Two Harbors Investment Corp. (Form: S-4/A, Received: 10/09/2009 06:01:47)

As filed with the Securities and Exchange Commission on October 8, 2009

Registration No. 333-160199

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 4 TO

FORM S-4

REGISTRATION STATEMENT

UNDER THE

SECURITIES ACT OF 1933

TWO HARBORS INVESTMENT CORP.

(Exact Name of Each Registrant as Specified in Its Charter)

Maryland

6798

27-0312904

(State or Other Jurisdiction of

Incorporation or Organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

601 Carlson Parkway, Suite 330

Minnetonka, MN 55305

(612) 238-3300

Brian C. Taylor, Chairman

Two Harbors Investment Corp.

601 Carlson Parkway, Suite 330

Minnetonka, MN 55305

(612) 238-3300

(Address, Including Zip Code, and Telephone Number,

Including Area Code, of Registrant’s Principal Executive Offices)

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

Copies to:

David Alan Miller, Esq.

Jeffrey M. Gallant, Esq.

Graubard Miller

The Chrysler Building

405 Lexington Avenue

New York, New York 10174

Telephone: (212) 818-8800

Fax: (212) 818-8881

Brian Hoffmann, Esq.

Jay Bernstein, Esq.

Clifford Chance US LLP

31 West 52 ^nd Street

New York, New York 10019

Telephone: (212) 878-8000

Fax: (212) 878-8375

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective and all other conditions to the merger contemplated by the merger agreement described in the included proxy statement/prospectus have been satisfied or waived.

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x		Smaller reporting company ¨
(Do not check if a smaller reporting company)

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ¨

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ¨

CALCULATION OF REGISTRATION FEE



Title of Each Class of Security Being Registered ⁽¹⁾	Amount Being Registered	Proposed Maximum Offering Price per Security ⁽²⁾		Proposed Maximum Aggregate Offering Price		Amount of Registration Fee ⁽³⁾
Shares of common stock ⁽⁴⁾	26,249,000	$	9.69	$	254,352,810	$	14,192.89
Warrants to purchase shares of common stock ⁽⁴⁾	33,249,000	$	0.47	$	15,627,030	$	871.99
Shares of common stock underlying the Warrants ⁽⁴⁾ ⁽⁵⁾	33,249,000	$	9.69	$	322,182,810	$	17,977.80
Total Fee Due				$	592,162,650	$	33,042.68	⁽⁶⁾

(1)

All securities being registered are to be issued by Two Harbors Investment Corp., a Maryland corporation (“Two Harbors”). In connection with the merger of Capitol Acquisition Corp. (“Capitol”), a publicly-traded Delaware corporation, and Two Harbors Merger Corp., as described in the proxy statement/prospectus forming a part of this registration statement, all of the outstanding common stock of Capitol held by public stockholders and all of the outstanding warrants of Capitol held by public and private warrantholders will be converted on a one-for-one basis into securities of Two Harbors. As a result of the merger and related transactions, Capitol will become a subsidiary of Two Harbors.

(2)	Based on the prices on June 18, 2009 of the common stock and warrants of Capitol pursuant to Rule 457(f)(1).

(3)	Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $55.80 per $1,000,000 of the proposed maximum aggregate offering price.

(4)	Shares of common stock and warrants that will be issued to holders of securities of Capitol upon consummation of the transactions described in footnote 1 above.

(5)	Pursuant to Rule 416, there are also being registered such additional securities as may be issued to prevent dilution resulting from stock splits, stock dividends or similar transactions or as a result of the anti-dilution provisions contained in the warrants.

(6)	The filing fee has been previously paid.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the SEC, acting pursuant to said Section 8(a), may determine.

CAPITOL ACQUISITION CORP.

509 7 ^TH STREET, N.W.

WASHINGTON, D.C. 20004

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

OF CAPITOL ACQUISITION CORP.

TO BE HELD ON OCTOBER 26, 2009

To the Stockholders of Capitol Acquisition Corp.:

NOTICE IS HEREBY GIVEN that the special meeting of stockholders of Capitol Acquisition Corp., a Delaware corporation (“Capitol”), will be held at 10:00 a.m. eastern time, on October 26, 2009, at the offices of Graubard Miller, Capitol’s counsel, at The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York 10174. You are cordially invited to attend the meeting, which will be held for the following purposes:

(1) to consider and vote upon separate proposals to amend Capitol’s amended and restated certificate of incorporation to allow Capitol to complete the merger with Two Harbors Merger Corp., a Delaware corporation (“Merger Sub Corp.”) and a wholly-owned subsidiary of Two Harbors Investment Corp., a Maryland corporation (“Two Harbors”), even though (i) Capitol will ultimately be acquired by Two Harbors, (ii) neither Two Harbors nor Merger Sub Corp. is an operating business, (iii) the fair market value of Two Harbors and Merger Sub Corp. on the date of the transaction is less than 80% of the balance of Capitol’s trust account, (iv) the transaction will not be approved by disinterested independent directors and (v) Capitol will not be receiving a fairness opinion from an independent investment banking firm that the transaction is fair to public stockholders from a financial point of view — we refer to these proposals collectively as the “initial charter proposals”;

(2) to consider and vote upon a proposal to (i) adopt the Agreement and Plan of Merger, dated as of June 11, 2009, as amended as of August 17, 2009 and September 20, 2009 (“Merger Agreement”), among Capitol, Merger Sub Corp., Two Harbors and Pine River Capital Management L.P., a Delaware limited partnership (“Pine River”) and the sole stockholder of Two Harbors, which, among other things, provides for the merger of Merger Sub Corp. with and into Capitol, with Capitol being the surviving entity and becoming a wholly-owned subsidiary of Two Harbors, and (ii) approve the business combination contemplated by the Merger Agreement — this proposal is referred to as the “merger proposal”;

(3) to consider and vote upon separate proposals to approve the following differences between the charter of Two Harbors and Capitol’s current amended and restated certificate of incorporation: (i) the name of the new public entity will be “Two Harbors Investment Corp.” as opposed to “Capitol Acquisition Corp.”; (ii) Two Harbors has 450,000,000 authorized shares of common stock and 50,000,000 authorized shares of preferred stock and may increase or decrease such amounts without stockholder approval, as opposed to Capitol having 75,000,000 authorized shares of common stock and 1,000,000 authorized shares of preferred stock and not being able to increase or decrease such amounts without stockholder approval; (iii) Two Harbors’ corporate existence is perpetual as opposed to Capitol’s corporate existence terminating on November 8, 2009; (iv) Two Harbors’ board of directors is not classified as opposed to Capitol’s which is classified; (v) Two Harbors’ charter does not include the various provisions applicable only to specified purpose acquisition corporations that Capitol’s amended and restated certificate of incorporation contains; (vi) Two Harbors’ charter includes a provision that will assist Two Harbors in qualifying to be treated as a real estate investment trust (“REIT”) commencing with Two Harbors’ taxable year ending December 31, 2009, which provision is not included in Capitol’s amended and restated certificate of incorporation; this provision prevents stockholders or other persons from transferring, acquiring or holding Two Harbors stock if, as a result, (a) Two Harbors’ stock will not be beneficially owned by 100 or more persons, (b) more than 50% of the value of the outstanding shares of stock will be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities), (c) any person will own more than 9.8% in value or in number of shares, whichever is more restrictive, of Two Harbors common stock, after applying certain attribution rules and subject to certain exceptions, or (d) any person will own more than 9.8% in value or in number of shares, whichever is more restrictive, of Two Harbors stock, after applying certain attribution rules and subject to certain exceptions; and (vii) Two Harbors’ charter includes

a provision that provides that Two Harbors’ board of directors may revoke or otherwise terminate Two Harbors’ REIT election, without approval of Two Harbors’ stockholders, if it determines that it is no longer in Two Harbors’ best interests to continue to qualify as a REIT, which provision is not included in Capitol’s amended and restated certificate of incorporation — we refer to these proposals collectively as the “secondary charter proposals”; and

(4) to consider and vote upon a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the special meeting, Capitol is not authorized to consummate the merger — this proposal is referred to as the “adjournment proposal.”

These items of business are described in the attached proxy statement/prospectus, which you are encouraged to read in its entirety before voting. Only holders of record of Capitol common stock at the close of business on September 24, 2009 are entitled to notice of the special meeting and to vote and have their votes counted at the special meeting and any adjournments or postponements of the special meeting.

Capitol’s officers, directors and stockholders prior to Capitol’s initial public offering have agreed to vote any shares of Capitol common stock they purchase after the initial public offering in favor of the proposals being presented at the special meeting.

After careful consideration, Capitol’s board of directors has determined that the proposals are fair to and in the best interests of Capitol and its stockholders and unanimously recommends that you vote or give instruction to vote “FOR” the approval of all of the proposals.

The approval of the initial charter proposals and the merger proposal is a condition to the consummation of the merger discussed above. Under the Merger Agreement, the approval of the secondary charter proposals is not a condition to the consummation of the merger and the vote on such proposal will not impact whether the merger is consummated.

All Capitol stockholders are cordially invited to attend the special meeting in person. To ensure your representation at the special meeting, however, you are urged to complete, sign, date and return the enclosed proxy card as soon as possible. If you are a stockholder of record of Capitol common stock, you may also cast your vote in person at the special meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank on how to vote your shares or, if you wish to attend the meeting and vote in person, obtain a proxy from your broker or bank.

A complete list of Capitol stockholders of record entitled to vote at the special meeting will be available for ten days before the special meeting at the principal executive offices of Capitol for inspection by stockholders during ordinary business hours for any purpose germane to the special meeting.

Your vote is important regardless of the number of shares you own. Whether you plan to attend the special meeting or not, please sign, date and return the enclosed proxy card as soon as possible in the envelope provided. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted.

Thank you for your participation. We look forward to your continued support.


October 9, 2009		By Order of the Board of Directors

		Mark D. Ein
		Chairman of the Board

IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR SHARES WILL BE VOTED IN FAVOR OF EACH OF THE PROPOSALS AND YOU WILL NOT BE ELIGIBLE TO HAVE YOUR SHARES CONVERTED INTO A PRO RATA PORTION OF THE TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION OF THE NET PROCEEDS OF CAPITOL’S INITIAL PUBLIC OFFERING (“IPO”) ARE HELD. YOU MUST AFFIRMATIVELY VOTE AGAINST THE MERGER PROPOSAL AND DEMAND THAT CAPITOL CONVERT YOUR SHARES INTO CASH NO LATER THAN THE CLOSE OF THE VOTE ON THE MERGER PROPOSAL TO EXERCISE YOUR CONVERSION RIGHTS. IN ORDER TO CONVERT YOUR SHARES, YOU MUST TENDER YOUR STOCK TO CAPITOL’S STOCK TRANSFER AGENT PRIOR TO THE SPECIAL MEETING OF CAPITOL STOCKHOLDERS. YOU MAY TENDER YOUR STOCK BY EITHER DELIVERING YOUR STOCK CERTIFICATE TO THE TRANSFER AGENT OR BY DELIVERING YOUR SHARES ELECTRONICALLY USING THE DEPOSITORY TRUST COMPANY’S DWAC (DEPOSIT WITHDRAWAL AT CUSTODIAN) SYSTEM. IF THE MERGER IS NOT COMPLETED, THEN THESE SHARES WILL NOT BE CONVERTED INTO CASH. IF YOU HOLD THE SHARES IN STREET NAME, YOU WILL NEED TO INSTRUCT THE ACCOUNT EXECUTIVE AT YOUR BANK OR BROKER TO WITHDRAW THE SHARES FROM YOUR ACCOUNT IN ORDER TO EXERCISE YOUR CONVERSION RIGHTS. SEE “THE MERGER PROPOSAL — CONVERSION RIGHTS” FOR MORE SPECIFIC INSTRUCTIONS.

CAPITOL ACQUISITION CORP.

509 7 ^TH STREET, N.W.

WASHINGTON, D.C. 20004

NOTICE OF SPECIAL MEETING OF WARRANTHOLDERS

OF CAPITOL ACQUISITION CORP.

TO BE HELD ON OCTOBER 26, 2009

To the Warrantholders of Capitol Acquisition Corp.:

NOTICE IS HEREBY GIVEN that the special meeting of warrantholders of Capitol Acquisition Corp., a Delaware corporation (“Capitol”), will be held at 10:00 a.m. eastern time, on October 26, 2009, at the offices of Graubard Miller, Capitol’s counsel, at The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York 10174. You are cordially invited to attend the meeting, which will be held for the following purposes:

(1) to consider and vote upon separate proposals to amend certain terms of the Warrant Agreement, dated as of November 8, 2007, between Capitol and Continental Stock Transfer & Trust Company which governs the terms of Capitol’s outstanding warrants, in connection with the consummation of the transactions contemplated by the Agreement and Plan of Merger, dated as of June 11, 2009, as amended as of August 17, 2009 and September 20, 2009 (“Merger Agreement”), among Capitol, Two Harbors Investment Corp., a Maryland corporation (“Two Harbors”), Two Harbors Merger Corp., a Delaware corporation (“Merger Sub Corp.”) and a wholly-owned subsidiary of Two Harbors, and Pine River Capital Management L.P., a Delaware limited partnership (“Pine River”) and the sole stockholder of Two Harbors, which, among other things, provides for the merger of Merger Sub Corp. with and into Capitol with Capitol being the surviving entity and becoming a wholly-owned subsidiary of Two Harbors. The amendments to the Warrant Agreement will provide that (i) the exercise price of Capitol’s warrants will be increased to $11.00 per share, (ii) the expiration date of the warrants will be extended from November 7, 2012 to November 7, 2013 and (iii) a holder’s ability to exercise warrants will be limited to ensure that such holder’s Beneficial Ownership or Constructive Ownership as defined in Two Harbors’ charter does not exceed the restrictions contained in the charter limiting the ownership of shares of Two Harbors’ common stock — we refer to these proposals collectively as the “warrant amendment proposals”;

(2) to consider and vote upon a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the special meeting, Capitol is not authorized to consummate any of the warrant amendment proposals —this proposal is referred to as the “adjournment proposal.”

These items of business are described in the attached proxy statement/prospectus, which you are encouraged to read in its entirety before voting. Only holders of record of Capitol warrants at the close of business on September 24, 2009 are entitled to notice of the special meeting and to vote and have their votes counted at the special meeting and any adjournments or postponements of the special meeting.

The approval of each of the warrant amendment proposals is a condition to the consummation of the merger discussed above. Capitol’s officers, directors and stockholders prior to Capitol’s initial public offering, as well as Pine River, have executed lockup agreements whereby such parties have agreed to vote in favor of the warrant amendment proposals at the special meeting.

After careful consideration, Capitol’s board of directors has determined that the proposals are fair to and in the best interests of Capitol and its warrantholders and unanimously recommends that you vote or give instruction to vote “FOR” the approval of all of the proposals.

All Capitol warrantholders are cordially invited to attend the special meeting in person. To ensure your representation at the special meeting, however, you are urged to complete, sign, date and return the enclosed proxy card as soon as possible. If you are a warrantholder of record of Capitol, you may also cast your vote in person at the special meeting. If your warrants are held in an account at a brokerage firm or bank, you must instruct your broker or bank on how to vote your warrants or, if you wish to attend the meeting and vote in

person, obtain a proxy from your broker or bank. If you do not vote or do not instruct your broker or bank how to vote, it will have the same effect as voting against the warrant amendment proposals.

A complete list of Capitol warrantholders of record entitled to vote at the special meeting will be available for ten days before the special meeting at the principal executive offices of Capitol for inspection by warrantholders during ordinary business hours for any purpose germane to the special meeting.

Your vote is important regardless of the number of warrants you own. Whether you plan to attend the special meeting or not, please sign, date and return the enclosed proxy card as soon as possible in the envelope provided. If your warrants are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the warrants you beneficially own are properly counted.

Thank you for your participation. We look forward to your continued support.


October 9, 2009		By Order of the Board of Directors

		Mark D. Ein
		Chairman of the Board

IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR WARRANTS WILL BE VOTED IN FAVOR OF EACH OF THE PROPOSALS. IF THE MERGER IS NOT COMPLETED AND CAPITOL DOES NOT COMPLETE AN INITIAL BUSINESS COMBINATION PRIOR TO NOVEMBER 8, 2009, THEN THE WARRANTS WILL EXPIRE WORTHLESS.

The information in this proxy statement/prospectus is not complete and may be changed. We may not issue these securities until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO AMENDMENT AND COMPLETION, DATED OCTOBER 8, 2009

PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS AND WARRANTHOLDERS OF

CAPITOL ACQUISITION CORP.

PROSPECTUS FOR UP TO

26,249,000 SHARES OF COMMON STOCK

AND

33,249,000 WARRANTS

AND

33,249,000 SHARES OF COMMON STOCK UNDERLYING SUCH WARRANTS

TWO HARBORS INVESTMENT CORP.

Capitol Acquisition Corp., a Delaware corporation (“Capitol”), is pleased to report that its board of directors has approved an Agreement and Plan of Merger, dated as of June 11, 2009, as amended as of August 17, 2009 and September 20, 2009 (“Merger Agreement”), among Capitol, Two Harbors Investment Corp., a Maryland corporation (“Two Harbors”), Two Harbors Merger Corp., a Delaware corporation (“Merger Sub Corp.”) and a wholly-owned subsidiary of Two Harbors, and Pine River Capital Management L.P., a Delaware limited partnership (“Pine River”) and the sole stockholder of Two Harbors, pursuant to which (i) Merger Sub Corp. will merge with and into Capitol with Capitol surviving the merger and becoming a wholly-owned subsidiary of Two Harbors and (ii) holders of Capitol securities (not exercising conversion rights as described below) at the time of merger will become security holders of Two Harbors.

