities. Under these conditions, the value of our real estate securities portfolio would tend to decrease. Conversely, if the spread used to value these securities were to decrease or “tighten,” the value of our real estate securities would tend to increase. Such changes in the market value of our real estate securities portfolio may affect our net equity or cash flow either directly through their impact on unrealized gains or losses on available-for-sale securities by diminishing our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital.


	Effect on Net Interest Income

We fund our investments with short-term borrowings under repurchase agreements. During periods of rising interest rates, the borrowing costs associated with those investments tend to increase while the income earned on such investments could remain substantially unchanged. This results in a narrowing of the net interest spread between the related assets and borrowings and may even result in losses.

On June 30, 2006, we were party to 45 interest swap contracts. The following table summarizes the expiration dates of these contracts and their notional amounts (in thousands):


Expiration Date	Notional Amount

2006	$	15,000
2007		403,000
2008		596,000
2009		60,000
2010		127,500
2011		30,000
2013		53,084
2015		54,000
2016		67,000
2021		42,933

TOTAL	$	1,448,517

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


	Extension Risk

We invest in RMBS, some of which have interest rates that are fixed for the first few years of the loan (typically three, five, seven or ten years) and thereafter reset periodically on the same basis as adjustable-rate RMBS. We compute the projected weighted-average life of our RMBS based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when a fixed-rate or hybrid adjustable-rate residential mortgage-backed security is acquired with borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related RMBS. This strategy is designed to protect us from rising interest rates because the borrowing costs are fixed for the duration of the fixed-rate portion of the related residential mortgage-backed security.

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


	Hybrid Adjustable-Rate RMBS Interest Rate Cap Risk

We also invest in hybrid adjustable-rate RMBS which are based on mortgages that are typically subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the security’s interest yield may change during any given period. However, our borrowing costs pursuant to our repurchase agreements will not be subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation by caps, while the interest-rate yields on our hybrid adjustable-rate RMBS would effectively be limited by caps. This problem will be magnified to the extent we acquire hybrid adjustable-rate RMBS that are not based on mortgages which are fully indexed. In addition, the underlying mortgages may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of less cash income on our hybrid adjustable-rate RMBS than we need in order to pay the interest cost on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.


	Interest Rate Mismatch Risk

We intend to continue to fund a substantial portion of our investments with borrowings that, after the effect of hedging, have interest rates based on indices and repricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and repricing terms of our investments. Thus, we anticipate that in most cases the interest rate indices and repricing terms of our mortgage assets and our funding sources will not be identical, thereby creating an

interest rate mismatch between assets and liabilities. Therefore, our cost of funds would likely rise or fall more quickly than would our earnings rate on assets. During periods of changing interest rates, such interest rate mismatches could negatively impact our financial condition, cash flows and results of operations. To mitigate interest rate mismatches, we may utilize hedging strategies discussed above.

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


	Prepayment Risk

Prepayments are the full or partial repayment of principal prior to the original term to maturity of a mortgage loan and typically occur due to refinancing of mortgage loans. Prepayment rates for existing RMBS generally increase when prevailing interest rates fall below the market rate existing when the underlying mortgages were originated. In addition, prepayment rates on adjustable-rate and hybrid adjustable-rate RMBS generally increase when the difference between long-term and short-term interest rates declines or becomes negative. Prepayments of RMBS could harm our results of operations in several ways. Some adjustable-rate mortgages underlying our adjustable-rate RMBS may bear initial “teaser” interest rates that are lower than their “fully-indexed” rates, which refers to the applicable index rates plus a margin. In the event that such an adjustable-rate mortgage is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, the holder of the related residential mortgage-backed security would have held such security while it was less profitable and lost the opportunity to receive interest at the fully-indexed rate over the expected life of the adjustable-rate residential mortgage-backed security. Additionally, we currently own mortgage assets that were purchased at a premium. The prepayment of such assets at a rate faster than anticipated would result in a write-off of any remaining capitalized premium amount and a consequent reduction of our net interest income by such amount. Finally, in the event that we are unable to acquire new mortgage assets to replace the prepaid assets, our financial condition, cash flow and results of operations could be negatively impacted.


	Effect on Fair Value

Another component of interest rate risk is the effect changes in interest rates will have on the market value of our assets. We face the risk that the market value of our assets will increase or decrease at different rates than that of our liabilities, including our hedging instruments. We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. Duration essentially measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different duration numbers for the same securities.

The following interest rate sensitivity analysis is measured using an option-adjusted spread model combined with a proprietary prepayment model. We shock the curve up and down 100 basis points and analyze the change in interest rates, prepayments and cash flows through a Monte Carlo simulation. We then calculate an average price for each scenario which is used in our risk management analysis.

The following sensitivity analysis table shows the estimated impact on the fair value of our interest rate-sensitive investments, repurchase agreement liabilities, CDO liabilities and swaps,

at June 30, 2006, assuming rates instantaneously fall 100 basis points and rise 100 basis points:


	Interest Rates						Interest Rates
	Fall 100						Rise 100
	Basis Points			Unchanged			Basis Points

	(Dollars in thousands)
Mortgage assets and other securities available for sale(1)
Fair value	$	2,756,932		$	2,692,928		$	2,629,772
Change in fair value	$	64,004		$	0		$	(63,156	)
Change as a percent of fair value		2.38	%		0.00	%		(2.35	)%

Real Estate Loans
Fair value	$	140,820		$	135,361		$	130,376
Change in fair value	$	5,459		$	0		$	(4,985	)
Change as a percent of fair value		4.03	%		0.00	%		(3.68	)%

Repurchase Agreements(2)
Fair value	$	(2,498,620	)	$	(2,496,730	)	$	(2,494,840	)
Change in fair value		n/m			n/m			n/m
Change as a percent of fair value		n/m			n/m			n/m

CDO Liabilities
Fair value	$	(211,519	)	$	(210,903	)	$	(210,254	)
Change in fair value	$	(616	)		n/m		$	649
Change as a percent of fair value		0.29	%		n/m			(0.31	)%
Designated and undesignated interest rate swaps
Fair value	$	5,439		$	34,458		$	62,133
Change in fair value	$	(29,019	)	$	0		$	27,675
Change as a percent of notional value		(2.00	)%		0.00	%		1.91	%

Credit default swaps
Fair value	$	1,542		$	1,396		$	1,272
Change in fair value	$	146		$	0		$	(124	)
Change as a percent of notional value		0.14	%		0.00	%		(0.12	)%

Cross currency swap
Fair value	$	(931	)	$	(329	)	$	202
Change in fair value	$	(602	)	$	0		$	531
Change as a percent of notional value		(1.30	)%		0.00	%		1.14	%


(1)	The fair value of other available-for-sale investments that are sensitive to interest rate changes are included.

(2)	The fair value of the repurchase agreements would not change materially due to the short-term nature of these instruments.

n/m = not meaningful

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


	Currency Risk

We have foreign currency exposure related to one commercial real estate loan, which is denominated in Canadian dollars. From time to time, we may make other investments that are denominated in a foreign currency through which we may be subject to foreign currency exchange risk.

Changes in currency rates can adversely impact the fair values and earnings of our non-U.S. holdings. We expect to attempt to mitigate this impact by utilizing currency swaps on our foreign currency-denominated investments or foreign currency forward commitments to hedge the net exposure.

Risk Management

To the extent consistent with maintaining our REIT status, we seek to manage our interest rate risk exposure to protect our portfolio of RMBS and other mortgage securities and related debt against the effects of major interest rate changes. We generally seek to manage our interest rate risk by:


	•	monitoring and adjusting, if necessary, the reset indices and interest rates related to our MBS and our borrowings;

	•	attempting to structure our borrowing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;

	•	using derivatives, financial futures, swaps, options, caps, floors and forward sales, to adjust the interest rate sensitivity of our MBS and our borrowings; and

	•	actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods, and gross reset margins of our MBS and the interest rate indices and adjustment periods of our borrowings.

BUSINESS

Our Company

We were organized on January 25, 2005 by Hyperion Brookfield, who may be deemed to be our promoter, and completed a private offering of our common stock in March 2005, in which we raised net proceeds of approximately $405.6 million. In our March 2005 private offering, Deutsche Bank Securities Inc. and Wachovia Capital Markets, LLC served as the initial purchasers/placement agents. In our March 2005 private offering, an indirect subsidiary of Brookfield purchased 800,000 shares, or 3.2% (assuming all outstanding options have vested and are exercised), of our common stock and certain of our executive officers, directors and members of our strategic advisory committee, and certain executive officers of Hyperion Brookfield Crystal River and Hyperion Brookfield that provide services to us collectively purchased 183,800 shares, or 0.7% (assuming all outstanding options have vested and are exercised), of our common stock. In addition, upon completion of our March 2005 private offering, we issued to Hyperion Brookfield Crystal River, and it subsequently transferred to certain of its officers and employees, certain of our directors and other individuals associated with Hyperion Brookfield or Brookfield and their respective affiliates who provide services to us, 84,000 shares of restricted stock and we granted to Hyperion Brookfield Crystal River, and it subsequently transferred to certain of its officers and employees, certain of our directors and other individuals associated with Hyperion Brookfield or Brookfield and their respective affiliates who provide services to us, options to purchase 126,000 shares of our common stock with an exercise price of $25.00 per share, representing in the aggregate approximately 1.2% of the outstanding shares of our common stock as of the date of this prospectus, assuming all outstanding options have vested and are exercised. As of the date of this prospectus, Hyperion Brookfield, Brookfield, Hyperion Brookfield Crystal River and their affiliates, including our executive officers, members of our strategic advisory committee and certain of our directors, as well as our independent directors, collectively own 2,105,800 shares of our common stock, representing 8.4% of our outstanding shares of common stock, and have options to purchase an additional 130,000 shares of our common stock representing an additional 0.5% of our outstanding shares of common stock, in each case, assuming all outstanding options have vested and are exercised.

We currently target and expect to continue to target asset classes that provide consistent, stable risk-adjusted returns. We expect to continue to leverage our investments to enhance returns on our investments. We make portfolio allocation decisions based on various factors, including expected cash yield, relative value, risk-adjusted returns, current and projected credit fundamentals, current and projected macroeconomic considerations, current and projected supply and demand, credit and market risk concentration limits, liquidity, cost and availability of financing and hedging activities, as well as maintaining our REIT qualification and our exclusion from regulation under the Investment Company Act. These factors place significant limits on the amount of certain of our targeted investments such as aircraft and consumer ABS, non-real estate-related CDOs and other equity investments that we may include in our portfolio.

Our Manager

We are externally managed and advised by Hyperion Brookfield Crystal River, a wholly-owned subsidiary of Hyperion Brookfield formed on January 25, 2005 solely for the purpose of serving as our manager, whose officers consist of investment professionals and employees of Hyperion Brookfield or one or more of its affiliates. As of October 23, 2006, Hyperion Brookfield Crystal River had no employees and we and Hyperion Brookfield Crystal River had no independent officers and were entirely dependent on Hyperion Brookfield for the day-to-day management of our operations. While our directors periodically review our

investment guidelines and our investment portfolio, other than any investments involving our affiliates or our sub-advisors’ affiliates or investments proposed by Brookfield Sub-Advisor, which they are required to review and approve prior to such investments being made, they do not review all of our proposed investments. Our officers, as employees of Hyperion Brookfield or one of its affiliates, have been delegated the responsibility to review and make investments consistent with our investment strategy as articulated by our strategic advisory committee. Hyperion Brookfield Crystal River did not have any experience managing a REIT prior to its entering into a management agreement with us and it currently does not provide management or other services to entities other than us. Prior to our formation, Hyperion Brookfield had no prior experience managing a REIT. However, Hyperion Brookfield has a successful 17-year history of acquiring and managing MBS and ABS through an investment philosophy predicated on the concept of relative value. Hyperion Brookfield was founded in 1989 by Lewis Ranieri, an MBS market pioneer and former Vice Chairman of Salomon Brothers, Inc. Today, Hyperion Brookfield employs approximately 85 professionals and is dedicated to providing investment management services for institutional clients and mutual funds through the management of core fixed income portfolios as well as separately managed portfolios of RMBS, CMBS and ABS. As of June 30, 2006, Hyperion Brookfield and its affiliates managed approximately $19.7 billion in assets for institutional clients, closed-end investment companies and CDOs.

We and our Manager believe that the most significant opportunities for out-performance exist between and within our target asset classes, as well as among individual securities. Our Manager will strive to identify and capitalize on relative value anomalies through the assessment of relationships between supply and demand, changes in interest rates and associated prepayment expectations, market volatility and investor trends. We and our Manager believe that, on a long-term basis, this investment approach will provide attractive risk-adjusted returns.

We are able to draw upon the unique resources of two sub-advisors to enhance the management of our portfolio:


	•	Brookfield Sub-Advisor. For investments in mortgages and other non-commercial real estate financing instruments, commercial real estate, hydroelectric, gas- and coal-fired power generating facilities, timber assets and certain other asset classes, we are able to draw upon a sub-advisory relationship with Brookfield Sub-Advisor. Through this relationship, we are able to access the resources of Brookfield, an asset manager focused on property, power and infrastructure assets with approximately $56.7 billion of assets under management as of June 30, 2006. Brookfield’s portfolio of high quality assets at such date included interests in approximately 75 commercial properties and 140 power generating plants.

	•	Ranieri & Co. Our Manager utilizes Ranieri & Co. to provide guidance on macroeconomic trends, market trends in MBS and overall portfolio strategy. We expect that our relationship with Ranieri & Co. will continue to provide us with access to its relationships for investment and financing opportunities. Ranieri & Co is managed by Lewis Ranieri, whose leading role in the development of MBS has earned him recognition as a pioneer of the securitized mortgage market in the U.S.

We believe our relationship with Hyperion Brookfield, our Manager and our sub-advisors provides us with substantial benefits in sourcing, underwriting and managing our investments. Our Manager is responsible for administering our business activities and day-to-day operations and uses the resources of Hyperion Brookfield to support our operations. We believe that our management agreement and sub-advisory agreements provides us access to broad referral networks, experience in capital markets, credit analysis, debt structuring, hedging and asset management, as well as corporate operations and governance. Our Manager, together with our sub-advisors, has well-respected, established portfolio management resources for each of our

targeted asset classes and an extensive, mature infrastructure supporting those resources. Our Manager’s and our sub-advisors’ portfolio management resources and infrastructure are fully scalable to service our company’s activities. We also expect to benefit from our Manager’s comprehensive risk management, which addresses not only the risks of portfolio loss, such as risks relating to price volatility, position sizing and leverage, but also the operational risks such as execution of transactions, clearing of transactions, recording of transactions, and monitoring of positions that can have major adverse impacts on investment programs.

Our Manager and our sub-advisors have senior management teams with extensive experience in identifying and financing, hedging and managing RMBS, ABS, CMBS, real estate equity and mezzanine investments. Mr. Clifford Lai, our president and chief executive officer is also the chief executive officer of Hyperion Brookfield, and leads Hyperion Brookfield’s CMBS team. Mr. John Dolan, our chief investment officer, is also the chief investment officer of Hyperion Brookfield and the leader of its RMBS/ ABS team. Each has over 25 years of investment experience.

Our Portfolio

As of June 30, 2006, we had a portfolio of approximately $2.8 billion consisting primarily of RMBS, as shown in the following chart:


								Weighted Average

			Estimated		Percent of						Months					Constant
			Asset		Total						to		Yield to			Prepayment
Security Description			Value(1)		Investments			Coupon			Reset(2)		Maturity			Rate(3)

			(In thousands)
Commercial Real Estate Debt:
	Below investment grade CMBS		$	303,064		10.7	%		5.06	%				9.84	%
	Real estate loans			135,361		4.8			7.34					7.55

	Total Commercial Real Estate Debt			438,425		15.5			5.58					9.13
RMBS:
	Non-Agency:
		Senior prime 5/1 adjustable rate		222,988		7.9			5.27			45.00		6.43			21.66	%
		Junior prime		157,095		5.6			6.81			23.55		16.89			24.70
		Subprime		162,204		5.7			7.34			10.51		9.30			31.28
	Agency:
		3/1 hybrid adjustable rate		642,086		22.7			4.99			28.83		6.23			28.19
		5/1 hybrid adjustable rate		1,150,529		40.7			5.05			48.20		6.10			24.25

	Total RMBS			2,334,902		82.6			5.38			37.81		7.11			25.59
CDO Preferred Stock				4,634		0.1
Other ABS:
	Aircraft ABS			50,328		1.8			5.66					7.54

		Total Investments	$	2,828,289		100.0	%		5.41	%				7.42	%


(1)	All securities listed in this chart are carried at their estimated fair value other than real estate loans, which are carried at their cost. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition”.

(2)	Represents number of months before conversion to floating rate.

(3)	Represents the estimated percentage of principal that will be prepaid over the next 12 months based on historical principal paydowns.

We have invested a substantial portion of our capital in Agency Adjustable Rate RMBS pending the full implementation of our diversified investment strategy. We currently expect the portion of our portfolio invested in non-RMBS investments to be in the range of 15% to 40% of our assets in an effort to create a more diversified, less correlated portfolio of investments, which may include investments in non-U.S. dollar denominated securities, within 12 months of the completion of our initial public offering, subject to the availability of appropriate investment opportunities. However, our portfolio in its current form does not fully balance the interest rate or mark-to-market risks inherent in our RMBS investments, and we will not be able to eliminate all of our portfolio risk through asset allocation. Future dividends and capital appreciation are not guaranteed. Our investments will depend on prevailing market conditions and trends. We have not adopted any policy that establishes specific asset allocations among our targeted asset classes, and our targeted allocations will vary from time to time. As a result, we cannot predict the percentage of our assets that will be invested in each asset class or whether we will invest in other classes or investments. We generally expect to incur total leverage of up to five times the amount of our equity for most investments other than Agency Adjustable Rate RMBS,

which we anticipate we generally will lever up to 15 times the amount of our equity allocated to this asset class. We currently expect our overall long-term average portfolio leverage to be three to five times the amount of our equity. We may change our investment strategy and policies and the percentage of assets that may be invested in each asset class, or in the case of securities, in a single issuer, without a vote of our stockholders.

Because we will elect and intend to qualify to be taxed as a REIT and to operate our business so as to be exempt from regulation under the Investment Company Act, we are required to invest a substantial majority of our assets in qualifying real estate assets, such as agency RMBS, mortgage loans and other liens on and interests in real estate. Therefore, the percentage of our assets we may invest in other MBS, ABS, alternative assets and other types of instruments is limited, unless those investments comply with various federal income tax requirements for REIT qualification and the requirements for exclusion from Investment Company Act regulation.

As of June 30, 2006, we had entered into master repurchase agreements with 17 counterparties and as of such date, we had outstanding obligations under repurchase agreements with 13 counterparties totaling approximately $2,496.7 million with a weighted average borrowing rate of 5.24%. In addition to repurchase agreements, we rely on credit facilities with multiple counterparties for capital needed to fund our other investments, including a $31 million unsecured revolving credit facility with Signature Bank, as administrative agent, that we entered into on March 1, 2006. On November 30, 2005, we closed our first CDO financing transaction. See “Business — Our Financing Strategy — Term Financing-CDOs.” We have no restriction on the amount of leverage that we may use.

Our Business Strengths


	*Access to a Top-Ranked Investment Advisor with a Superior Track Record*

Hyperion Brookfield has a long history of excellent investment performance across MBS and ABS sectors and consistently has been recognized as one of the top investment advisors in these sectors. Hyperion Brookfield’s investment performance track record is discussed below under “Hyperion Brookfield’s Historical Performance.” From the firm’s inception in 1989 as a specialty MBS manager, Hyperion Brookfield has focused on subordinated RMBS, CMBS and ABS securities. As a result, it has developed substantial resources and proprietary technology to support its investment activities. The collective experience of the firm’s senior investment professionals includes investing in whole loans, structuring and rating RMBS transactions, selling and purchasing subordinated RMBS, CMBS and ABS, conducting originator and servicer reviews, as well as the modeling of cash flows and the valuation of excess spread. In the last five years, Hyperion Brookfield’s and its affiliates’ assets under management have grown from approximately $4.5 billion to approximately $19.7 billion as of June 30, 2006.

We believe that Hyperion Brookfield’s specialization in collateralized securities differentiates it from its peers. We believe that its stringent investment process, extensive experience in specialized sub-sectors and ability to access securities for its clients give it clear and distinct competitive advantages in the market. As a participant in the market for over ten years, Hyperion Brookfield has substantial scale and a wealth of historical data.


	*Access to Complementary Investment Skills of Leading Sub-Advisors*

Brookfield has over 25 years of experience operating and investing in real estate, hydroelectric, gas-and coal-fired power generating facilities and timber assets and, as of June 30, 2006 had approximately $56.7 billion of assets under management. Based on its long history of ownership within these asset classes and high transaction volume, we believe that Brookfield, as an owner/operator, has developed the specialized internal resources and expertise to properly evaluate opportunities in these asset classes and to manage them post-acquisition. We expect that Brookfield will, from time to time, through Brookfield Sub-Advisor, originate debt and equity investment opportunities and provide us with the opportunity to acquire assets from its extensive portfolio, to finance Brookfield portfolio assets and to co-invest with Brookfield in assets that meet our investment objectives.

Lewis Ranieri has been a dominant presence in real estate finance and capital markets for the last 30 years and has high level access to major residential and commercial real estate industry participants. He will continue to provide advice and insights into market developments and economic trends that draw from his unique position and knowledge of the industry.


	*Experienced Professionals and Senior Management Team*

The experience of Hyperion Brookfield Crystal River’s approximately 30 asset management professionals together with its sub-advisors provides us with investment opportunities across all of our target asset classes. Clifford Lai, our president and chief executive officer, and John Dolan, our chief investment officer, lead Hyperion Brookfield’s CMBS and RMBS/ ABS teams, respectively, and each has over 25 years of investment experience. The remainder of Hyperion Brookfield Crystal River’s asset management professionals have an average of 13 years of investment experience.

Crystal River’s strategic advisory committee, chaired by Lewis Ranieri, advises and consults with our board of directors and our officers with respect to the formulation and execution of our investment policies, financing and leveraging strategies and investment guidelines, as well as our investment portfolio holdings. The other members of the investment strategy committee are Clifford Lai and John Dolan of Hyperion Brookfield and Bruce Flatt and Bruce Robertson of Brookfield. Our board of directors consists of Bruce Robertson, who also serves as chairman of the board, Rodman Drake, Janet Graham, Harald Hansen, Clifford Lai, William Paulsen and Louis Salvatore. We believe our strategic advisory committee and our board of directors provides us with a competitive advantage through their experience, financial industry contacts and investment ideas.


	*Diversified Investment Strategy*

Subject to the availability of attractive investment opportunities, we expect that our MBS portfolio will be comprised of RMBS, CMBS and home equity ABS, thereby providing investors with diversification across MBS asset classes. In addition, we intend to complement our investments in MBS with a variety of other alternative asset classes to attempt to enhance returns to our stockholders and to reduce the overall risk of our portfolio in order to achieve a lower correlation of risk compared to MBS, although no assurances may be given as to the composition of our investment portfolio at any time. We expect to add further diversification and enhance the return of our core portfolio of real estate-related securities and loans by investing in alternative assets including commercial real estate, timber, and hydroelectric, gas- and coal-fired power generating facilities. Historically, these alternative assets have had a low correlation of return compared to MBS and other real estate loans. We believe that our affiliation with Hyperion Brookfield and our sub-advisors offers an attractive opportunity to invest in these alternative assets and leverage their expertise for our stockholders. The

percentage of assets that we may invest in higher-yielding fixed income asset classes is limited unless those investments comply with various federal income tax requirements for REIT qualification and the requirements for exclusion from Investment Company Act regulation.


	*Access to Hyperion Brookfield’s Infrastructure*

We have access to Hyperion Brookfield’s portfolio management infrastructure, which includes a comprehensive, sophisticated systems platform that has been developed through a combination of proprietary and third-party models and systems, based on Hyperion Brookfield’s broad investment experience. Through its extensive experience in investing in these financial products, Hyperion Brookfield has developed models based on historical data in order to estimate the lifetime prepayment speeds and lifetime credit losses for pools of mortgage loans. The models are based primarily on loan characteristics, such as loan-to-value ratios (LTV), credit scores, loan type, loan rate, property type, etc., and also include other qualitative factors such as the loan originator and servicer. For credit losses, the models also assume a certain level of stress to prevailing employment rates and housing prices. Once the models have been used to project the base case prepayment speeds and to project the base case cumulative loss, those outputs are used to create yield estimates and to project cash flows. In addition, we benefit from existing detailed policies and procedures for risk management, operations, transaction processing and recording, credit analysis, accounting, technology systems, legal and compliance and internal audit. We believe that an established infrastructure is crucial to the success of a complex investment vehicle such as a REIT. These systems directly support and are completely integrated with Hyperion Brookfield Crystal River’s portfolio management functions. Although as the parent company of our Manager, Hyperion Brookfield has an economic incentive to provide us with access to these systems to the extent that their provision will increase the management fees that we pay to our Manager through our improved performance, Hyperion Brookfield is not contractually obligated to provide us with access to any of these systems.


	*Relationships and Deal Flow of Hyperion Brookfield and Our Sub-Advisors*

Investing in our targeted asset classes is highly competitive, and our Manager competes with many other investment managers for profitable investment opportunities in these areas. We believe that the combined and complementary strengths of Hyperion Brookfield and our sub-advisors in this regard give us a competitive advantage over other asset managers. We intend to capitalize on the deal-sourcing opportunities that we believe Hyperion Brookfield, Brookfield Sub-Advisor and Ranieri & Co. each bring to us as a result of their investment experience in our targeted asset classes, record of past successes and personal networks of contacts in the financial community, including real estate investors, investment banks, lenders and other financial intermediaries and sponsors. Hyperion Brookfield currently sources many of its investments, and we expect Hyperion Brookfield, Brookfield Sub-Advisor and Ranieri & Co. to source many of our investments, through their close relationships with a large and diverse group of financial intermediaries that each of them has developed over the course of the last several years through their prior investing and financing transactions with other industry participants.

Brookfield and its affiliates currently source investments through the relationships they have created as a longstanding investor and operator in mortgages and other real estate debt, real estate, hydroelectric, gas- and coal-fired power generating facilities and timber sectors. With access to Brookfield management teams located in offices throughout North America, we believe that Brookfield Sub-Advisor is well positioned to identify, evaluate and manage investment opportunities for us in both the United States and Canada.


	*Alignment of Interests of Hyperion Brookfield Crystal River and Our Stockholders*

Our Manager, Hyperion Brookfield Crystal River, has agreed to receive at least 10% of its incentive management fee under our management agreement in shares of our common stock and has also generally agreed not to transfer those shares prior to one year after the date they are paid, subject to certain ownership limitations. In addition, we issued to our Manager 84,000 shares of restricted stock and we granted to our Manager options to purchase 126,000 shares of our common stock, with an exercise price equal to $25.00 per share, representing in the aggregate approximately 0.8% of the outstanding shares of our common stock on a fully-diluted basis. On March 15, 2006, one-third of these shares of restricted stock and the shares underlying the options vested or became exercisable, and the remainder will vest or become exercisable in equal annual installments on March 15, 2007 and March 15, 2008. These shares and options were subsequently transferred to certain of our Manager’s officers and employees, certain of our directors and other individuals associated with Hyperion Brookfield or Brookfield and their respective affiliates who provide services to us. We believe this investment provides an incentive for Hyperion Brookfield Crystal River to operate our company with a view towards maximizing returns to our stockholders.

Our Formation and Structure

We were organized on January 25, 2005 by Hyperion Brookfield, who may be deemed to be our promoter, and completed a private offering of our common stock in March 2005, in which we raised net proceeds of approximately $405.6 million. In our March 2005 private offering, Deutsche Bank Securities Inc. and Wachovia Capital Markets, LLC served as the initial purchasers/placement agents. In our March 2005 private offering, an indirect subsidiary of Brookfield purchased 800,000 shares, or 3.2% (assuming all outstanding options have vested and are exercised), of our common stock and certain of our executive officers, directors and members of our strategic advisory committee, and certain executive officers of Hyperion Brookfield Crystal River and Hyperion Brookfield that provide services to us collectively purchased 183,800 shares, or 0.7% (assuming all outstanding options have vested and are exercised), of our common stock. In addition, upon completion of our March 2005 private offering, we issued to Hyperion Brookfield Crystal River, and it subsequently transferred to certain of its officers and employees, certain of our directors and other individuals associated with Hyperion Brookfield or Brookfield and their respective affiliates and employees who provide services to us, 84,000 shares of restricted stock and we granted to Hyperion Brookfield Crystal River, and it subsequently transferred to certain of its officers and employees, certain of our directors and other individuals associated with Hyperion Brookfield or Brookfield and their respective affiliates who provide services to us, options to purchase 126,000 shares of our common stock with an exercise price of $25.00 per share, representing in the aggregate approximately 0.8% of the outstanding shares of our common stock as of the date of this prospectus, assuming all outstanding options have vested and are exercised. As of the date of this prospectus, Hyperion Brookfield, Brookfield, Hyperion Brookfield Crystal River and their respective affiliates and employees who provide services to us, including our executive officers, members of our strategic advisory committee and certain of our directors, as well as our independent directors, will collectively own 2,105,800 shares of our common stock, including 1,105,800 shares that may be sold by selling stockholder listed in this prospectus, representing 8.4% of our outstanding shares of common stock, and have options to purchase an additional 130,000 shares of our common stock representing an additional 0.5% of our outstanding shares of common stock, in each case, assuming all outstanding options have vested and are exercised.

The following chart illustrates the organizational structure of our company.

Our Investment Strategy


	*Relative Value Philosophy*

Hyperion Brookfield Crystal River’s and our strategic advisory committee’s investment strategy is consistent with Hyperion Brookfield’s investment philosophy, which is predicated on the concept of relative value. Hyperion Brookfield believes the most significant opportunities for out-performance exist between and within sectors, as well as among individual securities. The investment process begins with a macroeconomic assessment of the market. Included in the market assessment is the analysis of the interest rate environment, the phase of the real estate

cycle, consumer credit trends, supply and demand relationships, as well as a review of any recently released or pending economic data. Hyperion Brookfield seeks to determine the relative merits of sectors by combining the analysis of historical relationships with the firm’s anticipated outlook for the market. Portfolio managers evaluate developments in each sector, along with current offerings, recent transactions and market clearing levels and yield spread levels to provide a relative value outlook. The portfolio manager will closely examine yield spread histories between sectors, credit spread histories within sectors, fundamental credit, and option-adjusted spread analyses to examine call features and options. Hyperion Brookfield’s analytical platform is designed not only to identify technical and fundamental changes in various yield relationships, but also to quantify whether such changes in relative value are temporary, and therefore represent an investment opportunity, or are more permanent. This analysis is utilized to determine optimal areas to allocate credit risk in the portfolio across sectors and maturities and to maximize yield and total return expectations. The portfolio manager will analyze the risks of the various sectors, specifically, the outlook for delinquencies, housing affordability, consumer debt, collateral value appreciation, and loss severities for residential and commercial property. Hyperion Brookfield’s investment philosophy has historically been successful at identifying and exploiting relative value opportunities over a complete market cycle.

The most important component of Hyperion Brookfield’s relative value investment strategy is security selection, a process that is the result of both quantitative and qualitative inputs, as well as the experience of the portfolio managers. Members of the investment team, utilizing Hyperion Brookfield’s proprietary analytics, determine the relative strengths of various securities based on applicable criteria such as issuer, issue, vintage, credit rating, structure, and geographic exposure. The security selection process focuses on four primary areas: the analysis of credit strength, the analysis of security structure, the determination of relative value, and a surveillance function. The analysis of credit strength entails the assessment of such attributes as a security’s loan-to-value ratio, vintage and issuer. Security structure involves the comprehensive examination of a security’s structural attributes such as senior/subordinated, single asset, conduit, large loan, as well as its yield maintenance provisions and prepayment lock-outs. After these first two analyses, the relative value of a security versus other candidates is determined through the evaluation of such aspects as yield spread, liquidity, and subordination levels. Finally, after purchase, a surveillance function begins that uses such analytical tools as Hyperion Brookfield’s proprietary credit filters and shortfall model to determine whether a security continues to perform as expected.

Our objective is to provide attractive returns to our investors through a combination of dividends and capital appreciation. To achieve this objective, we opportunistically invest in a diversified investment portfolio of real estate securities and various other asset classes. We believe that this strategy permits us to be opportunistic and invest in those assets that generate attractive risk-adjusted returns, subject to maintaining our REIT status and exclusion from regulation under the Investment Company Act. Accordingly, we have not adopted policies that require us to establish or maintain any specific asset allocations, and our targeted allocations will vary from time to time as determined by our board of directors.

We benefit from the full range of experience and depth of resources developed by Hyperion Brookfield and its affiliates in managing approximately $19.7 billion of assets as of June 30, 2006. We believe this experience allows us to create a diversified portfolio that will provide attractive returns to investors. We rely on Hyperion Brookfield’s expertise in identifying assets within our target asset classes that will have limited price volatility risk, yet will provide consistent, stable margins. We expect to make portfolio allocation decisions based on various factors, including expected cash yield, relative value, risk-adjusted returns, current and projected credit fundamentals, current and projected macroeconomic considerations, current and projected supply and demand, credit and market risk concentration limits, liquidity, cost of

financing and financing availability, as well as maintaining our REIT qualification and exclusion from regulation under the Investment Company Act.

Because we will elect and intend to qualify to be taxed as a REIT and to operate our business so as to be excepted from regulation under the Investment Company Act, we are required to invest a substantial majority of our assets in qualifying real estate assets, such as certain types of MBS and loans secured by mortgages on real estate. Therefore, the percentage of our assets we may invest in ABS, leveraged finance instruments and other types of instruments will be limited, unless those investments comply with various federal income tax requirements for REIT qualification and the requirements for an exemption from regulation under the Investment Company Act.


	*Our Target Asset Classes*

Our targeted asset classes and the principal investments we expect to make in each are as follows:


Asset Class		Principal Investments

MBS

	— RMBS	• Agency ARMS
		• Non-Agency ARMS
		• Non-Conforming Loans
		• Other RMBS

	— CMBS	• Investment Grade CMBS (Senior and Subordinated)
		• Below-Investment Grade CMBS (Rated and Non-Rated)

Mortgages and Other Real Estate Debt		• Whole Mortgage Loans
		• Bridge Loans
		• B Notes
		• Mezzanine Loans
		• Land Loans
		• Construction Loans
		• Construction Mezzanine Loans

Commercial Real Estate		• Direct Property Ownership
		• REIT Common and Preferred Stock Investments
		• Preferred Equity Investments
		• Joint Ventures

Other ABS		• CDOs
		• NIMs
		• Consumer ABS
		• Aircraft ABS


Asset Class		Principal Investments

Alternative Assets		• Hydroelectric, Gas- and Coal-Fired Power Generating Facilities
		• Timber
		• Other Equity Investments

Although we intend to focus on the investments described above, our investment decisions depend on prevailing market conditions. We have not adopted any policy that establishes specific asset allocations among our targeted asset classes. As a result, we cannot predict the percentage of our assets that will be invested in each asset class or whether we will invest in other classes or investments. Our board of directors will not review all of our proposed investments, but will review our portfolio at least quarterly and will review our investment strategy and policies at least annually. We may change our investment strategy and policies and the percentage of assets that may be invested in each asset class, or in the case of securities, in a single issuer, without a vote of our stockholders.

The following discusses the principal investments we have made and that we expect to make.


	*Residential Mortgage-Backed Securities*

We intend to continue to invest in Agency and Non-Agency MBS. Agency MBS are securities that represent participations in, are secured by or payable from, mortgage loans secured by real residential property. These securities include, but are not limited to:


	•	Agency mortgage pass-through certificates, which are securities issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac; and

	•	Agency CMOs, which are debt obligations issued by Ginnie Mae, Fannie Mae or Freddie Mac that are backed by mortgage pass-through securities and are evidenced by a series of bonds or certificates issued in multiple classes. The principal and interest on the underlying mortgage assets may be allocated among the several classes of a series of CMOs in many ways.

Non-Agency MBS are debt obligations issued by private originators of residential mortgage loans. Non-Agency RMBS generally are issued as CMOs, and are backed by pools of whole

100

mortgage loans or by mortgage pass-through certificates. Non-Agency RMBS generally are securitized in senior and subordinated structures, or structured with one or more of the types of credit enhancement. In senior and subordinated structures, the senior class investors have greater protection against potential losses on the underlying mortgage loans or assets than subordinated class investors, who assume the first losses if there are defaults on the underlying loans. We expect to enter into interest rate swaps, futures, options or other strategies to reduce the impact of changes in interest and financing rates for these investments.

ARMS have interest rates that reset periodically, typically every six or 12 months. Because the interest rates on ARMS adjust periodically based on market conditions, ARMS tend to have interest rates that do not significantly deviate from current market rates. This, in turn, can cause ARMS to have less price sensitivity to interest rates.

Hybrid ARMS have interest rates that have an initial fixed period (typically two, three, five, seven or ten years) and thereafter reset at regular intervals in a manner similar to traditional ARMS. Prior to the first interest rate reset date, hybrid ARMS have a price sensitivity to interest rates similar to that of a fixed-rate mortgage with a maturity equal to the period prior to the first reset date. After the first interest rate reset date occurs, the price sensitivity of a hybrid ARM resembles that of a non-hybrid ARM in that it does not significantly deviate from current market rates. However, because many hybrid ARMS are structured with a relatively short initial fixed interest rate period, even during that fixed rate period, the price sensitivity of hybrid ARMS may be low.

The investment characteristics of pass-through RMBS differ from those of traditional fixed-income securities. The major differences include the payment of interest and principal on the RMBS, as described above, and the possibility that principal may be prepaid on the RMBS at any time due to prepayments on the underlying mortgage loans. These differences can result in significantly greater price and yield volatility than is the case with traditional fixed-income securities. On the other hand, the guarantees on agency RMBS by Fannie Mae, Freddie Mac and, in the case of Ginnie Mae, the U.S. government, provide reasonable assurance that the investor will be ultimately repaid the principal face amount of the security.

Mortgage prepayments are affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage, and other social and demographic conditions. Generally, prepayments on pass-through RMBS increase during periods of falling mortgage interest rates and decrease during periods of stable or rising mortgage interest rates. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield on our portfolio.

We currently leverage our investments in agency ARMS in the range of up to 15 times the amount of our equity allocated to this asset class. We leverage our other RMBS investments in the range of 0 to 5 times the amount of our equity allocated to the asset class.

As of June 30, 2006, we had approximately $2,334.9 million in RMBS with a weighted average coupon rate of 5.38%.


	*Commercial Mortgage-Backed Securities*

We invest in CMBS which are secured by, or evidence ownership interests in, a single commercial mortgage loan, or a partial or entire pool of mortgage loans secured by commercial properties. These securities may be senior, subordinated, investment grade or non-investment grade. We expect the majority of our CMBS investments to be rated by at least one nationally recognized rating agency, and to consist of securities that are part of a capital structure or securitization where the rights of such class to receive principal and interest are subordinated to senior classes but senior to the rights of lower rated classes of securities. We generally intend

101

to invest in CMBS that will yield high current interest income and where we consider the return or principal to be likely. We intend to acquire CMBS from private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, finance companies, investment banks and other entities. We expect to enter into interest rate swaps, futures, options or other strategies to reduce the impact of changes in interest and financing rates for these investments.

The yields on CMBS depend on the timely payment of interest and principal due on the underlying mortgage loans and defaults by the borrowers on such loans may ultimately result in deficiencies and defaults on the CMBS. In the event of a default, the trustee for the benefit of the holders of CMBS has recourse only to the underlying pool of mortgage loans and, if a loan is in default, to the mortgaged property securing such mortgage loan. After the trustee has exercised all of the rights of a lender under a defaulted mortgage loan and the related mortgaged property has been liquidated, no further remedy will be available. However, holders of relatively senior classes of CMBS will be protected to a certain degree by the structural features of the securitization transaction within which such CMBS were issued, such as the subordination of the relatively more junior classes of the CMBS.

We currently leverage our investments in CMBS in the range of 0 to 5 times the amount of our equity allocated to the asset class. As of June 30, 2006, we had approximately $303.1 million in CMBS with a weighted average coupon rate of 5.06%.


	*Whole Mortgage Loans and Bridge Loans*

We may originate or purchase whole loans secured by first mortgages which provide long-term mortgage financing to commercial property developers and owners that generally have maturity dates ranging from three to ten years. We also may originate or purchase first mortgage loans that provide interim or bridge financing until permanent mortgage financing can be obtained. The maturity dates on bridge loans are generally less than five years. In some cases, we may originate and fund a first mortgage loan with the intention of selling the senior tranche and retaining the B Note or mezzanine loan tranche. As of June 30, 2006, we had originated 100% of the aggregate principal amount of whole mortgage loans and bridge loans that we held.

We currently expect to leverage our investments in whole mortgage loans and bridge loans in the range of 0 to 8 times the amount of our equity allocated to the asset class. As of June 30, 2006, we had approximately $99.1 million in whole loans with a weighted average coupon rate of 6.35%.


	*Commercial Real Estate Subordinated Loans*

We intend to continue to invest in commercial real estate subordinated loans, which we refer to as B Notes, that may be rated by at least one nationally recognized rating agency. A B Note is typically a privately negotiated loan that is:


	•	secured by a first mortgage on a single large commercial property or group of related properties; and

	•	subordinated to an A Note secured by the same first mortgage on the same property.

The subordination of a B Note typically is evidenced by an inter-creditor agreement with the holder of the related A Note.

B Notes share certain credit characteristics with subordinated CMBS, in that both reflect an interest in a first mortgage and are subject to more credit risk with respect to the underlying mortgage collateral that the corresponding senior securities or the A Notes, as the case may be.

102

As opposed to a typical CMBS secured by a large pool of mortgage loans, B Notes typically are secured by a single property, and the associated credit risk is concentrated in that single property. B Notes also share certain credit characteristics with second mortgages, in that both are subject to more credit risk with respect to the underlying mortgage collateral than the corresponding first mortgage or the A Note, as the case may be. We intend to acquire B Notes in negotiated transactions with the originators, as well as in the secondary market.

We currently expect to leverage our investments in B Notes in the range of 0 to 4 times the amount of our equity allocated to the asset class. As of June 30, 2006, we had approximately $9.0 million in B Notes with a coupon rate of 8.69%.


	*Mezzanine Loans*

We may originate or purchase mezzanine loans which are subordinated to a first mortgage loan on a property and are senior to the borrower’s equity in the property. These loans are made to the owner of the property and are secured by pledges of ownership interests in the property and/or the property owner. The mezzanine lender can foreclose on the pledge interests and thereby succeed to ownership of the property subject to the lien of the first mortgage. As of June 30, 2006, we had originated 100% of the aggregate principal amount of mezzanine loans that we held.

We currently expect to leverage our investments in mezzanine loans in the range of 0 to 3 times the amount of our equity allocated to the asset class. As of June 30, 2006, we had $6.0 million in mezzanine loans with a coupon rate of 10.58%.


	*Construction Loans and Construction Mezzanine Loans*

We also may originate, or acquire participations in, construction or rehabilitation loans on commercial properties that generally provide 85% to 90% of total project costs and are secured by first lien mortgages. Alternatively, we may make mezzanine loans to finance construction or rehabilitation where our security is subordinate to the first lien mortgage. Construction loans generally would provide us with fees and interest income at risk adjusted rates and potentially a percentage of net operating income or gross revenues from the property, payable to us on an ongoing basis, and a percentage of any increase in value of the property, payable upon maturity or refinancing of the loan. As of June 30, 2006, we had originated 100% of the aggregate principal amount of construction loans and construction mezzanine loans that we held.

We currently expect to leverage our investments in construction loans and construction mezzanine loans in the range of 0 to 4 times the amount of our equity allocated to the asset class. As of June 30, 2006, we had approximately $21.3 million in construction loans with a weighted average coupon rate of 10.93%.


	*Direct Real Property Ownership*

We also may make direct investments in income-producing commercial real estate either within or outside the United States. Such investments may include office, multi-family residential, retail and industrial properties. We may acquire ownership of commercial property that we will own and operate or otherwise acquire controlling and non-controlling interests in commercial property through joint ventures and similar arrangements.

We currently expect to leverage our direct real estate investments in the range of 3 to 8 times the amount of our equity allocated to the asset class. As of June 30, 2006, we had $0 of direct investments in real property.

103


	*Preferred Equity Investments*

We may make preferred equity investments in entities that directly or indirectly own income-producing commercial real estate. These preferred equity investments are not secured, but holders have priority relative to common equity holders on cash flow distributions and proceeds of capital events. In addition, preferred holders can often enhance their position and protect their equity position with lender-type covenants that limit the entity’s activities and grant us the right to control the property after default subject to the lien of the first mortgage.

We currently expect to leverage our preferred equity investments in the range of 0 to 5 times the amount of our equity allocated to the asset class. As of June 30, 2006, we had $0 in preferred equity investments.


	*REIT Common and Preferred Stock Investments*

We may invest in public and private issuances of common and preferred stock issued by REITs.

We currently expect to leverage our investments in REIT preferred stock in the range of 0 to 3 times the amount of our equity allocated to the asset class, subject to applicable margin requirements. As of June 30, 2006, we had $0 of investments in REIT common stock and REIT preferred stock.


	*Net Interest Margin Securities*

We may invest in NIMS, which are notes that are payable from and secured by excess cash flow that is generated by MBS or home equity loan-backed securities, or HELs, after paying the debt service, expenses and fees on such securities. The excess cash flow represents all or a portion of a residual that is generally retained by the originator of the MBS or HELs. Because the residual is illiquid, the originator will monetize the position by securitizing the residual and issuing a NIM, usually in the form of a note that is backed by the excess cash flow generated in the underlying securitization. In other words, a NIM represents the securitization of the excess cash flow (or excess stream of income) in a senior security backed by a pool of mortgages or HELs. NIMs may be more sensitive to increases in interest rates and a weaker economy than the underlying ABS or MBS securities.

We currently expect to leverage our investments in NIMs in the range of 2 to 4 times the amount of our equity allocated to the asset class. As of June 30, 2006, we had $0 of investments in NIMs.


	*Consumer Asset-Backed Securities*

We expect to continue to invest in investment grade and non-investment grade consumer ABS. Consumer ABS are generally securities for which the underlying collateral consists of assets such as home equity loans, credit card receivables and auto loans. Aircraft ABS are generally collateralized by aircraft leases. Issuers of consumer and aircraft ABS generally are special purpose entities owned or sponsored by banks and finance companies, captive finance subsidiaries of non-financial corporations or specialized originators such as credit card lenders.

We expect that a significant amount of the consumer and aircraft ABS that we hold at any time will be rated between A1/A — and B1/B+ and will have an explicit rating from at least one nationally-recognized statistical rating agency.

104

We currently leverage our investments in consumer ABS in the range of 0 to 15 times the amount of our equity allocated to the asset class. As of June 30, 2006, we had approximately $50.3 million in aircraft ABS.


	*Collateralized Debt Obligations*

We may continue to invest in the debt and equity tranches of CDOs to gain exposure to corporate bonds, ABS and other instruments. Because of Hyperion Brookfield’s experience in structuring and managing CDOs, we believe we have a competitive advantage in analyzing investment opportunities in CDOs.

In general, CDOs are issued by special purpose vehicles that hold a portfolio of debt obligation securities. The CDO vehicle issues tranches of debt securities of different seniority, and equity to fund the purchase of the portfolio. The debt tranches are typically rated based on collateral quality, diversification and structural subordination. The equity securities issued by the CDO vehicle are the “first loss” piece of the CDO vehicle’s capital structure, but they are also generally entitled to all residual amounts available for payment after the CDO vehicle’s obligations to the debt holders have been satisfied. Some CDO vehicles are “synthetic,” in which the credit risk to the collateral pool is transferred to the CDO vehicle by means of a credit derivative such as a credit default swap.

We currently expect to leverage our investments in CDOs in the range of 1 to 3 times the amount of our equity allocated to the asset class. As of June 30, 2006, we had approximately $4.6 million in preferred equity of CDOs.


	*Power and Timber*

We intend to make investments in income-producing timber and power generation assets. These investments may be in the form of either debt or equity interests. We may acquire these investments directly or participate with others through the syndication of debt positions, or in partnerships with other investors in equity ownership. These investments may be made in Brookfield’s major geographic focus, namely, the United States and Canada, or elsewhere. Investments in power generation may relate to electricity generating facilities, such as hydroelectric, gas- or coal-fired power generating facilities. Investments in timber may be through freehold or leasehold interests, and will vary with respect to timber type, including hardwood and softwood, and age distribution.

We currently expect to leverage our power and timber investments in the range of 0 to 8 times the amount of our equity allocated to the asset class. As of June 30, 2006, we had $0 of investments in power or timber.


	*Other Equity Investments*

To a lesser extent, subject to maintaining our qualification as a REIT, we also may invest from time to time in equity securities, which may or may not be related to real estate. These investments may include direct purchases of private equity as well as purchases of interests in private equity funds. We will follow a value-oriented investment approach and focus on the anticipated future cash flows generated by the underlying business, discounted by an appropriate rate to reflect both the risk of achieving those cash flows and the alternative uses for the capital to be invested. We will also consider other factors such as the strength of management, the liquidity of the investment, the underlying value of the assets owned by the issuer, and prices of similar or comparable securities.

105

We currently expect to hold all, or at least a significant portion, of our other equity investments through our TRS. To the extent that we do so, the income from such investments will be subject to corporate income tax.

We currently expect to leverage our other equity investments in the range of 0 to 3 times the amount of our equity allocated to the asset class. As of June 30, 2006, we had $0 of other equity investments.


	*Other Investments*

As discussed above, we may invest opportunistically in other types of investments within Hyperion Brookfield’s core competencies, including those discussed below.

High Yield Corporate Bonds, Investment Grade Corporate Bonds and Related Derivatives. High yield corporate bonds are debt obligations of corporations and other non-governmental entities rated below Baa or BBB. Investment grade corporate bonds are debt obligations of corporations and other non-governmental entities rated Baa and BBB or higher. To the extent we invest in these bonds, we expect that a material amount of the holdings will not be secured by mortgages or liens on assets. A substantial portion of the investment grade corporate bonds we hold may have an interest-only payment schedule, with the principal amount staying outstanding and at risk until the bond’s maturity.

Government Bonds and Related Derivatives. We may invest in bonds issued or guaranteed by the U.S. government or any instrumentality thereof, as well as bonds of major non-U.S. governments and their instrumentalities. We may invest in these bonds both for cash management purposes and as part of hedging and arbitrage strategies that involve the use of interest rate derivatives, such as swaps, options, caps, floors and futures.

Other Fixed Income-Related Instruments. We may engage in the purchase and sale of derivative instruments, such as exchange-listed and over-the-counter put and call options on securities, financial futures, equity indices, and other financial instruments, either as outright investments, for hedging purposes or in connection with other strategies.

We likely will hold at least some of the corporate bonds, government bonds and derivative instruments in which we invest for strategic purposes through our TRS. To the extent that we do so, the income from such bonds and instruments will be subject to corporate income tax.

Investment Sourcing

We recognize that investing in our targeted asset classes is highly competitive, and that Hyperion Brookfield Crystal River will compete with many other investment managers for profitable investment opportunities in these areas. Accordingly, we believe the ability to identify and source such opportunities is very important to our success, and distinguishes us from many REITs with a similar focus to ours. We think that the combined and complementary strengths of Hyperion Brookfield and Brookfield Sub-Advisor in this regard give us a competitive advantage over such REITs.

Hyperion Brookfield currently sources many of its investments, and Hyperion Brookfield Crystal River sources many of our investments, through Hyperion Brookfield’s close relationships with a large and diverse group of financial intermediaries, ranging from major investment banks and brokerage firms to specialty dealers and financial sponsors. On a combined basis, these firms extensively cover our targeted asset classes. Hyperion Brookfield also sources many investments from traditional sources, using proprietary deal screening procedures and credit analytics.

106

Brookfield has over 25 years of experience operating and investing in real estate, hydroelectric, gas- and coal-fired power generating facilities and timber assets. Based on its long history of ownership within these asset classes and its high transaction volume, we believe that Brookfield, as an owner/operator, has developed the specialized internal resources and expertise to properly evaluate opportunities in these asset classes and to manage them. We expect that Brookfield will, from time to time, through Brookfield Sub-Advisor, provide us with the opportunity to acquire assets from its extensive portfolio, to finance Brookfield’s and its affiliates’ portfolio assets and to co-invest with Brookfield and its affiliates in assets that meet our investment objective.

Investment Process

To evaluate, invest and manage our investments in RMBS, Other ABS and Real Estate, Hyperion Brookfield Crystal River utilizes Hyperion Brookfield’s proprietary analytical methods in performing scenario analysis to forecast cash flows and expected total returns under different interest rate assumptions. Simulation analysis is also performed to provide a broader array of potential patterns of return over different interest rate scenarios. Such analysis may be applied to individual securities or to an entire portfolio. Hyperion Brookfield Crystal River also performs relative value analyses of individual securities based on yield, credit rating, average life, expected duration and option-adjusted spreads. Other considerations in Hyperion Brookfield Crystal River’s investment process include analysis of fundamental economic trends, suitability for investment by a REIT, consumer borrowing trends, home price appreciation and relevant regulatory developments.

Our investments in real estate assets and other alternative asset classes will be recommended and, if approved by our board of directors, closed and managed by Brookfield Sub-Advisor.

To evaluate, invest and manage investments in real estate, Brookfield Sub-Advisor, through its affiliates, will utilize its experience and strong track record as an operator of commercial properties. Relying on Brookfield’s local presence in offices in the United States, Canada, Brazil and the United Kingdom, we expect that Brookfield Sub-Advisor is well positioned to underwrite and analyze real estate investments throughout North America, including the analysis of market conditions and building specific issues (including lease and structural analysis). Other considerations in the investment process will include valuation and analyses of economic conditions and demographic trends as well as supply and demand considerations.

To evaluate, invest and manage investments in hydroelectric, gas- and coal-fired power generating facilities, Brookfield Sub-Advisor, through its affiliates, will utilize its experience as an owner and operator of hydroelectric, gas- and coal-fired power generating facilities. With Brookfield’s operations in Canada, the United States and Brazil, we expect that Brookfield Sub-Advisor is well-positioned to underwrite and analyze investment opportunities in these regions including an analysis of current market conditions and property specific issues, such as in the case of hydro-electric generating facilities, structural assessments of dams and generating facilities, water flows and water storage capability, water use agreements, and turbines. Other considerations in the investment process include, but are not limited to, an analysis of market supply and demand, and an evaluation of the relative competitiveness of the sources of supply in the market, including but not limited to, as applicable, nuclear, coal-fired, gas-fired, hydroelectric, wind and emerging alternative forms of electricity generation.

Brookfield, through its affiliates, owns and manages timber operations in Canada, the United States and Brazil. Relying on Brookfield’s presence in these markets, we believe that Brookfield Sub-Advisor has the capability to underwrite and analyze investment opportunities for us. Considerations in the investment process include but are not limited to, the forest density, age

107

and species distribution, growth rates, which can vary by species and geographic region, proximity to and depth of markets, and anticipated harvesting and silviculture costs.

Hyperion Brookfield’s Historical Performance

Hyperion Brookfield has a successful 17-year history of acquiring and managing MBS and ABS through an investment philosophy predicated on the concept of relative value, an investment philosophy that involves a macroeconomic assessment of the fixed income markets to determine the relative attractiveness of investment sectors and sub-sectors, by taking into account the effect of changes in yield relationships and various factors that indicate that they may be temporary and represent an investment opportunity. See “Business — Our Investment Strategy — Relative Value Philosophy” for further information regarding the concept of relative value. Hyperion Brookfield was founded in 1989 by Lewis Ranieri, an MBS market pioneer and former Vice Chairman of Salomon Brothers, Inc. As of June 30, 2006, Hyperion Brookfield employed approximately 85 professionals. Hyperion Brookfield is dedicated to providing investment management services for institutional clients and mutual funds through the management of core fixed income portfolios as well as separately managed portfolios of RMBS, CMBS and ABS.

As of June 30, 2006, Hyperion Brookfield and its affiliates managed approximately $19.7 billion in assets for more than 80 institutional clients, including Crystal River, four closed-end investment companies and three CDOs. Hyperion Brookfield’s four managed closed-end investment companies include two NYSE-listed funds, The Hyperion Strategic Mortgage Income Fund and Hyperion Total Return Fund.

The following table sets forth Hyperion Brookfield’s historical investment performance with respect to its assets under management in its Enhanced MBS and high yield CMBS categories. These asset classes are those in which Hyperion Brookfield invests that are similar in nature to the assets in which we currently invest and intend to continue to invest. As of June 30, 2006, Enhanced MBS and high yield CMBS comprised 25.1% of Hyperion Brookfield’s assets under management, or AUM, and approximately 29.9% of our investment portfolio, or 81.7% of our portfolio not invested in Agency ARMS as of that date. However, the investment returns shown below generally were obtained using much lower levels of financial leverage than what we intend to use. Past performance is not indicative of future results. In addition, this information is a reflection of Hyperion Brookfield’s historical performance and not a guarantee or prediction of the return that Hyperion Brookfield or Hyperion Brookfield Crystal River will achieve for us. The percentile rankings noted below reflect the performance of Hyperion Brookfield against other asset managers for the same period. For example, performance that is reflected in the 46th percentile means that Hyperion Brookfield’s performance ranked in the top 46% of all asset managers with that investment strategy for the period noted.

