NEWCASTLE INVESTMENT CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM 10-Q

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

For the quarterly period ended March 31, 2004

or

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

For the transition period from ________________ to ___________________

Commission File Number: 001-31458

NEWCASTLE INVESTMENT CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

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

1251 Avenue of the Americas, New York, NY 10020
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

(212) 798-6100
----------------------------------------------------
(Registrant's telephone number, including area code)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes [X] No [ ].

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

COMMON STOCK, $0.01 PAR VALUE PER SHARE: 34,781,833 OUTSTANDING AS OF MAY 7,
2004.

NEWCASTLE INVESTMENT CORP.
FORM 10-Q

INDEX

PAGE
----

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003 1
Consolidated Statements of Income (unaudited) for the three months ended March 31, 2004 and 2003 2
Consolidated Statements of Stockholders' Equity (unaudited) for the three months ended March 31,
2004 and 2003 3
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2004 and 2003 4
Notes to Consolidated Financial Statements (unaudited) 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 27

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28

SIGNATURES 29

CAUTIONARY STATEMENTS

The information contained in this quarterly report on Form 10-Q is not a
complete description of our business or the risks associated with an investment
in our Company. We urge you to carefully review and consider the various
disclosures made by us in this report and in our other filings with the SEC,
including our annual report on Form 10-K for the year ended December 31, 2003,
that discuss our business in greater detail.

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

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

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

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

MARCH 31, 2004
(UNAUDITED) DECEMBER 31, 2003
-------------- -----------------

ASSETS
Real estate securities, available for sale $ 2,598,620 $ 2,089,712
Real estate securities portfolio deposit - 19,541
Other securities, available for sale 252,642 221,577
Real estate related loans, net 384,262 341,193
Investments in unconsolidated subsidiaries 52,743 30,640
Operating real estate, net 89,741 102,995
Real estate held for sale 39,917 29,404
Residential mortgage loans, net 569,621 586,237
Cash and cash equivalents 56,251 60,403
Restricted cash 19,496 13,132
Deferred costs, net 8,118 10,304
Receivables and other assets 28,151 27,943
----------- -----------
$ 4,099,562 $ 3,533,081
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
CBO bonds payable $ 2,204,187 $ 1,793,533
Other bonds payable 253,380 260,674
Notes payable 189,845 154,562
Repurchase agreements 708,635 715,783
Derivative liabilities 63,991 32,457
Dividends payable 21,843 16,703
Due to affiliates 3,242 2,445
Accrued expenses and other liabilities 10,938 17,561
----------- -----------
3,456,061 2,993,718
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 100,000,000 shares authorized, 2,500,000
shares of Series B Cumulative Redeemable Preferred Stock, liquidation
preference $25.00 per share, issued and outstanding 62,500 62,500
Common stock, $0.01 par value, 500,000,000 shares authorized, 34,711,833 and
31,374,833 shares issued and outstanding at March 31, 2004 and
December 31, 2003, respectively 347 314
Additional paid-in capital 538,057 451,806
Dividends in excess of earnings (15,169) (14,670)
Accumulated other comprehensive income 57,766 39,413
----------- -----------
643,501 539,363
----------- -----------
$ 4,099,562 $ 3,533,081
=========== ===========

1

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

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

THREE MONTHS ENDED MARCH 31,
---------------------------------
2004 2003
------------ ------------

REVENUES
Interest income $ 49,030 $ 25,029
Rental and escalation income 5,797 4,913
Gain on settlement of investments 5,136 2,491
------------ ------------
59,963 32,433
------------ ------------
EXPENSES
Interest expense 29,419 14,357
Property operating expense 2,391 2,352
Loan and security servicing expense 782 402
General and administrative expense 1,198 830
Management fee to affiliate 2,397 1,305
Incentive compensation to affiliate 2,374 1,330
Depreciation and amortization 553 456
------------ ------------
39,114 21,032
------------ ------------
Income before equity in earnings of unconsolidated subsidiaries 20,849 11,401
Equity in earnings of unconsolidated subsidiaries 1,223 -
------------ ------------
Income from continuing operations 22,072 11,401
Income (loss) from discontinued operations (221) (298)
------------ ------------
NET INCOME 21,851 11,103
Preferred dividends (1,523) (203)
------------ ------------
INCOME AVAILABLE FOR COMMON STOCKHOLDERS $ 20,328 $ 10,900
============ ============
NET INCOME PER SHARE OF COMMON STOCK
BASIC $ 0.59 $ 0.46
============ ============
DILUTED $ 0.58 $ 0.46
============ ============
Income from continuing operations per share of common stock, after
preferred dividends
Basic $ 0.60 $ 0.47
============ ============
Diluted $ 0.59 $ 0.47
============ ============
Income (loss) from discontinued operations per share of common stock
Basic $ (0.01) $ (0.01)
============ ============
Diluted $ (0.01) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING
BASIC 34,401,800 23,488,517
============ ============
DILUTED 34,976,378 23,619,909
============ ============

DIVIDENDS DECLARED PER COMMON SHARE $ 0.60 $ 0.45
============ ============

2

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(dollars in thousands)

PREFERRED STOCK COMMON STOCK
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ---------- ---------- ----------

STOCKHOLDERS' EQUITY - DECEMBER 31, 2003 2,500,000 $ 62,500 31,374,833 $ 314
Dividends declared - - - -
Issuance of common stock - - 3,300,000 33
Exercise of common stock options - - 37,000 -
Comprehensive income:
Net income - - - -
Unrealized gain on securities - - - -
Realized (gain) on securities:
reclassification adjustment - - - -
Foreign currency translation - - - -
Unrealized (loss) on derivatives
designated as cash flow hedges - - - -
Total comprehensive income
--------- ---------- ---------- ----------
STOCKHOLDERS' EQUITY - MARCH 31, 2004 2,500,000 $ 62,500 34,711,833 $ 347
========= ========== ========== ==========
STOCKHOLDERS' EQUITY - DECEMBER 31, 2002 - $ - 23,488,517 $ 235
Dividends declared - - - -
Issuance of preferred stock 2,500,000 62,500 - -
Comprehensive income:
Net income - - - -
Unrealized gain on securities - - - -
Realized (gain) on securities:
reclassification adjustment - - - -
Foreign currency translation - - - -
Unrealized gain on derivatives designated
as cash flow hedges - - - -
Total comprehensive income
--------- ---------- ---------- ----------
STOCKHOLDERS' EQUITY - MARCH 31, 2003 2,500,000 $ 62,500 23,488,517 $ 235
========= ========== ========== ==========

ACCUM.
ADDITIONAL DIVIDENDS OTHER TOTAL STOCK-
PD. IN IN EXCESS OF COMP. HOLDERS'
CAPITAL EARNINGS INCOME EQUITY
---------- ------------ ---------- ------------

STOCKHOLDERS' EQUITY - DECEMBER 31, 2003 $ 451,806 $ (14,670) $ 39,413 $ 539,363
Dividends declared - (22,350) - (22,350)
Issuance of common stock 85,770 - - 85,803
Exercise of common stock options 481 - - 481
Comprehensive income:
Net income - 21,851 - 21,851
Unrealized gain on securities - - 56,386 56,386
Realized (gain) on securities:
reclassification adjustment - - (4,151) (4,151)
Foreign currency translation - - (305) (305)
Unrealized (loss) on derivatives
designated as cash flow hedges - - (33,577) (33,577)
----------
Total comprehensive income 40,204
---------- ---------- ---------- ----------
STOCKHOLDERS' EQUITY - MARCH 31, 2004 $ 538,057 $ (15,169) $ 57,766 $ 643,501
========== ========== ========== ==========
STOCKHOLDERS' EQUITY - DECEMBER 31, 2002 $ 290,935 $ (13,966) $ 7,037 $ 284,241
Dividends declared - (10,773) - (10,773)
Issuance of preferred stock (2,436) - - 60,064
Comprehensive income:
Net income - 11,103 - 11,103
Unrealized gain on securities - - 3,401 3,401
Realized (gain) on securities:
reclassification adjustment - - (3,480) (3,480)
Foreign currency translation - - 1,740 1,740
Unrealized gain on derivatives designated
as cash flow hedges - - 3,570 3,570
----------
Total comprehensive income 16,334
---------- ---------- ---------- ----------
STOCKHOLDERS' EQUITY - MARCH 31, 2003 $ 288,499 $ (13,636) $ 12,268 $ 349,866
========== ========== ========== ==========

3

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

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

THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
--------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES

Net income $ 21,851 $ 11,103
Adjustments to reconcile net income to net cash provided by operating activities
(inclusive of amounts related to discontinued operations):
Depreciation and amortization 606 711
Accretion of discount and other amortization (564) (3,354)
Equity in earnings of unconsolidated subsidiaries (1,223) -
Deferred rent (706) (151)
Gain on settlement of investments (5,052) (2,291)
Unrealized gain on non-hedge derivatives (583) -

Change in:
Restricted cash (6,703) (1,334)
Receivables and other assets 376 (3,259)
Due to affiliates 797 433
Accrued expenses and other liabilities (6,405) 2,264
--------- ---------
Net cash provided by operating activities 2,394 4,122
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of real estate securities (500,983) (513,395)
Proceeds from sale of real estate securities 44,445 34,879
Deposit on real estate securities (treated as a derivative) (15,042) (4,922)
Purchase of other securities (40,914) (14,127)
Purchase of loans (50,000) (210,281)
Repayments of loan and security principal 75,567 13,926
Proceeds from settlement of loans - 162,554
Purchase and improvement of operating real estate (161) -
Proceeds from sale of operating real estate - 2,238
Contributions to unconsolidated subsidiaries (26,788) -
Distributions from unconsolidated subsidiaries 5,908 -
Payment of deferred costs (80) -
--------- ---------
Net cash used in investing activities (508,048) (529,128)
--------- ---------