Two Harbors is a newly-formed Maryland corporation that will commence operations upon completion of the merger described in this proxy statement/prospectus. Two Harbors intends to elect and qualify to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes, commencing with Two Harbors’ taxable year ending December 31, 2009. Two Harbors generally will not be subject to U.S. federal income tax on its net taxable income to the extent that it annually distributes all of its net taxable income to stockholders and maintains its intended qualification as a REIT. Two Harbors also intends to operate its business in a manner that will permit it to maintain its exemption from registration under the Investment Company Act of 1940 (“1940 Act”).

Proposals to approve the Merger Agreement and the other matters discussed in this proxy statement/prospectus will be presented at the special meetings of stockholders and warrantholders of Capitol scheduled to be held on October 26, 2009.

Capitol’s common stock, units and warrants are currently listed on the NYSE Amex under the symbols CLA, CLA.U and CLA.WS, respectively. Capitol’s units, common stock and warrants will no longer be traded following consummation of the merger. The parties have applied to have the common stock and warrants of Two Harbors listed on the New York Stock Exchange (“NYSE”) following consummation of the merger under the symbol TWO and TWO.WS, respectively. However, there is no assurance that the common stock and warrants will be listed on the NYSE or any other exchange following consummation of the merger.

This proxy statement/prospectus provides you with detailed information about the merger and other matters to be considered by the Capitol stockholders and warrantholders. You are encouraged to carefully read the entire document and the documents incorporated by reference. IN PARTICULAR, BEFORE YOU DECIDE WHETHER TO VOTE OR INSTRUCT YOUR VOTE TO BE CAST TO APPROVE THE PROPOSALS DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS, YOU SHOULD CAREFULLY READ “ RISK FACTORS ” BEGINNING ON PAGE 19 FOR A DISCUSSION OF THE FOLLOWING AND OTHER RISKS:

•

Two Harbors has no operating history and may not be able to successfully operate its business or generate sufficient revenue to make or sustain distributions to its stockholders.

•

Pine River has limited experience with investing in RMBS, which may hinder Two Harbors’ ability to achieve its investment objectives. In addition, the RMBS investment strategy currently employed by Pine River is different from the investment strategy that Two Harbors intends to employ and, accordingly, Two Harbors is not expected to experience returns, if any, comparable to those experienced by Pine River.

•

Two Harbors is dependent on its external manager and Pine River and may not find a suitable replacement if Two Harbors or Two Harbors’ manager terminates the management agreement.

•

There are conflicts of interest in Two Harbors’ relationship with Pine River and its affiliates, including Two Harbors’ manager, which could result in decisions that are not in the best interests of Two Harbors’ stockholders or warrantholders.

•

Two Harbors’ failure to qualify as a REIT would subject it to U.S. federal income tax and potentially increased state and local taxes, which would reduce the amount of cash available for distribution to its stockholders.

•

Maintenance of Two Harbors’ exemption from registration under the 1940 Act imposes limits on Two Harbors’ operations, which may adversely affect its business.

•

Two Harbors has not yet identified any specific assets.

•

The transaction with Two Harbors was not approved by a majority of Capitol’s disinterested independent directors and Capitol’s board of directors did not obtain a fairness opinion in determining whether or not to proceed with the transaction with Two Harbors and, as a result, no independent party has passed upon the fairness of the transaction from a financial point of view to Capitol’s public stockholders.

Your vote is very important. Whether or not you expect to attend the special meetings, the details of which are described on the following pages, please complete, date, sign and promptly return the accompanying proxy in the enclosed envelope.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.

The proxy statement/prospectus statement is dated October 9, 2009, and is first being mailed on or about October 9, 2009.

Capitol consummated its initial public offering (“IPO”) on November 14, 2007. Citigroup Global Markets Inc. (“Citigroup”) acted as sole book-running manager and representative of the underwriters in the IPO. Upon consummation of the merger, the underwriters in Capitol’s IPO will be entitled to receive an aggregate of approximately $4.5 million to $5.9 million of deferred underwriting commissions, which represents a reduction of their deferred underwriting commissions, in exchange for certain rights to participate in future securities offerings by Two Harbors following consummation of the merger. If the merger is not consummated and Capitol is required to be liquidated, the underwriters will not receive any of such funds and such funds will be returned to Capitol’s public stockholders upon its liquidation. Capitol is having ongoing discussions with Citigroup regarding obtaining Citigroup’s consent to any necessary amendments to the agreements entered into in connection with the IPO in order to consummate the transactions described herein, although such content may not be received.

TABLE OF CONTENTS


		Page
Summary of the Material Terms of the Merger		1
Questions and Answers For Capitol Stockholders and Warrantholders About the Proposals		5
Summary Historical Consolidated Financial Information		12
Summary Unaudited Pro Forma Condensed Combined Financial Information		15
Comparative Share Information		17
Risk Factors		19
Forward-Looking Statements		54
Special Meetings of Capitol Stockholders and Warrantholders		56
Proposals to be Considered by the Capitol Stockholders		62
The Initial Charter Proposal s		62
The Merger Proposal		65
The Merger Agreement		92
U.S. Federal Income Tax Considerations		99
Unaudited Pro Forma Condensed Combined Financial Information		121
The Secondary Charter Proposals		128
The Adjournment Proposal		131
Proposals to be Considered by the Capitol Warrantholders		132
The Warrant Amendment Proposal s		132
The Adjournment Proposal		133
Other Information Related to Capitol		134
Business of Two Harbors		144
Two Harbors’ Market Opportunity		165
Management of Two Harbors Following the Merger		169
Two Harbors’ Management’s Discussion and Analysis of Financial Condition and Results of Operations		189
Comparison of Rights of Capitol and Two Harbors		202
Certain Provisions of the Maryland General Corporation Law and Two Harbors’ Charter and Bylaws		221
Beneficial Ownership of Securities		226
Certain Relationships and Related Transactions		230
Description of Securities		234
Price Range of Securities and Dividends		242
Stockholder Proposals		244
Legal Matters		244
Experts		244
Delivery of Documents to Stockholders		244
Where You Can Find More Information		245
Index to Financial Statements		246

ANNEXES
Agreement and Plan of Merger		A-1-1
Amendment No. 1 to Agreement and Plan of Merger		A-2-1
Amendment No. 2 to Agreement and Plan of Merger		A-3-1
Two Harbors Articles of Amendment and Restatement		B-1
Two Harbors Bylaws		C-1
Form of Management Agreement		D-1
Tax Opinion of Graubard Miller		E-1
Capitol Second Amended and Restated Certificate of Incorporation		F-1
Supplement and Amendment to Warrant Agreement		G-1
Opinion of Richards, Layton & Finger, P.A.		H-1
Prior Performance of Pine River’s RMBS Strategy		I-1
Section 262 of the Delaware General Corporation Law		J-1

SUMMARY OF THE MATERIAL TERMS OF THE MERGER

The following summary highlights some of the information in this proxy statement/prospectus. It does not contain all of the information that you should consider before deciding how to vote on any of the proposals described herein. You should read carefully the more detailed information set forth under “Risk Factors” and the other information included in this proxy statement/prospectus.

Background

In the prospectus included in the registration statement for Capitol’s IPO, Capitol undertook to consummate an initial business combination in which it acquired an operating business with a fair market value equal to at least 80% of the balance in Capitol’s trust account (excluding deferred underwriting discounts and commissions). If the operating business was affiliated with any of Capitol’s officers, directors and stockholders prior to the IPO (“Capitol Founders”), Capitol was required to have such transaction approved by its disinterested independent directors and obtain a fairness opinion from an independent investment banking firm that the transaction was fair to public stockholders from a financial point of view. These requirements were set forth in Capitol’s amended and restated certificate of incorporation. In the proposed merger, (i) Capitol will ultimately be acquired by Two Harbors, (ii) neither Two Harbors nor Merger Sub Corp. is an operating business, (iii) the fair market value of Two Harbors and Merger Sub Corp. on the date of the transaction is less than 80% of the balance of the trust account, (iv) the transaction will not be approved by disinterested independent directors (because there are no disinterested independent directors) and (v) Capitol will not be receiving a fairness opinion from an independent investment banking firm that the transaction is fair to public stockholders from a financial point of view. Accordingly, the proposed merger does not satisfy the requirements set forth in Capitol’s amended and restated certificate of incorporation. However, Capitol considered and analyzed numerous companies and acquisition opportunities in its search for an attractive business combination candidate, none of which were believed to be as attractive to public stockholders as the proposed merger.

Proposals to be Considered at the Special Meeting of Capitol’s Stockholders

Capitol is proposing to amend the terms of its amended and restated certificate of incorporation to allow for the consummation of the proposed transaction. See the section entitled “ The Initial Charter Proposals .”

If the initial charter proposals are approved, stockholders will be asked to adopt the Merger Agreement and approve the business combination contemplated by the Merger Agreement. The parties to the Merger Agreement are Capitol, Two Harbors, Merger Sub Corp. and Pine River. Pursuant to the Merger Agreement, (i) Merger Sub Corp. will merge with and into Capitol with Capitol surviving the merger and becoming a wholly-owned subsidiary of Two Harbors and (ii) holders of Capitol securities at the time of the merger (other than holders of Public Shares (as defined below) exercising conversion rights) will become security holders of Two Harbors as described below.

In addition to voting on the initial charter proposals and the merger proposal, the stockholders of Capitol will vote on proposals to:

•

approve the following differences between the charter of Two Harbors and Capitol’s amended and restated certificate of incorporation: (i) the name of the new public entity will be “Two Harbors Investment Corp.” as opposed to “Capitol Acquisition Corp.”; (ii) Two Harbors has 450,000,000 authorized shares of common stock and 50,000,000 authorized shares of preferred stock and may increase or decrease such amounts without stockholder approval, as opposed to Capitol having 75,000,000 authorized shares of common stock and 1,000,000 authorized shares of preferred stock and not being able to increase or decrease such amounts without stockholder approval; (iii) Two Harbors’ corporate existence is perpetual as opposed to Capitol’s corporate existence terminating on November

8, 2009; (iv) Two Harbors’ board of directors is not classified as opposed to Capitol’s which is classified; (v) Two Harbors’ charter does not include the various provisions applicable only to specified purpose acquisition corporations that Capitol’s amended and restated certificate of incorporation contains; (vi) Two Harbors’ charter includes a provision that will assist Two Harbors in qualifying to be treated as a REIT commencing with Two Harbors’ taxable year ending December 31, 2009, which provision is not included in Capitol’s amended and restated certificate of incorporation; this provision prevents stockholders or other persons from transferring, acquiring or holding Two Harbors stock if, as a result, (a) Two Harbors’ stock will not be beneficially owned by 100 or more persons, (b) more than 50% of the value of the outstanding shares of stock will be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities), (c) any person will own more than 9.8% in value or in number of shares, whichever is more restrictive, of Two Harbors common stock, after applying certain attribution rules and subject to certain exceptions, or (d) any person will own more than 9.8% in value or in number of shares, whichever is more restrictive, of Two Harbors stock, after applying certain attribution rules and subject to certain exceptions; and (vii) Two Harbors’ charter includes a provision that provides that Two Harbors’ board of directors may revoke or otherwise terminate Two Harbors’ REIT election, without approval of Two Harbors’ stockholders, if it determines that it is no longer in Two Harbors’ best interests to continue to qualify as a REIT, which provision is not included in Capitol’s amended and restated certificate of incorporation. Under the Merger Agreement, the approval of the secondary charter proposals are not a condition to the consummation of the merger and the vote on such proposals will not impact whether the merger is consummated. See the section entitled “ The Secondary Charter Proposals. ”

•

adjourn the meeting, if necessary. It is possible for Capitol to obtain sufficient votes to approve the adjournment proposal but not receive sufficient votes to approve the initial charter proposals and merger proposal. In such a situation, Capitol could adjourn the meeting and attempt to solicit additional votes in favor of such proposals. See the section entitled “ The Adjournment Proposal. ”

Proposals to be Considered at the Special Meeting of Capitol’s Warrantholders

Capitol is also seeking the approval from the holders of its warrants to (i) increase the exercise price of Capitol’s warrants from $7.50 per share to $11.00 per share, (ii) extend the expiration date of the warrants from November 7, 2012 to November 7, 2013 and (iii) limit a holder’s ability to exercise warrants to ensure that such holder’s Beneficial Ownership or Constructive Ownership as defined in Two Harbors’ charter does not exceed the restrictions contained in the charter limiting the ownership of shares of Two Harbors’ common stock. The approval of each of the warrant amendment proposals is a condition to the merger being consummated. The amendments will be effective immediately upon consummation of the merger. The Capitol Founders, as well as Pine River, have executed lockup agreements whereby such parties have agreed to vote in favor of the warrant amendment proposals at the special meeting. See the section entitled “ The Warrant Amendment Proposals .”

Actions in Connection with the Proposed Merger

In connection with the merger, the Capitol Founders have agreed to have cancelled the 6,562,257 shares (“Founders’ Shares”) acquired by them prior to the IPO.

At the closing of the merger, the funds in Capitol’s trust account will be released to pay up to approximately $7.3 million in transaction fees and expenses and up to approximately $5.9 million in deferred underwriting discounts and commissions, as well as to pay any tax liabilities and reimbursement of expenses of the Capitol Founders if either are incurred prior to the closing of the merger (although it is not currently anticipated that either will be incurred in any material amount) and to make purchases of Public Shares, if any. The balance of the funds will be released to Two Harbors to pay Capitol stockholders who properly exercise their conversion

rights and for working capital and general corporate purposes of Two Harbors and Capitol. The merger is conditioned on Capitol’s trust account containing no less than $100 million after the closing after taking into account all of the payments described above.

It is possible that the present holders of 30.0% or more of the Public Shares will vote against the merger and seek conversion of their Public Shares into cash in accordance with Capitol’s amended and restated certificate of incorporation. If such event were to occur, the merger could not be completed. To preclude such possibility Capitol, the Capitol Founders, Two Harbors and their respective affiliates may enter into arrangements to provide for the purchase of the Public Shares from holders thereof who indicate their intention to vote against the merger and seek conversion or otherwise wish to sell their Public Shares or other arrangements that would induce holders of Public Shares not to vote against the merger proposal. Definitive arrangements have not yet been determined but some possible methods are described in the section titled “ The Merger Proposal — Actions That May Be Taken to Secure Approval of Capitol’s Stockholders .”

Capitol has received an opinion from its counsel, Graubard Miller, and Two Harbors has received an opinion from its counsel, Clifford Chance US LLP, relating to the tax treatment of the proposed transaction to Capitol’s stockholders. Graubard Miller and Clifford Chance US LLP have consented to the use of their opinions in this proxy statement/prospectus. For a detailed description of the material U.S. federal income tax consequences of the merger and warrant amendment, see the section entitled “ U.S. Federal Income Tax Considerations .”

The merger and the transactions contemplated by the Merger Agreement are not subject to any additional federal or state regulatory requirement or approval, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), except for filings with the State of Delaware necessary to effectuate the merger.

Business and Management of Two Harbors Following the Consummation of the Proposed Merger

As a result of the merger, the holders of common stock and warrants of Capitol will receive like securities of Two Harbors, on a one-to-one basis, in exchange for their existing Capitol securities. Pine River will not be receiving any consideration, including any shares in Two Harbors, as a result of the transaction other than a percentage of the management fees PRCM Advisers LLC will be paid pursuant to the management agreement. The holders of Capitol’s common stock and warrants will be holders of the securities of Two Harbors after the merger in the same proportion as their current holdings in Capitol, except as (i) increased by (A) the cancellation of shares of common stock of Capitol by its founders immediately prior to the consummation of the merger, (B) conversion of shares of Capitol common stock sold in Capitol’s initial public offering (“Public Shares”) by any holder thereof exercising its conversion rights and (C) the purchase of Public Shares pursuant to arrangements that provide for Capitol to purchase such shares after the closing of the merger (as described under “ The Merger Proposal — Actions That May Be Taken to Secure Approval of Capitol’s Stockholders ”) and (ii) decreased by the issuance of shares of restricted stock to Two Harbors’ independent directors upon consummation of the transaction.

Two Harbors is a newly-formed Maryland corporation that will commence operations upon completion of the merger described in this proxy statement/prospectus. Two Harbors intends to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes, commencing with Two Harbors’ taxable year ending December 31, 2009. Two Harbors generally will not be subject to U.S. federal income tax on its net taxable income to the extent that it annually distributes all of its net taxable income to stockholders and maintains its intended qualification as a REIT. Two Harbors also intends to operate its business in a manner that will permit it to maintain its exemption from registration under the 1940 Act. Upon consummation of the merger, Two Harbors will initially seek to invest in residential mortgage-backed securities (“RMBS”) for which a U.S. Government agency or a federally chartered corporation guarantees payments of principal and interest on the securities (“Agency RMBS”), RMBS that are not issued or guaranteed by a U.S. Government agency or federally chartered

corporation (“non-Agency RMBS”) and assets other than RMBS. Two Harbors was formed solely to complete the business combination with Capitol and has no material assets or liabilities. Its only assets following the business combination will be the funds released to it from Capitol’s trust account upon consummation of the business combination and its stock of Capitol. Two Harbors will be externally managed and advised by PRCM Advisers LLC, a subsidiary of Pine River. Founded in 2002, Pine River is a global multistrategy asset management firm, with approximately $1.1 billion in assets under management as of September 1, 2009, including $328 million in a private fund, Nisswa Fixed Income Master Fund Ltd. (“Nisswa Fixed Income Fund”), dedicated to investments in RMBS and related strategies. The term “assets under management” refers to the assets of the Pine River managed funds less the liabilities of these funds but excluding from liabilities any performance fees that have been accrued but not yet paid to Pine River. Pine River began managing RMBS investments on February 1, 2008. See the section entitled “ Business of Two Harbors .”

