1270436--3/14/2006--SUNSET_FINANCIAL_RESOURCES

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Risks Related to Our Business and Operations We might not be able to operate our business or implement our operating and investment policies successfully. An interruption or reduction in the securitization markets or change in terms offered by these markets could have a material adverse effect on our results of operations, financial condition and business prospects. Reverse repurchase agreements, which are our primary source of financing, involve the risk that the market value of the assets that we are required to repurchase may decline below the repurchase price of the assets we have sold. Failure to maintain adequate funding under warehouse facilities and reverse repurchase agreements may harm our results of operations. Our operations are highly leveraged, without limit as to the amount of debt we can incur and any debt incurred will increase our exposure to losses. If the value of the assets we pledge to secure loans declines, we will experience losses and may lose our REIT status. Our use of repurchase agreements to borrow funds may give our lenders greater rights in the event that either we or any of our lenders file for bankruptcy. Future revisions to our policies can be made without stockholder consent creating uncertainty for investors that may increase the risk and change the nature of your investment. Complying with REIT requirements may force us to liquidate otherwise attractive investments. We use hedging strategies that involve risk and that may not be successful in insulating us from exposure to changing interest and prepayment rates. Interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates, which could harm our results of operations. Complying with REIT requirements may limit our ability to hedge effectively. We may not be able to achieve our leverage goals, which could cause us to experience losses or reduced profits. Risks Related to Mortgage Assets and Our Acquisition Activities Interest rate fluctuations will affect the value of our mortgage assets, our net income and the market value of our net assets. Variances in the yield curve may adversely affect our net income and the market value of our net assets. Prepayment rates on our mortgage assets could increase, thus adversely affecting our yields. We might experience reduced net interest income or a loss from holding fixed rate investments during periods of rising interest rates. We may be subject to the risks associated with inadequate or untimely services from loan-servicers, which may adversely affect our results of operations. Our investment strategy includes acquiring commercial mortgage assets which generally involve a greater risk of loss than residential mortgage assets. We have risk of loss on our mortgage assets. Our investment strategy includes investing in commercial mortgage bridge loans that are not secured by income producing real properties, which involves greater risks of loss. We are subject to certain risks as the result of our commercial mortgage bridge loans that we own jointly with other interest holders. Competition might prevent us from acquiring new mortgage assets at favorable yields, which would harm our results of operations. We may not be successful in identifying suitable new acquisitions that meet our criteria, which may impede our growth and negatively affect our results of operations. Our mortgage assets may be concentrated in specific geographic regions and any adverse market or economic conditions in those regions may have a disproportionately adverse effect on the ability of our customers to make their loan payments. We may be required to repurchase mortgage loans that we have sold or to indemnify holders of our mortgage-backed securities. New legislation may restrict our ability to acquire and sell mortgage loans, negatively impeding our revenues. Failure to maintain an exemption from the Investment Company Act would harm our results of operations. One-action rules may harm the value of the security interest. If we fail to remain qualified as a REIT, our distributions will not be deductible by us, and our income will be subject to taxation, reducing our earnings available for distribution. We may be unable to comply with the strict income distribution requirements applicable to REITs or compliance with such requirements could adversely affect our financial condition. Our ability to satisfy the income and asset tests applicable to REITs depends on the nature of our assets, the sources of our income, and factual determinations, including the value of the real property underlying our loans. The tax on prohibited transactions limits our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales for federal income tax purposes. Even if we qualify as a REIT, the income earned by a taxable REIT subsidiary will be subject to federal income tax. The REIT qualification rules impose limitations on the types of investments and activities that we may undertake which may preclude us from pursuing the most economically beneficial investment alternatives. The taxable mortgage pool rules limit the manner in which we effect securitizations. Recent change in taxation of corporate distributions may adversely affect the value of our shares.

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1270436--3/14/2006--SUNSET_FINANCIAL_RESOURCES_INC