TWO

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2009, for Two Harbors Investment Corp. (the "Company"). The Company is a Maryland corporation formed to invest primarily in residential mortgage-backed securities (RMBS) and intends to qualify as a Real Estate Investment Trust (REIT). The financial statements presented reflect the historical operations of Capitol Acquisition Corp. ("Capitol"), a development stage company, which was the accounting acquirer in a reverse merger transaction that closed on October 28, 2009. Consequently, the financial data represents Capitol's pre-merger status and does not reflect the consolidated operations of Two Harbors post-merger.

Key Financial Metrics

Note: The Company had no operating revenue during the period as it was a development stage entity holding funds in trust pending a business combination.

Material Changes vs. Prior Period

• Operating Loss: The Company reported a net loss of $(919,927) for the three months ended September 30, 2009, compared to a net income of $548,631 for the same period in 2008. This deterioration was driven by a significant increase in general and administrative expenses to $1,040,300 (from $225,564 in 2008), largely due to costs associated with the merger transaction.
• Interest Income: Interest and dividend income dropped to $890 for the quarter ended September 30, 2009, from $956,751 in the prior year quarter, reflecting lower interest rates on trust account holdings.
• Liquidity: Operating cash decreased from $2,778,143 at December 31, 2008, to $1,253,979 at September 30, 2009, due to operating cash outflows and tax payments.
• Liabilities: Current liabilities increased significantly to $1,173,743 from $193,555 in the prior year, primarily due to accrued expenses related to the merger.

Guidance, Outlook, and Subsequent Events

Merger Completion: On October 28, 2009, the merger between Capitol and Two Harbors Investment Corp. closed. Capitol became a wholly-owned subsidiary. Following the merger, the Company had approximately $124 million in cash available to fund investments and operations, with a book value of approximately $9.30 per share.

Investment Strategy: The Company intends to invest in Agency and non-Agency RMBS. As of December 8, 2009, the Company had acquired a portfolio of approximately $488 million in assets, utilizing the $124 million in equity and approximately $264 million in repurchase agreements (leverage).

Portfolio Composition (as of Dec 8, 2009):

• Agency RMBS: ~$410 million
• Non-Agency RMBS: ~$62 million
• Interest-Only Securities: ~$16 million

Risks and Contingencies: The Company faces significant risks related to interest rate fluctuations, prepayment speeds, credit risk in non-Agency assets, and liquidity constraints due to leverage. The Company relies on repurchase agreements for financing, which are subject to margin calls. Additionally, the Company must maintain REIT qualification, which imposes strict distribution and asset composition requirements.

Key Facts for Investor Verification

• Post-Merger Financials: Verify that the financial statements in this filing represent the pre-merger entity (Capitol) and do not reflect the post-merger investment portfolio or leverage.
• Cash Deployment: Confirm the deployment of the ~$124 million released from the trust account into the RMBS portfolio as described in the subsequent events section.
• Leverage Levels: Verify the current debt-to-equity ratio and the terms of the repurchase agreements, as the Company utilizes significant leverage (targeting up to 7x-10x on Agency assets).
• REIT Status: Confirm the Company's ongoing compliance with REIT qualification requirements, including the 90% distribution rule and asset tests.
• Management Agreement: Review the terms of the management agreement with PRCM Advisers LLC, including fee structures and termination provisions.