PSN Mortgage-Backed Universe — percentile rankings (as of 6/30/2006)


	Hyperion Enhanced					Hyperion High Yield
	MBS					CMBS

	Gross					Gross
	Return			Percentile		Return			Percentile

1 year		0.69	%		46		7.29	%		1
3 year		3.91	%		1		10.54	%		1
5 year		6.24	%		1		13.69	%		1
10 year		7.97	%		1

108

accuracy of the information provided by PSN. All rates of return are annualized. Performance figures shown are gross of fees and do not take into account advisory fees or transaction costs. These costs reduced actual returns. Index returns do not reflect any management fees, transaction costs or expenses.

The following tables set forth Hyperion Brookfield’s investment track record for a composite of its accounts managed in its High Yield CMBS and Enhanced MBS strategies, which are similar to our CMBS and Non-Agency RMBS investments, respectively. No selective periods of performance have been used. Valuations and returns are computed and stated in U.S. dollars. The returns are computed using time-weighted total rates of return. A time-weighted rate of return eliminates the distorting effects created by inflows of new money and is the most common method used to compare the returns of investment managers. The effect of varying cash inflows is eliminated by assuming a single investment at the beginning of a period and measuring the growth or loss of market value to the end of that measurement period. Leverage has not been employed. Accounting is based on trade date. Accrued income is calculated for all fixed income securities which have been held at any time during the month. The daily interest accrual is computed and accumulated as an income flow on each day that the security is held. Accrual accounting recognizes all revenues and expenses in the period they are incurred. Unlike cash accounting, the transaction may not always occur when the physical cash is received. Cash flows generated from contributions and withdrawals are accumulated as capital flows at the end of the day on which they occur. Past performance is not indicative of future results. In addition, this information is a reflection of Hyperion Brookfield’s historical performance and not a guarantee or prediction of the return that Hyperion Brookfield or Hyperion Brookfield Crystal River will achieve for us.

Hyperion Brookfield’s High Yield CMBS strategy is to invest primarily in commercial mortgage-backed securities, rated below-investment grade, with the objective of outperforming the Lehman High Yield CMBS Index, which is comprised of below-investment grade rated CMBS securities. The Index data has been taken from published sources. Index performance returns do not reflect management fees or expenses. Performance results are presented before management and custodial fees but after all trading commissions. All returns are represented gross of withholding taxes.

Hyperion Brookfield High Yield CMBS Composite

Performance Disclosures


	Gross Rate			Net Rate of			Benchmark					Composite		Composite		% of		Total Firm
	of Return(1)			Return(2)			Return(3)			Number of		Dispersion(5)		Assets		Firm		AUM
Year	(%)			(%)			(%)			Portfolios(4)		(%)		($ millions)		AUM(6)		($ millions)

2006 YTD as of 6/30/06		4.97			4.78			2.42			1		0		187		1		19,652
2005		10.75			10.32			12.95			1		0		178		1		17,619
2004		17.32			16.96			16.70			3		4.78		209		2		12,920
2003		5.53			5.16			3.61			3		5.67		212		2		8,869
2002		25.60			25.08			24.42			1		0		180		2		8,156
2001		11.11			10.61			11.14			1		0		128		2		7,076
2000		18.58			18.05			22.44			1		0		115		2		5,705
1999		0.95			0.59			3.44			2		0.28		126		3		4,673
1998		(6.38	)		(6.71	)		(9.89	)		2		0.43		104		2		5,211
3/97-12/97 (7)		14.38			14.18			22.83			2		1.36		101		2		6,493

109


(1)	Gross performance results are presented before management and custodial fees but after all trading commissions.

(2)	Net performance is calculated using the fee schedule of the portfolios comprising the composite.

(3)	The benchmark is the Lehman High Yield CMBS Index, which is composed of below-investment-grade rated CMBS securities. The index data has been taken from published sources. Index performance returns do not reflect management fees or expenses.

(4)	Number of portfolios or accounts invested only in Hyperion Brookfield’s High Yield CMBS strategy. In accordance with the Global Investment Performance Standards, performance disclosures do not include any portfolio or account partially invested in such strategy, including Crystal River.

(5)	The composite dispersion is calculated on a high-low basis by averaging monthly dispersion in the composite for each calendar year. Dispersion is the mathematical difference between returns on multiple portfolios. A lower dispersion means that there was a lower variance among the performance of the multiple portfolios, while a higher dispersion indicates larger variance among the various portfolio returns.

(6)	AUM refers to Hyperion Brookfield’s assets under management.

(7)	April 1997 is the inception date of the Hyperion Brookfield High Yield CMBS Composite. For periods of less than one year, returns are not annualized.

Hyperion Brookfield’s Enhanced MBS strategy is to invest primarily in credit sensitive MBS — specifically, Non-Agency MBS and real estate-related asset-backed securities — with the objective of capitalizing on relative value opportunities and outperforming the Lehman MBS Index, which is an unmanaged index comprised of fixed-rate securities backed by pools of mortgages that are rated investment grade or higher. The Index data has been taken from published sources. Index performance returns do not reflect management fees or expenses. Performance results are presented before management and custodial fees but after all trading commissions. All returns are represented gross of withholding taxes.

Hyperion Brookfield Enhanced MBS Composite

Performance Disclosures


	Gross Rate			Net Rate of			Benchmark					Composite		Composite		% of		Total Firm
	of Return(1)			Return(2)			Return(3)			Number of		Dispersion(5)		Assets		Firm		AUM
Year	(%)			(%)			(%)			Portfolios(4)		(%)		($ millions)		AUM(6)		($ millions)

2006 YTD as of 6/30/06		0.60			0.51			(0.06	)		8		0.43		2,853		15		19,652
2005		3.68			3.50			2.62			7		0.57		2,754		16		17,619
2004		6.01			5.82			4.70			5		1.72		2,149		17		12,920
2003		4.07			3.89			3.05			3		0.43		1,588		18		8,869
2002		10.29			10.09			8.74			2		0		1,446		18		8,156
2001		11.92			11.72			8.22			1		0		1,125		16		7,076
2000		14.45			14.31			11.16			1		0		973		17		5,705
1999		2.61			2.48			1.86			1		0		928		20		4,673
1998		5.21			5.09			6.96			1		0		867		17		5,211
1997		13.49			13.35			9.49			1		0		812		13		6,493
1996		5.24			5.11			5.35			1		0		817		14		5,932
1995		24.52			24.34			16.80			1		0		697		14		5,162
1994		(5.69	)		(5.84	)		(1.61	)		1		0		366		10		3,820
1993		11.81			11.66			6.84			2		0		243		7		3,593


(1)	Gross performance results are presented before management and custodial fees but after all trading commissions.

(2)	Net performance is calculated based on a fee of 18 bps per annum which is the highest average fee for this strategy. The actual fee schedule of the underlying portfolios of the composite may vary slightly.

110


(3)	The Lehman MBS Index is an unmanaged index comprised of fixed-rate securities backed by pools of mortgage pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index data has been taken from published sources. Index performance returns do not reflect management fees or expenses.

(4)	Number of portfolios or accounts invested only in Hyperion Brookfield’s Enhanced MBS strategy. In accordance with the Global Investment Performance Standards, performance disclosures do not include any portfolio or account partially invested in such strategy, including Crystal River.

(5)	The composite dispersion is calculated on a high-low basis by averaging monthly dispersion in the composite for each calendar year. Dispersion is the mathematical difference between returns on multiple portfolios. A lower dispersion means that there was a lower variance among the performance of the multiple portfolios, while a higher dispersion indicates larger variance among the various portfolio returns.

(6)	AUM refers to Hyperion Brookfield’s assets under management.

Hyperion Brookfield Crystal River Portfolio Management Resources

Our Manager, together with our sub-advisors, has respected, well-established portfolio management resources for each of our targeted asset classes, and an extensive, mature infrastructure supporting those resources. These portfolio management resources and infrastructure are fully scalable to service our company’s activities.

Chairman of the Strategic Advisory Committee

Lewis S. Ranieri is the founder of the Hyperion Brookfield private equity funds and chairman and/or director of various other non-operating entities owned directly and indirectly by Hyperion Brookfield. Mr. Ranieri also serves as Chairman, Chief Executive Officer and President of Ranieri & Co., a private investment advisor and management corporation. He is also Chairman of the Board of Directors of American Financial Realty Trust, Capital Lease Funding, Inc., Computer Associates International, Inc. and Franklin Bank Corp. In addition, Mr. Ranieri serves on the Board of Directors of Reckson Associates Realty Corp.

Prior to forming Hyperion Brookfield , Mr. Ranieri had been Vice Chairman of Salomon Brothers, Inc. He is generally considered to be a pioneer of the securitized mortgage market in the U.S. Mr. Ranieri helped develop the capital markets as a source of funds for housing and commercial real estate, established Salomon Brothers’ leadership position in the MBS area, and also led the effort to obtain federal legislation to support and build the market. At Salomon Brothers, Mr. Ranieri was responsible for the firm’s activities in the mortgage, real estate and government-guaranteed areas.

Regarded as an expert and innovator in both the mortgage and capital markets, Mr. Ranieri has served on the National Association of Home Builders Mortgage Roundtable continuously since 1989. In recognition of his dedication and lifelong achievements in the housing industry, Mr. Ranieri was inducted into the National Housing Hall of Fame. He is also a recipient of the lifetime achievement award given by the Fixed Income Analysts Society, Inc. and was subsequently inducted into the FIASI Hall of Fame for outstanding practitioners in the advancement of the analysis of fixed-income securities and portfolios.

Mr. Ranieri acts as a trustee or director of Environmental Defense and The Metropolitan Opera Association and is Chairman of the Board of the American Ballet Theatre.

111

Residential MBS/ ABS Team


	Years of
	Investment
Name	Experience		Relevant Investment Experience

John Dolan		29	Chief Investment Officer and Managing Partner — Hyperion Brookfield. Before joining Hyperion Brookfield, Mr. Dolan served as Managing Director and was responsible for managing the Active Bond Group in the Global Investment Management area at Bankers Trust. Prior to that, he spent eight years at Salomon Brothers, Inc. as a Managing Director specializing in mortgage-backed securities trading and new product development. He started his career at Citibank, in 1977, where he managed the MBS trading desk and focused on new development and product education.

Michelle Russell-Dowe		12	Managing Director — Hyperion Brookfield. Prior to joining Hyperion Brookfield, Ms. Russell-Dowe was a Vice President in the Residential Mortgage-Backed Securities Group at Duff & Phelps Credit Rating Company, and was responsible for the rating and analysis of residential mortgage-backed transactions. Ms. Russell-Dowe’s experience at Duff & Phelps included modeling, collateral evaluation and rating of both first-and second-lien mortgage-backed transactions, as well as loan-to-value, re-performing, non-performing, and seller financed mortgage loans. In addition, Ms. Russell-Dowe managed Duff & Phelps’s monitoring and surveillance efforts for outstanding rated residential MBS transactions.

Anthony Breaks		8	Director — Hyperion Brookfield. Mr. Breaks is responsible for investments in CDOs, credit derivatives and other structured products. In addition, Mr. Breaks advises on the issuance of CDOs and structured financings by Hyperion Brookfield and affiliates. Prior to joining Hyperion Brookfield, Mr. Breaks was a Senior Vice President at Brascan Strategic Asset Management where he was responsible for developing structured fixed income vehicles for Brascan Strategic Asset Management and its partners. Prior to Brascan Strategic Asset Management, Mr. Breaks was a director at Liberty Hampshire and was responsible for structuring two CDOs, a series of CDO restructurings, as well as ongoing surveillance and analytics for CDO assets. Prior to joining Liberty Hampshire, Mr. Breaks was with Merrill Lynch where he worked in trading and structuring capacities in Adjustable Rate Mortgages, Medium Term Notes, and CDOs. Mr. Breaks is a Chartered Financial Analyst.

112

Commercial MBS Team


	Years of
	Investment
Name	Experience		Relevant Investment Experience

Clifford Lai		25	Chief Executive Officer and Managing Partner — Hyperion Brookfield. Prior to joining Hyperion Brookfield, Mr. Lai was Managing Director of Fixed Income at First Boston Asset Management, where he was responsible for over $7.5 billion in high-grade, fixed income assets. His previous positions include Vice President and Manager of Mortgage Research at Morgan Stanley, Senior Portfolio Manager at Benham Capital Management, and Asset/Liability Manager for World Savings and Loan in Oakland, California.

Julie Madnick		15	Managing Director — Hyperion Brookfield. Prior to her involvement in CMBS, Ms. Madnick developed portfolio strategies geared towards maintaining book yield while maximizing asset and liability management efficiency for Hyperion Brookfield’s insurance clients. Ms. Madnick was also involved in MBS account management, where she analyzed sector, product, duration, and credit weightings versus appropriate indices, and made portfolio repositioning recommendations. Earlier in her career, Ms. Madnick worked at Salomon Brothers, Inc., where she focused on identifying value in mortgage-backed pass-throughs and variance implementation to maximize the firm’s profitability.

Real Estate and Alternative Assets Team

113

Portfolio Management Infrastructure

We benefit from Hyperion Brookfield’s extensive portfolio management infrastructure. We believe that successful portfolio management, particularly of complex vehicles such as a REIT, requires a robust infrastructure. Hyperion Brookfield has made a major investment in risk management, operations, and other resources that directly support its portfolio teams. For control purposes, these systems are completely separate from portfolio management functions. A majority of these systems have been developed in-house by Hyperion Brookfield. Specifically, Hyperion Brookfield currently employs approximately 85 individuals, most of them professional level employees, in the following areas:


	•	Investment management,

	•	Quantitative analysis,

	•	Accounting, tax and finance,

	•	Operations,

	•	Technology systems,

	•	Risk management and

	•	Legal/compliance.

Risk Management

Risk management is a cornerstone of Hyperion Brookfield’s portfolio management system and we believe these risk management capabilities distinguish us from many of our competitors. Through our management agreement with Hyperion Brookfield Crystal River, we benefit from Hyperion Brookfield’s comprehensive risk management program, which addresses not only the risks of portfolio loss, such as risks relating to price volatility, position sizing and leverage, but also the operational risks that can have major adverse impacts on investment programs. Operational risks include execution of transactions, clearing of transactions, recording of transactions, position monitoring, supervision of traders, portfolio valuation, counterparty credit and approval, custodian relationships, trader authorization, accounting and regulatory.

Hyperion Brookfield’s risk management operation is headed by Hyperion Brookfield’s chief investment officer, who reports directly to Hyperion Brookfield’s president. Another important element of risk control at Hyperion Brookfield is its investment strategy committee, which consists of its chief investment officer and senior members of its portfolio management team. In addition to reviewing daily and monthly operations, Hyperion Brookfield’s chief investment officer and risk management team formulates policies to identify risk, prepares risk management reports and makes recommendations to Hyperion Brookfield’s investment strategy committee.

Hyperion Brookfield’s systems are backed up nightly, with tapes taken offsite and stored with a third-party provider. Hyperion Brookfield’s business continuity plan generally allows for a complete return of operations within 48 hours. The plan includes access to an offsite facility and daily offsite storage of systems data with automatic systems backup. The disaster recovery plan is updated periodically and lists the processes required to allow for full systems recovery.

Our Financing Strategy


	*Leverage Strategy*

We use leverage in order to increase potential returns to our stockholders. We use leverage for the purpose of financing our portfolio and do not expect to speculate on changes in interest rates. However, our use of leverage may also have the effect of increasing losses when economic conditions are unfavorable. While we have identified our leverage targets for each

114

principal investment detailed above, our investment policies require no minimum or maximum leverage and our strategic advisory committee will have the discretion, without the need for further approval by our board of directors, to increase the amount of leverage we incur above our targeted range for individual asset classes. Our investment guidelines and our portfolio and leverage are periodically reviewed by our board of directors as part of their ongoing oversight of our Manager’s activities and performance.

Hyperion Brookfield has broad experience in using leverage to enhance portfolio returns, and we believe this experience will help us enhance our returns. Hyperion Brookfield’s leverage experience includes the following:


	•	The CDOs that Hyperion Brookfield co-structures and manages are significantly leveraged vehicles. The principal amount of the debt securities issued by the CDOs is much greater than the equity tranches, which function as a “first loss” piece.

	•	Hyperion Brookfield uses total return swaps, which are leveraged instruments, to enhance investment returns.

	•	For its closed-end bond fund, Hyperion Brookfield trades various derivative instruments that are inherently leveraged, such as interest rate futures, options and swaps.


	*Repurchase Agreements*

We finance certain of our RMBS through the use of repurchase agreements. These agreements allow us to borrow against RMBS we own. We sell our RMBS to a counterparty and agree to repurchase the same RMBS from the counterparty at a price equal to the original sales price plus an interest factor. These agreements are accounted for as debt, secured by the underlying assets. During the term of a repurchase agreement, we earn the principal and interest on the related RMBS and pay interest to the counterparty.

Repurchase agreements are one of the primary vehicles we use to achieve our desired amount of leverage for our RMBS. We intend to continue to maintain formal relationships with multiple counterparties for the purpose of obtaining financing on favorable terms. Our repurchase agreement counterparties are commercial and investment banks with whom we have agreements in place that cover the terms of our transactions.

As of June 30, 2006, we had entered into master repurchase agreements with 17 counterparties and as of such date, we had outstanding repurchase obligations under repurchase agreements with 13 counterparties totaling approximately $2,496.7 million with a weighted average borrowing rate of 5.24%.

In certain circumstances, we have financed the purchase of securities from a counterparty through a repurchase agreement with the same counterparty pursuant to which we pledge the purchased securities. Currently, we record the acquisition of these securities as assets and the related borrowing under repurchase agreements as financing liabilities on our consolidated balance sheet with changes in the fair value of the securities being recorded as a component of other comprehensive income in stockholders’ equity. Interest income earned on the securities and interest expense incurred on the repurchase obligations are reported separately on our consolidated income statement.

115

securities purchased and repurchase agreements on a gross basis on our balance sheet. Additionally, we would not be able to report on a gross basis on our income statement the related interest income earned and interest expense incurred. Instead, we would be required to present the net investment on our balance sheet together with an embedded derivative with the corresponding change in fair value of the derivative being recorded in the income statement. The value of the derivative would reflect not only changes in the value of the underlying securities, but also changes in the value of the underlying credit provided by the counterparty. As of June 30, 2006 we had three such transactions that were outstanding, and our June 30, 2006 balance sheet included approximately $13.1 million of such securities and approximately $10.7 million of such repurchase agreement liabilities. Although we believe our accounting for these transactions is appropriate, we will continue to evaluate our position as the interpretation of this issue among industry participants and standard setters evolves.


	*Warehouse Facilities*

In addition to repurchase agreements, we rely on credit facilities for capital needed to fund our other investments. These facilities, referred to as warehouse lines or warehouse facilities, are typically lines of credit from other financial institutions that we can draw from to fund our investments. Warehouse lines are typically collateralized loans made to investors who invest in securities and loans that in turn pledge the resulting securities and loans to the warehouse lender. Third party custodians, usually large banks, typically hold the securities and loans funded with the warehouse facility borrowings, including the securities, loans, notes, mortgages and other important loan documentation, for the benefit of the lender who is deemed to own the securities and loans and, if there is a default under the warehouse line, for the benefit of the warehouse lender.

The pool of assets in a warehouse facility typically must meet certain requirements, including term, average life, investment rating, agency rating and sector diversity requirements. There are also certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs. Failure to comply with these requirements could result in either the need to post additional collateral or cancellation of the financing facility.

We intend to continue to maintain formal relationships with multiple counterparties for the purpose of maintaining warehouse lines on favorable terms.

As of June 30, 2006, we had no outstanding borrowings under warehouse lines. On March 1, 2006, we entered into a $31.0 million unsecured revolving credit facility with Signature Bank, as administrative agent, in order to provide us with additional liquidity.


	*Term Financing — CDOs*

We intend to continue to finance certain of our assets using term financing strategies, including CDOs and other match-funded financing structures. CDOs are multiple class debt securities, or bonds, secured by pools of assets, such as mortgage-backed securities and corporate debt. Like typical securitization structures, in a CDO:


	•	the assets are pledged to a trustee for the benefit of the holders of the bonds;

	•	one or more classes of the bonds are rated by one or more rating agencies; and

	•	one or more classes of the bonds are marketed to a wide variety of fixed income investors, which enables the CDO sponsor to achieve a relatively low cost of long-term financing.

Unlike typical securitization structures, the underlying assets may be sold, subject to certain limitations, without a corresponding pay-down of the CDO provided the proceeds are reinvested

116

in qualifying assets. As a result, CDOs enable the sponsor to actively manage, subject to certain limitations, the pool of assets. We believe CDO financing structures may be an appropriate financing vehicle for our targeted non-residential real estate asset classes, because they will enable us to obtain long-term cost of funds and minimize the risk that we have to refinance our liabilities prior to the maturities of our investments while giving us the flexibility to manage credit risk and, subject to certain limitations, to take advantage of profit opportunities.

As of June 30, 2006, other than as discussed below with respect to our CDO 2005-1 transaction, we had no outstanding borrowings under term financing structures.

On November 30, 2005, we closed a $295.3 million private placement of CDOs, our first sponsored CDO financing. We invested the net proceeds from the financing in accordance with our investment objectives and strategies described in this prospectus. The following related transactions occurred in connection with the private placement, which together we refer to as the CDO 2005-1 transaction:


	•	we and our affiliates sold CMBS, ABS, loans (including, without limitation, whole loans, B Notes, participations and mezzanine loans) and synthetic securities for an aggregate sale price of $377.9 million to Crystal River CDO 2005-1 Ltd., our consolidated wholly-owned subsidiary that we refer to as the Issuer;

	•	the Issuer issued $269.8 million of floating rate CDOs and $25.5 million of fixed rate CDOs, each secured by its assets;

	•	the Issuer sold $227.5 million of the CDOs that are rated investment grade to a group of institutional investors; and

	•	we acquired and retained $52.3 million of the CDOs that are rated investment grade and all of the $15.5 million of below investment grade classes in addition to all of the Issuer’s $82.7 million of equity.

The CDO 2005-1 transaction provides us with a number of significant benefits, including:


	•	creating non-recourse financing at an all-in borrowing cost to us that is significantly lower than the cost of our existing sources of debt capital;

	•	obtaining long-term, floating rate financing that matches both the interest rate index and duration of our assets; and

	•	establishing us as a CDO issuer and collateral manager, which we believe will facilitate our issuance of additional CDOs in the future.

On March 2, 2006, we prepaid an aggregate of $16.3 million of floating rate CDOs issued in the CDO 2005-1 transaction from the proceeds of a real estate loan owned by the Issuer that was prepaid by the borrower, and from our available cash.


	*Total Return Swaps*

Subject to maintaining our REIT qualification, we may finance certain of our investments using total return swaps, which are swaps in which the non-floating rate side is based on the total return of an equity or fixed income instrument with a life longer than the swap. Total return swaps allow an investor to gain exposure to an underlying loan without actually owning the loan. In these swaps, the total return (interest, fees and capital gains/losses on an underlying loan) is paid to an investor in exchange for a floating rate payment. The investor pays a fraction of the value of the total amount of the loan that is referenced in the swap as collateral posted with the swap counterparty. The total return swap, therefore, is a leveraged investment in the underlying loan.

117

We generally enter into total return swaps with one-, two- or three-year maturities. Because swap maturities may not correspond with the maturities of the assets underlying the swap, we may wish to renew many of the swaps as they mature. However, there is a limited number of providers of such swaps, and there is no assurance the initial swap providers will choose to renew the swaps, and, if they do not renew, that we would be able to obtain suitable replacement providers.

Total return swaps will not be qualifying assets or produce qualifying income for purposes of the REIT asset and income tests. See “Federal Income Tax Consequences of Our Qualification as a REIT.” We may enter into total return swaps through a TRS, which may cause the income from such swaps to be subject to corporate income tax.

As of June 30, 2006, we had not engaged in any total return swaps.


	*Example of the Impact of the Use of Leverage*

In example 1 below, we use borrowed funds to increase the initial yield on our investment in Agency Adjustable Rate RMBS from 5.35% to 12.35%. In example 2 below, we borrow less funds and increase our yield only from 5.35% to 10.35%. As mentioned above, however, borrowed funds can also lead to lower returns and greater losses than if we did not borrow funds. We plan to execute these types of transactions by arranging repurchase agreements in which we pledge our assets as collateral to secure our repayment obligations. Some of those repurchase agreements may have terms in which a decline in the pledged assets’ market value could trigger an early repayment of the existing obligations. If, in the example set forth below, we repay Agency Adjustable Rate RMBS early, the return on equity could be reduced. As reflected below, if we were required to increase the amount of equity capital we invested by $242,424 in order to repay $242,424 of repurchase agreement obligations, then the return on equity would be reduced from 12.35% to 10.35%. These examples are not guarantees or predictions of the returns we will achieve. They are only illustrations of the impact of leverage. For risks related to the use of hedging, see “Risk Factors — We expect to leverage our investments, which may adversely affect our return on our investments and may reduce cash available for distribution.”


		Example 1			Example 2

1.	Amount invested in Agency ARMS	$	10,000,000		$	10,000,000
2.	Nominal yield on Agency ARMS		5.35	%		5.35	%
3.	Income from Agency ARMS (1 × 2)*	$	535,000		$	535,000
4.	Leverage assumed for Agency ARMS (debt/equity)		14.0	x		10.0x
5.	Amount borrowed to finance investment in Agency ARMS	$	9,333,333		$	9,090,909
6.	Interest rate on amount borrowed		4.10	%		4.10	%
7.	Interest expense (5 × 6)*	$	382,667		$	372,727
8.	Hedging costs on amount borrowed		0.75	%		0.75	%
9.	Hedging expense (5 × 8)*	$	70,000		$	68,182
10.	Net income on Agency ARMS (3-7-9)*	$	82,333		$	94,091
11.	Equity capital invested (1-5)*	$	666,667		$	909,091
12.	Return on equity capital invested before expenses (10/11)*		12.35	%		10.35	%


*	The numbers in parentheses refer to the line numbers.

118

Our Hedging and Interest Rate Risk Management Strategy

Repurchase agreements generally have maturities of 30 to 90 days and the weighted average life of the RMBS we own is generally longer. The difference in maturities, in addition to reset dates and reference indices, creates potential interest rate risk.

We expect to utilize derivative financial instruments to hedge all or a portion of the interest rate risk associated with certain types of our borrowings. Under the federal income tax laws applicable to REITs, we generally will be able to enter into certain transactions to hedge indebtedness that we may incur, or plan to incur, to acquire or carry real estate assets, provided that our total gross income from such hedges and other non-qualifying sources must not exceed 25% of our total gross income.

We engage in a variety of interest rate management techniques that seek to mitigate changes in interest rates or potentially other influences on the values of our assets. Because of the tax rules applicable to REITs, we may be required to implement certain of these techniques through a TRS that is fully subject to corporate income taxation. However, no assurances can be given that these investment and leverage strategies can successfully be implemented. Our interest rate management techniques may include:


	•	puts and calls on securities or indices of securities;

	•	Eurodollar futures contracts and options on such contracts;

	•	interest rate swaps and/or swaptions; and

	•	other similar transactions.

These techniques may also be used in an attempt to protect us against declines in the market value of our assets that result from general trends in debt markets.

We may, from time to time, enter into interest rate swap agreements to offset the potential adverse effects of rising interest rates under certain short-term repurchase agreements. The interest rate swap agreements have historically been structured such that we receive payments based on a variable interest rate and make payments based on a fixed interest rate. The cost of such swap agreements is de minimis as these swaps often trade in a very liquid market and are based on the yield curve, and as the yield curve flattens, the swap agreements become accretive to our net income. The variable interest rate on which payments are received is calculated based on various reset mechanisms for LIBOR. The repurchase agreements generally have maturities of 30 to 90 days and carry interest rates that correspond to LIBOR rates for those same periods. The swap agreements effectively fix our borrowing cost and are not held for speculative or trading purposes.

Interest rate management techniques do not eliminate risk but seek to mitigate interest rate risk. For example, if both long-term and short-term interest rates were to increase significantly, it could be expected that:


	•	the weighted average life of the MBS would be extended because prepayments of the underlying mortgage loans would decrease; and

	•	the market value of any fixed rate MBS would decline as long-term interest rates increased.

As of June 30, 2006, we had hedged a portion of the liabilities related to our investment portfolio by entering into a combination of one-, two-, three-, five- and ten-year interest rate swaps. The total notional par value of such swaps was approximately $1,448.5 million.

119

Illustration of Impact of Interest Rate Volatility on Return

The following table illustrates how an effective hedging strategy can offset the negative impact that rising interest rates would otherwise have on assets with a fixed yield. In example 1 below, which represents a hypothetical investment in subordinated CMBS, the return on equity capital invested declines from 16.70% to 12.32% as a result of an illustrative 250 bps increase in funding costs. In example 2, which assumes an investment in the same security, an additional cost is incurred upfront to hedge the entire liability exposure, which results in a return on equity capital invested of 15.56%. However, in this example the investor would be unaffected by interest rate increases, since the incremental funding costs would be offset by a gain in the hedging instrument (i.e., the all-in financing cost would be effectively locked). An effective hedging strategy can help reduce the volatility of returns in a portfolio. These examples are not guarantees or predictions of the returns we will achieve. They are only illustrations of the impact of hedging. For risks related to the use of hedging, see “Risk Factors — Risks Related to our Business and Investment Strategy — Hedging against interest rate exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.”


		Example 1: Unhedged Investment						Example 2: Hedged Investment

					Investment After						Investment After
		Initial Investment			Rate Increase			Initial Investment			Rate Increase

1.	Amount invested in Subordinated CMBS	$	10,000,000		$	10,000,000		$	10,000,000		$	10,000,000
2.	Nominal yield on Subordinated CMBS		9.12	%		9.12	%		9.12	%		9.12	%
3.	Income from Subordinated CMBS (1 × 2)*	$	912,000		$	912,000		$	912,000		$	912,000
4.	Leverage assumed for Subordinated CMBS (debt/equity)		1.75	x		1.75	x		1.75	x		1.75	x
5.	Amount borrowed to finance investment in Subordinated CMBS	$	6,363,636		$	6,363,636		$	6,363,636		$	6,363,636
6.	Interest rate on amount Borrowed		4.79	%		7.29	%		4.79	%		7.29	%
7.	Hedging cost on amount Borrowed		0.00	%		0.00	%		0.65	%		0.65	%
8.	Loss/(gain) on hedging Instrument		0.00	%		0.00	%		0.00	%		(2.50	)%
9.	All-in financing cost (including hedging cost) (6 + 7 + 8)*		4.79	%		7.29	%		5.44	%		5.44	%
10.	Interest expense (5 × 6)*	$	304,818		$	463,909		$	304,818		$	463,909
11.	Net hedging expense (5 × (7 + 8))*	$	0		$	0		$	41,364		$	(117,727	)
12.	Net income on Subordinated CMBS (3 — 10 — 11)*	$	607,182		$	488,091		$	565,818		$	565,818
13.	Equity capital invested (1 — 5)*	$	3,636,364		$	3,636,364		$	3,636,364		$	3,636,364
14.	Return on equity capital invested before expenses (12/13)*		16.70	%		12.32	%		15.56	%		15.56	%


*	The numbers in parentheses refer to the line numbers.

120

To the extent that interest rates decrease and a hedge is inefficient because there is no interest rate increase against which to protect, the resulting leveraged return will range from 11.18% for a fully inefficient hedge (where rates do not increase) to 15.56% for a fully efficient hedge (where rates increase above the rate of the hedging instrument), depending on the extent to which the hedge is inefficient.

Resolution of Potential Conflicts of Interest in Allocation of Investment Opportunities

Hyperion Brookfield will abide by its conflicts of interest policy and thus will offer us the right to participate in all investment opportunities that it determines are appropriate for us in view of our investment objectives, policies and strategies and other relevant factors, subject to the exception that, in accordance with Hyperion Brookfield’s conflict of interest policy described below, we might not participate in each such opportunity but will on an overall basis equitably participate with Hyperion Brookfield’s other clients in all such opportunities. Hyperion Brookfield allocates investments to eligible accounts, including Crystal River, based on current demand according to the market value of the account (which is the amount of available capital that, consistent with such account’s investment parameters, may be invested in a proposed investment). An account has current demand if it has positive market value. If the investment cannot fulfill the pro rata allocation or be allocated in marketable portions, the investment is allocated on a rotational basis to accounts with current demand, with an emphasis placed on those accounts that were excluded in prior allocations, but without any preference given to accounts based on their market value. The rotational system is determined by Hyperion Brookfield’s chief investment officer and is overseen by its compliance officer to ensure fair and equitable investment allocation to all accounts in accordance with the Investment Advisers Act. As of June 30, 2006, Hyperion Brookfield managed 19 client accounts that had investment strategies that overlapped our investment strategy.

Unlike Hyperion Brookfield, Brookfield Sub-Advisor is not bound by Hyperion Brookfield’s conflict of interest policy and thus is not obligated to offer us any specific investment opportunities. Any decision to do so will be entirely within Brookfield Sub-Advisor’s discretion and it can be expected that some investments that are appropriate for us in view of our investment criteria will not be offered to us and will be made by affiliates of Brookfield without our participation.

Hyperion Brookfield historically has managed accounts with similar or overlapping investment strategies and has a conflict-resolution system in place so that we may share equitably with other Hyperion Brookfield client accounts in all investment opportunities, particularly those involving a security with limited supply, that may be suitable for our company and such other client accounts.

Hyperion Brookfield’s chief investment officer oversees its conflict-resolution system, and Hyperion Brookfield’s chief compliance officer regularly monitors the procedural aspects of the program. The program places particular emphasis on the equitable allocation of scarce investment opportunities, which are situations where Hyperion Brookfield is unable to obtain the full amount of the securities that it wishes to purchase for the relevant client accounts, such as newly-issued debt instruments.

In these situations, Hyperion Brookfield’s policy is to first determine and document the amount of the security it wishes to purchase for each of the participating accounts, based on the size, objectives of the accounts, current client demand and other relevant factors. Hyperion Brookfield then places an order for the total of these amounts. If Hyperion Brookfield is able to obtain only partial execution of the order, its policy calls for the allocation of the purchased securities in the same proportion that it would have allocated a full execution of the order. The policy permits departure from such proportional allocation only if the allocation would result in an inefficiently small amount of the security being purchased for an account. In that case, the

121

policy provides for a “rotational” protocol of allocating subsequent partial executions so that, on an overall basis, each account is treated equitably.

Other conflict-resolution policies of Hyperion Brookfield and the terms of our management agreement with Hyperion Brookfield Crystal River that will apply to the management of our company include controls for:


	•	Split price executions — These are situations where Hyperion Brookfield places an order for multiple clients and the order is executed at different prices. Hyperion Brookfield’s policy is that the executions are to be allocated to the participating accounts so that each account receives the same average price.

	•	Cross trades — These are trades where Hyperion Brookfield places an order for a client account to buy (or sell) a particular security and places a simultaneous or virtually simultaneous order for another client account to sell (or buy) the same security. In such case, under Hyperion Brookfield’s policies, the pair of transactions must be approved by the chief investment officer and executed at the prevailing market price as determined by an independent broker-dealer.

	•	Principal transactions — Under the terms of our management agreement with Hyperion Brookfield Crystal River, we have agreed not to acquire an investment from, sell an investment to or make any co-investment with any proprietary account of Hyperion Brookfield, Brookfield or any of their respective affiliates, which we refer to as related persons, or any account advised by any related person, or borrow funds from or lend funds to any related person or invest in any investment vehicle advised by any related person unless the transaction is on terms no less favorable than can be obtained on an arm’s length basis from unrelated third parties based on prevailing market prices, other reliable indicators of fair market value or an independent valuation or appraisal and has been approved in advance by a majority of our independent directors. If we invest in an investment vehicle advised by a related person, including, for example, a private investment fund managed by an affiliate of Brookfield, and the asset class of such investment is one that we are professionally staffed to underwrite, we expect, although no assurance can be given, that our Manager and/or such affiliate would waive any base and incentive management fees relating to such investment in excess of the base and incentive management fees that we would owe our Manager in respect of such investment had we made the investment directly and not through such affiliate.

Our Manager may engage other parties, including its affiliates or any of our sub-advisors and/or any of their respective affiliates, to provide services to us or our subsidiaries, including asset management, property management, leasing, financing and disposition and/or similar services customarily provided to a business similar to ours, provided that, such services are provided at market rates with standard market terms and, in the case of a sub-advisor or an affiliate of either our Manager or a sub-advisor, the party providing the services has sufficient qualifications and experience to perform the services at a level of quality comparable to non-affiliated service providers in the area, the cost to our Manager is no less favorable than can be obtained from an unrelated third party on an arm’s length basis and any such arrangements are approved in advance by a majority of our independent directors.

Policies with Respect to Certain Other Activities

If our board of directors determines that additional funding is required, we may raise such funds through additional offerings of equity or debt securities or the retention of cash flow (subject to provisions in the Internal Revenue Code concerning distribution requirements and the taxability of undistributed REIT taxable income) or a combination of these methods. In the event that our board of directors determines to raise additional equity capital, it has the

122

authority, without stockholder approval, to issue additional common stock or preferred stock in any manner and on such terms and for such consideration as it deems appropriate, at any time.

We have not in the past but may in the future offer equity or debt securities in exchange for property and to repurchase or otherwise reacquire our shares and may engage in such activities in the future.

In addition, we have in the past and may in the future borrow money to finance the acquisition of investments. We intend to use traditional forms of financing, such as repurchase agreements and warehouse facilities. We also intend to utilize structured financing techniques, such as CDOs, to create attractively priced non-recourse financing at an all-in borrowing cost that is lower than that provided by traditional sources of financing and that provide long-term, floating rate financing. Our investment guidelines and our portfolio and leverage are periodically reviewed by our Board of Directors as part of their oversight of our Manager.

We have in the past and may in the future, subject to gross income and asset tests necessary for REIT qualification, invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers, we have not made in the past but may in the future make such investments for the purpose of exercising control over such entities.

We engage in the purchase and sale of investments. We have in the past and may in the future make loans to third parties in the ordinary course of business for investment purposes. We will not underwrite the securities of other issuers.

We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by our independent registered public accounting firm and with quarterly reports containing unaudited consolidated financial statements for each of the first three quarters of each fiscal year.

Our board of directors may change any of these policies without prior notice to you or a vote of our stockholders.

Operating and Regulatory Structure

We have elected and qualified to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005 and expect to qualify as a REIT in subsequent tax years. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. We believe that we were organized and have operated in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and that our intended manner of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT.

As a REIT, we generally will not be subject to federal income tax on the REIT taxable income that we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates. Even if we qualify for federal taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property. Crystal River Capital TRS Holdings, Inc., our TRS, will be a regular taxable corporation that will be subject to federal, state and local income tax on its income.

Our investment activities are managed by Hyperion Brookfield Crystal River and supervised by our strategic advisory committee and board of directors. In exchange for its services, we pay Hyperion Brookfield Crystal River an annual base management fee determined by our stockholders’ equity but not by our performance, as well as an incentive management fee based on our performance.

123

We and Hyperion Brookfield Crystal River have retained Brookfield Sub-Advisor as a sub-advisor with respect to investments in mortgages and other real estate debt, real estate and other real estate-related, yield-oriented assets and Ranieri & Co. as a sub-advisor with respect to senior level guidance and relationships. Each sub-advisor evaluates potential investments, recommends suitable investments and, on our behalf, closes each investment approved by our strategic advisory committee or our board of directors.

Exclusion from Regulation Under the Investment Company Act

We intend to continue to operate our business so as to be excluded from regulation under the Investment Company Act. Because we conduct our business directly and through wholly-owned subsidiaries, we must ensure not only that we, but also each of our subsidiaries, qualify for an exclusion from regulation under the Investment Company Act.

For purposes of the ensuing discussion “we” and “our” refer to Crystal River Capital, Inc. alone and not its subsidiaries.

Based on no-action letters issued by the Division, we classify our investment in residential mortgage loans as qualifying real estate assets, as long as the loans are “fully secured” by an interest in real estate. That is, if the loan-to-value ratio of the loan is equal to or less than 100%, then we consider the mortgage loan a qualifying real estate asset. We do not consider loans with loan-to-value ratios in excess of 100% to be qualifying real estate assets for the 55% test, but only real estate-related assets for the 80% test.

We also consider RMBS such as agency whole pool certificates to be qualifying real estate assets. An agency whole pool certificate is a certificate issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae that represents the entire beneficial interest in the underlying pool of mortgage loans. By contrast, an agency certificate that represents less than the entire beneficial interest in the underlying mortgage loans is not considered to be a qualifying real estate asset for purposes of the 55% test, but constitutes a real estate-related asset for purposes of the 80% test.

We will treat our ownership interest in pools of whole loan RMBS, in cases in which we acquire the entire beneficial interest in a particular pool, as qualifying real estate assets based on no-action positions of the Division. As of June 30, 2006 such assets comprise in excess of 61.0% of our total assets. We generally do not expect our investments in CMBS and other RMBS investments to constitute qualifying real estate assets for the 55% test, unless such treatment is consistent with guidance of the Division or the Commission. Instead, these investments generally will be classified as real estate-related assets for purposes of the 80% test. We do not expect that our investments in CDOs, ABS, credit default swaps and total return swaps will constitute qualifying real estate assets, although we may treat our equity interests in a CDO issuer that we determine is a “majority owned subsidiary” and that is excluded from Investment Company Act regulation under Section 3(c)(5)(C) of the

124

Investment Company Act as qualifying real estate assets, consistent with guidance of the Division and the Commission. Moreover, to the extent that these investments are not backed by mortgage loans or other interests in real estate, they will constitute miscellaneous assets, which can constitute no more than 20% of our assets.

We also invest in other types of RMBS, CMBS, B Notes and mezzanine loans, which we will not treat as qualifying real estate assets for purposes of determining our eligibility for the exclusion provided by Section 3(c)(5)(C) unless such treatment is consistent with guidance of the Commission or the Division. We have not requested no-action or other interpretative guidance or applied for an exemptive order with respect to the treatment of such assets. In the absence of guidance of the Commission or the Division that otherwise supports the treatment of such investments as qualifying real estate assets, we will treat them, for purposes of determining our eligibility for the exclusion provided by Section 3(c)(5)(C), as real estate-related assets or miscellaneous assets as appropriate. Any additional guidance from the Division could provide additional flexibility to us, or it could further inhibit our ability to pursue the investment strategy we have chosen.

Competition

Our net income depends, in large part, on our ability to acquire assets at favorable spreads over our borrowing costs. In acquiring real estate-related assets, we compete with other mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, other lenders, governmental bodies and other entities. In addition, there are numerous mortgage REITs with similar asset acquisition objectives, and others may be organized in the future. The effect of the existence of additional REITs may be to increase competition for the available supply of mortgage assets suitable for purchase. Many of our competitors are significantly larger than us, have access to greater capital and other resources and may have other advantages over us. In addition to existing companies, other companies may be organized for similar purposes, including companies organized as REITs focused on purchasing mortgage assets. A proliferation of such companies may increase the competition for equity capital and thereby adversely affect the market price of our common stock. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us.

We have had and expect to continue to have access to Hyperion Brookfield Crystal River’s and our sub-advisors’ professionals and their industry expertise, which will provide us with a competitive advantage and help us assess investment risks and determine appropriate pricing for certain potential investments. In addition, we expect that these relationships will enable us to learn about, and compete more effectively for, financing opportunities with attractive companies in the industries in which we seek to invest. For additional information concerning the competitive risks we face, see “Risk Factors — Risks Related To Our Business and Investment Strategy — We operate in a highly competitive market for investment opportunities.”

125

Staffing

We are managed by Hyperion Brookfield Crystal River pursuant to the management agreement between Hyperion Brookfield Crystal River and us. All of our executive officers are employees or directors of Hyperion Brookfield or one or more of its affiliates. We expect that Hyperion Brookfield will have additional investment professionals who will support Hyperion Brookfield Crystal River’s operations. See “Management — Management Agreement.”

Legal Proceedings

We and Hyperion Brookfield Crystal River are not currently subject to any material legal proceedings.

Place of Business

126

MANAGEMENT

Directors and Executive Officers

Our board of directors consists of seven directors, five of which have been determined by our board of directors to be independent in accordance with the general independence standards of the New York Stock Exchange.

The terms of office of our board of directors are divided into three classes:


	•	Class I directors, whose term will expire at the annual meeting of stockholders to be held in 2006 and when their successors are duly elected and qualify;

	•	Class II directors, whose term will expire at the annual meeting of stockholders to be held in 2007 and when their successors are duly elected and qualify; and

	•	Class III directors, whose term will expire at the annual meeting of stockholders to be held in 2008 and when their successors are duly elected and qualify.

Our Class I directors are Janet Graham, Harald Hansen and Bruce Robertson; our Class II directors are William Paulsen and Louis Salvatore; and our Class III directors are Clifford Lai and Rodman Drake. At each annual meeting of stockholders, the successors to the directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election and until their successors are elected and qualify.

All of our executive officers are employees or directors of Hyperion Brookfield or one or more of its affiliates.

Our directors and executive officers, their ages and titles with Crystal River, and their positions with Hyperion Brookfield, as of October 23, 2006, are as follows:


				Position at Hyperion
Name	Age		Title	Brookfield or its affiliates

Clifford Lai		53	Chief Executive Officer, President and Director	Chief Executive Officer
John Dolan		53	Chief Investment Officer	Chief Investment Officer
John Feeney		47	Executive Vice President and Secretary	President
Barry Sunshine		47	Chief Financial Officer	Director
Bruce Robertson		39	Chairman(1)	Managing Partner-Public Securities of Brookfield Asset Management Inc.
Rodman Drake		63	Director(2)(3)	Director of Hyperion Total Return Fund, Inc., Hyperion Strategic Mortgage Income Fund, Inc., Hyperion Strategic Bond Fund, Inc. and Hyperion Collateralized Securities Fund, Inc.
Janet Graham		52	Director(4)	—
Harald Hansen		75	Director(2)	Director of Hyperion Strategic Bond Fund, Inc. and Hyperion Collateralized Securities Fund, Inc.

127


				Position at Hyperion
Name	Age		Title	Brookfield or its affiliates

William Paulsen		60	Director(5)	—
Louis Salvatore		60	Director(5)	Director and Chairman of Audit Committee of Hyperion Total Return Fund, Inc. and Hyperion Strategic Mortgage Income Fund, Inc.


(1)	Appointed on May 10, 2006.

(2)	Appointed on February 23, 2005.

(3)	Mr. Drake was appointed by our board of directors to serve as our Lead Independent Director, effective May 10, 2006.

(4)	Appointed on September 28, 2005.

(5)	Appointed on June 21, 2005.

Biographical Information

Information for each of our directors, executive officers and independent directors is set forth below.


	Clifford Lai

Mr. Lai, Chief Executive Officer of Hyperion Brookfield since 1998, President from 1998 through August 2006, Chief Investment Officer from 1993 through 1998 and a Managing Partner since 2005, oversees the overall management of the firm and is a portfolio manager for a number of its investment strategies. Mr. Lai also serves as President of Hyperion Brookfield’s closed-end fixed income mutual funds, as well as Chief Investment Officer for Hyperion Brookfield’s joint venture, Lend Lease Hyperion Capital Advisors LLC. He is also a member of Hyperion Brookfield’s board of directors. Mr. Lai has over 25 years of experience in the industry. Prior to joining Hyperion Brookfield, he was president, chief executive officer and secretary of AIG-Hyperion, Inc. Prior to joining AIG-Hyperion, Mr. Lai was managing director of fixed income at First Boston Asset Management, where he was responsible for over $7.5 billion in high-grade, fixed income assets. His previous positions include vice president and manager of mortgage research at Morgan Stanley, senior portfolio manager at Benham Capital Management, and asset/liability manager for World Savings and Loan in Oakland, California. He earned a BA from the University of California-Berkeley and an MBA from California State University at San Francisco.


	John Dolan

Mr. Dolan, Chief Investment Officer of Hyperion Brookfield since 2001, Chief Investment Strategist from 1998 through 2001 and a Managing Partner since 2005, is responsible for the firm’s overall investment strategies, risk management, product development and quantitative research efforts, as well as developing and implementing new initiatives for Hyperion Brookfield’s investment process. In addition to managing client portfolios, Mr. Dolan oversees the firm’s approach to evaluating new structures in the fixed income market, particularly with regard to credit risk. He is also a member of Hyperion Brookfield’s board of directors. Mr. Dolan has over 28 years of experience in the industry. Prior to joining Hyperion Brookfield, he served as a managing director of mortgage-backed securities trading for Salomon Brothers, Inc. He is a graduate of Union College and holds an MBA from the Wharton Graduate Business School.

128


	John Feeney

Mr. Feeney, President of Hyperion Brookfield since August 2006, Director of Marketing of 1997 through 2006, and Director of Marketing for AIG-Hyperion from 1994 through 1997, manages Hyperion Brookfield’s day-to-day operations. Mr. Feeney is a member of the firm’s board of directors. Mr. Feeney has over 24 years of experience in the industry. Before joining Hyperion Brookfield, Mr. Feeney was a vice president in the fixed income department of Credit Suisse First Boston. He spent six years in Tokyo, Japan, as a senior marketing representative for Credit Suisse First Boston, with responsibility for the distribution of fixed income and asset management products to institutional clients in Japan and other Asian markets. Previously, he spent two years in fixed income sales at PaineWebber. Mr. Feeney began his career in the money market and foreign exchange trading and sales areas at Chase Manhattan Bank. While at Chase, Mr. Feeney spent one-and-a-half years in the Treasury Department of the bank’s branch in the Republic of Panama. Mr. Feeney earned a BA from Georgetown University.


	Barry Sunshine

Mr. Sunshine, Chief Financial Officer of Crystal River and a Director of Hyperion Brookfield since September 1, 2005 and a certified public accountant, is responsible for financial reporting and supervision of the accounting function for Crystal River. Prior to joining Crystal River, Mr. Sunshine was a partner at the accounting firm of Schwartz & Hofflich from January 1990 through August 2005. Prior to working with Schwartz & Hofflich, Mr. Sunshine was a senior tax accountant with Arthur Andersen LLP. Mr. Sunshine earned a BS in Accounting from Fairleigh Dickinson University and a Master of Science in Taxation from Pace University.


	Bruce Robertson

Mr. Robertson, Managing Partner of Public Securities for Brookfield Asset Management Inc. since 2002, has primary responsibility for management and growth of Brookfield’s public securities management business. Mr. Robertson also serves as Director, President and Chief Executive Officer of the management companies for Brookfield’s Canadian closed-end exchange-traded mutual funds. Between 1996 and 2002, Mr. Robertson served in a number of capacities with Brookfield’s affiliates, including as Chief Financial Officer of a predecessor to Brookfield, corporate development within Brookfield Power, merchant banking origination and management, and as Vice President of Investment Banking at Trilon Securities Corporation. Prior to joining Brookfield, Mr. Robertson spent over seven years with Deloitte & Touche, including five years in its insolvency and restructuring practice. Mr. Robertson also served as a director of Criimi Mae Inc. until its sale in January 2006. Mr. Robertson is a Chartered Accountant and earned a Bachelor of Commerce (Honours) degree from Queen’s University at Kingston, Canada.


	Rodman Drake

Mr. Drake, our Lead Independent Director since May 2006, has served as the Chairman of the Board, since 2003, and as a director, since 1989, of several investment companies advised by Hyperion Brookfield and its affiliates, and has served as a member of the audit committee and chairman of the nominating and compensation committee for several of those investment companies during that time. Mr. Drake is a co-founder of Baringo Capital LLC, a private equity firm that was formed in 2002, and serves on the boards of directors of the Animal Medical Center, Celgene Corporation, Parsons Brinckerhoff, Inc., The Student Loan Corporation and Jackson Hewitt Tax Service, Inc. Mr. Drake also is Chairman of the Excelsior Funds and Laudus Funds groups, which are sponsored by US Trust Co. and Charles Schwab. Mr. Drake earned a BA from Yale University and an MBA from Harvard Business School.

129


	Janet Graham

Since March 1996, Ms. Graham has had her own independent Toronto-based advisory services/consulting business, which has operated under the name IQ Alliance Incorporated since August 2002, and has undertaken a wide variety of engagements on behalf of major corporate clients, including the delivery of real estate related financial advisory services. Ms. Graham recently began to work as a life and executive coach. Ms. Graham is a member of the Board of Trustees of IPC US REIT, a publicly traded Canadian real estate investment trust, and a member of the Board of Directors of the Canadian Urban Institute, a Canadian non-profit organization, and of Toronto Waterfront Revitalization Corporation, a corporation without share capital. Prior to March 1996, Ms. Graham held senior positions at CIBC and CIBC Wood Gundy Securities Inc. for 15 years specializing in corporate finance and corporate lending to real estate and other companies. Ms. Graham holds a Bachelor of Applied Science from Guelph University in Guelph, Ontario and a Master of Business Administration from York University in Toronto, Ontario and is a chartered accountant, a Canadian designation.


	Harald Hansen

Since 1999, Mr. Hansen has served as a director of several investment companies advised by Hyperion Brookfield and its affiliates. Mr. Hansen served as the chief executive officer of First Union National of Georgia since 1987 and chairman of the board starting in 1989 until his retirement in 1996. Mr. Hansen has also served as the executive vice president in charge of the General Banking Group of First National Bank of Georgia. He serves on the boards of directors of Georgia Commerce Bank and Chairman of the Executive Committee, Midtown Alliance and the U.S. Disabled Athletes Fund. Mr. Hansen is a Trustee of Oglethorpe University and Asheville School and a Trustee of the Tull Foundation. Mr. Hansen earned a BS degree from Duke University. He is a retired colonel in the United States Marine Corps Reserve.


	William Paulsen

Mr. Paulsen is an independent private investor. Mr. Paulsen serves as a trust manager for Camden Properties, an apartment real estate investment trust that is the successor company by merger of Summit Properties. Mr. Paulsen was a founder and the chief executive officer of Summit Properties from 1993 until his retirement in 2001 and served as co-chairman of the board of directors until 2005. Mr. Paulsen is active in Angel Investment and was the founder of The Charleston Angel Partnership in Charleston, South Carolina. He also serves as a Trustee of The Asheville School. Mr. Paulsen earned a BS and an MBA from The University of North Carolina at Chapel Hill.


	Louis Salvatore

Mr. Salvatore is a certified public accountant. Since September 2002, Mr. Salvatore has been the representative of one of the four board members of Arthur Andersen LLP. From September 1992 to August 2002, Mr. Salvatore was the managing partner of Arthur Andersen’s metropolitan New York offices, and from January 1998 to August 2002, he was the Northeast Region managing partner. From 1989 to January 2001, Mr. Salvatore was a member of the board of partners of Andersen Worldwide S.C. and, from August 2000 to January 2001, he was interim managing partner — chief executive officer of Andersen Worldwide. Mr. Salvatore serves on the board of directors of the Catholic Charities Diocese of Brooklyn and as a director and chairman of the audit committee for each of Jackson Hewitt Tax Service Inc., Hyperion Strategic Mortgage Income Fund, Inc. and Hyperion Total Return Fund, Inc. Mr. Salvatore has been designated by the board as a “financial expert.”

130

Board Committees

Our board of directors has established three committees consisting solely of independent directors, the principal functions of which are briefly described below. Matters put to a vote at any one of our three committees must be approved by a majority of the directors on the committee who are present at a meeting at which there is a quorum or by unanimous written consent of the directors on that committee.


	Audit Committee

Our board of directors has established an audit committee, which is composed of our five independent directors, Ms. Graham and Messrs. Drake, Hansen, Paulsen and Salvatore. Mr. Salvatore chairs our audit committee and has been determined by our board of directors to be an “audit committee financial expert” as that term is defined by the Securities and Exchange Commission. The committee assists the board of directors in overseeing:


	•	our accounting and financial reporting processes;

	•	the integrity and audits of our consolidated financial statements;

	•	our compliance with legal and regulatory requirements;

	•	the qualifications and independence of our independent registered public accounting firm; and

	•	the performance of our independent registered public accounting firm and any internal auditors.

The committee is also responsible for engaging an independent registered public accounting firm, reviewing with the independent registered public accounting firm the plans and results of the audit engagement, approving professional services provided by the independent registered public accounting firm and considering the range of audit and non-audit fees.


	Compensation Committee

Our board of directors has established a compensation committee, which is composed of Ms. Graham and Messrs. Drake, Hansen, Paulsen and Salvatore. Mr. Paulsen chairs the committee, whose principal functions are to:


	•	evaluate the performance of our Manager;

	•	review the compensation and fees payable to our Manager under our management agreement; and

	•	administer our incentive plans.


	Nominating and Corporate Governance Committee

Our board of directors has established a nominating and corporate governance committee, which is composed of Ms. Graham and Messrs. Drake, Hansen, Paulsen and Salvatore. Mr. Hansen chairs the committee, which is responsible for seeking, considering and recommending to the full board of directors qualified candidates for election as directors and recommending a slate of nominees for election as directors at the annual meeting of stockholders. It also periodically prepares and submits to the board of directors for adoption the committee’s selection criteria for director nominees. It reviews and makes recommendations on matters involving general operation of the board of directors and our corporate governance, and recommends to the board of directors nominees for each committee of the board of directors. In addition, the committee annually facilitates the assessment of the board of directors’

131

performance as a whole and of the individual directors and reports thereon to the board of directors.

Code of Business Conduct and Ethics

Our board of directors has established a code of business conduct and ethics that applies to our officers and directors and to employees and officers and directors of Hyperion Brookfield and its affiliates and Hyperion Brookfield Crystal River when such individuals are acting for or on our behalf. Among other matters, our code of business conduct and ethics is designed to deter wrongdoing and to promote:


	•	honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

	•	full, fair, accurate, timely and understandable disclosure in our Securities and Exchange Commission reports and other public communications;

	•	compliance with applicable governmental laws, rules and regulations;

	•	prompt internal reporting of violations of the code to appropriate persons identified in the code; and

	•	accountability for adherence to the code.

