1279493--3/31/2006--SAXON_CAPITAL

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Risks related to our business Our business requires a significant amount of cash, and if we are unable to obtain the cash required to execute our business plan, our business and financial condition will be significantly harmed. We depend on borrowings and securitizations to fund our mortgage loans, acquire mortgage servicing rights, finance servicing advance receivables, and reach our desired amount of leverage, which exposes us to liquidity risks. If we fail to obtain or renew sufficient funding on favorable terms or at all, we will be limited in our ability to make mortgage loans, acquire mortgage servicing rights or finance servicing advance receivables which will harm our results of operations. The residential mortgage loan origination business is cyclical and is expected to decline in 2006 and upcoming years, which could reduce the level of mortgage loans we produce in the future and adversely impact our business in the future. We face intense competition that could adversely affect our market share and revenues. We might be prevented from securitizing our mortgage loans at opportune times and prices, which could adversely affect our ability to generate cash flow. Defaults on the mortgage loans in our securitization pools may impact our ability to market future pools. We may not be able to successfully execute our credit enhancement strategies, which could restrict our access to financing and adversely affect our business. The timing of cash flows from our securitizations may be uncertain. We are subject to increased risk of default, foreclosure and losses associated with our strategy of lending to lower credit grade borrowers and/or purchasing loans in bulk. Our interest-only loans and other adjustable-payment mortgage loans may have a higher risk of default than our fully-amortizing loans. We are subject to risks related to mortgage loans in our portfolio, including borrower defaults, fraud losses and other losses, which could have a material adverse effect on our business, financial condition, liquidity and results of operations. If we do not successfully implement our growth strategy, our financial performance could be harmed. We may be required to repurchase mortgage loans that we have securitized or sold, or to indemnify purchasers of our loans. Investors may require greater returns relative to benchmark rates. The acquisition of mortgage servicing rights requires many assumptions and complex analysis. Our servicing rights may be terminated if delinquencies occur on the loans we service. Our dependence on information systems may result in problems if these systems fail or are interrupted. The success and growth of our business will depend upon our ability to adapt to and implement technological changes. We depend on technology licensed to us by third parties, and the suspension or termination of these licenses could cause system delays or interruptions. We depend on third parties for many administrative and operational services, and the loss or disruption of such services could have a material adverse effect on us. Our management has limited experience operating a REIT and our management s past experience may not be sufficient to successfully manage our business as a REIT. Our interest rate risk management strategies may not be successful in mitigating the risks associated with interest rates. Our hedging strategies may be limited by REIT requirements. We are required to advance borrowers monthly principal and interest payments for securitized loans that we service before receiving the corresponding payment from the borrower (even if a loan is past due). Additionally, we are also required to advance servicing expenses related to the mortgage loans we service. These advances could have a material adverse effect on our business, financial condition, liquidity and results of operations. We depend on brokers and correspondent lenders for a substantial portion of our loan production. Geographic concentration of our mortgage loan production increases our exposure to risks in those areas, particularly California. We may be subject to environmental risks with respect to properties to which we take title. Loss of our key management could result in a material adverse effect on our business. Fraudulent and negligent acts on the part of loan applicants, mortgage brokers, appraisers, other vendors, and our employees could subject us to losses. Risks related to interest rates and general economic conditions An increase in interest rates may reduce overall demand for mortgage loans, reduce our net interest income or otherwise adversely affect our business or profitability. Declining interest rates could lead to more prepayments of our loans by our customers, adversely impact the value of our servicing rights or otherwise adversely affect our results of operations. A prolonged economic slowdown or a lengthy or severe recession could harm our operations. Interests in real property secure our mortgage loans and we may suffer a loss if the value of the underlying property declines. Risks related to regulatory and legal requirements We incur significant costs related to governmental regulation. The nationwide scope of our mortgage loan production and servicing activities exposes us to risks of noncompliance with an increasing and inconsistent body of complex laws and regulations at the federal, state, and local levels. Our failure to obtain and maintain licenses in the jurisdictions in which we do business could have a material adverse effect on our results of operations, financial condition, and business. New legislation, rules or regulations may restrict our ability to make loans, negatively affecting our revenues. If warehouse and repurchase providers of financing and securitization underwriters face exposure stemming from legal violations committed by the companies to whom they provide financing services, this could increase our borrowing costs and negatively affect the market for whole loans and securitizations. We are subject to various legal actions, which if decided adversely, could have a material adverse effect on us. If many of our borrowers become eligible to defer mortgage loan payments under the Servicemembers Civil Relief Act of 2003 or similar state laws, our cash flows and interest income may be adversely affected. The conduct of the independent brokers through whom we produce our wholesale loans could subject us to fines or other penalties. Federal and state laws and regulations regarding telemarketing and outbound fax marketing may limit our ability to market our products and services and may increase our costs and potentially subject us to additional legal liability. Compliance with proposed and recently enacted changes in securities laws and regulations are likely to increase our costs. We are subject to significant legal and reputational risks and expenses under federal and state laws concerning privacy, use, and security of customer information. Our failure to maintain an exemption from the Investment Company Act would harm our results of operations. Risks related to our qualification as a REIT under federal income tax rules Making the required cash distributions to remain qualified as a REIT may impact our liquidity. We may be unable to comply with the requirements applicable to REITs or compliance with such requirements could adversely affect our financial condition. Distributions we make to most domestic non-corporate shareholders are generally not eligible for taxation at capital gains rates, which may adversely affect the price of our common stock. If we make distributions in excess of current and accumulated earnings and profits, those distributions may reduce your adjusted basis in our common stock, and to the extent such distributions exceed your adjusted basis, you may recognize a capital gain. Recognition of excess inclusion income by us could have adverse tax consequences to us or our shareholders. Because taxable REIT subsidiaries are subject to tax at the regular corporate rates, we may not be able to fully realize the tax benefits we anticipate as a result of being a REIT. We may be subject to a penalty tax if interest on indebtedness owed to us by our taxable REIT subsidiaries accrues at a rate in excess of a commercially reasonable rate or if transactions between us and our taxable REIT subsidiaries are entered into on other than arm s-length terms. Risks of Ownership of Our Common Stock We have not established a minimum distribution payment level, and we cannot assure you of our ability to make distributions to our shareholders in the future. Our use of taxable REIT subsidiaries may affect the price of our common stock relative to the stock price of other REITs. Shares of our common stock available for future sale could have an adverse effect on our stock price. Our earnings and cash distributions could adversely affect our stock price. Market interest rates could have an adverse effect on our stock price. Limits on ownership of our common stock could have adverse consequences to you and could limit your opportunity to receive a premium on our stock. Maryland law and our governing documents may make third party acquisitions of our stock or changes in control more difficult. Risks Related to our Restatement of our Financial Statements We may become subject to liability and incur increased expenditures as a result of our restatement of our financial statements. ur internal controls and disclosure controls and procedures could lead to material errors in our financial statements and cause us to fail to meet our reporting obligations.

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1279493--3/31/2006--SAXON_CAPITAL_INC