After the merger, the directors of Two Harbors will be Brian C. Taylor, Thomas Siering, Stephen G. Kasnet, William W. Johnson and W. Reid Sanders, who are designees of Pine River, Mark D. Ein, a designee of Capitol, and another designee of Capitol, to be determined (the “Capitol Designee”). Messrs. Kasnet, Johnson, Sanders and the Capitol Designee will be considered independent directors under applicable regulatory rules. The officers of Two Harbors will be Thomas Siering, Steven Kuhn, William Roth, Jeffrey Stolt, Andrew Garcia and Timothy O’Brien.

Concurrent with the consummation of the merger, Two Harbors will enter into a management agreement with PRCM Advisers LLC pursuant to which PRCM Advisers LLC will provide the day-to-day management of Two Harbors’ operations. The management agreement requires PRCM Advisers LLC to manage Two Harbors’ business affairs in conformity with the policies and the investment guidelines that are approved and monitored by Two Harbors’ board of directors. The management agreement has an initial three-year term and will be renewed for one-year terms thereafter unless terminated by either Two Harbors or PRCM Advisers LLC. PRCM Advisers LLC is entitled to receive from Two Harbors a management fee, payable quarterly in arrears equal to 1.5% of Two Harbors’ stockholder equity (as defined in the management agreement). Two Harbors is also obligated to reimburse certain expenses incurred by PRCM Advisers LLC and its affiliates. PRCM Advisers LLC is further entitled to receive a termination fee from Two Harbors under certain circumstances. For a more detailed description of the management agreement, see the section entitled “ Management of Two Harbors Following the Merger .”

CLA Founders LLC, an entity affiliated with the Capitol Founders (“Sub-Manager”), has agreed to provide certain services to PRCM Advisers LLC upon consummation of the merger pursuant to a sub-management agreement. In exchange for such services, Sub-Manager will receive a sub-management fee of 20% of the management fee earned by PRCM Advisers LLC under its management agreement with Two Harbors with respect to the first $1 billion of Two Harbors’ stockholders’ equity and 10% of the management fee earned by PRCM Advisers LLC under the management agreement with respect to Two Harbors’ stockholders’ equity in excess of $1 billion. Unless terminated earlier, the sub-management agreement will terminate on the fifth anniversary of the merger, at which time PRCM Advisers LLC will pay the Sub-Manager a final payment equal to 7.7 times the annualized rate of the last quarterly payment to Sub-Manager, subject to certain adjustments. The sub-management agreement provides that, during its five-year term, if PRCM Advisers LLC or certain Pine River affiliates manage certain other public investment vehicles, including other REITs, PRCM Advisers LLC will negotiate in good faith to provide Sub-Manager the right to enter into a sub-management agreement on substantially the same terms as the sub-management agreement or an alternative arrangement reasonably acceptable to PRCM Advisers LLC and Sub-Manager. For a more detailed description of the interests of the Capitol Founders and other persons having an interest in the transaction, see the section entitled “ The Merger Proposal — Interests of Capitol’s Directors and Officers and Others in the Merger .”

In evaluating the proposals described above, you should carefully read this proxy statement/prospectus and especially consider the factors discussed in the section entitled “Risk Factors.”

QUESTIONS AND ANSWERS

FOR CAPITOL STOCKHOLDERS AND WARRANTHOLDERS ABOUT THE PROPOSALS


Q.	Why am I receiving this proxy statement/prospectus?	A. Capitol has agreed to a business combination under the terms of the Agreement and Plan of Merger, as amended, that is described in this proxy statement/prospectus. This agreement is referred to as the “Merger Agreement”. A copy of the Merger Agreement is attached to this proxy statement/prospectus as Annexes A-1, A-2 and A-3, which you are encouraged to read. Stockholders are being asked to consider and vote upon proposals entitled “ The Initial Charter Proposals, ” “ The Merger Proposal, ” “ The Secondary Charter Proposals ” and “ The Adjournment Proposal, ” all as described in more detail in this proxy statement/prospectus. Warrantholders are being asked to consider and vote upon proposals entitled “ The Warrant Amendment Proposals ” and “ The Adjournment Proposal ,” all as described in more detail in this proxy statement/prospectus. The approval of the initial charter proposals, the merger proposal and the warrant amendment proposals is a condition to the consummation of the merger. If any of the initial charter proposals, the merger proposal or the warrant amendment proposals is not approved, the other proposals will not be presented to stockholders and warrantholders for a vote and the merger will not be consummated. The approval of the secondary charter proposals are not a condition to the consummation of the merger and the vote on such proposals will not impact whether the merger is consummated. This proxy statement/prospectus contains important information about the proposed merger and the other matters to be acted upon at the special meetings. You should read it carefully. Your vote is important. You are encouraged to vote as soon as possible after carefully reviewing this proxy statement/prospectus.

Q.	Do I have conversion rights?	A. If you are a holder of Public Shares, you have the right to vote against the merger proposal and demand that Capitol convert such shares into a pro rata portion of the trust account in which a substantial portion of the net proceeds of Capitol’s IPO are held. These rights to vote against the merger and demand conversion of the Public Shares into a pro rata portion of the trust account are sometimes referred to herein as conversion rights.

Q.	How do I exercise my conversion rights?	A. If you are a holder of Public Shares and wish to exercise your conversion rights, you must (i) vote against the merger proposal, (ii) demand that Capitol convert your shares into cash, and (iii) deliver your stock to Capitol’s transfer agent physically or electronically using the Depository Trust Company’s DWAC (Deposit Withdrawal at Custodian) System prior to the vote at the meeting. As all of the Public Shares are held in “street name,” every holder may deliver his shares electronically using the DWAC System. Any action that does not include an affirmative vote against the merger will prevent you from exercising your conversion rights. Your vote on any proposal other than the merger proposal will have no impact on your right to convert. You may exercise your conversion rights either by checking the box on the proxy card or by submitting your request in writing to Mark Zimkind of Continental Stock Transfer & Trust Company, Capitol’s transfer agent, at the address listed at the end of this section. If you (i) initially vote for the merger proposal but then wish to vote against it and exercise your conversion rights or (ii) initially vote

against the merger proposal and wish to exercise your conversion rights but do not check the box on the proxy card providing for the exercise of your conversion rights or do not send a written request to Continental Stock Transfer & Trust Company to exercise your conversion rights, or (iii) initially vote against the merger but later wish to vote for it, you may request Capitol to send you another proxy card on which you may indicate your intended vote. You may make such request by contacting Capitol at the phone number or address listed at the end of this section.

Any request for conversion, once made, may be withdrawn at any time up to the vote taken with respect to the merger proposal. If you delivered your shares for conversion to Capitol’s transfer agent and decide prior to the special meeting not to elect conversion, you may request that Capitol’s transfer agent return the shares (physically or electronically). You may make such request by contacting Capitol’s transfer agent at the phone number or address listed at the end of this section.

Any corrected or changed proxy card must be received by Capitol’s secretary prior to the special meeting. No demand for conversion will be honored unless the holder’s stock has been delivered (either physically or electronically) to the transfer agent prior to the meeting.

A holder voting through his broker would be able to correct or change his vote immediately by having such broker submit a corrected or changed vote electronically. A holder voting by submitting a proxy card would need to send in a corrected or changed proxy card and it would then take several days thereafter for Capitol or Capitol’s transfer agent to receive the revised proxy card once it is mailed by the holder. A holder may obtain a new proxy card by requesting Capitol or its transfer agent to provide a new one (which will be done by Capitol or the transfer agent promptly after such request) or print a copy of such proxy card which is an exhibit to the registration statement of which this proxy statement/prospectus forms a part from the SEC’s website at www.sec.gov.

If the merger is completed, then, if you have also properly exercised your conversion rights, you will be entitled to receive a pro rata portion of the trust account, including any interest earned thereon, calculated as of two business days prior to the date of the consummation of the merger. As of June 30, 2009, there was $259,064,422 in the trust account, restricted, which would amount to approximately $9.87 per Public Share upon conversion. If you exercise your conversion rights, then you will be exchanging your shares of Capitol common stock for cash and will no longer own these shares.

Exercise of your conversion rights does not result in either the exercise or loss of any Capitol warrants that you may hold. Your warrants will continue to be outstanding following a conversion of your common stock, will be automatically converted into warrants to purchase shares of Two Harbors’ common stock that will have terms that are substantially similar in all material respects to those of the Capitol warrants (subject to the amendments to the warrants contemplated by the warrant amendment proposals) and will become exercisable upon consummation of the merger. A registration statement must be in effect to allow you to exercise any warrants you may hold or to allow Two Harbors to call the warrants for redemption if the redemption conditions are satisfied. If the merger is not consummated and Capitol does not complete a different business combination prior to November 8, 2009, the warrants will not become exercisable and will be worthless upon dissolution of Capitol in accordance with its amended and restated certificate of incorporation.


Q.	What will I receive if I exercise my conversion rights?	A. If the transactions contemplated by the Merger Agreement are consummated, then, if you have also properly exercised your conversion rights, you will be entitled to receive a pro rata portion of the trust account, including any interest earned thereon, calculated as of two business days prior to the date of the consummation of the transactions contemplated by the Merger Agreement. As of September 24, 2009, there was approximately $259,000,000 in the trust account, which would amount to approximately $9.87 per Public Share upon conversion. If you exercise your conversion rights, then you will be exchanging your shares of Capitol common stock for cash and will no longer own these shares.

Q.	When will I receive my conversion payment if I exercise my conversion rights?	A. Capitol expects the conversion payments will be made promptly after the closing of the merger.

Q.	What will I receive if the transactions contemplated by the Merger Agreement are not consummated and Capitol is liquidated?	A. If the transactions contemplated by the Merger Agreement are not consummated by November 8, 2009, Capitol’s amended and restated certificate of incorporation provides that its corporate existence will automatically terminate and it will liquidate and promptly distribute to its public stockholders, pro rata, the amount in trust plus any remaining non-trust account funds after payment of its liabilities. As of September 24, 2009, there was approximately $259,000,000 in the trust account, which would amount to approximately $9.87 per Public Share upon conversion. The holders of the Founders’ Shares are not entitled to share in the proceeds of Capitol’s liquidation.

Q.	When will I receive my liquidation payment if the transactions contemplated by the Merger Agreement are not consummated and Capitol is liquidated?	A. If the transactions contemplated by the Merger Agreement are not consummated by November 8, 2009, Capitol expects that the liquidation payments will be made to its stockholders within 30 to 60 days after November 8, 2009.

Q.	Do I have appraisal rights if I object to the proposed merger?	A. Capitol stockholders may have appraisal rights in connection with the merger contemplated by this proxy statement/prospectus. If appraisal rights are available, holders of shares of Capitol common stock who do not vote in favor of the merger proposal and who properly demand appraisal of their shares will be entitled to appraisal rights in connection with the mergers under Section 262 of the Delaware General Corporation Law (“DGCL”). Holders of Public Shares electing to exercise conversion rights will not be entitled to appraisal rights. Holders of Capitol warrants also will not be entitled to appraisal rights. For additional information, including the procedures for properly demanding appraisal, see “ The Merger Proposal — Appraisal Rights .”



Q.	What happens to the funds deposited in the trust account after consummation of the merger?	A. At the closing of the merger, the funds in the trust account will be released to pay up to approximately $7.3 million in transaction fees and expenses and up to approximately $5.9 million in deferred underwriting discounts and commissions, as well as to pay any tax liabilities and reimbursement of expenses of the Capitol Founders if either are incurred prior to the closing of the merger (although it is not currently anticipated that either will be incurred in any material amount) and to make purchases of Public Shares, if any. We will also use the funds in the trust account to consummate any stock purchase contracts we enter into with stockholders who have indicated to us that they intend to vote against the merger. The balance of the funds will be released to Two Harbors to pay Capitol stockholders who properly exercise their conversion rights and for working capital and general corporate purposes of Two Harbors and Capitol. The merger is conditioned on Capitol’s trust account containing no less than $100 million after the closing after taking into account all of the payments described above.

Q.	What did Capitol estimate its business combination and working capital expenses would be in its IPO prospectus?	A. Following consummation of Capitol’s IPO, it had access to an aggregate of approximately $3,800,000 for its working capital requirements. Capitol had estimated that it would incur approximately $800,000 for expenses for the due diligence and investigation of a target business or businesses; approximately $800,000 for legal, accounting and other expenses associated with structuring, negotiating and documenting an initial business combination; and approximately $2,070,000 for general working capital that would be used for miscellaneous expenses and reserves.

Q.	Since Capitol’s IPO prospectus contained certain differences in what is being proposed at the meeting, what are my legal rights?	A. You should be aware that Capitol’s amended and restated certificate of incorporation and IPO prospectus require Capitol to complete a business combination in which it acquires a target business having a fair market value equal to at least 80% of Capitol’s trust account balance (excluding deferred underwriting discounts and commissions) and, if the transaction is a related party transaction, to obtain the approval from disinterested independent directors and an opinion from an independent investment banking firm indicating that the transaction is fair to public stockholders from a financial point of view. Furthermore, Capitol’s IPO prospectus did not disclose that funds in its trust account might be used, directly or indirectly, to purchase Public Shares from holders who have indicated their intention to vote against the merger and seek conversion of their shares to cash (as Capitol may contemplate doing). Also, Capitol’s IPO prospectus stated that specific provisions in Capitol’s amended and restated certificate of incorporation may not be amended prior to the consummation of an initial business combination but that Capitol had been advised that such provision limiting its ability to amend its amended and restated certificate of incorporation may not be enforceable under Delaware law. Accordingly, each person who purchased Public Shares in the IPO and still held such shares upon learning of these facts may have securities law claims against Capitol for rescission (under which a successful claimant has the right to receive the total amount paid for his or her securities pursuant to an allegedly deficient prospectus, plus interest and less any income earned on the securities, in exchange for surrender of the securities) or damages (compensation for loss on an investment caused by alleged material misrepresentations or omissions in the sale of a security). Such claims may entitle stockholders asserting them to as much as $10.00 or more per share, based on the initial offering price of the IPO units comprised of stock and warrants, less any amount received from sale of the original warrants, plus interest from the date of Capitol’s IPO (which, in the case of holders of Public Shares, may be more than the pro rata share of the trust account to which they are entitled on conversion or liquidation). See “ The Merger Proposal — Rescission Rights. ”



Q.	What happens if the merger is not consummated?	A. If the merger is not consummated by November 8, 2009, either party may terminate the Merger Agreement. If Capitol is unable to complete the merger or another business combination by November 8, 2009, its amended and restated certificate of incorporation provides that it must liquidate. In any liquidation of Capitol, the funds deposited in the trust account, plus any interest earned thereon and remaining in trust, less claims requiring payment from the trust account by creditors who have not waived their rights against the trust account, if any, will be distributed pro rata to the holders of Capitol’s Public Shares. Holders of the Founders’ Shares, including all of Capitol’s officers and directors, have waived any right to any liquidation distribution with respect to those shares. Mark D. Ein, Capitol’s Chief Executive Officer, has agreed to be personally liable under certain circumstances to ensure that the proceeds in the trust account are not reduced by the claims of prospective target businesses and vendors or other entities that are owed money by Capitol for services rendered or products sold to it. Capitol cannot assure you that Mr. Ein will be able to satisfy those obligations. See the section entitled “ Other Information Related to Capitol — Liquidation If No Business Combination ” for additional information.

Q.	When do you expect the merger to be completed?	A. It is currently anticipated that the merger will be consummated promptly following the Capitol special meetings on October 26, 2009. For a description of the conditions for the completion of the merger, see the section entitled “The Merger Agreement — Conditions to Closing of the Merger.”

Q.	What do I need to do now?	A. Capitol urges you to read carefully and consider the information contained in this proxy statement/prospectus, including the annexes, and to consider how the merger, warrant amendment and other proposals will affect you as a stockholder or warrantholder of Capitol. You should then vote as soon as possible in accordance with the instructions provided in this proxy statement/prospectus and on the enclosed proxy card.

Q.	How do I vote?	A. If you are a holder of record of Capitol common stock or warrants, you may vote in person at the special meetings or by submitting a proxy for the special meetings. You may submit your proxy by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed postage paid envelope. If you hold your shares or warrants in “street name,” which means your shares or warrants are held of record by a broker, bank or nominee, you should contact your broker to ensure that votes related to the shares or warrants you beneficially own are properly counted. In this regard, you must provide the record holder of your shares or warrants with instructions on how to vote your shares or warrants or, if you wish to attend the meetings and vote in person, obtain a proxy from your broker, bank or nominee. Stockholders and warrantholders who hold their securities through a broker or bank will have the option to authorize their proxies to vote their securities electronically through the Internet or by telephone. If you hold your securities through a broker, bank or other nominee, you should check your proxy card or voting instruction card forwarded by your broker, bank or other nominee who holds your securities for instructions on how to vote by these methods. Votes submitted at any time prior to the meeting will be accepted. However, to ensure that your vote is properly counted and to avoid any problems or unforeseen delays, you should submit your vote as early as possible and prior to 11:59 p.m. on the day before the meeting. After such time, a holder would need to contact his bank, broker or nominee directly to vote or change his vote.