Continued on Page 5

4

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

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

THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES

Issuance of CBO bonds payable 409,588 467,094
Repayments of other bonds payable (6,920) (2,438)
Borrowings under notes payable 40,000 -
Repayments of notes payable (2,945) (215)
Borrowings under repurchase agreements 29,511 199,716
Repayments of repurchase agreements (36,659) (158,439)
Issuance of preferred stock - 62,500
Costs related to issuance of preferred stock - (2,436)
Issuance of common stock 86,790 -
Costs related to issuance of common stock (987) -
Exercise of common stock options 481 -
Dividends paid (17,210) (9,161)
Payment of deferred financing costs (147) (1,313)
--------- ---------
Net cash provided by financing activities 501,502 555,308
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,152) 30,302

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60,403 45,463
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 56,251 $ 75,765
========= =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during the period for interest expense $ 28,978 $ 14,684

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Common stock dividends declared but not paid $ 20,827 $ 10,570
Preferred stock dividends declared but not paid $ 1,016 $ 203
Deposit used in acquisition of real estate securities (treated as a derivative) $ 35,457 $ 44,409

5

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2004
(dollars in tables in thousands, except per share data)

1. GENERAL

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

Newcastle was formed as a wholly owned subsidiary of Newcastle Investment
Holdings Corp. ("Holdings") for the purpose of separating the real estate
securities and certain of the operating real estate businesses from Holdings'
other investments. Prior to Newcastle's initial public offering, Holdings
contributed to Newcastle certain assets and liabilities in exchange for
16,488,517 shares of Newcastle's common stock. Newcastle's operations commenced
on July 12, 2002. On May 19, 2003, Holdings distributed to its stockholders all
of the shares of Newcastle's common stock that it held, and it no longer owns
any of Newcastle's common equity. Approximately 2.3 million of such shares are
held by an affiliate of the Manager (see below) at March 31, 2004. In addition,
an affiliate of the Manager held options to purchase approximately 1.7 million
shares of our common stock at March 31, 2004.

In October 2002, Newcastle sold 7.0 million shares of its common stock in a
public offering (the "IPO") at a price to the public of $13.00 per share, for
net proceeds of approximately $80.0 million. During 2003, Newcastle sold an
aggregate of approximately 7.9 million shares of its common stock in public
offerings for net proceeds of approximately $163.3 million. In January 2004,
Newcastle sold 3.3 million shares of its common stock in a public offering at a
price to the public of $26.30 per share, for net proceeds of approximately $85.8
million. Newcastle had 34,711,833 shares of common stock outstanding at March
31, 2004.

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

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

The accompanying consolidated financial statements and related notes of
Newcastle have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial reporting and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared under accounting principles generally accepted in the United States
have been condensed or omitted. In the opinion of management, all adjustments
considered necessary for a fair presentation of Newcastle's financial position,
results of operations and cash flows have been included and are of a normal and
recurring nature. The operating results presented for interim periods are not
necessarily indicative of the results that may be expected for any other interim
period or for the entire year. These financial statements should be read in
conjunction with Newcastle's December 31, 2003 consolidated financial statements
and notes thereto included in Newcastle's annual report on Form 10-K filed with
the Securities and Exchange Commission. Capitalized terms used herein, and not
otherwise defined, are defined in Newcastle's December 31, 2003 consolidated
financial statements.

2. INFORMATION REGARDING BUSINESS SEGMENTS

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

6

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004
(dollars in tables in thousands, except per share data)

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

Residential
Real Estate Real Estate Operating Real Mortgage
Securities Related Loans Estate Loans Unallocated Total
----------- ------------- -------------- ------------ ----------- -----------

March 31, 2004 and the Three Months
then Ended
Gross revenues $ 43,772 $ 6,069 $ 5,810 $ 4,202 $ 110 $ 59,963
Operating expenses (255) (7) (2,487) (536) (5,857) (9,142)
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) 43,517 6,062 3,323 3,666 (5,747) 50,821
Interest expense (21,582) (4,237) (1,467) (2,133) - (29,419)
Depreciation and amortization - - (553) - - (553)
Equity in earnings of unconsolidated
subsidiaries - 1,069 154 - - 1,223
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations 21,935 2,894 1,457 1,533 (5,747) 22,072
Income from discontinued operations - - (221) - - (221)
----------- ----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ 21,935 $ 2,894 $ 1,236 $ 1,533 $ (5,747) $ 21,851
=========== =========== =========== =========== =========== ===========
Revenue derived from non-US sources:
Canada $ - $ - $ 4,704 $ - $ - $ 4,704
=========== =========== =========== =========== =========== ===========
Belgium $ - $ - $ 1,974 $ - $ - $ 1,974
=========== =========== =========== =========== =========== ===========
Total assets $ 2,910,753 $ 392,890 $ 168,725 $ 571,168 $ 56,026 $ 4,099,562
=========== =========== =========== =========== =========== ===========
Long-lived assets outside the US:
Canada $ - $ - $ 53,443 $ - $ - $ 53,443
=========== =========== =========== =========== =========== ===========
Belgium $ - $ - $ 76,215 $ - $ - $ 76,215
=========== =========== =========== =========== =========== ===========
December 31, 2003
Total assets $ 2,385,265 $ 353,779 $ 146,635 $ 587,831 $ 59,571 $ 3,533,081
=========== =========== =========== =========== =========== ===========
Long-lived assets outside the US:
Canada $ - $ - $ 54,250 $ - $ - $ 54,250
=========== =========== =========== =========== =========== ===========
Belgium $ - $ - $ 78,149 $ - $ - $ 78,149
=========== =========== =========== =========== =========== ===========
Three Months Ended March 31, 2003
Gross revenues $ 24,543 $ - $ 4,929 $ 2,961 $ - $ 32,433
Operating expenses (158) - (2,560) (259) (3,242) (6,219)
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) 24,385 - 2,369 2,702 (3,242) 26,214
Interest expense (12,141) - (1,083) (1,133) - (14,357)
Depreciation and amortization - - (456) - - (456)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations 12,244 - 830 1,569 (3,242) 11,401
Income from discontinued operations - - (298) - - (298)
----------- ----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ 12,244 $ - $ 532 $ 1,569 $ (3,242) $ 11,103
=========== =========== =========== =========== =========== ===========
Revenue derived from non-US sources:
Canada $ - $ - $ 4,223 $ - $ - $ 4,223
=========== =========== =========== =========== =========== ===========
Belgium $ - $ - $ 1,922 $ - $ - $ 1,922
=========== =========== =========== =========== =========== ===========

7

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004
(dollars in tables in thousands, except per share data)

3. REAL ESTATE SECURITIES

The following is a summary of Newcastle's real estate securities at March 31,
2004, all of which are classified as available for sale and are therefore marked
to market through other comprehensive income pursuant to SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities." Unrealized
losses that are considered other than temporary are recognized currently in
income. There were no such losses incurred during the three months ended March
31, 2004. The unrealized losses on Newcastle's securities are primarily the
result of market factors, rather than credit impairment, and Newcastle believes
their carrying amounts are fully recoverable. None of the securities are
delinquent. Eight of the securities, with an aggregate unrealized loss of
approximately $6.4 million, have been in an unrealized loss position for more
than twelve months. The unrealized losses on these securities were primarily
caused by changes in credit spreads which management believes to be temporary;
no material loss is expected to be realized on such securities.

Gross Unrealized Weighted Average
--------------------- --------------------------------------
Current Face Amortized Maturity
Amount Cost Basis Gains Losses Carrying Value S&P Rating Coupon Yield (Years)
------------ ----------- --------- --------- -------------- ---------- ------ ----- --------