Any waiver of the code of business conduct and ethics for our executive officers or directors may be made only by our Audit Committee or, in the case of employees of Hyperion Brookfield and its affiliates who are involved in our business and who are not our executive officers, by our chief executive officer and the general counsel of Hyperion Brookfield Crystal River, and will be promptly disclosed as required by law or stock exchange regulations.

Director Compensation

Any member of our board of directors who is also an employee of our Manager, Hyperion Brookfield, or Brookfield or their respective affiliates, or the non-independent directors, will not receive additional compensation for serving on our board of directors. Each independent director will receive an annual retainer of $50,000 (which was increased from $35,000 effective October 1, 2005) in quarterly payments in arrears, with the option to receive a portion or all of such fee in our common stock or common stock units, subject to certain restrictions, and will also receive an annual award of 2,000 shares of restricted stock following each annual meeting of stockholders. We also reimburse our non-independent directors for their travel expenses incurred in connection with their attendance at full board and committee meetings. In addition, the chair of our Audit Committee is paid an annual retainer of $10,000 and the chairs of our Nominating and Corporate Governance Committee and our Compensation Committee each are paid an annual retainer of $3,000.

Our independent directors are also eligible to receive restricted stock, options and other stock-based awards under our 2005 long-term incentive plan. Rodman Drake and Harald Hansen each received an award of 1,400 shares of restricted stock, and our former director Leo Walsh received an award of 700 shares of our restricted stock on March 15, 2005, all of which shares vested on the date of issue, in lieu of all or a portion of their respective director’s fee for 2005. On March 15, 2006, we issued 2,000 shares of restricted stock to Janet Graham. The forfeiture restrictions with respect to 666 of such shares lapsed at issuance and the forfeiture restrictions on the other 1,334 shares will lapse in equal installments on March 15, 2007 and March 15, 2008. In addition, on March 15, 2006, we granted to each of Harald Hansen, William Paulsen and Louis Salvatore an award of 2,000 shares of our common stock, which they received in the form of restricted stock units under our 2005 long-term incentive plan. We granted options to purchase 4,000 shares of our common stock to Rodman Drake on

132

March 15, 2006. The options with respect to 1,333 shares vested upon issuance and the remaining 2,667 options will vest ratably on the first two anniversaries of the grant date.

Executive Compensation

We have not paid, and we do not intend to pay, any annual cash compensation to our executive officers for their services as executive officers. Our executive officers are compensated by Hyperion Brookfield Crystal River from the income Hyperion Brookfield Crystal River receives under the management agreement between Hyperion Brookfield Crystal River and us.

2005 Long-Term Incentive Plan

Our board of directors adopted a 2005 long-term incentive plan, which we refer to as the 2005 Plan, in March 2005. The purpose of the 2005 Plan is to provide incentives to our Manager, executive officers, employees, directors and other persons and entities that provide services to us to motivate them toward our long-term success, growth and profitability and to attract, retain and reward key personnel. The 2005 Plan authorizes the award of stock options, stock appreciation rights, stock, restricted stock, restricted stock units, stock units, deferred stock units and performance-based awards.

The 2005 Plan provides for the issuance through the end of the 2006 calendar year of 1,748,750 shares of our common stock. In subsequent calendar years, the maximum limit on the number of shares will increase by an amount equal to ten percent (10%) of the difference, if any (but not less than zero) between the number of shares of our common stock that were outstanding as of the last day of the immediately preceding calendar year and the number of shares of our common stock that were outstanding as of the last day of the calendar year preceding such year. In no event will the number of shares of our common stock issued pursuant to the 2005 Plan exceed 10,000,000. On March 15, 2005, 210,000 shares of restricted stock and options to purchase common stock were issued or reserved for issuance to our Manager, and our Manager allocated those shares and options to our officers, directors, members of our strategic advisory committee and employees and to employees of Hyperion Brookfield that provide services to us. In addition, on March 15, 2005, an aggregate of 3,500 restricted shares were issued to three of our independent directors and on March 15, 2006, an aggregate of 32,000 shares of restricted stock and options in respect of 4,000 shares were issued to one of our executives and two of our independent directors. Administration of the 2005 Plan is carried out by the compensation committee of the board of directors. The compensation committee or the board of directors may delegate its authority under the 2005 Plan to one or more officers but it may not delegate its authority with respect to awards to individuals subject to Section 16 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. As used in this summary, the term administrator means the compensation committee or the board of directors and its delegate. The shares of our common stock subject to any award that expires, or is forfeited, cancelled or becomes unexercisable, will again be available for subsequent awards, except as prohibited by law. In addition, future awards may occur with respect to shares of our common stock that we refrain from otherwise delivering pursuant to an award as payment of either the exercise price of an award or applicable withholding and employment taxes.

Either our board of directors or a committee appointed by our board of directors may administer the 2005 Plan. We refer to our board of directors and any committee exercising discretion under the 2005 Plan from time to time as the Committee. The board of directors may at any time appoint additional members to the Committee, remove and replace members of the Committee with or without cause, and fill vacancies on the Committee. To the extent permitted by law, the Committee may authorize one or more persons who are reporting persons for purposes of Rule 16b-3 under the Exchange Act, or other officers, to make awards to eligible

133

persons who are not reporting persons for purposes of Rule 16b-3 under the Exchange Act, or other officers whom we have specifically authorized to make awards. With respect to decisions involving an award intended to satisfy the requirements of section 162(m) of the Internal Revenue Code, the Committee is to consist solely of two or more directors who are “outside directors” for purposes of that code section. The Committee may delegate administrative functions to individuals who are reporting persons for purposes of Rule 16b-3 of the Exchange Act, officers or employees of ours or our affiliates.

Subject to the terms of the 2005 Plan, the Committee has express authority to determine the eligible persons who will receive awards, the number of shares of our common stock, units, or share appreciation rights, which we refer to as SARs, to be covered by each award, and the terms and conditions of awards. The Committee has broad discretion to prescribe, amend, and rescind rules relating to the 2005 Plan and its administration, to interpret and construe the 2005 Plan and the terms of all award agreements, and to take all actions necessary or advisable to administer the 2005 Plan. Within the limits of the 2005 Plan, the Committee may accelerate the vesting of any awards, allow the exercise of unvested awards, and may modify, replace, cancel, or renew them. In addition, the Committee may buy-out options or SARs, subject to certain conditions may terminate and cancel options or SARs in exchange for a commitment to issue options or SARs after more than six months or, subject to shareholder approval or under certain circumstances, reduce the exercise price for outstanding options or SARs.

The 2005 Plan provides that we and our affiliates will indemnify members of the Committee and their delegates against any claims, liabilities, or costs arising from the good faith performance of their duties under the 2005 Plan. The 2005 Plan releases these individuals from liability for good faith actions associated with the 2005 Plan’s administration.

Our Manager, officers, directors, employees and other persons or entities that provide services to us, including employees of our Manager or its affiliates are eligible to participate in the 2005 plan. The Committee may grant options that are intended to qualify as incentive stock options, which we refer to as ISOs, only to employees, and may grant all other awards to eligible persons.

Options granted under the 2005 Plan provide participants with the right to purchase shares of our common stock at a predetermined exercise price. The Committee may grant options that are intended to qualify as ISOs or options that are not intended to so qualify, which we refer to as Non-ISOs. The 2005 Plan also provides that ISO treatment may not be available for options that become first exercisable in any calendar year to the extent the value of the underlying shares that are the subject of the option exceed $100,000, based upon the fair market value of the shares of our common stock on the option grant date.

A SAR generally permits a participant who receives it to receive, upon exercise, cash and/or shares of our common stock equal in value to the excess of the fair market value, on the date of exercise, of the shares of our common stock with respect to which the SAR is being exercised, over the exercise price of the SAR for such shares. The Committee may grant SARs in tandem with options, or independently of them. SARs that are independent of options may limit the value payable on its exercise to a percentage, not exceeding 100%, of the excess value.

The exercise price of Non-ISOs may not be less than 75% of the fair market value on the grant date of the shares of our common stock subject to the award, and the exercise price of SARs may not be less than 75% of the fair market value on the grant date of the shares subject to the award. The exercise price of ISOs may not be less than 110% of the fair market value on the grant date of the underlying shares of our common stock subject to the award for participants who own more than ten percent of our shares of common stock on the grant date. For ISOs granted to other participants and for options intended to be exempt from Internal

134

Revenue Code Section 162(m) limitations, the exercise price may not be less than 100% of the fair market value of the underlying shares of common stock on the grant date.

To the extent exercisable in accordance with the agreement granting them, an option or SAR may be exercised in whole or in part, and from time to time during its term; subject to earlier termination relating to a holder’s termination of employment or service. With respect to options, unless otherwise provided in an award agreement, payment of the exercise price may be made in any of the following forms, or combination of them: cash or check in U.S. dollars, certain shares of our common stock, cashless exercise under a program the Committee approves and surrender of restricted stock, restricted stock units, SARs or deferred stock units.

The term over which participants may exercise options and SARs may not exceed ten years from the date of grant; five years in the case of ISOs granted to employees who, at the time of grant, own more than 10% of our outstanding shares of common stock.

Under the 2005 Plan, no participant other than our Manager may receive options and SARs that relate to no more than 100,000 shares of our common stock per calendar year and our Manager may not receive options or SARs that relate to more than 1,000,000 shares of our common stock per calendar year.

Under the 2005 Plan, the Committee may grant restricted stock that are forfeitable until certain vesting requirements are met, may grant restricted stock units which represent the right to receive shares of our common stock after certain vesting requirements are met, and may grant unrestricted stock as to which the participant’s interest is immediately vested. For restricted awards, the 2005 Plan provides the Committee with discretion to determine the terms and conditions under which a participant’s interests in such awards become vested. Unless otherwise provided in an award agreement, recipients of restricted stock will be entitled to the dividends declared and paid on the underlying stock and recipients of restricted stock units will be entitled to cash payments equal to the amount of the dividends otherwise payable if the shares underlying the restricted stock units were outstanding. The 2005 Plan provides for unrestricted stock that vests in full upon the date of a grant or other date determined by the Committee. The 2005 Plan also provides for deferred stock units in order to permit certain directors, officers, consultants, or select members of management to defer their receipt of compensation payable in cash or shares of our common stock, including shares that would otherwise be issued upon the vesting of restricted stock and restricted stock units. Deferred stock units represent a future right to receive shares of our common stock.

If an award agreement does not provide for earlier payment of dividends, whenever shares of our common stock are released pursuant to these awards, the participant will be entitled to receive additional shares of our common stock that reflect any stock dividends that our stockholders received between the date of the award and issuance or release of the shares of our common stock. Likewise, a participant will be entitled to receive a cash payment reflecting cash dividends paid to our stockholders during the same period. Such cash dividends will accrue interest, at 5% per annum, from their payment date to our stockholders until paid in cash when the shares of our common stock to which they relate are either released from restrictions in the case of restricted stock or issued in the case of restricted stock units.

The 2005 Plan authorizes the Committee to grant performance-based awards in the form of performance units that the Committee may, or may not, designate as “performance compensation awards” that are intended to be exempt from Internal Revenue Code Section 162(m) limitations. In either case, performance units vest and become payable based upon the achievement, within the specified period of time, of performance objectives applicable to the individual, us, or any affiliate. Performance units are payable in shares of common stock, cash, or some combination of the two; subject to an individual participant limit for participants, other than our Manager, of $500,000 and 100,000 shares of our common stock per performance period. The participant limit for our Manager is 1,000,000 shares of our common

135

stock and $500,000 per performance period. The Committee decides the length of performance periods, but the periods may not be less than one fiscal year.

With respect to performance compensation awards, the 2005 Plan requires that the Committee specify in writing the performance period to which the award relates, and an objective formula by which to measure whether and the extent to which the award is earned on the basis of the level of performance achieved with respect to one or more performance measures. Once established for a performance period, the performance measures and performance formula applicable to the award may not be amended or modified in a manner that would cause the compensation payable under the award to fail to constitute performance-based compensation under Internal Revenue Code Section 162(m).

Under the 2005 Plan, the possible performance measures for performance compensation awards include basic, diluted or adjusted earnings per share; sales or revenue; earnings before interest, taxes and other adjustments, in total or on a per share basis; basic or adjusted net income; basic or adjusted funds from operations or cash flow; returns on equity, assets, capital, revenue or similar measure; level and growth of dividends; the price or increase in price of our common stock; total stockholder return; total assets; growth in assets on new origination of assets; equity market capitalization; assets under management; and mergers, acquisitions, and sales of assets of affiliates or business units. Each measure will be, to the extent applicable, determined in accordance with generally accepted accounting principles as consistently applied by us, or such other standard applied by the Committee and, if so determined by the Committee, and in the case of a performance compensation award, to the extent permitted under Internal Revenue Code Section 162(m), adjusted to omit the effects of extraordinary items, gain or loss on the disposal of a business segment, unusual or infrequently occurring events and transactions and cumulative effects of changes in accounting principles. Performance measures may vary from performance period to performance period, and from participant to participant, and may be established on a stand-alone basis, in tandem or in the alternative.

As a condition to the issuance of shares of our common stock pursuant to awards, the 2005 Plan requires satisfaction of any applicable federal, state, local, or foreign withholding tax obligations that may arise in connection with the award or the issuance of shares of our common stock.

Awards may not be sold, pledged, assigned, hypothecated, transferred, or disposed of other than by will or the laws of descent and distribution, except to the extent the Committee permits lifetime transfers to charitable institutions, certain family members, or related trusts, or as otherwise approved by the Committee for directors, officers, a select group of management or highly compensated employees and with respect to awards to our Manager, which are transferable to employees of our Manager or its affiliates that provide services to us.

The Committee will equitably adjust the number of shares covered by each outstanding award, and the number of shares that have been authorized for issuance under the 2005 Plan but as to which no awards have yet been granted or that have been returned to the 2005 Plan upon cancellation, forfeiture, or expiration of an award, as well as the price per share covered by each such outstanding award, to reflect any increase or decrease in the number of issued shares resulting from a stock split, reverse stock split, stock dividend, combination, recapitalization or reclassification of the shares of our common stock, or any other increase or decrease in the number of issued shares effected without receipt of consideration by us. In the event of any such transaction or event, the Committee may provide in substitution for any or all outstanding options under the 2005 Plan such alternative consideration, including securities of any surviving entity, as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all options so replaced. In any case, such substitution of securities will not require the consent of any person who is granted options pursuant to the 2005 Plan.

136

In addition, in the event or in anticipation of a change in control, as defined in the 2005 Plan, the Committee may at any time in its sole and absolute discretion and authority, without obtaining the approval or consent of our stockholders or any participant with respect to his or her outstanding awards, except to the extent an award provides otherwise, take one or more of the following actions: (1) arrange for or otherwise provide that each outstanding award will be assumed or substituted with a substantially equivalent award by a successor corporation or a parent or subsidiary of such successor corporation; (2) accelerate the vesting of awards for any period, and may provide for termination of unexercised options and SARs at the end of that period, so that awards shall vest (and, to the extent applicable, become exercisable) as to the shares of our common stock that otherwise would have been unvested and provide that our repurchase rights with respect to shares of our common stock issued upon exercise of an award shall lapse as to the shares of our common stock subject to such repurchase right; or (3) arrange or otherwise provide for payment of cash or other consideration to participants in exchange for the satisfaction and cancellation of outstanding awards.

Notwithstanding the above, in the event a participant holding an award assumed or substituted by the successor corporation in a change in control is involuntarily terminated, as defined in the 2005 Plan, by the successor corporation in connection with, or within 12 months following consummation of, the change in control, then any assumed or substituted award held by the terminated participant at the time of termination shall accelerate and become fully vested, and exercisable in full in the case of options and SARs, and any repurchase right applicable to any shares of our common stock shall lapse in full. The acceleration of vesting and lapse of repurchase rights provided for in the previous sentence shall occur immediately prior to the effective date of the participant’s termination.

In the event of any distribution to our stockholders of securities of any other entity or other assets, other than dividends payable in cash or our stock, without receipt of consideration by us, the Committee may, in its discretion, appropriately adjust the price per share covered by each outstanding award to reflect the effect of such distribution. Finally, if we dissolve or liquidate, all awards will immediately terminate, subject to the ability of our board of directors to exercise any discretion that the board of directors may exercise in the case of a change in control.

The term of the 2005 Plan is ten years from the date of approval by our board of directors. Our board of directors may from time to time, amend, alter, suspend, discontinue, or terminate the 2005 Plan; provided that no amendment, suspension, or termination of the 2005 Plan shall materially and adversely affect awards already granted unless it relates to an adjustment pursuant to certain transactions that change our capitalization or it is otherwise mutually agreed between the participant and the Committee. An amendment will not become effective without the approval of our stockholders if it increases the number of shares of common stock that may be issued under the 2005 Plan (other than changes to reflect certain corporate transactions and changes in capitalization as described above). Notwithstanding the foregoing, the Committee may amend the 2005 plan to eliminate provisions which are no longer necessary as a result of changes in tax or securities laws or regulations, or in the interpretation thereof.

On March 15, 2005, we issued to our Manager 84,000 shares of restricted stock and granted to our Manager options to purchase 126,000 shares of our common stock, with an exercise price equal to $25 per share, representing in the aggregate approximately 0.8% of the outstanding shares of our common stock on a fully-diluted basis. The forfeiture restrictions with respect to 27,996 of such shares of restricted stock have lapsed and options to purchase 41,995 of such shares have vested and the remainder of such restricted stock and options will vest or become exercisable in equal annual installments on March 15, 2007 and March 15, 2008. Hyperion Brookfield Crystal River has the right in its discretion to allocate, and has allocated, these shares and options to certain of its officers and employees, certain of our directors and other individuals associated with Hyperion Brookfield or Brookfield and their

137

respective affiliates who provide services to us. We believe this investment provides an incentive for Hyperion Brookfield Crystal River to operate our company with a view towards maximizing returns to our stockholders. On March 15, 2005, we issued to three of our independent directors an aggregate of 3,500 shares of restricted stock, which shares vested on the respective date of issuance. On March 15, 2006, we issued to one of our independent directors and one of our executive officers an aggregate of 32,000 shares of restricted stock, and the forfeiture restrictions with respect to 666 of those shares immediately vested, and we granted to one of our independent directors options to purchase 4,000 shares of our common stock, of which options to purchase 1,333 shares immediately vested.

Equity Compensation Plan Information

The following table presents information as of June 30, 2006 with respect to compensation plans under which shares of our common stock are authorized for issuance.

Weighted Average

Number of Securities

Number of Securities to Be

Exercise Price of

Remaining Available

Issued upon Exercise of

Outstanding

for Future Issuance

Outstanding Options,

Options, Warrants

under Equity

Plan Category

Warrants and Rights(1)

and Rights

Compensation Plans(2)

Equity Compensation Plans Approved by Stockholders

130,000

25.00

1,499,250

Equity Compensation Plans Not Approved by Stockholders(3)

—

Total

130,000

25.00

1,499,250


(1)	There are no outstanding warrants or rights.

(2)	Amounts exclude any securities to be issued upon exercise of outstanding options. Includes 9,876 shares of common stock to be issued in respect of deferred stock units and restricted stock units issued to certain of our independent directors.

(3)	The Company does not have any equity compensation plans that have not been approved by stockholders.

Indemnification and Limitation on Liability; Insurance


	•	actual receipt of an improper benefit or profit in money, property or services; or

	•	active and deliberate dishonesty established by a final judgment and which is material to the cause of action.

Our charter contains such a provision which eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law.

Our charter authorizes us, and our bylaws obligate us, to the maximum extent permitted by Maryland law, to indemnify any present or former director or officer or any individual who, while serving as our director or officer and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee and who is made, or is threatened to be made, a party to the proceeding by reason of his or her service in that capacity from and against any claim or liability to which that individual may become subject or which that individual may incur by reason of his or her service in any such capacity and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. Our charter and bylaws

138

also permit us to indemnify and advance expenses to any individual who served our predecessor in any of the capacities described above and any of our or our predecessor’s employees or agents.

Maryland law requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in such capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made, or threatened to be made, a party by reason of their service in those or other capacities unless it is established that:


	•	the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty,

	•	the director or officer actually received an improper personal benefit in money, property or services, or

	•	in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of:


	•	a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and

	•	a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

We have obtained a policy of insurance under which our directors and officers will be insured, subject to the limits of the policy, against certain losses arising from claims made against such directors and officers by reason of any acts or omissions covered under such policy in their respective capacities as directors or officers, including certain liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Management Agreement

We have entered into a management agreement with Hyperion Brookfield Crystal River, pursuant to which it provides for the day-to-day management of our operations.

The management agreement requires Hyperion Brookfield Crystal River to manage our business affairs in conformity with the policies and the investment guidelines that are approved

139

and monitored by our board of directors. Hyperion Brookfield Crystal River’s role as Manager is under the supervision and direction of our board of directors. Hyperion Brookfield Crystal River is responsible for


	•	the selection, purchase and sale of our portfolio investments, other than those investments proposed by our sub-advisors,

	•	our financing activities, and

	•	providing us with investment advisory services.

Hyperion Brookfield Crystal River 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, which may include, without limitation, the following:


	•	serving as our consultant with respect to the periodic review of the investment criteria and parameters for our investments, borrowings and operations for the approval of our board of directors;

	•	investigating, analyzing and selecting possible investment opportunities and originating, acquiring, financing, retaining, selling, negotiating for prepayment, restructuring or disposing of our investments consistent with our investment guidelines;

	•	with respect to any prospective investment by us and any sale, exchange or other disposition of any investment by us, conducting negotiations on our behalf with sellers and purchasers and their respective agents, representatives and investment bankers;

	•	engaging and supervising, on our behalf and at our expense, independent contractors who provide investment banking, mortgage brokerage, securities brokerage and other financial services and such other services as may be required relating to our investments;

	•	coordinating and managing operations of any joint venture or co-investment interests held by us and conducting all matters with any joint venture or co-investment partners;

	•	providing executive and administrative personnel, office space and office services required in rendering services to us;

	•	administering our day-to-day operations and performing and supervising the performance of such other administrative functions necessary to our management as may be agreed upon by Hyperion Brookfield Crystal River and our board of directors, including the collection of revenues and the payment of our debts and obligations and maintenance of appropriate computer services to perform such administrative functions;

	•	communicating on our behalf with the holders of any of our equity or debt securities as required to satisfy the reporting and other requirements of any governmental bodies or agencies or trading markets and to maintain effective relations with such holders;

	•	counseling us in connection with policy decisions to be made by our board of directors;

	•	evaluating and recommending to our board of directors hedging strategies and engaging in hedging activities on our behalf, consistent with our qualification as a REIT and with our investment guidelines;

	•	counseling us regarding the maintenance of our qualification as a REIT and monitoring compliance with the various REIT qualification tests and other rules set out in the Internal Revenue Code and Treasury Regulations thereunder and using commercially reasonable efforts to cause us to qualify for taxation as a REIT;

	•	counseling us regarding the maintenance of our exemption from regulation under the Investment Company Act and monitoring compliance with the requirements for maintaining such exemption and using commercially reasonable efforts to cause us to

140

maintain such exemption from regulation as an investment company under the Investment Company Act;

• assisting us in developing criteria for asset purchase commitments that are specifically tailored to our investment objectives and making available to us its knowledge and experience with respect to mortgage loans, real estate, real estate-related securities, other real estate-related assets and non-real estate-related assets;

• furnishing reports and statistical and economic research to us regarding our activities and services performed for us by Hyperion Brookfield Crystal River;

• monitoring the operating performance of our investments and providing periodic reports with respect thereto to our board of directors, including comparative information with respect to such operating performance and budgeted or projected operating results;

• investing or reinvesting any money or securities of ours (including investing in short-term investments pending investment in other investments, payment of fees, costs and expenses, or payments of dividends or distributions to our stockholders), and advising us as to our capital structure and capital raising;

• causing us to retain a qualified independent public accounting firm and legal counsel, as applicable, to assist in developing appropriate accounting procedures, compliance procedures and testing systems with respect to financial reporting obligations and compliance with the provisions of the Internal Revenue Code applicable to REITs and causing us to conduct quarterly compliance reviews with respect thereto;

• causing us to qualify to do business in all applicable jurisdictions and to obtain and maintain all appropriate licenses;

• assisting us in complying with all regulatory requirements applicable to us in respect of our business activities, including preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports and documents, if any, required under the Exchange Act;

• taking all necessary actions to enable us to make required tax filings and reports, including soliciting stockholders for required information to the extent provided by the provisions of the Internal Revenue Code and Treasury Regulations applicable to REITs;

• handling and resolving all claims, disputes or controversies (including all litigation, arbitration, settlement or other proceedings or negotiations) in which we may be involved or to which we may be subject arising out of our day-to-day operations, subject to such limitations or parameters as may be imposed from time to time by our board of directors;

• using commercially reasonable efforts to cause expenses incurred by or on behalf of us to be commercially reasonable or commercially customary and within any budgeted parameters or expense guidelines set by our board of directors from time to time;

• obtaining appropriate warehouse facilities or other financings for our investments consistent with our investment guidelines;

• advising us with respect to and structuring long-term financing vehicles for our portfolio of assets, and offering and selling securities publicly or privately in connection with any such structured financing;

• performing such other services as may be required from time to time for management and other activities relating to our assets as our board of directors shall reasonably request or Hyperion Brookfield Crystal River shall deem appropriate under the particular circumstances; and

• using commercially reasonable efforts to cause us to comply with all applicable laws.

141

Pursuant to the management agreement, Hyperion Brookfield Crystal River will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Hyperion Brookfield Crystal River, its directors, officers, managers and employees will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the management agreement, except by reason of acts or omissions constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the management agreement. We have agreed to indemnify Hyperion Brookfield Crystal River, its affiliates, directors, officers, members, managers, employees and agents and our strategic advisory committee members with respect to all liabilities, judgments, costs, charges, losses, expenses and claims arising from claims of third parties caused by acts or omissions of Hyperion Brookfield Crystal River not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed or not performed in good faith in accordance with and pursuant to the management agreement or claims of its employees relating to the terms and conditions of employment. Hyperion Brookfield Crystal River has agreed to indemnify us, our directors and officers with respect to all liabilities, judgments, costs, charges, losses, expenses and claims arising from claims of third parties caused by acts or omissions of Hyperion Brookfield Crystal River constituting bad faith, willful misconduct, gross negligence or reckless disregard of its duties under the management agreement or any claims by Hyperion Brookfield Crystal River’s employees relating to the terms and conditions of their employment by Hyperion Brookfield Crystal River. Hyperion Brookfield Crystal River will carry errors and omissions and other customary insurance upon the completion of the offering.

Pursuant to the terms of the management agreement, Hyperion Brookfield Crystal River is required to provide us with our management team, including a chief executive officer, president, chief investment officer, chief financial officer and executive vice president, along with appropriate support personnel, to provide the management services to be provided by Hyperion Brookfield Crystal River to us. However, Hyperion Brookfield Crystal River is not obligated to dedicate certain of its employees exclusively to us nor is it obligated to dedicate any specific portion of its time to our business. None of Hyperion Brookfield’s employees are contractually dedicated to our Manager’s obligations under the management agreement. In addition, our board of directors has formed a strategic advisory committee to advise and consult with our board and our senior management team with respect to our investment policies, investment portfolio holdings, financing and leveraging strategies and investment guidelines. The members of the strategic advisory committee are Lewis Ranieri, who also serves as chairman of the committee, Clifford Lai and John Dolan of Hyperion Brookfield and Bruce Flatt and Bruce Robertson of Brookfield. Although it is not contractually prohibited from doing so, Hyperion Brookfield Crystal River currently does not, nor does it intend to, provide services to third parties that are unrelated to us.

The initial term of the management agreement expires on December 31, 2008 and will be automatically renewed for a one-year term each anniversary date thereafter. After the initial term, our independent directors will review Hyperion Brookfield Crystal River’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 the affirmative vote of the holders of at least 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 fees payable to Hyperion Brookfield Crystal River are not fair, subject to Hyperion Brookfield Crystal River’s right to prevent such a compensation termination by accepting a mutually acceptable reduction of management fees. Our board of directors will provide 180 days’ prior notice of any such termination and Hyperion Brookfield Crystal River will be paid a termination fee equal to the amount of two times the sum of the average annual base management fee and the average annual incentive management fee earned by Hyperion

142

Brookfield Crystal River during the two 12-month periods immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

We may also terminate the management agreement for cause without payment of the termination fee with 30 days’ prior written notice from our board of directors. Cause is defined as:


	•	Hyperion Brookfield Crystal River’s continued material breach of any provision of the management agreement following a period of 30 days after written notice thereof;

	•	Hyperion Brookfield Crystal River’s fraud, misappropriation of funds, or embezzlement against us;

	•	Hyperion Brookfield Crystal River’s gross negligence of duties under the management agreement;

	•	the occurrence of certain events with respect to the bankruptcy or insolvency of Hyperion Brookfield Crystal River, including an order for relief in an involuntary bankruptcy case or Hyperion Brookfield Crystal River authorizing or filing a voluntary bankruptcy petition;

	•	the dissolution of Hyperion Brookfield Crystal River; and

	•	certain changes of control (as defined in the management agreement) of Hyperion Brookfield Crystal River.

Cause does not include unsatisfactory performance that is materially detrimental to our business.

Our Manager may terminate the management agreement effective upon 30-days prior written notice of termination to us in the event that we default in the performance or observance of any material term, condition or covenant in the management agreement and the default continues for a period of 30-days after written notice to us specifying the default and requesting that the default be remedied in such 30-days period. The management agreement may be terminated at the option of Hyperion Brookfield Crystal River, without payment of the termination fee, in the event we become regulated as an investment company under the Investment Company Act, with such termination deemed to occur immediately prior to such event.

Sub-Advisory Agreements

We and Hyperion Brookfield Crystal River have entered into sub-advisory agreements with each of Brookfield Sub-Advisor and Ranieri & Co., pursuant to which they provide advisory services to us in conjunction with Hyperion Brookfield Crystal River’s service to us as our external manager.

Brookfield Sub-Advisor has been engaged to supervise, manage and provide advisory services in connection with our investments in commercial real estate, mortgages and other non-commercial real estate financing instruments, hydroelectric, gas- and coal-fired power generating facilities, timber assets and certain other asset classes, make recommendations with respect to the purchase and sale of such assets and mortgages and other real estate debt and to supervise and arrange for the purchase and sale of such assets, subject to the approval of our Board of Directors. Ranieri & Co. has been engaged to advise and consult with Hyperion Brookfield Crystal River concerning macroeconomic trends, market trends in RMBS and portfolio management. Each sub-advisory agreement may be terminated without penalty by us, our Manager or by the sub-advisor upon 60 days written notice and will terminate automatically upon the termination of the management agreement with Hyperion Brookfield Crystal River or in

143

the event of an “assignment” thereof within the meaning of the Investment Advisors Act or at any time for cause.

Each sub-advisor, its respective directors, officers, managers and employees will not be liable to us, any subsidiary of ours, our Manager and any directors, officers, managers, stockholders, owners or partners of the foregoing for acts or omissions performed or not performed in accordance with and pursuant to its sub-advisory agreement with us, except by reason of acts or omissions constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under its sub-advisory agreement. We have agreed to indemnify each sub-advisor and our Manager and their respective affiliates, officers, directors, members, managers, employees, agents, successors and assigns with respect to all liabilities, judgments, costs, charges, losses, expenses and claims by third parties arising from either acts or omissions of such sub-advisor other than those constituting bad faith, willful misconduct, gross negligence or reckless disregard of duties under its sub-advisory agreement with us and our Manager as determined by a final court order or claims by such sub-advisor’s employees relating to the terms and conditions of their employment with the sub-advisor. Each sub-advisor has agreed to indemnify us and our Manager, their directors and officers with respect to all liabilities, judgments, costs, charges, losses, expenses and claims by third parties arising from acts or omissions of such sub-advisor constituting bad faith, willful misconduct, gross negligence or reckless disregard of its duties under its sub-advisory agreement with us as determined by a final court order or any claims by such sub-advisor’s employees relating to the terms and conditions of their employment with the sub-advisor. Each sub-advisor will carry errors and omissions and other customary insurance upon the completion of the offering.

Brookfield Sub-Advisor is a special purpose entity formed solely for the purpose of serving as our sub-advisor. Brookfield Sub-Advisor, which is not a registered investment adviser, has no other clients and has informed us that it will not accept any other clients without our consent. Since Brookfield Sub-Advisor is not registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended, we will not be afforded the protections and the benefits of such Act and the regulations promulgated thereunder with respect to activities that Brookfield Sub-Advisor takes on our behalf.

Base Management Fees and Incentive Management Fees; Sub-Advisor Compensation

We do not maintain an office or employ personnel. Instead we rely on the facilities and resources of Hyperion Brookfield provided through Hyperion Brookfield Crystal River to conduct our operations. Expense reimbursements to Hyperion Brookfield Crystal River are made on the first business day of each calendar month.

Base Management Fee. We pay Hyperion Brookfield Crystal River a base management fee monthly in arrears in an amount equal to 1/12 of our equity as defined in the management agreement times 1.50%. Hyperion Brookfield Crystal River uses the proceeds from its management fee in part to pay compensation to its officers and employees who, notwithstanding that certain of them also are our officers, receive no cash compensation directly from us.

For purposes of calculating the base management fee, our equity means, for any month, the sum of the net proceeds from any issuance of our equity securities, after deducting any underwriting discounts and commissions and other expenses and costs relating to the issuance, plus our retained earnings at the end of such month (without taking into account any non-cash equity compensation expense incurred in current or prior periods), which amount shall be reduced by any amount that we pay for repurchases of our common stock. The foregoing calculation of the base management fee will be adjusted to exclude one-time events pursuant to changes in GAAP, as well as non-cash charges after discussion between Hyperion Brookfield

144

Crystal River and our independent directors and approval by a majority of our independent directors in the case of non-cash charges.

Hyperion Brookfield Crystal River’s base management fee is to be calculated by Hyperion Brookfield Crystal River within fifteen business days after the end of each month and such calculation is to be promptly delivered to us. We are obligated to pay the base management fee in cash within twenty business days after the end of each month.

Reimbursement of Expenses. Because Hyperion Brookfield Crystal River’s employees perform certain legal, regulatory, compliance, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, Hyperion Brookfield Crystal River is paid or reimbursed for the documented cost of performing such tasks (which is not subject to any annual limitation), provided that such costs and reimbursements are no greater than those which would be paid to outside professionals or consultants on an arm’s length basis. Our Manager waived the reimbursement of its expenses through December 31, 2006.

We also pay all operating expenses, except those specifically required to be borne by Hyperion Brookfield Crystal River under the management agreement. Hyperion Brookfield Crystal River is responsible for all costs incident to the performance of its duties under the management agreement, including compensation of Hyperion Brookfield Crystal River’s employees and other related expenses. The expenses required to be paid by us include, but are not limited to:


	•	issuance and transaction costs incident to the acquisition, disposition and financing of our investments;

	•	legal, regulatory, compliance, tax, accounting, consulting, auditing and administrative fees and expenses;

	•	the compensation and expenses of our directors and the cost of liability insurance to indemnify our directors and officers;

	•	the costs associated with the establishment and maintenance of our credit facilities and other indebtedness (including commitment fees, accounting fees, legal fees, closing costs, etc.);

	•	expenses associated with our other securities offerings;

	•	expenses relating to the payment of dividends;

	•	expenses connected with communications to holders of our securities and in complying with the continuous reporting and other requirements of the Commission and other governmental bodies;

	•	transfer agent and exchange listing fees;

	•	the costs of printing and mailing proxies and reports to our stockholders;

	•	costs associated with any computer software or hardware, electronic equipment, or purchased information technology services from third party vendors that is used solely for us;

	•	costs and out-of-pocket expenses incurred by directors, officers, employees or other agents of Hyperion Brookfield Crystal River for travel on our behalf;

	•	the costs and expenses incurred with respect to market information systems and publications, research publications and materials;

	•	settlement, clearing, and custodial fees and expenses;

145


	•	the costs of maintaining compliance with all federal, state and local rules and regulations, including securities regulations, or any other regulatory agency, all taxes and license fees and all insurance costs incurred on our behalf; and

	•	expenses relating to any office or office facilities, including disaster backup recovery sites and facilities maintained for us or separate from offices of Hyperion Brookfield Crystal River.

In addition, we are required to pay our pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of Hyperion Brookfield Crystal River and its affiliates required for our operations. Hyperion Brookfield Crystal River has waived its right to request reimbursement from us of these expenses that it incurs through December 31, 2006.

Incentive Management Fee. In addition to the base management fee, Hyperion Brookfield Crystal River will receive quarterly incentive compensation in an amount equal to 25% of:


	•	the dollar amount by which our net income (before non-cash compensation expense and the incentive management fee) per share for such quarter exceeds an amount equal to:


	•	the product of the weighted average price per share in our March 2005 private offering, our August 2006 initial public offering and any subsequent offerings of our common stock multiplied by the higher of:


	•	2.4375% and

	•	25% of the then applicable 10-year treasury note rate plus 0.50%,


	•	multiplied by the weighted average number of shares of common stock outstanding during the quarter

provided, that the foregoing calculation of the incentive management fee shall be adjusted to exclude one-time events pursuant to changes in GAAP, as well as non-cash charges after discussion between Hyperion Brookfield Crystal River and our independent directors and approval by a majority of our independent directors in the case of non-cash charges.

We structured the incentive fee in this manner in order to provide Hyperion Brookfield Crystal River with an incentive to manage our portfolio with a view towards achieving positive net income. Our ability to achieve returns in excess of the thresholds noted above in order for Hyperion Brookfield Crystal River to earn the incentive compensation described in the proceeding paragraph is dependent upon the level and volatility of interest rates, our ability to react to changes in interest rates and to utilize successfully the operating strategies described herein, and other factors, many of which are not within our control.

Hyperion Brookfield Crystal River will compute the quarterly incentive management fee within 30 days after the end of each fiscal quarter, and we will pay the quarterly incentive management fee with respect to each fiscal quarter within five business days following the delivery to us of Hyperion Brookfield Crystal River’s written statement setting forth the computation of the incentive management fee for such quarter. In accordance with the management agreement, our Manager and the independent members of our board of directors have agreed to adjust the calculation of the Manager’s incentive fee to exclude non-cash adjustments required by SFAS 133 relating to the valuation of interest rate swaps, currency swaps and credit default swaps. The management agreement provides that 10% of Hyperion Brookfield Crystal River’s incentive management fee is to be paid in shares of our common stock (provided that under our management agreement, Hyperion Brookfield Crystal River may not receive payment of its incentive management fee in shares of our common stock if such payment would result in Hyperion Brookfield Crystal River owning directly or indirectly through one or more subsidiaries more than 9.8% of our common stock) and the balance in cash.

146

Hyperion Brookfield Crystal River may, in its sole discretion, elect to receive a greater percentage of its incentive management fee in the form of our common stock. Under our management agreement, Hyperion Brookfield Crystal River agrees that it may not elect to receive shares of our common stock as payment of its incentive management fee, except in accordance with all applicable securities exchange rules and securities laws (including prohibitions on insider trading).

The number of shares to be received by Hyperion Brookfield Crystal River will be based on the fair market value of these shares. Shares of our common stock delivered as payment of the incentive management fee will be immediately vested or exercisable, provided that Hyperion Brookfield Crystal River has agreed not to sell the shares prior to one year after the date they are paid. Hyperion Brookfield Crystal River’s transfer restriction will lapse if the management agreement is terminated. Hyperion Brookfield Crystal River will have the right in its discretion to allocate these shares to its officers, employees and other individuals who provide services to us and we will issue or permit the transfer of these shares in accordance with our Manager’s instructions, subject to applicable law and provided that these shares will remain subject to the foregoing one-year lock-up period.

We have agreed to register the resale of these shares of our common stock. We have also granted Hyperion Brookfield Crystal River the right to include these shares in any registration statements we might file in connection with any future public offerings, subject only to the right of the underwriters of those offerings to reduce the total number of secondary shares included in those offerings (with such reductions to be proportionately allocated among selling stockholders participating in those offerings).

An example of a hypothetical quarterly incentive fee calculation under our management agreement with Hyperion Brookfield Crystal River follows.

This hypothetical example assumes the following:


	•	GAAP net income before non-cash equity compensation expense and after exclusion of non-cash SFAS 133 adjustments (“Adjusted GAAP net income”) equals $9,000,000;

	•	17,400,000 shares of common stock are outstanding and the weighted average number of shares of common stock outstanding during the quarter is 17,400,000;

	•	U.S. 10-year treasury rate is 4.5%; and

	•	weighted average offering price per share of common stock is $25.00.

Under these assumptions, the quarterly incentive fee payable to Hyperion Brookfield Crystal River would be as calculated below:


1.	Adjusted GAAP net income per share ($9,000,000/17,400,000)	$	0.5172
2.	Weighted average offering price per share of common stock ($25.00) multiplied by the greater of (A) 2.00% or (B) 0.50% plus one-fourth of the 10-year U.S. treasury rate (1.63%)	$	0.5000
3.	Excess of Adjusted GAAP net income per share over amount calculated in 2 above ($0.5172-$0.5000)	$	0.0172
4.	Weighted average number of shares outstanding multiplied by the amount calculated in 3 above (17,400,000 x $0.0172)	$	299,280
5.	Incentive Fee equals 25% of amount calculated in 4 above	$	74,820

Discretionary Awards to our Manager under the 2005 Plan. In the discretion of our compensation committee, we may, but are not required to (other than as noted above under “— Incentive Management Fee”) make awards under our 2005 Plan to our Manager or our sub-advisors.

147

Sub-Advisor Compensation. Our sub-advisors are paid advisory fees by our Manager funded by management fees paid by us to our Manager.

Brookfield Sub-Advisor is paid a monthly advisory fee equal to 20% of the base management fees and incentive management fees received by our Manager under our management agreement with our Manager. Our Manager also will pay Brookfield Sub-Advisor 20% of any termination fees received by our Manager in the event that our management agreement with our Manager is terminated. If the sub-advisory agreement with Brookfield Sub-Advisor is terminated, our Manager will continue to pay termination fees to Brookfield Sub-Advisor equal to the annual investment advisory fees and termination fees otherwise payable in accordance with the foregoing until the fifteenth anniversary of its sub-advisory agreement with us and our Manager.

Ranieri & Co. is paid an annual advisory fee of $100,000.

In addition, we are responsible for paying certain expenses and for reimbursement of the sub-advisors for such expenses that are incurred on our behalf.

Restricted Stock and Option Grant

Upon completion of our March 2005 private offering, we issued to Hyperion Brookfield Crystal River 84,000 shares of restricted stock and granted to Hyperion Brookfield Crystal River options to purchase 126,000 shares of our common stock with an exercise price of $25.00 per share, representing in the aggregate approximately 0.8% of the outstanding shares of our common stock as of the date of this prospectus on a fully-diluted basis, and it subsequently transferred those shares and options to certain of its officers and employees, certain of our directors and other individuals associated with Hyperion Brookfield or Brookfield and their respective affiliates who provide services to us. The forfeiture restrictions with respect to 27,996 of such shares of restricted stock have lapsed and options to purchase 41,995 of such shares have vested and the remainder of such restricted stock and options will vest or become exercisable in equal annual installments on March 15, 2007 and March 15, 2008. In the event of the forfeiture of such restricted stock or options, such restricted stock or options, as the case may be, will revert to our Manager.

Conflicts of Interest In Our Relationship With Hyperion Brookfield Crystal River and Hyperion Brookfield

We are entirely dependent on Hyperion Brookfield Crystal River for our day-to-day management and only have a few independent officers. Our chairman of the board, chief executive officer and president, chief financial officer, chief investment officer and executive vice president also serve as officers and/or directors of Hyperion Brookfield or certain of its affiliates. As a result, our management agreement with Hyperion Brookfield Crystal River was negotiated between related parties and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.

Hyperion Brookfield engages in other investment management activities pursuant to which it manages accounts that have overlapping objectives with us. Hyperion Brookfield has agreed to offer us the right to participate in all investment opportunities that it determines are appropriate for us in view of our investment objectives, policies and strategies, and other relevant factors, subject to the application of its conflict-resolution system. Hyperion Brookfield has a conflict-resolution system in place so that our company may share equitably with other Hyperion Brookfield client accounts in all investment opportunities, particularly those involving a security with limited supply, that may be suitable for our account and such other accounts. This system also includes other controls designed to prevent any client account receiving favorable treatment over any other client account. Hyperion Brookfield allocates investments to eligible accounts, including Crystal River, based on current demand according to the market value of the

148

account. If the investment cannot fulfill the pro rata allocation or be allocated in marketable portions, the investment is allocated on a rotational basis and based on current demand, with an emphasis placed on those accounts that were excluded in prior allocations. The rotational system is determined by Hyperion Brookfield’s chief investment officer and is overseen by its compliance officer to ensure fair and equitable investment allocation to all accounts in accordance with the Investment Advisers Act.

The ability of Hyperion Brookfield Crystal River and Hyperion Brookfield and their respective officers and employees to engage in other business activities may reduce the time Hyperion Brookfield Crystal River spends managing us.

We do not currently contemplate entering into any investment opportunity in which Hyperion Brookfield or Hyperion Brookfield Crystal River has an interest. In the event that any such investment opportunity is made available to us in the future, the transaction will require the approval in advance of a majority of our independent directors. We may acquire investments from Brookfield or its affiliates. Brookfield Sub-Advisor is not obligated to offer to us such investment opportunities, but may do so in its discretion. With respect to the acquisition or disposition of all investments recommended by Brookfield Sub-Advisor, in the absence of available market prices, the transaction price for any transaction will be based on an independent third-party valuation of the investment to be acquired or disposed, and all transactions will be approved in advance by our board of directors and by a majority of our independent directors.

Termination of the management agreement with Hyperion Brookfield Crystal River without cause is difficult and costly. The management agreement provides that it may only be terminated without cause following the initial period annually upon the affirmative vote of at least two-thirds of our independent directors, or by a vote of the holders of at least a majority of the outstanding shares of our common stock, based either upon unsatisfactory performance by Hyperion Brookfield Crystal River that is materially detrimental to us or upon a determination that the management fee payable to Hyperion Brookfield Crystal River is not fair, subject to Hyperion Brookfield Crystal River’s right to prevent such a termination by accepting a mutually acceptable reduction of management fees. Hyperion Brookfield Crystal River will be provided 45 days’ prior notice of any such termination and will be paid a termination fee equal to the amount of two times the sum of the average annual base management fee and the average annual incentive management fee earned by Hyperion Brookfield Crystal River during the two 12-month periods immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. These provisions may increase the effective cost to us of terminating the management agreement, thereby adversely affecting our ability to terminate Hyperion Brookfield Crystal River without cause.

Hyperion Brookfield Crystal River is authorized to follow very broad investment guidelines in managing our portfolio. Our directors periodically review our investment guidelines and our

149

investment portfolio. However, our board of directors will not review all of our proposed investments, other than any investments involving our affiliates or our sub-advisors’ affiliates or investments proposed by Brookfield Sub-Advisor, which they are required to review and approve prior to such investment being made. In addition, in conducting periodic reviews, the directors rely primarily on information provided to them by Hyperion Brookfield Crystal River. Furthermore, Hyperion Brookfield Crystal River may use complex strategies and transactions entered into by Hyperion Brookfield Crystal River may be difficult or impossible to unwind by the time they are reviewed by the directors. Hyperion Brookfield Crystal River has great latitude within the broad guidelines of the investment guidelines in determining the types of assets it may decide are proper investments for us. Poor investment decisions would have a material adverse effect on our ability to make distributions to our stockholders.

Pursuant to the management agreement, Hyperion Brookfield Crystal River will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Hyperion Brookfield Crystal River, its directors, officers, managers and employees will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the management agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the management agreement. We have agreed to indemnify Hyperion Brookfield Crystal River, its directors and its officers with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of Hyperion Brookfield Crystal River not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with and pursuant to the management agreement. Hyperion Brookfield Crystal River has agreed to indemnify us, our directors and officers with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of Hyperion Brookfield Crystal River constituting bad faith, willful misconduct, gross negligence or reckless disregard of its duties under the management agreement or any claims by Hyperion Brookfield Crystal River’s employees relating to the terms and conditions of their employment by Hyperion Brookfield Crystal River.

At the discretion of Hyperion Brookfield Crystal River and us, Hyperion Brookfield Crystal River may enter into a separate management agreement with Crystal River Capital TRS Holdings, Inc. for the purpose of providing management services with respect to our different lines of business, so long as the aggregate compensation paid to Hyperion Brookfield Crystal River by us and our TRS does not exceed the aggregate compensation payable under our management agreement.

Affiliates of Hyperion Brookfield Crystal River or our sub-advisors may provide services to us or to our subsidiaries, including property management, leasing, financing and disposition services. Our management agreement with Hyperion Brookfield Crystal River will provide that affiliates of Hyperion Brookfield Crystal River, Brookfield Sub-Advisor or Ranieri & Co. may be retained to provide services to us that are customarily provided in connection with the acquisition, development, management, leasing, financing and disposition of real estate or the management and administration of businesses similar to ours, provided that such services are provided at market rates, the agreements with the affiliates contain standard market terms, the affiliate providing the services has sufficient qualifications and experience to perform the services at a level of quality comparable to non-affiliated service providers in the area and the agreements with the affiliates are approved in advance by a majority of our independent directors.

Policies with Respect to Certain Transactions. Pursuant to the Maryland General Corporation Law, a contract or other transaction between a corporation and a director or between the corporation and any other corporation or other entity in which a director serves as a director or

150

has a material financial interest is not void or voidable solely on the grounds of such common directorship or interest, the presence of such director at the meeting at which the contract or transaction is authorized, approved or ratified or the counting of the director’s vote in favor thereof if (1) the fact of common directorship or interest is disclosed to the board of directors or a committee of the board of directors, and the board of directors or committee authorizes the transaction or contract by the affirmative vote of a majority of disinterested directors, even if the disinterested directors constitute less than a quorum, (2) the fact of the common directorship or interest is disclosed to the stockholders entitled to vote thereon, and the transaction or contract is authorized, approved or ratified by vote of a majority of votes cast by such stockholders (excluding the votes of shares owned by the interested director or other corporation or other entity), or (3) the transaction or contract is fair and reasonable to the corporation.

Our management agreement with our Manager provides that except to the extent that it interferes with the dedication of its and their time appropriate for the proper performance of our Manager’s duties under our management agreement, our Manager and its affiliates and their respective officers are permitted to engage in other businesses or to render services of any kind to any other person, including investment in, or advisory services to others investing in, any type of real estate, real estate related investment or non-real estate related investment, including investments which meet our principal investment objectives or in which we invest or are selling. There are no limitations on any director, officer or affiliate with respect to their (i) having a direct or indirect pecuniary interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or in which we have an interest or (ii) engaging for their own account in business activities of the types conducted or to be conducted by us.

151

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of October 23, 2006, certain ownership information with respect to our common stock for those persons known to us who directly or indirectly own, control or hold with the power to vote, 5% or more of our outstanding common stock and all executive officers and directors, individually and as a group. In accordance with Commission rules, each listed person’s beneficial ownership includes:


	•	all shares the investor actually owns beneficially or of record;

	•	all shares over which the investor has or shares voting or dispositive control (such as in the capacity as a general partner of an investment fund); and

	•	all shares the investor has the right to acquire within 60 days (such as upon exercise of options that are currently vested or which are scheduled to vest within 60 days).


	Percentage of Common
	Stock Outstanding

	Shares
Name and Address(2)	Owned(1)		Percentage

Omega Advisors, Inc.(3)		1,400,000		5.6	%
Bruce Robertson(4)		6,666		*
John H. Dolan(5)(6)		41,000		*
Rodman Drake(7)(8)(9)		10,933		*
John J. Feeney, Jr.(5)(6)		41,000		*
Janet Graham(7)		2,000		*
Harald Hansen(8)(10)		2,733		*
Clifford Lai(5)(11)		57,000		*
William Paulsen(12)		10,000		*
Louis Salvatore(13)		—		*
Barry Sunshine(14)		38,666		*
All executive officers and directors as a group(15)		209,998		*


*	Less than 1%.

(1)	Does not reflect 130,000 shares of common stock reserved for issuance upon exercise of options previously granted or 1,499,250 shares of common stock available for future issuance under our 2005 Plan (which includes 10,160 shares to be issued in respect of deferred stock units and restricted stock units issued to certain of our independent directors).

(2)	The address for Hyperion Brookfield Asset Management, Inc. is Three World Financial Center, 200 Vesey Street, Tenth Floor, New York, New York 10281-1010. The address for all executive officers and directors and Hyperion Brookfield Crystal River Capital Advisors, LLC is c/o Hyperion Brookfield Asset Management, Inc., Three World Financial Center, 200 Vesey Street, Tenth Floor, New York, New York 10281-1010.

(3)	The address for Omega Advisors, Inc. is 88 Pine Street, 31st Floor, New York, NY 10005. Omega Advisors, Inc. (“Omega”) advises us of the following: Omega is the investment adviser to each of Omega Capital Partners, L.P., Omega Equity Investors, L.P., Omega Capital Investors, L.P., Beta Equities, Inc., The Ministers and Missionaries Benefit Board of American Baptist Churches, GS&Co Profit Sharing Master Trust and Presidential Life Corporation (collectively, the “Omega Funds”). Pursuant to an advisory contract with each of the Omega Funds, Omega has investment and voting discretion over the securities beneficially owned by the Omega Funds. Leon G. Cooperman, the beneficial owner of Omega, may be deemed to be the beneficial owner of the shares held by the Omega Funds. However, Omega has no direct economic interest in the securities owned by the Omega Funds. Each of the Omega Funds is a separate entity for tax and accounting purposes. Each of the Omega Funds has its own assets, liabilities and shareholders or equityholders, as applicable. Omega further advises us that each of the Omega Funds is not a registered broker-dealer and that to the best of Omega’s knowledge, each of the Omega Funds does not currently own our securities, other than those being registered hereby. The amount of securities shown excludes 40,000 shares purchased on behalf of The Leon and Toby Cooperman Family Foundation by its trustee, Leon G. Cooperman. Leon G. Cooperman may be deemed to be the beneficial owner of the shares held by the foundation.

152


(4)	Excludes options to purchase 13,334 shares of common stock that have not vested and will not vest within 60 days of the date of this prospectus.

(5)	Includes 13,334 shares of restricted common stock that have not vested and will not vest within 60 days of the date of this prospectus.

(6)	Excludes options to purchase 2,000 shares of common stock that have not vested and will not vest within 60 days of the date of this prospectus.

(7)	Includes 1,334 shares of restricted common stock that have not vested and will not vest within 60 days of the date of this prospectus.

(8)	Excludes options to purchase 2,667 shares of common stock that have not vested and will not vest within 60 days of the date of this prospectus.

(9)	Excludes 1,043 shares issuable in respect of deferred stock units owned by such person. Includes 1,200 shares of common stock owned by Leland R. Drake Marital Trust. Mr. Drake has no pecuniary interest in such shares.


(10)	Excludes 2,244 shares issuable in respect of deferred stock units and restricted stock units owned by such person. 1,334 shares issuable in respect of restricted stock units have not vested and will not vest within 60 days of the date of this prospectus.

(11)	Excludes options to purchase 6,000 shares of common stock that have not vested and will not vest within 60 days of the date of this prospectus.

(12)	Includes 10,000 shares owned by the Paulsen Foundation, for which Mr. Paulsen serves as the president. Mr. Paulsen has no pecuniary interest in such shares. Excludes 3,288 shares issuable in respect of deferred stock units and restricted stock units owned by such person. 1,334 shares issuable in respect of restricted stock units have not vested and will not vest within 60 days of the date of this prospectus.

(13)	Excludes 3,585 shares issuable in respect of deferred stock units and restricted stock units owned by such person. 1,334 shares issuable in respect of restricted stock units have not vested and will not vest within 60 days of the date of this prospectus.

(14)	Includes 30,000 shares of restricted common stock that have not vested and will not vest within 60 days of the date of this prospectus. Excludes options to purchase 17,334 shares of common stock that have not vested and will not vest within 60 days of the date of this prospectus.

(15)	Excludes a total of 1,800,000 shares of common stock, representing 7.2% of our common stock outstanding as of the date of this prospectus, owned by affiliates of Brookfield for which our executive officers and directors associated with affiliates of Brookfield disclaim beneficial ownership. The shares for which beneficial ownership is disclaimed include 800,000 shares owned by Imagine Insurance Company Limited and 1,000,000 shares owned by Brascan (U.S.) Corporation. Imagine Insurance Company Limited and Brascan (U.S.) Corporation each disclaim beneficial ownership of the shares owned by each other.

153

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Our related parties include our directors and executive officers named under the caption “Management” as well as Hyperion Brookfield Crystal River, Hyperion Brookfield and Brookfield. See “Management.” Upon completion of our March 2005 private offering, we entered into a management agreement with Hyperion Brookfield Crystal River, pursuant to which Hyperion Brookfield Crystal River provides for the day-to-day management of our operations. The management agreement requires Hyperion Brookfield Crystal River 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 chairman of the board, president and chief executive officer, chief investment officer, chief financial officer and executive vice president also serve as officers and/or directors of Hyperion Brookfield Crystal River, Hyperion Brookfield and/or Brookfield. As a result, the management agreement between us and Hyperion Brookfield Crystal River was negotiated between related parties, and the terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party. See “Management — Conflicts of Interest in Our Relationship with Hyperion Brookfield Crystal River,” “Risk Factors — Risks Related to our Business — There are conflicts of interest in our relationship with Hyperion Brookfield Crystal River, which could result in decisions that are not in the best interests of our stockholders,” “Management — Management Agreement” and “Management — Management Fees and Incentive Compensation.”