Q.	If my shares or warrants are held in “street name,” will my broker, bank or nominee automatically vote my shares or warrants for me?	A. No. Your broker, bank or nominee cannot vote your shares or warrants unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee.

Q.	May I change my vote after I have mailed my signed proxy card?	A. Yes. Send a later-dated, signed proxy card to Capitol’s secretary at the address set forth below so that it is received by Capitol’s secretary prior to the special meetings or attend the special meetings in person and vote. You also may revoke your proxy by either sending a notice of revocation to Capitol’s secretary, which must be received by Capitol’s secretary prior to the special meetings, or attending the special meetings and revoking your proxy and voting in person. To ensure that your revised vote is properly counted and to avoid any problems or unforeseen delays, you should submit the notice of revocation and new proxy as early as possible and prior to 11:59 p.m. on the day before the meeting. After such time, a holder would need to contact his bank, broker or nominee directly to vote or change his vote.

Q.	What should I do with my stock, warrant and unit certificates?	A. Upon consummation of the merger, Capitol’s units will automatically separate and no longer be traded as a separate security. If you are not electing conversion in connection with your vote on the merger proposal, the merger is approved and consummated, and you hold your securities in Capitol in certificate form, as opposed to holding your securities through your broker, you do not need to exchange your existing certificates for certificates issued by Two Harbors. Your current Capitol certificates will automatically represent your rights in Two Harbors’ securities. You may, however, exchange your certificates if you choose, by contacting Two Harbors’ transfer agent, Continental Stock Transfer & Trust Company (Reorganization Department), after the consummation of the merger and following their requirements for reissuance. Capitol stockholders who affirmatively vote against the merger and exercise their conversion rights must deliver their shares to Capitol’s transfer agent (either physically or electronically) as instructed by Capitol or Capitol’s transfer agent prior to the vote at the meeting.

Q.	What should I do if I receive more than one set of voting materials?	A. You may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold your shares or warrants in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares or warrants. If you are a holder of record and your shares or warrants are registered in more than one name, you will receive


		more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive in order to cast a vote with respect to all of your Capitol shares or warrants.

Q.	Who can help answer my questions?	A. If you have questions about the merger or if you need additional copies of the proxy statement/prospectus or the enclosed proxy card you should contact: Mr. Mark D. Ein Capitol Acquisition Corp. 509 7 ^th Street, N.W. Washington, D.C. 20004 Tel: (202) 654-7060 Fax: (202) 654-7063 or Morrow & Co., LLC 470 West Avenue Stamford, Connecticut Tel: (800) 662-5200 To obtain timely delivery, Capitol stockholders and warrantholders must request the materials no later than October 21, 2009. You may also obtain additional information about Capitol from documents filed with the Securities and Exchange Commission (“SEC”) by following the instructions in the section entitled “Where You Can Find More Information.” If you intend to affirmatively vote against the merger and seek conversion of your shares, you will need to deliver your stock (either physically or electronically) to Capitol’s transfer agent prior to the vote at the meeting. If you have questions regarding the certification of your position or delivery of your stock, please contact: Mr. Mark Zimkind Continental Stock Transfer & Trust Company 17 Battery Place New York, New York 10004 Tel: (212) 845-3287 Fax: (212) 616-7616

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

Capitol and Two Harbors are providing the following summary historical financial information to assist you in your analysis of the financial aspects of the merger.

Two Harbors’ balance sheet data as of June 11, 2009 are derived from Two Harbors’ audited balance sheet, which is included elsewhere in this proxy statement/prospectus.

Capitol’s balance sheet data as of December 31, 2008 and December 31, 2007 and statements of income data and cash flow data for the year ended December 31, 2008, and for the period from June 26, 2007 (inception) through December 31, 2007 and 2008 are derived from Capitol’s audited financial statements, which are included elsewhere in this proxy statement/prospectus. Capitol’s balance sheet data as of June 30, 2009 and statements of income data and cash flow data for the six months ended June 30, 2009 and 2008 are derived from Capitol’s unaudited financial statements, which are included elsewhere in this proxy statement/prospectus.

The information is only a summary and should be read in conjunction with each of Capitol’s and Two Harbors’ historical financial statements and related notes and “Other Information Related to Capitol — Capitol’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Two Harbors’ Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere herein. The historical results included below and elsewhere in this proxy statement/prospectus are not indicative of the future performance of Two Harbors.

Summary Historical Consolidated Financial Information — Two Harbors


	June 11, 2009
Balance Sheet Data:
Total Assets	$	1,001
Total Liabilities	$	1
Total Stockholders’ Equity	$	1,000
Net Asset Value Per Share	$	1.00

Summary Historical Financial Information — Capitol


	For the Six Months Ended June 30,						For the Year Ended December 31, 2008			For the Period From June 26, 2007 (inception) through December 31, 2007
Income Statement Data:	2009			2008			For the Year Ended December 31, 2008
	(Unaudited)
Revenue	$	—		$	—		$	—		$	—
Loss from operations		(1,706,109	)		(550,769	)		(1,059,606	)		(140,999	)
Interest and dividend income		55,432			3,103,862			4,442,222			1,474,220
Net (loss) income attributable to common stockholders	$	(1,472,041	)	$	1,682,795		$	2,058,827		$	714,573
Basic and diluted net (loss) income per share	$	(0.06	)	$	0.07		$	0.08		$	0.06
Weighted average shares outstanding excluding shares subject to possible conversion — basic and diluted		24,936,558			24,936,558			24,936,558			11,602,789


Balance Sheet Data:	June 30, 2009		December 31, 2008		December 31, 2007
Working capital	$	1,138,207	$	2,769,263	$	1,260,417
Cash held in Trust Account, restricted	$	259,064,422	$	259,084,043	$	258,346,625
Total assets	$	261,368,034	$	262,095,130	$	260,303,897
Total liabilities	$	870,351	$	193,555	$	696,855
Value of common stock which may be redeemed for cash ($9.87, $9.87, and $9.84 per share, respectively)	$	77,807,833	$	77,739,684	$	77,503,978
Stockholders’ equity	$	182,689,850	$	184,161,891	$	182,103,064


	For the Six Months Ended June 30,					For the Year Ended December 31, 2008			For the Period From June 26, 2007 (inception) through December 31, 2007
Cash Flow Data:	2009			2008		For the Year Ended December 31, 2008
	(Unaudited)
Net cash (used in) provided by operating activities	$	(759,967	)	$	995,881	$	1,763,031		$	1,389,340
Net cash (used in) provided by investing activities	$	(107,002	)	$	196,584	$	554,148		$	(259,820,845	)
Net cash (used in) provided by financing activities	$	—		$	—	$	(511	)	$	258,892,980
Net (decrease) increase in cash	$	(866,969	)	$	1,192,465	$	2,316,668		$	461,475

SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The summary unaudited pro forma condensed combined financial information has been derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial information included elsewhere in this proxy statement/prospectus.

The unaudited condensed combined pro forma statements of operations for the six months ended June 30, 2009 and the year ended December 31, 2008 give pro forma effect to the merger as if it had occurred on January 1, 2008. The unaudited pro forma condensed combined balance sheet as of June 30, 2009 gives pro forma effect to the merger as if it had occurred on such date. The unaudited condensed combined pro forma statement of operations for the six months ended June 30, 2009 was derived from Capitol’s unaudited condensed financial statements for the six months ended June 30, 2009, and the unaudited condensed combined pro forma statement of operations for the year ended December 31, 2008 was derived from Capitol’s audited financial statements for the year ended December 31, 2008. The unaudited pro forma condensed combined balance sheet at June 30, 2009 was derived from Capitol’s unaudited condensed financial statements and Two Harbors’ audited financial statements as of June 30, 2009 and June 11, 2009, respectively.

The historical financial information has been adjusted to give effect to pro forma events that are related and/or directly attributable to the merger and are factually supportable. The adjustments presented on the unaudited pro forma condensed combined financial information have been identified and presented in “Unaudited Pro Forma Condensed Combined Financial Information” to provide relevant information necessary for an accurate understanding of the combined company upon consummation of the merger.

This information should be read together with the consolidated financials statements of Capitol and the notes thereto, the financial statements of Two Harbors and the notes thereto, “ Unaudited Pro Forma Condensed Combined Financial Information ,” “ Other Information Related to Capitol — Capitol’s Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” and “ Two Harbors’ Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this proxy statement/prospectus.

The unaudited pro forma condensed combined financial statements have been prepared using the assumptions below with respect to cash and stockholders’ equity:

•

Assuming Maximum Transaction Size: This presentation assumes that no Capitol stockholders exercise conversion rights with respect to their shares of Capitol common stock into a pro rata portion of the trust account and that all of the funds held in the trust account are available after closing for the payment of transactional costs and for operating purposes; and

•

Assuming Minimum Transaction Size of $100 Million: This presentation assumes that pursuant to the merger proposal, Capitol stockholders holding 30.0% of the Public Shares exercise their conversion rights, such shares were converted into their pro rata share of the funds in the trust account, and/or Capitol takes actions to secure approval of the merger proposal as described in the section titled “The Merger Proposal — Actions That May be Taken to Secure Approval of Capitol’s Stockholders,” and Capitol’s trust account contains $100 million at the closing.

The unaudited pro forma condensed combined financial statements are presented for informational purposes only and are subject to a number of uncertainties and assumptions and do not purport to represent what the companies’ actual performance or financial position would have been had the transaction occurred on the dates indicated and does not purport to indicate the financial position or results of operations as of any future date or for any future period.

Two Harbors Investment Corp. and Subsidiaries

Summary Unaudited Condensed Combined Pro Forma Statement of Operations

For the Six Months Ended June 30, 2009


	Combined Pro Forma (assuming maximum transaction size)			Combined Pro Forma (assuming minimum transaction size of $100 million)
Revenue	$	—		$	—
General and administrative expenses		4,973,427			3,864,925

Loss from operations		(4,973,427	)		(3,864,925	)
Interest and dividend Income		55,432			55,432

Loss before benefit from (provision for) income taxes		(4,917,995	)		(3,809,493	)
Benefit from (provision for) income taxes		—			—

Net loss	$	(4,917,995	)	$	(3,809,493	)

Weighted average shares outstanding—basic and diluted		26,249,000			10,943,835
Earnings per share—basic and diluted	$	(0.19	)	$	(0.35	)

Two Harbors Investment Corp. and Subsidiaries

Summary Unaudited Condensed Combined Pro Forma Statement of Operations

For the Year Ended December 31, 2008


	Combined Pro Forma (assuming maximum transaction size)			Combined Pro Forma (assuming minimum transaction size of $100 million)
Revenue	$	—		$	—
General and administrative expenses		7,594,242			5,377,239

Loss from operations		(7,594,242	)		(5,377,239	)
Interest and dividend Income		4,442,222			4,442,222

Loss before benefit from (provision for) income taxes		(3,152,020	)		(935,017	)
Benefit from (provision for) income taxes		—			—

Net loss	$	(3,152,020	)	$	(935,017	)

Weighted average shares outstanding—basic and diluted		26,249,000			10,943,835
Earnings per share—basic and diluted	$	(0.12	)	$	(0.09	)

Two Harbors Investment Corp. and Subsidiaries Summary Unaudited Pro Forma

Balance Sheet Data at June 30, 2009


	Combined Pro Forma (assuming maximum transaction size)		Combined Pro Forma (assuming minimum transaction size of $100 million)
Cash	$	247,801,213	$	100,001,000
Total Current Assets	$	247,884,374	$	100,084,161
Total Assets	$	248,179,429	$	100,379,216
Total Current Liabilities	$	870,352	$	870,352
Total Stockholders’ Equity	$	247,309,077	$	99,508,864

COMPARATIVE SHARE INFORMATION

The following table sets forth selected historical equity ownership information for Capitol and Two Harbors and unaudited pro forma combined per share ownership information after giving effect to the merger, which pro forma information has been presented to reflect the following:

•

Assuming Minimum Transaction Size of $100 Million: This presentation assumes that, pursuant to the merger proposal, Capitol stockholders holding 30.0% of the Public Shares exercise their conversion rights, such shares were converted into their pro rata share of the funds in the trust account, and/or Capitol takes actions to secure approval of the merger proposal as described in the section titled “The Merger Proposal — Actions That May be Taken to Secure Approval of Capitol’s Stockholders,” and Capitol’s trust account contains no less than $100 million at the closing.

This information is being provided to aid you in your analysis of the financial aspects of the merger. This information should be read together with the consolidated financials statements of Capitol and the notes thereto, the financial statements of Two Harbors and the notes thereto, “ Unaudited Pro Forma Condensed Combined Financial Information ,” “ Other Information Related to Capitol — Capitol’s Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” and “ Two Harbors’ Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this proxy statement/prospectus.

The unaudited pro forma consolidated per share information reflects that the merger will be accounted for as an acquisition by Capitol under Financial Accounting Standards Board Statement No. 141R, “Business Combinations” (“SFAS 141R”) for accounting purposes. The determination was primarily based upon Capitol having all of the ownership of the newly merged entity. The acquisition has not changed the control of Capitol; therefore, Capitol’s balance sheet accounts will be reflected at their historical carryover basis. Two Harbors’ balance sheet accounts will be recorded at estimated fair value which is expected to approximate their carrying value.

The unaudited pro forma consolidated per share information does not purport to represent what the actual results of operations of Capitol and Two Harbors would have been had the merger been completed or to project Capitol’s or Two Harbors’ results of operations that may be achieved after the merger. The unaudited pro forma book value per share information below does not purport to represent what the value of Capitol and Two Harbors would have been had the merger been completed nor the book value per share for any future date or period.

Unaudited Pro Forma Consolidated Per Share Information ⁽¹⁾


	Historical					Equivalent Pro Forma						Consolidated Pro Forma
	Capitol Acquisition Corp.			Two Harbors Investment Corp.		Capitol Acquisition Corp. Assuming Maximum Transaction Size ⁽⁴⁾			Capitol Acquisition Corp. Assuming Minimum Transaction Size ⁽⁴⁾			Assuming Maximum Transaction Size			Assuming Minimum Transaction Size
Six Months ended June 30, 2009
Basic earnings per share	$	(0.06	)	$	0.00	$	(0.19	)	$	(0.35	)	$	(0.19	)	$	(0.35	)
Diluted earnings per share	$	(0.06	)	$	0.00	$	(0.19	)	$	(0.35	)	$	(0.19	)	$	(0.35	)
Cash dividends declared per share ⁽¹⁾	$	—		$	—	$	—		$	—		$	—		$	—
Book value per share at June 30, 2009 ⁽²⁾⁽³⁾	$	7.33		$	1.00	$	9.42		$	9.09		$	9.42		$	9.09

Year Ended December 31, 2008
Basic earnings (loss) per share ⁽³⁾	$	0.08		$	0.00	$	(0.12	)	$	(0.33	)	$	(0.12	)	$	(0.33	)
Diluted earnings (loss) per share ⁽³⁾	$	0.08		$	0.00	$	(0.12	)	$	(0.33	)	$	(0.12	)	$	(0.33	)
Cash dividends declared per share ⁽¹⁾	$	—		$	—	$	—		$	—		$	—		$	—

(1)

Since inception, neither Capitol nor Two Harbors has declared any dividends on its shares of common stock. Upon completion of the merger described in this proxy statement/prospectus, Two Harbors intends to make regular quarterly distributions to holders of its common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. Subject to the requirements of the Maryland General Corporation Law, Two Harbors intends to pay regular quarterly dividends to its stockholders in an amount equal to Two Harbors’ net taxable income, if and to the extent authorized by Two Harbors’ board of directors. Future dividends payable are indeterminable at this time.

(2)

Book value per share of Capitol is computed by dividing the sum of total stockholders’ equity by the 32,811,257 shares outstanding at the balance sheet date less 7,874,699 shares subject to possible conversion. Book value per share for the pro forma columns is computed by dividing the sum of total stockholders’ equity by the 26,249,000 shares outstanding assuming the maximum transaction size and 10,943,835 shares outstanding assuming the minimum transaction size.

(3)	Book value per share of Two Harbors is computed by dividing stockholders’ equity at the balance sheet date by the 1,000 shares outstanding at the balance sheet date.

(4)	All outstanding shares of Capitol will be converted on a one-for-one basis into the securities of the consolidated registrant, Two Harbors; accordingly, equivalent pro forma per share amounts will be equal to the consolidated pro forma per share amounts of Two Harbors.

RISK FACTORS

You should carefully consider the following risk factors, together with all of the other information included in this proxy statement/prospectus, before you decide whether to vote or instruct your vote to be cast to approve the proposals described in this proxy statement/prospectus.

Risks Related to Two Harbors’ Business and Operations Following the Merger

The value of your investment in Two Harbors following consummation of the merger will be subject to the significant risks affecting REITs, and mortgage REITs in particular, described below. If any of the events described below occur, Two Harbors’ post-acquisition business, financial condition, liquidity and/or results of operations could be adversely affected in a material way. This could cause the price of its common stock or warrants to decline, perhaps significantly, and you therefore may lose all or part of your investment.

Risks Related To Two Harbors’ Business

Two Harbors operates in a highly competitive market and competition may limit its ability to acquire desirable assets.