Portfolio I
CMBS $ 316,602 $ 289,015 $ 32,024 $ (3,363) $ 317,676 BB+ 6.88% 8.89% 6.53
Unsecured REIT debt 233,907 235,379 23,387 (318) 258,448 BBB- 6.91% 6.80% 6.20
------------ ----------- --------- --------- ------------ ---- ----- ---- ----
Subtotal - Portfolio I 550,509 524,394 55,411 (3,681) 576,124 BBB- 6.89% 7.95% 6.39
------------ ----------- --------- --------- ------------ ---- ----- ---- ----
Portfolio II
CMBS 274,954 265,400 19,172 (590) 283,982 BBB- 6.27% 7.12% 6.41
Unsecured REIT debt 119,517 119,736 15,126 (41) 134,821 BBB- 7.61% 7.54% 7.24
Asset-backed securities 64,022 62,131 2,076 (2,457) 61,750 A+ 6.44% 7.17% 6.91
------------ ----------- --------- --------- ------------ ---- ----- ---- ----
Subtotal - Portfolio II 458,493 447,267 36,374 (3,088) 480,553 BBB- 6.64% 7.24% 6.70
------------ ----------- --------- --------- ------------ ---- ----- ---- ----
Portfolio III
CMBS 333,645 346,050 8,308 (149) 354,209 BBB 5.81% 5.25% 5.91
Unsecured REIT debt 97,110 101,611 8,189 - 109,800 BBB 6.88% 6.12% 8.24
Asset-backed securities 62,236 60,721 1,939 (281) 62,379 A 4.10% 4.82% 5.03
------------ ----------- --------- --------- ------------ ---- ----- ---- ----
Subtotal - Portfolio III 492,991 508,382 18,436 (430) 526,388 BBB 5.80% 5.37% 6.26
------------ ----------- --------- --------- ------------ ---- ----- ---- ----
Portfolio IV
CMBS 346,975 337,243 10,422 (165) 347,500 BBB- 4.49% 4.97% 4.63
Unsecured REIT debt 104,848 108,713 8,457 - 117,170 BBB 6.62% 5.96% 8.14
Asset-backed securities 49,467 46,695 2,857 - 49,552 A- 4.73% 5.55% 6.24
------------ ----------- --------- --------- ------------ ---- ----- ---- ----
Subtotal - Portfolio IV 501,290 492,651 21,736 (165) 514,222 BBB 4.96% 5.24% 5.52
------------ ----------- --------- --------- ------------ ---- ----- ---- ----
Portfolio V
CMBS 223,645 220,437 985 (406) 221,016 BBB- 4.67% 4.99% 7.06
Unsecured REIT debt 73,145 77,272 343 (444) 77,171 BBB 5.76% 5.01% 8.95
Asset-backed securities 80,215 80,397 278 (27) 80,648 A- 2.68% 2.66% 5.28
------------ ----------- --------- --------- ------------ ---- ----- ---- ----
Subtotal - Portfolio V 377,005 378,106 1,606 (877) 378,835 BBB 4.46% 4.50% 7.05
------------ ----------- --------- --------- ------------ ---- ----- ---- ----
Total Real Estate
Securities* $ 2,380,288 $ 2,350,800 $ 133,563 $ (8,241) $ 2,476,122 BBB- 5.83% 6.14% 6.34
============ =========== ========= ========= ============ ==== ===== ==== ====
Other Securities
Rated $ 254,572 $ 231,047 $ 7,274 $ - $ 238,321 BB 7.03% 8.53% 5.15
Unrated 18,153 14,321 - - 14,321 N/A 12.16% 17.06% 2.62
------------ ----------- --------- --------- ------------ ---- ----- ---- ----
Total Other Securities $ 272,725 $ 245,368 $ 7,274 $ - $ 252,642 BB 7.37% 9.03% 4.98
============ =========== ========= ========= ============ ==== ===== ==== ====
Total Securities $ 2,653,013 $ 2,596,168 $ 140,837 $ (8,241) $ 2,728,764 BBB- 5.98% 6.39% 6.20
============ =========== ========= ========= ============ ==== ===== ==== ====

*Carrying value excludes restricted cash of $122.5 million included in Real
Estate Securities pending its reinvestment.

8

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004
(dollars in tables in thousands, except per share data)

The total current face amount of fixed rate securities was $1,999.3 million, and
of floating rate securities was $653.7 million.

4. RECENT ACTIVITIES

In January 2004, Newcastle sold 3.3 million shares of its common stock in a
public offering at a price to the public of $26.30 per share, for net proceeds
of approximately $85.8 million. For the purpose of compensating the Manager for
its successful efforts in raising capital for Newcastle, in connection with this
offering, Newcastle granted options to the Manager to purchase 330,000 shares of
Newcastle's common stock at the public offering price, which were valued at
approximately $0.6 million.

In January 2004, Newcastle purchased from an underwriter $31.5 million face
amount of B and BB rated securities of Global Signal Trust I, a special purpose
vehicle established by Global Signal Inc., at a price resulting in a weighted
average yield of approximately 9.00%. Newcastle financed these securities with
approximately $21.3 million of repurchase agreements. Newcastle obtained
interest rate swaps in order to hedge its risk of exposure to changes in market
interest rates with respect to this debt. Two of Newcastle's directors are the
CEO and President of Global Signal, Inc., respectively. A private equity fund
managed by an affiliate of the Manager owns a significant portion of Global
Signal Inc.'s common stock; the Manager receives from this private equity fund,
in addition to management fees, incentive compensation if the fund's aggregate
investment returns exceed certain thresholds. Pursuant to this underwritten 144A
offering, approximately $418.0 million of Global Signal Trust I securities were
issued in 7 classes, rated AAA through B, of which the B and BB classes
constituted $73.0 million. The balance of the B and BB securities were sold on
identical terms to a private investment fund managed by an affiliate of the
Manager and to a large third party mutual fund complex; the Manager receives
from this private investment fund, in addition to management fees, incentive
compensation if the fund's aggregate investment returns exceed certain
thresholds. The proceeds of the 144A offering were utilized by Global Signal
Inc. to repay an existing credit facility, to pay an extraordinary dividend of
approximately $140 million to its stockholders of which approximately $67
million was paid to the above-referenced private equity fund, and for general
working capital purposes.

In March 2004, Newcastle purchased a 49% interest in a $153 million portfolio of
approximately 200 convenience and retail gas stores located in ten states
throughout the southeastern and southwestern regions of the U.S. The properties
are subject to a sale-leaseback arrangement under long-term triple net leases
with a 15 year minimum term. Circle K Stores Inc. ("Tenant"), an indirect wholly
owned subsidiary of Alimentation Couche-Tard Inc. ("ACT"), is the counterparty
under the leases. ACT guarantees the obligations of Tenant under the leases.
Newcastle structured this transaction through a joint venture in a limited
liability company, in which it invested approximately $26.8 million of equity,
with a private investment fund managed by an affiliate of the Manager, pursuant
to which it co-invested on equal terms. This investment was financed with a
$101.9 million bridge loan at the limited liability company level. Newcastle and
the affiliate of the Manager have each guaranteed 50% of such loan. Newcastle
expects to permanently refinance such loan in the second quarter of 2004 at
which time its guaranty will terminate. Newcastle believes the fair value of its
guaranty is negligible at March 31, 2004. The Manager receives from this private
investment fund, in addition to management fees, incentive compensation if the
fund's aggregate investment returns exceed certain thresholds. This limited
liability company is an investment company and therefore maintains its financial
records on a fair value basis. Newcastle has retained such accounting relative
to its investment in such limited liability company, which is accounted for
under the equity method at fair value. This investment is included in the
operating real estate segment.

In October 2003, Newcastle entered into an agreement with a major financial
institution for the right to purchase commercial mortgage backed securities,
senior unsecured REIT debt, real estate loans and asset backed securities (the
"Portfolio V Collateral") for its next real estate securities portfolio. The
agreement was treated as a non-hedge derivative for accounting purposes and was
therefore marked-to-market through current income; a gain of approximately $1.1
million has been recorded during the three months ended March 31, 2004. In March
2004, Newcastle completed its fifth CBO financing, CBO V, whereby the Portfolio
V Collateral was purchased by a consolidated subsidiary which issued $414.0
million face amount of investment grade senior bonds and $36.0 million face
amount of non-investment grade subordinated bonds, which were retained by
Newcastle, in a private placement. Four classes of the senior bonds bear
floating interest rates. Newcastle obtained an interest rate swap in order to
hedge its exposure to the risk of changes in market interest rates with respect
to these bonds.

In March 2004, Newcastle committed to a plan to sell one property in the LIV
portfolio (in addition to the five classified as held for sale at December 31,
2003). Newcastle expects a sale of this property be completed in 2004.
Accordingly, this property has been reclassified as Real Estate Held for Sale.
Although Newcastle currently anticipates completing this sale in the near term,
there is no assurance that this sale will be completed or on what terms it will
be completed. Pursuant to SFAS No. 144, Newcastle has retroactively recorded the
operations of such property, including the interest expense on the related
mortgage balance which would be repaid upon its sale, in Income from
Discontinued Operations for all periods presented.

9

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004
(dollars in tables in thousands, except per share data)

5. DERIVATIVE INSTRUMENTS

The following table summarizes the notional amounts and fair (carrying) values
of Newcastle's derivative financial instruments as of March 31, 2004.

Notional Amount Fair Value Longest Maturity
--------------- ---------- ----------------

Interest rate caps treated as hedges (A) $ 612,397 $ 6,210 October 2015

Interest rate swaps, treated as hedges (B) $ 1,429,166 $ (59,750) March 2015

Non-hedge derivative obligations (B) (C) $ (1,215) July 2038

(A) Included in Deferred Costs, Net.

(B) Included in Derivative Liabilities.

(C) Represents two essentially offsetting interest rate caps and two
essentially offsetting interest rate swaps, each with notional amounts of
$32.5 million, an interest rate cap with a notional amount of $17.5
million, and an interest rate cap with a notional amount of approximately
$67.1 million.

6. EARNINGS PER SHARE

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

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

THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---------- ----------

Weighted average number of shares of common
stock outstanding, basic 34,401,800 23,488,517
Dilutive effect of stock options, based
on the treasury stock method 574,578 131,392
---------- ----------
Weighted average number of shares of common
stock outstanding, diluted 34,976,378 23,619,909
========== ==========

During and after the first quarter of 2004, the Manager assigned, for no value,
a total of approximately 0.7 million of its options for Newcastle's common stock
to certain of the Manager's employees, of which approximately 0.1 million were
immediately exercised. As of May 7, 2003, Newcastle's outstanding options are
summarized as follows:

Held by the Manager 1,072,525

Issued to the Manager and
subsequently transferred to
certain of the Manager's employees 638,702
Held by directors 13,500
----------
Total 1,724,727
==========

10

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

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

GENERAL

We own a diversified portfolio of moderately credit sensitive real estate
securities, including commercial mortgage backed securities (including B-notes),
senior unsecured debt issued by property REITs and real estate related asset
backed securities. Mortgage backed securities are interests in or obligations
secured by pools of mortgage loans. We generally target investments rated A
through BB. We also own, directly and indirectly, interest in loans and pools of
loans, including real estate related loans and residential mortgage loans. We
also own, directly and indirectly, interests in operating real estate, including
credit leased operating real estate in Canada and Belgium. We consider credit
leased operating real estate to be real estate that is leased primarily to
tenants with, or whose major tenant has, investment grade credit ratings.

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

Our objective is to maximize the difference between the yield on our investments
and the cost of financing these investments while hedging our interest rate
risk. We emphasize asset quality, diversification, match-funded financing and
credit risk management.