Prior to the completion of our March 2005 private offering, we and Hyperion Brookfield Crystal River entered into sub-advisory agreements with a subsidiary of Brookfield and Ranieri & Co. pursuant to which the sub-advisors provide advisory services to us in conjunction with Hyperion Brookfield Crystal River’s service to us as external manager. In 2006, we terminated our sub-advisory agreement with the Brookfield subsidiary and replaced it with a sub-advisory agreement with Brookfield Sub-Advisor. In addition, we may from time to time acquire properties from Hyperion Brookfield, Brookfield Sub-Advisor and their affiliates. We will not engage in transactions with Hyperion Brookfield or its affiliates without the approval in advance of a majority of our independent directors. With respect to the acquisition or disposition of all investments recommended by Brookfield Sub-Advisor, in the absence of available market prices, the transaction price for any transaction will be based on an independent third party valuation of the investment to be acquired or disposed, and all transactions must be approved in advance by our board of directors and by a majority of our independent directors.

In our March 2005 private offering, Imagine Insurance Company Limited, an indirect subsidiary of Brookfield, purchased 800,000 shares, or 3.2% (assuming all outstanding options have vested and are exercised), of our common stock outstanding as of the date of this prospectus and certain of our executive officers, directors and members of our strategic advisory committee, and certain executive officers of Hyperion Brookfield Crystal River and Hyperion Brookfield that provide services to us collectively purchased 183,800 shares, or 0.7% (assuming all outstanding options have vested and are exercised), of our common stock outstanding as of the date of this prospectus. In addition, upon completion of our March 2005 private offering, we issued to Hyperion Brookfield Crystal River, and it subsequently transferred to directors, officers and employees of Hyperion Brookfield and its affiliates, 84,000 shares of restricted stock and options to purchase 126,000 shares of our common stock with an exercise price of $25.00 per share, representing in the aggregate approximately 0.8% of the outstanding shares of our common stock as of the date of this prospectus, assuming all outstanding options have vested and are exercised. Following completion of this offering, Hyperion Brookfield, Brookfield, Hyperion Brookfield Crystal River and their respective affiliates and employees who provide services to us, including our executive officers and certain of our directors, as well as our independent directors, collectively own 2,105,800 shares of our common stock, including 1,105,800 shares that may be sold by selling stockholders listed in this prospectus,

154

representing 8.4% of our outstanding shares of common stock, and have options to purchase an additional 130,000 shares of our common stock representing an additional 0.5% of our outstanding shares of common stock, in each case, assuming all outstanding options have vested and are exercised.

The base management fee incurred for the period March 15, 2005 (commencement of operations) to December 31, 2005 and for the six months ended June 30, 2006 was approximately $4.8 million and $2.8 million, respectively. Amortization expense for those periods totaling approximately $0.6 million and $0.5 million, respectively, related to the restricted stock and options granted to Hyperion Brookfield Crystal River was included in management fee expense to related party in our consolidated statement of operations. See Note 8 to our Consolidated Financial Statements for additional information regarding the grant to Hyperion Brookfield Crystal River. Our Manager did not earn an incentive fee for the period March 15, 2005 (commencement of operations) to December 31, 2005 or for the six months ended June 30, 2006. Our Manager has waived its right to request reimbursement from us of third-party expenses that it incurs through December 31, 2006.

In August 2005, we borrowed $35.0 million from Trilon International Inc. (Barbados), or Trilon, an affiliate of our Manager, for ninety days. The note bore interest at the rate of 5.1% per annum and matured on November 15, 2005. In November 2005, we extended the note until February 15, 2006 at an interest rate of 5.59%. The loan was repaid in February 2006. The loan from Trilon was incurred to finance our investment in the Forbes Trinchera Ranch loan. Trilon was selected as the financing source because it agreed to finance 100% of the investment on terms that were more favorable to us than we were able to obtain from an unrelated third-party lender. The Trilon loan was unsecured and bore interest at a lower rate than other unsecured loan bids that we were able to obtain. We financed the Forbes Trinchera Ranch loan in a manner consistent with our investment and leverage strategy. In December 2005, we entered into a master repurchase agreement with Trilon and borrowed approximately $16.4 million under that agreement, together with cash on hand, to repay the Trilon note. We pledged the Atlas loan (see below) against such borrowing.

In addition, during 2005 and 2006, we made the following investments that were sourced by related parties, each of which, consistent with our policies, was determined by our board of directors to be on terms no less favorable than can be obtained on an arm’s length basis from unrelated third parties based on prevailing market prices, other reliable indicators of fair market value or an independent valuation or appraisal and each of which was approved in advance by a majority of our independent directors:

In April 2005, we made a $6.0 million mezzanine loan to Mile High Center Investments, LLC that bears interest at LIBOR plus 550 basis points per annum, which was sourced by Hyperion GMAC Capital Advisors, LLC (Hyperion GMAC). We paid customary origination fees to GMAC Commercial Mortgage in connection with the sourcing of this investment.

In June 2005, we purchased $53.9 million principal amount of CMBS in GMACC 2005-C1, which was sourced by Hyperion GMAC, for $29.1 million. We did not pay any origination fees to Hyperion GMAC in connection with the sourcing of this investment.

In June 2005, we purchased a $14.6 million interest in a loan to Birchwood Acres, LLC, that is secured by The Harmony development project in Osceola County, FL, and was sourced by Hyperion GMAC and Ranieri & Co. As of June 30, 2006, we had funded $13.8 million of our commitment. We paid customary origination fees to Franklin Bank, for which Lewis Ranieri serves as chairman of the board of directors, in connection with the sourcing of this investment.

In June 2005, we made a $1.6 million construction mezzanine loan that bears interest at 16.0% per annum to Westover Cambridge Condominiums, Portland, OR, which was sourced by Hyperion GMAC. We paid customary origination fees to GMAC Commercial Mortgage in

155

connection with the sourcing of this investment. Our total commitment under this loan is $9.5 million. As of June 30, 2006, we had funded $7.1 million of our commitment.

In August 2005, we purchased $87.5 million principal amount of CMBS in Comm 2005-C6, which was sourced by Hyperion GMAC. We did not pay any origination fees to Hyperion GMAC in connection with the sourcing of this investment.

In August 2005, we made a $50.0 million loan that bears interest at LIBOR plus 250 basis points per annum to the Forbes Trinchera Ranch, which was sourced by Ranieri & Co. We did not pay any origination fees to Ranieri & Co. in connection with the sourcing of this investment. In September 2005, we sold a $13.0 million participation in the loan to two third parties.

In November 2005, we purchased the preferred equity piece of Millerton ABS CDO for approximately $2.4 million, which was sourced by Hyperion Brookfield. The preferred equity piece is subordinated to all the debt securities of Millerton ABS CDO and it is not entitled to any distributions from Millerton ABS CDO until all payments have been made to holders of debt securities issued by Millerton ABS CDO and all expenses of Millerton ABS CDO have been paid. We did not pay any origination fees to Hyperion Brookfield in connection with the sourcing of this investment.

In December 2005, we made a $17.3 million loan that bears interest at 6.09% per annum, in the form of a senior term loan, to Atlas Cold Storage Limited, which was sourced by Brookfield. We did not pay any origination fees to Brookfield in connection with the sourcing of this investment.

In December 2005, we made a $43.0 million whole loan that bears interest at 5.42% per annum to Highvale Coal Limited, which was sourced by Brookfield. We did not pay any origination fees to Brookfield in connection with the sourcing of this investment.

In February 2006, we purchased the preferred equity piece of Millerton II High Grade ABS CDO for approximately $2.5 million, which was sourced by Hyperion Brookfield. The preferred equity piece is subordinated to all the debt securities of Millerton II High Grade ABS CDO and it is not entitled to any distributions from Millerton II High Grade ABS CDO until all payments have been made to holders of debt securities issued by Millerton II High Grade ABS CDO and all expenses of Millerton II High Grade ABS CDO have been paid. We did not pay any origination fees to Hyperion Brookfield in connection with the sourcing of this investment.

As of the date of this prospectus, we were party to a repurchase agreement with Trilon that generated net proceeds of approximately $40.8 million, and was collateralized by a security interest in a loan to Highvale Coal Properties LP. The term of the agreement is from the funding date of September 28, 2006 to the repurchase date of October 28, 2006, and interest will accrue daily based on a 360-day year at a rate of one month LIBOR plus 0.30%.

As of the date of this prospectus, we were party to a repurchase agreement with Trilon that generated net proceeds of approximately $16.4 million and was collateralized by a security interest in the Atlas loan (see above). The term of the agreement is from the funding date of September 28, 2006 to the repurchase date of October 28, 2006, and interest will accrue daily based on a 360-day year at a per annum rate of LIBOR plus 0.30%.

156

SELLING STOCKHOLDERS

The following table sets forth information, as of October 23, 2006, with respect to the selling stockholders and shares of our common stock beneficially owned by the selling stockholders that selling stockholders may from time to time offer and sell pursuant to this prospectus. The selling stockholders may offer and sell any or all of our common stock that they hold. In accordance with Commission rules, each listed person’s beneficial ownership includes:


	•	all shares the investor actually owns beneficially or of record;

	•	all shares over which the investor has or shares voting or dispositive control (such as in the capacity as a general partner of an investment fund); and

	•	all shares the investor has the right to acquire within 60 days (such as upon exercise of options that are currently vested or which are scheduled to vest within 60 days).

The shares of common stock offered by the selling stockholders pursuant to this prospectus were originally issued and sold by us in our March 2005 private offering. The term selling stockholders includes the holders of our common stock listed below and the beneficial owners of the common stock and their transferees, pledgees, donees or other successors.

Any selling stockholder that is identified as a broker-dealer will be deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act, unless such selling stockholder obtained the stock as compensation for services. In addition, any affiliate of a broker-dealer will be deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act, unless such selling stockholder purchased in the ordinary course of business and, at the time of its purchase of the stock to be resold, did not have any agreements or understandings, directly or indirectly, with any person to distribute the stock. As a result, any profits on the sale of the common stock by selling stockholders who are deemed to be “underwriters” and any discounts, commissions or concessions received by any such broker-dealers who are deemed to be “underwriters” will be deemed to be underwriting discounts and commissions under the Securities Act. Selling stockholders who are deemed to be “underwriters” will be subject to prospectus delivery requirements of the Securities Act and to certain statutory liabilities, including, but not limited to, those under Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act.

No selling stockholders in the selling stockholder table below have been identified as broker-dealers or affiliates of broker-dealers other than as set forth in the footnotes to the table.


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

153 LLC(1)		10,000		10,000		—		—
2nd Generation Properties LLC(1)		30,000		30,000		—		—
Abrahim El Gamal 1995 Trust UAD 3/17/95(2)		3,000		3,000		—		—
Wendell H. Adair, Jr.		4,000		4,000		—		—
Adam Erlbaum Trust UAD 4/4/97(3)		4,000		4,000		—		—
ADI Family Limited Partnership(4)		16,000		16,000		—		—
Morteza Afghahi		1,600		1,600		—		—
Robert C. Africano		4,000		4,000		—		—
Albury Associates Corp.(5)		6,000		6,000		—		—
Mark C. Alpert		19,000		19,000		—		—
Alrose Holding LLC(6)		10,000		10,000		—		—

157


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Amin El Gamal 1995 Trust UAD 3/17/95(2)		3,000		3,000		—		—
Mark E. Anable		2,000		2,000		—		—
Panos Anastassiadis		2,000		2,000		—		—
Norman K. Anderson		2,000		2,000		—		—
Mark C. Andreassi		4,000		4,000		—		—
Andrew Patrick Cownie 1991 Trust DTD 6/11/91(7)		620		620		—		—
Anne M. Asher Living Trust(8)		2,000		2,000		—		—
Ansam Metals(193)		8,000		8,000		—		—
Mark Appel & Eloise M. Appel		2,000		2,000		—		—
Ardara US Direct Investment Inc.(9)		40,000		40,000		—		—
Ashraf El Gamal 1995 Trust UAD 3/17/95(2)		3,000		3,000		—		—
David Baer		1,000		1,000		—		—
Bert B. Bahnson		2,000		2,000		—		—
Duane A. Baker		10,000		10,000		—		—
Richard L. Baker		2,000		2,000		—		—
Lewis Bakes & Sandra Bakes		10,000		10,000		—		—
Howard Balter		9,000		9,000		—		—
Barbara Alicia Gubbins Living Trust DTD 9/16/97(10)		4,000		4,000		—		—
Barbara J. White Family Trust(11)		3,000		3,000		—		—
Carolyn Bardos		4,000		4,000		—		—
Douglas R. Barnard		500		500		—		—
William C. Bartholomay		10,000		10,000		—		—
Algerd Basiulis		1,000		1,000		—		—
Danute I. Basiulis		1,000		1,000		—		—
Basso Family Trust DTD 9/28/98(12)		6,500		6,500		—		—
Steven C. Bauman		700		700		—		—
Steven Belkin		40,000		40,000		—		—
Andrew G. Bene		2,500		2,500		—		—
Berco Limited(13)		100,000		100,000		—		—
Daniel J. Berdechowski		2,000		2,000		—		—
Peter Bergmann		1,000		1,000		—		—
Howard Bergtraum & Susan Bergtraum		10,000		10,000		—		—
Alan Berman		2,000		2,000		—		—
Andrew S. Berwick, Jr.		4,000		4,000		—		—
Berwick Family Trust(14)		5,000		5,000		—		—
Bindley Capital Partners I LLC(15)		40,000		40,000		—		—
Erich Bloch		4,000		4,000		—		—
Luis R. Bolivar		2,800		2,800		—		—
Paul H. Bourke		4,000		4,000		—		—

158


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

John B. Bowen III		2,000		2,000		—		—
James Tully Bragg		419		419		—		—
Michael Brauser & Betsy Brauser		20,000		20,000		—		—
Broadlawn Master Fund LTD(16)		10,000		10,000		—		—
Howard Brody		6,000		6,000		—		—
Brookside Capital Partners Fund, L.P.(17)		400,000		400,000		—		—
BRU Holding Co LLC(18)		20,000		20,000		—		—
Redfield E. Bryan		12,200		12,200		—		—
Buchwald Family Trust(19)		20,000		20,000		—		—
Lawrence Byrne		40,000		40,000		—		—
John Cachianes & Carolyn Cachianes		10,000		10,000		—		—
James A. Cardwell & Evonne Cardwell		14,000		14,000		—		—
Jack K. Carroll		2,000		2,000		—		—
Cassidy Hope Wright 1995 Trust UAO 3/31/95 (191)		5,000		5,000		—		—
Century Surety Insurance Co.(20)		16,000		14,000		2,000		*
Andrew Michael Allen Chandler		10,000		10,000		—		—
Charles Wexford Bragg 2000 Trust DTD 11/17/00(7)		880		880		—		—
Chelsea Partnership(21)		1,000		1,000		—		—
Chesed Congregations of America(22)		400,000		400,000		—		—
Cheyne Asset-Backed Fund, L.P. (192)		600,000		600,000		—		—
Yu Chin Chien		4,000		4,000		—		—
Won-Young Ken Cho & Sonmi Julia Cho		4,000		4,000		—		—
Craig H. Christensen		1,000		1,000		—		—
Christenson Family Trust DTD 10/19/90 Amended 12/31/98(23)		20,000		20,000		—		—
Ciconia & Co. LLC(24)		20,000		20,000		—		—
Citigroup Global Markets Limited(25)		250,000		250,000		—		—
Clara Kingan Cownie 2000 Trust DTD 11/6/00(7)		880		880		—		—
CLICO International Life Insurance Limited(26)		13,800		13,800		—		—
Columbia Marsico Mid Cap Growth Fund, a series of Columbia Funds Series Trust(27)		300,129		300,129		—		—
Columbia Marsico Mid Cap Growth Fund, Variable Series, a series of Columbia Funds Variable Insurance Trust I(27)		36,316		36,316		—		—

159


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Columbia Marsico 21st Century Fund, a series of Columbia Funds Series Trust(27)		233,425		233,425		—		—
Columbia Marsico 21st Century Fund, Variable Series, a series of Columbia Funds Variable Insurance Trust I(27)		11,719		11,719		—		—
CREF Stock Account(28)		101,298		101,298		—		—
Keith A. Condict		4,000		4,000		—		—
Charles B. Cooper		20,000		20,000		—		—
Sol N. Corbin		2,000		2,000		—		—
Steven M. Corbin		4,000		4,000		—		—
Ronald D. Corwin & Beth Blumenthal		5,000		5,000		—		—
Joanne Corzine		90,000		90,000		—		—
James S. Cownie		20,000		20,000		—		—
Elmer E. Crane		2,000		2,000		—		—
C. David Culbertson & M. Andriette Culbertson		4,000		4,000		—		—
Jacqueln J. Curtis		2,000		2,000		—		—
David A. Friedman Revocable Trust UAD 6/15/93(29)		2,000		2,000		—		—
David E. & Marilyn W. Withrow Foundation(30)		2,000		2,000		—		—
David Schecter MD PA Profit Sharing Plan & Trust DTD 7/1/79(31)		10,000		10,000		—		—
Bradley C. Davis		1,000		1,000		—		—
De Werd Trust UAD 5/4/98(32)		15,200		15,200		—		—
Deerfield Opportunities Fund LLC(33)		60,000		60,000		—		—
Deerfield Triarc Capital LLC		90,000		90,000		—		—
Deutsche Bank AG London Branch(34)		1,106,300		1,000,000		106,300		*
Jimmy A. Dew		8,000		8,000		—		—
Debra DiMaio		4,000		4,000		—		—
Diamond Hill Strategic Income Fund(36)		52,000		8,000		44,000		*
Carolyn P. Dietrich		1,500		1,500		—		—
David DiPietro & Christy DiPietro		3,000		3,000		—		—
Frank J. Disantis		1,000		1,000		—		—
David Diwik & Marianne Diwik		30,000		30,000		—		—
Donald E Klaiss & Marguerite Klaiss Living Trust DTD 8/19/99(37)		4,000		4,000		—		—
David J. Donovan		6,000		6,000		—		—
Douglas Pansch Trust DTD 5/15/00(38)		4,000		4,000		—		—
David Doyle		100,000		100,000		—		—

160


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Drake Associates, L.P.(39)		20,000		10,000		10,000		*
Duane A. Baker Money Purchase Plan(40)		4,000		4,000		—		—
Brian R. Duffy		1,000		1,000		—		—
Jose Dumont		2,000		2,000		—		—
Phillip Dunegan		4,000		4,000		—		—
Sandy Durko		800		800		—		—
Matthew Edelman & Jan Edelman		500		500		—		—
Edward and Lourdes Rodriguez 1999 Trust(41)		2,000		2,000		—		—
Edward O. Boshell Jr. Charitable Remainder Unitrust UAD 11/30/93(42)		10,000		10,000		—		—
E. Liberman Trust UAD 9/16/00(43)		1,000		1,000		—		—
Ellerbeck Family Partners Ltd.(44)		10,000		10,000		—		—
George D. Elling		4,000		4,000		—		—
Michael M. Ellis		1,000		1,000		—		—
Craig Lawrence Enenstein & Carolyn Jill Enenstein		1,000		1,000		—		—
Engel Family Revocable Inter Vivos Trust DTD 7/14/92(194)		5,000		5,000		—		—
Harry L. Epstein		1,500		1,500		—		—
Steven H. Erlbaum		9,000		9,000		—		—
Erlbaum Family Limited Partnership(45)		4,000		4,000		—		—
Eric Eshelman & Leigh Eshelman		1,000		1,000		—		—
F & F Partners(46)		10,000		10,000		—		—
F & M Dow Investments Limited Partnership(47)		5,000		5,000		—		—
Glenn Falcao		6,000		6,000		—		—
Darold L. Farr		600		600		—		—
FEA III LP(48)		100,000		100,000		—		—
Richard I. Feinberg		2,000		2,000		—		—
Robert J. Finnegan		2,000		2,000		—		—
Bruce Fixelle		10,000		10,000		—		—
Fleet Maritime, Inc.(49)		6,160		6,160		—		—
Donald C. Force		2,000		2,000		—		—
Alicia M. Fowers		2,000		2,000		—		—
Nancy J. Fox & Jon Edwards		8,000		3,000		5,000		*
Donald J. Franceschini		3,000		3,000		—		—
Leonard E. Friedman		10,000		10,000		—		—
Joseph Frumkin		2,000		2,000		—		—
Andrew Lawrence Furgatch		40,000		40,000		—		—
Robert W. Ganger		2,000		2,000		—		—
George W. Gardner & Kay M. Gardner		2,000		2,000		—		—

161


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Robert F. Gaynes		4,000		4,000		—		—
Sydnie C. Geismar		500		500		—		—
George E. McCown Revocable Trust DTD 10/15/86(50)		2,000		2,000		—		—
George Weiss Associates, Inc. Profit Sharing Plan(51)		200,000		200,000		—		—
James E. Gerry		20,000		20,000		—		—
Efrem Gerszberg		2,500		2,500		—		—
Glenview Capital Management, LLC(52)		1,100,000		1,100,000		—		—
Michael Golden		1,000		1,000		—		—
Robert Goldfein		8,000		8,000		—		—
Goodman Family Trust DTD 12/29/97(53)		4,000		4,000		—		—
Robert M. Gordon & Wendy Bebie		1,000		1,000		—		—
Michael Gottlieb		2,000		2,000		—		—
Bruce K. Gould		1,800		1,800		—		—
Jeffrey S. Gould		1,800		1,800		—		—
Charles Graaskamp		2,000		2,000		—		—
Doris L. Green		1,000		1,000		—		—
Lawrence T. Green		1,200		1,200		—		—
Milton Greene		1,800		1,800		—		—
Roger N. Greene & Diane M. Greene		2,000		2,000		—		—
Howard V. Gregory		10,000		10,000		—		—
Christopher C. Grieb		1,000		1,000		—		—
Wilfred Griekspoor		3,500		3,500		—		—
Robert H. Grohskopf, Jr.		20,000		10,000		10,000		*
Larry Guentherman		2,000		2,000		—		—
Peter E. Haas, Jr.		2,000		2,000		—		—
Michael F. Haggerty		6,000		6,000		—		—
Halcyon Asset Management LLC(54)		325,000		325,000		—		—
John Haller		4,000		4,000		—		—
Barbara W. Hamilton		4,000		4,000		—		—
Frank P. Hamilton		4,000		4,000		—		—
Daniel D. Hammond		10,000		10,000		—		—
Steve Harmon		2,000		2,000		—		—
Charles R. Hart, Jr.		3,000		1,000		2,000		*
Hart Watters APLC Profit Sharing Plan Trust(55)		5,000		5,000		—		—
Fred B. Hartman		6,000		6,000		—		—
Hazard Family Foundation(195)		4,000		4,000		—		—
Helen Caplan Charitable Lead Unit Trust(56)		10,000		10,000		—		—
Hellberg Revocable Trust(57)		5,000		5,000		—		—
Thomas K. Henderson		5,000		5,000		—		—

162


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Jerome H. Herman		1,400		1,400		—		—
Charles & Miriam Herzka		4,000		4,000		—		—
Carter D. Hicks		1,000		1,000		—		—
James F. Higgins		1,000		1,000		—		—
Highfields Capital I LP(58)		179,640		179,640		—		—
Highfields Capital II LP(58)		420,360		420,360		—		—
Dwight R. Hilson		1,500		1,500		—		—
Mindy Hilson		1,500		1,500		—		—
Bernd Jurgen Hintz		20,000		20,000		—		—
Susan Hirsch		2,000		2,000		—		—
Hobson & Carol LeBlanc Family Revocable Living Trust(59)		4,800		4,800		—		—
J. Curt Hockemeier & Nancy H. Hockemeier		2,000		2,000		—		—
Kevin Hoffman & Lucia Hoffman		2,000		2,000		—		—
Hollingsworth Funds Inc.(60)		20,000		20,000		—		—
Bernard Homer & Lore Homer		4,000		4,000		—		—
Guy Homer & Michele Homer		2,000		2,000		—		—
Richard L. Horton & Violet Horton		20,000		10,000		10,000		*
Terrill J. Horton & Sammie N. Horton		10,000		10,000		—		—
Willis D. Horton & Glenda Horton		15,000		10,000		5,000		*
HRLD Limited Partnership(61)		20,000		20,000		—		—
Martin L. Hudler & Kimberly S. Hudler		2,000		2,000		—		—
Harry T. Iida		8,000		8,000		—		—
Imagine Insurance Company Limited(62)		800,000		800,000		—		—
Isabel Frances Bragg Trust DTD 12/20/04(7)		880		880		—		—
Andrew F. Jacobs		2,000		2,000		—		—
Richard L. Jacobson		10,000		10,000		—		—
Richard A. Jacoby		4,000		4,000		—		—
Rita J. Jacoby		2,000		2,000		—		—
James J. Cunnane Revocable Trust DTD 6/15/94 as restated 8/31/99(63)		6,000		6,000		—		—
James Sloan Cownie, III 2002 Trust DTD 12/22/02(7)		880		880		—		—
James W Buffett Trust UAD 12/28/90(64)		4,000		4,000		—		—
David L. Jarmon & Kasumi M. Jarmon		3,000		3,000		—		—
JSC Trust(65)		2,382		2,382		—		—
Lanny W. Jenkins		4,000		4,000		—		—
Rebecca A. Jenkins		2,000		2,000		—		—
Paul W. Jennings		4,000		4,000		—		—
Jezae Family Partners(66)		8,000		8,000		—		—

163


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Joel A. & Kimberly L. Laub Family Trust(67)		20,000		20,000		—		—
Stanley M. Joffe		800		800		—		—
John Sperling 1994 Irrevocable Trust(68)		15,000		15,000		—		—
J. Robert Jones & Susan M. Jones		6,000		6,000		—		—
Wesley R. Jones		4,000		4,000		—		—
Jones-Wright Family Trust DTD 4/6/92(69)		10,000		10,000		—		—
Joseph M. Sedlack Defined Benefit Plan(70)		4,000		4,000		—		—
Kevin Judd		4,000		4,000		—		—
Robert Judd		4,000		4,000		—		—
Julio & Ida Liberman Trust(71)		1,000		1,000		—		—
Richard L. Kagan		1,500		1,500		—		—
Ann H. Kahan		1,000		1,000		—		—
Samuel S. Kahan		1,000		1,000		—		—
Herbert M. Kaku		2,000		2,000		—		—
Kalb Family Living Trust(72)		4,000		3,000		1,000		*
Robert C. Kanuth, Jr.		9,000		9,000		—		—
Kapco Equity Partners I, LLC(73)		8,000		8,000		—		—
John Karlton & Darla Karlton		10,000		10,000		—		—
Matty Karpf		1,000		1,000		—		—
Linda Kaufman		1,000		1,000		—		—
Judith L. Kay		4,000		4,000		—		—
Paul H. Keck & Mary E. Keck		3,000		3,000		—		—
Drew Keith		20,000		20,000		—		—
Clyde Keller		10,000		10,000		—		—
James C. Kelly & Lyn E. Kelly		3,000		3,000		—		—
Donald L. Kemen		2,000		2,000		—		—
Yunghi Kim		500		500		—		—
Robert Klein		8,000		8,000		—		—
George Kolber		7,000		7,000		—		—
Benjamin E. Kopin & Elizabeth Shapiro Kopin		2,000		2,000		—		—
Robert S. Korman		800		800		—		—
Laurence Korn		4,000		4,000		—		—
Kraus Medical Partners Defined Benefit Retirement Trust(74)		8,000		8,000		—		—
Sharon Krause		2,000		2,000		—		—
Sunda Kroopnick		1,500		1,500		—		—
John R. Lagana		3,000		3,000		—		—
Joseph F. Lagana & Christine E. Lagana		1,600		1,600		—		—
Robert S. Lagana & Joanne Lagana		1,600		1,600		—		—
David G. Lambert		27,000		27,000		—		—

164


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Robert T. Lasky & Macy Lasky		10,000		10,000		—		—
Laurance Freed Declaration of Trust DTD 8/5/96(75)		2,000		2,000		—		—
Linda J. Lear		4,000		4,000		—		—
Hobson E. LeBlanc		3,200		3,200		—		—
Susan Elizabeth Lehrman		8,000		8,000		—		—
Stephen O. Lesser		1,000		1,000		—		—
Zev Levy		2,000		2,000		—		—
Liberman Irrevocable Trust DTD 11/2(76)		1,000		1,000		—		—
Joseph A. Lieberman III		500		500		—		—
Lilli Ann Corporation(77)		6,000		4,000		2,000		*
James T. Lindstrom		4,000		4,000		—		—
Thomas Lisa		3,000		3,000		—		—
Susan M. Lobel		2,000		2,000		—		—
Leonard M. Lodish		6,000		3,000		3,000		*
Louis F. & Virginia C. Bantle Charitable Foundation(78)		10,000		10,000		—		—
Donald N. Love		1,000		1,000		—		—
Fang Lu		20,000		20,000		—		—
M1 Properties, LLC(6)		30,000		10,000		20,000		*
Norman H. Maas		1,000		1,000		—		—
William S. Macaulay		2,000		2,000		—		—
Macleod CRUT UAD 9/30/99(79)		3,100		3,100		—		—
Madeline Louise Bragg Trust(7)		880		880		—		—
Make A Wish Charitable Foundation(80)		15,000		15,000		—		—
Malcolm A. Litman Revocable Trust (35)		500		500		—		—
Craig Alan Manchester		10,000		10,000		—		—
Lynn J. Mangum		20,000		20,000		—		—
Kenneth A. Manire		4,400		4,400		—		—
Rochelle Manire		2,000		2,000		—		—
Ziba Mansouri		1,400		1,400		—		—
Mark Jules Bebie Testamentary Trust FBO Andrew B. Gordon DTD 4/14/93(81)		1,000		1,000		—		—
Mark Jules Bebie Testamentary Trust FBO Katherine G. Gordon DTD 4/14/93(81)		1,000		1,000		—		—
Mark Jules Bebie Testamentary Trust FBO Michael J. Gordon DTD 4/14/93(81)		1,000		1,000		—		—
Marsico 21st Century Fund, a series of The Marsico Investment Fund(27)		240,411		240,411		—		—
Michael D. Marvin		8,000		8,000		—		—

165


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Mary Lou Harllee Irrevocable Trust(82)		1,500		1,500		—		—
Cynthia L. Mason		2,000		2,000		—		—
Ronald M. Mason		2,000		2,000		—		—
William M. Matthews		2,000		2,000		—		—
Christopher Maurizi		8,000		8,000		—		—
Mayberry Investments Limited(83)		110,000		110,000		—		—
Ayn M. McClendon		2,000		2,000		—		—
William E. McClure, Jr.		15,000		15,000		—		—
Douglas H. McCorkindale		2,000		2,000		—		—
Burt R. McCorkle		2,000		2,000		—		—
Douglas McCormick		2,000		2,000		—		—
Brian F. McGarvey		10,000		10,000		—		—
Patrick J. McGovern, Jr.		2,000		2,000		—		—
Robert J. McMullan & Susan S. McMullan		2,000		2,000		—		—
James M. McNamara & Lana McNamara		10,000		10,000		—		—
Carver A. Mead		16,000		16,000		—		—
Walter R. Meggitt		2,000		2,000		—		—
Dinsa Mehta		2,800		2,800		—		—
Drew Meister		1,000		1,000		—		—
Paul N. Metzelaar		1,000		1,000		—		—
Michael J. Rothberg Revocable Family Trust(84)		10,000		10,000		—		—
Michael Lance Ornstein Living Trust DTD 7/27/04(85)		6,000		6,000		—		—
Michael S. Walsh Trust(86)		4,000		4,000		—		—
Millennium Partners, L.P.(87)		200,000		200,000		—		—
Edward S. Miller		4,000		4,000		—		—
Lewis Miller		5,500		5,500		—		—
Michael Miller & Sharron Reiss-Miller		3,000		3,000		—		—
William O. Mingus		2,000		2,000		—		—
Mel Minoff & Lee Minoff		2,000		2,000		—		—
Lester W. Mohrfeld		2,000		2,000		—		—
Ann E. Monaco		4,000		4,000		—		—
Thomas A. Morgenfeld		1,400		1,400		—		—
William P. Morrison		3,000		3,000		—		—
Barbara M. Morse		2,000		2,000		—		—
Frank L. Morse		2,000		2,000		—		—
Ronald & Joan Moss Revocable Trust DTD 1/23/96(88)		20,000		20,000		—		—
Raymond D. Moyer & Jennifer Warren		3,000		3,000		—		—
Angelo R. Mozilo		7,000		7,000		—		—

166


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Arsen Mrakovcic		2,000		2,000		—		—
John & Sheila Murray Revocable Trust DTD 12/27/00(89)		3,000		3,000		—		—
Namtor Growth Fund(90)		3,000		3,000		—		—
James A. Nathan		2,000		2,000		—		—
William O. Neel		5,000		5,000		—		—
Patricia Nelligan		500		500		—		—
Samuel Newhouse III		4,000		4,000		—		—
Nicks Revocable Trust DTD 8/13/99(91)		6,000		6,000		—		—
Thomas William John Nimmo		1,000		1,000		—		—
Walter S. Nimmo		6,500		6,500		—		—
Albert Nipon		4,500		4,500		—		—
O & G Capital, LLC(92)		40,000		40,000		—		—
Leonard Olim		200		200		—		—
Olin B. King Management Trust DTD 1/25/05(93)		52,000		52,000		—		—
Oliver Family Trust DTD 2/6/77(94)		2,000		2,000		—		—
Omega Advisors, Inc.(95)		1,400,000		1,400,000		—		—
Arturo Ortega		1,000		1,000		—		—
Ralph J. Ortiz		2,000		2,000		—		—
OZ Master Fund, Ltd.(96)		393,840		393,840		—		—
OZF Ltd., BVI (109)		40,000		40,000		—		—
John L. Palazzola		10,000		10,000		—		—
Parana Management Corp. buba (97)		4,000		4,000		—		—
Gavin J. Parfit		1,000		1,000		—		—
Kenneth Pasternak		600,000		600,000		—		—
Patricia Ann Cownie Bragg 1991 Trust DTD 6/11/91(7)		419		419		—		—
Paul L. Wolpert Trust UAD 8/5/80(98)		3,000		3,000		—		—
Paul Michael Cownie 1991 Trust DTD 6/11/91(7)		880		880		—		—
Paulette J. Meyer 1993 Revocable Trust(99)		1,000		1,000		—		—
Christopher Peatros		2,000		2,000		—		—
Steven W. Pekarthy & Sue Ann Pekarthy		4,000		4,000		—		—
Clifford W. Perry, Jr.		2,000		2,000		—		—
Pauline D. Perry		2,000		2,000		—		—
Peter Matthew Cownie 1991 Trust DTD 6/11/91(7)		880		880		—		—
Peter S. Harllee, Jr. Revocable Trust DTD 8/7/97(100)		1,000		1,000		—		—
Eddie L. Pierce		2,000		2,000		—		—

167


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Shirley Pierce		2,000		2,000		—		—
David Pillor & Renee Pillor		6,000		6,000		—		—
C. Edward Pleasants, Jr.		4,000		4,000		—		—
Gail A. Plessner		2,000		2,000		—		—
Herbert U. Plessner		2,000		2,000		—		—
Thomas Lawrence Pollard		4,000		4,000		—		—
Potomac Investors LLC(101)		10,000		10,000		—		—
Prefix Venture Partners LLC(102)		4,000		4,000		—		—
James R. Price		4,000		4,000		—		—
Jeffrey A. Proeh		2,500		2,500		—		—
Public Service Mutual Insurance Co.(103)		200,000		200,000		—		—
Public Service Mutual Pension Plan(104)		25,000		25,000		—		—
Pueblo of Zuni Zuni Trust Fund(105)		13,000		13,000		—		—
Raffin Revocable Trust (106)		4,000		3,000		1,000		*
Rahnasto/Osborne Revocable Trust(107)		3,000		3,000		—		—
Ralls “G” Trust(108)		14,000		14,000		—		—
Lewis S. Ranieri		60,000		60,000		—		—
Richard M. Ratino		5,000		5,000		—		—
Ray F. Dietrich Trust(110)		1,500		1,500		—		—
Scott Rechler		4,000		4,000		—		—
Arthur H. Reidel		4,000		4,000		—		—
Derek R. Reisfield		5,000		5,000		—		—
John F. Rieckelman		2,000		2,000		—		—
RM Investments LP(111)		40,000		40,000		—		—
Robert Margolis Living Trust DTD 4/6/94(112)		10,000		10,000		—		—
Richard Roney & Mary Roney		1,000		1,000		—		—
Henry Rose		6,000		6,000		—		—
David Rosenfeld		2,000		2,000		—		—
RREEF America LLC(113)		500,000		500,000		—		—
Barry Rubenstein & Marilyn Rubenstein		25,000		25,000		—		—
Mehrdad Sadat		3,200		3,200		—		—
Mehrdad Sadat & Ziba Mansouri		5,800		5,800		—		—
Safe Auto Insurance Co.(114)		8,000		6,000		2,000		*
Jeff Sagansky		10,000		10,000		—		—
Sails in Concert Inc. Profit Sharing Plan UAD 5/1/86 as amended(115)		2,000		2,000		—		—
Salah M. Hassanein Trust DTD 5/14/96(116)		6,000		6,000		—		—
Michael R. Samuelian & Luann T. Samuelian		4,000		4,000		—		—

168


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Howard E. Sanders		2,000		2,000		—		—
William P. Sandridge, Jr.		2,000		2,000		—		—
Leonard Santorelli		3,000		3,000		—		—
The Saperstein Family Trust Separate Property UAD 2/2/01(117)		10,000		10,000		—		—
George Savitsky		4,000		4,000		—		—
Geoff Schaaf PSP(118)		1,500		1,500		—		—
Patricia A. Schieber		2,000		2,000		—		—
Thomas C. Schievelbein & Betty J. Schievelbein		4,000		4,000		—		—
Norman Schlanger		15,000		15,000		—		—
Cheryl Fisher Schneider		10,000		10,000		—		—
Ruth C. Schuch		1,500		1,500		—		—
David J. Schucker		2,000		2,000		—		—
Edwin R. Schuler Management Trust(119)		4,000		4,000		—		—
Andrew P. Schuyler		2,500		2,500		—		—
Robert W. Schwabe		1,000		1,000		—		—
Stanley A. Schwalb & Karin I. Schwalb		10,000		10,000		—		—
Marcus F. Schwartz		10,000		10,000		—		—
Barry Schwimmer		2,000		2,000		—		—
SCP Gauthier(120)		3,000		3,000		—		—
Sea Palms Investments LLC(121)		4,000		4,000		—		—
Security Trust(122)		10,000		10,000		—		—
Rebecca K. Seidman		4,000		4,000		—		—
Jason Seiken		1,500		1,500		—		—
Marshall Senk & Amy Senk		10,000		10,000		—		—
SFB Investment Company, LLLP(123)		2,000		2,000		—		—
Sandra S. Shannon		3,200		3,200		—		—
Jodi L. Shelton		10,000		10,000		—		—
Peter Shen		10,000		10,000		—		—
Toby B. Shine		10,000		10,000		—		—
Mark Shriro		7,000		7,000		—		—
Steven Shulman		60,000		60,000		—		—
William A. Simpson		4,000		4,000		—		—
Siouxland Urology Associates(124)		17,000		17,000		—		—
Bruce Slovin		3,000		3,000		—		—
SM Investments LP(125)		20,000		20,000		—		—
Tyler M. Smith		4,000		4,000		—		—
Vincent C. Smith		80,000		80,000		—		—
Richard R. Snowdon & Marlee A. Snowdon		4,000		2,000		2,000		*

169


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Leon J. Snyder		5,000		5,000		—		—
Alan Sokol & Patricia Sokol		4,000		4,000		—		—
Bud Solk		2,000		2,000		—		—
Jeffrey Sonnenfeld		10,000		10,000		—		—
Sonterra Holdings LLC(126)		4,000		4,000		—		—
Peter Sperling		15,000		15,000		—		—
SRB Investment Services, LLLP(123)		2,000		2,000		—		—
Star Lake Productions Inc.(127)		1,500		1,500		—		—
Roger T. Staubach		20,000		20,000		—		—
James H. Stevenson		2,000		2,000		—		—
William C. Stitt		4,000		4,000		—		—
Simon S. Strauss		1,000		1,000		—		—
Robert A. Styerwalt		2,000		2,000		—		—
Susan Ann Slavik Inter-vivos Trust DTD 3/2/90 as amended(128)		10,000		10,000		—		—
T2 Capital Management, LLC(129)		2,000		2,000		—		—
Tate 1997 Living Trust(130)		2,000		2,000		—		—
The AML Trust(131)		2,000		2,000		—		—
The Badie Family Trust(132)		2,000		2,000		—		—
The Bill & Eve Gerber Family Trust DTD 2/17/93(133)		4,000		4,000		—		—
The Bruce Wood Revocable Living Trust(134)		2,000		2,000		—		—
The Caroline A Davis Revocable Living Trust DTD 10/11/01(135)		1,000		1,000		—		—
The Colombatto Family Trust DTD 7/26/00(136)		20,000		20,000		—		—
The Cuccio Family Trust(137)		8,000		8,000		—		—
The Darold L. Farr & Joyce L. Farr Trust(138)		3,000		3,000		—		—
The Dury Revocable Trust DTD 6/30/99(139)		4,000		4,000		—		—
The Easton Community Property Trust DTD 12/27/02(140)		4,000		4,000		—		—
The Family Trust U/A Third of the John D Wing Trust(141)		2,000		2,000		—		—
The George Hall Family Trust(142)		1,000		1,000		—		—
The Hackett Family Trust(143)		10,000		10,000		—		—
The Heywood Trust(144)		40,000		40,000		—		—
The Hirschman Family Trust(145)		4,000		4,000		—		—
The Jay Goldman Master LP(146)		15,000		15,000		—		—
The Jayam Living Trust DTD 7/25/01(147)		1,500		1,500		—		—

170


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

The Joan Kay Wylde Living Trust(148)		4,000		4,000		—		—
The John G.B., Jr & Jane R. Ellison Family Foundation, Inc.(149)		20,000		20,000		—		—
The Lapiner Amalgamated Trust(150)		4,000		4,000		—		—
The Leon and Toby Cooperman Family Foundation(151)		40,000		40,000		—		—
The Livingston Revocable Trust UAD 11/18/91(152)		10,000		10,000		—		—
The Lyons-Binch 1993 Revocable Trust UAD 6/21/01(153)		1,000		1,000		—		—
The Malo Family Trust(154)		4,000		4,000		—		—
The Milford Trust(155)		4,000		4,000		—		—
The Morgenfeld Family Living Trust(156)		1,400		1,400		—		—
The Phyllis Meier Trust UAD 9/29/97(157)		10,000		10,000		—		—
The Rhode Island Eye Institute 401K Profit Sharing Plan(158)		1,500		1,500		—		—
The Richard Heftel Living Trust(159)		40,000		40,000		—		—
The Robert E. Whitsitt Living Trust DTD 5/15/91(160)		500		500		—		—
The Robert J. Rotenberg 2002 Irrevocable Trust DTD 1/7/02(161)		85,000		85,000		—		—
The Rose Foundation(162)		20,000		20,000		—		—
The Sandan Trust(163)		4,000		4,000		—		—
The Spoo Family Trust(164)		2,000		2,000		—		—
The Stanton Family Foundation(165)		15,000		15,000		—		—
The Thomas Miller Family Trust(166)		11,900		11,900		—		—
The Thompson Family Trust(167)		4,000		4,000		—		—
The Tomsic Company Money Purchase Pension Plan(168)		10,000		10,000		—		—
The UPMC Health System Trust(169)		600,000		600,000		—		—
The Vintox Fund, LTD(170)		10,000		10,000		—		—
The Warren H. Judd/Myra Judd Trust UAD 12/17/03(171)		8,000		8,000		—		—
Third Avenue Management LLC(172)		1,100,000		1,000,000		100,000		*
Kurt B. Thompson & Beth Ann Thompson		2,000		2,000		—		—

171


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

TIAA-CREF Asset Management Commingled Funds Trust I, Mid Cap Value Fund(173)		2,400		2,400		—		—
TIAA-CREF Institutional Mid Cap Value Fund(173)		24,302		24,302		—		—
TIAA-CREF Institutional Real Estate Securities Fund(173)		105,000		105,000		—		—
TIAA-CREF Life Real Estate Securities Fund(173)		15,000		15,000		—		—
Tip Top LP(174)		10,000		10,000		—		—
Dorothy Tornetta		1,000		1,000		—		—
Tower Insurance Company(175)		254,700		200,000		54,700		*
Keith P. Tracy		4,000		4,000		—		—
David A. Tremblay & Cecelia M. Tremblay		1,000		1,000		—		—
Carol B. Turchin & Ben Monderer		40,000		40,000		—		—
Ronald R. Tuttle		4,000		4,000		—		—
Tuttle Trust of 1992(176)		4,000		4,000		—		—
Susan D. Twellman		2,000		2,000		—		—
Shimon Ullman		3,500		3,500		—		—
Union Communications Company(177)		75,000		75,000		—		—
Terence Unter		4,000		4,000		—		—
Benjamin J. Veit		800		800		—		—
Ventling Family Trust(178)		2,000		2,000		—		—
James Edward Virtue		10,000		10,000		—		—
Louis J. Volpe		40,000		40,000		—		—
Vornado Realty Non-Qualified Deferred Compensation FBO Michelle Felman(179)		4,000		4,000		—		—
Vornado Realty Non-Qualified Deferred Compensation FBO Wendy Silverstein(180)		4,000		4,000		—		—
Wakefield Capital (182)		3,000		3,000		—		—
Patrick M. Walsh		2,000		2,000		—		—
Corinne G. Wardle		7,000		7,000		—		—
Stuart Warrington		8,000		8,000		—		—
Wasatch Advisors(181)		897,885		300,000		597,885		2.4%
Alexander Wattles		200		200		—		—
Bonnie Wattles		200		200		—		—
Clifton T. Weatherford		5,000		5,000		—		—
William B. Weidlein		10,000		10,000		—		—
Daniel H. Wheeler & Amy A. Fox		3,000		3,000		—		—
Wight Investment Partners(183)		20,000		20,000		—		—
Williams Family Trust DTD 12/12/94(184)		10,000		10,000		—		—
Paul T. Williamson		7,200		7,200		—		—

172


	Shares of				Shares of		Percentage of
	Common Stock		Shares of		Common Stock		Common Stock
Name of	Beneficially		Common Stock		Beneficially		Beneficially
Selling	Owned Prior to		That May be		Owned After		Owned After
Stockholder(a)	the Offering		Offered		the Offering		the Offering

Winner Living Trust DTD 2/4/99(185)		6,000		6,000		—		—
Honora W. Wohlgemuth		2,000		2,000		—		—
Paul Wolpert & Carolyn Wolpert		1,500		1,500		—		—
Wolpert & Wolpert — Surgeons & Physicians Profit Sharing Plan(186)		6,000		6,000		—		—
Wolpert Farms LLP(187)		4,000		4,000		—		—
WRC Management LLC(188)		4,000		4,000		—		—
Karen K. Wylde		4,000		4,000		—		—
Kenneth R. Wynn Family Trust(189)		10,000		10,000		—		—
Gerrick Y. Yamamoto		6,000		6,000		—		—
Martina Yamin		1,000		1,000		—		—
Michael Yamin		1,000		1,000		—		—
Yates Petroleum Corp.(190)		10,000		10,000		—		—
Michael F. Young		24,000		20,000		4,000		*
Philip Youtie		3,000		3,000		—		—
Mark I. Zeni & Roxann J. Zeni		4,000		4,000		—		—
Zuni Tribe LCR Settlement Fund(105)	7,000 17,353,085		7,000 16,371,200			— 981,885		—
TOTAL


	(a)	The term “selling stockholder” includes donees, pledgees, transferees or other successors-in-interest selling shares received after the date of this prospectus from a selling stockholders as a gift, pledge, partnership distribution or other related non-sale transaction.


	(1)	Rose Caiola, a member of the selling stockholder, exercises voting and dispositive power with respect to these shares.

	(2)	Mahmoud El Torai, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(3)	Gary Erlbaum and Michael Erlbaum, the trustees, exercise voting and dispositive power with respect to these shares.

	(4)	Anthony Ivankovich, the general partner, exercises voting and dispositive power with respect to these securities.

	(5)	Shlomo Kattan exercises sole voting and dispositive power with respect to these shares.

	(6)	Luigi Caiola, the manager of the selling stockholder, exercises voting and dispositive power with respect to these shares.

	(7)	Mindy Nussbaum-Bell, a Vice President and Trust Officer of Bankers Trust Co., the trustee of the selling stockholder, may be deemed to exercise voting and/or investment control with respect to these shares.

	(8)	Anne M. Asher, the trustee, exercises voting and dispositive power with respect to these shares.

	(9)	Ducat Limited, a director of the selling stockholder, exercises voting and dispositive power with respect to these shares.


	(10)	Barbara Alicia Gubbins, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(11)	Kay S. Bradley, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(12)	Gregory Basso and Noreen Basso, the co-trustees, exercise sole voting and dispositive power with respect to these shares.

	(13)	Ian Buchanan, the managing director of the selling stockholder, exercises voting and dispositive power with respect to these shares.

	(14)	Andrew S. Berwick, Jr. and Phyllis Berwick, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(15)	Thomas Salentine and William Bindley exercise voting and dispositive power with respect to these shares.

	(16)	Jon Bloom exercises sole voting and dispositive power with respect to these shares.

173


	(17)	Domenic Ferrante is the managing member of Brookside Capital Management, LLC, which is the general partner of Brookside Capital Investors, L.P., the general partner of the selling stockholder, and he exercises voting and dispositive power with respect to these shares.

	(18)	Bruce E. Toll, the sole member of the selling stockholder, exercises sole voting and dispositive power with respect to these shares.

	(19)	Aaron Buchwald and Daphne Buchwald, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(20)	William Zox, a portfolio manager of Diamond Hill Capital Management, exercises voting and dispositive power with respect to these shares pursuant to an Investment Management Agreement with the selling stockholder.

	(21)	Stephen Needel, the managing partner of the selling stockholder, exercises sole voting and dispositive power with respect to these shares.

	(22)	Abraham Wolfson and Aaron Wolfson, the president and vice president, respectively, of the selling stockholder, exercise sole voting and dispositive power with respect to these shares.

	(23)	Glenn C. Christenson and Anne D. Christenson, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(24)	Carl Stork, a member of the selling stockholder, exercises sole voting and dispositive power with respect to these shares.

	(25)	Johannes Brenner, a managing director of the selling stockholder, exercises voting and dispositive power with respect to these shares. Citigroup Global Markets Inc., a SEC-registered broker-dealer, is an affiliate of the selling stockholder. The selling stockholder has represented to us that the selling stockholder purchased the shares in the ordinary course of business and, at the time of its purchase of the stock to be resold, did not have any agreements or understandings, directly or indirectly, with any person to distribute the stock. Accordingly, the selling stockholder is not deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act.

	(26)	Leroy Parris, Terrence Thornhill and Cheryl Haynes exercise voting and dispositive power with respect to these shares.

	(27)	Banc of America Finance Services, Inc., Banc of America Investment Services, Inc., Banc of America Securities LLC, Banc of America Specialist, Inc., Columbia Management Distributors, Inc. and Fitzmaurice Investment Management Services, LLC, SEC-registered broker-dealers, are affiliates of the selling stockholder. The selling stockholder has represented to us that the selling stockholder purchased the shares in the ordinary course of business and, at the time of its purchase of the stock to be resold, did not have any agreements or understandings, directly or indirectly, with any person to distribute the stock. Accordingly, the selling stockholder is not deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act.

	(28)	TIAA-CREF Investment Management, LLC, the investment adviser to the CREF Stock Account, is an SEC registered investment adviser and a subsidiary of Teachers Insurance and Annuity Association of America. Drew Collins and Hans Erickson are both Managing Directors of the investment manager and are authorized to sign on behalf of this fund. TIAA-CREF Individual & Institutional Services, LLC, and Teachers Personal Investors Service, Incorporated, both SEC registered broker-dealers, are also subsidiaries of Teachers Insurance and Annuity Association of America. The selling stockholder has represented to us that the selling stockholder purchased the shares in the ordinary course of business and, at the time of its purchase of the stock to be resold, did not have any agreements or understandings, directly or indirectly, with any person to distribute the stock. Accordingly, the selling stockholder is not deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act.

	(29)	David A. Friedman, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(30)	David E. Withrow and Marilyn W. Withrow, directors of the selling stockholder, exercise sole voting and dispositive power with respect to these shares.

	(31)	David Schecter, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(32)	Jourdain B. De Werd and Michelle De Werd, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(33)	Deerfield Opportunities Fund LLC (“DOF”) is a limited liability company with a single managing member, Deerfield Capital Management LLC (“DCM”). Approximately 94% of the voting control of DCM is held by Triarc Companies, Inc., a publicly-traded company (“Triarc”). Nelsen Peltz and Peter W. May, the chairman and chief executive officer and the president and chief operating officer, respectively, of Triarc own a substantial amount of Triarc’s voting stock and may be considered to have voting control over Triarc. Triarc-related entities are also the principal non-managing members of DOF, and have certain voting rights with respect to DOF pursuant to DOF’s operating agreement.

	(34)	Deutsche Bank Securities, Inc., a SEC-registered broker-dealer, is an affiliate of the selling stockholder. The selling stockholder has represented to us that the selling stockholder purchased the shares in the ordinary course of business and, at the time of its purchase of the stock to be resold, did not have any agreements or understandings, directly or indirectly, with any person to distribute the stock. Accordingly, the selling stockholder is not deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act.

	(35)	Malcolm A. Litman, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(36)	William Zox, a portfolio manager of the selling stockholder, exercises voting and dispositive power with respect to these shares.

174


	(37)	Donald E. Klaiss, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(38)	Douglas Pansch, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(39)	Alec Rutherford is the portfolio manager of Drake Asset Management LLC, the general partner of the selling stockholder, and in such capacity, exercises voting and dispositive power with respect to these shares.

	(40)	Duane A. Baker, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(41)	Edward Rodriguez and Lourdes Rodriguez, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(42)	Edward O. Boshell, Jr., the trustee, exercises sole voting and dispositive power with respect to these shares.

	(43)	Elias Liberman and Miriam Liberman, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(44)	Ronald L. Ellerbeck, the general partner, exercises sole voting and dispositive power with respect to these shares.

	(45)	William J. Frutkin, the vice president of the general partner of the selling stockholder, exercises voting and dispositive power with respect to these shares.

	(46)	Peter E. Haas, Jr. is the managing general partner of the selling stockholder and exercises voting and dispositive power with respect to these shares.

	(47)	Melvin A. Dow is the sole manager of F&M GP, LLC, the general partner of the selling stockholder, and exercises voting and dispositive power with respect to these shares.

	(48)	Warren Eisenberg is the managing member of Feinstein Eisenberg Associates LLC, the general partner of the selling stockholder, and exercises voting and dispositive power with respect to these shares.

	(49)	Daniel S. Och, the senior managing member of OZ Management, LLC, the investment manager of the selling stockholder, may be deemed to exercise voting and/or investment control with respect to these shares.

	(50)	George E. McCown, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(51)	Steven Kleinman exercises voting and dispositive power with respect to these shares. Weiss Investment Management Services LLC, a SEC-registered broker-dealer, is an affiliate of the selling stockholder. The selling stockholder has represented to us that the selling stockholder purchased the shares in the ordinary course of business and, at the time of its purchase of the stock to be resold, did not have any agreements or understandings, directly or indirectly, with any person to distribute the stock. Accordingly, the selling stockholder is not deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act.

	(52)	Glenview Capital Management, LLC (‘’GCM”) advises us of the following: GCM is the investment adviser to each of Glenview Capital Partners, L.P., Glenview Institutional Partners, L.P., Glenview Capital Master Fund, Ltd., GCM Little Arbor Partners, L.P., GCM Little Arbor Institutional Partners, L.P. and GCM Little Arbor Master Fund, Ltd. (collectively, the “GCM Funds”). Pursuant to an advisory contract with the GCM Funds, GCM has investment and voting discretion over the securities beneficially owned by the GCM Funds. Larry Robbins, Senior Managing Member of Glenview Capital GP, LLC (“GC-GP”) and GCM, through his ownership of GC-GP and GCM, may be deemed to be the beneficial owner of the shares held by the GCM Funds. Each of the GCM Funds is considered to be a separate entity for tax and accounting purposes. GCM further advises us that each of the GCM Funds is not a registered broker-dealer and that each of the GCM Funds does not currently own our securities, other than those being registered hereby.

	(53)	Howard J. Goodman and Janice Goodman, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(54)	Halcyon Asset Management LLC, Halcyon Offshore Asset Management LLC and Halcyon Structured Asset Management L.P. (collectively, “Halcyon”) advise us of the following: Halcyon is the investment adviser to each of Halcyon Fund L.P., Halcyon Offshore Event-Driven Strategies Fund, Halcyon Offshore Enhanced Master L.P., Gryphon Hidden Values VIII Ltd., Institutional Benchmark Masterfund Ltd. — Arbitrage, Institutional Benchmark Masterfund Ltd. — Event-Driven, Halcyon MAC 19 Ltd., HFR ED Select Performance Master Trust and Halcyon Structured Opportunities Investors L.P. (collectively, the “Halcyon Funds”). Pursuant to an advisory contract with each of the Halcyon Funds, Halcyon has investment and voting discretion over the securities beneficially owned by the Halcyon Funds. John Bader and Kevah Konner, the managing principals and co-portfolio managers of Halcyon, exercise sole voting and dispositive power over the shares owned by the Halcyon Funds.


		However, Halcyon has no direct economic interest in the securities owned by the Halcyon Funds. Each of the Halcyon Funds is a separate entity for tax and accounting purposes. Each of the Halcyon Funds has its own assets, liabilities and shareholders or equityholders, as applicable. Halcyon further advises us that each of the Halcyon Funds is not a registered broker-dealer and that to the best of Halcyon’s knowledge, each of the Halcyon Funds does not currently own our securities, other than those being registered hereby.


