1271831--3/19/2007--FIELDSTONE_INVESTMENT

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Risks Relating to Our Pending Merger with C-BASS We are subject to business uncertainties and contractual restrictions while our merger with C-BASS is pending. Failure to complete the merger with C-BASS could negatively affect our stock price and our future business and financial prospects. The merger agreement limits our ability to pursue alternatives to this merger. Risks Related to Our Business We have a limited operating history with building and managing an investment portfolio of non-conforming mortgage loans held for investment, which limits your ability to evaluate a key component of our business strategy and our growth prospects and increases your investment risk. Our ability to complete securitizations in the future depends in part upon the past performance of our investment pools, which due to our limited history, limits your ability to evaluate our business strategy making your investment risky. We have recently imposed stricter mortgage loan and borrower requirements, which may result in a decrease in our mortgage loan origination and purchase volumes and, consequently, our loan sale and securitization volumes. We are subject to liquidity risks arising from our dependence upon financing facilities and securitizations and our status as a REIT. We may be required to repurchase mortgage loans that we have sold, or repurchase or substitute loans that have been securitized, which could significantly reduce our cash flow, affect our liquidity, and reduce our net income. We could be harmed if we are forced to sell a greater percentage of our loans at a discount or if we are unable to sell some loans at all. Characteristics of the non-conforming mortgage loans we originate and of our portfolio of mortgage loans expose us to a higher risk of default on these loans. Our efforts to manage credit risk may not be successful in limiting delinquencies and defaults in underlying loans and, as a result, our results of operations may be affected. Changes in prepayment rates for our mortgage loans have adversely affected our net interest income and results of operations and may continue to do so for the foreseeable future. Our ability to generate net interest income from our securitized loans is dependent upon the success of our portfolio-based model of securitizations, which is subject to several risks. Recent increases and fluctuations in interest rates have adversely affected our earnings and may limit or eliminate our ability to borrow under our credit facilities and to originate mortgages. Our hedging strategies may not be successful in mitigating our risks associated with changes in interest rates. Competition in the securitization market may negatively affect our net income. Our credit facilities contain covenants that restrict our operations and any default under these credit facilities may inhibit our ability to originate mortgage loans. If we do not receive the payments from the loans that we anticipate, our revenues may be insufficient to cover our costs to originate, the interest expense and the losses on these loans, as well as the repayment of principal on the securitization used to finance these loans. Our non-conforming loans are underwritten to non-conforming underwriting standards, which may result in losses or shortfalls on our mortgage-backed securities. The success of our portfolio management and securitization business will depend upon our ability to service effectively the loans held in our portfolio and in our securitizations. A prolonged economic slowdown, a lengthy or severe recession or declining real estate values may result in a reduction of mortgage origination activity and an increase in foreclosures, which could limit our ability to grow our loan portfolio and thus our net income. The residential mortgage origination business is a cyclical industry, and we expect that a rise in interest rates may result in a decreased volume of loan originations in the foreseeable future resulting in increased competition for the remaining loans. Our business may be significantly affected by the economies of California and Texas, where we conduct a significant amount of our business. We face intense competition that could adversely affect our market share and our revenues. An interruption in or breach of our information systems could impair our ability to originate loans on a timely basis and may result in lost business. If we are unable to maintain and expand our network of independent brokers, our loan origination business will decrease. Loss of our key management or the inability to attract and retain key employees may impair our ability to operate successfully. We may be subject to losses due to fraudulent and negligent acts on the part of loan applicants, mortgage brokers, other vendors and our employees. The success and growth of our business will depend upon our ability to adapt to and implement technological changes. Our operations are subject to a body of complex laws and regulations at the federal, state and local levels, thereby potentially increasing our exposure to the risks of non-compliance. New legislation, including legislation relating to high cost loans, may restrict our ability to make loans or sell existing loans, negatively affecting our revenues and liquidity. Regulation AB may create additional liabilities, costs and restrictions for our business. We are subject to the risk that provisions of our loan agreements may be unenforceable We may become involved in class action lawsuits and regulatory actions that may materially effect us. We are exposed to environmental liabilities with respect to properties to which we take title, which may harm our liquidity and results of operations. Risks Related to our Organization and Structure Our organizational documents contain provisions that may inhibit potential acquisition bids that our stockholders may consider favorable, and the market price of our common stock may be lower as a result. Our rights and the rights of our stockholders to take action against our directors and officers are limited. We may be unable to comply with the requirements applicable to REITs, or compliance with these requirements could adversely affect our financial condition. There would be adverse consequences to us and our stockholders if we failed to qualify as a REIT. Despite our REIT status, we remain subject to various taxes, including substantial contingent tax liabilities. We could lack access to funds to meet our dividend and tax obligations. We may not qualify as a REIT if we failed to distribute by the close of 2003 any undistributed earnings and profits that were attributable to a non-REIT C corporation taxable year. The tax imposed on REITs for prohibited transactions limits our ability to engage in transactions, including certain methods of securitizing our loans that would be treated as sales for federal income tax purposes. We and some of our stockholders could have federal income tax liability if we recognize any excess inclusion income.

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1271831--3/19/2007--FIELDSTONE_INVESTMENT_CORP