We were formed in June 2002 as a wholly owned subsidiary of Newcastle Investment
Holdings Corp. (referred to as Holdings) for the purpose of separating the real
estate securities and certain of the credit leased operating real estate
businesses from Holdings' other investments. Prior to our initial public
offering, Holdings contributed to us certain assets and liabilities in exchange
for 16,488,517 shares of our common stock. Our operations commenced on July 12,
2002. On May 19, 2003, Holdings distributed to its stockholders all of the
shares of our common stock that it held, and it no longer owns any of our common
equity. Approximately 2.3 million of such shares are held by an affiliate of our
manager at March 31, 2004. In addition, an affiliate of our manager held options
to purchase approximately 1.7 million shares of our common stock at March 31,
2004.

In October 2002, we sold 7.0 million shares of our common stock in our initial
public offering at a price to the public of $13.00 per share, for net proceeds
of approximately $80.0 million. During 2003, we sold an aggregate of
approximately 7.9 million shares of our common stock in public offerings for net
proceeds of approximately $163.3 million. In January 2004, we sold 3.3 million
shares of our common stock in a public offering at a price to the public of
$26.30 per share, for net proceeds of approximately $85.8 million. At March 31,
2004, we had 34,711,833 shares of common stock outstanding.

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

We conduct our business by investing in four primary investment categories
(business segments): (i) real estate securities, (ii) real estate related loans
(iii) operating real estate, including credit leased operating real estate,
including a portfolio of properties located in Canada, which we refer to as our
Bell Canada portfolio, and a portfolio of properties located in Belgium, which
we refer to as our LIV portfolio, and (iv) residential mortgage loans.

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

Residential
For the Three Months Real Estate Real Estate Operating Mortgage
Ended March 31, Securities Related Loans Real Estate Loans Unallocated Total
- -------------------- ----------- ------------- ----------- ----------- ----------- --------

2004 $ 43,772 $ 6,069 $ 5,810 $ 4,202 $ 110 $ 59,963
2003 $ 24,543 $ - $ 4,929 $ 2,961 $ - $ 32,433

11

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP"). The preparation of financial statements in conformity
with GAAP requires the use of estimates and assumptions that could affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities and the reported amounts of revenue and expenses. Actual results
could differ from these estimates. The following is a summary of our accounting
policies that are most effected by judgments, estimates and assumptions.

In December 2003, Financial Accounting Standards Board Interpretation ("FIN")
No. 46R "Consolidation of Variable Interest Entities" was issued as a
modification of FIN 46. FIN 46R, which became effective in the first quarter of
2004, clarifies the methodology for determining whether an entity is a variable
interest entity ("VIE") and the methodology for assessing who is the primary
beneficiary of a VIE. Under FIN 46R, only the primary beneficiary of a VIE may
consolidate the VIE. We have historically consolidated our five existing CBO
transactions (the "CBO Entities") because we own the entire equity interest in
each of them, representing a substantial portion of their capitalization, and we
control the management and resolution of their assets.

VIEs are defined as entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. A VIE is required to be
consolidated by its primary beneficiary, and only by its primary beneficiary,
which is defined as the party who will absorb a majority of the VIE's expected
losses or receive a majority of the expected residual returns as a result of
holding variable interests.

We have determined that certain of the CBO Entities are VIEs and that we are the
primary beneficiary of each of these VIEs and will therefore continue to
consolidate them. We have also determined that the application of FIN 46R did
not result in a change in our accounting for any other entities. We will
continue to analyze future CBO entities, as well as other investments, pursuant
to the requirements of FIN 46R. These analyses require considerable judgment in
determining the primary beneficiary of a VIE since they involve subjective
probability weighting of subjectively determined possible cash flow scenarios.
The result could be the consolidation of an entity acquired or formed in the
future that would otherwise not have been consolidated or the non-consolidation
of such an entity that would otherwise have been consolidated.

We have classified our real estate securities as available for sale. As such,
they are carried at fair value with net unrealized gains or losses reported as a
component of accumulated other comprehensive income. Fair value is based
primarily upon multiple broker quotations, as well as counterparty quotations,
which provide valuation estimates based upon reasonable market order indications
or a good faith estimate thereof. These quotations are subject to significant
variability based on market conditions, such as interest rates and credit
spreads. Changes in market conditions, as well as changes in the assumptions or
methodology used to determine fair value, could result in a significant increase
or decrease in our book equity. We must also assess whether unrealized losses on
securities, if any, reflect a decline in value which is other than temporary
and, accordingly, write the impaired security down to its value through
earnings. For example, a decline in value is deemed to be other than temporary
if it is probable that we will be unable to collect all amounts due according to
the contractual terms of a security which was not impaired at acquisition.
Temporary declines in value generally result from changes in market factors,
such as market interest rates and credit spreads, or from certain macroeconomic
events, including market disruptions and supply changes, which do not directly
impact our ability to collect amounts contractually due. Significant judgment is
required in this analysis. To date, no such write-downs have been made.

Income on these securities is recognized using a level yield methodology based
upon a number of assumptions that are subject to uncertainties and
contingencies. Such assumptions include the expected disposal date of such
security and the rate and timing of principal and interest receipts (which may
be subject to prepayments, delinquencies and defaults). These uncertainties and
contingencies are difficult to predict and are subject to future events, and
economic and market conditions, which may alter the assumptions.

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

We purchase, directly and indirectly, real estate related and residential
mortgage loans to be held for investment. We must periodically evaluate each of
these loans for possible impairment. Impairment is indicated when it is deemed
probable that we will be unable to collect all amounts due according to the
contractual terms of the loan. Upon determination of impairment, we would
establish a specific valuation allowance with a corresponding charge to
earnings. Significant judgment is required both

12

in determining impairment and in estimating the resulting loss allowance. In
2003, a loss allowance of $0.1 million was recorded with respect to the
residential mortgage loans in our portfolio. No other loan impairments have been
recorded to date.

Income on these loans is recognized similarly to that on our securities and is
subject to similar uncertainties and contingencies.

We own operating real estate held for investment. We review our operating real
estate for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Upon determination of
impairment, we would record a write-down of the asset, which would be charged to
earnings. Significant judgment is required both in determining impairment and in
estimating the resulting write-down. To date, we have determined that no
write-downs have been necessary on the operating real estate in our portfolio.
In addition, when operating real estate is classified as held for sale, it must
be recorded at the lower of its carrying amount or fair value less costs of
sale. Significant judgment is required in determining the fair value of such
properties. At March 31, 2004, we have six properties classified as held for
sale on which an aggregate loss of approximately $1.5 million was recorded in
adjusting them to fair value in 2003.

RESULTS OF OPERATIONS

The following table summarizes the changes in our results of operations from
period to period (dollars in thousands):

Period to Period Period to Period
Increase Percent Change
Three Months Ended Three Months Ended
March 31, 2004/2003 March 31, 2004/2003 Explanation
------------------- ------------------- -----------

Interest Income 24,001 95.9% (A)
Rental and escalation income 884 18.0% (B)
Gain on settlement of investments 2,645 106.2% (C)

Interest expense 15,062 104.9% (A)
Property operating expense 39 1.7% (B)
Loan and security servicing expense 380 94.5% (A)
General and administrative expense 368 44.3% (D)
Management fee to affiliate 1,092 83.7% (E)
Incentive compensation to affiliate 1,044 78.5% (E)
Depreciation and amortization 97 21.3% (B)

Equity in earnings of unconsolidated
subsidiaries 1,223 N/A (F)
Income from continuing operations 10,673 93.6%

(A) Changes in interest income and expense are primarily due to our
acquisition of portfolios of interest bearing assets and related
financings, as follows:

Period to Period Increase
----------------------------------------------
Interest Income Interest Expense
------------------- -------------------
Three Months Ended Three Months Ended
March 31, 2004/2003 March 31, 2004/2003
------------------- -------------------

Real Estate Securities Portfolio III $ 4,428 $ 4,065
Real Estate Securities Portfolio IV 6,495 4,122
Real Estate Securities Portfolio V 1,208 49
Other real estate securities* 3,885 1,288
Real estate related loan #1 1,409 539
Real estate related loan #2 428 181
Residential Mortgage Loan Portfolio 1,947 998
ICH CMO Loan Portfolio 4,051 3,517
Other 150 303
---------- ---------
$ 24,001 $ 15,062

*Represents a portfolio of securities collateralized by first mortgage
loans on manufactured housing units.

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

(B) These changes are primarily the result of foreign currency fluctuations
with respect to our Bell Canada and LIV portfolios.

13

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

(D) The increases in general and administrative expense are primarily a
result of our increased size resulting from our equity issuances during
this period.

(E) The increase in management fees is a result of our increased size
resulting from our equity issuances during this period. The increase in
incentive compensation is primarily a result of our increased earnings.

(F) The increase in earnings from unconsolidated subsidiaries is primarily
a result of our acquisition of an interest in an LLC which owns a
portfolio of real estate related loans and of an interest in an LLC
which owns a portfolio of convenience and retail gas stores.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measurement of our ability to meet potential cash requirements,
including ongoing commitments to repay borrowings, fund and maintain
investments, and other general business needs. Additionally, to maintain our
status as a REIT under the Internal Revenue Code, we must distribute annually at
least 90% of our REIT taxable income. Our primary sources of funds for liquidity
consist of net cash provided by operating activities, borrowings under loans and
the issuance of debt and equity securities. Our loans and debt securities are
generally secured directly by our investment assets. As of March 31, 2004, our
real estate securities purchased in connection with our CBO financings as well
as our Bell Canada portfolio and ICH CMO loans were securitized, while our LIV
portfolio, our residential mortgage loan portfolio, several of our other real
estate securities and two of our other real estate related loans served as
collateral for loan obligations (including repurchase agreements).