	(55)	Charles R. Hart, Jr., the trustee, exercises sole voting and dispositive power with respect to these shares.

	(56)	Eli Caplan, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(57)	Stephen A. Hellberg and Carissa Hellberg, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(58)	Jonathan S. Jacobson and Richard L. Grubman are portfolio managers for the selling stockholder and exercise voting and dispositive power over the shares.

175


	(59)	Hobson LeBlanc and Carol LeBlanc, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(60)	I.T. Welling, Jr., the president of the selling stockholder, exercises sole voting and dispositive power with respect to these shares.

	(61)	David Huber is the general partner of the selling stockholder and in such capacity, exercises sole voting and dispositive power with respect to these shares.

	(62)	Per Sekse, the chief investment officer of the selling stockholder, exercises voting and dispositive power with respect to these shares.

	(63)	James Cunnane, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(64)	Irwin Rennert exercises voting and dispositive power with respect to these shares.

	(65)	James Cownie, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(66)	Jonathan J. Cohen, the managing partner of the selling stockholder, exercises sole voting and dispositive power with respect to these shares.

	(67)	Joel Laub, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(68)	Peter Sperling and John Sperling, the trustees, each exercise voting and dispositive power with respect to these shares.

	(69)	William Wright and Joell Jones, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(70)	Joseph Sedlack, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(71)	Julio Liberman and Ida Liberman, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(72)	Christopher W. Kalb and Carol P. Kalb, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(73)	Roy Kapani, the president of the selling stockholder, exercises voting and dispositive power with respect to these shares.

	(74)	Peter Kraus, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(75)	Laurance Freed, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(76)	Jason Liberman, Melinda Pollock and Laura Kieffer, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(77)	John Berl and James F. Crafts, Jr., co-trustees of The Adolph P. Schuman Marital Trust, the sole stockholder of the selling stockholder, exercise sole voting and dispositive power with respect to these shares.

	(78)	Robert C. Bantle, the president of this selling stockholder, exercises sole voting and dispositive power with respect to these shares.

	(79)	Michael Yamin, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(80)	Sandra Bakes, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(81)	Wendy Bebie, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(82)	Peter S. Harllee, Jr., the trustee, exercises sole voting and dispositive power with respect to these shares.

	(83)	Gary Peart, the chief executive officer of the selling stockholder, exercises voting and dispositive power with respect to these shares.

	(84)	Michael Rothberg, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(85)	Michael Lance Ornstein, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(86)	Michael S. Walsh, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(87)	Millennium Partners, L.P. advises us of the following: Millennium Management, L.L.C., a Delaware limited liability company (“MM”), is the managing member of Millennium Partners, L.P., a Cayman Islands exempted limited partnership (“MP”), and consequently may be deemed to have voting control and investment discretion over securities owned by MP, including these shares. Israel A. Englander is the managing member of MM. As a result, Mr. Englander may be deemed to be the beneficial owner of any shares deemed to be beneficially owned by MM. The foregoing should not be construed in and of itself as an admission by either of MM or Mr. Englander as to beneficial ownership of the shares of our common stock owned by MP. Millenco, L.P., MLP Trading Co., LLC and Millennium Funding Associates, LLC, all SEC-registered broker-dealers, are affiliates of MP. The selling stockholder has represented to us that the selling stockholder purchased the shares in the ordinary course of business and, at the time of its purchase of the stock to be resold, did not have any agreements or understandings, directly or indirectly, with any person to distribute the stock. Accordingly, the selling stockholder is not deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act.

	(88)	Ronald Moss and Joan Moss, the co-trustees, exercise sole voting and dispositive power with respect to these shares.

	(89)	John Murray and Sheila Murray, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(90)	Noel Rothman, Michael C. Rothman and Gregory C. Rothman have voting and dispositive power over these shares.

176


	(91)	Stephanie Lynn Nicks, the trustee, exercises sole voting and dispositive power with respect to these shares.

	(92)	Jeff Taylor, the manager of the selling stockholder, exercises voting and dispositive power with respect to these shares.

	(93)	Olin B. King has voting and investment power over these shares this selling stockholder beneficially owns.

	(94)	Bruce J. Oliver and Betty C. Oliver, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(95)	Omega Advisors, Inc. (“Omega”) advises us of the following: Omega is the investment adviser to each of Omega Capital Partners, L.P., Omega Equity Investors, L.P., Omega Capital Investors, L.P., Beta Equities, Inc., The Ministers and Missionaries Benefit Board of American Baptist Churches, GS&Co Profit Sharing Master Trust and Presidential Life Corporation (collectively, the “Omega Funds”). Pursuant to an advisory contract with each of the Omega Funds, Omega has investment and voting discretion over the securities beneficially owned by the Omega Funds. Leon G. Cooperman, the beneficial owner of Omega, may be deemed to be the beneficial owner of the shares held by the Omega Funds. However, Omega has no direct economic interest in the securities owned by the Omega Funds. Each of the Omega Funds is a separate entity for tax and accounting purposes. Each of the Omega Funds has its own assets, liabilities and shareholders or equityholders, as applicable. Omega further advises us that each of the Omega Funds is not a registered broker-dealer and that to the best of Omega’s knowledge, each of the Omega Funds does not currently own our securities, other than those being registered hereby. The amount of securities shown excludes 40,000 shares purchased on behalf of The Leon and Toby Cooperman Family Foundation by its trustee, Leon G. Cooperman. Leon G. Cooperman may be deemed to be the beneficial owner of the shares held by the foundation.

	(96)	Daniel S. Och, the senior managing member of OZ Management, LLC, the investment manager of the selling stockholder, may be deemed to exercise voting and/or investment control with respect to these shares.

	(97)	Guido van der Schuren exercises voting and dispositive power with respect to these shares.

	(98)	Paul L. Wolpert, John Wolpert and Regina Ratino, the trustees, exercise sole voting and dispositive power with respect to these shares.

	(99)	Paulette J. Meyer, the trustee, exercises sole voting and dispositive power with respect to these shares.


(100)	Peter S. Harllee, Jr., the trustee, exercises sole voting and dispositive power with respect to these shares.

(101)	John K. Freeman, the manager of the selling stockholder, exercises sole voting and dispositive power with respect to these shares.

(102)	Gregory T. George, a managing director of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(103)	John Hill, the president of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(104)	John Hill exercises voting and dispositive power with respect to these shares.

(105)	Arlen Quetawki and Carmelita Sanchez, the governor and lieutenant governor, respectively, of the Pueblo of Zuni, exercise sole voting and dispositive power with respect to these shares.

(106)	Steven B. Raffin and Sherry M. Raffin, the trustees, exercise sole voting and dispositive power with respect to these shares.

(107)	Alfred Osborne and Nancy Ann Rahnasto, the co-trustees, exercise sole voting and dispositive power with respect to these shares.

(108)	Gary B. Crossland, the trustee, exercises sole voting and dispositive power with respect to these shares.

(109)	Tis Prager and Urs Brunner, directors of the selling stockholder, exercise voting and dispositive power with respect to these shares.

(110)	Carolyn P. Dietrich and Cali Dietrich, the trustees, exercise sole voting and dispositive power with respect to these shares.

(111)	Ross Mitchell, the managing partner, exercise sole voting and dispositive power with respect to these shares.

(112)	Robert Margolis has sole investment and dispositive power over these shares.

(113)	Deutsche Asset Managment Investor Services, Inc., a SEC-registered broker-dealer, is an affiliate of the selling stockholder. The selling stockholder has represented to us that the selling stockholder purchased the shares in the ordinary course of business and, at the time of its purchase of the stock to be resold, did not have any agreements or understandings, directly or indirectly, with any person to distribute the stock. Accordingly, the selling stockholder is not deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act.

(114)	William Zox, a portfolio manager of Diamond Hill Capital Management, exercises voting and dispositive power with respect to these shares pursuant to an Investment Management Agreement with the selling stockholder.

(115)	Irwin Rennert, the trustee, exercises sole voting and dispositive power with respect to these shares.

(116)	Salah Hassanein, the trustee, exercises sole voting and dispositive power with respect to these shares.

(117)	David I. Saperstein, the trustee, exercises sole voting and dispositive power with respect to these shares.

(118)	Geoff Schaaf, the trustee, exercises sole voting and dispositive power with respect to these shares.

(119)	Edwin R. Schuler, the trustee, exercises sole voting and dispositive power with respect to these shares.

177


(120)	Laurent Nouvion, the chief executive officer of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(121)	Alan Long, the managing member, exercises sole voting and dispositive power with respect to these shares.

(122)	John K. Freeman and Jan Freeman, the trustees, exercise sole voting and dispositive power with respect to these shares.

(123)	Stephen F. Been, the manager of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(124)	John Wolpert exercises voting and dispositive power with respect to these shares.

(125)	Susan Mitchell, the managing partner, exercises sole voting and dispositive power with respect to these shares.

(126)	Craig Esterley, the managing member of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(127)	Denise Gordon exercises sole voting and dispositive power with respect to these shares.

(128)	Susan Ann Slavik, the trustee, exercises sole voting and dispositive power with respect to these shares.

(129)	Richard Taney, the managing member of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(130)	Michael Tate, the trustee, exercises sole voting and dispositive power with respect to these shares.

(131)	Milton Bilak, the trustee, exercises sole voting and dispositive power with respect to these shares.

(132)	Ronald P. Badie and Fabiana Badie, the trustees, exercise sole voting and dispositive power with respect to these shares.

(133)	William Norman Gerber and Eve Somer Gerber, the trustees, exercise sole voting and dispositive power with respect to these shares.

(134)	Bruce J. Wood, the trustee, exercises sole voting and dispositive power with respect to these shares.

(135)	Caroline A. Davis, the trustee, exercises sole voting and dispositive power with respect to these shares.

(136)	Martin Colombatto and Stefanie Colombatto, the trustees, exercise sole voting and dispositive power with respect to these shares.

(137)	Anthony Cuccio and Roberta Cuccio, the trustees, exercise sole voting and dispositive power with respect to these shares.

(138)	Darold L. Farr and Joyce L. Farr, the trustees, exercise sole voting and dispositive power with respect to these shares.

(139)	David Dury and Anneke Dury, the trustees, exercise sole voting and dispositive power with respect to these shares.

(140)	Douglas Easton and Kirsty Easton, the trustees, exercise sole voting and dispositive power with respect to these shares.

(141)	Merrilleon Wing, the trustee, exercises sole voting and dispositive power with respect to these shares.

(142)	George Hall and Diana Hall, the trustees, exercise sole voting and dispositive power with respect to these shares.

(143)	Terry C. Hackett, the trustee, exercises sole voting and dispositive power with respect to these shares.

(144)	Eldrick Woods, the trustee, exercises sole voting and dispositive power with respect to these shares.

(145)	Ronald A. Hirschman, the trustee, exercises sole voting and dispositive power with respect to these shares.

(146)	Jay Goldman is the managing member of The Jay Goldman Capital GP LLC, the general partner of the selling stockholder, and in such capacity, he exercises sole voting and dispositive power with respect to these shares.

(147)	Ramkumar Jayam and Mayura Jayam, the trustees, exercise sole voting and dispositive power with respect to these shares.

(148)	Karen K. Wylde, the trustee, exercises sole voting and dispositive power with respect to these shares.

(149)	John G.B. Ellison, Jr., the president of this selling stockholder, exercises voting and dispositive power with respect to these shares.

(150)	Stanley M. Joffe, the trustee, exercises sole voting and dispositive power with respect to these shares.

(151)	Leon G. Cooperman, the trustee, exercises sole voting and dispositive power with respect to these shares.

(152)	C. Ronald Livingston and Sandra J. Livingston, the co-trustees, exercise sole voting and dispositive power with respect to these shares.

(153)	Williams Binch and Lynda Binch, the trustees, exercise sole voting and dispositive power with respect to these shares.

(154)	Leslie Malo, the trustee, exercises sole voting and dispositive power with respect to these shares.

(155)	Stanley M. Joffe, the trustee, exercises sole voting and dispositive power with respect to these shares.

(156)	Thomas A. Morgenfeld and Norma S. Morgenfeld, the trustees, exercise sole voting and dispositive power with respect to these shares.

(157)	Phyllis Meier, the trustee, exercises sole voting and dispositive power with respect to these shares.

(158)	Robert L. Bahr, the trustee, exercises sole voting and dispositive power with respect to these shares.

178


(159)	Richard Heftel, the trustee, exercises sole voting and dispositive power with respect to these shares.

(160)	Robert E. Whitsitt, the trustee, exercises sole voting and dispositive power with respect to these shares.

(161)	M. Mitchell Rotenberg and D. Daniel Rotenberg, the trustees, exercise sole voting and dispositive power with respect to these shares.

(162)	Michael D. Rose, the chairman of the selling stockholder, exercises sole voting and dispositive power with respect to these shares.

(163)	Stanley M. Joffe, the trustee, exercises sole voting and dispositive power with respect to these shares.

(164)	Arthur W. Spoo and Lily S. Spoo, the trustees, exercise sole voting and dispositive power with respect to these shares.

(165)	Daniel W. Stanton and Mary Stanton, the trustees, exercise sole voting and dispositive power with respect to these shares.

(166)	Thomas Miller, the trustee, exercises sole voting and dispositive power with respect to these shares.

(167)	Robert H. Thompson and Shirley L. Thompson, the trustees, exercise sole voting and dispositive power with respect to these shares.

(168)	Ronald Tomsic, the trustee, exercises sole voting and dispositive power with respect to these shares.

(169)	E. Talbot Heppenstall, Jr., the treasurer of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(170)	Robert Topping, the general partner of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(171)	Warren Judd and Myra Judd, the trustees, exercise sole voting and dispositive power with respect to these shares.

(172)	Third Avenue Management LLC (“TAM”) advises us of the following: TAM is the investment adviser to the Third Avenue Real Estate Value Fund (“TAREX”). Pursuant to an advisory contract with TAREX, TAM has investment and voting discretion over the securities beneficially owned by TAREX. Since TAREX’s inception, TAREX has designated Michael Winer as its portfolio manager and, in this capacity, he has sole voting and dispositive power over the securities comprising TAREX’s portfolio. However, TAM has no economic interest in any of the investments which it manages on behalf of TAREX. TAREX is a separate mutual fund comprising part of the Third Avenue Trust, a Delaware business trust. Although TAREX shares the same board of trustees with certain other funds for which TAM serves as the investment adviser, each fund is considered to be a separate entity for tax and accounting purposes. Each fund has its own assets, liabilities and its own shareholders, primarily consisting of U.S. residents or citizens. No shareholder is known to beneficially own 5% or more of any of these funds. TAM further advises us that TAREX is not a registered broker-dealer (although TAM and TAREX may be deemed to be affiliated with M.J. Whitman LLC, a registered broker/ dealer that is not a participant in this offering).

(173)	Teachers Advisors, Inc., the investment advisor to TIAA-CREF Asset Management Commingled Funds Trust I, Mid Cap Value Fund, TIAA-CREF Institutional Mid Cap Value Fund, TIAA-CREF Institutional Real Estate Securities Fund and TIAA-CREF Life Real Estate Securities Fund, is an SEC registered investment adviser and a subsidiary of Teachers Insurance and Annuity Association of America. Drew Collins and Hans Erickson are both Managing Directors of the investment manager and are authorized to sign on behalf of this fund. TIAA-CREF Individual & Institutional Services, LLC, and Teachers Personal Investors Service, Incorporated, both SEC-registered broker-dealers, are also subsidiaries of Teachers Insurance and Annuity Association of America. The selling stockholder has represented to us that the selling stockholder purchased the shares in the ordinary course of business and, at the time of its purchase of the stock to be resold, did not have any agreements or understandings, directly or indirectly, with any person to distribute the stock. Accordingly, the selling stockholder is not deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act.

(174)	Jonathan Connors, a partner of the selling stockholder, exercises sole voting and dispositive power with respect to these shares.

(175)	Frank Colalucci, the chief financial officer of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(176)	Ronald R. Tuttle, the trustee, exercises sole voting and dispositive power with respect to these shares.

(177)	Benjamin Nazarian, the manager of the general partner of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(178)	Thomas Ventling and Jennifer Ventling, the trustees, exercise sole voting and dispositive power with respect to these shares.

(179)	Michelle Felman, the beneficiary of this deferred compensation plan account, exercises sole voting and dispositive power with respect to these shares.

(180)	Wendy Silverstein, the beneficiary of this deferred compensation plan account, exercises sole voting and dispositive power with respect to these shares.

(181)	Wasatch Advisors, Inc. (“WA”) advises us of the following: WA is the investment adviser to Wasatch Small Cap Value Fund and various separate accounts (collectively, the “WA Clients”). Pursuant to an advisory contract with each of the WA Clients, WA has investment and voting discretion over the securities beneficially owned by the WA Clients. John Mazanec, or another designee of WA, has investment and voting discretion over the shares owned by the WA Clients. However, WA has no direct economic interest in the securities

179

owned by the WA Clients. Each of the WA Clients is a separate entity for tax and accounting purposes. Each of the WA Clients has its own assets, liabilities and shareholders or equityholders, as applicable. WA further advises us that each of the WA Clients is not a registered broker-dealer.

(182) Joseph DiRenzo, the general partner of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(183) Russell B. Wight, Jr. is the general partner and sole beneficial owner of Wight Investment Partners and in such capacity, exercises sole voting and dispositive power with respect to these shares.

(184) James E. Williams and Antoinette J. Williams, the trustees, exercise sole voting and dispositive power with respect to these shares.

(185) Andrew Winner and Denise Winner, the trustees, exercise sole voting and dispositive power with respect to these shares.

(186) Michael Wolpert and Paul Wolpert, the trustees, exercise sole voting and dispositive power with respect to these shares.

(187) Paul Wolpert exercises sole voting and dispositive power with respect to these shares.

(188) William Chetney, the sole member of the selling stockholder, exercises sole voting and dispositive power with respect to these shares.

(189) Kenneth R. Wynn, the trustee, exercises sole voting and dispositive power with respect to these shares.

(190) John Perini, the cash and investment manager of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(191) Beverly Wright Edwards, the trustee, exercises voting and dispositive power with respect to these shares.

(192) Ed Chai, the fund manager for Cheyne Capital Management Limited, exercises voting and dispositive power with respect to these shares.

(193) Benjamin Zager, an executive vice president of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(194) Jerome Engel, the trustee, exercises voting and dispositive power with respect to these shares.

(195) C. Michael Hazard, the trustee, exercises sole voting and dispositive power with respect to these shares.

* Less than 1%.

180

DESCRIPTION OF CAPITAL STOCK

The following description of our capital stock is only a summary. While we believe that the following description covers the material terms of our capital stock, the description may not contain all of the information that is important to you. We encourage you to read carefully this entire document, our charter and our bylaws and the other documents we refer to for a more complete understanding of our capital stock.

General

Our charter provides that we may issue up to 500,000,000 shares of common stock and 100,000,000 shares of preferred stock, both having par value $0.001 per share. As of October 23, 2006, 25,019,500 shares of our common stock were issued and outstanding and no shares of preferred stock were issued and outstanding. Our board of directors, with the approval of a majority of the entire board and without any action on the part of our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue. Under Maryland law, our stockholders generally are not personally liable for our debts and obligations solely as a result of their status as stockholders.

Common Stock

All shares of our common stock have equal rights as to earnings, assets, dividends and voting and, when they are issued, will be duly authorized, validly issued, fully paid and non-assessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our board of directors and declared by us out of funds legally available therefor. Shares of our common stock generally have no preemptive, appraisal, preferential exchange, conversion or redemption rights and are freely transferable, except where their transfer is restricted by federal and state securities laws, by contract or by the restrictions in our charter. In the event of our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after payment of or adequate provision for all of our known debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time. Subject to our charter restrictions on the transfer and ownership of our stock and except as may otherwise be specified in the terms of any class or series of common stock, each share of our common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting power. There is no cumulative voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock can elect all of our directors, and holders of less than a majority of such shares will be unable to elect any director.

Power to Reclassify Shares of Our Stock

Our charter authorizes our board of directors to classify and reclassify any unissued shares of stock into other classes or series of stock, including preferred stock. Prior to issuance of shares of each class or series, the board of directors is required by Maryland law and by our charter to set, subject to our charter restrictions on the transfer and ownership of our stock, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the board of directors could authorize the issuance of shares of common stock or preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interests. No shares of our

181

preferred stock are presently outstanding and we have no present plans to issue any preferred stock.

Power to Issue Additional Shares of Common Stock and Preferred Stock

We believe that the power of our board of directors to amend the charter without stockholder approval to increase the total number of authorized shares of our stock or any class or series of our stock, to issue additional authorized but unissued shares of our common stock or preferred stock and to classify or reclassify unissued shares of our common stock or preferred stock and thereafter to cause us to issue such classified or reclassified shares of stock will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. The additional classes or series, as well as our common stock, will be available for issuance without further action by our stockholders, unless stockholder action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although our board of directors has no intention at the present time of doing so, it could authorize us to issue a class or series that could, depending upon the terms of such class or series, delay, defer or prevent a transaction or a change in control of us that might involve a premium price for holders of our common stock or otherwise be in their best interests.

Restrictions on Ownership and Transfer

In order to qualify as a REIT under the Internal Revenue Code for each taxable year beginning after December 31, 2005, our shares of capital stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. Also, for our taxable years beginning after December 31, 2005, no more than 50% of the value of our outstanding shares of capital stock may be owned, directly or constructively, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the second half of any calendar year.

Our charter, subject to certain exceptions, contains restrictions on the number of shares of our capital stock that a person may own and may prohibit certain entities from owning our shares. Our charter provides that (subject to certain exceptions described below) no person may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, more than 9.8% in value or in number of shares, whichever is more restrictive, of any class or series of our outstanding shares of capital stock.

Our charter also prohibits any person from beneficially or constructively owning shares of our capital stock that would result in our being “closely held” under Section 856(h) of the Internal Revenue Code or otherwise cause us to fail to qualify as a REIT and from transferring shares of our capital stock if the transfer would result in our capital stock being owned by fewer than 100 persons. Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our capital stock that will or may violate any of the foregoing restrictions on transferability and ownership, or who is the intended transferee of shares of our stock which are transferred to the trust (as described below), is required to give notice immediately to us and provide us with such other information as we may request in order to determine the effect of such transfer on our status as a REIT. The foregoing restrictions on transferability and ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.

Our board of directors, in its sole discretion, may exempt a person from the foregoing restrictions. The person seeking an exemption must provide to our board of directors such representations, covenants and undertakings as our board of directors may deem appropriate in order to conclude that granting the exemption will not cause us to lose our status as a REIT.

182

Our board of directors may also require a ruling from the Internal Revenue Service or an opinion of counsel in order to determine or ensure our status as a REIT.

Until such time as all classes of our equity securities are “publicly-offered” for purposes of the regulations promulgated under the Employee Retirement Income Security Act of 1974 (ERISA), known as the DOL Plan Asset Regulations, our charter limits equity participation in any class of our capital stock by benefit plan investors to less than 25% in the aggregate, disregarding for such purposes any stock held by persons or their affiliates who have discretionary authority or control over our assets or who provide investment advice for a fee with respect to our assets (such as Hyperion Brookfield Crystal River, Brookfield and their respective affiliates), so that such participation in that class of our stock by benefit plan investors will not be deemed to be “significant.” Since the consummation of our initial public offering in August 2006, we anticipate that our common stock is treated as “publicly-offered” securities for purposes of the DOL Plan Asset Regulations, and we have no other outstanding classes of capital stock.

Any attempted transfer of our stock which, if effective, would result in a violation of the foregoing restrictions will cause the number of shares causing the violation (rounded to the nearest whole share) to be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries, and the proposed transferee will not acquire any rights in such shares. The automatic transfer will be deemed to be effective as of the close of business on the business day (as defined in our charter) prior to the date of the transfer. If, for any reason, the transfer to the trust does not occur or would not prevent a violation of the restrictions on ownership contained in our charter, our charter provides that the purported transfer will be void ab initio. Shares of our stock held in the trust will be issued and outstanding shares. The proposed transferee will not benefit economically from ownership of any shares of stock held in the trust, will have no rights to dividends and no rights to vote or other rights attributable to the shares of stock held in the trust. The trustee of the trust will have all voting rights and rights to dividends or other distributions with respect to shares held in the trust. These rights will be exercised for the exclusive benefit of the charitable beneficiary. Any dividend or other distribution paid prior to our discovery that shares of stock have been transferred to the trust will be paid by the recipient to the trustee upon demand. Any dividend or other distribution authorized but unpaid will be paid when due to the trustee. Any dividend or distribution paid to the trustee will be held in trust for the charitable beneficiary. Subject to Maryland law, the trustee will have the authority to rescind as void any vote cast by the proposed transferee prior to our discovery that the shares have been transferred to the trust and to recast the vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary. However, if we have already taken irreversible corporate action, then the trustee will not have the authority to rescind and recast the vote.

Within 20 days of receiving notice from us that shares of our stock have been transferred to the trust, the trustee will sell the shares to a person designated by the trustee, whose ownership of the shares will not violate the above ownership limitations. Upon such sale, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the proposed transferee and to the charitable beneficiary as follows: the proposed transferee will receive the lesser of (1) the price paid by the proposed transferee for the shares or, if the proposed transferee did not give value for the shares in connection with the event causing the shares to be held in the trust (e.g., a gift, devise or other similar transaction), the market price (as defined in our charter) of the shares on the day of the event causing the shares to be held in the trust and (2) the price received by the trustee from the sale or other disposition of the shares. Any net sale proceeds in excess of the amount payable to the proposed transferee will be paid immediately to the charitable beneficiary. If, prior to our discovery that shares of our stock have been transferred to the trust, the shares are sold by the proposed transferee, then (1) the shares shall be deemed to have

183

been sold on behalf of the trust and (2) to the extent that the proposed transferee received an amount for the shares that exceeds the amount the proposed transferee was entitled to receive, the excess shall be paid to the trustee upon demand.

In addition, shares of our stock held in the trust will be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of the price per share in the transaction that resulted in the transfer to the trust (or, in the case of a devise or gift, the market price at the time of the devise or gift) and the market price on the date we, or our designee, accept the offer. We will have the right to accept the offer until the trustee has sold the shares. Upon a sale to us, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the proposed transferee.

All certificates representing shares of our capital stock will bear a legend referring to the restrictions described above.

Every owner of more than 5% (or such lower percentage as required by the Internal Revenue Code or the regulations promulgated thereunder) of all classes or series of our stock, including shares of common stock, within 30 days after the end of each taxable year, will be required to give written notice to us stating the name and address of such owner, the number of shares of each class and series of shares of our stock which the owner beneficially owns and a description of the manner in which the shares are held. Each owner shall provide to us such additional information as we may request in order to determine the effect, if any, of the beneficial ownership on our status as a REIT and to ensure compliance with the ownership limitations. In addition, each such owner shall upon demand be required to provide to us such information as we may request, in good faith, in order to determine our status as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance.

These ownership limitations could delay, defer or prevent a transaction or a change in control that might involve a premium price for the common stock or might otherwise be in the best interests of our stockholders.

Transfer Agent and Registrar

The transfer agent and registrar for our shares of common stock is American Stock Transfer & Trust Company.

Registration Rights

The persons who purchased shares of our common stock in our March 2005 private offering and their transferees are entitled to the benefits of a registration rights agreement. Pursuant to this agreement, we are required, among other things, to:


	•	file with the Commission as soon as practicable, but in no event later than December 10, 2005, the resale shelf registration statement of which this prospectus is a part registering all of the 17,400,000 shares of common stock purchased or placed by Deutsche Bank Securities Inc. and Wachovia Capital Markets, LLC in our March 2005 private placement and not registered in our initial public offering and the 84,000 shares of restricted stock and 126,000 shares of common stock underlying options issued to our Manager upon completion of our March 2005 private offering; and

	•	use our commercially reasonable efforts to cause the resale shelf registration statement of which this prospectus is a part to become effective under the Securities Act as promptly as practicable after the filing (and to maintain the resale shelf registration statement continuously effective under the Securities Act for a specified period).

184

Concurrent with the filing of the registration statement for our initial public offering, we filed the resale shelf registration statement of which this prospectus is a part. Under the registration rights agreement, we were permitted to delay the effectiveness of the resale shelf registration statement of which this prospectus is a part until after we consummated our initial public offering.

Upon completion of our initial public offering, the holders of our common stock that are beneficiaries of the registration rights agreement were not able to sell any shares of our common stock that we issued in our March 2005 private offering for a lock-up period of 60 days (and in the case of any subsequent underwritten offering in which a holder’s shares are included, any remaining shares not included in the underwritten offering will be subject to a lock-up period of 60 days), as determined between us and the underwriters.

Notwithstanding the foregoing, we will be permitted to suspend the use, from time to time, of the prospectus that is part of the registration statement (and therefore suspend sales under the registration statement) for certain periods, referred to as “blackout periods,” if:


	•	the representative of the underwriters in any underwritten public offering by us of our common stock advises us that an offer or sale of shares covered by the registration statement would have a material adverse effect on our offering;

	•	our board of directors determines in good faith that the offer or sale of shares covered by the registration statement would materially impede, delay or interfere with any proposed financing, offer or sale of securities, acquisition, corporate reorganization or other significant transaction involving our company; or

	•	our board of directors determines in good faith that it is in our best interests or it is required by law that we supplement the registration statement or file a post-effective amendment to the registration statement in order to ensure that the prospectus included in the registration statement contains the financial information required under Section 10(a)(3) of the Securities Act, discloses any fundamental change in the information included in the prospectus or discloses any material information with respect to the plan of distribution that was not disclosed in the registration statement or any material change to that information,

and we provide the stockholders notice of the suspension. The cumulative blackout periods in any 12-month period commencing on the closing of the offering may not exceed an aggregate of 90 days and furthermore may not exceed 45 consecutive days, except as a result of a refusal by the Commission to declare any post-effective amendment to the registration statement as effective after we have used all commercially reasonable efforts to cause the post-effective amendment to be declared effective, in which case, we must terminate the blackout period immediately following the effective date of the post-effective amendment.

A holder that sells our common stock pursuant to a registration statement or as a selling stockholder pursuant to an underwritten public offering generally will be required to be named as a selling stockholder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the registration rights agreement that are applicable to such holder (including certain indemnification rights and obligations). In addition, each holder of our common stock may be required to deliver information to be used in connection with the registration statement in order to have such holder’s common stock included in the registration statement and to benefit from the provisions of the next paragraph.

Each common stock certificate may contain a legend to the effect that the holder thereof, by its acceptance thereof, will be deemed to have agreed to be bound by the provisions of the registration rights agreement. In that regard, each holder will be deemed to have agreed that, upon receipt of notice of the occurrence of any event which makes a statement in the

185

prospectus which is part of the registration statement untrue in any material respect or which requires the making of any changes in such prospectus in order to make the statements therein not misleading, or of certain other events specified in the registration rights agreement, such holder will suspend the sale of our common stock pursuant to such prospectus until we have amended or supplemented such prospectus to correct such misstatement or omission and have furnished copies of such amended or supplemented prospectus to such holder or we have given notice that the sale of the common stock may be resumed.

We also agreed to use our commercially reasonable efforts to list our common stock on the New York Stock Exchange or the Nasdaq Stock Market. Our common stock is listed on the New York Stock Exchange under the symbol “CRZ.”

The summary herein of certain provisions of the registration rights agreement does not purport to be complete and is subject to, and qualified in its entirety by reference to, all of the provisions of the registration rights agreement filed with the Securities and Exchange Commission as an exhibit to the registration statement of which this prospectus forms a part.

186

COMMON STOCK ELIGIBLE FOR FUTURE SALE

Prior to our initial public offering, there was no public market for our common stock. We cannot predict the effect, if any, that sales of shares or the availability of shares for sale will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of our common stock into the public market, through this shelf registration or otherwise, or the perception that such sales could occur, could adversely affect the prevailing market price of our common stock. As of October 23, 2006, we had outstanding 25,019,500 shares of our common stock. Of those shares, 7,500,000 were sold in our IPO and are freely transferable. All of the remaining 17,519,500 shares are eligible for future sale into the public market and could depress the prevailing market price of our common stock.

Rule 144

In general, under Rule 144, a person (or persons whose shares are aggregated), including any person who may be deemed our affiliate, who owns shares of our common stock that are restricted securities and that were acquired from us or any of our affiliates at least one year prior to the proposed sale is entitled to sell, within any three-month period beginning 90 days after the date of the prospectus for our initial public offering, a number of shares that does not exceed the greater of:


	•	1% of the number of shares of common stock then outstanding; or

	•	the average weekly trading volume of the common stock on the NYSE during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

Sales under Rule 144 are also subject to certain manner of sale provisions, certain notice requirements and the availability of current public information about us.

Any person who is deemed to be our affiliate must comply with all the provisions of Rule 144 (other than the one-year holding period requirement) in order to sell shares of our common stock that are not restricted securities (such as shares acquired by our affiliates either in this offering or through purchases in the open market following this offering).

Rule 144(k)

In addition, under Rule 144(k), a person who is not our affiliate, and who has not been our affiliate at any time during the 90 days preceding any sale, is entitled to sell restricted securities without regard to the public information, volume limitation, manner of sale and notice provisions of Rule 144, provided that at least two years have elapsed since the later of the date the shares were acquired from us or any of our affiliates.

Registration Rights

In connection with our March 2005 private offering, we entered into a registration rights agreement with Deutsche Bank Securities Inc. and Wachovia Capital Markets, LLC on behalf of the holders of common stock issued in the private offering. Pursuant to that agreement, we have included in the registration statement of which this prospectus is a part shares of common stock proposed to be offered by selling stockholders who purchased shares of our common stock originally issued and sold in the private offering. We agreed to cause this shelf registration statement to remain effective until the first to occur of (a) the disposition of all shares of common stock sold in our March 2005 private offering under the resale registration statement of which this prospectus forms a part or pursuant to Rule 144, (b) the date on which, in the opinion of our counsel, all the shares of common stock sold in our March 2005 private offering that are not held by our affiliates are saleable under Rule 144(k) under the

187

Securities Act or (c) the date that is two years after the effective date of the shelf registration statement of which this prospectus forms a part.

We also have agreed to register shares of restricted stock and shares of common stock underlying options issued to Hyperion Brookfield Crystal River upon completion of our March 2005 private offering and shares of common stock issued to Hyperion Brookfield Crystal River as incentive compensation under our management agreement (which includes 84,000 shares of restricted stock that we issued to Hyperion Brookfield Crystal River, which it subsequently transferred to certain of its officers and employees, certain of our directors and other individuals associated with Hyperion Brookfield or Brookfield and their respective affiliates who provide services to us, and options to purchase 126,000 shares of common stock that we granted to Hyperion Brookfield Crystal River, which it subsequently transferred to certain of its officers and employees, certain of our directors and other individuals associated with Hyperion Brookfield or Brookfield and their respective affiliates who provide services to us.

188

CERTAIN PROVISIONS OF THE MARYLAND GENERAL CORPORATION LAW

AND OUR CHARTER AND BYLAWS

The following description of the terms of our capital stock and certain provisions of Maryland law is only a summary. While we believe that the following description covers the material terms of our capital stock and certain provisions of Maryland law, the description may not contain all of the information that is important to you. We encourage you to read carefully this entire document, the MGCL, our charter and our bylaws and the other documents we refer to for a more complete understanding of our capital stock.

The MGCL and our charter and bylaws contain provisions that could make it more difficult for a potential acquiror to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.

Classification of Board of Directors

Pursuant to our charter, our board of directors is divided into three classes of directors. Beginning in 2006, directors of each class will be chosen for three-year terms upon the expiration of their current terms and every year one class of our directors will be elected by our stockholders. We believe that classification of our board of directors will help to assure the continuity and stability of our business strategies and policies as determined by our board of directors. Holders of shares of our common stock will not have the right to cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the shares of our common stock entitled to vote will be able to elect all of the successors of the class of directors whose terms expire at the meeting.

The classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult. Two separate meetings of stockholders, instead of one, will generally be required to effect a change in a majority of our board of directors. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. The staggered terms of directors may delay, defer or prevent a tender offer or an attempt to change control of us, even though a tender offer or change in control might be in the best interests of our stockholders.

Number of Directors; Vacancies; Removal

Our charter provides that the number of directors will be set only by the board of directors in accordance with our bylaws. Our bylaws provide that a majority of our entire board of directors may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than four (4) nor more than fifteen (15). Our bylaws currently provide that any vacancy may be filled by a majority of the remaining directors, except a vacancy resulting from an increase in the number of directors must be filled by a majority of the entire board of directors. Any individual elected to fill such vacancy will serve until the next annual meeting of stockholders, and until a successor is duly elected and qualifies. However, our charter and Bylaws provide that, at such time as we have at least three independent directors and a class of our common or preferred stock is registered under the Exchange Act, we elect to be subject to the provision of Subtitle 8 of Title 3 of the MGCL regarding the filling of vacancies on the board of directors. Accordingly, at such time, except as may be provided by the board of directors in setting the terms of any class or series of stock, any and all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not

189

constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the class in which the vacancy occurred and until a successor is duly elected and qualifies.

Our charter provides that a director may be removed only for cause, as defined in our charter, and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors.

Action by Stockholders

Under the MGCL, stockholder action can be taken only at an annual or special meeting of stockholders or by unanimous written consent in lieu of a meeting (unless the charter provides for a lesser percentage, which our charter does not). These provisions, combined with the requirements of our bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.

Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals

Our bylaws provide that with respect to an annual meeting of stockholders, nominations of individuals for election to the board of directors and the proposal of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by the board of directors or (3) by a stockholder who was a stockholder of record both at the time of giving of notice by such stockholder as provided for in our bylaws and at the time of the annual meeting and who is entitled to vote at the meeting and who has complied with the advance notice procedures of the bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of individuals for election to the board of directors at a special meeting may be made only (1) pursuant to our notice of the meeting, (2) by the board of directors or (3) provided that the board of directors has determined that directors will be elected at the meeting, by a stockholder who was a stockholder of record both at the time of giving of notice by such stockholder as provided for in our bylaws and at the time of the annual meeting and who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws.

The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our board of directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our board of directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.

Calling of Special Meetings of Stockholders

Our bylaws provide that special meetings of stockholders may be called by our board of directors and certain of our officers. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders shall be called by the secretary of the

190

corporation upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.

Approval of Extraordinary Corporate Action; Amendment of Charter and Bylaws

Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter, with certain exceptions, generally provides for approval of charter amendments and extraordinary transactions, which have been first declared advisable by our board of directors, by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. An affirmative vote of two-thirds of all votes entitled to be cast on the matter is required for approval of amendments to our charter related to (i) removal of directors from our board of directors, (ii) the classification and reclassification of shares of our preferred stock, (iii) the classification and reclassification of shares of our common stock, and (iv) restrictions on transfer and ownership.

Our bylaws provide that the board of directors will have the exclusive power to adopt, alter or repeal any provision of our bylaws and to make new bylaws.

No Appraisal Rights

As permitted by the MGCL, our charter provides that stockholders will not be entitled to exercise appraisal rights unless a majority of our board of directors determines in advance that such rights will apply to one or more transactions.

Control Share Acquisitions

The Maryland Control Share Acquisition Act provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:


	•	one-tenth or more but less than one-third;

	•	one-third or more but less than a majority; or

	•	a majority or more of all voting power.

Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.

A person who has made or proposes to make a control share acquisition may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholders’ meeting.

191

If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may repurchase for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to repurchase control shares is subject to certain conditions and limitations. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholders’ meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.

The Control Share Acquisition Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation.

Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions by any person of our shares of stock. There can be no assurance that such provision will not be amended or eliminated at any time in the future. However, we will amend our bylaws to be subject to the Control Share Acquisition Act only if the board of directors determines that it would be in our best interests.

Certain Restrictions on Ownership and Transfer of Our Capital Stock

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 9.8% in value or number (whichever is more restrictive) of our outstanding shares of capital stock. The board may not grant such an exemption to any proposed transferee whose ownership of in excess of 9.8% of our outstanding shares would result in the termination of our status as a REIT. Our charter also prohibits any person from (a) beneficially or constructively owning shares of our capital stock that would result in us being “closely held” under Section 856(h) of the Internal Revenue Code or otherwise cause us to fail to qualify as a REIT, and (b) transferring shares of our capital stock if such transfer would result in our capital stock being owned by fewer than 100 persons. Any person who acquires or attempts or intends to acquire beneficial ownership of shares of our capital stock that will or may violate any of the foregoing restrictions on transferability and ownership, or who is the intended transferee of shares of our stock which are transferred to a trust for the exclusive benefit of one or more charitable beneficiaries, will be required to give notice immediately to us and provide us with such other information as we may request in order to determine the effect of such transfer on our REIT status. See “Description of Capital Stock — Restrictions on Ownership and Transfer.” These restrictions on transferability and ownership will not apply if the board of directors determines that it is no longer in our best interests to continue to qualify as a REIT.

To attempt to prevent our assets from being treated as plan assets under ERISA, our charter generally limits equity participation in any class of our capital stock by benefit plan investors to less than 25% in the aggregate, disregarding for such purposes any stock held by persons or their affiliates who have discretionary authority or control over our assets or who provide investment advice for a fee with respect to our assets. In this regard, our charter provides that we will have the power, in our sole discretion, to take certain actions to avoid having our assets characterized as “plan assets” under the DOL Plan Asset Regulations, including the right, without limitation, to cause an investor that is a benefit plan investor to withdraw a portion or all of their investment in our stock. In addition, our charter also contains other restrictions, including a restriction on the transfer or assignment of any interest in our

192

common stock to any Covered Plans or Controlling Person. This restriction lapsed when the registration statement with respect to our initial public offering became effective. In addition, our charter contains various other restrictions on the ownership and transfer of our capital stock. See “Description of Capital Stock — Restrictions on Ownership and Transfer.”

Our charter provides that any ownership or purported transfer of our capital stock in violation of the foregoing restrictions (including the procurement and delivery of a required investor letter) will result in the shares owned or transferred in such violation being automatically transferred to a charitable trust for the benefit of a charitable beneficiary, and the purported owner or transferee acquiring no rights in such shares. If the transfer is ineffective for any reason to prevent a violation of the restriction, the transfer that would have resulted in such violation will be void ab initio.

Business Combinations

Under the Maryland Business Combination Act, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:


	•	any person who beneficially owns 10% or more of the voting power of the corporation’s shares; or

	•	an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board of directors.

After the five-year prohibition, any business combination between the corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:


	•	80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

	•	two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Our board of directors has adopted a resolution which provides that any business combination between us and any other person is exempted from the provisions of the Business Combination Act, provided that the business combination is first approved by the board of directors. This resolution, however, may be altered or repealed in

193

whole or in part at any time. If this resolution is repealed, or the board of directors does not otherwise approve a business combination, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

Subtitle 8

Subtitle 8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to any or all of five provisions:


	•	a classified board;

	•	a two-thirds stockholder vote requirement for removing a director;

	•	a requirement that the number of directors be fixed only by vote of the directors;

	•	a requirement that a vacancy on the board of directors be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred; and

	•	a majority requirement for the calling of a special meeting of stockholders.

Through provisions in our charter and bylaws unrelated to Subtitle 8, we already (a) have a classified board, (b) require a two-thirds stockholder vote for the removal of any director from the board of directors, as well as require such removal be for cause (as defined in our charter), (c) unless called by our chairman of the board, our president, our chief executive officer or the board of directors, require the request of holders of a majority of outstanding shares to call a special meeting and (d) vest in the board of directors exclusive power to fix the number of directorships. Our charter also provides that at such time as Subtitle 8 becomes applicable to us, our board of directors will have the exclusive power to fill vacancies on the board of directors, by a vote of the remaining directors, and such vacancies will be filled until the end of the term of the class of directors in which the vacancy occurred.

Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses

Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our charter contains such a provision which eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law.

Maryland law requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or

194

otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made, or are threatened to be made, a party by reason of their service in those or other capacities unless it is established that (1) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty, (2) the director or officer actually received an improper personal benefit in money, property or services or (3) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit was improperly received. However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that a personal benefit was improperly received, unless in either case a court orders indemnification, and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

195

FEDERAL INCOME TAX CONSEQUENCES OF OUR QUALIFICATION AS A REIT

This section summarizes certain material federal income tax considerations that you, as a stockholder, may consider relevant. Paul, Hastings, Janofsky & Walker LLP has acted as our counsel, has reviewed this summary, and is of the opinion that the discussion contained herein, insofar as it purports to summarize matters of law and legal matters, provides a fair summary of such matters. Because this section is a summary, it does not address all aspects of taxation that may be relevant to particular stockholders in light of their personal investment or tax circumstances, or to certain types of stockholders that are subject to special treatment under the federal income tax laws, such as insurance companies, tax-exempt organizations (except to the extent discussed in “— Taxation of Tax-Exempt Stockholders” below), financial institutions or broker-dealers, and non-U.S. individuals and foreign corporations (except to the extent discussed in “— Taxation of Non-U.S. Stockholders” below).

The statements in this section are based on the current federal income tax laws. We cannot assure you that new laws, interpretations of law, or court decisions, any of which may take effect retroactively, will not cause any statement in this section to be inaccurate.

For purposes of this section, the term “U.S. stockholder” means a holder of our common stock that, for United States federal income tax purposes, is:


	•	a citizen or resident of the United States;

	•	a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any of its States, or the District of Columbia;

	•	an estate whose income is subject to U.S. federal income taxation regardless of its source; or

	•	any trust if (i) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (ii) it has a valid election in place to be treated as a U.S. person.

The term “non-U.S. stockholder” means a holder (other than an entity or arrangement treated as a partnership for federal income tax purposes) of our common stock other than a U.S. stockholder.

If a partnership, entity or arrangement treated as a partnership for federal income tax purposes holds our common stock, the federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. If you are a partner in a partnership holding our common stock, you should consult your tax advisor regarding the consequences of the purchase, ownership and disposition of our common stock by the partnership.

We urge you to consult your own tax advisor regarding the specific tax consequences to you of the purchase, ownership and sale of our common stock and of our election to be taxed as a REIT. Specifically, you should consult your own tax advisor regarding the federal, state, local, foreign, and other tax consequences of such purchase, ownership, sale and election, and regarding potential changes in applicable tax laws.

Taxation of Our Company

We elected to be taxed as a REIT under the federal income tax laws commencing with our taxable year ended on December 31, 2005. We believe that, commencing with such taxable year, we have been organized and have operated in such a manner so as to qualify for taxation as a REIT under the federal income tax laws, and we intend to continue to operate in such a

196

manner, but no assurances can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. This section discusses the laws governing the federal income tax treatment of a REIT and its stockholders. These laws are highly technical and complex.

In connection with this offering, Paul, Hastings, Janofsky & Walker LLP is rendering an opinion that, commencing with our taxable year ended December 31, 2005, we have been organized in conformity with the requirements for qualification and taxation as a REIT under the federal income tax laws, and our actual and proposed method of operation has enabled us and will continue to enable us to meet the requirements for qualification and taxation as a REIT under the federal income tax laws for our taxable year ended December 31, 2005 and in the future. Investors should be aware that Paul, Hastings, Janofsky & Walker LLP’s opinion is based upon customary assumptions, is conditioned upon certain representations made by us as to factual matters, including representations regarding the nature of our assets and the conduct of our business, and is not binding upon the Internal Revenue Service, or IRS, or any court. In addition, Paul, Hastings, Janofsky & Walker LLP’s opinion is based on existing federal income tax law governing qualification as a REIT, which is subject to change, either prospectively or retroactively. Moreover, our qualification and taxation as a REIT depend upon our ability to meet on a continuing basis, through actual annual operating results, certain qualification tests set forth in the federal tax laws. Those qualification tests involve the percentage of income that we earn from specified sources, the percentage of our assets that falls within specified categories, the diversity of our stock ownership, and the percentage of our earnings that we distribute. Paul, Hastings, Janofsky & Walker LLP will not review our compliance with those tests on a continuing basis. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements. For a discussion of the tax consequences of our failure to qualify as a REIT, see “— Failure to Qualify.”

As a REIT, we generally will not be subject to federal income tax on the REIT taxable income that we distribute to our stockholders, but taxable income generated by Crystal River Capital TRS Holdings, Inc., our TRS, will be subject to regular federal corporate income tax and any applicable state or local income tax on corporations. However, our stockholders will generally be taxed on dividends that they receive at ordinary income rates unless such dividends are designated by us as capital gain dividends, return of capital or qualified dividend income. This differs from non-REIT C corporations, which generally are subject to federal corporate income taxes but whose individual and certain non-corporate trust and estate stockholders are generally taxed on dividends they receive at a maximum rate of 15% (through 2008), and whose corporate stockholders generally receive the benefits of a dividends received deduction that substantially reduces the effective rate that they pay on such dividends. In general, income earned by a REIT and distributed to its stockholders will be subject to less aggregate federal income taxation than if such income were earned by a non-REIT C corporation, subjected to corporate income tax on C corporations, and then distributed and taxed to stockholders.

While we generally are not subject to corporate income taxes on income that we distribute currently to stockholders, we will be subject to federal tax in the following circumstances:


	•	We will pay federal income tax on taxable income, including net capital gain, that we do not distribute to stockholders during, or within a specified time period after, the calendar year in which the income is earned.

	•	We may be subject to the “alternative minimum tax” on any items of tax preference that we do not distribute or allocate to stockholders.

197


	•	We will pay income tax at the highest corporate rate on:


	•	net income from the sale or other disposition of property acquired through foreclosure, or foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, and

	•	other non-qualifying income from foreclosure property.


	•	We will pay a 100% tax on net income earned from sales or other dispositions of property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business.

	•	If we fail to satisfy the 75% gross income test or the 95% gross income test, as described below under “— Requirements for Qualification — Gross Income Tests,” and nonetheless continue to qualify as a REIT because we meet other requirements, we will pay a 100% tax on the amount by which we fail the 75% gross income test or the 95% gross income test, multiplied, in either case, by a fraction intended to reflect our profitability.

	•	In the event of a more than de minimis failure of the asset tests, as described below under “— Requirements for Qualification — Asset Tests,” as long as the failure was due to reasonable cause and not to willful neglect and we dispose of the assets or otherwise comply with such asset tests within six months after the last day of the quarter in which the failure was discovered, we will pay a tax equal to the greater of $50,000 or 35% of the net income from the nonqualifying assets during the period in which we failed to satisfy such asset tests.

	•	If we fail to satisfy one or more requirements for REIT qualification, other than the gross income tests (due to reasonable cause and not willful neglect) and the asset tests, we will be required to pay a penalty of $50,000 for each such failure.

	•	If we fail to distribute during a calendar year at least the sum of:


	•	85% of our REIT ordinary income for the year,

	•	95% of our REIT capital gain net income for the year, and

	•	any undistributed taxable income from earlier periods,


	we will pay a 4% nondeductible excise tax on the excess of the required distribution over the amount we actually distributed, plus any retained amounts on which income tax has been paid at the corporate level.


	•	We may elect to retain and pay income tax on our net long-term capital gain. In that case, a stockholder would include in income for federal income tax purposes its proportionate share of our undistributed long-term capital gain (to the extent that we make a timely designation of such gain to the stockholder) and would receive a credit or refund for its proportionate share of the tax we paid.

	•	We will be subject to a 100% excise tax on certain transactions between us and a TRS to the extent that such transactions are not conducted on an arm’s length basis.

	•	If we acquire any asset from a C corporation, or a corporation that generally is subject to full corporate-level tax, in a merger or other transaction in which we acquire a basis in the asset that is determined by reference either to the C corporation’s basis in the asset or to another asset, we will pay tax at the highest regular corporate rate applicable if we recognize gain on the sale or disposition of the asset during the 10-year period after we acquire the asset. The amount of gain on which we will pay tax is the lesser of:


	•	the amount of gain that we recognize at the time of the sale or disposition, and

198


	•	the amount of gain that we would have recognized if we had sold the asset at the time we acquired it, assuming that the C corporation will not elect in lieu of this treatment to an immediate tax when the asset is acquired.


	•	If we own a residual interest in a real estate mortgage investment conduit, or REMIC, we will be taxable at the highest corporate rate on the portion of any excess inclusion income that we derive from the REMIC residual interests equal to the percentage of our stock that is held by “disqualified organizations.” Although the law is unclear, similar rules may apply if we own an equity interest in a taxable mortgage pool. To the extent that we own a REMIC residual interest or a taxable mortgage pool through a TRS, we will not be subject to this tax. For a discussion of “excess inclusion income,” see “— Requirements for Qualification — Taxable Mortgage Pools.” A “disqualified organization” includes:


	•	the United States;

	•	any state or political subdivision of the United States;

	•	any foreign government;

	•	any international organization;

	•	any agency or instrumentality of any of the foregoing;

	•	any other tax-exempt organization, other than a farmer’s cooperative described in section 521 of the Internal Revenue Code, that is exempt both from income taxation and from taxation under the unrelated business taxable income provisions of the Internal Revenue Code; and

	•	any rural electrical or telephone cooperative.

In addition, notwithstanding our status as a REIT, we may also have to pay certain state and local income taxes, because not all states and localities treat REITs in the same manner that they are treated for federal income tax purposes. Moreover, as further described below, any TRS in which we own an interest, including Crystal River Capital TRS Holdings, Inc., will be subject to federal corporate income tax, and state and local tax where applicable, on its taxable income.

Requirements For Qualification

A REIT is a corporation, trust, or association that meets each of the following requirements:


	1. It is managed by one or more trustees or directors.

	2. Its beneficial ownership is evidenced by transferable shares, or by transferable certificates of beneficial interest.

	3. It would be taxable as a domestic corporation, but for the REIT provisions of the federal income tax laws.

	4. It is neither a financial institution nor an insurance company subject to special provisions of the federal income tax laws.

	5. At least 100 persons are beneficial owners of its shares or ownership certificates.

	6. Not more than 50% in value of its outstanding shares or ownership certificates is owned, directly or indirectly, by five or fewer individuals, which the federal income tax laws define to include certain entities, during the last half of any taxable year.

199


	7. It elects to be a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrative requirements established by the IRS that must be met to elect and maintain REIT status.

	8. It meets certain other qualification tests, described below, regarding the nature of its income and assets.

We must meet requirements 1 through 4 during our entire taxable year and must meet requirement 5 during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Requirements 5 and 6 will apply to us beginning with our 2006 taxable year. If we comply with all the requirements for ascertaining the ownership of our outstanding stock in a taxable year and have no reason to know that we violated requirement 6, we will be deemed to have satisfied requirement 6 for that taxable year. For purposes of determining share ownership under requirement 6, an “individual” generally includes a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes. An “individual,” however, generally does not include a trust that is a qualified employee pension or profit sharing trust under the federal income tax laws, and beneficiaries of such a trust will be treated as holding our stock in proportion to their actuarial interests in the trust for purposes of requirement 6.

We are issuing sufficient common stock with sufficient diversity of ownership to satisfy requirements 5 and 6. In addition, our charter restricts the ownership and transfer of our stock so that we should continue to satisfy these requirements. The provisions of our charter restricting the ownership and transfer of the common stock are described in “Description of Capital Stock — Restrictions on Ownership and Transfer.”

In addition, we must satisfy all relevant filing and other administrative requirements established by the IRS that must be met to elect and maintain REIT status, use a calendar year for federal income tax purposes, and comply with the record keeping requirements of the Internal Revenue Code and regulations promulgated thereunder.

Qualified REIT Subsidiaries. A corporation that is a “qualified REIT subsidiary” is not treated as a corporation separate from its parent REIT. All assets, liabilities, and items of income, deduction, and credit of a “qualified REIT subsidiary” are treated as assets, liabilities, and items of income, deduction, and credit of the REIT. A “qualified REIT subsidiary” is a corporation, other than a TRS, all of the capital stock of which is owned by the REIT. Thus, in applying the requirements described herein, any “qualified REIT subsidiary” that we own will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiary will be treated as our assets, liabilities, and items of income, deduction, and credit.

Other Disregarded Entities and Partnerships. An unincorporated domestic entity, such as a limited liability company, that has a single owner, generally is not treated as an entity separate from its parent for federal income tax purposes. An unincorporated domestic entity with two or more owners generally is treated as a partnership for federal income tax purposes unless an election is made to be taxed as a C corporation. In the case of a REIT that is a partner in a partnership that has other partners, the REIT is treated as owning its proportionate share of the assets of the partnership and as earning its allocable share of the gross income of the partnership for purposes of the applicable REIT qualification tests. For purposes of the 10% value test (described in “— Asset Tests”), our proportionate share is based on our proportionate interest in the equity interests and certain debt securities issued by the partnership. For all of the other asset and income tests, our proportionate share is based on our proportionate interest in the capital interests in the partnership. Our proportionate share of the assets, liabilities, and items of income of any partnership, joint venture, or limited liability company that is treated as a partnership for federal income tax purposes in which we acquire

200

an interest, directly or indirectly, will be treated as our assets and gross income for purposes of applying the various REIT qualification requirements.

Taxable REIT Subsidiaries. A REIT is permitted to own up to 100% of the stock of one or more “taxable REIT subsidiaries,” or TRSs. A TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by the parent REIT. The subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. However, an entity will not qualify as a TRS if it directly or indirectly operates or manages a lodging or health care facility or, generally, provides to another person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated. Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.

We and Crystal River Capital TRS Holdings, Inc. have jointly elected to treat Crystal River Capital TRS Holdings, Inc. as a TRS of ours. As a TRS, Crystal River Capital TRS Holdings, Inc. is subject to federal income tax, and state and local income tax where applicable, on its taxable income. To the extent that Crystal River Capital TRS Holdings, Inc. is required to pay taxes, it will have less cash available for distribution to us. If dividends are paid by Crystal River Capital TRS Holdings, Inc. to us, then the dividends we pay to our stockholders who are taxed as individuals, up to the amount of dividends we receive from Crystal River Capital TRS Holdings, Inc., will generally be eligible to be taxed at a maximum rate of 15% (through 2008) applicable to qualified dividend income. See “— Taxation of Taxable U.S. Stockholders.” Currently, we anticipate that Crystal River Capital TRS Holdings, Inc. will retain its after-tax income subject to our compliance with the 20% asset test.

The TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on certain transactions between a TRS and its parent REIT or the REIT’s tenants to the extent that they are not conducted on an arm’s length basis.

Taxable Mortgage Pools. An entity, or a portion of an entity, may be classified as a taxable mortgage pool under the Internal Revenue Code if:


	•	substantially all of its assets consist of debt obligations or interests in debt obligations;

	•	more than 50% of those debt obligations are real estate mortgage loans or interests in real estate mortgage loans as of specified testing dates;

	•	the entity has issued debt obligations that have two or more maturities; and

	•	the payments required to be made by the entity on its debt obligations “bear a relationship” to the payments to be received by the entity on the debt obligations that it holds as assets.

Under U.S. Treasury regulations, if less than 80% of the assets of an entity (or a portion of an entity) consist of debt obligations, these debt obligations are considered not to comprise “substantially all” of its assets, and therefore the entity would not be treated as a taxable mortgage pool.

We have made and in the future intend to make investments or enter into financing and securitization transactions that give rise to us being considered to own an interest in one or more taxable mortgage pools. Where an entity, or a portion of an entity, is classified as a taxable mortgage pool, it is generally treated as a taxable corporation for federal income tax purposes. However, special rules apply to a REIT, a portion of a REIT, or a qualified REIT subsidiary that is a taxable mortgage pool. The portion of the REIT’s assets, held directly or through a qualified REIT subsidiary that qualifies as a taxable mortgage pool is treated as a qualified REIT subsidiary that is not subject to corporate income tax, and the taxable mortgage

201

pool classification does not affect the tax status of the REIT. Rather, the consequences of the taxable mortgage pool classification would generally, except as described below, be limited to the REIT’s stockholders. The Treasury Department has yet to issue regulations governing the tax treatment of the stockholders of a REIT that owns an interest in a taxable mortgage pool.

A portion of our income from a taxable mortgage pool arrangement, which might be non-cash accrued income, or “phantom” taxable income, could be treated as “excess inclusion income.” Excess inclusion income is an amount, with respect to any calendar quarter, equal to the excess, if any, of (i) income allocable to the holder of a REMIC residual interest or taxable mortgage pool interest over (ii) the sum of an amount for each day in the calendar quarter equal to the product of (a) the adjusted issue price at the beginning of the quarter multiplied by (b) 120% of the long-term federal rate (determined on the basis of compounding at the close of each calendar quarter and properly adjusted for the length of such quarter). This non-cash or “phantom” income would be subject to the distribution requirements that apply to us and could therefore adversely affect our liquidity. See “— Distribution Requirements.”

Our excess inclusion income would be allocated among our stockholders. A stockholder’s share of excess inclusion income (i) would not be allowed to be offset by any net operating losses otherwise available to the stockholder, (ii) would be subject to tax as unrelated business taxable income in the hands of most types of stockholders that are otherwise generally exempt from federal income tax, and (iii) would result in the application of U.S. federal income tax withholding at the maximum rate (30%), without reduction for any otherwise applicable income tax treaty, to the extent allocable to most types of foreign stockholders. See “— Taxation of Taxable U.S. Stockholders,” “— Taxation of Tax-Exempt Stockholders,” and “—Taxation of Non-U.S. Stockholders.” The manner in which excess inclusion income would be allocated among shares of different classes of our stock or how such income is to be reported to stockholders is not clear under current law. Tax-exempt investors, foreign investors, and taxpayers with net operating losses should carefully consider the tax consequences described above and are urged to consult their tax advisors in connection with their decision to invest in our common stock.

If we own less than 100% of the ownership interests in a subsidiary that is a taxable mortgage pool, the foregoing rules would not apply. Rather, the subsidiary would be treated as a corporation for federal income tax purposes, and would potentially be subject to corporate income tax. In addition, this characterization would alter our REIT income and asset test calculations and could adversely affect our compliance with those requirements. We currently do not have, and currently do not intend to form, any subsidiary in which we own some, but less than all, of the ownership interests that are or will become taxable mortgage pools, and we intend to monitor the structure of any taxable mortgage pools in which we have an interest to ensure that they will not adversely affect our status as a REIT.

Gross Income Tests

We must satisfy two gross income tests annually to maintain our qualification as a REIT. First, at least 75% of our gross income for each taxable year must consist of defined types of income that we derive, directly or indirectly, from investments relating to real property or mortgage loans on real property or qualified temporary investment income. Qualifying income for purposes of the 75% gross income test generally includes:


	•	rents from real property;

	•	interest on debt secured by a mortgage on real property, or on interests in real property;

	•	dividends or other distributions on, and gain from the sale of, shares in other REITs;

	•	gain from the sale of real estate assets;

202


	•	income derived from a REMIC in proportion to the real estate assets held by the REMIC, unless at least 95% of the REMIC’s assets are real estate assets, in which case all of the income derived from the REMIC; and

	•	income derived from the temporary investment of new capital that is attributable to the issuance of our stock or a public offering of our debt with a maturity date of at least five years and that we receive during the one-year period beginning on the date on which we received such new capital.

Second, in general, at least 95% of our gross income for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test, other types of interest and dividends, gain from the sale or disposition of stock or securities or any combination of these. Gross income from our sale of property that we hold primarily for sale to customers in the ordinary course of business is excluded from both the numerator and the denominator in both income tests. In addition, income and gain from “hedging transactions,” as defined in “— Hedging Transactions,” that we enter into to hedge indebtedness incurred or to be incurred to acquire or carry real estate assets and that are clearly and timely identified as such will be excluded from both the numerator and the denominator for purposes of the 95% gross income test (but not the 75% gross income test). We will monitor the amount of our non-qualifying income and we will manage our investment portfolio to comply at all times with the gross income tests. The following paragraphs discuss the specific application of the gross income tests to us.

Interest. The term “interest,” as defined for purposes of both gross income tests, generally excludes any amount that is based in whole or in part on the income or profits of any person. However, interest generally includes the following:


	•	an amount that is based on a fixed percentage or percentages of receipts or sales; and

	•	an amount that is based on the income or profits of a debtor, as long as the debtor derives substantially all of its income from the real property securing the debt from leasing substantially all of its interest in the property, and only to the extent that the amounts received by the debtor would be qualifying “rents from real property” if received directly by a REIT.

If a loan contains a provision that entitles a REIT to a percentage of the borrower’s gain upon the sale of the real property securing the loan or a percentage of the appreciation in the property’s value as of a specific date, income attributable to that loan provision will be treated as gain from the sale of the property securing the loan, which generally is qualifying income for purposes of both gross income tests.

Interest on debt secured by a mortgage on real property or on interests in real property, including, for this purpose, discount points, prepayment penalties, loan assumption fees, and late payment charges that are not compensation for services, generally is qualifying income for purposes of the 75% gross income test. However, if the highest principal amount of a loan outstanding during a taxable year exceeds the fair market value of the real property securing the loan as of the date the REIT agreed to originate or acquire the loan, a portion of the interest income from such loan will not be qualifying income for purposes of the 75% gross income test, but will be qualifying income for purposes of the 95% gross income test. The portion of the interest income that will not be qualifying income for purposes of the 75% gross income test will be equal to the portion of the principal amount of the loan that is not secured by real property — that is, the amount by which the loan exceeds the value of the real estate that is security for the loan.

The interest, original issue discount, and market discount income that we receive from our mortgage-related assets generally will be qualifying income for purposes of both gross income tests. However, many of our loans will not be secured by mortgages on real property or

203

interests in real property. Our interest income from those loans will be qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. In addition, as discussed above, if the fair market value of the real estate securing any of our loans is less than the principal amount of the loan, a portion of the income from that loan will be qualifying income for purposes of the 95% gross income test but not the 75% gross income test.

Fee Income. We may receive various fees in connection with our operations. The fees will be qualifying income for purposes of both the 75% and 95% gross income tests if they are received in consideration for entering into an agreement to make a loan secured by real property and the fees are not determined by income and profits of the borrower. Other fees are not qualifying income for purposes of either gross income test. Any fees earned by Crystal River Capital TRS Holdings, Inc., our TRS, will not be included for purposes of the gross income tests.

Dividends. Our share of any dividends received from any corporation (including Crystal River Capital TRS Holdings, Inc., our TRS, and any other TRS, but excluding any REIT) in which we own an equity interest will qualify for purposes of the 95% gross income test but not for purposes of the 75% gross income test. Our share of any dividends received from any other REIT in which we own an equity interest will be qualifying income for purposes of both gross income tests.

Rents from Real Property. We do not hold and currently do not intend to acquire any real property, but we may acquire real property or an interest therein in the future. To the extent that we acquire real property or an interest therein, rents we receive will qualify as “rents from real property” in satisfying the gross income requirements for a REIT described above only if the following conditions are met:


	•	First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from rents from real property solely by reason of being based on fixed percentages of receipts or sales.

	•	Second, rents we receive from a “related party tenant” will not qualify as rents from real property in satisfying the gross income tests unless the tenant is a TRS, at least 90% of the property is leased to unrelated tenants and the rent paid by the TRS is substantially comparable to the rent paid by the unrelated tenants for comparable space. A tenant is a related party tenant if the REIT, or an actual or constructive owner of 10% or more of the REIT, actually or constructively owns 10% or more of the tenant.

	•	Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to the personal property will not qualify as rents from real property.

	•	Fourth, we generally must not operate or manage our real property or furnish or render services to our tenants, other than through an “independent contractor” who is adequately compensated and from whom we do not derive revenue. However, we may provide services directly to tenants if the services are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not considered to be provided for the tenants’ convenience. In addition, we may provide a minimal amount of “non-customary” services to the tenants of a property, other than through an independent contractor, as long as our income from the services does not exceed 1% of our income from the related property. Furthermore, we may own up to 100% of the stock of a TRS, which may provide customary and non-customary services to tenants without tainting its rental income from the related properties.

Hedging Transactions. From time to time, we enter into hedging transactions with respect to one or more of our assets or liabilities. Income and gain from “hedging transactions” will be

204

excluded from gross income for purposes of the 95% gross income test (but will be treated as nonqualifying income for purposes of the 75% gross income test). A “hedging transaction” includes any transaction entered into in the normal course of our trade or business primarily to manage the risk of interest rate, price changes, or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets. We will be required to clearly identify any such hedging transaction before the close of the day on which it was acquired, originated, or entered into. To the extent that we hedge for other purposes, or to the extent that a portion of our mortgage loans is not secured by “real estate assets” (as described below under “ — Asset Tests”) or in other situations, the income from those transactions will likely be treated as nonqualifying income for purposes of both gross income tests. We intend to structure any hedging transactions in a manner that does not jeopardize our status as a REIT.

Prohibited Transactions. A REIT will incur a 100% tax on the net income derived from any sale or other disposition of property, other than foreclosure property, that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We believe that none of our assets will be held primarily for sale to customers. Whether a REIT holds an asset “primarily for sale to customers in the ordinary course of a trade or business” depends, however, on the facts and circumstances surrounding the sale, including those related to a particular asset. Nevertheless, we will attempt to comply with the terms of safe-harbor provisions in the federal income tax laws prescribing when a sale of real property will not be characterized as a prohibited transaction. We cannot assure you, however, that we can comply with the safe-harbor provisions or that we will avoid owning property that may be characterized as property that we hold “primarily for sale to customers in the ordinary course of a trade or business.” To the extent necessary to avoid the prohibited transactions tax, we will conduct sales of our assets through Crystal River Capital TRS Holdings, Inc. or one of our other TRSs.

Foreclosure Property. We will be subject to tax at the maximum corporate rate on any income from foreclosure property, other than income that otherwise would be qualifying income for purposes of the 75% gross income test, less expenses directly connected with the production of that income. However, gross income from foreclosure property will qualify under the 75% and 95% gross income tests. Foreclosure property is any real property, including interests in real property, and any personal property incident to such real property:


	•	that is acquired by a REIT as the result of the REIT having bid on such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default or default was imminent on a lease of such property or on indebtedness that such property secured;

	•	for which the related loan or lease was acquired by the REIT at a time when the default was not imminent or anticipated; and

	•	for which the REIT makes a proper election to treat the property as foreclosure property.

However, a REIT will not be considered to have foreclosed on a property where the REIT takes control of the property as a mortgagee-in-possession and cannot receive any profit or sustain any loss except as a creditor of the mortgagor. Property generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which the REIT acquired the property, or longer if an extension is granted by the Secretary of the Treasury. This grace period terminates and foreclosure property ceases to be foreclosure property on the first day:


	•	on which a lease is entered into for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test, or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after

205

such day that will give rise to income that does not qualify for purposes of the 75% gross income test;

• on which any construction takes place on the property, other than completion of a building or any other improvement, where more than 10% of the construction was completed before default became imminent; or

• which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business which is conducted by the REIT, other than through an independent contractor from whom the REIT itself does not derive or receive any income.

Failure to Satisfy Gross Income Tests. If we fail to satisfy one or both of the gross income tests for any taxable year, we nevertheless may qualify as a REIT for that year if we qualify for relief under certain provisions of the federal income tax laws. Those relief provisions generally will be available if:


	•	our failure to meet such tests is due to reasonable cause and not due to willful neglect; and

	•	following such failure for any taxable year, a schedule of the sources of our income is filed in accordance with regulations prescribed by the Secretary of the Treasury.

We cannot predict, however, whether in all circumstances we would qualify for the relief provisions. In addition, as discussed above in “—Taxation of Our Company,” even if the relief provisions apply, we would incur a 100% tax on the gross income attributable to the amount by which we fail the 75% or 95% gross income test, multiplied, in either case, by a fraction intended to reflect our profitability.

Asset Tests

To qualify as a REIT, we also must satisfy the following asset tests at the end of each quarter of each taxable year. First, at least 75% of the value of our total assets must consist of:


	•	cash or cash items, including certain receivables;

	•	government securities;

	•	interests in real property, including leaseholds and options to acquire real property and leaseholds;

	•	interests in mortgage loans secured by real property;

	•	stock in other REITs;

	•	investments in stock or debt instruments during the one-year period following our receipt of new capital that we raise through equity offerings or public offerings of debt with at least a five-year term; and

	•	regular or residual interests in a REMIC. However, if less than 95% of the assets of a REMIC consists of assets that are qualifying real estate-related assets under the federal income tax laws, determined as if we held such assets, we will be treated as holding directly our proportionate share of the assets of such REMIC.

Second, of our investments not included in the 75% asset class, the value of our interest in any one issuer’s securities may not exceed 5% of the value of our total assets.

Third, we may not own more than 10% of the voting power or value of any one issuer’s outstanding securities.

206

Fourth, no more than 20% of the value of our total assets may consist of the securities of one or more TRSs.

Fifth, no more than 25% of the value of our total assets may consist of the securities of TRSs and other non-TRS taxable subsidiaries and other assets that are not qualifying assets for purposes of the 75% asset test.

For purposes of the second and third asset tests, the term “securities” does not include stock in another REIT, equity or debt securities of a qualified REIT subsidiary or TRS, mortgage loans that constitute real estate assets, or equity interests in a partnership.

For purposes of the 10% value test, the term “securities” does not include:


	•	“Straight debt” securities, which is defined as a written unconditional promise to pay on demand or on a specified date a sum certain in money if (i) the debt is not convertible, directly or indirectly, into stock, and (ii) the interest rate and interest payment dates are not contingent on profits, the borrower’s discretion, or similar factors. “Straight debt” securities do not include any securities issued by a partnership or a corporation in which we or any controlled TRS (i.e., a TRS in which we own directly or indirectly more than 50% of the voting power or value of the stock) hold non-“straight debt” securities that have an aggregate value of more than 1% of the issuer’s outstanding securities. However, “straight debt” securities include debt subject to the following contingencies:


	•	a contingency relating to the time of payment of interest or principal, as long as either (i) there is no change to the effective yield of the debt obligation, other than a change to the annual yield that does not exceed the greater of 0.25% or 5% of the annual yield, or (ii) neither the aggregate issue price nor the aggregate face amount of the issuer’s debt obligations held by us exceeds $1 million and no more than 12 months of unaccrued interest on the debt obligations can be required to be prepaid; and

	•	a contingency relating to the time or amount of payment upon a default or prepayment of a debt obligation, as long as the contingency is consistent with customary commercial practice.


	•	Any loan to an individual or an estate.

	•	Any “section 467 rental agreement,” other than an agreement with a related party tenant.

	•	Any obligation to pay “rents from real property.”

	•	Certain securities issued by governmental entities.

	•	Any security issued by a REIT.

	•	Any debt instrument of an entity treated as a partnership for federal income tax purposes to the extent of our interest as a partner in the partnership.

	•	Any debt instrument of an entity treated as a partnership for federal income tax purposes not described in the preceding bullet points if at least 75% of the partnership’s gross income, excluding income from the prohibited transaction, is qualifying income for purposes of the 75% gross income test described above in “— Requirements for Qualification — Gross Income Tests.”

It is possible that we may hold mezzanine loans that are secured by equity interests in a non-corporate entity that directly or indirectly owns real property. IRS Revenue Procedure 2003-65 provides a safe harbor pursuant to which a mezzanine loan to such a non-corporate entity, if it meets each of the requirements contained in the Revenue Procedure, will be treated by the IRS as a real estate asset for purposes of the REIT asset tests (described below), and interest derived from it will be treated as qualifying mortgage interest for purposes

207

of the 75% gross income test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. Moreover, the mezzanine loans that we acquire may not meet all of the requirements for reliance on this safe harbor. For example, our corporate mezzanine loans will not qualify for the safe harbor and generally will not be qualifying assets for purposes of the 75% asset test.

We believe that most of the residential mortgage loans and mortgage-backed securities that we hold are, and those that we expect to hold will be, qualifying assets for purposes of the 75% asset test. For purposes of these rules, however, if the outstanding principal balance of a mortgage loan exceeds the fair market value of the real property securing the loan, a portion of such loan likely will not be a qualifying real estate asset under the federal income tax laws. Although the law on the matter is not entirely clear, it appears that the non-qualifying portion of that mortgage loan will be equal to the portion of the loan amount that exceeds the value of the associated real property that is security for that loan. Our debt securities issued by other REITs or C corporations that are not secured by mortgages on real property, such as corporate mezzanine loans, will not be qualifying assets for purposes of the 75% asset test. We believe that any stock that we will acquire in other REITs will be qualifying assets for purposes of the 75% asset test. However, if a REIT in which we own stock fails to qualify as a REIT in any year, the stock in such REIT will not be a qualifying asset for purposes of the 75% asset test. Instead, we would be subject to the second, third, fourth, and fifth assets tests described above with respect to our investment in such a disqualified REIT. We will also be subject to those assets tests with respect to our investments in any non-REIT C corporations for which we do not make a TRS election. We anticipate that value of our investment in Crystal River Capital TRS Holdings, Inc., our TRS, will be less than 20% of the value of our total assets.

We will monitor the status of our assets for purposes of the various asset tests and will seek to manage our portfolio to comply at all times with such tests. There can be no assurances, however, that we will be successful in this effort. In this regard, to determine our compliance with these requirements, we will need to estimate the value of the real estate securing our mortgage loans at various times. In addition, we will have to value our investment in our other assets to ensure compliance with the asset tests. Although we will seek to be prudent in making these estimates, there can be no assurances that the IRS might not disagree with these determinations and assert that a different value is applicable, in which case we might not satisfy the 75% and the other asset tests and would fail to qualify as a REIT. If we fail to satisfy the asset tests at the end of a calendar quarter, we will not lose our REIT qualification if:


	•	we satisfied the asset tests at the end of the preceding calendar quarter; and

	•	the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by the acquisition of one or more non-qualifying assets.

If we did not satisfy the condition described in the second item, above, we still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose.

In the event that we violate the second or third asset tests described above at the end of any calendar quarter, we will not lose our REIT qualification if (i) the failure is de minimis (up to the lesser of 1% of our assets or $10 million) and (ii) we dispose of assets or otherwise comply with the asset tests within six months after the last day of the quarter. In the event of a more than de minimis failure of any of the asset tests, as long as the failure was due to reasonable cause and not to willful neglect, we will not lose our REIT qualification if we (i) dispose of assets or otherwise comply with the asset tests within six months after the last day of the quarter of identification of the issue and (ii) pay a tax equal to the greater of $50,000 or 35% of the net income from the nonqualifying assets during the period in which we failed to satisfy the asset tests.

208

To avoid an inadvertent violation of the second, third or fourth asset tests described above, we may form a trust the sole beneficiary of which will be Crystal River Capital TRS Holdings, Inc., our TRS. Upon an uncured violation of the second, third or fourth asset tests described above that we believe may not qualify due to reasonable cause and not due to willful neglect, the asset or assets causing the violation would be deemed automatically to have been transferred to the trust prior to the occurrence of the violation. Once a deemed transfer occurs, we would have no further ownership interest in the assets transferred, and all income subsequently accruing with respect to the transferred assets would be reported on Crystal River Capital TRS Holdings, Inc.’s tax returns and would be subject to federal income tax, and state and local tax where applicable. Although the IRS has issued favorable protective asset trust rulings to a REIT, there can be no assurances that the IRS would respect the deemed transfer of assets to the trust.

We currently believe that the mortgage-related assets, securities and other assets that we hold do satisfy, and those that we expect to hold will satisfy, the foregoing asset test requirements. However, no independent appraisals will be obtained to support our conclusions as to the value of our assets and securities, or in many cases, the real estate collateral for the mortgage loans that we hold. Moreover, the values of some assets may not be susceptible to a precise determination. As a result, there can be no assurance that the IRS will not contend that our ownership of securities and other assets violates one or more of the asset tests applicable to REITs.

Distribution Requirements

Each taxable year, we must distribute dividends, other than capital gain dividends and deemed distributions of retained capital gain, to our stockholders in an aggregate amount at least equal to:


	•	the sum of


	•	90% of our “REIT taxable income,” computed without regard to the dividends paid deduction and our net capital gain, and

	•	90% of our after-tax net income, if any, from foreclosure property, minus


	•	the sum of certain items of non-cash income.

We must pay such distributions in the taxable year to which they relate, or in the following taxable year if either (i) we declare the distribution before we timely file our federal income tax return for the year and pay the distribution on or before the first regular dividend payment date after such declaration or (ii) we declare the distribution in October, November or December of the taxable year, payable to stockholders of record on a specified day in any such month, and we actually pay the dividend before the end of January or the following year. The distributions under clause (i) are taxable to the stockholders in the year in which paid, and the distributions in clause (ii) are treated as paid on December 31 of the prior taxable year. In both instances, these distributions relate to our prior taxable year for purposes of the 90% distribution requirement.

We will pay federal income tax on taxable income, including net capital gain, that we do not distribute to stockholders. Furthermore, if we fail to distribute during a calendar year, or by the end of January following the calendar year in the case of distributions with declaration and record dates falling in the last three months of the calendar year, at least the sum of:


	•	85% of our REIT ordinary income for such year,

	•	95% of our REIT capital gain income for such year, and

	•	any undistributed taxable income from prior periods,

we will incur a 4% nondeductible excise tax on the excess of such required distribution over the amounts we actually distribute. We may elect to retain and pay income tax on the net long-term

209

capital gain we receive in a taxable year. See “—Taxation of Taxable U.S. Stockholders.” If we so elect, we will be treated as having distributed any such retained amount for purposes of the 4% nondeductible excise tax described above. We intend to make timely distributions sufficient to satisfy the annual distribution requirements and to avoid corporate income tax and the 4% nondeductible excise tax.

It is possible that, from time to time, we may experience timing differences between the actual receipt of income and actual payment of deductible expenses and the inclusion of that income and deduction of such expenses in arriving at our REIT taxable income. Possible examples of those timing differences include the following:


	•	Because we may deduct capital losses only to the extent of our capital gains, we may have taxable income that exceeds our economic income.

	•	We will recognize taxable income in advance of the related cash flow if any of our mortgage-backed securities are deemed to have original issue discount. We generally must accrue original issue discount based on a constant yield method that takes into account projected prepayments but that defers taking into account credit losses until they are actually incurred.

	•	We may recognize taxable market discount income when we receive the proceeds from the disposition of, or principal payments on, loans that have a stated redemption price at maturity that is greater than our tax basis in those loans, although such proceeds often will be used to make non-deductible principal payments on related borrowings.

	•	We may recognize phantom taxable income from any residual interests in REMICs or retained ownership interests in mortgage loans subject to collateralized mortgage obligation debt.

Although several types of non-cash income are excluded in determining the annual distribution requirement, we will incur corporate income tax and the 4% nondeductible excise tax with respect to those non-cash income items if we do not distribute those items on a current basis. As a result of the foregoing, we may have less cash than is necessary to distribute all of our taxable income and thereby avoid corporate income tax and the excise tax imposed on certain undistributed income. In such a situation, we may need to borrow funds or issue additional common or preferred stock.

Under certain circumstances, we may be able to correct a failure to meet the distribution requirement for a year by paying “deficiency dividends” to our stockholders in a later year. We may include such deficiency dividends in our deduction for dividends paid for the earlier year. Although we may be able to avoid income tax on amounts distributed as deficiency dividends, we will be required to pay interest to the IRS based upon the amount of any deduction we take for deficiency dividends.

Recordkeeping Requirements

We must maintain certain records in order to qualify as a REIT. In addition, to avoid a monetary penalty, we must request on an annual basis information from our stockholders designed to disclose the actual ownership of our outstanding stock. We intend to comply with these requirements.

Failure to Qualify

If we fail to satisfy one or more requirements for REIT qualification, other than the gross income tests and the asset tests, we could avoid disqualification if our failure is due to reasonable cause and not to willful neglect and we pay a penalty of $50,000 for each such failure. In addition, there are relief provisions for a failure of the gross income tests and asset tests, as described in “— Gross Income Tests” and “— Asset Tests.”

210

If we fail to qualify as a REIT in any taxable year, and no relief provision applies, we would be subject to federal income tax and any applicable alternative minimum tax on our taxable income at regular corporate rates. In calculating our taxable income in a year in which we fail to qualify as a REIT, we would not be able to deduct amounts paid out to stockholders. In fact, we would not be required to distribute any amounts to stockholders in that year. In such event, to the extent of our current and accumulated earnings and profits, all distributions to stockholders would be taxable as ordinary income. Subject to certain limitations of the federal income tax laws, corporate stockholders might be eligible for the dividends received deduction and individual and certain non-corporate trust and estate stockholders may be eligible for a reduced federal income tax rate, currently at a maximum rate of 15%, on such dividends. Unless we qualified for relief under specific statutory 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. We cannot predict whether in all circumstances we would qualify for such statutory relief.

Taxable REIT Subsidiaries

As described above, we may own up to 100% of the stock of one or more TRSs. A TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by us. A corporation will not qualify as a TRS if it directly or indirectly operates or manages any hotels or health care facilities or provides rights to any brand name under which any hotel or health care facility is operated. We and our corporate subsidiary must elect for the subsidiary to be treated as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of our assets may consist of securities of one or more TRSs, and no more than 25% of the value of our assets may consist of the securities of TRSs and other non-TRS taxable subsidiaries and other assets that are not qualifying assets for purposes of the 75% asset test. The TRS rules limit the deductibility of interest paid or accrued by a TRS to us to assure that the TRS is subject to an appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on certain transactions between a TRS and us or our tenants to the extent that they are not conducted on an arm’s length basis. We made an election to treat Crystal River Capital TRS Holdings, Inc. as a TRS. We believe that all transactions between us and Crystal River Capital TRS Holdings, Inc. and any other TRS that we form or acquire will be conducted on an arm’s length basis.

Taxation of Taxable U.S. Stockholders

As long as we qualify as a REIT, a taxable “U.S. stockholder” must generally take into account as ordinary income distributions made out of our current or accumulated earnings and profits that we do not designate as capital gain dividends or retained long-term capital gain. Such distribution to a U.S. stockholder will not qualify for the dividends received deduction generally available to corporations. In addition, dividends paid to a U.S. stockholder generally will not be treated as “qualified dividend income.” The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the maximum tax rate for qualified dividend income received by non-corporate taxpayers to 15% for tax years through 2008. Without future congressional action, the maximum tax rate for such taxpayers on qualified dividend income will increase to 35% in 2009 and 39.6% in 2011. Qualified dividend income generally includes dividends paid to individuals, trusts and estates by domestic C corporations and certain qualified foreign corporations. Because we are not generally subject to federal income tax on the portion of our REIT taxable income distributed to our stockholders (see “— Taxation of Our Company” above), our dividends generally will not be eligible for the maximum 15% rate on qualified dividend income. As a result, our ordinary REIT dividends will continue to be taxed at the higher tax rate generally applicable to ordinary income. Currently, the highest marginal individual income tax rate on ordinary income is 35%. However, the maximum 15% tax rate for qualified dividend income will apply to our ordinary REIT dividends to the extent attributable to

211

(i) dividends received by us from non-REIT corporations, such as our TRSs, and (ii) income upon which we have paid corporate income tax (e.g., to the extent that we distribute less than 100% of our taxable income). In general, to qualify for the reduced tax rate on qualified dividend income, a stockholder must hold our common stock for more than 60 days during the 121-day period beginning on the date that is 60 days before the date on which our common stock become ex-dividend.

A U.S. stockholder generally will take into account distributions that we designate as capital gain dividends as long-term capital gain without regard to the period for which the U.S. stockholder has held our common stock. A corporate U.S. stockholder, however, may be required to treat up to 20% of certain capital gain dividends as ordinary income.

A U.S. stockholder will not incur tax on a distribution in excess of our current and accumulated earnings and profits if the distribution does not exceed the adjusted basis of the U.S. stockholder’s common stock. Instead, the distribution will reduce the adjusted basis of such common stock. A U.S. stockholder will recognize a distribution in excess of both our current and accumulated earnings and profits and the U.S. stockholder’s adjusted basis in his or her common stock as long-term capital gain, or short-term capital gain if the shares of common stock have been held for one year or less, assuming the shares of common stock are a capital asset in the hands of the U.S. stockholder. In addition, if we declare a distribution in October, November, or December of any year that is payable to a U.S. stockholder of record on a specified date in any such month, such distribution shall be treated as both paid by us and received by the U.S. stockholder on December 31 of such year, provided that we actually pay the distribution during January of the following calendar year and that such distribution qualifies as a dividend consisting of current and accumulated earnings and profits.

Stockholders may not include in their individual income tax returns any of our net operating losses or capital losses. Instead, these losses are generally carried over by us for potential offset against our future income. Taxable distributions from us and gain from the disposition of our common stock will not be treated as passive activity income and, therefore, stockholders generally will not be able to apply any “passive activity losses,” such as losses from certain types of limited partnerships in which the stockholder is a limited partner, against such income. In addition, taxable distributions from us and gain from the disposition of our common stock generally will be treated as investment income for purposes of the investment interest limitations. We will notify stockholders after the close of our taxable year as to the portions of the distributions attributable to that year that constitute ordinary income, return of capital and capital gain.

We may recognize taxable income in excess of our economic income, known as phantom income, in the first years that we hold certain investments, and experience an offsetting excess of economic income over our taxable income in later years. As a result, stockholders at times may be required to pay federal income tax on distributions that economically represent a return of capital rather than a dividend. These distributions would be offset in later years by distributions representing economic income that would be treated as returns of capital for federal income tax purposes. Taking into account the time value of money, this acceleration of federal income tax liabilities may reduce a stockholder’s after-tax return on his or her investment to an amount less than the after-tax return on an investment with an identical before-tax rate of return that did not generate phantom income. For example, if an investor with a 30% tax rate purchases a taxable bond with an annual interest rate of 10% on its face value, the investor’s before-tax return on the investment would be 10% and the investor’s after-tax return would be 7%. However, if the same investor purchased our common stock at a time when the before-tax rate of return was 10%, the investor’s after-tax rate of return on such stock might be somewhat less than 7% as a result of our phantom income. In general, as the ratio of our phantom income to our total income increases, the after-tax rate of return received by a taxable

212

stockholder will decrease. We will consider the potential effects of phantom income on our taxable stockholders in managing our investments.

Any excess inclusion income that we recognize generally will be allocated among our stockholders to the extent that it exceeds our undistributed REIT taxable income in a particular year. A stockholder’s share of excess inclusion income would not be allowed to be offset by any net operating losses or other deductions otherwise available to the stockholder.

Taxation of U.S. Stockholders on the Disposition of Common Stock

In general, a U.S. stockholder must treat any gain or loss realized upon a taxable disposition of our common stock as long-term capital gain or loss if the U.S. stockholder has held the common stock for more than one year and otherwise as short-term capital gain or loss. In general, a U.S. stockholder will realize gain or loss in an amount equal to the difference between the sum of the fair market value of any property and the amount of cash received in such disposition and the U.S. stockholder’s adjusted tax basis in such common stock. A stockholder’s adjusted tax basis generally will equal the U.S. stockholder’s acquisition cost, increased by the excess of net capital gains deemed distributed to the U.S. stockholder (discussed above) less tax deemed paid on it and reduced by any returns of capital. However, a U.S. stockholder must treat any loss upon a sale or exchange of common stock held by such stockholder for six months or less as a long-term capital loss to the extent of capital gain dividends and any other actual or deemed distributions from us that such U.S. stockholder treats as long-term capital gain. All or a portion of any loss that a U.S. stockholder realizes upon a taxable disposition of the common stock may be disallowed if the U.S. stockholder purchases other shares of our common stock within the 61-day period beginning 30 days before and ending 30 days after the disposition of the common stock.

Capital Gains and Losses

A taxpayer generally must hold a capital asset for more than one year for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. The highest marginal individual income tax rate currently is 35% (which rate is scheduled to apply until December 31, 2010). The maximum tax rate on long-term capital gain applicable to individuals, trusts and estates is 15% for sales and exchanges of assets held for more than one year occurring through December 31, 2008. The maximum tax rate on long-term capital gain from the sale or exchange of “section 1250 property,” or depreciable real property, is 25% to the extent that such gain would have been treated as ordinary income if the property were “section 1245 property.” With respect to distributions that we designate as capital gain dividends and any retained capital gain that we are deemed to distribute, we generally may designate whether such a distribution is taxable to our individual, trust and estate stockholders at a 15% or 25% rate. Thus, the tax rate differential between capital gain and ordinary income for those taxpayers may be significant. In addition, the characterization of income as capital gain or ordinary income may affect the deductibility of capital losses. A non-corporate taxpayer may deduct capital losses not offset by capital gains against its ordinary income only up to a maximum annual amount of $3,000, or $1,500 in the case of a married individual filing a separate tax return. A non-corporate taxpayer may carry forward unused capital losses indefinitely. A corporate taxpayer must pay tax on its net capital gain at ordinary corporate rates. A corporate taxpayer may deduct capital losses only to the extent of capital gains, with unused losses generally being eligible to be carried back three years and forward five years.

Information Reporting Requirements and Backup Withholding

We will report to our stockholders and to the IRS the amount of distributions we pay during each calendar year, and the amount of tax we withhold, if any. Under the backup withholding

213

rules, a stockholder may be subject to backup withholding, currently at a rate of 28%, with respect to distributions unless the holder:


	•	is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact; or

	•	provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding rules.

A stockholder who does not provide us with its correct taxpayer identification number also may be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the stockholder’s income tax liability. Non-U.S. stockholders generally are not subject to backup withholding, however, we may be required to withhold a portion of capital gain distributions to any non-U.S. stockholders who fail to certify their non-foreign status to us.

Taxation of Tax-Exempt Stockholders

Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income, or UBTI. While many investments in real estate generate UBTI, the IRS has issued a ruling that dividend distributions from a REIT to an exempt employee pension trust do not constitute UBTI so long as the exempt employee pension trust does not otherwise use the shares of the REIT in an unrelated trade or business of the pension trust. Based on that ruling, amounts that we distribute to tax-exempt stockholders generally should not constitute UBTI. However, if a tax-exempt stockholder were to finance its acquisition of common stock with debt, a portion of the income that it receives from us would constitute UBTI pursuant to the “debt-financed property” rules. Moreover, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans that are exempt from taxation under special provisions of the federal income tax laws are subject to different UBTI rules, which generally will require them to characterize distributions that they receive from us as UBTI. Furthermore, a tax-exempt stockholder’s share of any excess inclusion income that we recognize would be subject to tax as UBTI. Finally, in certain circumstances, a qualified employee pension or profit sharing trust that owns more than 10% of our stock must treat a percentage of the dividends that it receives from us as UBTI. Such percentage is equal to the gross income we derive from an unrelated trade or business, determined as if we were a pension trust, divided by our total gross income for the year in which we pay the dividends. That rule applies to a pension trust holding more than 10% of our stock only if:


	•	the percentage of our dividends that the tax-exempt trust must treat as UBTI is at least 5%;

	•	we qualify as a REIT by reason of the modification of the rule requiring that no more than 50% of our stock be owned by five or fewer individuals that allows the beneficiaries of the pension trust to be treated as holding our stock in proportion to their actuarial interests in the pension trust; and

	•	either:


	•	one pension trust owns more than 25% of the value of our stock; or

	•	a group of pension trusts individually holding more than 10% of the value of our stock collectively owns more than 50% of the value of our stock.

Taxation of Non-U.S. Stockholders

The rules governing U.S. federal income taxation of non-U.S. stockholders are complex. This section is only a summary of such rules. We urge non-U.S. stockholders to consult their own tax advisors to determine the impact of federal, state, and local income tax laws on ownership of our common stock, including any reporting requirements.

214

A non-U.S. stockholder that receives a distribution that is not attributable to gain from our sale or exchange of United States real property interests, as defined below, and that we do not designate as a capital gain dividend or retained capital gain will recognize ordinary income to the extent that we pay the distribution out of our current or accumulated earnings and profits. A withholding tax equal to 30% of the gross amount of the distribution ordinarily will apply unless an applicable tax treaty reduces or eliminates the tax. However, if a distribution is treated as effectively connected with the non-U.S. stockholder’s conduct of a U.S. trade or business, the non-U.S. stockholder generally will be subject to federal income tax on the distribution at graduated rates, in the same manner as U.S. stockholders are taxed on distributions and also may be subject to the 30% branch profits tax in the case of a corporate non-U.S. stockholder. We plan to withhold U.S. income tax at the rate of 30% on the gross amount of any distribution paid to a non-U.S. stockholder unless either:


	•	a lower treaty rate applies and the non-U.S. stockholder provides us with the appropriate IRS Form W-8 evidencing eligibility for that reduced rate, or

	•	the non-U.S. stockholder provides us with an IRS Form W-8ECI claiming that the distribution is effectively connected income.

However, reduced treaty rates are not available to the extent that the income allocated to the non-U.S. stockholder is excess inclusion income. Our excess inclusion income generally will be allocated among our stockholders to the extent that it exceeds our undistributed REIT taxable income in a particular year.

A non-U.S. stockholder will not incur tax on a distribution in excess of our current and accumulated earnings and profits if the excess portion of the distribution does not exceed the adjusted basis of its common stock. Instead, the excess portion of the distribution will reduce the adjusted basis of that common stock. A non-U.S. stockholder will be subject to tax on a distribution that exceeds both our current and accumulated earnings and profits and the adjusted basis of the common stock, if the non-U.S. stockholder otherwise would be subject to tax on gain from the sale or disposition of its common stock, as described below. Because we generally cannot determine at the time we make a distribution whether the distribution will exceed our current and accumulated earnings and profits, we normally will withhold tax on the entire amount of any distribution at the same rate as we would withhold on a dividend. However, a non-U.S. stockholder may obtain a refund of amounts that we withhold if we later determine that a distribution in fact exceeded our current and accumulated earnings and profits.

We may be required to withhold 10% of any distribution that exceeds our current and accumulated earnings and profits. Consequently, although we intend to withhold at a rate of 30% (unless a lower treaty rate applies) on the entire amount of any distribution, to the extent that we do not do so, we will withhold at a rate of 10% on any portion of a distribution not subject to withholding at a rate of 30% (or other applicable treaty rate).

For any year in which we qualify as a REIT, a non-U.S. stockholder will incur tax on distributions that are attributable to gain from our sale or exchange of “United States real property interests” under special provisions of the federal income tax laws known as “FIRPTA.” The term “United States real property interests” includes interests in real property and shares in corporations at least 50% of whose assets consists of interests in real property. The term “United States real property interests” generally does not include mortgage loans or mortgage-backed securities. As a result, we do not anticipate that we will generate material amounts of gain that would be subject to FIRPTA. Under the FIRPTA rules, a non-U.S. stockholder is taxed on distributions attributable to gain from sales of United States real property interests as if the gain were effectively connected with a U.S. business of the non-U.S. stockholder. A non-U.S. stockholder thus would be taxed on such a distribution at the normal capital gain rates applicable to U.S. stockholders, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of a nonresident alien individual. A non-U.S. corporate stockholder not entitled to treaty relief or exemption also may be subject

215

to the 30% branch profits tax on such a distribution. We must withhold 35% of any such distribution that we could designate as a capital gain dividend. A non-U.S. stockholder may receive a credit against our tax liability for the amount we withhold. Because our common stock is traded on an established securities market, capital gain distributions that are attributable to our sale of real property will be treated as ordinary dividends rather than as gain from the sale of a United States real property interest, as long as the non-U.S. stockholder receiving such distributions does not own more than 5% of our common stock during the taxable year. As a result, non-U.S. stockholders generally would be subject to withholding tax on such capital gain distributions in the same manner as they are subject to withholding tax on ordinary dividends.

Because our common stock is regularly traded on an established securities market, an additional exception to the tax under FIRPTA is available, even if we do not qualify as a domestically-controlled REIT at the time the non-U.S. stockholder sells our common stock. The gain from such a sale by such a non-U.S. stockholder will not be subject to tax under FIRPTA if:


	•	our common stock is considered regularly traded under applicable Treasury regulations on an established securities market, such as the New York Stock Exchange; and

	•	the non-U.S. stockholder owned, actually or constructively, 5% or less of our common stock at all times during a specified testing period.

If the gain on the sale of the common stock were taxed under FIRPTA, a non-U.S. stockholder would be taxed on that gain in the same manner as U.S. stockholders, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals. Furthermore, a non-U.S. stockholder generally will incur tax on gain not subject to FIRPTA if:


	•	the gain is effectively connected with the non-U.S. stockholder’s U.S. trade or business, in which case the non-U.S. stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain, or the

	•	non-U.S. stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year, in which case the non-U.S. stockholder will incur a 30% tax on his or her capital gains.

Sunset of Reduced Tax Rate Provisions

Several of the tax considerations described herein are subject to a sunset provision. The sunset provisions generally provide that for taxable years beginning after December 31, 2008, certain provisions that are currently in the Internal Revenue Code will revert back to a prior version of those provisions. These provisions include provisions related to the reduced maximum income tax rate for long-term capital gains of 15% (rather than 20%) for taxpayers taxed at individual rates, the application of the maximum 15% tax rate to qualified dividend income, and certain other tax rate provisions described herein. The impact of this reversion is not discussed herein. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of sunset provisions on an investment in our common stock.

State and Local Taxes

We and/or our stockholders may be subject to taxation by various states and localities, including those in which we or a stockholder transacts business, owns property or resides. The state and local tax treatment may differ from the federal income tax treatment described above. Consequently, stockholders should consult their own tax advisors regarding the effect of state and local tax laws upon an investment in the common stock.

216

PLAN OF DISTRIBUTION

This prospectus relates to the offer and sale of our shares of common stock by the selling stockholders named in this prospectus. As used in this section of the prospectus, the term “selling stockholders” includes the selling stockholders named in the table above and any of their pledgees, donees, transferees or other successors-in-interest who receive shares of our common stock offered hereby from a selling stockholder as a gift, pledge, partnership distribution or other nonsale related transfer and who subsequently sell any of such shares after the date of this prospectus.

All costs, expenses and fees in connection with the registration of the shares of common stock offered hereby will be borne by us. Underwriting discounts, brokerage commissions and similar selling expenses, if any, attributable to the sale of the securities covered by this prospectus will be borne by the respective selling stockholders.

The selling stockholders may sell under this prospectus the shares which are outstanding at different times. The selling stockholders will act independently of us in making decisions as to the timing, manner and size of each sale. The sales may be made on any national securities exchange or quotation system on which the shares may be listed or quoted at the time of sale, in the over-the-counter market or other than in such organized and unorganized trading markets, in one or more transactions, at:


	•	fixed prices, which may be changed;

	•	prevailing market prices at the time of sale;

	•	varying prices determined at the time of sale; or

	•	negotiated prices.

The shares may be sold by one or more of the following methods in addition to any other method permitted under this prospectus:


	•	a block trade in which the broker-dealer so engaged may sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;

	•	a purchase by a broker-dealer as principal and resale by such broker-dealer for its own account;

	•	an ordinary brokerage transaction or a transaction in which the broker solicits purchasers;

	•	a privately negotiated transaction;

	•	an underwritten offering;

	•	securities exchange or quotation system sale that complies with the rules of the exchange or quotation system;

	•	through short sale transactions following which the shares are delivered to close out the short positions;

	•	through the writing of options relating to such shares; or

	•	through a combination of the above methods of sale.

The method of distribution of such shares will be described in the applicable prospectus supplement.

The selling stockholders may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated transactions. In connection with those derivatives, the third parties may sell shares covered by this prospectus, including in short sale transactions. If so, the third party may use shares pledged by the selling

217

stockholders or borrowed from the selling stockholders or others to settle those sales or to close out any related open borrowings of shares, and may use shares received from the selling stockholders in settlement of those derivatives to close out any related open borrowings of shares. We will file a supplement to this prospectus to describe any derivative transaction effected by the selling stockholders and to identify the third party in such transactions as an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act.

The selling stockholders may effect such transactions by selling the shares covered by this prospectus directly to purchasers, to or through broker-dealers, which may act as agents for the seller and buyer or principals, or to underwriters who acquire shares for their own account and resell them in one or more transactions. Such broker-dealers or underwriters may receive compensation in the form of discounts, concessions, or commissions from the selling stockholders and/or the purchasers of the shares covered by this prospectus for whom such broker-dealers may act as agents or to whom they sell as principal, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions) and such discounts, concessions, or commissions may be allowed or re-allowed or paid to dealers. Any public offering price and any discounts or concessions allowed or paid to dealers may be changed at different times.

The selling stockholders and any broker-dealers that participate with the selling stockholders or third parties to derivative transactions in the sale of the shares covered by this prospectus may be deemed to be “underwriters” within the meaning of Section 2(a)(11) of the Securities Act, and any commissions received by such broker-dealers and any profit on the resale of the shares sold by them while acting as principals might be deemed to be underwriting discounts or commissions under the Securities Act.

We will make copies of this prospectus available to the selling stockholders and have informed them of their obligation to deliver copies of this prospectus to purchasers at or before the time of any sale of the shares.

The selling stockholders also may resell all or a portion of their shares in open market transactions in reliance upon Rule 144 under the Securities Act, or any other available exemption from required registration under the Securities Act, provided they meet the criteria and conform to the requirements of such exemption.

We will file a supplement to this prospectus, if required, pursuant to Rule 424(b) under the Securities Act upon being notified by a selling stockholder that any material arrangements have been entered into with a broker-dealer for the sale of shares through a block trade, special offering, exchange or secondary distribution or a purchase by a broker-dealer. Such supplement will disclose:


	•	the name of each such selling stockholder and of the participating broker-dealer(s);

	•	the number of shares involved;

	•	the price at which such shares were sold;

	•	the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable;

	•	as appropriate, that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus; and

	•	other facts material to the transaction.

In addition, upon receiving notice from a selling stockholder that a donee, pledgee or transferee or other successor-in-interest intends to sell more than 500 shares covered by this prospectus, we will file a supplement to this prospectus pursuant to Rule 424(b) under the Securities Act to identify the non-sale transferee.

218

The selling stockholders are not restricted as to the price or prices at which they may sell their shares. Sales of such shares may have an adverse effect on the market price of the securities, including the market price of the shares. Moreover, the selling stockholders are not restricted as to the number of shares that may be sold at any time, and it is possible that a significant number of shares could be sold at the same time, which may have an adverse effect on the market price of the shares.

We and the selling stockholders may agree to indemnify any broker-dealer or agent that participates in transactions involving sales of the shares against certain liabilities, including liabilities arising under the Securities Act.

219

LEGAL MATTERS

Certain legal matters have been passed upon for us by Paul, Hastings, Janofsky & Walker LLP, New York, New York. Venable LLP will pass upon the validity of the shares of common stock offered under this prospectus and certain other matters under Maryland law.

EXPERTS

Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated financial statements and schedule at December 31, 2005 and for the period March 15, 2005 (commencement of operations) to December 31, 2005, as set forth in their report. We’ve included our consolidated financial statements and schedule in this prospectus and elsewhere in this registration statement in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Commission a registration statement on Form S-11, including exhibits and schedules filed with the registration statement of which this prospectus is a part, under the Securities Act with respect to the shares of common stock to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and exhibits and schedules to the registration statement. For further information with respect to our company and the shares of common stock to be sold in this offering, reference is made to the registration statement, including the exhibits and schedules to the registration statement. Copies of the registration statement, including the exhibits and schedules to the registration statement, may be examined without charge at the public reference room of the Commission, 100 F Street, N.E., Room 1580, Washington, DC 20549. Information about the operation of the public reference room may be obtained by calling the Commission at 1-800-SEC-0300. Copies of all or a portion of the registration statement may be obtained from the public reference room of the Securities and Exchange Commission upon payment of prescribed fees. Our Commission filings, including our registration statement, are also available to you on the Commission’s website at www.sec.gov.

As a result of our initial public offering, we are subject to the information and reporting requirements of the Exchange Act, and will file periodic reports and proxy statements and will make available to our stockholders annual reports containing audited financial information for each year and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information.

220

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Crystal River Capital, Inc. and Subsidiaries:


Audited Consolidated Financial Statements:
	Report of Independent Registered Public Accounting Firm	F-2
	Consolidated Balance Sheet as of December 31, 2005	F-3
	Consolidated Statement of Income for the period March 15, 2005 (commencement of operations) to December 31, 2005	F-4
	Consolidated Statement of Changes in Stockholders’ Equity for the period March 15, 2005 (commencement of operations) to December 31, 2005	F-5
	Consolidated Statement of Cash Flows for the period March 15, 2005 (commencement of operations) to December 31, 2005	F-6
	Notes to Consolidated Financial Statements	F-7
	Schedule IV — Schedule of Mortgage Loans on Real Estate	F-33

Unaudited Consolidated Financial Statements:
	Consolidated Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005	F-34
	Consolidated Statements of Income for the Three Months Ended June 30, 2006 and 2005, the Six Months Ended June 30, 2006 and for the period March 15, 2005 (commencement of operations) to June 30, 2005 (unaudited)	F-35
	Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2006 (unaudited)	F-36
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and for the period March 15, 2005 (commencement of operations) to June 30, 2005 (unaudited)	F-37
	Notes to Consolidated Financial Statements (unaudited)	F-38

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
of Crystal River Capital, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Crystal River Capital, Inc. and Subsidiaries as of December 31, 2005 and the related consolidated statements of income, stockholders’ equity, and cash flows for the period March 15, 2005 (commencement of operations) to December 31, 2005. Our audit also included the financial statement schedule listed in the Index at Page F-1. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Crystal River Capital, Inc. and Subsidiaries at December 31, 2005 and the consolidated results of their operations and their cash flows for the period March 15, 2005 (commencement of operations) to December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, represents fairly in all material respects the information set forth therein.

As described in Note 2 to the consolidated financial statements, the accompanying consolidated statement of cash flows of Crystal River Capital, Inc. and Subsidiaries for the period March 15, 2005 (commencement of operations) to December 31, 2005 has been restated.


	/s/ Ernst & Young LLP

New York, New York
May 2, 2006, except for the 1st paragraph of Note 2, which is as of July 6, 2006

F-2

CRYSTAL RIVER CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2005

(In thousands, except share and per share data)


ASSETS:
	Available for sale securities, at fair value
		Commercial MBS	$	206,319
		Residential MBS — Non-Agency MBS		512,685
		— Agency ARMS		1,663,462
		ABS		54,530
		Preferred stock		2,232
	Real estate loans			146,497
	Cash and cash equivalents			21,463
	Restricted cash			18,499
	Receivables:
		Principal paydown		11,773
		Interest		12,091
		Interest purchased		612
	Prepaid expenses and other assets			961
	Deferred financing costs, net			6,662
	Derivative assets			11,983

Total Assets			$	2,669,769


LIABILITIES AND STOCKHOLDERS’ EQUITY:
	Accounts payable and accrued liabilities		$	4,173
	Due to Manager			486
	Repurchase agreements			1,977,858
	Repurchase agreement, related party			16,429
	Collateralized debt obligations			227,500
	Note payable, related party			35,000
	Delayed funding of real estate loan			4,339
	Interest payable			12,895
	Derivative liabilities			9,660

	Total Liabilities			2,288,340


	Commitment and contingencies
	Preferred Stock, par value $0.001 per share; 100,000,000 shares authorized, no shares issued and outstanding			—
	Common stock, par value $0.001 per share; 500,000,000 shares authorized, 17,487,500 shares issued and outstanding			17
	Additional paid-in capital			406,311
	Accumulated other comprehensive loss			(11,742	)
	Declared dividends in excess of earnings			(13,157	)

	Total Stockholders’ Equity			381,429

	Total Liabilities and Stockholders’ Equity		$	2,669,769

See accompanying notes to consolidated financial statements

F-3

CRYSTAL RIVER CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

FOR THE PERIOD

MARCH 15, 2005 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 2005

(In thousands, except share and per share data)


REVENUES:
	Net interest income:
		Interest income—available for sale securities		$	76,038
		Interest income—real estate loans			3,556

			Total interest income		79,594
		Less interest expense			48,425

	Net interest income				31,169

Expenses:
	Management fees, related party				5,448
	Professional fees				2,205
	Insurance expense				250
	Director’s fees				141
	Start up costs				349
	Miscellaneous expenses				43

	Total expenses				8,436

		Income before other revenues (expenses)			22,733

Other revenues (expenses):
	Realized net (loss) on sale of real estate loans and securities available for sale				(521	)
	Realized and unrealized (loss) on derivatives				(2,497	)
	Loss on impairment of available for sale securities				(5,782	)
	Other				15

	Total other revenues (expenses):				(8,785	)

Net income				$	13,948

Net income per share — basic				$	0.80

Net income per share — diluted				$	0.80

Weighted-Average number of shares outstanding:
		Basic			17,487,500

		Diluted			17,487,500

Dividends declared per common share				$	1.55

See accompanying notes to consolidated financial statements

F-4

CRYSTAL RIVER CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE PERIOD

MARCH 15, 2005 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 2005

(In thousands, except share data)


		Common									Declared
		Stock						Accumulated			Dividends
						Additional		Other			In Excess
				Par		Paid-In		Comprehensive			of						Comprehensive
		Shares		Value		Capital		Loss			Earnings			Total			Income

Net income				$	—	$	—	$	—		$	13,948		$	13,948		$	13,948
Net unrealized holdings loss on securities available for sale									(23,447	)					(23,447	)		(23,447	)
Unrealized gain on cash flow hedges									10,632						10,632			10,632
Realized gain on cash flow hedges									1,073						1,073			1,073

Comprehensive income																	$	2,206

Dividends declared on common stock												(27,105	)		(27,105	)
Proceeds of issuance of common stock, net of offering costs			17,400,000		17		405,596								405,613
Issuance of stock based compensation:
	Manager		84,000
	Board of directors		3,500				88								88
Amortization of stock based compensation							627								627

Balance — December 31, 2005			17,487,500	$	17	$	406,311	$	(11,742	)	$	(13,157	)	$	381,429

See accompanying notes to consolidated financial statements

F-5

CRYSTAL RIVER CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIOD MARCH 15, 2005 (COMMENCEMENT OF OPERATIONS)

TO DECEMBER 31, 2005 (RESTATED)

(In thousands)


CASH FLOWS FROM OPERATING ACTIVITIES
	Net income			$	13,948
	Adjustments to reconcile net income to net cash provided by operating activities:
		Amortization of stock based compensation			627
		Amortization of underwriting costs on available for sale securities and real estate loans			44
		Accretion of net discount on available for sale securities and real estate loans			(3,816	)
		Realized gain on sale of available for sale securities			(4	)
		Realized loss on sale of real estate loans			525
		Loss on impairment of available for sale securities			5,782
		Unrealized loss on derivatives			2,576
		Amortization of deferred financing costs			314
	Change in operating assets and liabilities:
		Interest receivable			(12,091	)
		Prepaid expenses and other assets			(961	)
		Accounts payable and accrued liabilities			4,173
		Due to Manager			486
		Interest payable			12,895
		Derivative liability-interest			5,759

			Net cash provided by operating activities		30,257

CASH FLOWS FROM INVESTING ACTIVITIES
	Purchase of securities available for sale				(2,772,900	)
	Interest purchased				(612	)
	Underwriting costs on real estate loans				(50	)
	Underwriting costs on available for sale securities				(941	)
	Principal paydown on available for sale securities				297,066
	Principal paydown on real estate loans				89
	Proceeds from the sale of available for sale securities				374
	Proceeds from the sale of real estate loans				32,151
	Funding of real estate loans				(174,881	)

			Net cash used in investing activities		(2,619,704	)

CASH FLOWS FROM FINANCING ACTIVITIES
	Proceeds from issuance of common stock, net of issuance costs				405,613
	Net proceeds received on settlement of interest rate swaps				1,090
	Issuance of collateralized debt obligations				227,500
	Net deposits into restricted cash				(18,499	)
	Payment of deferred financing costs				(6,976	)
	Proceeds from note payable, related party				35,000
	Dividends paid				(27,105	)
	Net proceeds from repurchase agreements				1,977,858
	Net proceeds from repurchase agreement, related party				16,429

			Net cash provided by financing activities		2,610,910

			Net increase in cash and cash equivalents		21,463
			Cash and cash equivalents, beginning of period		—

			Cash and cash equivalents, end of period	$	21,463

Supplemental disclosure of cash flows:
			Cash paid during the period for interest	$	32,024
			Cash paid during the period for income taxes		—
Supplemental disclosure of noncash investing activities:
			Delayed funding of real estate loan		4,339
			Principal paydown receivables		11,773

See accompanying notes to consolidated financial statements

F-6

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005

(In thousands, except share and per share data)


1.	ORGANIZATION

References herein to “we,” “us” or “our” refer to Crystal River Capital, Inc. and its subsidiaries unless the context specifically requires otherwise.