Two Harbors operates in a highly competitive market. Two Harbors’ profitability depends, in large part, on its ability to acquire its target assets at favorable prices. In acquiring its target assets, Two Harbors will compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds, commercial and investment banks, commercial finance and insurance companies and other financial institutions. Many of Two Harbors’ competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than Two Harbors does. Furthermore, competition for assets of the types and classes which Two Harbors will seek to acquire may lead to the price of such assets increasing, which may further limit its ability to generate desired returns. Also, as a result of this competition, desirable assets may be limited in the future and Two Harbors may not be able to take advantage of attractive opportunities from time to time, as Two Harbors can provide no assurance that Two Harbors will be able to identify and make acquisitions that are consistent with its objectives.

Two Harbors has no operating history and may not be able to successfully operate its business or generate sufficient revenue to make or sustain distributions to its stockholders.

Two Harbors was incorporated in May 2009 and has no operating history. Two Harbors has no assets and will commence operations only upon consummation of the merger. Two Harbors cannot assure you that it will be able to operate its business successfully or implement its policies and strategies as described in this proxy statement/prospectus. Additionally, the past performance of PRCM Advisers LLC’s affiliates, including the Nisswa Fixed Income Fund, should not be viewed as an indication of the future performance of Two Harbors. There can be no guarantee that Two Harbors will have similar opportunities to invest in assets that generate similar returns.

PRCM Advisers LLC intends to draw upon the experience of Pine River’s Fixed Income investment team in implementing Two Harbors’ investment and financing strategies. However, Pine River has limited experience with investing in RMBS. Pine River’s Fixed Income investment team first began managing RMBS investments in February 1, 2008 in connection with Pine River’s RMBS strategy. This limited experience may hinder Two Harbors’ ability to achieve its investment objectives. In addition, the investment strategy of Pine River’s RMBS

strategy is different from the investment strategy that Two Harbors intends to employ in several important respects. In particular, Pine River traded actively in fixed-rate, adjustable and interest-only RMBS, including collateralized mortgage obligations (“CMOs”) and “to-be-announced” forward contracts (“TBAs”), and equity investments in REIT, and actively hedged its trading positions. By contrast, Two Harbors will initially seek to invest primarily in Agency and non-Agency RMBS with a buy-and-hold emphasis, and does not currently anticipate actively trading its assets. For more information regarding these differences, see “ Business of Two Harbors — Historical Performance of Pine River’s RMBS Strategy .” Accordingly, Two Harbors is not expected to experience returns, if any, comparable to those experienced by Pine River’s RMBS strategy. Indeed, Pine River’s RMBS strategy has achieved financial returns since its inception in February 2008 that are not likely to be sustained going forward by either Pine River or Two Harbors.

Two Harbors may change any of its strategies, policies or procedures without stockholder consent.

Two Harbors may change any of its strategies, policies or procedures with respect to acquisitions, asset allocation, growth, operations, indebtedness, financing strategy and distributions at any time without the consent of its stockholders, which could result in its making acquisitions that are different from, and possibly riskier than, the types of acquisitions described in this proxy statement/prospectus. A change in its strategy may increase its exposure to credit risk, interest rate risk, financing risk, default risk and real estate market fluctuations. Furthermore, a change in its asset allocation could result in its making acquisitions in asset categories different from those described in this proxy statement/prospectus. These changes could adversely affect its financial condition, results of operations, the market price of its common stock or warrants and its ability to make distributions to its stockholders.

Difficult conditions in the mortgage and residential real estate markets may cause Two Harbors to experience market losses related to its holdings, and Two Harbors does not expect these conditions to improve in the near future.

Two Harbors’ results of operations are materially affected by conditions in the mortgage market, the residential real estate market, the financial markets and the economy generally. Recently, concerns about the mortgage market and a declining real estate market, as well as inflation, energy costs, geopolitical issues and the availability and cost of credit, have contributed to increased volatility and diminished expectations for the economy and markets going forward. The mortgage market has been severely affected by changes in the lending landscape and there is no assurance that these conditions have stabilized or that they will not worsen. This has an impact on new demand for homes, which will compress the home ownership rates and weigh heavily on future home price performance. There is a strong correlation between home price growth rates and mortgage loan delinquencies. The further deterioration of the market for RMBS may cause Two Harbors to experience losses related to its assets and to sell assets at a loss. Declines in the market values of its investments may adversely affect its results of operations and credit availability, which may reduce earnings and, in turn, cash available for distribution to its stockholders.

The lack of liquidity of Two Harbors’ assets may adversely affect Two Harbors’ business, including its ability to value and sell its assets.

Two Harbors may acquire assets or other instruments that are not liquid, including securities and other instruments that are not publicly traded. Moreover, turbulent market conditions, such as those currently in effect, could significantly and negatively impact the liquidity of Two Harbors’ assets. It may be difficult or impossible to obtain third-party pricing on the assets Two Harbors purchases. Illiquid assets typically experience greater price volatility, as a ready market does not exist, and can be more difficult to value. In addition, validating third-party pricing for illiquid assets may be more subjective than more liquid assets. The illiquidity of Two Harbors’ assets may make it difficult for Two Harbors to sell such assets if the need or desire arises. In addition, if Two Harbors is required to liquidate all or a portion of its portfolio quickly, Two Harbors may realize significantly less than the value at which Two Harbors has previously recorded its assets. To the extent that Two Harbors utilizes leverage to finance its purchase of assets that are or become liquid, the negative impact on Two Harbors related to trying to sell assets in a short period of time for cash could be greatly exacerbated. As a result, Two Harbors’ ability to vary its portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect Two Harbors’ results of operations and financial condition.

Maintenance of Two Harbors’ 1940 Act exemption imposes limits on Two Harbors’ operations, which may adversely affect its business.

Two Harbors intends to conduct its operations so as not to become required to register as an investment company under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis. Excluded from the term “investment securities,” among other things, are U.S. Government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. Two Harbors is organized as a holding company that conducts its businesses primarily through the Two Harbors Operating Company LLC (or “Subsidiary LLC”). Both Two Harbors and the Subsidiary LLC intend to conduct their operations so that they do not come within the definition of an investment company because less than 40% of the value of their total assets on an unconsolidated basis will consist of “investment securities.” Certain of Subsidiary LLC’s subsidiaries intend to rely upon the exemption from registration as an investment company under the 1940 Act pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exemption generally means that at least 55% of each such subsidiaries’ portfolio must be comprised of qualifying assets and at least 80% of its portfolio must be comprised of qualifying assets and real estate-related assets under the 1940 Act. Qualifying assets for this purpose include mortgage loans and other assets, such as whole pool Agency RMBS, that are considered the functional equivalent of mortgage loans for the purposes of the 1940 Act. Two Harbors expects each of its subsidiaries relying on Section 3(c)(5)(C) to invest at least 55% of its assets in whole pool Agency RMBS and other interests in real estate that constitute qualifying assets in accordance with SEC staff guidance and an additional 25% of its assets in either qualifying assets or non-Agency RMBS and other types of real estate related assets that do not constitute qualifying assets. As a result of the foregoing restrictions, Two Harbors will be limited in its ability to make or dispose of certain investments. To the extent that the SEC staff publishes new or different guidance with respect to these matters, Two Harbors may be required to adjust its strategy accordingly. In addition, Two Harbors will be limited in its ability to make certain investments and these limitations could result in the subsidiary holding assets Two Harbors might wish to sell or selling assets Two Harbors might wish to hold. Although Two Harbors intends to monitor the portfolios of its subsidiaries relying on the Section 3(c)(5)(C) exemption periodically and prior to each acquisition or disposition of assets, there can be no assurance that such subsidiaries will be able to maintain this exemption.

Two Harbors may in the future organize special purpose subsidiaries that will borrow under the Federal Reserve System’s Term Asset-Backed Securities Loan Facility (“TALF”). Two Harbors expects that these TALF subsidiaries will rely on Section 3(c)(7) for their 1940 Act exemption and, therefore, its interest in each of these TALF subsidiaries would constitute an “investment security” for purposes of determining whether Two Harbors passes the 40% test. Two Harbors may in the future organize one or more TALF subsidiaries, as well as other subsidiaries, that seek to rely on the 1940 Act exemption provided to certain structured financing vehicles by Rule 3a-7. To the extent that Two Harbors organizes subsidiaries that rely on Rule 3a-7 for an exemption from the 1940 Act, these subsidiaries will also need to comply with the provisions of this Rule which in certain circumstances may require, among other things, that the indenture governing the notes issued by the subsidiary include additional limitations on the types of assets the subsidiary may sell or acquire out of the proceeds of assets that mature, are refinanced or otherwise sold, on the period of time during which such transactions may occur, and on the amount of transactions that may occur. In addition, any subsidiaries organized to rely on Rule 3a-7 will also need to comply with guidance that may be issued by the Division of Investment Management of the SEC on how such subsidiaries must be organized to comply with the restrictions contained in Rule 3a-7. In light of the requirements of Rule 3a-7, Two Harbors’ ability to manage assets held in a special purpose subsidiary that complies with Rule 3a-7 will be limited and Two Harbors may not be able to purchase or sell

assets owned by that subsidiary when Two Harbors would otherwise desire to do so, which could lead to losses. Two Harbors expects that the aggregate value of its interests in TALF subsidiaries that seek to rely on Rule 3a-7, as well as other subsidiaries that it may organize in the future that may rely on Rule 3a-7, will comprise less than 20% of Two Harbors’ total assets on an unconsolidated basis.

The determination of whether an entity is a majority-owned subsidiary of Two Harbors is made by Two Harbors. The 1940 Act defines a majority-owned subsidiary of a person as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person. The 1940 Act further defines voting securities as any security presently entitling the owner or holder thereof to vote for the election of directors of a company. Two Harbors treats companies in which it owns at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test. Two Harbors has not requested the SEC staff to approve its treatment of any company as a majority-owned subsidiary and the SEC staff has not done so. If the SEC or its staff were to disagree with Two Harbors’ treatment of one or more companies as majority-owned subsidiaries, Two Harbors would need to adjust its strategy and its assets in order to continue to pass the 40% test. Any such adjustment in its strategy could have a material adverse effect on Two Harbors.

Qualification for exemption from registration under the 1940 Act will limit Two Harbors’ ability to make certain investments. For example, these restrictions will limit the ability of Two Harbors’ subsidiaries to invest directly in mortgage-backed securities that represent less than the entire ownership in a pool of mortgage loans, debt and equity tranches of securitizations and certain ABS and real estate companies or in assets not related to real estate.

For additional details, see “ Business of Two Harbors — Operating and Regulatory Structure — 1940 Act Exemption .”

Loss of Two Harbors’ 1940 Act exemption would adversely affect Two Harbors, the market price of shares of its common stock or warrants and its ability to distribute dividends, and could result in the termination of the management agreement with PRCM Advisers LLC.

As described above, Two Harbors intends to conduct its operations so as not to become required to register as an investment company under the 1940 Act based on current laws, regulations and guidance. Further, although Two Harbors intends to monitor its portfolio periodically, there can be no assurance that Two Harbors will be able to maintain its exclusion as an investment company under the 1940 Act. If Two Harbors were to fail to qualify for an exclusion in the future, Two Harbors could be required to restructure its activities or the activities of its subsidiaries, including effecting sales of assets in a manner that, or at a time when, Two Harbors would not otherwise choose, which could negatively affect the value of its common stock or warrants, the sustainability of its business model, and its ability to make distributions. The sale could occur during adverse market conditions, and Two Harbors could be forced to accept a price below that which it believes is appropriate. The loss of Two Harbors’ 1940 Act exclusion would also permit PRCM Advisers LLC to terminate the management agreement, which could result in a material adverse effect on Two Harbors’ business and results of operations.

Rapid changes in the values of Two Harbors’ target assets may make it more difficult for Two Harbors to maintain its qualification as a REIT or its exemption from the 1940 Act.

If the market value or income potential of Two Harbors’ target assets declines as a result of increased interest rates, prepayment rates, general market conditions, government actions or other factors, Two Harbors may need to increase its real estate assets and income or liquidate its non-qualifying assets to maintain its REIT qualification or its exemption from the 1940 Act. If the decline in real estate asset values or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-real estate assets Two Harbors may own. Two Harbors may have to make decisions that it otherwise would not make absent the REIT and 1940 Act considerations.

Two Harbors expects to use leverage in executing its business strategy, which may adversely affect the return on its assets and may reduce cash available for distribution to its stockholders, as well as increase losses when economic conditions are unfavorable.

Two Harbors expects to use leverage to finance its investment operations and to enhance its financial returns. Initially, Two Harbors expects its primary source of leverage to be repurchase agreement financing for its Agency RMBS assets. Other sources of leverage may include credit facilities (including term loans and revolving facilities), and potentially funding under programs established by the U.S. government, including TALF financing if TALF is extended to cover RMBS assets.

Through the use of leverage, Two Harbors may acquire positions with market exposure significantly greater than the amount of capital committed to the transaction. For example, by entering into repurchase agreements with advance rates, or haircut levels, of 5% (which is not an atypical haircut for Agency RMBS), Two Harbors could leverage its capital allocated to Agency RMBS by a ratio of as much as 20 to one. It is not uncommon for investors in Agency RMBS to obtain leverage equal to 10 or more times equity through the use of repurchase agreement financing. Initially, Two Harbors expects that it may deploy, on a debt-to-equity basis, up to 7 to 10 times leverage on Two Harbors’ Agency RMBS assets. However, there is no specific limit on the amount of leverage Two Harbors may use.

Leverage will magnify both the gains and the losses of Two Harbors’ trading positions. Leverage will increase Two Harbors’ returns as long as Two Harbors earns a greater return on investments purchased with borrowed funds than Two Harbors’ cost of borrowing such funds. However, if Two Harbors uses leverage to acquire an asset and the value of the asset decreases, the leverage will increase Two Harbors’ losses. Even if the asset increases in value, if the asset fails to earn a return that equals or exceeds Two Harbors’ cost of borrowing, the leverage will decrease Two Harbors’ returns.

Two Harbors may be required to post large amounts of cash as collateral or margin to secure its leveraged positions. In the event of a sudden, precipitous drop in value of Two Harbors’ assets, Two Harbors might not be able to liquidate assets quickly enough to repay its borrowings, further magnifying its losses. Even a small decrease in the value of a leveraged asset may require Two Harbors to post additional margin or cash collateral. This may decrease the cash available to Two Harbors for distributions to stockholders.

Two Harbors may depend on repurchase agreements and bank credit facilities to execute its business plan and Two Harbors’ inability to access funding through these sources could have a material adverse effect on its results of operations, financial condition and business.

Two Harbors’ ability to fund its acquisitions may be impacted by its ability to secure repurchase agreements and bank credit facilities (including term loans and revolving facilities) on acceptable terms. Two Harbors currently has two master repurchase agreements in place with two counterparties and expects additional master repurchase agreements will be executed after the mailing of the proxy statement/prospectus, but can provide no assurance that lenders will be willing or able to provide Two Harbors with sufficient financing. In addition, because repurchase agreements are short-term commitments of capital, lenders may respond to market conditions making it more difficult for Two Harbors to secure continued financing. During certain periods of the credit cycle, lenders may lose their ability or curtail their willingness to provide financing. If Two Harbors is not able to renew its then existing facilities or arrange for new financing on terms acceptable to it, or if Two Harbors defaults on its covenants or are otherwise unable to access funds under any of these facilities, Two Harbors may have to curtail its asset acquisition activities and/or dispose of assets.

It is possible that the lenders that will provide Two Harbors with financing could experience changes in their ability to advance funds to Two Harbors, independent of Two Harbors’ performance or the performance of its portfolio of assets. If major market participants continue to exit the business, it could further adversely affect the marketability of all fixed income securities, and this could negatively impact the value of Two Harbors’ assets, thus reducing Two Harbors’ net book value. Furthermore, if many of Two Harbors’ potential lenders are unwilling or unable to provide Two Harbors with financing, Two Harbors could be forced to sell its assets at an

inopportune time when prices are depressed. In addition, if the regulatory capital requirements imposed on Two Harbors’ lenders change, they may be required to significantly increase the cost of the financing that they provide to Two Harbors. Two Harbors’ lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the regulatory environment and their management of perceived risk, particularly with respect to assignee liability. Moreover, the amount of financing Two Harbors will receive under its repurchase agreements will be directly related to the lenders’ valuation of the assets that secure the outstanding borrowings. Typically repurchase agreements grant the respective lender the absolute right to reevaluate the market value of the assets that secure outstanding borrowings at any time. If a lender determines in its sole discretion that the value of the assets has decreased, it has the right to initiate a margin call. A margin call would require Two Harbors to transfer additional assets to such lender without any advance of funds from the lender for such transfer or to repay a portion of the outstanding borrowings. Any such margin call could have a material adverse effect on Two Harbors’ results of operations, financial condition, business, liquidity and ability to make distributions to its stockholders, and could cause the value of Two Harbors’ common stock or warrants to decline. Two Harbors may be forced to sell assets at significantly depressed prices to meet such margin calls and to maintain adequate liquidity, which could cause Two Harbors to incur losses. Moreover, to the extent Two Harbors is forced to sell assets at such time, given market conditions, Two Harbors may be selling at the same time as others facing similar pressures, which could exacerbate a difficult market environment and which could result in Two Harbors’ incurring significantly greater losses on its sale of such assets. In an extreme case of market duress, a market may not even be present for certain of Two Harbors’ assets at any price.

