1271831--4/14/2006--FIELDSTONE_INVESTMENT

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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. Dependence upon financing facilities and securitizations and our ability to maintain our status as a REIT may create liquidity risks. The failure to prevail in our litigation with our former shareholders could have a negative effect on our liquidity. 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. Fluctuating or rising interest rates may reduce our earnings or limit or eliminate our ability to borrow under our credit facilities and to originate mortgages. Our internal controls and disclosure controls and procedures may not be adequate to ensure that we are able to report accurately our financial results. If we do not manage our growth effectively, our management, administrative, operational and financial infrastructure may be harmed. Our hedging strategies may not be successful in mitigating our risks associated with changes in interest rates. Our portfolio consists primarily of adjustable-rate mortgage (ARM) loans, many of which are interest only for the first five years, which exposes us to a higher risk of default. Our credit facilities contain covenants that restrict our operations and any default under these credit facilities would inhibit our ability to grow our business and increase revenues. We do not have comprehensive historical loan performance data on our loans sold on which to base future loan performance estimates on our loans held for investment. 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. If the prepayment rates for our mortgage loans are higher than expected, our net interest income may be reduced. Our non-conforming loans are underwritten to non-conforming underwriting standards, which may result in losses or shortfalls on our mortgage-backed securities. We may be required to repurchase mortgage loans that we have sold, or replace loans that have been securitized, which could significantly reduce our cash flow and limit our ability to make distributions to our stockholders. 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 Illinois, 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, negatively affecting our revenues. Regulation AB may create additional liabilities, costs and restrictions for our business. 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 Restatement of our Financial Statements We may become subject to liability and incur increased expenditures as a result of the restatement of our financial statements. Our internal controls and disclosure controls and procedures may not be adequate to ensure that we are able to report accurately our financial results, and we have identified material weaknesses and significant deficiencies in disclosure controls and procedures and in internal control over financial reporting that we may not be able to mitigate or entirely eliminate. 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 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--4/14/2006--FIELDSTONE_INVESTMENT_CORP