We are a Maryland corporation that was formed in January 2005 for the purpose of acquiring and originating a diversified portfolio of commercial and residential real estate structured finance investments. We commenced operations on March 15, 2005 when we completed an offering of 17,400,000 shares of common stock, which we refer to as the Private Offering, as more fully explained in Note 8. We are externally managed and are advised by Hyperion Brookfield Crystal River Capital Advisors, LLC (the “Manager”) as more fully explained in Note 10.

We intend to elect to be taxed as a Real Estate Investment Trust (“REIT”) under the Internal Revenue Code beginning with the 2005 tax year. To maintain our tax status as a REIT, we plan to distribute at least 90% of our taxable income. In view of our election to be taxed as a REIT, we have tailored our balance sheet investment program to originate or acquire loans and investments to produce a portfolio that meets the asset and income tests necessary to maintain qualification as a REIT.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


	*Restatement to the Consolidated Statement of Cash Flows*

Subsequent to the issuance of our consolidated financial statements for the period March 15, 2005 (commencement of operations) to December 31, 2005, management has determined that our consolidated statement of cash flows for the period March 15, 2005 (commencement of operations) to December 31, 2005 should be restated to correct an error in the way we had previously presented certain net cash flows from investing and financing activities related to the acquisition and financing of securities purchased from the same counterparty. The restatement increases cash used for purchases of securities available for sale and net cash proceeds provided by repurchase agreements by $672,583. The restatement does not affect the total net change in cash and cash equivalents on the consolidated statement of cash flows for the period ended December 31, 2005, and has no impact on our consolidated balance sheet as of December 31, 2005, the consolidated statement of income, the consolidated statement of changes in stockholders’ equity or the income per share amounts for the period March 15, 2005 (commencement of operations) to December 31, 2005.

F-7

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

We are presenting the following changes to our consolidated statement of cash flows:


	For the period March 15, 2005
	(commencement of operations) to
	December 31, 2005

	As previously reported			As restated

	(Amounts in thousands)
Cash Flows from Investing Activities:
Purchase of securities available for sale	$	(2,100,317	)	$	(2,772,900	)
Net cash used in investing activities	$	(1,947,121	)	$	(2,619,704	)
Cash Flows from Financing Activities:
Net proceeds from repurchase agreements	$	1,305,275		$	1,977,858
Net cash provided by financing activities	$	1,938,327		$	2,610,910
Supplemental disclosure of noncash investing and financing activities:
Securities purchased and financed with repurchase agreements	$	672,583		$	—


	*Principles of Consolidation*

Our consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, Crystal River CDO 2005-1, Ltd., Crystal River CDO 2005-1 LLC, CRC SPV1, LLC, CRC SPV2, LLC and Crystal River Capital TRS Holdings, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.


	*Use of Estimates*

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates.


	*Cash and Cash Equivalents*

We classify highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents. Cash and cash equivalents may include cash and short term investments. Short term investments are stated at cost, which approximates their fair value, and may consist of investments in money market accounts.


	*Restricted Cash*

Restricted cash consists primarily of funds held on deposit with brokers to serve as collateral for certain interest rate swap agreements and repurchase agreements.


	*Securities*

We invest in U.S. Agency and Non-Agency securities, residential and commercial MBS and other real estate debt and equity instruments. We account for our available for sale securities (Agency ARMS, CMBS, RMBS, ABS and other real estate and equity instruments) in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). We classify our securities as available for sale because we may dispose of them prior to maturity in response to changes

F-8

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

in the market, liquidity needs or other events, even though we do not hold the securities for the purpose of selling them in the near future.

All investments classified as available for sale are reported at fair value, based on quoted market prices provided by independent pricing sources, when available, or from quotes provided by dealers who make markets in certain securities, or from our management’s estimates in cases where the investments are illiquid. In making these estimates, our management utilizes pricing information obtained from dealers who make markets in these securities. However, under certain circumstances we may adjust these values based on our knowledge of the securities and the underlying collateral. Our management also uses a discounted cash flow model, which utilizes prepayment and loss assumptions based upon historical experience, economic factors and the characteristics of the underlying cash flow in order to substantiate the fair value of the securities. The assumed discount rate is based upon the yield of comparable securities. The determination of future cash flows and the appropriate discount rates are inherently subjective and, as a result, actual results may vary from our management’s estimates.

Unrealized gains and losses are recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

Periodically, all available for sale securities are evaluated for other than temporary impairment in accordance with SFAS 115 and Emerging Issues Task Force (“EITF”) No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financials Assets (“EITF 99-20”). An impairment that is an “other than temporary impairment” is a decline in the fair value of an investment below its amortized cost attributable to factors that indicate the decline will not be recovered over the remaining life of the investment. Other than temporary impairments result in reducing the carrying value of the security to its fair value through the statement of income, which also creates a new carrying value for the investment. We compute a revised yield based on the future estimated cash flows as described in the section titled “Revenue Recognition” below. Significant judgments, including making assumptions regarding the estimated prepayments, loss assumptions and the changes in interest rates, are required in determining impairment.


	*Real Estate Loans*

Real estate loans are carried at cost, net of unamortized loan origination costs and fees, discounts, repayments, sales of partial interest in loans and unfunded commitments, unless the loan is deemed to be impaired. We account for our real estate loans in accordance with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Losses (“SFAS 91”).

Real estate loans are evaluated for possible impairment on a periodic basis in accordance with SFAS No. 114, Accounting by Creditors For Impairment of a Loan, an Amendment of FASB Statement No. 5 and 15 (“SFAS 114”). Impairment occurs when we determine it is probable that we will not be able to collect all amounts due according to the contractual terms of the loan. Upon determination of impairment, we establish a reserve for loan losses and recognize a corresponding charge to the statement of income through a provision for loan losses. Significant judgments are required in determining impairment, including making assumptions regarding the value of the loan and the value of the real estate, partnership interest or other collateral that secures the loan.

F-9

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)


	*Accounting For Derivative Financial Instruments and Hedging Activities*

We account for our derivative and hedging activities in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”). SFAS 133 requires us to recognize all derivative instruments at their fair value as either assets or liabilities on our balance sheet. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether we have designated it, and whether it qualifies as, part of a hedging relationship and on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. We have no fair value hedges or hedges of a net investment in foreign operations as of December 31, 2005.

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 are attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (i.e., in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate debt). The remaining gain or loss on the derivative instrument in excess of the cumulative changes in the present value of future cash flows of the hedged item, if any, is recognized in the realized and unrealized gain (loss) on derivatives in current earnings during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in realized and unrealized gain (loss) on derivatives in the current earnings during the period of change. Income and/or expense from interest rate swaps are recognized as an adjustment to interest expense. We account for income and expense from interest rate swaps on an accrual basis over the period to which the payments and/or receipts relate.


	*Dividends to Stockholders*

We record dividends to stockholders on the declaration date. The actual dividend and its timing are at the discretion of our board of directors. We intend to pay sufficient dividends to avoid incurring any income or excise tax. During 2005, we declared and paid to our shareholders dividends in the amount of $27,105.


	*Organization Costs*

We expensed our costs of organization as incurred.


	*Offering Costs*

Offering costs that were incurred in connection with the Private Offering are reflected as a reduction of additional paid-in-capital. Offering costs in connection with our planned initial public offering are currently reflected in prepaid expenses and other assets and will be reflected as a reduction of additional paid-in-capital upon the successful completion of our initial public offering or expensed if our initial public offering is not successful.

F-10

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)


	*Revenue Recognition*

Interest income for our available for sale securities and real estate loans is recognized over the life of the investment using the effective interest method and recorded on the accrual basis. Interest income on mortgage-backed securities (“MBS”) is recognized using the effective interest method as required by EITF 99-20. Real estate loans are generally originated or purchased at or near par value, and interest income is recognized based on the contractual terms of the loan instruments. Any loan fees or acquisition costs on originated loans or securities are capitalized and recognized as a component of interest income over the life of the investment utilizing the straight-line method, which approximates the effective interest method.

Under EITF 99-20, at the time of purchase, our management estimates the future expected cash flows and determines the effective interest rate based on these estimated cash flows and the purchase price. As needed, we update these estimated cash flows and compute a revised yield based on the current amortized cost of the investment. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties and contingencies, including the rate and timing of principal payments (including prepayments, repurchases, defaults and liquidations), the pass-through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans and the timing of the magnitude of credit losses on the mortgage loans underlying the securities have to be judgmentally estimated. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our management’s estimates and our interest income.

We record security transactions on the trade date. Realized gains and losses from security transactions are determined based upon the specific identification method and recorded as gain (loss) on sale of available for sale securities and real estate loans in the statement of income.

We account for accretion of discounts or premiums on available for sale securities and real estate loans using the effective interest yield method. Such amounts have been included as a component of interest income in the statement of income.

We may sell all or a portion of our real estate investments to a third party. To the extent the fair value received for an investment differs from the amortized cost of that investment and control of the asset that is sold is surrendered making it a “true sale”, as defined under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (“SFAS 140”), a gain or loss on the sale will be recorded in the statement of income as realized net (loss) gain on sale of real estate loans. To the extent a real estate investment is sold that has any fees which were capitalized at the time the investment was made and were being recognized over the term of the investment, the unamortized fees are recognized at the time of sale and included in any gain or loss on sale of real estate loans.

Dividend income on preferred stock is recorded on the dividend declaration date.


	*Deferred Financing Costs*

Deferred financing costs represent commitment fees, legal and other third party costs associated with obtaining commitments for financing that result in a closing of such financing. These costs are amortized over the terms of the respective agreements using the effective interest method or a method that approximates the effective interest method and the amortization is included in interest expense. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking

F-11

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

financing transactions that do not close are expensed in the period in which it is determined that the financing will not close.


	*Income Taxes*

We intend to elect to be taxed as a REIT and to comply with the corresponding federal income tax provisions. Accordingly, we generally will not be subject to federal or state income tax to the extent that we make qualifying distributions to our stockholders and provided we satisfy the REIT requirements, including certain asset, income, distribution and stock ownership tests. If we were to fail to meet these requirements, we would be subject to federal, state and local income taxes, which could have a material adverse impact on our results of operations and amounts available for distribution to our stockholders.

The dividends paid deduction of a REIT for qualifying dividends to our stockholders is computed using our taxable income as opposed to using our financial statement net income. Some of the significant differences between financial statement net income and taxable income include the timing of recording unrealized gains/realized gains associated with certain assets, the book/tax basis of assets, interest income, impairment, credit loss recognition related to certain assets (asset-backed mortgages), accounting for derivative instruments and amortization of various costs (including start up costs).

We have a taxable REIT subsidiary (“TRS”) that has made a joint election with us to be treated as our TRS. The TRS is a separate entity subject to federal income tax under the Internal Revenue Code. The TRS does not own any material assets nor does it have any operations. Therefore, there is no provision for federal income tax at December 31, 2005.


	*Earnings per Share*

We compute basic and diluted earnings per share in accordance with SFAS No. 128, Earnings Per Share (“SFAS 128”). Basic earnings per share (“EPS”) is computed based on the income available to common stockholders divided by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is based on the income available to common stockholders divided by the weighted average number of shares of common stock plus any additional shares of common stock attributable to stock options, provided that the options have a dilutive effect. At December 31, 2005, options to purchase a total of 126,000 shares of common stock have been excluded from the computation of diluted EPS as there would be no dilutive effect.


	*Variable Interest Entities*

F-12

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

finance its activities without additional subordinated financial support, are unable to direct the entity’s activities, or are not exposed to the entity’s losses or entitled to its residual returns. VIEs within the scope of FIN 46R are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is determined to be the party that absorbs a majority of the VIE’s expected losses, receives the majority of the VIE’s expected returns, or both.

Our ownership of the subordinated classes of commercial mortgage backed securities (“CMBS”) and residential mortgage backed securities (“RMBS”) from a single issuer may provide us with the right to control the foreclosure/workout process on the underlying loans, which we refer to as the Controlling Class CMBS and RMBS. There are certain exceptions to the scope of FIN 46R, one of which provides that an investor that holds a variable interest in a qualifying special-purpose entity (“QSPE”) is not required to consolidate that entity unless the investor has the unilateral ability to cause the entity to liquidate. SFAS 140 sets forth the requirements for an entity to qualify as a QSPE. To maintain the QSPE exception, the special-purpose entity must initially meet the QSPE criteria and must continue to satisfy such criteria in subsequent periods. A special-purpose entity’s QSPE status can be impacted in future periods by activities undertaken by its transferor(s) or other involved parties, including the manner in which certain servicing activities are performed. To the extent that our CMBS or RMBS investments were issued by a special-purpose entity that meets the QSPE requirements, we record those investments at the purchase price paid. To the extent the underlying special-purpose entities do not satisfy the QSPE requirements, we follow the guidance set forth in FIN 46R as the special purpose entities would be determined to be VIEs.

F-13

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

The following table details the purchase date, face amount of our investment, face amount of the respective issuance and our amortized cost in our CMBS and RMBS investments as of December 31, 2005 in which we own a greater than 50 percent interest in the most subordinate class:


						Total Face
			Purchase	Original Face Amount		Amount of	Amortized
Security Trust Description			Date	Purchased		Issuance	Cost

CMBS:
	GMACC 2005-C1		June 2005	$	53,928	$1,597,857	$	29,478
	WBCMT 2005-C18		May 2005		36,846	1,405,372		19,577
	COMM 2005-C6		August 2005		87,538	2,272,503		54,233
	BSCMS 2005-PWR9		September 2005		83,001	2,152,389		50,368

Total CMBS					261,313	7,428,121		153,656

RMBS:
	CWHL 2004-J8		March 2005		611	244,517		294
	GSR MTG 2005-1F		March 2005		2,767	691,667		1,651
	HVMLT 2005-2		March 2005		39,422	1,944,860		25,364
	JPMMT 2003-A1		March 2005		809	269,635		478
	WFMBS 2003-17		March 2005		3,002	1,000,331		1,784
	WFMBS 2004-DD		March 2005		2,101	600,085		1,225
	WFMBS 2005-2		March 2005		1,953	950,946		1,009
	FHASI 2005-AR2		April 2005		39,009	281,707		34,659
	FHASI 2005-AR3		June 2005		2,522	315,111		1,877
	JPMMT 2005-A3		June 2005		8,696	1,895,799		6,513
	FFML 2005-FF3		May 2005		5,080	770,271		4,615
	WAMU 2005-AR6		April 2005		27,704	3,167,184		15,807
	WFMBS 2005-AR5		May 2005		2,754	500,446		1,914
	WFMBS 2004-Z		July 2005		4,552	1,300,298		2,441
	FFNT 2005-FF5		July 2005		2,488	29,763		2,303
	BOAMS 2005-H		August 2005		3,888	706,792		2,612
	JPMMT 2005-A5		August 2005		4,726	1,195,013		3,471
	FHAMS 2005-AA6		August 2005		6,476	575,025		4,521
	RFMSI 2005-SA4		September 2005		1,681	850,478		1,301
	FHASI 2005-AR4		September 2005		2,129	425,565		1,293
	FHASI 2005-AR5		October 2005		1,082	216,253		647

Total RMBS					163,452	17,931,746		115,779

		Total		$	424,765	$25,359,867	$	269,435

Our maximum exposure to loss as a result of our investment in these QSPE’s totaled $269,435 as of December 31, 2005.

F-14

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

The financing structures that we offer to the borrowers on certain of our real estate loans involve the creation of entities that could be deemed VIEs and therefore, could be subject to FIN 46R. Our management has evaluated these entities and has concluded that none of them are VIEs that are subject to the consolidation rules of FIN 46R.


	*Stock Based Compensation*

We account for stock-based compensation in accordance with the provisions of the SFAS No. 123R, Accounting for Stock-Based Compensation (“SFAS 123R”), which establishes accounting and disclosure requirements using fair value based methods of accounting for stock-based compensation plans. Compensation expense related to grants of stock and stock options are recognized over the vesting period of such grants based on the estimated fair value on the grant date.

Stock compensation awards granted to Hyperion Brookfield Crystal River Capital Advisors, LLC, our external manager, are accounted for in accordance with EITF 96-18, Accounting For Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services, which requires us to measure the fair value of the equity instrument using the stock prices and other measurement assumptions as of the earlier of either the date at which a performance commitment by the counterparty is reached or the date at which the counterparty’s performance is complete.


	*Concentration of Credit Risk and Other Risks and Uncertainties*

Our investments are primarily concentrated in mortgage backed securities that pass through collections of principal and interest from the underlying mortgages and there is a risk that some borrowers on the underlying mortgage will default. Therefore, mortgage backed securities may bear some exposure to credit losses. Our maximum exposure to loss due to credit risk if all parties to the investments failed completely to perform according to the terms of the contracts as of December 31, 2005 is $2,439,228. Our real estate loans may bear some exposure to credit losses. Our maximum exposure to loss due to credit risk if all parties to the real estate loans failed completely to perform according to the terms of the loans as of December 31, 2005 is $146,497.

We bear certain other risks typical in investing in a portfolio of mortgage backed securities. Principal risks potentially affecting our financial position, income and cash flows include the risk that: (i) interest rate changes can negatively affect the market values of our mortgage backed securities, (ii) interest rate changes can influence decisions made by borrowers in the mortgages underlying the securities to prepay those mortgages, which can negatively affect both the cash flows from, and the market value of, our mortgage backed securities, and (iii) adverse changes in the market value of our mortgage backed securities and/or our inability to renew short term borrowings would result in the need to sell securities at inopportune times and cause us to realize losses.

Other financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and real estate loans. We place our cash and cash equivalents in excess of insured amounts with high quality financial institutions. The collateral securing our real estate loans are located in the United States and Canada as more fully described in Note 4.

F-15

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)


	*Other Comprehensive Income (Loss)*

Comprehensive income (loss) consists of net income and other comprehensive income. Our other comprehensive income (loss) is comprised primarily of unrealized gains and losses on securities available for sale and the net unrealized and deferred gains and losses on certain derivative instruments accounted for as cash flow hedges.


	*Foreign Currency Transactions*

We conform to the requirements of the SFAS No. 52, Foreign Currency Translation(“SFAS 52”). SFAS 52 requires us to record realized and unrealized gains and losses from transactions denominated in a currency other than our functional currency (US dollar) in determining net income.


	*Recently Issued Accounting Pronouncements*

In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-Monetary Assets, an amendment of APB Opinion No. 29 (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets provided by APB Opinion No. 29, Accounting for Non-monetary Transactions (“APB 29”), and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005 and we will adopt SFAS 153 in the first quarter of 2006. We currently do not anticipate that the effects of SFAS 153 will materially affect our consolidated financial statements upon adoption.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). SFAS 154 requires the retrospective application to prior periods’ financial statements of changes in accounting principles, unless it is impractical to determine either the period-specific effects or the cumulative effect of the accounting change. SFAS 154 also requires that a change in the depreciation, amortization, or depletion method for long-lived non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and we will adopt this provision, if applicable, during fiscal year 2006.

In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1, The Meaning of Other than Temporary Impairment and its Application to Certain Investments. This FSP, which is effective for reporting periods beginning after December 15, 2005, addresses the determination of when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. We currently do not anticipate that the effects of FSP FAS 115-1 will materially affect our consolidated financial statements upon adoption.

F-16

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. Finally, SFAS 155 amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for fiscal periods beginning after September 15, 2006 and we will adopt SFAS 155 in the first quarter of 2007. We currently do not anticipate that the effects of SFAS 155 will materially affect our consolidated financial statements upon adoption.

In April 2006, the FASB issued FSP FIN 46(R)-6, Determining the Variability to be Considered When Applying FASB Interpretation No. 46(R) (“FIN 46(R)-6”). FIN 46(R)-6 addresses the approach to determine the variability to consider when applying FIN 46(R). The variability that is considered in applying Interpretation 46(R) may affect (i) the determination as to whether an entity is a VIE, (ii) the determination of which interests are variable in the entity, (iii) if necessary, the calculation of expected losses and residual returns of the entity, and (iv) the determination of which party is the primary beneficiary of the VIE. Thus, determining the variability to be considered is necessary to apply the provisions of Interpretation 46(R). FIN 46(R)-6 is required to be prospectively applied to entities in which we first become involved after July 1, 2006 and would be applied to all existing entities with which we are involved if and when a “reconsideration event” (as described in FIN 46) occurs. We are currently evaluating the effects of adopting FIN 46(R)-6 on our consolidated financial statements.


3.	AVAILABLE FOR SALE SECURITIES

Our available for sale securities are carried at their estimated fair values. The amortized cost and estimated fair values of our available for sale securities as of December 31, 2005 are summarized as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
Security Description	Cost		Gains		Losses			Fair Value

CMBS	$	208,703	$	1,272	$	(3,656	)	$	206,319
Residential MBS-Non-Agency ARMs		520,825		1,221		(9,361	)		512,685
Residential MBS-Agency ARMs		1,677,125		443		(14,106	)		1,663,462
ABS		53,670		941		(81	)		54,530
REIT preferred stock		2,352		—		(120	)		2,232

Total	$	2,462,675	$	3,877	$	(27,324	)	$	2,439,228

As of December 31, 2005, we pledged an aggregate of $2,030,591 and $248,361 in estimated fair value of our available for sale securities to secure our repurchase agreements and collateralized debt obligations, respectively.

F-17

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


3.	AVAILABLE FOR SALE SECURITIES — (Continued)

As of December 31, 2005, the aggregate estimated fair values by underlying credit rating of our available for sale securities were as follows:


		December 31, 2005

		Estimated Fair
Security Rating		Value		Percentage

AAA		$	1,916,132		78.55	%
AA			—		—
A			28,992		1.19
BBB			188,214		7.72
BB			164,518		6.75
B			97,615		4.00
Not rated			43,757		1.79

	Total	$	2,439,228		100.00	%

As of December 31, 2005, the face amount and net unearned discount on our investments was as follows:


Face amount	$	2,662,103
Net unearned discount		(199,428	)

Amortized cost	$	2,462,675

For the period ended December 31, 2005, $3,779 of net discount on available for sale securities was accreted into interest income.


	*Commercial Mortgage Backed Securities (“CMBS”)*

Our investments include CMBS, which are mortgage backed securities that are secured by, or evidence ownership interests in, a single commercial mortgage loan, or a partial or entire pool of mortgage loans secured by commercial properties. The securities may be senior, subordinated, investment grade or non-investment grade.

The following is a summary of our CMBS investments as of December 31, 2005:


										Weighted Average
			Gross Unrealized
	Amortized							Estimated								Term
Security Rating:	Cost		Gains		Losses			Fair Value		Coupon			Yield			(yrs)

AAA	$	—	$	—	$	—		$	—		—	%		—	%		—
AA		—		—		—			—		—			—			—
A		—		—		—			—		—			—			—
BBB		81,639		245		(1,215	)		80,669		5.32			6.40			11.12
BB		64,314		33		(1,000	)		63,347		4.71			7.75			10.82
B		36,306		540		(430	)		36,416		4.72			11.63			13.02
Not rated		26,444		454		(1,011	)		25,887		4.69			20.76			13.75

Total CMBS	$	208,703	$	1,272	$	(3,656	)	$	206,319		4.87	%		9.54	%		12.15

F-18

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


3.	AVAILABLE FOR SALE SECURITIES — (Continued)


	*Residential Mortgage Backed Securities (“RMBS”)*

Our investments include RMBS, which are securities that represent participations in, and are secured by or payable from, mortgage loans secured by residential property. Our RMBS investments include (i) Agency mortgage pass-through certificates, which are securities issued or guaranteed by the Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Government National Mortgage Association (“Ginnie Mae”) and (ii) Agency Collateralized Mortgage Obligations issued by Fannie Mae or Freddie Mac backed by mortgage pass-through securities and evidenced by a series of bonds or certificates issued in multiple classes (collectively, “Agency Adjustable Rate RMBS” or “Agency ARMS”) and Non-Agency pass-through certificates which are rated classes in senior/ subordinated structures (“Non-Agency RMBS”).

The following is a summary of our Non-Agency RMBS investments as of December 31, 2005:


										Weighted Average
			Gross Unrealized
	Amortized							Estimated								Terms
Security Rating:	Cost		Gains		Losses			Fair Value		Coupon			Yield			(yrs)

AAA	$	255,086	$	—	$	(2,416	)	$	252,670		5.28	%		5.64	%		3.83
AA		—		—		—			—		—			—			—
A		17,511		—		(618	)		16,893		5.90			7.29			4.43
BBB		66,273		28		(1,187	)		65,114		6.16			7.55			4.77
BB		101,243		387		(2,691	)		98,939		6.51			11.08			4.95
B		62,541		189		(1,531	)		61,199		6.64			15.28			7.61
Not rated		18,171		617		(918	)		17,870		6.10			39.69			7.03

Total Non-Agency RMBS	$	520,825	$	1,221	$	(9,361	)	$	512,685		5.91	%		9.32	%		5.04

The following is a summary of our Agency ARMS investments as of December 31, 2005:


										Weighted Average
			Gross Unrealized
	Amortized							Estimated								Terms
Security Rating:	Cost		Gains		Losses			Fair Value		Coupon			Yield			(yrs)

AAA	$	1,677,125	$	443	$	(14,106	)	$	1,663,462		4.75	%		5.34	%		4.07
AA		—		—		—			—		—			—			—
A		—		—		—			—		—			—
BBB		—		—		—			—		—			—			—
BB		—		—		—			—		—			—			—
B		—		—		—			—		—			—			—
Not rated		—		—		—			—		—			—			—

Total Agency ARMS	$	1,677,125	$	443	$	(14,106	)	$	1,663,462		4.75	%		5.34	%		4.07


	*Asset-Backed Securities (“ABS”)*

As of December 31, 2005, we invested in asset-backed securities with an estimated fair value of $54,530. Aircraft ABS generally are collateralized by aircraft leases. Issuers of consumer and aircraft ABS generally are special-purpose entities owned or sponsored by banks and finance companies, captive finance subsidiaries of non-financial corporations or specialized originators such as credit card lenders.

F-19

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


3.	AVAILABLE FOR SALE SECURITIES — (Continued)

The following is a summary of our ABS as of December 31, 2005:


			Gross							Weighted Average
			Unrealized
	Amortized							Estimated								Terms
Security Rating:	Cost		Gains		Losses			Fair Value		Coupon			Yield			(yrs)

AAA	$	—	$	—	$	—		$	—		—	%		—	%		—
AA		—		—		—			—		—			—			—
A		12,082		17		—			12,099		4.74			6.14			4.12
BBB		41,588		924		(81	)		42,431		4.85			7.02			5.93
BB		—		—		—			—		—			—			—
B		—		—		—			—		—			—			—
Not rated		—		—		—			—		—			—			—

Total ABS	$	53,670	$	941	$	(81	)	$	54,530		4.83	%		6.83	%		5.55


	*Other Securities*

We invested in the preferred stock of Millerton I CDO with an estimated fair value of $2,232 as of December 31, 2005. The preferred stock of Millerton I CDO had a credit rating of BB as of December 31, 2005.


	*Unrealized Losses*

The following table sets forth the amortized cost, fair value and unrealized loss for securities we owned as of December 31, 2005:


		Number of		Amortized				Unrealized
Security Rating		Securities		Cost		Fair Value		Loss

AAA			62	$	1,515,976	$	1,499,454	$	(16,522	)
AA			—		—		—		—
A			4		17,511		16,893		(618	)
BBB			23		112,402		109,919		(2,483	)
BB			33		127,727		123,916		(3,811	)
B			31		65,349		63,388		(1,961	)
Not rated			25		25,487		23,558		(1,929	)

	Total		178	$	1,864,452	$	1,837,128	$	(27,324	)

All securities that we owned as of December 31, 2005 with unrealized losses were acquired within twelve months of December 31, 2005. The unrealized losses on all securities were the result of changes in market interest rates subsequent to their purchase. The unrealized losses on non-rated bonds were also due to market conditions and price volatility. Because we have the ability and intent to hold these investments until a recovery of fair value, which may be maturity, we do not consider these investments to be other than temporarily impaired at December 31, 2005.


	*Other Than Temporary Impairments*

As of December 31, 2005, we held nine Agency ARMS securities that we determined to be other than temporarily impaired. As a result, we recorded an impairment charge of $5,782 in the statement of income that has been reclassified out of other comprehensive of income. We

F-20

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


3.	AVAILABLE FOR SALE SECURITIES — (Continued)

determined that the impairment was other than temporary as we expect to sell these securities in the near future at a loss. Through April 2006, we have sold five of the nine Agency ARMS.


	*Sale of Available for Sale Securities*

During 2005, we sold one security for proceeds of $374 realizing a gain of $4.


4.	REAL ESTATE LOANS

We invest in mezzanine loans, B Notes, construction loans and whole loans. A mezzanine loan is a loan that is subordinated to a first mortgage loan on a property and is senior to the borrower’s equity in the properties. Mezzanine loans are made to the property’s owner and are secured by pledges of ownership interests in the property and/or the property owner. The mezzanine lender can foreclose on the pledged interests and thereby succeed to ownership of the property subject to the lien of the first mortgage.

A subordinated commercial real estate loan, which we refer to as a B Note, may be rated by at least one nationally recognized rating agency. A B Note is typically a privately negotiated loan that is secured by a first mortgage on a single large commercial property or group of related properties; and is subordinated to an A Note secured by the same first mortgage on the same property.

A construction loan represents a participation in a construction or rehabilitation loan on a commercial property that generally provides 85% to 90% of total project costs and is secured by a first lien mortgage on the property. Alternatively, mezzanine loans can be used to finance construction or rehabilitation where the security is subordinate to the first mortgage lien. Construction loans and mezzanine loans used to finance construction or rehabilitation generally would provide fees and interest income at risk-adjusted rates.

A whole mortgage loan is a loan secured by a first lien mortgage which provides mortgage financing to commercial and residential property owners and developers. Generally, mortgage loans have maturities that range from three to ten years for commercial properties and up to 30 years for residential properties.

The following is a summary of our real estate loans as of December 31, 2005:


Date of Initial	Scheduled		Property Name/					Carrying		Interest
Investment	Maturity		Location	Property Type	Face Value			Value		Rate

April 2005		June 2007	1700 Broadway	Office	$	6,000	(1)	$	6,000		9.59	%
June 2005		July 2008	Birchwood Acres	Multi family		12,611			12,617		7.39
June 2005		November 2007	Cambridge Condos	Multi family		5,631			5,631		16.00
August 2005		July 2007	Morgan Hotel B Note	Hotel		15,890	(1)		15,910		8.89
July 2005		May 2007	VIAD Corp. Center B	Office		9,000	(1)		9,005		7.89
			Note
August 2005		September 2010	Forbes Trinchera	Land		37,000	(2)		37,005		6.89
			Ranch
December 2005		December 2015	Atlas Term Loan	Commercial storage		17,294	(3)		17,300		6.09
December 2005		July 2021	Highvale Coal Ltd	Coal Energy		43,029			43,029		5.42

Totals					$	146,455		$	146,497


(1)	Pledged as collateral for CDO notes.

(2)	$18,000 of this loan was pledged as collateral for CDO notes.

(3)	Pledged as collateral for repurchase agreements.

F-21

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


4.	REAL ESTATE LOANS — (Continued)

The carrying values of our loans include unamortized underwriting fees of $42.

As of December 31, 2005, we pledged an aggregate of $17,294 and $48,890 in face value of our real estate loans to secure our repurchase agreements and collaterized debt obligations, respectively.

The 1700 Broadway loan is a mezzanine loan on a commercial office building located in Denver, Colorado. The loan bears interest at a floating rate equal to 5.5% over LIBOR.

The Birchwood Acres loan is a construction loan for a mixed use residential and commercial development near Orlando, Florida. The loan bears interest at a floating rate equal to 3.1% over LIBOR.

The Cambridge Condos loan is a construction loan on a residential property located in Portland, Oregon. The loan bears interest at the fixed rate of 16.0% and the loan matures in November 2007 with an extension, at the borrower’s option, until May 2008.

The Morgan Hotel loan is a B Note on a commercial portfolio of five full service hotels located in Florida, New York and California. The loan bears interest at a floating rate equal to 4.5% over LIBOR. The loan was fully repaid in February 2006.

The VIAD Corporate Center loan is a B Note on a commercial real estate loan located in Phoenix, Arizona. The loan bears interest at a floating rate equal to 3.5% over LIBOR.

The Forbes Trinchera Ranch loan is a first mortgage loan on undeveloped land located in Colorado. The loan bears interest at a floating rate equal to 2.5% over LIBOR.

The Atlas Cold Storage Refrigeration loan represents a 20% pari passu interest in a revolving credit facility secured by various commercial properties located throughout Canada and the U.S. The loan bears interest at a fixed rate of 6.09%.

The Highvale Coal Ltd. loan is a commercial real estate loan on property located in Calgary, Canada. The loan bears interest at a fixed rate of 5.42%. Highvale Coal Ltd. is an affiliate of the Manager.

During 2005, we sold one loan and one loan participation for an aggregate selling price of $32,151, net of closing costs, realizing a loss of $525 which is recorded in realized net loss on sale of real estate loans and securities available for sale in the income statement.


5.	DEBT AND OTHER FINANCING ARRANGEMENTS

The following is a summary of our debt as of December 31, 2005:


Type of Debt:		Amount

Repurchase agreements		$	1,977,858
Repurchase agreements, related party			16,429
Collateralized debt obligations			227,500
Note payable, related party			35,000

	Total Debt	$	2,256,787


	*Repurchase Agreements*

During the period ended December 31, 2005, we entered into thirteen master repurchase agreements with ten counterparties to finance our asset purchases on a short term basis. Under these agreements, we sell our assets to the counterparties and agree to repurchase those assets on a date certain at a repurchase price generally equal to the original sales price plus

F-22

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


5.	DEBT AND OTHER FINANCING ARRANGEMENTS — (Continued)

accrued but unpaid interest. The counterparties will purchase each asset financed under the facility at a percentage of the asset’s value on the date of origination, which is the purchase rate, and we will pay interest to the counterparty at short term interest rates (usually based on one-month LIBOR) plus a pricing spread. We have agreed to a schedule of purchase rates and pricing spreads with these counterparties that generally are based upon the class and credit rating of the asset being financed. The facilities are recourse to us. For financial reporting purposes, we characterize all of the borrowings under these facilities as balance sheet financing transactions.

Under the repurchase agreements, we are required to maintain adequate collateral with these counterparties. If the market value of the collateral we have pledged declines, then the counterparty may require us to provide additional collateral to secure our obligations under the repurchase agreement. As of December 31, 2005, we were required to provide additional collateral in the amount of $18,499, which is classified as restricted cash on the balance sheet.

As of December 31, 2005, we had repurchase agreements outstanding in the amount of $1,994,287 with a weighted-average borrowing rate of 4.33%. As of December 31, 2005, the repurchase agreements had remaining weighted-average maturities of 45 days and are summarized below:


					Weighted-
	Outstanding		Fair Value of		Average			Maturity
Repurchase Counterparty	Balance		Collateral		Borrowing Rate			Range (days)

*Related Party*
Trilon International, Inc.	$	16,429	$	17,294		4.83	%		89

*Unrelated Parties*
Bear, Stearns & Co. Inc		377,993		391,847		4.31			9-47
Credit Suisse First Boston LLC		214,653		218,519		4.42			24-73
Deutsche Bank Securities Inc.		156,536		156,169		4.19			24-47
Greenwich Capital Markets, Inc.		254,017		260,168		4.31			9-73
Banc of America Securities LLC		153,183		160,180		4.44			68
Lehman Brothers Inc.		332,698		327,806		4.23			9-55
Morgan Stanley & Co., Incorporated		228,821		233,962		4.30			12-55
Wachovia Capital Markets, LLC		242,946		257,169		5.32			9-73
Wachovia Bank, National Association		17,011		24,771		4.41			594

		1,977,858		2,030,591		4.33

Total	$	1,994,287	$	2,047,885		4.33	%		9-594

F-23

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


5.	DEBT AND OTHER FINANCING ARRANGEMENTS — (Continued)

As of December 31, 2005, the maturity ranges of our outstanding repurchase agreements segregated by our available for sale securities and real estate loans are as follows:


	Up to 30 days		31 to 90 days		Over 90 days		Total

Agency RMBS	$	538,808	$	1,051,235	$	—	$	1,590,043
Non-agency RMBS		170,975		112,895		17,011		300,881
CMBS		31,815		12,974		—		44,789
ABS		24,630		17,515		—		42,145
Real estate loans		—		16,429		—		16,429

Total	$	766,228	$	1,211,048	$	17,011	$	1,994,287

In August 2005, we entered into a $200,000 Master Repurchase Agreement (the “Master Repurchase Agreement”) with Wachovia Bank (the “Bank”). The Master Repurchase Agreement is for a two year term (expires August 2007) with a one year renewal option at the Bank’s discretion. Subject to the terms and conditions thereof, the Master Repurchase Agreement provides for the purchase, sale and repurchase of commercial and residential mortgage loans, commercial mezzanine loans, B Notes, participation interests in the foregoing, commercial mortgage-backed securities and other mutually agreed upon collateral and bears interest at varying rates over LIBOR based upon the type of asset included in the repurchase obligation. In November 2005, the Bank increased the borrowing capacity to $275,000. As of December 31, 2005, the unused amount under the Master Repurchase Agreement is $257,989.

In certain circumstances, we financed the purchase of securities from a counterparty through a repurchase agreement with the same counterparty pursuant to which we pledge the purchased securities. Currently, we record the acquisition of these securities and the related borrowing under repurchase agreements as financing liabilities on the consolidated balance sheet with changes in the fair value of the securities being recorded as a component of other comprehensive income in our stockholders’ equity. Interest income earned on the securities and the interest expense incurred on the repurchase obligations are reported separately on the consolidated statement of income.

It has come to our attention and to the attention of other market participants, as well as our repurchase counterparties, that SFAS 140 may require a different accounting treatment for such transactions. Under SFAS 140, transactions in which we acquire securities from a counterparty that are financed through a repurchase agreement with the same counterparty will not qualify as a purchase by us if we are not able to conclude that the securities purchased have been legally isolated from the counterparty. If the acquisitions do not qualify as a purchase of securities under SFAS 140, then we would not be permitted to include the securities purchased and the repurchase agreements on a gross basis on our balance sheet. Additionally, we would not be able to report on a gross basis on our statement of income the related interest income and interest expense incurred. Instead, we would be required to present the net investment on our balance sheet together with an embedded derivative with the corresponding change in fair value of the derivative being recorded in the statement of income. The value of the derivative would reflect not only changes in the value of the underlying securities, but also changes in the value of the underlying credit provided by the counterparty. Although we believe our accounting for these transactions is appropriate, we will continue to evaluate our position as any interpretation of the issue among industry participants and standard setters evolves. We had 27 such transactions outstanding as of December 31, 2005, and if we had reported these transactions

F-24

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


5.	DEBT AND OTHER FINANCING ARRANGEMENTS — (Continued)

net, our assets and liabilities on our December 31, 2005 balance sheet would be reduced by $676,280 and $672,583, respectively.

Certain repurchase agreements contain financial covenants, of which the most restrictive relate to maintaining our REIT status and maintaining a specific net asset value or worth. We were in compliance with our financial covenants as of December 31, 2005.


	*Note Payable, Related Party*

In August 2005, we borrowed $35,000 from an affiliate of the Manager for 90 days on an unsecured basis. In November 2005, we extended the loan an additional 90 days. The note bears interest at the rate of 5.59% per annum as of December 31, 2005, and it matures on February 13, 2006. Interest expense on this note was $703 for the period ended December 31, 2005. In addition, we had interest payable of $250 on this note at December 31, 2005, which is included in interest payable on the balance sheet. This note was repaid in February 2006.


	*Collateralized Debt Obligations (“CDOs”)*

In November 2005, we issued approximately $377,904 of CDOs through two newly-formed subsidiaries, Crystal River Capital CDO 2005-1 Ltd., or the Issuer, and Crystal River Capital CDO 2005-1 LLC, or the Co-Issuer. The CDO consists of $227,500 of investment grade notes and $67,750 of non-investment grade notes, which were co-issued by the Issuer and the Co-Issuer, and $82,654 of preference shares, which were issued by the Issuer. We retained all of the non-investment grade securities, the preference shares and the common shares in the Issuer. The issuer holds assets, consisting primarily of whole loans, CMBS and RMBS securities, which serve as collateral for the CDO. Investment grade notes in the aggregate principal amount of $217,500 were issued with floating coupons with a combined weighted average interest rate of three-month LIBOR plus 0.58%. In addition, $10,000 of investment grade notes were issued with a fixed coupon rate of 6.02%. The CDO may be replenished, pursuant to certain rating agency guidelines relating to credit quality and diversification, with substitute collateral for loans that are repaid during the first five years of the CDO. Thereafter, the CDO securities will be retired in sequential order from the senior-most to junior-most as loans are repaid. We incurred approximately $5,906 of issuance costs, which is amortized over the average life of the CDO. The Issuer and Co-Issuer are consolidated in our financial statements. The investment grade notes are treated as a secured financing, and are non recourse to us. Proceeds from the sale of the investment grade notes issued were used to repay outstanding debt under our repurchase agreements. The CDO was collateralized by investments with a fair value of $297,250 as of December 31, 2005.

F-25

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


5.	DEBT AND OTHER FINANCING ARRANGEMENTS — (Continued)

Scheduled maturities of our debt as of December 31, 2005 are as follows:


					Repurchase
			Repurchase		Agreement-		Note Payable-
	CDO		Agreements		Related Party		Related Party		Totals

2006	$	9,185	$	1,977,858	$	16,429	$	35,000	$	2,038,472
2007		36,794		—		—		—		36,794
2008		37,974		—		—		—		37,974
2009		33,570		—		—		—		33,570
2010		43,837		—		—		—		43,837
Thereafter		66,140		—		—		—		66,140

	$	227,500	$	1,977,858	$	16,429	$	35,000	$	2,256,787

Interest expense for the period ended December 31, 2005 was $48,425, which is comprised of interest expense on repurchase agreements of $43,230, notes payable, related party interest expense of $703, swap interest expense of $3,191, CDO interest expense of $987 and amortization of deferred financing costs of $314.

As of December 31, 2005, interest payable is comprised of $11,660 relating to repurchase agreements, $987 relating to CDO notes and $248 relating to the related party note payable.


6.	COMMITMENTS AND CONTINGENCIES

We invest in real estate construction loans. We have outstanding commitments to fund real estate construction loans in the aggregate of $24,050 as of December 31, 2005. At December 31, 2005, we had made advances totaling $18,242 under these commitments.


7.	RISK MANAGEMENT TRANSACTIONS

Our objectives in using derivatives include reducing our exposure to interest expense movements through our use of interest rate swaps, reducing our exposure to foreign currency movements through our use of foreign currency swaps, and generating additional yield for investing through our use of credit default swaps.

As of December 31, 2005, we had interest rate swap open positions with notional amounts of $1,291,406 (including an interest rate swap with a notional amount of $53,906 in our CDO) with a fair value of $11,983, which are reported as derivative assets on our balance sheet. Included in derivative liabilities as of December 31, 2005 in the amount of $9,660 is accrued interest on open swap positions, a Canadian foreign currency swap and credit default swaps with a fair value of $5,759, $308 and $3,593, respectively. At December 31, 2005, we had not hedged repurchase agreements totaling $756,787.

The change in unrealized gains of interest rate swaps designated as cash flow hedges are separately disclosed in the statement of changes in stockholders’ equity. As of December 31, 2005, unrealized gains aggregating $10,632 on cash flow hedges were recorded in other comprehensive income. The realized gain on settled swaps in the amount of $1,090 is being amortized into income through interest expense. As of December 31, 2005, such amounts totaled $17. The balance is deferred as a component of other comprehensive income. The unrealized gain on derivatives recorded in the statement of income for the period ended December 31, 2005 related to hedge ineffectiveness was $382. The amount recognized in the

F-26

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


7.	RISK MANAGEMENT TRANSACTIONS — (Continued)

statement of income for the period ended December 31, 2005 related to economic hedges not designated for hedge accounting was an unrealized gain of $803.

Interest expense incurred on derivative instruments of $3,207 is included in interest expense on the statement of income. Net realized losses on the settlement of swaps for the period ended December 31, 2005 is $80 and is recorded in realized and unrealized loss on derivatives in the statement of income. The estimated amount of existing net unrealized gains as of December 31, 2005 that is expected to be reclassified into earnings within the next twelve months is $3,301.

The maturities of the notional amounts of our interest rate swaps are as follows: $45,000 in 2006, $403,000 in 2007, $476,000 in 2008, $60,000 in 2009, $127,500 in 2010, $30,000 in 2011, $53,906 in 2013, $54,000 in 2015 and $42,000 in 2016.

As of December 31, 2005, we held 11 credit default swaps, as the protection seller, with notional amount of $105 million. A credit default swap (“CDS”) is a financial instrument used to transfer the credit risk of a reference entity from one party to another for a specified period of time. In a standard CDS contract, one party, referred to as the protection buyer, purchases credit default protection from another party, referred to as the protection seller, for a specific notional amount of obligations of a reference entity. In these transactions, the protection buyer pays a premium to the protection seller. The premium generally is paid monthly in arrears, but may be paid in full up front in the case of a CDS with a short maturity. Generally, if a credit event occurs during the term of the CDS, the protection seller pays the protection buyer the notional amount and takes delivery of the reference entity’s obligation. CDSs are generally unconditional, irrevocable and non-cancelable. As of December 31, 2005, our CDSs had a net fair value of $(3,593), which is recorded in realized and unrealized loss on derivatives in the statement of income. The premium earned from CDS in the amount of $299 is included in realized and unrealized loss on derivatives in the statement of income.


8.	STOCKHOLDERS’ EQUITY AND LONG-TERM INCENTIVE PLAN

In March 2005, we completed the Private Offering in which we sold 17,400,000 shares of common stock, $0.001 par value, at an offering price of $25 per share, including the purchase of 400,000 shares of common stock by the initial purchasers/placement agents pursuant to an over-allotment option. We received proceeds from these transactions in the amount of $405,613, net of underwriting commissions, placement agent fees and other offering costs totaling $29,387. Each share of common stock entitles its holder to one vote per share. Officers, directors and entities affiliated with our Manager own 945,800 shares of our common stock as of December 31, 2005.

In March 2005, we adopted a Long-Term Incentive Plan (the “Plan”) which provides for awards under the Plan in the form of stock options, stock appreciation rights, restricted and unrestricted stock awards, restricted stock units, deferred stock units and other performance awards. Our Manager and our officers, employees, directors, advisors and consultants who provide services to us are eligible to receive awards under the Plan. The Plan has a term of ten years and limits awards to a maximum of 1,740,000 shares of common stock for the calendar year ending December 31, 2005. For subsequent years, the maximum number of shares of common stock that may be subject to awards granted under the Plan can increase by ten percent of the difference between the number of shares of common stock outstanding at the

F-27

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


8.	STOCKHOLDERS’ EQUITY AND LONG-TERM INCENTIVE PLAN — (Continued)

end of the current calendar year and the prior calendar year. In no event will the total number of shares that can be issued under the Plan exceed 10,000,000.

In connection with the Plan, a total of 84,000 shares of restricted common stock and 126,000 stock options (exercise price of $25 per share) were granted to our Manager in March 2005. The Manager subsequently transferred these shares and options to certain of its officers and employees, certain of our directors and other individuals associated with our Manager who provide services to us. The restrictions on the restricted common stock lapse and full rights of ownership vest for one-third of the restricted shares and options on each of the first three anniversary dates of issuance. Vesting is predicated on the continuing involvement of our Manager in providing services to us. In addition, 3,500 shares of unrestricted stock were granted to the independent members of our board of directors in March 2005 in lieu of cash remunerations. The independent members of our board of directors were fully vested in the shares at the date of grant.

The fair value of the shares of the restricted stock issued to our Manager as of December 31, 2005 was $2,100 and the fair value of the stock options granted as of December 31, 2005 was $276 ($2.19 per share). The fair value of our stock options and restricted shares was determined contemporaneously. For the period ended December 31, 2005, $627 was expensed relating to the amortization of the restricted stock and the stock options. Compensation costs related to the restricted shares and stock options not yet recognized into earnings as of December 31, 2005 is $1,749, which will be recognized ratably through March 2008. The fair value of the stock option granted was estimated using a Binomial option-pricing model with the following weighted-average assumptions as of December 31, 2005: dividend yield of 10.5%, expected volatility of 20%, risk-free interest rate of 5%; and expected life of the options of six years. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Our stock options have characteristics that are significantly different from those of traded options and changes in the subjective input assumptions could materially affect the fair value estimate.

Information regarding the awards we made under the stock plan through December 31, 2005 is as follows:


		Number of
		Shares of		Weighted
		Restricted		Average Fair
		Stock		Value

Nonvested stock awards, at beginning of period			—	$	—
	Granted		87,500		25.00
	Vested		3,500		25.00
	Forfeited		—		—

Nonvested stock awards, at end of period			84,000	$	25.00

Price range of stock awards outstanding		$	25.00

F-28

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


8.	STOCKHOLDERS’ EQUITY AND LONG-TERM INCENTIVE PLAN — (Continued)

Information regarding the granted and outstanding options to purchase our common stock as of December 31, 2005 is as follows:


				Weighted		Weighted
		Number of		Average		Average Fair
		Options		Exercise Price		Value

Options, outstanding at beginning of period			—	$	—	$	—
	Granted		126,000		25.00		2.19
	Exercised		—		—		—
	Forfeited		—		—		—

Options, outstanding at end of period			126,000	$	25.00	$	2.19

Options exercisable at end of period			—
Price range of options outstanding		$	25.00
Weighted-average remaining contractual life			9.21 years


9.	FINANCIAL RISKS

We are subject to various risks, including credit, interest rate and market risk. We are subject to interest rate risk to the extent that our interest-bearing liabilities mature or re-price at different speeds, or different bases, than our interest-earning assets. Credit risk is the risk of default on our investments that result from a counterparty’s failure to make payments according to the terms of the contract.

Market risk reflects changes in the value of the securities and real estate loans due to changes in interest rates or other market factors, including the rate of prepayments of principal and the value of the collateral underlying our available for sale securities and real estate loans.

As of December 31, 2005, the mortgage loans in the underlying collateral pools for all securities we owned were secured by properties predominantly in California (22%), Florida (8%) and New York (5%). All other states are individually less than 5%.


10.	RELATED PARTY TRANSACTIONS

We entered into a management agreement (the “Agreement”) with our Manager on March 15, 2005. The initial term of the Agreement expires in December 2008. After the initial term, the Agreement will be automatically renewed for a one-year term each anniversary date thereafter unless we or our Manager terminates the Agreement. The Agreement provides that our Manager will provide us with investment management services and certain administrative services and will perform our day to day operations. The base management fee for such services is equal to 1.5% of one-twelfth of our equity, as defined in the Agreement, determined on a monthly basis, payable in arrears.

In addition, under the Agreement, our Manager earns a quarterly incentive fee equal to 25% of the amount by which the quarterly net income per share, as defined in the Agreement, exceeds an amount equal to the product of the weighted average offering price per share multiplied by the higher of (i) 2.4375% or (ii) 25% of the then applicable ten-year Treasury note rate plus 0.50%, multiplied by the then weighted average number of outstanding shares for the quarter. The incentive fee is paid quarterly. The Agreement provides that 10% of the incentive management fee is to be paid in shares of our common stock (providing that such

F-29

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


10.	RELATED PARTY TRANSACTIONS — (Continued)

payment does not result in our Manager owning directly or indirectly more than 9.8% of our issued and outstanding common stock) and the balance is to be paid in cash. Our Manager may, at its sole discretion, elect to receive a greater percentage of its incentive management fee in shares of our common stock.

The Agreement may be terminated upon the affirmative vote of at least two-thirds of the independent members of our board of directors after the expiration of the initial term and by providing at least 180 days prior notice based upon either: (i) unsatisfactory performance by our Manager that is materially detrimental to us, or (ii) a determination by the independent members of our board of directors that the management fees payable to our Manager are not fair (subject to our Manager’s right to prevent a compensation termination by accepting a mutually acceptable reduction of the management fees). If we terminate the Agreement, then we must pay our Manager a termination fee equal to twice the sum of the average annual base and incentive fees earned by our Manager during the two twelve-month periods immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

We granted to our Manager 84,000 shares of our restricted common stock and options to purchase 126,000 shares of our common stock for a ten year period at a price of $25 per share in March 2005. The restricted stock and the options vest over a three year period. For the period ended December 31, 2005, the base management expense is $4,821, of which $486 remains unpaid as of December 31, 2005. In addition, included in the management fee expense is $627 of amortization of stock-based compensation related to restricted stock and options granted. No incentive management fees were incurred for the period ended December 31, 2005.

The Agreement provides that we are required to reimburse our Manager for certain expenses incurred by our Manager on our behalf provided that such costs and reimbursements are no greater than that which would be paid to outside professionals or consultants on an arm’s length basis. For the period ended December 31, 2005, we did not incur any reimbursable costs due to our Manager.

Our Manager has entered into sub-advisory agreements with other affiliated entities and such fees will be paid from any management fee earned by our Manager. In addition, certain of these affiliated sub-advisory entities introduced investments to us for purchase in the amount of $253,565. The purchase prices were at arm’s length and the acquisitions were approved by the independent members of our board of directors.

Included in prepaid expenses and other assets are receivables from employees in the amount of $54.


11.	FAIR VALUE OF FINANCIAL INSTRUMENTS

We are required to disclose the fair value of our financial instruments for which it is practical to estimate that value under SFAS No. 107, Disclosure about Fair Value of Financial Instruments (“SFAS 107”). SFAS 107 defines fair value as the amount at which financial instruments could be exchanged in a current transaction between willing parties, in other than a forced sale or liquidation. 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, we derive or estimate fair value using various valuation techniques, such as computing the present value of estimated future cash flows using discount

F-30

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


11.	FAIR VALUE OF FINANCIAL INSTRUMENTS — (Continued)

rates commensurate with the risks involved. However, the determination of the estimated cash flows may be subjective and imprecise. Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In that regard, the derived fair value estimates may not be substantiated by comparison to independent markets, and in many cases, may not be realized in immediate settlement of the instrument. The fair values indicated below are indicative of the interest rate, prepayment and loss assumptions as of December 31, 2005, and may not take into consideration the effects of subsequent interest rate, prepayment or loss assumption fluctuations or changes in the values of underlying collateral. The fair value of cash and cash equivalents, restricted cash, receivables, prepaid expenses and other assets, accounts payable and accrued liabilities, due to Manager, delayed funding of real estate loans and interest payable approximate their carrying values due to the short maturities of these items.

The carrying amounts and estimated fair values of our other financial instruments as of December 31, 2005 were as follows:


		Carrying		Estimated
		Amount		Fair Value

Assets:
	Available for sale securities, at fair value	$	2,462,675	$	2,439,228
	Real estate loans		146,497		146,455
	Derivative assets		11,983		11,983
Liabilities:
	Repurchase agreements,		1,977,858		1,977,858
	Repurchase agreement, related party		16,429		16,429
	Collateralized debt obligations		227,500		227,500
	Note payable, related party		35,000		35,000
	Derivative liabilities		9,660		9,660

The methodologies used and key assumptions made to estimate fair values are as follows:


	Available for sale securities — The fair value of securities available for sale is estimated by obtaining broker quotations, where available, based upon reasonable market order indications or a good faith estimate thereof. For securities where market quotes are not readily obtainable, management may also estimate values, and considers factors including the credit characteristics and term of the underlying security, market yields on securities with similar credit ratings, and sales of similar securities, where available.

	Real estate loans — The fair value of our loan portfolio is estimated by using a discounted cash flow analysis, utilizing scheduled cash flows and discount rates estimated by management to approximate those that a willing buyer and seller might use.

	Derivative assets and liabilities — The fair value of our derivative assets and liabilities is estimated using current market quotes and third-party quotations, where available.

	Repurchase agreements — Our management believes that the stated interest rates approximate market rates (when compared to similar credit facilities with similar credit risk). As such, the fair value of the repurchase agreement is estimated to be equal to the outstanding principal amount.

F-31

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements


11.	FAIR VALUE OF FINANCIAL INSTRUMENTS — (Continued)


	Collateralized debt obligations and note payable, related party — The fair value of CDOs and note payable, related party is estimated using a discounted cash flow analysis, based on our management’s estimates of market interest rates. For mortgages where we have an early prepayment right, our management also considers the prepayment amount to evaluate the fair value.


12.	REGISTRATION RIGHTS AGREEMENT

At the time of the Private Offering, we entered into a Registration Rights Agreement that requires, among other things, that we file with the Securities and Exchange Commission no later than December 10, 2005 a resale registration statement providing for the resale of the shares of our common stock that we sold in the Private Offering. We filed the resale registration statement on December 9, 2005. We also are required to use commercially reasonable efforts to cause the resale registration statement to become effective as promptly as practicable after the filing and to list our common stock on the New York Stock Exchange or the NASDAQ Stock Market if we meet the criteria for listing.


13.	SUBSEQUENT EVENTS

In January 2006, the counterparty to three of our repurchase agreements initiated a margin call in the amount of $4,800. We subsequently transferred $3,100 in cash and $1,700 in securities to the counterparty in connection with the margin call.