We expect that our cash on hand and our cash flow provided by operations will
satisfy our liquidity needs with respect to our current investment portfolio
over the next twelve months. However, we currently expect to seek additional
capital in order to grow our investment portfolio. We have an effective shelf
registration statement with the SEC which allows us to issue various types of
securities, such as common stock, preferred stock, depository shares, debt
securities and warrants, from time to time, up to an aggregate of $750 million,
of which approximately $588 million remains available as of March 31, 2004.

We expect to meet our long-term liquidity requirements, specifically the
repayment of our debt obligations, through additional borrowings and the
liquidation or refinancing of our assets at maturity. We believe that the value
of these assets is, and will continue to be, sufficient to repay our debt at
maturity under either scenario. Our ability to meet our long-term liquidity
requirements relating to capital required for the growth of our investment
portfolio is subject to obtaining additional equity and debt financing.
Decisions by investors and lenders to enter into such transactions with us will
depend upon a number of factors, such as our historical and projected financial
performance, compliance with the terms of our current credit arrangements,
industry and market trends, the availability of capital and our investors' and
lenders' policies and rates applicable thereto, and the relative attractiveness
of alternative investment or lending opportunities.

Our ability to execute our business strategy, particularly the growth of our
investment portfolio, depends to a significant degree on our ability to obtain
additional capital. Our core business strategy is dependent upon our ability to
issue the match-funded debt we use to finance our real estate securities and
other real estate related assets at rates that provide a positive net spread. A
significant portion of our investments are financed with collateralized bond
obligations, known as CBOs. If spreads for CBO liabilities widen or if demand
for such liabilities ceases to exist, then our ability to execute future CBO
financings will be severely restricted.

We expect to meet our short-term liquidity requirements generally through our
cash flow provided by operations, as well as investment specific borrowings. In
addition, at March 31, 2004 we had an unrestricted cash balance of $56.3
million. Our cash flow provided by operations differs from our net income due to
four primary factors: (i) accretion of discount or premium on our real estate
securities and loans, discount on our debt obligations, deferred financing costs
and interest rate cap premiums, and deferred hedge gains and losses, (ii) gains
and losses, (iii) depreciation of our operating real estate, and (iv)
straight-lined rental income. Proceeds from the sale of real estate securities
which serve as collateral for our CBO financings, including gains thereon, are
required to be retained in the CBO structure until the related bonds are retired
and are therefore not available to fund current cash needs.

Our real estate securities are generally financed long-term and their credit
status is continuously monitored; therefore, these investments are expected to
generate a generally stable current return, subject to interest rate
fluctuations. Our operating real estate is also financed long-term and primarily
leased to credit tenants with long-term leases and is therefore expected to
generate generally

14

stable current cash flows. However, the primary tenant of one of the office
buildings in our Bell Canada portfolio vacated in March 2004. See "Quantitative
and Qualitative Disclosures About Market Risk -- Interest Rate Exposure" below.

With respect to our operating real estate, we expect to incur expenditures
approximately $3.0 million relating to tenant improvements, in connection with
the inception of leases, and capital expenditures during the twelve months
ending March 31, 2005.

Debt Obligations

The following tables present certain information regarding our debt obligations
as of March 31, 2004 (unaudited) (dollars in thousands):

Unhedged Weighted
Average Funding Final Stated Weighted Average Weighted Average
Carrying Amount Face Amount Cost Maturity Funding Cost (A) Maturity (Years)
--------------- ----------- ----------------- ------------ ---------------- ----------------

CBO Bonds Payable

CBO I $ 432,442 $ 437,500 3.74% (B) July 2038 4.81% 4.42
CBO II 439,979 444,000 2.87% (B) April 2037 6.02% 6.21
CBO III 467,453 472,000 2.38% (B) March 2038 3.99% 8.33
CBO IV 454,685 460,000 1.98% (B) Sept. 2038 3.57% 8.09
CBO V 409,628 414,000 2.00% (B) March 2039 3.06% 7.74
--------------- ----------- ---- ----
2,204,187 2,227,500 4.30% 6.98
--------------- ----------- ---- ----
Other Bonds Payable

Bell Canada Securitization 38,725 39,350 7.02% April 2012 7.02% 1.87
ICH CMO 214,655 214,655 6.53% (B) August 2030 6.53% 4.16
--------------- ----------- ----
253,380 254,005 6.60%
--------------- ----------- ----
Notes Payable

LIV Mortgage 72,183 72,183 6.10% Nov. 2006 6.10% 2.44
Real Estate Loan Financing #1 77,662 77,662 LIBOR+1.50% Nov. 2006 2.60% 2.71
Real Estate Loan Financing #2 40,000 40,000 LIBOR+1.50% Feb. 2007 2.59% 2.86
--------------- ----------- ----
189,845 189,845 3.93%
--------------- ----------- ----
Repurchase Agreements

Residential Mortgage Loans (C) 541,449 541,449 LIBOR+0.41% March 2005 1.50% 1.01
MH Securities (D) 126,291 126,291 LIBOR+0.65% June 2004 4.05% 0.25
Other Securities 40,895 40,895 LIBOR+0.61% One Month 2.81% 0.08
--------------- ----------- ----
708,635 708,635 2.03%
--------------- ----------- ----
Total debt obligations $ 3,356,047 $ 3,379,985 3.97%
=============== =========== ====

(A) Including the effect of applicable hedges.

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

(C) The counterparty on this repo is Bear Stearns Mortgage Capital
Corporation.

(D) The counterparty on this repo is Greenwich Capital Management Inc.

15

Face
Amount Initial
Month of Floating Hedges Hedge
Issued Collateral Rate Debt Purchased Cost
-------------- ------------------------------------ ------------ ------------------- ---------

CBO Bonds Payable

CBO I July 1999 Real Estate Securities-Portfolio I $ 342,500 Two swaps, two caps $ 15,400
CBO II April 2002 Real Estate Securities-Portfolio II 372,000 One swap, one cap 1,200
CBO III March 2003 Real Estate Securities-Portfolio III 427,800 One swap, one cap 1,300
CBO IV September 2003 Real Estate Securities-Portfolio IV 442,500 One swap, one cap 3,100
CBO V March 2004 Real Estate Securities-Portfolio V 382,750 One swap -

Other Bonds Payable
Operating Real Estate-Bell Canada
Bell Canada Securitization (B) April 2002 portfolio None None N/A

ICH CMO See Below Real Estate Related Loans-ICH CMO 5,959 None N/A

Notes Payable

LIV Mortgage (C) November 2002 Operating Real Estate-LIV Portfolio None None N/A
Real estate related loan-
Real Estate Loan Financing #1 November 2003 The Newkirk Group 77,662 None (A) N/A
Real Estate Loan Financing #2 February 2004 Real estate related loan-public REIT 40,000 None (A) N/A

Repurchase Agreements

Residential Mortgage Loans Rolling Residential mortgage loan portfolio 541,449 None (A) N/A
MH Securities Rolling Other Securities-MH securities 126,291 Nine swaps N/A
Other Securities Rolling Other Securities 40,895 Two swaps N/A

(A) Asset bears floating rate.

(B) Denominated in Canadian dollars.

(C) Denominated in Euros.

Our long-term debt obligations existing at March 31, 2004 (gross of $23.9
million of discounts) are expected to mature as follows (unaudited) (in
millions):

Period from April 1, 2004 through December 31, 2004 $ 177,195
2005 548,657
2006 135,638
2007 40,000
2008 -
2009 -
Thereafter 2,478,495
-----------
Total $ 3,379,985
===========

In connection with the sale of two classes of CBO I bonds, we entered into two
interest rate swaps and three interest rate cap agreements that do not qualify
for hedge accounting.

In November 2001, we sold the retained subordinated $17.5 million Class E Note
from CBO I to a third party. The Class E Note bore interest at a fixed rate of
8.0% and had a stated maturity of June 2038. The sale of the Class E Note
represented an issuance of debt and was recorded as additional CBO bonds
payable. In April 2002, a wholly owned subsidiary of ours repurchased the Class
E Note. The repurchase of the Class E Note represented a repayment of debt and
was recorded as a reduction of CBO bonds payable. The Class E Note is included
in the collateral for CBO II. The Class E Note is eliminated in consolidation.

16

One class of the CBO IV bonds, the $395.0 million face amount of Class I-MM
bonds, was issued subject to remarketing procedures and related agreements
whereby such bonds are remarketed and sold on a periodic basis. The Class I-MM
bonds are fully insured by a third party with respect to the timely payment of
interest and principal thereon.

In October 2003, we entered into an agreement with a major financial institution
for the right to purchase commercial mortgage backed securities, senior
unsecured REIT debt, real estate loans and asset backed securities (the
"Portfolio V Collateral") for our next real estate securities portfolio. The
agreement was treated as a non-hedge derivative for accounting purposes and was
therefore marked-to-market through current income; a gain of approximately $1.1
million has been recorded during the three months ended March 31, 2004. In March
2004, we completed our fifth CBO financing, CBO V, whereby the Portfolio V
Collateral was purchased by a consolidated subsidiary which issued $414.0
million face amount of investment grade senior bonds and $36.0 million face
amount of non-investment grade subordinated bonds, which were retained by us, in
a private placement.

In October 2003, pursuant to FIN 46 "Consolidation of Variable Interest
Entities," we consolidated an entity which holds a portfolio of commercial
mortgage loans which has been securitized. This investment, which we refer to as
the ICH CMO, was previously treated as a non-consolidated residual interest in
such securitization. We exercise no control over the management or resolution of
these assets and our residual investment in this entity was recorded at $2.9
million prior to its consolidation. The primary effect of the consolidation is
the requirement that we reflect the gross loan assets and gross bonds payable of
this entity in our financial statements.