The current dislocations in the residential mortgage sector have caused many lenders to tighten their lending standards, reduce their lending capacity or exit the market altogether. For example, in the repurchase agreement market, non-Agency RMBS have been significantly more difficult to finance than Agency RMBS. In connection with repurchase agreements, financing rates and haircut levels have also increased. Repurchase agreement counterparties have taken these steps in order to compensate themselves for a perceived increased risk due to the illiquidity of the underlying collateral. Further contraction among lenders, insolvency of lenders or other general market disruptions could adversely affect one or more of Two Harbors’ potential lenders and could cause one or more of its potential lenders to be unwilling or unable to provide Two Harbors with financing on attractive terms or at all.

If a counterparty to Two Harbors’ repurchase transactions defaults on its obligation to resell the underlying security back to Two Harbors at the end of the transaction term, or if the value of the underlying security has declined as of the end of that term, or if Two Harbors defaults on its obligations under the repurchase agreement, Two Harbors will lose money on its repurchase transactions.

When Two Harbors engages in repurchase transactions, it will generally sell securities to lenders ( i.e. , repurchase agreement counterparties) and receive cash from the lenders. The lenders will be obligated to resell the same securities back to Two Harbors at the end of the term of the transaction. Because the cash Two Harbors will receive from the lender when Two Harbors initially sells the securities to the lender is less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation to resell the same securities back to Two Harbors, Two Harbors would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). Two Harbors would also lose money on a repurchase transaction if the value of the underlying securities has declined as of the end of the transaction term, as Two Harbors would have to repurchase the securities for their initial value but would receive securities worth less than that amount. Further, if Two Harbors defaults on one of its obligations under a repurchase transaction, the lender will be able to terminate the transaction and cease entering into any other repurchase transactions with Two Harbors. Two Harbors expects that Two Harbors’ repurchase agreements will contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under its other agreements could also declare a default. If a default occurs under any of its repurchase agreements and the lenders terminate one or more of its repurchase agreements, Two Harbors may need to enter into replacement repurchase agreements with different lenders. There can be no assurance that Two Harbors will be successful in entering into such

replacement repurchase agreements on the same terms as the repurchase agreements that were terminated or at all. Any losses Two Harbors incurs on its repurchase transactions could adversely affect its earnings and thus its cash available for distribution to its stockholders.

An increase in Two Harbors’ borrowing costs relative to the interest Two Harbors receives on its leveraged assets may adversely affect its profitability and its cash available for distribution to its stockholders.

As Two Harbors’ repurchase agreements and other short-term borrowings mature, Two Harbors will be required either to enter into new borrowings or to sell certain of its assets. An increase in short-term interest rates at the time that Two Harbors seeks to enter into new borrowings would reduce the spread between the returns on its assets and the cost of its borrowings. This would adversely affect the returns on Two Harbors’ assets, which might reduce earnings and, in turn, cash available for distribution to its stockholders.

There can be no assurance that the actions of the U.S. government, Federal Reserve, U.S. Treasury and other governmental and regulatory bodies for the purpose of stabilizing the financial markets, including the establishment of the TALF and the PPIP, or market response to those actions, will achieve the intended effect, and Two Harbors’ business may not benefit from these actions and further government or market developments could adversely impact Two Harbors.

In response to the financial issues affecting the banking system and the financial markets and going concern threats to investment banks and other financial institutions, the U.S. government, Federal Reserve and U.S. Treasury and other governmental and regulatory bodies have taken action to stabilize the financial markets. Significant measures include: the enactment of the Emergency Economic Stabilization Act of 2008 (“EESA”) to, among other things, establish the Troubled Asset Relief Program (the “TARP”) to purchase certain assets from financial institutions; the enactment of the Housing and Economic Recovery Act of 2008 (“HERA”), which established a new regulator for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”); and the establishment of the TALF, which provides non-recourse loans to borrowers to fund their purchase of eligible assets, which currently include certain asset-backed securities (“ABS”) and commercial mortgage-backed securities (“CMBS”), and the Public-Private Investment Program (the “PPIP”), which is designed to encourage the transfer of certain legacy assets, including real estate-related assets, off of the balance sheets of financial institutions.

Although the federal government has committed capital to Fannie Mae and Freddie Mac, there can be no assurance that these actions will be adequate for their needs. If these actions are inadequate, these entities could continue to suffer losses and could fail to honor their guarantees and other obligations. If these entities fail to honor their guarantees, the value of any Agency RMBS assets Two Harbors holds would decline which would materially adversely affect our business, operations and financial condition.

There can be no assurance that the EESA, HERA, TALF, PPIP or other recent U.S. government actions will have a beneficial impact on the financial markets, including on current extreme levels of volatility. To the extent the market does not respond favorably to these initiatives or these initiatives do not function as intended, Two Harbors’ business may not receive the anticipated positive impact from the legislation or other U.S. government actions. There can also be no assurance that Two Harbors will be eligible to participate in programs established by the U.S. government or, if Two Harbors is eligible, that Two Harbors will be able to utilize them successfully or at all. In addition, because the programs are designed, in part, to restart the market for certain of Two Harbors’ target assets, the establishment of these programs may result in increased competition for attractive opportunities in Two Harbors’ target assets. In addition, the U.S. government, the Federal Reserve, the U.S. Treasury and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis. Two Harbors cannot predict whether or when such actions may occur, and such actions could have an adverse impact on Two Harbors’ business, results of operations and financial condition.

Two Harbors is highly dependent on information systems and systems failures could significantly disrupt its business, which may, in turn, negatively affect the market price of its common stock or warrants and its ability to pay dividends.

Two Harbors’ business is highly dependent on communications and information systems of PRCM Advisers LLC and, through the shared facilities and services agreement, Pine River. Any failure or interruption of the systems of PRCM Advisers LLC or Pine River could cause delays or other problems in Two Harbors’ securities trading activities, which could have a material adverse effect on Two Harbors’ operating results and negatively affect the market price of its common stock or warrants and its ability to pay dividends to its stockholders.

Two Harbors may enter into hedging transactions that could expose it to contingent liabilities in the future.

Subject to maintaining its qualification as a REIT, part of Two Harbors’ strategy may involve entering into hedging transactions that could require it to fund cash payments in certain circumstances ( e.g. , the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument). The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in Two Harbors’ results of operations, and Two Harbors’ ability to fund these obligations will depend on the liquidity of its assets and access to capital at the time, and the need to fund these obligations could adversely impact Two Harbors’ financial condition.

Hedging against interest rate exposure may adversely affect Two Harbors’ earnings, which could reduce its cash available for distribution to its stockholders.

Subject to maintaining its qualification as a REIT, Two Harbors may pursue various hedging strategies to seek to reduce its exposure to adverse changes in interest rates. Two Harbors’ hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect Two Harbors because, among other things:

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interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

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available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;

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the duration of the hedge may not match the duration of the related liability;

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the amount of income that a REIT may earn from certain hedging transactions (other than through taxable REIT subsidiaries (“TRSs”)), to offset interest rate losses is limited by U.S. federal income tax provisions governing REITs;

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the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs Two Harbors’ ability to sell or assign its side of the hedging transaction; and

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the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.

Two Harbors’ hedging transactions, which are intended to limit losses, may actually adversely affect Two Harbors’ earnings, which could reduce its cash available for distribution to its stockholders.

In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom Two Harbors enters into a hedging transaction will most likely result in its

default. Default by a party with whom Two Harbors enters into a hedging transaction may result in the loss of unrealized profits and force Two Harbors to cover its commitments, if any, at the then current market price. Although generally Two Harbors will seek to reserve the right to terminate its hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and Two Harbors may not be able to enter into an offsetting contract in order to cover its risk. Two Harbors cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and Two Harbors may be required to maintain a position until exercise or expiration, which could result in losses.

Two Harbors may fail to qualify for hedge accounting treatment and therefore may suffer losses on the derivatives that it enters into.

Two Harbors intends to record derivative and hedging transactions in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). Under these standards, Two Harbors may fail to qualify for hedge accounting treatment for a number of reasons, including if Two Harbors uses instruments that do not meet the SFAS 133 definition of a derivative (such as short sales), Two Harbors fails to satisfy SFAS 133 hedge documentation and hedge effectiveness assessment requirements or its instruments are not highly effective. If Two Harbors fails to qualify for hedge accounting treatment, its operating results may suffer because losses on the derivatives that Two Harbors enters into may not be offset by a change in the fair value of the related hedged transaction.

Declines in the market values of Two Harbors’ assets may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to Two Harbors’ stockholders.

A substantial portion of Two Harbors’ assets will be classified for accounting purposes as “available-for-sale.” Changes in the market values of those assets will be directly charged or credited to stockholders’ equity. As a result, a decline in values may reduce the book value of Two Harbors. Moreover, if the decline in value of an available-for-sale security is other than temporary, such decline will reduce earnings.

A decline in the market value of its assets may adversely affect Two Harbors, particularly in instances where Two Harbors has borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require Two Harbors to post additional collateral to support the loan. If Two Harbors is unable to post the additional collateral, Two Harbors would have to sell the assets at a time when Two Harbors might not otherwise choose to do so. A reduction in credit available may reduce Two Harbors’ earnings and, in turn, cash available for distribution to stockholders.

Changes in accounting treatment may adversely affect Two Harbors’ reported profitability.

In February 2008, the Financial Accounting Standards Board (“FASB”) issued final guidance regarding the accounting and financial statement presentation for transactions that involve the acquisition of RMBS, residential mortgage loans and other financial assets from a counterparty and the subsequent financing of these securities through repurchase agreements with the same counterparty. If Two Harbors does not meet the criteria under the final guidance to account for the transactions on a gross basis, its accounting treatment would not affect the economics of these transactions, but would affect how these transactions are reported on Two Harbors’ financial statements. If Two Harbors is not able to comply with the criteria under this final guidance for same party transactions, Two Harbors would be precluded from presenting RMBS, residential mortgage loans and other financial assets and the related financings, as well as the related interest income and interest expense, on a gross basis on its financial statements. Instead, Two Harbors would be required to account for the purchase commitment and related repurchase agreement on a net basis and record a forward commitment to purchase RMBS, residential mortgage loans and other financial assets as a derivative instrument. Such forward commitments would be recorded at fair value with subsequent changes in fair value recognized in earnings. Additionally, Two Harbors would record the cash portion of its interest in RMBS, residential mortgage loans and other financial assets as a mortgage-related receivable from the counterparty on its balance sheet. Although Two

Harbors would not expect this change in presentation to have a material impact on its net income, it could have an adverse impact on Two Harbors’ operations. It could have an impact on Two Harbors’ ability to include certain RMBS, residential mortgage loans and other financial assets purchased and simultaneously financed from the same counterparty as qualifying real estate interests or real estate-related assets used to qualify under the exemption to not have to register as an investment company under the 1940 Act. It could also limit Two Harbors’ opportunities as Two Harbors may need to limit its purchases of RMBS, residential mortgage loans and other financial assets that are simultaneously financed with the same counterparty.

The increasing number of proposed U.S. federal, state and local laws may increase Two Harbors’ risk of liability with respect to certain mortgage loans and could increase its cost of doing business.

The U.S. Congress and various state and local legislatures are considering, and in the future may consider, legislation which, among other provisions, would permit limited assignee liability for certain violations in the mortgage loan origination process. Two Harbors cannot predict whether or in what form the U.S. Congress or the various state and local legislatures may enact legislation affecting its business. Two Harbors will evaluate the potential impact of any initiatives which, if enacted, could affect Two Harbors’ practices and results of operations. Two Harbors is unable to predict whether federal, state or local authorities will require changes in its practices in the future. These changes, if required, could adversely affect Two Harbors’ profitability, particularly if Two Harbors makes such changes in response to new or amended laws, rules, regulations or ordinances in any state where Two Harbors acquires a significant portion of its mortgage loans, or if such changes result in Two Harbors being held responsible for any violations in the mortgage loan origination process.

Risks Related to Two Harbors’ Management and Two Harbors’ Relationship with PRCM Advisers LLC and Pine River

Two Harbors is dependent on PRCM Advisers LLC and Pine River and may not find a suitable replacement if Two Harbors or PRCM Advisers LLC terminates the management agreement.

Two Harbors has executive officers provided by PRCM Advisers LLC but no other employees. Two Harbors has no separate facilities and is completely reliant on PRCM Advisers LLC, which has significant discretion as to the implementation and execution of Two Harbors’ business strategies and risk management practices. Investors who are not willing to rely on PRCM Advisers LLC should not invest in Two Harbors’ common stock or warrants. The employees, systems and facilities of PRCM Advisers LLC and Pine River may be utilized by other funds and companies advised by PRCM Advisers LLC and by its affiliates, and PRCM Advisers LLC may not have sufficient access to such employees, systems and facilities in order to comply with its obligations under the management agreement. Two Harbors is subject to the risk that PRCM Advisers LLC will terminate the management agreement and that no suitable replacement will be found. Two Harbors believes that its success depends to a significant extent upon the experience of the employees of PRCM Advisers LLC and Pine River, whose continued service is not guaranteed.

There are conflicts of interest in Two Harbors’ relationship with Pine River and its affiliates, including PRCM Advisers LLC, which could result in decisions that are not in the best interests of Two Harbors’ stockholders or warrantholders.

Two Harbors is subject to conflicts of interest arising out of its relationship with Pine River and its affiliates, including PRCM Advisers LLC. Each of Two Harbors’ executive officers and certain of its non-independent directors is also an employee or partner of Pine River; they will not be exclusively dedicated to Two Harbors’ business. Furthermore, PRCM Advisers LLC is wholly-owned by Pine River. Each of Brian Taylor (the Chairman of Two Harbors’ Board of Directors), Thomas Siering (a Director, and the President of Two Harbors), Steven Kuhn (the Co-Chief Investment Officer of Two Harbors) and Jeff Stolt (the Chief Financial Officer of Two Harbors) is a partner and owner of equity interests in Pine River. In addition, Mark Ein (the non-executive Vice Chairman) owns an interest in Sub-Manager, which, in consideration for services to be provided to PRCM Advisers LLC under a sub-management agreement, is entitled to receive a percentage of the management fee

earned by PRCM Advisers LLC, and an affiliate of his is an investor in the Nisswa Fixed Income Fund, a private fund for which Pine River serves as investment manager. As a result, the management agreement with PRCM Advisers LLC was negotiated between related parties, and its terms, including fees payable to PRCM Advisers LLC, may not be as favorable to Two Harbors as if they had been negotiated with an unaffiliated third party. In addition, Two Harbors may choose not to enforce, or to enforce less vigorously, its rights under the management agreement because of its desire to maintain its ongoing relationship with PRCM Advisers LLC.

The management agreement with PRCM Advisers LLC does not prevent PRCM Advisers LLC and its affiliates from engaging in additional management or investment opportunities some of which will compete with Two Harbors. Pine River and its affiliates, including PRCM Advisers LLC, may engage in

additional management or investment opportunities that have overlapping objectives with Two Harbors, and may thus face conflicts in the allocation of investment opportunities to these other investments. Such allocation is at the discretion of PRCM Advisers LLC and Pine River and there is no guarantee that this allocation would be made in the best interest of Two Harbors’ stockholders or warrantholders. Additionally, the ability of PRCM Advisers LLC and Pine River and their respective officers and employees to engage in other business activities may reduce the time PRCM Advisers LLC spends managing Two Harbors.

In the future, Two Harbors may enter into additional transactions with Pine River or its affiliates. In particular, Two Harbors may purchase assets from Pine River or its affiliates or make co-purchases alongside Pine River or its affiliates. These transactions may not be the result of arm’s length negotiations and may involve conflicts between Two Harbors’ interests and the interests of Pine River and/or its affiliates in obtaining favorable terms and conditions. The management agreement provides that at least one of Two Harbors’ independent directors must approve in advance any investment in any security structured or issued by an entity managed by PRCM Advisers LLC or any of its affiliates. There can be no assurance that any procedural protections will be sufficient to assure that these transactions will be made on terms that will be at least as favorable to Two Harbors as those that would have been obtained in an arm’s length transaction.

Two Harbors will compete with current and future investment entities affiliated with PRCM Advisers LLC and Pine River for access to the benefits that Two Harbors’ relationship with Pine River provides to Two Harbors, including access to investment opportunities.

There will be conflicts of interest in allocating investment opportunities to Two Harbors and other funds, investment vehicles and ventures managed by Pine River. For example, Pine River currently serves as the investment manager for the Nisswa Fixed Income Fund, a private fund formed to invest and trade in Agency, non-Agency and other fixed-rate, adjustable and interest only RMBS, including CMO and TBAs, equity investments in REITs and related strategies. There will be a significant overlap in the assets and investment strategies of Two Harbors and the Nisswa Fixed Income Fund, and many of the same trading and investment personnel will provide services to both entities. Further, Pine River and its affiliates may in the future form additional funds or sponsor additional investment vehicles and ventures that have overlapping objectives with Two Harbors and therefore may compete with Two Harbors for investment opportunities.

Two Harbors’ cannot assure you that Pine River affiliates will not establish or manage other investment entities in the future that compete with Two Harbors for investments. Moreover, Pine River cannot assure you that PRCM Advisers LLC will allocate the most attractive investment opportunities to Two Harbors. Two Harbors will be competing with Pine River, its investment funds and vehicles and any other investment entities that Pine River may form or manage in the future for access to the benefits that Two Harbors’ relationship with Pine River provides to Two Harbors, including access to investment opportunities.