In January 2006, we entered into an agreement with Credit Suisse First Boston (“CSFB”) whereby CSFB will act as sole and exclusive structurer and placement agent with respect to an MBS and ABS CDO. The CDO is scheduled to include various mortgage backed and asset-backed securities totaling $300,000 to $400,000. The securities to be included in this transaction will be securities that we own, as well as future acquisitions.

In February 2006, we entered into an agreement with Deutsche Bank Securities Inc. (“DBSI”) whereby DBSI will act as an exclusive financial advisor in connection with the structuring and placement of our CMBS CDO. The CDO is scheduled to include various commercial real estate assets in the amount of $300,000 to $400,000 and we expect it to close by December 31, 2006.

In March 2006, we entered into an unsecured credit facility in the aggregate amount of $31,000 with a financial institution. The agreement expires in March 2009. The credit facility requires that each month the amount borrowed is fully repaid. The credit facility bears interest at the rate of the bank’s prime interest rate or LIBOR plus 1.75%.

On March 31, 2006, we declared a dividend on our common stock in the amount of $0.725 per share in the total amount of $12,702, payable on April 17, 2006 to stockholders of record on March 31, 2006.

F-32

Crystal River Capital, Inc. and Subsidiaries

Schedule IV — Schedule of Mortgage Loans on Real Estate

December 31, 2005

(in thousands)

Principal

Amount of

Loan

Subject to

Face

Carrying

Delinquent

Final

Periodic

Amount

Principal

Interest

Maturity

Payments

Prior

Loan Type

Rate

Date

Terms

Liens

Mortgages

Mortgages(1)

Interest

Construction Loans

Birchwood Acres(2)

3.1% over LIBOR

July 2008

Interest payable monthly with scheduled periodic principal payments over the life to maturity

N/A

12,611

12,617

—

Cambridge Condominiums(3)

16%

November 2007

Interest payable monthly at a fixed rate with the principal due at maturity

N/A

5,631

—

Total Construction Loans

18,242

18,248

—

B Notes

Morgans Hotel Group

4.5% over LIBOR

July 2007

Interest payable monthly with the principal due at maturity

N/A

15,890

15,910

—

VIAD Corp Center

3.5% over LIBOR

May 2007

Interest payable monthly with the principal due at maturity

N/A

9,000

9,005

—

Total B Notes

24,890

24,915

—

Mezzanine Loans

1700 Broadway

5.5% over LIBOR

June 2007

Interest is payable monthly at a varying rate with the principal due at maturity

N/A

6,000

—

Total Mezzanine Loans

6,000

—

Whole Loans

Forbes Trinchera Ranch

2.5% over LIBOR

September 2010

Interest payable monthly with the principal due at maturity

N/A

37,000

37,005

—

Atlas Term Loan

6.09%

December 2015

Interest payable quarterly with the principal due at maturity

N/A

17,294

17,300

—

Highvale Coal Ltd. (4)

5.42%

July 2021

Principal and interest are payable annually based on amortization schedule over the life to maturity

N/A

43,029

—

Total Whole Loans

97,323

97,334

—

Total Loans

146,455

146,497

—

(1) The aggregate cost for federal income tax purposes is $146,497.

(2) Total loan commitment is $14,600.

(3) Total loan commitment is $9,450 and provided for an extension option to May 2008.

(4) $4,339 of the Highvale Coal Ltd. loan was subject to a delayed funding at December 31, 2005.


Reconciliation of Mortgage Loans on Real Estate
Balance, March 15, 2005		$	—
Additions during period:
	New mortgage loans (4)		179,220
	Underwriting costs		50
Subtractions during period:
	Mortgages sold		(32,676	)
	Principal payments		(89	)
	Amortization of underwriting costs		(8	)

Balance, December 31, 2005		$	146,497

F-33

Crystal River Capital, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)


			June 30,			December 31,
			2006			2005

			(Unaudited)			(Audited)
Assets
	Available for sale securities, at fair value:
		Commercial MBS	$	303,064		$	206,319
		Residential MBS — Non-Agency MBS		542,287			512,685
		— Agency ARMS		1,792,615			1,663,462
		ABS		50,328			54,530
		Preferred stock		4,634			2,232
	Real estate loans			135,361			146,497
	Cash and cash equivalents			56,200			21,463
	Restricted cash			82,465			18,499
	Receivables:
		Principal paydown		7,824			11,773
		Interest		15,089			12,091
		Interest purchased		663			612
		Due from broker		114,429			—
	Prepaid expenses and other assets			2,245			961
	Deferred financing costs, net			5,887			6,662
	Derivative assets			35,854			11,983

Total assets			$	3,148,945		$	2,669,769


Liabilities and Stockholders’ Equity
Liabilities:
	Accounts payable, accrued expenses and cash collateral payable		$	27,278		$	4,173
	Due to Manager			2,820			486
	Dividends payable			12,705			—
	Repurchase agreements			2,439,496			1,977,858
	Repurchase agreements, related party			57,234			16,429
	Collateralized debt obligations (“CDOs”)			210,903			227,500
	Note payable, related party			—			35,000
	Delayed funding of real estate loan			—			4,339
	Interest payable			18,332			12,895
	Derivative liabilities			6,575			9,660

Total liabilities				2,775,343			2,288,340

Commitments and contingencies
Stockholders’ equity:
	Preferred Stock, par value $0.001 per share; 100,000,000 shares authorized, no shares issued and outstanding			—			—
	Common stock, par value $0.001 per share, 500,000,000 shares authorized, 17,523,500 and 17,487,500 shares outstanding at June 30, 2006 and December 31, 2005, respectively			18			17
	Additional paid-in capital			406,979			406,311
	Accumulated other comprehensive loss			(16,269	)		(11,742	)
	Declared dividends in excess of earnings			(17,126	)		(13,157	)

Total stockholders’ equity				373,602			381,429

Total liabilities and stockholders’ equity			$	3,148,945		$	2,669,769

See accompanying notes to unaudited consolidated financial statements.

F-34

Crystal River Capital, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except share and per share data)

(Unaudited)


													March 15, 2005
				Three Months Ended June 30,									(commencement
										Six Months Ended			of operations) to
				2006			2005			June 30, 2006			June 30, 2005

Revenues:
Net interest income:
	Interest income — available for sale securities			$	42,815		$	14,794		$	81,174		$	15,507
	Interest income — real estate loans				2,478			301			5,089			301

		Total interest income			45,293			15,095			86,263			15,808
	Less interest expense				(31,425	)		(7,542	)		(60,276	)		(7,645	)

		Net interest income			13,868			7,553			25,987			8,163

Expenses:
	Management fees, related party				1,635			1,749			3,312			2,069
	Professional fees				753			682			1,514			723
	Insurance expense				99			77			190			90
	Directors’ fees				92			27			236			35
	Start up costs				—			—			—			292
	Miscellaneous expenses				157			121			249			130

		Total expenses			2,736			2,656			5,501			3,339

			Income before other revenues (expenses)		11,132			4,897			20,486			4,824

Other revenues (expenses):
	Realized net loss on sale of securities available for sale				(1,100	)		—			(1,668	)		—
	Realized and unrealized gain (loss) on derivatives				(481	)		(4,565	)		7,449			(4,370	)
	Loss on impairment of available for sale securities				(5,666	)		—			(6,924	)		—
	Foreign currency exchange gain				2,066			—			1,875			—
	Other				57			(17	)		234			(17	)

		Total other revenues (expenses)			(5,124	)		(4,582	)		966			(4,387	)

Net income				$	6,008		$	315		$	21,452		$	437

Per share information:
	Net income per share of common stock:
		Basic		$	0.34		$	0.02		$	1.22		$	0.02

		Diluted		$	0.34		$	0.02		$	1.22		$	0.02

	Weighted average number of shares outstanding:
		Basic			17,528,607			17,487,500			17,511,937			17,487,500

		Diluted			17,528,607			17,487,500			17,511,937			17,487,500

	Dividends declared per common share			$	0.725		$	0.25		$	1.45		$	0.25

See accompanying notes to unaudited consolidated financial statements.

F-35

Crystal River Capital, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

For the Six Months Ended June 30, 2006

(In thousands)

(Unaudited)


												Declared
		Common Stock							Accumulated			Dividends
						Additional			Other			In Excess
				Par		Paid-In			Comprehensive			of						Comprehensive
		Shares		Value		Capital			Loss			Earnings			Total			Income

Balance at January 1, 2006			17,487,500	$	17	$	406,311		$	(11,742	)	$	(13,157	)	$	381,429
Net income													21,452			21,452		$	21,452
Net unrealized holdings loss on securities available for sale										(24,064	)					(24,064	)		(24,064	)
Unrealized gain on cash flow hedges										19,604						19,604			19,604
Amortization of realized cash flow hedge gain										(67	)					(67	)		(67	)

Comprehensive income																		$	16,925

Dividends declared on common stock													(25,421	)		(25,421	)
Issuance of stock based compensation:
	Manager and manager’s employees		34,000		1		(1	)								—
	Board of directors		2,000
Amortization of stock based compensation							669									669

Balance at June 30, 2006			17,523,500	$	18	$	406,979		$	(16,269	)	$	(17,126	)	$	373,602

See accompanying notes to unaudited consolidated financial statements.

F-36

Crystal River Capital, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


							March 15, 2005
				Six Months			(commencement
				Ended			of operations) to
				June 30, 2006			June 30, 2005

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income			$	21,452		$	437
	Adjustments to reconcile net income to net cash provided by operating activities:
		Dividend declared and expensed to directors and manager			—			22
		Amortization of stock based compensation			660			266
		Amortization of underwriting costs on available for sale securities and real estate loans			64			—
		Amortization of realized cash flow hedge gain			(67	)		—
		Accretion of net discount on available for sale securities and real estate loans			(4,093	)		(941	)
		Realized net loss on sale of available for sale securities			1,668			—
		Loss on impairment of available for sale securities			6,924			—
		Accretion of interest on real estate loan			(538	)		—
		Unrealized (gain) loss on derivatives			(7,840	)		4,290
		Amortization of deferred financing costs			985			—
		Gain on foreign currency exchange			(1,762	)		—
	Changes in operating assets and liabilities:
		Interest receivable			(3,348	)		(7,844	)
		Swap interest receivable			—			(841	)
		Prepaid expenses and other assets			(1,284	)		(262	)
		Accounts payable and accrued liabilities			(2,413	)		1,037
		Due to Manager			2,334			511
		Interest payable			5,437			4,809
		Interest payable, derivative			488			3,360

			Net cash provided by operating activities		18,667			4,844

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of securities available for sale				(828,504	)		(1,824,502	)
	Interest purchased				(51	)		(1,938	)
	Underwriting costs on available for sale securities				(339	)		—
	Principal paydown on available for sale securities				253,927			41,555
	Principal payments on real estate loans				155			—
	Proceeds from the sale of available for sale securities				182,482			—
	Proceeds from the repayment of real estate loans				15,845			—
	Funding of real estate loans				(6,926	)		(38,224	)

			Net cash used in investing activities		(383,411	)		(1,823,109	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of common stock, net of issuance costs				—			405,614
	Cash collateral payable				25,518			—
	Principal repayments on collateralized debt obligations				(16,597	)		—
	Net deposits into restricted cash				(63,966	)		(3,650	)
	Payment of deferred financing costs				(210	)		—
	Repayment of note payable, related party				(35,000	)		—
	Dividends paid				(12,707	)		—
	Net proceeds from repurchase agreements				461,638			1,436,547
	Net proceeds from repurchase agreement, related party				40,805			—

			Net cash provided by financing activities		399,481			1,838,511

			Net increase in cash and cash equivalents		34,737			20,246
			Cash and cash equivalents at beginning of period		21,463			—

			Cash and cash equivalents at end of period	$	56,200		$	20,246

Supplemental disclosure of noncash investing and financing activities:
			Prepaid stock compensation issued to directors	$	—		$	54
			Dividends declared, not yet paid		12,714			4,350
			Principal paydown receivable		7,824			11,874
			Purchase of available for sale securities not yet settled		—			108,087
			Sale of available for sale securities not yet settled		114,079			—

See accompanying notes to unaudited consolidated financial statements

F-37

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


1.	ORGANIZATION

References herein to “we,” “us” or “our” refer to Crystal River Capital, Inc. and its subsidiaries unless the context specifically requires otherwise.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


	*Basis of Quarterly Presentation*

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (which includes only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. These consolidated financial statements should be read in conjunction with the annual financial statements and notes thereto for the period ended December 31, 2005 included in the Company’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (the “SEC”).


	*Principles of Consolidation*


	*Use of Estimates*

F-38

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)


	*Cash and Cash Equivalents*


	*Securities*

Unrealized gains and losses are recorded as a component of accumulated other comprehensive loss in stockholders’ equity.

F-39

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)


	*Real Estate Loans*

Real estate loans are carried at cost, net of unamortized loan origination costs and fees, discounts, repayments, sales of partial interests in loans and unfunded commitments, unless the loan is deemed to be impaired. We account for our real estate loans in accordance with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases (“SFAS 91”).


	*Accounting For Derivative Financial Instruments and Hedging Activities*

We account for our derivative and hedging activities in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”). SFAS 133 requires us to recognize all derivative instruments at their fair value as either assets or liabilities on our balance sheet. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether we have designated it, and whether it qualifies, as part of a hedging relationship and on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. We have no fair value hedges or hedges of a net investment in foreign operations as of June 30, 2006.

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 are attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (i.e., in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate debt). The remaining gain or loss on the derivative instrument in excess of the cumulative changes in the present value of future cash flows of the hedged item, if any, is recognized in the realized and unrealized gain (loss) on derivatives in current earnings during the period of change. For derivative instruments not designated as hedging instruments (including foreign currency swaps), the gain or loss is recognized in realized and unrealized gain (loss) on derivatives in the current earnings during the period of change. Income and/or expense from interest rate swaps are recognized as an adjustment to interest expense. We account for income and expense from interest rate swaps on an accrual basis over the period to which the payments and/or receipts relate.

F-40

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)


	*Dividends to Stockholders*

We record dividends to stockholders on the declaration date. The actual dividend and its timing are at the discretion of our board of directors. We intend to pay sufficient dividends to avoid incurring any income or excise tax. During the six months ended June 30, 2006, we declared dividends in the amount of $25,421, of which $12,707 was distributed on April 17, 2006 and $12,714 was distributed on July 21, 2006.


	*Offering Costs*

Offering costs that were incurred in connection with the Private Offering are reflected as a reduction of additional paid-in-capital. Offering costs in connection with our initial public offering, which closed on August 2, 2006, are currently reflected in prepaid expenses and other assets and will be reflected as a reduction of additional paid-in-capital commencing in the third quarter of 2006.


	*Revenue Recognition*

Under EITF 99-20, at the time of purchase, our management estimates the future expected cash flows and determines the effective interest rate based on these estimated cash flows and the purchase price. As needed, we update these estimated cash flows and compute a revised yield based on the current amortized cost of the investment. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties and contingencies, including the rate and timing of principal payments (including prepayments, repurchases, defaults and liquidations), the pass-through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans and the timing and the magnitude of credit losses on the mortgage loans underlying the securities have to be judgmentally estimated. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our management’s estimates and our interest income.

F-41

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

We may sell all or a portion of our real estate investments to a third party. To the extent the fair value received for an investment differs from the amortized cost of that investment and control of the asset that is sold is surrendered making it a “true sale”, as defined under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (“SFAS 140”), a gain or loss on the sale will be recorded in the statement of income as realized net gain (loss) on sale of real estate loans. To the extent a real estate investment is sold that has any fees which were capitalized at the time the investment was made and were being recognized over the term of the investment, the unamortized fees are recognized at the time of sale and included in any gain or loss on sale of real estate loans.

Dividend income on preferred stock is recorded on the dividend declaration date.


	*Income Taxes*

The dividends paid deduction of a REIT for qualifying dividends to our stockholders is computed using our taxable income as opposed to using our financial statement net income. Some of the significant differences between financial statement net income and taxable income include the timing of recording unrealized gains/realized gains associated with certain assets, the book/tax basis of assets, interest income, impairment, credit loss recognition related to certain assets (asset-backed mortgages), accounting for derivative instruments and stock compensation and amortization of various costs (including start up costs).

We have a taxable REIT subsidiary (“TRS”) that has made a joint election with us to be treated as our TRS. The TRS is a separate entity subject to federal income tax under the Internal Revenue Code. During the quarter ended June 30, 2006, the TRS recorded a $28 current income tax accrual which is included in other expenses.


	*Earnings per Share*

We compute basic and diluted earnings per share in accordance with SFAS No. 128, Earnings Per Share (“SFAS 128”). Basic earnings per share (“EPS”) is computed based on the income available to common stockholders divided by the weighted average number of shares of common stock and other participating securities outstanding during the period. Diluted EPS is based on the income available to common stockholders divided by the weighted average number of shares of common stock plus any additional shares of common stock attributable to stock options, provided that the options have a dilutive effect. At June 30, 2006 and June 30, 2005, options to purchase a total of 130,000 shares of common stock and 126,000 shares of common stock, respectively, have been excluded from the computation of diluted EPS as there would be no dilutive effect.

F-42

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)


	*Variable Interest Entities*

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51 (“FIN 46”). FIN 46 provides guidance on identifying entities for which control is achieved through means other than through voting rights and on determining when and which business enterprise should consolidate a variable interest entity (“VIE”) when such enterprise would be determined to be the primary beneficiary. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. In December 2003, the FASB issued a revision of FIN 46, Interpretation No. 46R (“FIN 46R”), to clarify the provisions of FIN 46. FIN 46R states that a VIE is subject to consolidation if the investors in the entity being evaluated under FIN 46R either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’s activities, or are not exposed to the entity’s losses or entitled to its residual returns. VIEs within the scope of FIN 46R are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is determined to be the party that absorbs a majority of the VIE’s expected losses, receives the majority of the VIE’s expected returns, or both.

Our ownership of the subordinated classes of commercial mortgage backed securities (“CMBS”) and residential mortgage backed securities (“RMBS”) from a single issuer may provide us with the right to control the foreclosure/ workout process on the underlying loans, which we refer to as the Controlling Class CMBS and RMBS. There are certain exceptions to the scope of FIN 46R, one of which provides that an investor that holds a variable interest in a qualifying special-purpose entity (“QSPE”) is not required to consolidate that entity unless the investor has the unilateral ability to cause the entity to liquidate. SFAS 140 sets forth the requirements for an entity to qualify as a QSPE. To maintain the QSPE exception, the special-purpose entity must initially meet the QSPE criteria and must continue to satisfy such criteria in subsequent periods. A special-purpose entity’s QSPE status can be impacted in future periods by activities undertaken by its transferor(s) or other involved parties, including the manner in which certain servicing activities are performed. To the extent that our CMBS or RMBS investments were issued by a special-purpose entity that meets the QSPE requirements, we record those investments at the purchase price paid. To the extent the underlying special-purpose entities do not satisfy the QSPE requirements, we follow the guidance set forth in FIN 46R as the special purpose entities would be determined to be VIEs.

F-43

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

residual returns, we have concluded that we would not be the primary beneficiary of any of the underlying special-purpose entities. Additionally, the standard setters continue to review the FIN 46R provisions related to the computations used to determine the primary beneficiary of VIEs. Future guidance from regulators and standard setters may require us to consolidate the special-purpose entities that issued the CMBS and RMBS in which we have invested as described in the section titled “Recently Issued Accounting Pronouncements.”

Our maximum exposure to loss as a result of our investment in these QSPEs totaled $325,196 as of June 30, 2006.


	*Stock Based Compensation*

We account for stock-based compensation in accordance with the provisions of SFAS No. 123R, Accounting for Stock-Based Compensation (“SFAS 123R”), which establishes accounting and disclosure requirements using fair value based methods of accounting for stock-based compensation plans. Compensation expense related to grants of stock and stock options are recognized over the vesting period of such grants based on the estimated fair value on the grant date.

Stock compensation awards granted to Hyperion Brookfield Crystal River Capital Advisors, LLC, our external manager, and certain employees of the manager’s affiliates are accounted for in accordance with EITF 96-18, Accounting For Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services, which requires us to measure the fair value of the equity instrument using the stock prices and other measurement assumptions as of the earlier of either the date at which a performance commitment by the counterparty is reached or the date at which the counterparty’s performance is complete.


	*Concentration of Credit Risk and Other Risks and Uncertainties*

Our investments are primarily concentrated in mortgage backed securities that pass through collections of principal and interest from the underlying mortgages and there is a risk that some borrowers on the underlying mortgages will default. Therefore, mortgage backed securities may bear some exposure to credit losses. Our maximum exposure to loss due to credit risk if all parties to the investments failed completely to perform according to the terms of the contracts as of June 30, 2006 is $2,692,928. Our real estate loans may bear some exposure to credit losses. Our maximum exposure to loss due to credit risk if parties to the real estate loans, related and unrelated, failed completely to perform according to the terms of the loans as of June 30, 2006 is $135,361.

F-44

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

mortgages underlying the securities to prepay those mortgages, which can negatively affect both the cash flows from, and the market value of, our mortgage backed securities, and (iii) adverse changes in the market value of our mortgage backed securities and/or our inability to renew short term borrowings would result in the need to sell securities at inopportune times and cause us to realize losses.


	*Other Comprehensive Income*

Comprehensive income consists of net income and other comprehensive income. Our other comprehensive income is comprised primarily of unrealized gains and losses on securities available for sale and net unrealized and deferred gains and losses on certain derivative investments accounted for as cash flow hedges.


	*Foreign Currency Transactions*

We conform to the requirements of SFAS No. 52, Foreign Currency Translation (“SFAS 52”). SFAS 52 requires us to record realized and unrealized gains and losses from transactions denominated in a currency other than our functional currency (US dollar) in determining net income.


	*Recently Adopted Accounting Pronouncements*

In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-Monetary Assets, an amendment of APB Opinion No. 29 (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets provided by APB Opinion No. 29, Accounting for Non-monetary Transactions (“APB 29”), and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005 and we adopted SFAS 153 in the first quarter of 2006. The adoption of SFAS 153 did not materially affect our consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3(“SFAS 154”). SFAS 154 requires the retrospective application to prior periods’ financial statements of changes in accounting principles, unless it is impractical to determine either the period-specific effects or the cumulative effect of the accounting change. SFAS 154 also requires that a change in the depreciation, amortization, or depletion method for long-lived non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We adopted SFAS 154 in the first quarter of 2006. The adoption of SFAS 154 did not materially affect our consolidated financial statements.

F-45

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1, The Meaning of Other than Temporary Impairment and its Application to Certain Investments. This FSP, which is effective for reporting periods beginning after December 15, 2005, addresses the determination of when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. We adopted FSP FAS 115-1 in the first quarter of 2006. The adoption of FSP FAS 115-1 did not materially affect our consolidated financial statements.


	*Recently Issued Accounting Pronouncements Not Yet Adopted*

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Instruments (“SFAS 155”). SFAS 155 is an amendment of SFAS 133 and SFAS 140 that allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133 and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. Finally, SFAS 155 amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for fiscal periods beginning after September 15, 2006 and we will adopt SFAS 155 in the first quarter of 2007. We currently do not anticipate that the effects of SFAS 155 will materially affect our consolidated financial statements upon adoption.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140 (“SFAS 156”). SFAS 156 requires: 1) an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract under certain conditions, 2) all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, and 3) permits an entity to choose either the amortization method or the fair value measurement method for subsequent measurement of each class of separately recognized servicing assets and servicing liabilities. SFAS 156 is effective for fiscal periods beginning after September 15, 2006 and we will adopt SFAS 156 in the first quarter 2007. We currently do not anticipate that the effects of SFAS 156 will materially affect our consolidated financial statements upon adoption.

In April 2006, the FASB issued FSP FIN 46(R)-6, Determining the Variability to be Considered When Applying FASB Interpretation No. 46(R) (“FIN 46(R)-6”). FIN 46(R)-6 addresses the approach to determine the variability to consider when applying FIN 46(R). The variability that is considered in applying Interpretation 46(R) may affect (i) the determination as to whether an entity is a VIE, (ii) the determination of which interests are variable in the entity, (iii) if necessary, the calculation of expected losses and residual returns on the entity, and (iv) the determination of which party is the primary beneficiary of the VIE. Thus, determining the variability to be considered is necessary to apply the provisions of Interpretation 46(R). FIN 46(R)-6 is required to be prospectively applied to entities in which

F-46

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

we first become involved after July 1, 2006 and would be applied to all existing entities with which we are involved if and when a “reconsideration event” (as described in FIN 46) occurs. We are currently evaluating the effects of adopting FIN 46(R)-6 on our consolidated financial statements.

The FASB has placed on its agenda the accounting treatment of transactions whereby securities purchased from a particular counterparty are financed with same counterparty through a repurchase agreement pursuant to which we pledge the purchased securities. Currently, we record the acquisition of these securities and the related borrowing under repurchase agreements as assets and liabilities on the consolidated balance sheet, and the corresponding interest income and interest expense on the consolidated income statement. Any changes in the fair value of the securities are reported through other comprehensive income pursuant to FASB No. 115, Accounting for Certain Investments in Debt and Equity Securities, because the securities are classified as available for sale. However, in a transaction where the securities are acquired from and financed under a repurchase agreement with the same counterparty, the acquisition may not qualify as a sale from the seller’s perspective under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. In such cases, the sellers may be required to continue to consolidate the assets sold to us, based on their continuing involvement with such investments. Depending on the ultimate outcome of the FASB’s deliberations, we may be precluded from presenting the assets gross on our balance sheet and instead should be treating our net investment in such assets as a derivative. If it is determined that these transactions should be treated as an investment in derivatives, the derivative instruments entered into by us to hedge our interest rate exposure with respect to the borrowings under the associated repurchase agreements may no longer qualify for hedge accounting, and would then, as with the underlying asset transaction, also be marked to market through the income statement. This potential change in accounting treatment does not affect the economics of the transactions but does affect how the transactions would be reported on our consolidated financial statements. Our cash flows, liquidity and ability to pay a dividend would be unchanged, and we do not believe our REIT taxable income or REIT tax status would be affected. Our net equity would not be materially affected. As of June 30, 2006, we have identified available for sale securities with a fair value of approximately $13,097 that had been purchased from and financed with reverse repurchase agreements totaling $10,726 with the same counterparties since their purchase. If we were to change the current accounting treatment for these transactions as of June 30, 2006, our total assets and total liabilities would be reduced by approximately $10,726.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). This interpretation, among other things, creates a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. FIN 48 is effective for fiscal years

F-47

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

beginning after December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. We currently are evaluating the effect, if any, that this pronouncement will have on our future financial results.


	*Presentation*

Certain reclassifications have been made in the presentation of the prior periods consolidated financial statements to conform to the June 2006 presentation.


3.	AVAILABLE FOR SALE SECURITIES

Our available for sale securities are carried at their estimated fair values. The amortized cost and estimated fair values of our available for sale securities as of June 30, 2006 are summarized as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
Security Description	Cost		Gains		Losses			Fair Value

CMBS	$	312,594	$	1,219	$	(10,749	)	$	303,064
Residential MBS-Non-Agency ARMs		549,360		3,835		(10,908	)		542,287
Residential MBS-Agency ARMs		1,824,847		24		(32,256	)		1,792,615
ABS		48,786		2,028		(486	)		50,328
Preferred stock		4,852		—		(218	)		4,634

Total	$	2,740,439	$	7,106	$	(54,617	)	$	2,692,928

As of June 30, 2006, we pledged an aggregate of $2,380,048 and $248,007 in estimated fair value of our available for sale securities to secure our repurchase agreements and collateralized debt obligations, respectively.

As of June 30, 2006, the aggregate estimated fair values by underlying credit rating of our available for sale securities were as follows:


		Estimated Fair
Security Rating		Value		Percentage

AAA		$	2,015,604		74.85	%
AA			—		—
A			60,945		2.26
BBB			248,884		9.24
BB			194,494		7.22
B			114,204		4.25
Not rated			58,797		2.18

	Total	$	2,692,928		100.00	%

F-48

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


3.	AVAILABLE FOR SALE SECURITIES — (Continued)

As of June 30, 2006, the face amount and net unearned discount on our investments was as follows:


Description:

Face amount	$	2,985,231
Net unearned discount		244,792

Amortized cost	$	2,740,439

For the six months ended June 30, 2006 and the period ended June 30, 2005, $4,093 and $941, respectively, of net discount on available for sale securities was accreted into interest income.


	*Unrealized Losses*

The following table sets forth the amortized cost, fair value and unrealized loss for securities we owned as of June 30, 2006:


		Number of		Amortized				Unrealized
Security Rating		Securities		Cost		Fair Value		Loss

AAA			95	$	1,993,965	$	1,956,687	$	37,278
AA			—		—		—		—
A			1		2,550		2,543		7
BBB			38		197,854		192,986		4,868
BB			45		172,037		165,224		6,813
B			37		64,851		61,359		3,492
Not rated			24		35,914		33,755		2,159

	Total		240	$	2,467,171	$	2,412,554	$	54,617

As of June 30, 2006, we held 137 securities, with unrealized losses totaling $25,628, that we acquired within 12 months of June 30, 2006. The remaining 103 securities, with unrealized losses totaling $28,989, were acquired more than 12 months prior to June 30, 2006. The unrealized losses on all securities were the result of changes in market interest rates subsequent to their purchase. The unrealized losses on non-rated bonds were also due to market conditions and price volatility. Because we have the ability and intent to hold these investments until a recovery of fair value, which may be maturity, we do not consider these investments to be other than temporarily impaired at June 30, 2006.


	*Other Than Temporary Impairments*

As of June 30, 2006, we held six Agency ARMS and two CMBS securities that we determined to be other than temporarily impaired. In connection with the impairment of these Agency ARMS and CMBS, we recorded impairment charges of $5,666 and $6,924 in our statement of income for the three months ended June 30, 2006 and the six months ended June 30, 2006, respectively, that has been reclassified out of other comprehensive income. We have determined that the impairment with respect to the six Agency ARMS and one of the

F-49

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


3.	AVAILABLE FOR SALE SECURITIES — (Continued)

CMBS securities in the amount of $4,746 and $6,004 for the three months and six months ended June 30, 2006, respectively, was other than temporary as we expect to sell these securities in the near future at a loss. Subsequent to June 30, 2006, we have sold four of the six Agency ARMS and the two CMBS securities that were so impaired. As of June 30, 2006, as part of our periodic surveillance of the underlying value of the collateral securing our CMBS investments, we revalued two of the underlying loans in the collateral securing a CMBS security that resulted in a credit impairment charge for the three months and six months ended June 30, 2006 in the amount of $920 and $920, respectively.


	*Sale of Available for Sale Securities*

During the six months ended June 30, 2006, we sold one security for proceeds of $3,263 realizing a gain of $327 and we sold eight securities for proceeds of $293,647 (of which $114,429 is due from broker as of June 30, 2006) realizing a loss of $1,995.


4.	REAL ESTATE LOANS

During the first six months of 2006, we received payments in respect of real estate loan redemptions and principal repayments totaling $16,000, including the redemption in full in February 2006 of one of our B Notes that had a carrying value of $15,910 at December 31, 2005. In addition, during the first six months of 2006, we provided additional advances under construction loans of $2,587 and made a delayed funding on a real estate loan of $4,339.

As of June 30, 2006, our real estate loan portfolio had a total face value of $135,343 and a total carrying value of $135,361. The carrying value of our real estate loans at June 30, 2006 includes unamortized underwriting fees of $18. As of June 30, 2006, we pledged an aggregate of $62,085 and $33,000 in face value of our real estate loans to secure our repurchase agreements and collateralized debt obligations, respectively. At such date, our real estate loans included non-US dollar denominated assets with a carrying value of $44,791.


5.	DEBT AND OTHER FINANCING ARRANGEMENTS

The following is a summary of our debt as of June 30, 2006:


Type of Debt:

Repurchase agreements		$	2,439,496
Repurchase agreements, related party			57,234
Revolving credit facility			—
Collateralized debt obligations			210,903

	Total Debt	$	2,707,633


	*Repurchase Agreements*

As of June 30, 2006, we had entered into 17 master repurchase agreements with various counterparties to finance our asset purchases on a short term basis. Under these agreements, we sell our assets to the counterparties and agree to repurchase those assets on a date certain

F-50

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


5.	DEBT AND OTHER FINANCING ARRANGEMENTS — (Continued)

at a repurchase price generally equal to the original sales price plus accrued but unpaid interest. The counterparties will purchase each asset financed under the facility at a percentage of the asset’s value on the date of origination, which is the purchase rate, and we will pay interest to the counterparty at short term interest rates (usually based on one-month LIBOR) plus a pricing spread. We have agreed to a schedule of purchase rates and pricing spreads with these counterparties that generally are based upon the class and credit rating of the asset being financed. The facilities are recourse to us. For financial reporting purposes, we characterize all of the borrowings under these facilities as balance sheet financing transactions.

Under the repurchase agreements, we are required to maintain adequate collateral with these counterparties. If the market value of the collateral we have pledged declines, then the counterparty may require us to provide additional collateral to secure our obligations under the repurchase agreement. As of June 30, 2006, we were required to provide additional collateral in the amount of $78,490, which is classified as restricted cash on the balance sheet.

As of June 30, 2006, we had repurchase agreements outstanding in the amount of $2,496,730 with a weighted-average borrowing rate of 5.24%. As of June 30, 2006, the

F-51

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


5.	DEBT AND OTHER FINANCING ARRANGEMENTS — (Continued)

repurchase agreements had remaining weighted-average maturities of 55 days and are summarized below:


					Weighted-
	Outstanding		Fair Value of		Average			Maturity
Repurchase Counterparty	Balance		Collateral		Borrowing Rate			Range (days)

*Related Party*
Trilon International, Inc.	$	57,234	$	62,089		5.48	%		26-28

*Unrelated Parties*
Banc of America Securities LLC		191,815		199,170		5.15			7-47
Bear, Stearns & Co. Inc.		310,809		328,689		5.19			7-47
Citigroup Global Markets Inc.		171,837		177,062		5.27			40-81
Credit Suisse First Boston LLC		343,180		368,764		5.20			7-76
Deutsche Bank Securities Inc.		318,286		328,305		5.10			24-55
Greenwich Capital Markets, Inc.		220,191		226,434		5.26			40-76
Lehman Brothers Inc.		186,270		200,363		5.14			7-12
Merrill Lynch, Pierce, Fenner & Smith Incorporated		243,044		253,266		5.17			24-81
Morgan Stanley & Co., Incorporated		171,139		176,986		5.15			7-40
Wachovia Bank, National Association		119,207		169,073		6.23			413
Wachovia Capital Markets, LLC		29,494		33,248		5.48			7-76
WaMu Capital Corp.		134,224		139,363		5.24			7-69

		2,439,496		2,600,723

Total	$	2,496,730	$	2,662,812		5.24	%		7-413

As of June 30, 2006, the maturity ranges of our outstanding repurchase agreements segregated by our available for sale securities and real estate loans are as follows:


	Up to 30 days		31 to 90 days		Over 90 days		Total

Agency RMBS	$	936,075	$	974,127	$	—	$	1,910,202
Non-agency RMBS		132,356		127,908		70,389		330,653
CMBS		72,605		33,242		31,394		137,241
ABS		24,277		19,700		17,423		61,400
Real estate loans		57,234		—		—		57,234

Total	$	1,222,547	$	1,154,977	$	119,206	$	2,496,730

F-52

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


5.	DEBT AND OTHER FINANCING ARRANGEMENTS — (Continued)

In August 2005, we entered into a $200,000 Master Repurchase Agreement (the “Master Repurchase Agreement”) with Wachovia Bank (the “Bank”). The Master Repurchase Agreement is for a two year term (expires August 2007) with a one year renewal option at the Bank’s discretion. Subject to the terms and conditions thereof, the Master Repurchase Agreement provides for the purchase, sale and repurchase of commercial and residential mortgage loans, commercial mezzanine loans, B Notes, participation interests in the foregoing, commercial mortgage-backed securities and other mutually agreed upon collateral and bears interest at varying rates over LIBOR based upon the type of asset included in the repurchase obligation. In November 2005, the Bank increased the borrowing capacity to $275,000. As of June 30, 2006, the unused amount under the Master Repurchase Agreement is $155,793.


	*Collateralized Debt Obligations (“CDOs”)*

In November 2005, we issued approximately $377,904 of CDOs through two newly-formed subsidiaries, Crystal River Capital CDO 2005-1 Ltd., or the Issuer, and Crystal River Capital CDO 2005-1 LLC, or the Co-Issuer. The CDO consists of $227,500 of investment grade notes and $67,750 of non-investment grade notes, which were co-issued by the Issuer and the Co-Issuer, and $82,654 of preference shares, which were issued by the Issuer. We retained all of the non-investment grade securities, the preference shares and the common shares in the Issuer. The issuer holds assets, consisting primarily of whole loans, CMBS and RMBS securities, which serve as collateral for the CDO. Investment grade notes in the aggregate principal amount of $217,500 were issued with floating coupons with a combined weighted average interest rate of three-month LIBOR plus 0.58%. In addition, $10,000 of investment grade notes were issued with a fixed coupon rate of 6.02%. The CDO may be replenished, pursuant to certain rating agency guidelines relating to credit quality and diversification, with substitute collateral for loans that are repaid during the first five years of the CDO. Thereafter, the CDO securities will be retired in sequential order from the senior-most to junior-most as loans are repaid. We incurred approximately $5,906 of issuance costs, which is amortized over the average life of the CDO. The Issuer and Co-Issuer are consolidated in our financial statements. The investment grade notes are treated as a secured financing, and are non recourse to us. Proceeds from the sale of the investment grade notes issued were used to repay outstanding debt under our repurchase agreements. The CDO was collateralized by available for sale securities with fair values of $248,081 and real estate loans with carrying values of $33,009 as of June 30, 2006.


	*Note Payable, Related Party*

In August 2005, we borrowed $35,000 from an affiliate of our Manager for 90 days on an unsecured basis. In November 2005, we extended the loan an additional 90 days. The note bore interest at the fixed rate of 5.59% per annum and it matured on February 13, 2006. Interest expense on this note was $239 for the six months ended June 30, 2006. The note was repaid at maturity.

F-53

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


5.	DEBT AND OTHER FINANCING ARRANGEMENTS — (Continued)


	*Revolving Credit Facility*

In March 2006, we entered into an unsecured credit facility with Signature Bank that provides for borrowings of up to $31,000 in the aggregate. The credit facility expires in March 2009. The credit facility provides for monthly repayments of all amounts due. Borrowings under the credit facility bear interest at a rate equal to the bank’s prime interest rate or 1.75% over LIBOR. We had no amounts outstanding under this credit facility at June 30, 2006.

Certain of our repurchase agreements and our revolving credit facility contain financial covenants, including maintaining our REIT status and maintaining a specific net asset value or worth. As of June 30, 2006, with respect to two debt obligations, we failed to meet certain financial covenants including an interest expense coverage ratio. We obtained waivers with respect to all financial covenants which were not met. As a result, we were in compliance with or have obtained the necessary waivers with respect to all our financial covenants as of June 30, 2006.


6.	COMMITMENTS AND CONTINGENCIES

We invest in real estate construction loans. We had outstanding commitments to fund real estate construction loans in the aggregate of $24,050 as of June 30, 2006. At June 30, 2006, we had made advances totaling $21,369 under these commitments.


7.	RISK MANAGEMENT TRANSACTIONS

As of June 30, 2006, we had interest rate swap open positions with notional amounts of $1,448,517 (including an interest rate swap with a notional amount of $53,084 in our CDO) with a fair value of $34,458, which are reported as derivative assets on our balance sheet. Also, included in derivative assets at June 30, 2006 are credit default swaps with a fair value of $1,396. Included in derivative liabilities as of June 30, 2006 is a Canadian foreign currency swap with a fair value of $329 and accrued interest payable on open swap positions of $6,246. At June 30, 2006, we had not hedged repurchase agreements totaling $1,144,230.

The change in unrealized gains of interest rate swaps designated as cash flow hedges are separately disclosed in the statement of changes in stockholders’ equity. For the six months ended June 30, 2006, unrealized gains aggregating $19,604 on cash flow hedges were recorded in other comprehensive income. The realized gain on settled swaps in the amount of $67 is being amortized into income through interest expense for the six months ended June 30, 2006. As of June 30, 2006, such cumulative amortized amounts totaled $83. The unamortized balance of $1,007 is deferred as a component of other comprehensive income. The unrealized gain (loss) on derivatives recorded in the statement of income for the three months ended June 30, 2006, the six months ended June 30, 2006, the three months ended June 30, 2005 and the period March 15, 2005 (commencement of operations) to June 30, 2005 related to hedge ineffectiveness was $190, $251, $(5) and $(5), respectively. The amount recognized in the statement of income for the three months ended June 30, 2006, the six months ended June 30, 2006, the three months ended June 30, 2005 and the period March 15, 2005 (commencement of operations) to June 30, 2005 related to economic hedges not designated for hedge accounting was an unrealized gain (loss) of $726, $2,349, $(4,480) and $(4,285), respectively. Realized losses on the settlement of swaps for the period March 15,

F-54

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


7.	RISK MANAGEMENT TRANSACTIONS — (Continued)

2005 (commencement of operations) to June 30, 2005 was $80. The amount recognized in the statement of income for the three months and six months ended June 30, 2006 related to foreign currency swaps was a realized and unrealized loss of $2,112 and $870, respectively. The amount recognized in the statement of income for the three months and six months ended June 30, 2006 related to credit default swaps was an unrealized gain of $347 and $4,989, respectively, and premiums earned on those credit default swaps for the same periods of $369 and $731, respectively.

Interest income (expense) on derivative instruments of $3,101, $3,682, $(1,437) and $(1,437) is included as a component of interest expense on the statement of income for the three months ended June 30, 2006, the six months ended June 30, 2006, the three months ended June 30, 2005 and the period March 15, 2005 (commencement of operations) to June 30, 2005, respectively.


8.	STOCKHOLDERS’ EQUITY AND LONG-TERM INCENTIVE PLAN

In March 2005, we completed the Private Offering in which we sold 17,400,000 shares of common stock, $0.001 par value, at an offering price of $25 per share, including the purchase of 400,000 shares of common stock by the initial purchasers/placement agents pursuant to an over-allotment option. We received proceeds from these transactions in the amount of $405,613, net of underwriting commissions, placement agent fees and other offering costs totaling $29,387. Each share of common stock entitles its holder to one vote per share. Officers, directors and entities affiliated with our Manager owned 977,800 shares of our common stock as of June 30, 2006.

In March 2005, we adopted a Long-Term Incentive Plan (the “Plan”) which provides for awards under the Plan in the form of stock options, stock appreciation rights, restricted and unrestricted stock awards, restricted stock units, deferred stock units and other performance awards. Our Manager and our officers, employees, directors, advisors and consultants who provide services to us are eligible to receive awards under the Plan. The Plan has a term of ten years and, based on awards since adoption, limits awards through June 30, 2006 to a maximum of 1,748,750 shares of common stock . For subsequent periods, the maximum number of shares of common stock that may be subject to awards granted under the Plan can increase by ten percent of the difference between the number of shares of common stock outstanding at the end of the current calendar year and the prior calendar year. In no event will the total number of shares that can be issued under the Plan exceed 10,000,000.

F-55

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


8.	STOCKHOLDERS’ EQUITY AND LONG-TERM INCENTIVE PLAN — (Continued)

remunerations. The independent members of our board of directors fully vested in the shares at the date of grant.

For the six months ending June 30, 2006, we issued a total of 36,000 shares of restricted common stock. Of this amount, 30,000 shares were issued to one of our senior executives. The restrictions on the restricted common stock lapse and full rights of ownership vest for one-third of the restricted shares on each of the first three anniversary dates of issuance. The remaining 6,000 shares of restricted common stock were granted to an independent member of our board of directors and one of our Manager’s employees. The director vested one-third immediately and will vest in the remaining shares ratably on the second and third anniversary dates of issuance and the Manager’s employee will vest ratably on the first, second and third anniversary dates of issuance. In addition, for the six months ending June 30, 2006, we have issued 9,876 deferred stock units to certain other independent members of our board of directors. Of this amount, 3,876 deferred stock units were issued in lieu of cash remunerations. These independent members of our board of directors fully vested in these units at the date of grant. The remaining 6,000 deferred stock units became one-third vested to the members of our board of directors immediately and will vest in the remaining units ratably on the second and third anniversary dates of issuance. In August 2006, one of our Manager’s employees who owned 4,000 shares of restricted common stock resigned prior to the vesting of any of such shares. In accordance with the agreement pursuant to which those shares were issued, upon his resignation, those shares of restricted common stock were forfeited back to us.

In March 2006, we granted 4,000 stock options (exercise price of $25 per share) to one of our directors.

The fair value of the shares of the restricted stock issued to our Manager, directors and employees of our Manager’s affiliates as of June 30, 2006 was $2,880 and the fair value of the stock options granted as of June 30, 2006 was $257 ($1.98 per share). The fair value of our stock options and restricted shares was determined contemporaneously. For the three months ended June 30, 2006, the six months ended June 30, 2006, the three months ended June 30, 2005 and the period March 15, 2005 (commencement of operations) to June 30, 2005, $258, $500, $199 and $232, respectively, was expensed relating to the amortization of the restricted stock and the stock options. For the three months ended June 30, 2006 and the six months ended June 30, 2006, $57 and $153, respectively, was expensed relating to the amortization of deferred stock units. The fair value of the stock options granted was estimated using a Binomial option-pricing model with the following weighted-average assumptions as of June 30, 2006: dividend yield of 10.94%, expected volatility of 22%, risk-free interest rate of 5%; and the expected life of the options of six years. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Our stock options have characteristics that are significantly different from those of traded options and changes in the subjective input assumptions could materially affect the fair value estimate.


9.	FINANCIAL RISKS

F-56

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


9.	FINANCIAL RISKS — (Continued)

default on our investments that result in a counterparty’s failure to make payments according to the terms of the contract.


10.	RELATED PARTY TRANSACTIONS

We have entered into a management agreement (as amended, the “Agreement”) with our Manager. The initial term of the Agreement expires in December 2008. After the initial term, the Agreement will be automatically renewed for a one-year term each anniversary date thereafter unless we or our Manager terminates the Agreement. The Agreement provides that our Manager will provide us with investment management services and certain administrative services and will perform our day to day operations. The monthly base management fee for such services is equal to 1.5% of one-twelfth of our equity, as defined in the Agreement, payable in arrears.

In addition, under the Agreement, our Manager earns a quarterly incentive fee equal to 25% of the amount by which the quarterly net income per share, as defined in the Agreement (principally excludes the effect of stock compensation and the unrealized change in derivatives), exceeds an amount equal to the product of the weighted average offering price per share multiplied by the higher of (i) 2.4375% or (ii) 25% of the then applicable ten-year Treasury note rate plus 0.50%, multiplied by the then weighted average number of outstanding shares for the quarter. The incentive fee is paid quarterly. The Agreement provides that 10% of the incentive management fee is to be paid in shares of our common stock (providing that such payment does not result in our Manager owning directly or indirectly more than 9.8% of our issued and outstanding common stock) and the balance is to be paid in cash. Our Manager may, at its sole discretion, elect to receive a greater percentage of its incentive management fee in shares of our common stock. No incentive management fees were incurred during the six months ended June 30, 2006 or the period ended June 30, 2005.

We issued to our Manager 84,000 shares of our restricted common stock and granted options to purchase 126,000 shares of our common stock for a ten year period at a price of $25 per share in March 2005. We issued to one of our executive officers 30,000 shares of

F-57

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


10.	RELATED PARTY TRANSACTIONS — (Continued)

restricted common stock in March 2006 and we issued to one of our Manager’s employees 4,000 shares of restricted stock in June 2006. The restricted stock and the options vest over a three year period. For the three months ended June 30, 2006, the six months ended June 30, 2006, the three months ended June 30, 2005 and the period March 15, 2005 (commencement of operations) to June 30, 2005, the base management expense is $1,382, $2,837, $1,550 and $1,837, respectively, all of which remained unpaid as of the end of the respective periods. Included in the management fee expense for the three months ended June 30, 2006, the six months ended June 30, 2006, the three months ended June 30, 2005 and the period March 15, 2005 (commencement of operations) to June 30, 2005 is $253, $475, $199 and $232 of amortization of stock-based compensation related to restricted stock and options granted. The amount due to Manager at June 30, 2006 includes $486 in respect of management fees due at December 31, 2005.

The Agreement provides that we are required to reimburse our Manager for certain expenses incurred by our Manager on our behalf provided that such costs and reimbursements are no greater than that which would be paid to outside professionals or consultants on an arm’s length basis. For the six months ended June 30, 2006 and the period ended June 30, 2005, we did not incur any reimbursable costs due to our Manager.

We and our Manager have entered into sub-advisory agreements with other affiliated entities and the fees payable under such agreements will be paid from any management fees earned by our Manager. In addition, certain of these affiliated sub-advisory entities have introduced investments to us for purchase in the amount of $2,500 during the six months ended June 30, 2006. The purchase price was determined at arm’s length and the acquisition was approved in advance by the independent members of our board of directors.

F-58

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


11.	EARNINGS PER SHARE

The following table sets forth the calculation of Basic and Diluted EPS for the six months ended June 30, 2006 and the period ended June 30, 2005 (in thousands, except share and per share amounts):


		Six Months Ended June 30, 2006						Period Ended June 30, 2005

				Weighted						Weighted
				Average Number						Average Number
				of Shares		Per Share				of Shares		Per Share
		Net Income		Outstanding		Amount		Net Income		Outstanding		Amount

Basic EPS:
	Net earnings per share of common stock	$	21,452		17,511,937	$	1.22	$	437		17,487,500	$	0.02

Effect of Dilutive Securities:
	Options outstanding for the purchase of common stock		—		—				—		—

Diluted EPS:
	Net earnings per share of common stock and assumed conversions	$	21,452		17,511,937	$	1.22	$	437		17,487,500	$	0.02

F-59

Crystal River Capital, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2006

(In thousands, except share and per share data)

(unaudited)


11.	EARNINGS PER SHARE — (Continued)

The following table sets forth the calculation of Basic and Diluted EPS for the three months ended June 30, 2006 and June 30, 2005 (in thousands, except share and per share amounts):


		Three Months Ended June 30, 2006						Three Months Ended June 30, 2005

				Weighted						Weighted
				Average Number						Average Number
				of Shares		Per Share				of Shares		Per Share
		Net Income		Outstanding		Amount		Net Income		Outstanding		Amount

Basic EPS:
	Net earnings per share of common stock	$	6,008		17,528,607	$	0.34	$	315		17,487,500	$	0.02

Effect of Dilutive Securities:
	Options outstanding for the purchase of common stock		—		—				—		—

Diluted EPS:
	Net earnings per share of common stock and assumed conversions	$	6,008		17,528,607	$	0.34	$	315		17,487,500	$	0.02


12.	INITIAL PUBLIC OFFERING

In August 2006, we completed the initial public offering of our common stock, in which we sold 7,500,000 shares of common stock, $0.001 par value, at an offering price of $23 per share. We received proceeds from this transaction in the amount of $162,409, net of underwriting commissions and discounts but before other offering costs. Each share of common stock entitles its holder to one vote per share. An affiliate of the parent of our Manager purchased 1,000,000 shares of our common stock in our initial public offering. After the transaction, our outstanding shares totaled 25,019,500.


13.	SUBSEQUENT EVENTS

On June 23, 2006, we declared a quarterly dividend of $0.725 per share, which was paid on July 21, 2006 to our stockholders of record as of June 30, 2006.

F-60


	between the rate we pay on the swaps and rate we receive. Furthermore, a continued flattening of the shape of the yield curve should result in a decrease in our hedging costs, since we pay a fixed rate and receive a floating rate under the terms of our swap agreements. Similarly, a steepening of the shape of the yield curve should result in an increase in our hedging costs.

	Prepayment rates — as interest rates increase, we believe that prepayment rates are likely to fall. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayment rates also may be affected by other factors, including, without limitation, conditions in the housing and financial markets, general economic conditions and the relative interest rates on adjustable-rate and fixed-rate mortgage loans. If interest rates continue to increase, we believe that MBS prepayment rates would be likely to fall. If interest rates begin to fall, triggering an increase in prepayment rates, our current portfolio, which is heavily weighted towards hybrid adjustable-rate mortgages, would cause decreases in our net interest income relating to our MBS portfolio.

	Competition — we expect to face increased competition for our targeted investments. However, we expect that the size and growth of the market for these investments will continue to provide us with a variety of investment opportunities. In addition, we believe that bank lenders will continue their historical lending practices, requiring low loan-to-value ratios and high debt service coverages, which will provide opportunities to lenders like us to provide corporate mezzanine financing.


		percentage to the repurchase price. The margin percentage is a percentage agreed to by the buyer and seller or the percentage obtained by dividing the market value of the purchased securities on the purchase date by the purchase price on the purchase date.

	•	Our tangible net worth may not be less than the sum of $300.0 million plus the proceeds from all equity issuances, net of investment banking fees, legal fees, accountants’ fees, underwriting discounts and commissions and other customary fees and expenses that we actually incur.

	•	We may not permit the amount of our cash and cash equivalents at any time to be less than $10.0 million during the first year following the closing date of the master repurchase agreement or less than $15.0 million after the first year following the closing date, in either case after giving effect to any requested repurchase transaction.


		maintain such exemption from regulation as an investment company under the Investment Company Act;

	•	assisting us in developing criteria for asset purchase commitments that are specifically tailored to our investment objectives and making available to us its knowledge and experience with respect to mortgage loans, real estate, real estate-related securities, other real estate-related assets and non-real estate-related assets;

	•	furnishing reports and statistical and economic research to us regarding our activities and services performed for us by Hyperion Brookfield Crystal River;

	•	monitoring the operating performance of our investments and providing periodic reports with respect thereto to our board of directors, including comparative information with respect to such operating performance and budgeted or projected operating results;

	•	investing or reinvesting any money or securities of ours (including investing in short-term investments pending investment in other investments, payment of fees, costs and expenses, or payments of dividends or distributions to our stockholders), and advising us as to our capital structure and capital raising;

	•	causing us to retain a qualified independent public accounting firm and legal counsel, as applicable, to assist in developing appropriate accounting procedures, compliance procedures and testing systems with respect to financial reporting obligations and compliance with the provisions of the Internal Revenue Code applicable to REITs and causing us to conduct quarterly compliance reviews with respect thereto;

	•	causing us to qualify to do business in all applicable jurisdictions and to obtain and maintain all appropriate licenses;

	•	assisting us in complying with all regulatory requirements applicable to us in respect of our business activities, including preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports and documents, if any, required under the Exchange Act;

	•	taking all necessary actions to enable us to make required tax filings and reports, including soliciting stockholders for required information to the extent provided by the provisions of the Internal Revenue Code and Treasury Regulations applicable to REITs;

	•	handling and resolving all claims, disputes or controversies (including all litigation, arbitration, settlement or other proceedings or negotiations) in which we may be involved or to which we may be subject arising out of our day-to-day operations, subject to such limitations or parameters as may be imposed from time to time by our board of directors;

	•	using commercially reasonable efforts to cause expenses incurred by or on behalf of us to be commercially reasonable or commercially customary and within any budgeted parameters or expense guidelines set by our board of directors from time to time;

	•	obtaining appropriate warehouse facilities or other financings for our investments consistent with our investment guidelines;

	•	advising us with respect to and structuring long-term financing vehicles for our portfolio of assets, and offering and selling securities publicly or privately in connection with any such structured financing;

	•	performing such other services as may be required from time to time for management and other activities relating to our assets as our board of directors shall reasonably request or Hyperion Brookfield Crystal River shall deem appropriate under the particular circumstances; and

	•	using commercially reasonable efforts to cause us to comply with all applicable laws.


	owned by the WA Clients. Each of the WA Clients is a separate entity for tax and accounting purposes. Each of the WA Clients has its own assets, liabilities and shareholders or equityholders, as applicable. WA further advises us that each of the WA Clients is not a registered broker-dealer.

(182)	Joseph DiRenzo, the general partner of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(183)	Russell B. Wight, Jr. is the general partner and sole beneficial owner of Wight Investment Partners and in such capacity, exercises sole voting and dispositive power with respect to these shares.

(184)	James E. Williams and Antoinette J. Williams, the trustees, exercise sole voting and dispositive power with respect to these shares.

(185)	Andrew Winner and Denise Winner, the trustees, exercise sole voting and dispositive power with respect to these shares.

(186)	Michael Wolpert and Paul Wolpert, the trustees, exercise sole voting and dispositive power with respect to these shares.

(187)	Paul Wolpert exercises sole voting and dispositive power with respect to these shares.

(188)	William Chetney, the sole member of the selling stockholder, exercises sole voting and dispositive power with respect to these shares.

(189)	Kenneth R. Wynn, the trustee, exercises sole voting and dispositive power with respect to these shares.

(190)	John Perini, the cash and investment manager of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(191)	Beverly Wright Edwards, the trustee, exercises voting and dispositive power with respect to these shares.

(192)	Ed Chai, the fund manager for Cheyne Capital Management Limited, exercises voting and dispositive power with respect to these shares.

(193)	Benjamin Zager, an executive vice president of the selling stockholder, exercises voting and dispositive power with respect to these shares.

(194)	Jerome Engel, the trustee, exercises voting and dispositive power with respect to these shares.

(195)	C. Michael Hazard, the trustee, exercises sole voting and dispositive power with respect to these shares.


		such day that will give rise to income that does not qualify for purposes of the 75% gross income test;

	•	on which any construction takes place on the property, other than completion of a building or any other improvement, where more than 10% of the construction was completed before default became imminent; or

	•	which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business which is conducted by the REIT, other than through an independent contractor from whom the REIT itself does not derive or receive any income.