Other

In March 2004, we purchased a 49% interest in a $153 million portfolio of
approximately 200 convenience and retail gas stores located in ten states
throughout the southeastern and southwestern regions of the U.S. The properties
are subject to a sale-leaseback arrangement under long-term triple net leases
with a 15 year minimum term. We structured this transaction through a joint
venture, in which we invested approximately $26.8 million of equity, with an
affiliate of the Manager on equal terms. The investment is reflected as an
investment in an unconsolidated subsidiary and is included in the operating real
estate segment.

Stockholders' Equity

Common Stock

The following table summarizes information regarding our common stock offerings
since December 31, 2003:

Shares Issued Price to Public Net Proceeds Options Granted
Date (millions) per Share (millions) to Manager
- ------------ ------------- --------------- ------------ ---------------

January 2004 3.3 $26.30 $85.8 330,000

At March 31, 2004, we had 34,711,833 shares of common stock outstanding.

During and after the first quarter of 2004, the Manager assigned, for no value,
a total of approximately 0.7 million of its options for Newcastle's common stock
to certain of the Manager's employees, of which approximately 0.1 million were
immediately exercised. As of May 7, 2003, our outstanding options are summarized
as follows:

Held by the Manager 1,072,525
Issued to the Manager and subsequently
transferred to certain of the Manager's
employees 638,702
Held by directors 13,500
---------
Total 1,724,727
=========

After the above mentioned option exercise, we had 34,781,833 shares of common
stock outstanding.

Preferred Stock

In March 2003, we issued 2.5 million shares of 9.75% Series B Cumulative
Redeemable Preferred Stock (the "Series B Preferred"). The Series B Preferred
has a $25 liquidation preference, no maturity date and no mandatory redemption.
We have the option to redeem the Series B Preferred beginning in March 2008.

17

Other Comprehensive Income

During the three months ended March 31, 2004, our accumulated other
comprehensive income increased due to the following factors (in thousands):

Accumulated other comprehensive income, December 31, 2003 $ 39,413
Unrealized gain on securities 56,386
Realized (gain) on securities: reclassification adjustment (4,151)
Foreign currency translation (305)
Unrealized (loss) on derivatives designated as cash flow hedges (33,577)
----------
Accumulated other comprehensive income, March 31, 2004 $ 57,766
==========

Our book equity changes as our real estate securities portfolio and derivatives
are marked-to-market each quarter, among other factors. The primary causes of
mark-to-market changes are changes in interest rates and credit spreads. During
the period, the combination of tightening credit spreads and sustained low
interest rates has resulted in a net increase in unrealized gains on our real
estate securities portfolio. In an environment of widening credit spreads and
increasing interest rates, we believe our new investment activities would
benefit. While such an environment would likely result in a decrease in the fair
value of our existing securities portfolio and therefore reduce our book equity
and ability to realize gains on such existing securities, it would not directly
affect our earnings or our cash flow or our ability to pay a dividend.

In addition, the slight strengthening of the U.S. dollar against both the
Canadian dollar and the Euro has resulted in a decrease in unrealized gains on
our Canadian and Belgian operating real estate.

Common Dividends Paid

Declared for the Period Ended Paid Amount Per Share
- ----------------------------- -------------- ----------------

March 31, 2004 April 26, 2004 $0.60

Cash Flow

Net cash flow provided by operating activities decreased from $4.1 million for
the three months ended March 31, 2003 to $2.4 million for the three months ended
March 31, 2004. This change resulted from the acquisition and settlement of our
investments as described above.

Investing activities (used) ($508.0 million) and ($529.1 million) during the
three months ended March 31, 2004 and 2003, respectively. Investing activities
consisted primarily of investments made in certain real estate securities and
other real estate related assets, net of proceeds from the sale or settlement of
investments.

Financing activities provided $501.5 million and $555.3 million during the three
months ended March 31, 2004 and 2003, respectively. The equity issuances,
borrowings and debt issuances described above served as the primary sources of
cash flow from financing activities. Offsetting uses included the payment of
related deferred financing costs (including the purchase of hedging
instruments), the payment of dividends, and the repayment of debt as described
above.

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

CREDIT, SPREAD AND INTEREST RATE RISK

We are subject to credit, spread and interest rate risk with respect to our
investments in real estate securities and loans.

The commercial mortgage and other asset backed securities (including B-notes) we
invest in are generally junior in right of payment of interest and principal to
one or more senior classes, but benefit from the support of one or more
subordinate classes of securities or other form of credit support within a
securitization transaction. The senior unsecured REIT debt securities we invest
in reflect comparable credit risk. Credit risk refers to each individual
borrower's ability to make required interest and principal payments on the
scheduled due dates. We believe, based on our due diligence process, that these
securities offer attractive risk-adjusted returns with long-term principal
protection under a variety of default and loss scenarios. While the expected
yield on these securities is sensitive to the performance of the underlying
assets, the more subordinated securities or other features of the securitization
transaction, in the case of commercial mortgage and other asset backed
securities, and the issuer's underlying equity and subordinated debt, in the
case of senior unsecured REIT debt securities, are designed to bear the first
risk of default and loss. We further minimize credit risk by actively monitoring
our real estate securities portfolio and the

18

underlying credit quality of our holdings and, where appropriate, repositioning
our investments to upgrade the credit quality and yield on our investments.
While we have not experienced any significant credit losses, in the event of a
significant rising interest rate environment and/or economic downturn, loan and
collateral defaults may increase and result in credit losses that would
adversely affect our liquidity and operating results.

Our real estate securities portfolio is diversified by asset type, industry,
location and issuer. We expect that this diversification also helps to minimize
the risk of capital loss. At March 31, 2004, our real estate securities which
serve as collateral for our CBO financings had an overall weighted average
credit rating of approximately BBB-, and approximately 72.9% of these securities
had an investment grade rating (BBB- or higher). Our residential mortgage loan
portfolio is characterized by high credit quality borrowers with a weighted
average FICO score of 721 at origination. At March 31, 2004, if our residential
mortgage loans were held in securitized form, over 90% of the principal balance
would be rate AAA.

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

Furthermore, shifts in the U.S. Treasury yield curve, which represents the
market's expectations of future interest rates, would also affect the yield
required on our real estate securities and therefore their value. This would
have similar effects on our real estate securities portfolio and our financial
position and operations to a change in spreads.

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

Our general financing strategy focuses on the use of match-funded structures.
This means that we seek to match the maturities of our debt obligations with the
maturities of our investments to minimize the risk that we have to refinance our
liabilities prior to the maturities of our assets, and to reduce the impact of
changing interest rates on earnings.

In addition, we generally match-fund interest rates with like-kind debt (i.e.,
fixed rate assets are financed with fixed rate debt and floating rates assets
are financed with floating rate debt), directly or through the use of interest
rate swaps, caps, or other financial instruments, or through a combination of
these strategies, which allows us to reduce the impact of changing interest
rates on our earnings. Our financing strategy is dependent on our ability to
place the match-funded debt we use to finance our real estate securities at
spreads that provide a positive net spread. If spreads for CBO liabilities
(i.e., bonds issued by CBOs) widen or if demand for such liabilities ceases to
exist, then our ability to execute future CBO financings will be severely
restricted. See "Quantitative and Qualitative Disclosures About Market Risk -
Interest Rate Exposure" below.

Loans

Similar to our real estate securities portfolio, we are subject to credit and
spread risk with respect to our real estate related and residential mortgage
loan portfolios.

Unlike our real estate securities portfolio, our loans do not benefit from the
support of junior classes of securities, but rather bear the first risk of
default and loss. We believe that this credit risk is mitigated through our due
diligence process and periodic reviews of the borrower's payment history,
delinquency status, and the relationship of the loan balance to the underlying
property value.

19

Our loan portfolios are diversified by geographic location and by borrower. We
believe that this diversification also helps to minimize the risk of capital
loss.

Our loan portfolios are also subject to spread risk. Our floating rate loans are
valued based on a market credit spread to LIBOR. The value of the loans is
dependent upon the yield demanded by the market based on their credit relative
to LIBOR. The value of our floating rate loans would tend to decline should the
market require a higher yield on such loans, resulting in the use of a higher
spread over the benchmark rate (usually the applicable LIBOR yield). Our fixed
rate loans are valued based on a market credit spread over U.S. Treasuries and
are effected similarly by changes in U.S. Treasury spreads. If the value of our
loans subject to repurchase agreements were to decline, it could affect our
ability to refinance such loans upon the maturity of the related repurchase
agreements.

Any credit or spread losses incurred with respect to our loan portfolios would
effect us in the same way as similar losses on our real estate securities
portfolio as described above, except that our loan portfolios are not marked to
market.

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2004, we had the following material off-balance sheet
arrangement:

- A guarantee of certain payments under an interest rate swap
which may be entered into in 2007 in connection with the
securitization of the Bell Canada portfolio, if the bonds are
not fully repaid by such date. We believe the fair value of
this guarantee is negligible at March 31, 2004. At this time,
we do not anticipate a substantial risk of incurring a loss
with respect to this arrangement.

CONTRACTUAL OBLIGATIONS

During the first quarter of 2004, we had all of the material contractual
obligations referred to in our annual report on Form 10-K for the year ended
December 31, 2003, as well as the following:

Contract Category Change
CBO bond payable CBO V was issued.
Interest rate swaps, treated as hedges The floating rate CBO V bonds and certain repurchase
agreements were hedged with interest rate swaps.