PRCM Advisers LLC and Pine River will be subject to certain allocation policies, subject to change in their discretion, in allocating investments among Two Harbors and other investment funds and vehicles, as well as other ventures managed by them. See “ Management of Two Harbors Following the Merger — Resolution of Potential Conflicts of Interest in Allocation of Investment Opportunities .”

Members of Two Harbors’ management team have competing duties to other entities, which could result in decisions that are not in the best interests of Two Harbors’ stockholders or warrantholders.

Two Harbors’ executive officers and the employees of PRCM Advisers LLC and Pine River will not spend all of their time managing Two Harbors’ activities and Two Harbors’ investment portfolio. Two Harbors’ executive officers and the employees of PRCM Advisers LLC and Pine River will allocate some, or a material portion, of their time to other businesses and activities. For example, each of Two Harbors’ executive officers is also an employee or partner of Pine River. None of these individuals is required to devote a specific amount of time to Two Harbors’ affairs. Accordingly, Two Harbors will compete with Pine River, its existing funds, investment vehicles, other ventures and possibly other entities in the future for the time and attention of these officers.

The loss of Two Harbors’ access to Pine River’s investment professionals and principals may adversely affect Two Harbors’ ability to achieve its investment objectives.

Two Harbors depends on PRCM Advisers LLC’s access, through the shared facilities and services agreement, to the investment professionals and principals of Pine River and the information and origination opportunities generated by Pine River’s investment professionals and principals during the normal course of their investment and portfolio management activities. These investment professionals and principals evaluate, negotiate, structures, close and monitor Two Harbors’ investments and its financing activities and Two Harbors’ future success will depend on their continued service. The departure of a significant number of the investment professionals or principals of Pine River, could have a material adverse effect on Two Harbors’ ability to achieve its investment objectives. In addition, Two Harbors cannot assure you that PRCM Advisers LLC will remain PRCM Advisers LLC or that Two Harbors will continue to have access to Pine River’s investment professionals or principals or its information and asset origination opportunities.

If PRCM Advisers LLC ceases to be the investment manager of Two Harbors, financial institutions providing any financing arrangements to Two Harbors may not provide future financing to Two Harbors.

Financial institutions that Two Harbors seeks to finance its investments may require that PRCM Advisers LLC continue to act in such capacity. If PRCM Advisers LLC ceases to be Two Harbors’ manager, it may constitute an event of default and the financial institution providing the arrangement may have acceleration rights with respect to outstanding borrowings and termination rights with respect to Two Harbors’ ability to finance its future investments with that institution. If Two Harbors is unable to obtain financing for its accelerated borrowings and for its future investments under such circumstances, it is likely that Two Harbors would be materially and adversely affected.

PRCM Advisers LLC is newly formed and has no experience in managing a REIT, which may hinder its ability to achieve Two Harbors’ investment objectives or result in loss of Two Harbors’ qualification as a REIT.

The REIT rules and regulations are highly technical and complex, and the failure to comply with these rules and regulations could prevent Two Harbors from qualifying as a REIT or could force Two Harbors to pay unexpected taxes and penalties. PRCM Advisers LLC is newly formed with no experience in managing a portfolio of assets under these complex rules and regulations. Although PRCM Advisers LLC’s and Pine River’s officers and employees have been active in real estate operations and lending for many years, they have no experience operating a REIT and operating a business in compliance with the numerous technical restrictions and limitations set forth in the Internal Revenue Code of 1986, as amended (the “Code”) or the 1940 Act applicable to REITs. The inexperience of PRCM Advisers LLC described above may hinder Two Harbors’ ability to achieve its investment objectives or result in loss of Two Harbors’ qualification as a REIT.

Two Harbors’ board of directors will approve very broad investment guidelines for Two Harbors and will not review or approve each investment decision made by PRCM Advisers LLC. As a result, PRCM Advisers LLC may make investment and other decisions for Two Harbors that result in lower than expected returns or losses, or that otherwise may not fully reflect the best interests of its stockholders or warrantholders.

PRCM Advisers LLC will be authorized to follow very broad investment guidelines. Two Harbors’ board of directors will periodically review its investment guidelines and its investment portfolio but will not, and will not be required to, review or approve all of its proposed investments or any type or category of investment, except that the management agreement requires that investments in securities structured or issued by an entity managed by PRCM Advisers LLC must be approved by at least one of Two Harbors’ independent directors. In addition, in conducting periodic reviews, Two Harbors’ board of directors may rely primarily on information provided to it by PRCM Advisers LLC. Furthermore, PRCM Advisers LLC may use complex strategies, and transactions entered into by PRCM Advisers LLC may be costly, difficult or impossible to unwind by the time they are reviewed by Two Harbors’ board of directors. PRCM Advisers LLC has great latitude within the broad parameters of its investment guidelines in determining the types of assets it may decide are proper investments for Two Harbors, which could result in investment returns that are substantially below expectations or that result in losses, which would materially and adversely affect Two Harbors’ business operations and results. Further, decisions made and investments entered into by PRCM Advisers LLC may not fully reflect the best interests of Two Harbors’ stockholders or warrantholders.

The manner of determining the management fee may not provide sufficient incentive to PRCM Advisers LLC to maximize risk-adjusted returns on Two Harbors’ investment portfolio since it is based on Two Harbors’ stockholders’ equity and not on Two Harbors’ performance.

PRCM Advisers LLC is entitled to receive a management fee that is based on the amount of Two Harbors’ stockholders’ equity (as defined in the management agreement) at the end of each quarter, regardless of Two Harbors’ performance. Accordingly, the possibility exists that significant management fees could be payable to PRCM Advisers LLC for a given quarter despite the fact that Two Harbors could experience a net loss during that quarter. PRCM Advisers LLC’s entitlement to such significant nonperformance-based compensation may not provide sufficient incentive to PRCM Advisers LLC to devote its time and effort to source and maximize risk-adjusted returns on Two Harbors’ investment portfolio, which could, in turn, adversely affect Two Harbors’ ability to pay dividends to its stockholders and the market price of its common stock or warrants. Further, the management fee structure gives PRCM Advisers LLC the incentive to maximize stockholders’ equity by the issuance of new Two Harbors shares of common stock or the retention of existing equity, regardless of the effect of these actions on existing stockholders. In other words, the management fee structure will reward PRCM Advisers LLC primarily based on the size of Two Harbors, and not on its financial returns to stockholders.

The termination of the management agreement may be difficult and costly, which may adversely affect Two Harbors’ inclination to end its relationship with PRCM Advisers LLC.

Termination of the management agreement with PRCM Advisers LLC without cause is difficult and costly. The term “cause” is limited to those circumstances described under “ Management of Two Harbors Following the Merger — Management Agreement with PRCM Advisers LLC. ” The management agreement provides that, in the absence of cause, it may only be terminated by Two Harbors after the third anniversary of the consummation of the merger, upon the vote of the vote of at least two-thirds of all of Two Harbors’ independent directors or by a vote of the holders of a majority of the outstanding shares of Two Harbors’ common stock, based upon: (i) PRCM Advisers LLC’s unsatisfactory performance that is materially detrimental to Two Harbors, or (ii) a determination that the management fees payable to PRCM Advisers LLC are not fair, subject to PRCM Advisers LLC’s right to prevent termination based on unfair fees by accepting a reduction of management fees agreed to by at least two-thirds of all of Two Harbors’ independent directors. PRCM Advisers LLC will be provided 180 days prior notice of any such termination. Additionally, upon a termination by Two Harbors’ without cause (or upon a termination by PRCM Advisers LLC due to Two Harbors’ material breach), the management agreement provides that Two Harbors will pay PRCM Advisers LLC a termination payment equal to three times the sum of

the annual management fee received by PRCM Advisers LLC during the 24-month period before such termination, calculated as of the end of the most recently completed fiscal quarter. This provision increases the effective cost to Two Harbors of electing not to renew, or defaulting in Two Harbors’ obligations under, the management agreement, thereby adversely affecting Two Harbors’ inclination to end Two Harbors’ relationship with PRCM Advisers LLC, even if Two Harbors believes PRCM Advisers LLC’s performance is not satisfactory.

PRCM Advisers LLC is only contractually committed to serve Two Harbors until the third anniversary of the consummation of the merger. Thereafter, the management agreement is renewable on an annual basis; provided , however , that PRCM Advisers LLC may terminate the management agreement annually upon 180 days prior notice. If the management agreement is terminated and no suitable replacement is found to manage Two Harbors, Two Harbors may not be able to execute its business plan.

PRCM Advisers LLC’s, Pine River’s and Sub-Manager’s liability is limited under the management agreement, and Two Harbors has agreed to indemnify PRCM Advisers LLC, Sub-Manager and their respective affiliates, including Pine River, against certain liabilities. As a result, Two Harbors could experience poor performance or losses for which PRCM Advisers LLC would not be liable.

Pursuant to the management agreement, PRCM Advisers LLC will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of Two Harbors’ board of directors in following or declining to follow its advice or recommendations. PRCM Advisers LLC, Sub-Manager, their respective officers, stockholders, members, managers, personnel and directors, any person controlling or controlled by PRCM Advisers LLC or Sub-Manager and any person providing sub-advisory services to PRCM Advisers LLC will not be liable to Two Harbors, any subsidiary of Two Harbors, Two Harbors’ directors, stockholders or partners or any subsidiary’s stockholders, members or partners for acts or omissions performed in accordance with or pursuant to the management agreement, except by reason of acts constituting reckless disregard of PRCM Advisers LLC’s duties under the management agreement which has a material adverse effect on Two Harbors, willful misconduct or gross negligence, as determined by a final non-appealable order of a court of competent jurisdiction. Two Harbors has agreed to indemnify PRCM Advisers LLC, Sub-Manager and their respective affiliates, including Pine River, with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts or omissions of such indemnified parties not constituting reckless disregard of PRCM Advisers LLC’s duties under the management agreement which has a material adverse effect on Two Harbors, willful misconduct or gross negligence. As a result, Two Harbors could experience poor performance or losses for which PRCM Advisers LLC would not be liable.

Risks Related To Two Harbors’ Assets

Two Harbors may not realize gains or income from its assets.

Two Harbors seeks to generate both current income and capital appreciation for its stockholders. However, the assets Two Harbors acquires may not appreciate in value and, in fact, may decline in value, and the debt securities Two Harbors acquires may default on interest and/or principal payments. Accordingly, Two Harbors may not be able to realize gains or income from its assets. Any gains that Two Harbors does realize may not be sufficient to offset any other losses Two Harbors experiences. Any income that Two Harbors realizes may not be sufficient to offset its expenses.

Two Harbors has not yet identified any specific assets.

Two Harbors has not yet identified any specific assets for its portfolio and, thus, you will not be able to evaluate any proposed asset acquisitions before purchasing shares of Two Harbors’ common stock or warrants. Additionally, Two Harbors’ assets will be selected by PRCM Advisers LLC and Two Harbors’ stockholders and warrant holders will not have input into such decisions. Both of these factors will increase the uncertainty, and thus the risk, of investing in shares of Two Harbors’ common stock or warrants.

Until appropriate assets can be identified, PRCM Advisers LLC may invest the funds to be released from the trust account upon consummation of the merger in interest-bearing short-term investments, including money market accounts, that are consistent with Two Harbors’ intention to qualify as a REIT. These investments are expected to provide a lower net return than Two Harbors will seek to achieve from its target assets. Two Harbors expects to reallocate a portion of the funds to be released from the trust account upon consummation of the merger into a more diversified portfolio of assets within three to six months, subject to the availability of appropriate opportunities. Suitable opportunities may not be immediately available. Even if opportunities are available, there can be no assurance that PRCM Advisers LLC’s due diligence processes will uncover all relevant facts, including liabilities associated with potential assets or other weaknesses in such assets, or that any investment will be successful.

Two Harbors will have significant flexibility in using the funds to be released from the trust account upon consummation of the merger. You will be unable to evaluate the manner in which the funds to be released from the trust account upon consummation of the merger will be used or the economic merit of Two Harbors’ expected acquisitions and, as a result, Two Harbors may use the funds to acquire assets with which you may not agree. The failure of Two Harbors’ management to apply these proceeds effectively or find assets that meet its investment criteria in sufficient time or on acceptable terms could result in unfavorable returns, could cause a material adverse effect on Two Harbors’ business, financial condition, liquidity, results of operations and ability to make distributions to its stockholders, and could cause the value of its common stock or warrants to decline.

Prepayment rates may adversely affect the value of Two Harbors’ portfolio of assets.

The value of Two Harbors’ assets may be affected by prepayment rates on mortgage loans. Typically, the value of a mortgage-backed security includes market assumptions regarding, among other things, the speed at which the underlying mortgages will be prepaid. Generally, if the underlying mortgages are prepaid at a faster rate than anticipated, the value of the RMBS will decline because the total payment stream from the RMBS will be less. Further, if Two Harbors purchases assets at a premium to par value, when borrowers prepay their mortgage loans faster than expected, the corresponding prepayments on the mortgage-related securities may reduce the expected yield on such securities because Two Harbors will have to amortize the related premium on an accelerated basis. Conversely, if Two Harbors purchases assets at a discount to par value, when borrowers prepay their mortgage loans slower than expected, the decrease in corresponding prepayments on the mortgage-related securities may reduce the expected yield on such securities because Two Harbors will not be able to accrete the related discount as quickly as originally anticipated. Prepayment rates on loans may be affected by a number of factors including the availability of mortgage credit, the relative economic vitality of the area in which the related properties are located, the average remaining life of the loans, the average size of the remaining loans, the servicing of the mortgage loans, possible changes in tax laws, other opportunities for investment, homeowner mobility and other economic, social, geographic, demographic and legal factors. Consequently, such prepayment rates cannot be predicted with certainty and no strategy can completely insulate Two Harbors from prepayment or other such risks. In periods of declining interest rates, prepayment rates on mortgage loans generally increase. If general interest rates decline at the same time, the proceeds of such prepayments received during such periods are likely to be reinvested by Two Harbors in assets yielding less than the yields on the assets that were prepaid. In addition, the market value of the assets may, because of the risk of prepayment, benefit less than other fixed income securities from declining interest rates.

Recent market conditions may upset the historical relationship between interest rate changes and prepayment trends, which would make it more difficult for Two Harbors to analyze its portfolio of assets.

Two Harbors’ success depends on its ability to analyze the relationship of changing interest rates on prepayments of the mortgage loans that underlie its assets. Changes in interest rates and prepayments affect the market price of the assets that Two Harbors intends to purchase and any asset that Two Harbors holds at a given time. As part of Two Harbors’ overall portfolio risk management, Two Harbors will analyze interest rate changes and prepayment trends separately and collectively to assess their effects on Two Harbors’ portfolio of assets. In

conducting its analysis, Two Harbors will depend on certain assumptions based upon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions. If the recent dislocations in the residential mortgage market or other developments change the way that prepayment trends have historically responded to interest rate changes, Two Harbors’ ability to (1) assess the market value of its portfolio of assets, (2) implement its hedging strategies and (3) implement techniques to reduce its prepayment rate volatility would be significantly affected, which could materially adversely affect Two Harbors’ financial position and results of operations.

Two Harbors may acquire RMBS collateralized by Subprime Mortgage Loans, which are subject to increased risks.

Two Harbors may acquire RMBS backed by collateral pools of Subprime Mortgage Loans, which are mortgage loans that have been originated using underwriting standards that are less restrictive than those used in underwriting Prime Mortgage Loans (mortgage loans that generally conform to Agency underwriting guidelines) and Alt-A Mortgage Loans (mortgage loans made to borrowers whose qualifying mortgage characteristics do not conform to Agency underwriting guidelines and generally allow homeowners to qualify for a mortgage loan with reduced or alternate forms of documentation). These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories, mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Due to economic conditions, including increased interest rates and lower home prices, as well as aggressive lending practices, Subprime Mortgage Loans have in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Thus, because of the higher delinquency rates and losses associated with Subprime Mortgage Loans, the performance of RMBS backed by Subprime Mortgage Loans that Two Harbors may acquire could be correspondingly adversely affected, which could adversely impact Two Harbors’ results of operations, financial condition and business.

Two Harbors’ portfolio of assets may be concentrated, and non-Agency assets will be subject to risk of default.

While Two Harbors intends to diversify its portfolio of assets in the manner described in this proxy statement/prospectus, Two Harbors is not required to observe specific diversification criteria, except as may be set forth in the investment guidelines adopted by its board of directors. Therefore, Two Harbors’ portfolio of assets may at times be concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations. To the extent that Two Harbors’ portfolio is concentrated in any one region or type of security, downturns relating generally to such region or type of security may result in defaults on a number of Two Harbors’ assets within a short time period, which may reduce Two Harbors’ net income and the value of its shares or warrants and accordingly reduce its ability to pay dividends to its stockholders.

Two Harbors’ subordinated RMBS assets may be in the “first loss” position, subjecting it to greater risk of losses.

In general, losses on a mortgage loan included in a securitization will be borne first by the equity holder of the issuing trust, and then by the “first loss” subordinated security holder and then by the “second loss” mezzanine holder. In the event of default and the exhaustion of any classes of securities junior to those which Two Harbors may acquire and there is any further loss, Two Harbors will not be able to recover all of its investment in the securities it purchases. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related RMBS, the securities which Two Harbors may acquire may effectively become the

“first loss” position behind the more senior securities, which may result in significant losses to Two Harbors. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated securities, but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying RMBS to make principal and interest payments may be impaired. In such event, existing credit support in the securitization structure may be insufficient to protect Two Harbors against loss of its principal on these securities.