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

INFLATION

Substantially all of our office leases provide for separate escalations of real
estate taxes and operating expenses over a base amount, and/or increases in the
base rent based on changes in a Belgian index with respect to the LIV portfolio.
We believe that inflationary increases in expenses will generally be offset by
the expense reimbursements and contractual rent increases described above.

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

FUNDS FROM OPERATIONS

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

20

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

For the Three
Months Ended
March 31, 2004
--------------

Income available for common stockholders $ 20,328
Operating real estate depreciation 582
---------
Funds from Operations (FFO) $ 20,910
=========

Funds from Operations was derived from the Company's segments as follows
(unaudited) (in thousands):

Average Invested Common
Equity for the Three FFO for the Three
Book Equity at Months Ended Months Ended Return on Common
March 31, 2004 March 31, 2004 (2) March 31, 2004 Equity (ROE) (3)
-------------- ----------------------- ----------------- ----------------

Real estate and other securities $ 414,741 $ 379,369 $ 21,935 23.1%
Real estate related loans 59,982 58,935 2,894 19.6%
Operating real estate 62,522 39,509 1,818 18.4%
Residential mortgage loans 29,374 29,648 1,533 20.7%
Unallocated (1) (32,817) 8,936 (7,270) N/A
------------ ---------- ------------- ----
Total (2) 533,802 $ 516,397 $ 20,910 16.2%
========== ============= ====
Preferred stock 62,500
Accumulated depreciation (10,567)
Accumulated other comprehensive income 57,766
------------
Net book equity $ 643,501
============

(1) Unallocated FFO represents ($1,523) of preferred dividends and ($5,747)
of corporate general and administrative expense, management fees and
incentive compensation for the three months ended March 31, 2004.

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

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

RELATED PARTY TRANSACTIONS

In January 2004, we purchased from an underwriter $31.5 million face amount of B
and BB rated securities of Global Signal Trust I, a special purpose vehicle
established by Global Signal Inc., at a price resulting in a weighted average
yield of approximately 9.00%. Two of our directors are the CEO and President of
Global Signal, Inc., respectively. A private equity fund managed by an affiliate
of our manager owns a significant portion of Global Signal Inc.'s common stock;
our manager receives from this private equity fund, in addition to management
fees, incentive compensation if the fund's aggregate investment returns exceed
certain thresholds. Pursuant to this underwritten 144A offering, approximately
$418.0 million of Global Signal Trust I securities were issued in 7 classes,
rated AAA through B, of which the B and BB classes constituted $73.0 million.
The balance of the B and BB securities were sold on identical terms to a private
investment fund managed by an affiliate of our manager and to a large third
party mutual fund complex; our manager receives from this private investment
fund, in addition to management fees, incentive compensation if the fund's
aggregate investment returns exceed certain thresholds. The proceeds of the 144A
offering were utilized by Global Signal Inc. to repay an existing credit
facility, to pay an extraordinary dividend of approximately $140 million to its
stockholders of which approximately $67 million was paid to the above-referenced
private equity fund, and for general working capital purposes.

In March 2004, we and a private investment fund managed by an affiliate of our
manager co-invested and each indirectly own an approximately 49% interest in a
limited liability company that has acquired, in a sale-leaseback transaction,
approximately 200 properties from a public company for a purchase price of
approximately $153 million. The properties are subject to a number of master
leases, the initial term of which in each case is a minimum of 15 years. This
investment was financed with debt at the limited liability company level and our
investment in this entity, reflected as an investment in an unconsolidated
subsidiary on our consolidated balance sheet, was approximately $26.8 million as
of the date of acquisition. Our manager receives from the affiliated private
investment fund with which we co-invested, in addition to management fees,
incentivecompensation if the fund's aggregate investment returns exceed certain
thresholds.

21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

INTEREST RATE EXPOSURE

Our primary interest rate exposures relate to our real estate securities, loans
and floating rate debt obligations, as well as our interest rate swaps and caps.
Changes in the general level of interest rates can effect our net interest
income, which is the difference between the interest income earned on
interest-earning assets and the interest expense incurred in connection with our
interest-bearing liabilities. Changes in the level of interest rates also can
affect, among other things, our ability to acquire real estate securities and
loans, the value of our real estate securities and loans, and our ability to
realize gains from the settlement of such assets.

While we have not experienced any significant credit losses, in the event of a
significant rising interest rate environment and/or economic downturn, loan and
collateral defaults may increase and result in credit losses that would
adversely affect our liquidity and operating results.

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

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

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

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

While our strategy is to utilize interest rate swaps, caps and match-funded
financings in order to limit the effects of changes in interest rates on our
operations, there can be no assurance that our profitability will not be
adversely affected during any period as a result of changing interest rates. As
of March 31, 2004, an immediate 100 basis point increase in interest rates would
effect our earnings by no more than $1.2 million per annum.

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

22

Interest rate changes may also impact our net book value as our real estate
securities and related hedge derivatives are marked-to-market each quarter. Our
loan investments and debt obligations are not marked-to-market. Generally, as
interest rates increase, the value of our fixed rate securities, such as CMBS,
decreases and as interest rates decrease, the value of such securities will
increase. We seek to hedge changes in value attributable to changes in interest
rates by entering into interest rate swaps and other derivative instruments. In
general, we would expect that over time, decreases in the value of our real
estate securities portfolio attributable to interest rate changes will be offset
to some degree by increases in the value of our swaps, and vice versa. However,
the relationship between spreads on securities and spreads on swaps may vary
from time to time, resulting in a net aggregate book value increase or decline.
Our real estate securities portfolio is largely financed to maturity through
long-term CBO financings that are not redeemable as a result of book value
changes. Accordingly, unless there is a material impairment in value that would
result in a payment not being received on a security, changes in the book value
of our real estate securities portfolio will not directly affect our recurring
earnings or our ability to pay a dividend. As of March 31, 2004, an immediate
100 basis point increase in interest rates would impact our net book value by
approximately $36.6 million. Such a change in net book value would not directly
affect our earnings or cash flow.

CREDIT SPREAD CURVE EXPOSURE

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

Furthermore, shifts in the U.S. Treasury yield curve, which represents the
market's expectations of future interest rates, would also effect the yield
required on our real estate securities and therefore their value. This would
have similar effects on our real estate securities portfolio and our financial
position and operations to a change in spreads.

Our loan portfolios are also subject to spread risk. Our floating rate loans are
valued based on a market credit spread to LIBOR. The value of the loans is
dependent upon the yield demanded by the market based on their credit relative
to LIBOR. The value of our floating rate loans would tend to decline should the
market require a higher yield on such loans, resulting in the use of a higher
spread over the benchmark rate (usually the applicable LIBOR yield). Our fixed
rate loans are valued based on a market credit spread over U.S. Treasuries and
are effect similarly by changes in U.S. Treasury spreads. If the value of our
loans subject to repurchase agreements were to decline, it could affect our
ability to refinance such loans upon the maturity of the related repurchase
agreements.

Any decreases in the value of our loan portfolios due to spread changes would
effect us in the same way as similar changes to our real estate securities
portfolio as described above, except that our loan portfolios are not marked to
market.

As of March 31, 2004, an immediate 25 basis point movement in credit spreads
would impact our net book value by approximately $33.1 million, but would not
directly affect our earnings or cash flow.

CURRENCY RATE EXPOSURE

Our primary foreign currency exchange rate exposures relate to our operating
real estate and related leases. Our principal direct currency exposures are to
the Euro and the Canadian Dollar. Changes in the currency rates can adversely
impact the fair values and earnings streams of our non-U.S. holdings. We have
attempted to mitigate this impact in part by utilizing local
currency-denominated financing on our foreign investments to partially hedge, in
effect, these assets.

We have material investments in the LIV portfolio and the Bell Canada portfolio.
These properties are financed utilizing debt denominated in their respective
local currencies (the Euro and the Canadian Dollar). The net equity invested in
these portfolios at March 31, 2004, approximately $5.2 million and $21.4
million, respectively, is exposed to foreign currency exchange risk.

23

FAIR VALUES

For certain of our financial instruments, fair values are not readily available
since there are no active trading markets as characterized by current exchanges
between willing parties. Accordingly, fair values can only be derived or
estimated for these instruments using various valuation techniques, such as
computing the present value of estimated future cash flows using discount rates
commensurate with the risks involved. However, the determination of estimated
future cash flows is inherently subjective and imprecise. We note that minor
changes in assumptions or estimation methodologies can have a material effect on
these derived or estimated fair values, and that the fair values reflected below
are indicative of the interest rate, credit spread and currency rate
environments as of March 31, 2004 and do not take into consideration the effects
of subsequent interest rate, credit spread or currency rate fluctuations.

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

Interest Rate Risk

We held the following interest rate risk sensitive instruments at March 31, 2004
(unaudited) (dollars in thousands):

Carrying Principal Balance or Weighted Average Maturity
Amount Notional Amount Yield/Funding Cost Date Fair Value
----------- -------------------- ------------------ -------- -----------

ASSETS:

Real estate securities, available for sale (A) $ 2,598,620 $ 2,502,786 6.14% (A) $2,598,620
Other securities, available for sale (B) 252,642 272,725 9.03% (B) 252,642
Real estate related loans (C) 384,262 386,735 6.87% (C) 412,755
Residential mortgage loans (D) 569,621 562,190 2.93% (D) 569,621
Interest rate caps, treated as hedges (E) 6,210 612,397 N/A (E) 6,210

LIABILITIES:

CBO bonds payable (F) 2,204,187 2,227,500 4.30% (F) 2,255,863
Other bonds payable (G) 253,380 254,005 6.60% (G) 277,200
Notes payable (H) 189,845 189,845 3.93% (H) 190,579
Repurchase agreements (I) 708,635 708,635 2.03% (I) 708,635
Interest rate swaps, treated as hedges (J) 59,750 1,429,166 N/A (J) 59,750
Non-hedge derivative obligations (K) 1,215 (K) N/A (K) 1,215

(A) These securities serve as collateral for our CBO financings and contain
various terms, including floating and fixed rates, self-amortizing and
interest only. Their weighted average maturity is 6.34 years. The fair
value of these securities is estimated by obtaining third party broker
quotations, if available and practicable, and counterparty quotations.

(B) These securities have a weighted average maturity of 4.98 years. One of
these securities represents a subordinate interest in a CMBS
securitization, the balance represent asset backed securities and CMBS.
The fair value of these securities is estimated by obtaining third
party broker quotations, if available and practicable, and counterparty
quotations. The fair value of the first security, for which a quoted
market price is not readily available, is estimated by means of a
price/yield analysis based on our expected disposition strategy for
such asset.

(C) Represents the following loan portfolios (dollars in thousands):

Loan Carrying Weighted Avg. Weighted Average Floating Rate Loans as a
Name Count Amount Yield Maturity % of Carrying Amount Fair Value
- --------------------------- ----- ---------- ------------- ---------------- ------------------------- ----------

ICH CMO Loans 138 $ 237,485 7.62% 4.32 years 2.5% $ 265,978

Real Estate Related Loan #1 1 96,777 5.71% 2.71 years 100.0% 96,777
Real Estate Related Loan #2 1 50,000 5.59% 2.86 years 100.0% 50,000
---------- ---- ----------
$ 384,262 6.87% $ 412,755
========== ==== ==========

24

The ICH CMO loans were valued by discounting expected future receipts
by a rate calculated based on current market conditions for comparable
financial instruments, including market interest rates and credit
spreads. The other loans bear floating rates of interest and we believe
that, for similar financial instruments with comparable credit risks,
their effective rates approximate market rates. Accordingly, the
carrying amounts outstanding are believed to approximate fair value.

(D) This portfolio of residential mortgage loans bears a floating rate of
interest and has a weighted maturity of 4.05 years. We believe that,
for similar financial instruments with comparable credit risks, the
effective rate on this portfolio approximates a market rate.
Accordingly, the carrying amount of this portfolio is believed to
approximate fair value.

(E) Represents cap agreements as follows (dollars in thousands):

Notional Balance Effective Date Maturity Date Capped Rate Strike Rate Fair Value
- ---------------- -------------- --------------- ------------- ----------- ----------

$ 266,389 Current March 2009 1-Month LIBOR 6.50% $ 1,888
266,389 Current December 2004 1-Month LIBOR 1.32%* 171
18,000 January 2010 October 2015 3-Month LIBOR 8.00% 957
8,619 December 2010 June 2015 3-Month LIBOR 7.00% 1,105
53,000 May 2011 September 2015 1-Month LIBOR 7.50% 2,089
--------- -------
$ 612,397 $ 6,210
========= =======

*up to 6.50%

The fair value of these agreements is estimated by obtaining
counterparty quotations.

(F) These bonds were valued by discounting expected future payments by a
rate calculated based on current market conditions for comparable
financial instruments, including market interest rates and credit
spreads. The weighted average maturity of the CBO bonds payable is 6.98
years. The CBO bonds payable amortize principal prior to maturity based
on collateral receipts, subject to reinvestment requirements.

(G) The Bell Canada Securitization was valued, in U.S. dollars at the
period end exchange rate, by discounting expected future payments by a
rate calculated by imputing a spread over a market index on the date of
borrowing. It amortizes principal periodically with a balloon payment
at maturity in April 2012. The ICH CMO bonds were valued by discounting
expected future payments by a rate calculated based on current market
conditions for comparable financial instruments, including market
interest rates and credit spreads. They amortize principal prior to
maturity based on collateral receipts and their final stated maturity
is in June 2008.

(H) The LIV Mortgage was valued, in U.S. dollars at the period end exchange
rate, by discounting expected future payments by a rate calculated by
imputing a spread over a market index on the date of borrowing. It
amortizes principal periodically with a balloon payment at maturity in
November 2006. The real estate related loan #1 financing matures in
November 2006, bears a floating rate of interest and amortizes
principal based on collateral receipts. The real estate related loan #2
financing matures in February 2007, bears a floating rate of interest
and amortizes principal based on collateral receipts. We believe that,
for similar financial instruments with comparable credit risks, their
effective rates approximate market rates. Accordingly, the carrying
amounts outstanding are believed to approximate fair value.

(I) These agreements bear floating rates of interest and we believe that,
for similar financial instruments with comparable credit risks, the
effective rates approximate market rates. Accordingly, the carrying
amounts outstanding are believed to approximate fair value. These
agreements pay interest only prior to maturity and mature in one to
twelve months.

25

(J) Represents swap agreements as follows (dollars in the thousands):

Notional Balance Effective Date Maturity Date Swapped Rate Fixed Rate Fair Value
- ---------------- -------------- ------------- -------------- ---------- ----------

$ 76,111 Current July 2005 1-Month LIBOR 6.1755% $ 2,553
290,000 Current April 2011 3-Month LIBOR 5.9325% 39,590
276,060 Current March 2013 3-Month LIBOR 3.8650% (453)
192,500 Current March 2015 1-Month LIBOR 4.8880% 13,544
295,400 December 2004 March 2009 1-Month LIBOR* 3.1250% 911
165,300 Current March 2014 3-Month LIBOR 3.9950% 408
11,000 Current November 2008 1-Month LIBOR 3.5400% 256
9,000 Current July 2018 1-Month LIBOR 4.8300% 344
6,000 Current November 2018 1-Month LIBOR 4.4800% 206
80,000 Current January 2009 1-Month LIBOR 3.6500% 2,113
6,500 Current March 2009 1-Month LIBOR 3.3360% 68
21,295 Current January 2009 1-Month LIBOR 3.2900% 210
---------- --------
$1,429,166 $ 59,750
========== ========

*up to 6.50%

The fair value of these agreements is estimated by obtaining
counterparty quotations.

(K) These are two essentially offsetting interest rate caps and two
essentially offsetting interest rate swaps, each with notional amounts
of $32.5 million, an interest rate cap with a notional balance of $17.5
million, and an interest rate cap with a notional balance of
approximately $67.1 million. The maturity date of the purchased swap is
July 2009; the maturity date of the sold swap is July 2014, the
maturity date of the $32.5 million caps is July 2038, the maturity date
of the $17.5 million cap is July 2009, and the maturity date of the
$67.1 million cap is August 2004. They have been valued by reference to
counterparty quotations.

Currency Rate Risk

We held the following currency rate risk sensitive balances at March 31, 2004
(unaudited) (U.S. dollars; in thousands, except exchange rates):

Current
Carrying Exchange Rate Effect of a 5% Negative Effect of a 5% Negative
Amount (USD) Local Currency to USD Change in Euro Rate Change in CAD Rate
------------ -------------- ------------- ----------------------- -----------------------

Assets:

LIV portfolio $ 76,215 Euro 0.81340 $ (3,811) N/A
Bell Canada portfolio 53,443 CAD 1.30990 N/A $ (2,672)
LIV other, net 1,204 Euro 0.81340 (60) N/A
Bell Canada other, net 6,659 CAD 1.30990 N/A (333)

Liabilities:

LIV Mortgage 72,183 Euro 0.81340 3,609 N/A
Bell Canada Securitization 38,725 CAD 1.30990 N/A 1,936
------------ ------------
Total $ (262) $ (1,069)
============ ============

USD refers to U.S. dollars; CAD refers to Canadian dollars.

26

ITEM 4. CONTROLS AND PROCEDURES

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

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

27

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is not party to any material legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On March 30, 2004, Newcastle CDO IV, Limited and Newcastle CDO IV Corp. issued
$450.0 million face amount of collateralized bond obligations in a transaction
exempt from the registration requirements of the Securities Act pursuant to Rule
144A and Regulation S thereunder to qualified institutional buyers and persons
outside the United States.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits filed with this Form 10-Q:

3.1 Articles of Amendment and Restatement (incorporated by reference to
the Registrant's Registration Statement on Form S-11 (File No.
333-90578), Exhibit 3.1).

3.2 Articles Supplementary Relating to the Series B Preferred Stock
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 2003, Exhibit 3.3).

3.3 By-laws (incorporated by reference to the Registrant's Registration
Statement on Form S-11 (File No. 333-90578), Exhibit 3.2).

4.1 Rights Agreement between the Registrant and American Stock Transfer
and Trust Company, as Rights Agent, dated October 16, 2002
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 2002, Exhibit 4.1).

10.1 Amended and Restated Management and Advisory Agreement by and among
the Registrant and Fortress Investment Group LLC, dated June 23, 2003
(incorporated by reference to the Registrant's Registration Statement
on Form S-11 (File No. 333-106135), Exhibit 10.1).

31.1 Certification of Chief Executive Officer as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

(b) Reports on Form 8-K filed by the registrant during its fiscal quarter ended
March 31, 2004:

Form 8-K filed with the Securities and Exchange Commission on February 12, 2004,
regarding the Registrant's results of operations for the year ended December 31,
2003.

Form 8-K filed with the Securities and Exchange Commission on January 8, 2004,
regarding the Registrant's issuance and sale of 3,300,000 shares of its common
stock.

28

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:

NEWCASTLE INVESTMENT CORP.
(REGISTRANT)

By: /s/ Wesley R. Edens
------------------------
Wesley R. Edens
Chairman of the Board
Chief Executive Officer
Date: May 7, 2004

By: /s/ Debra A. Hess
------------------------
Debra A. Hess
Chief Financial Officer
Date: May 7, 2004

29