Increases in interest rates could adversely affect the value of Two Harbors’ assets and cause its interest expense to increase, which could result in reduced earnings or losses and negatively affect Two Harbors’ profitability as well as the cash available for distribution to its stockholders.

Two Harbors expects to focus primarily on acquiring mortgage-related assets by purchasing non-Agency RMBS, Agency RMBS, residential mortgage loans, RMBS derivatives and other financial assets. In a normal yield curve environment, some of these types of assets will generally decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result in losses to Two Harbors, which may negatively affect cash available for distribution to its stockholders.

A significant risk associated with these assets is the risk that both long-term and short-term interest rates will increase significantly. If long-term rates increased significantly, the market value of these assets could decline, and the duration and weighted-average life of the assets could increase. Two Harbors could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on the repurchase agreements Two Harbors may enter into to finance the purchase of these securities.

Market values of Two Harbors’ assets may decline without any general increase in interest rates for a number of reasons, such as increases or expected increases in defaults, increases or expected increases in voluntary prepayments for those assets that are subject to prepayment risk or widening of credit spreads.

In addition, in a period of rising interest rates, Two Harbors’ operating results will depend in large part on the difference between the income from its assets, net of credit losses, and financing costs. Two Harbors anticipates that, in most cases, the income from such assets will respond more slowly to interest rate fluctuations than the cost of its borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence Two Harbors’ net income. Increases in these rates will tend to decrease Two Harbors’ net income and market value of its assets.

Interest rate fluctuations may adversely affect the value of Two Harbors’ assets, net income and common stock.

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond Two Harbors’ control. Interest rate fluctuations present a variety of risks, including the risk of a narrowing of the difference between asset yields and borrowing rates, flattening or inversion of the yield curve and fluctuating prepayment rates, and may adversely affect Two Harbors’ income and the value of its common stock or warrants. Furthermore, the stock market has recently experienced extreme price and volume fluctuations that have affected the market price of many companies in industries similar or related to Two Harbors’ and that have been unrelated to these companies’ operating performances. Additionally, Two Harbors’ operating results and prospects may be below the expectations of public market analysts and investors or may be lower than those of companies with comparable market capitalizations, which could lead to a material decline in the market price of Two Harbors’ common stock or warrants.

Some of the assets in Two Harbors’ portfolio will be recorded at fair value (as determined in accordance with Two Harbors’ pricing policy as approved by its board of directors) and, as a result, there will be uncertainty as to the value of these assets.

Some of the assets in Two Harbors’ portfolio will be in the form of securities that are not publicly traded. The fair value of securities and other assets that are not publicly traded may not be readily determinable. Two Harbors will value these assets quarterly at fair value, as determined in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which may include unobservable inputs. Because such valuations are subjective, the fair value of certain of Two Harbors’ assets may fluctuate over short periods of time and its determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. The value of Two Harbors’ common stock or warrants could be adversely affected if Two Harbors’ determinations regarding the fair value of these assets were materially higher than the values that Two Harbors ultimately realizes upon their disposal.

A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could impair Two Harbors’ assets and harm its operations.

Because it is a newly-formed entity, Two Harbors is not burdened by the losses experienced by certain of its competitors as a result of the current recession and declines in real estate values. However, the risks associated with its business will be more severe during periods of future economic slowdown or recession, especially if these periods are accomplished by declining real estate values. Further, if the current economic slowdown persists or worsens after Two Harbors begins its investment program, Two Harbors will be subject to the same risks. Two Harbors’ non-Agency RMBS investments will be particularly sensitive to these risks.

Declining real estate values will likely reduce the level of new mortgage loan originations because borrowers often use appreciation in the value of their existing properties to support the purchase of additional properties. Borrowers may also be less able to pay principal and interest on Two Harbors’ loans if the value of real estate weakens. Further, declining real estate values significantly increase the likelihood that Two Harbors will incur losses on its loans in the event of default because the value of Two Harbors’ collateral may be insufficient to cover its cost on the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both Two Harbors’ net interest income from loans in its portfolio as well as Two Harbors’ ability to acquire and sell loans, which would significantly harm Two Harbors’ revenues, results of operations, financial condition, business prospects and Two Harbors’ ability to make distributions to its stockholders.

The non-Agency assets that Two Harbors will acquire are subject to delinquency, foreclosure and loss, which could result in losses to Two Harbors.

Residential mortgage loans are secured by single-family residential property and are subject to risks of delinquency and foreclosure and risks of loss. The ability of a borrower to repay a loan secured by a residential property typically is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn, acts of God, terrorism, social unrest and civil disturbances, may impair borrowers’ abilities to repay their loans. Owners of Agency RMBS are protected from the risk of default on the underlying mortgages by guarantees from federally chartered entities such as Fannie Mae and Freddie Mac and, in the case of the Government National Mortgage Association (“Ginnie Mae”), the U.S. government. However, Two Harbors also intends to acquire non-Agency RMBS, which are backed by residential real property but, in contrast to Agency RMBS, their principal and interest are not guaranteed by federally chartered entities or the U.S. government.

In the event of any default under a non-Agency mortgage loan held directly by Two Harbors, Two Harbors will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on Two Harbors’ cash flow from operations. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such

borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process which could have a substantial negative effect on Two Harbors’ anticipated return on the foreclosed mortgage loan.

Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, the assets that Two Harbors acquires.

The U.S. Government, through the Federal Reserve, the FHA and the FDIC, commenced implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. The programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans. In addition, members of Congress have indicated support for additional legislative relief for homeowners, including an amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy proceedings. The servicer will have the authority to modify mortgage loans that are in default, or for which default is reasonably foreseeable, if such modifications are in the best interests of the holders of the mortgage securities and such modifications are done in accordance with the terms of the relevant agreements. Loan modifications are more likely to be used when borrowers are less able to refinance or sell their homes due to market conditions, and when the potential recovery from a foreclosure is reduced due to lower property values. A significant number of loan modifications could result in a significant reduction in cash flows to the holders of the mortgage securities on an ongoing basis. These loan modification programs, as well as future legislative or regulatory actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans may adversely affect the value of, and the returns on, the assets that Two Harbors intends to acquire.

Two Harbors’ non-real estate investments may subject it to various risks, including credit risk, market risk, interest rate risk and liquidity risk.

Two Harbors intends to invest approximately 5% to 10% of its assets in certain non-real estate investments, subject to compliance with applicable REIT and 1940 Act requirements. These non-real estate investments may include asset-backed securities (“ABS”) collateralized by consumer or commercial receivables in sectors such as auto, credit card and student loans. Investors in ABS bear various risks, including credit risk, market risk, interest rate risk, liquidity risk, operations risk, structural risk and legal risk.

Credit risk arises from losses due to defaults by the borrowers in the underlying collateral and the ABS issuer’s or servicer’s failure to perform. These two elements may be related, as, for example, in the case of a servicer which does not provide adequate credit-review scrutiny to the serviced portfolio, leading to higher incidence of defaults. Market risk arises from the cash flow characteristics of the security, which for most ABS tend to be predictable. The greatest variability in cash flows comes from credit performance, including the presence of wind-down or acceleration features designed to protect the ABS purchaser in the event that credit losses in the portfolio rise well above expected levels. Interest rate risk arises for the ABS issuer from the relationship between the pricing terms on the underlying collateral and the terms of the rate paid to holders of the ABS and from the need to mark to market the excess servicing or spread account proceeds carried on the balance sheet. For the holder of the ABS, interest rate risk depends on the expected life of the ABS which may depend on prepayments on the underlying assets or the occurrence of wind-down or termination events. Liquidity risk may arise from an increase in perceived credit risk. Other risks arise through the potential for misrepresentation of loan quality or terms by the originating institution, misrepresentation of the nature and current value of the assets by the servicer and inadequate controls over disbursements and receipts by the servicer.

Risks Related to Two Harbors’ Organization and Structure

Certain provisions of Maryland law could inhibit changes in control.

Certain provisions of the Maryland General Corporation Law (“MGCL”) may have the effect of deterring a third party from making a proposal to acquire Two Harbors or of impeding a change in control under circumstances that otherwise could provide the holders of shares of Two Harbors’ common stock with the opportunity to realize a premium over the then-prevailing market price of such shares.

Two Harbors is subject to the “business combination” provisions of the MGCL that, subject to limitations, prohibit certain business combinations (including a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between Two Harbors and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of Two Harbors’ then outstanding voting stock or an affiliate or associate of Two Harbors who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of Two Harbors’ then outstanding voting stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder. After the five-year prohibition, any business combination between Two Harbors and an interested stockholder generally must be recommended by Two Harbors’ board of directors and approved by the affirmative vote of at least (1) eighty percent of the votes entitled to be cast by holders of outstanding shares of Two Harbors’ voting stock; and (2) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. These super-majority vote requirements do not apply if Two Harbors’ common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, Two Harbors’ board of directors has by resolution exempted business combinations (1) between Two Harbors and Pine River or its affiliates and (2) between Two Harbors and any person, provided that such business combination is first approved by Two Harbors’ board of directors (including a majority of Two Harbors’ directors who are not affiliates or associates of such person). Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between Two Harbors and any of them. As a result, Pine River may be able to enter into business combinations with Two Harbors that may not be in the best interests of Two Harbors’ stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute.

The “control share” provisions of the MGCL provide that “control shares” of a Maryland corporation (defined as voting shares of stock which, when aggregated with all other shares of stock controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by Two Harbors’ stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquirer of control shares, Two Harbors’ officers and Two Harbors’ employees who are also Two Harbors’ directors. Two Harbors’ bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of Two Harbors’ stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.

The “unsolicited takeover” provisions of the MGCL (Title 3, Subtitle 8 of the MGCL) permit Two Harbors’ board of directors, without stockholder approval and regardless of what is currently provided in Two Harbors’ charter or bylaws, to implement takeover defenses, some of which (for example, a classified board) Two Harbors does not currently have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for Two Harbors or of delaying, deferring or preventing a change in control of Two Harbors under circumstances that otherwise could provide the holders of shares of Two Harbors’ common stock with the opportunity to realize a premium over the then current market price. Two Harbors’ charter contains a provision

whereby Two Harbors has elected to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on its board of directors. See “ Certain Provisions of the Maryland General Corporation Law and Two Harbors’ Charter and Bylaws .”

Two Harbors’ authorized but unissued shares of common and preferred stock and the ownership limitations contained in Two Harbors’ charter, may prevent a change in Two Harbors’ control.

Two Harbors’ charter authorizes Two Harbors to issue additional authorized but unissued shares of common or preferred stock. In addition, Two Harbors’ board of directors may, with the approval of a majority of the entire board and without stockholder approval, amend its charter to increase or decrease the aggregate number of shares of its stock or the number of shares of stock of any class or series that Two Harbors has the authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the terms of the classified or reclassified shares. As a result, Two Harbors’ board may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for shares of Two Harbors’ common stock or otherwise be in the best interests of its stockholders.

In addition, Two Harbors’ charter contains restrictions limiting the ownership and transfer of shares of Two Harbors’ common stock and other outstanding shares of capital stock. The relevant sections of Two Harbors’ charter provide that, subject to certain exceptions described below, ownership of shares of Two Harbors’ common stock by any person is limited to 9.8% by value or by number of shares, whichever is more restrictive, of Two Harbors’ outstanding shares of common stock (the common share ownership limit), and no more than 9.8% by value or number of shares, whichever is more restrictive, of Two Harbors’ outstanding capital stock (the aggregate share ownership limit). The common share ownership limit and the aggregate share ownership limit are collectively referred to herein as the “ownership limits.” These charter provisions will restrict the ability of persons to purchase shares in excess of the relevant ownership limits.

Two Harbors’ charter contains provisions that make removal of its directors difficult, which could make it difficult for Two Harbors’ stockholders to effect changes in Two Harbors’ management.

Two Harbors’ charter provides that, subject to the rights of any series of preferred stock, a director may be removed only by the affirmative vote of at least two-thirds of all the votes entitled to be cast generally in the election of directors. Its bylaws provide that vacancies generally may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements make it more difficult to change Two Harbors’ management by removing and replacing directors and may prevent a change in Two Harbors’ control that is in the best interests of its stockholders.

Two Harbors’ rights and your rights to take action against its directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

As permitted by Maryland law, Two Harbors’ charter eliminate the liability of its directors and officers to Two Harbors and you for money damages, except for liability resulting from:

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actual receipt of an improper benefit or profit in money, property or services; or

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a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

In addition, Two Harbors’ charter authorizes Two Harbors to obligate itself to indemnify its present and former directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Two Harbors’ bylaws require Two Harbors to indemnify each present or former director or officer, to the maximum extent permitted by Maryland law, who is made, or threatened to be made, a party to any proceeding because of his or her service to Two Harbors. In addition, Two Harbors may be obligated to fund the defense costs incurred by its directors and officers. See “ Certain Provisions of the Maryland General Corporation Law and Two Harbors’ Charter and Bylaws — Indemnification and Limitation of Directors’ and Officers’ Liability. ”

Tax Risks

Two Harbors has been organized and intends to operate in a manner that will enable it to qualify as a REIT for U.S. federal income tax purposes commencing with its taxable year ending December 31, 2009. Two Harbors has not requested and does not intend to request a ruling from the Internal Revenue Service (the “IRS”) that it qualifies as a REIT. The U.S. federal income tax laws governing REITs are complex, and judicial and administrative interpretations of the U.S. federal income tax laws governing REIT qualification are limited. To qualify as a REIT, Two Harbors must meet, on an ongoing basis, various tests regarding the nature of its assets and its income, the ownership of its outstanding shares, and the amount of its distributions. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for Two Harbors to qualify as a REIT. Thus, while Two Harbors intends to operate so that it will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in its circumstances, no assurance can be given that it will so qualify for any particular year. These considerations also might restrict the types of assets that Two Harbors can acquire in the future.

If Two Harbors fails to qualify as a REIT in any taxable year, and does not qualify for certain statutory relief provisions, it would be required to pay U.S. federal income tax on its taxable income, and distributions to its stockholders would not be deductible by it in determining its taxable income. In such a case, Two Harbors might need to borrow money or sell assets in order to pay its taxes. Two Harbors’ payment of income tax would decrease the amount of its income available for distribution to its stockholders. Furthermore, if Two Harbors fails to maintain its qualification as a REIT, it no longer would be required to distribute substantially all of its net taxable income to its stockholders. In addition, unless Two Harbors were eligible for certain statutory relief provisions, it could not re-elect to qualify as a REIT until the fifth calendar year following the year in which it failed to qualify.

Complying with REIT requirements may cause Two Harbors to forego otherwise attractive investment opportunities or financing or hedging strategies.

To qualify as a REIT for U.S. federal income tax purposes, Two Harbors must continually satisfy various tests regarding the sources of its income, the nature and diversification of its assets, the amounts it distributes to its stockholders and the ownership of its stock. To meet these tests, Two Harbors may be required to forego investments it might otherwise make. Two Harbors may be required to make distributions to stockholders at disadvantageous times or when it does not have funds readily available for distribution, and may be unable to pursue investments that would be otherwise advantageous to it in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder Two Harbors’ investment performance.

Complying with REIT requirements may force Two Harbors to liquidate otherwise profitable assets.

To qualify as a REIT, Two Harbors must ensure that at the end of each calendar quarter, at least 75% of the value of its assets consists of cash, cash items, government securities and designated real estate assets, including certain mortgage loans and shares in other REITs. Subject to certain exceptions, Two Harbors’ ownership of securities, other than government securities and securities that constitute real estate assets, generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of Two Harbors’ assets, other than government securities and securities that constitute real estate assets, can consist of the securities of any one issuer, and no more than 25% of the value of Two Harbors’ total securities can be represented by securities of one or more TRSs. See “ U.S. Federal Income Tax Considerations — U.S. Federal

Income Tax Considerations of Two Harbors as a REIT — Asset Tests .” If Two Harbors fails to comply with these requirements at the end of any calendar quarter after the first calendar quarter for which it qualifies as a REIT, it must generally correct such failure within 30 days after the end of the calendar quarter to avoid losing its REIT qualification. As a result, Two Harbors may be required to liquidate otherwise profitable assets prematurely, which could reduce its return on assets, which could adversely affect returns to its stockholders.

Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax exempt investors.

If (i) all or a portion of Two Harbors’ assets are subject to the rules relating to taxable mortgage pools, (ii) Two Harbors is a “pension held REIT,” (iii) a tax exempt stockholder has incurred debt to purchase or hold Two Harbors’ common stock, or (iv) Two Harbors purchases residual REMIC interests that generate “excess inclusion income,” then a portion of the distributions to and, in the case of a stockholder described in clause (iii), gains realized on the sale of common stock by such tax exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code.

Complying with REIT requirements may limit Two Harbors’ ability to hedge effectively.

The REIT provisions of the Code may limit Two Harbors’ ability to hedge its assets and operations. Under these provisions, any income that Two Harbors generates from transactions intended to hedge its interest rate and currency risks will generally be excluded from gross income for purposes of the 75% and 95% gross income tests if the instrument hedges interest rate risk or foreign currency exposure on liabilities used to carry or acquire real estate or income or gain that would be qualifying income under the 75% or 95% gross income tests, and such instrument is properly identified under applicable Treasury regulations. In addition, any income from other hedges would generally constitute nonqualifying income for purposes of both the 75% and 95% gross income tests. See “U.S. Federal Income Tax Considerations — U.S. Federal Income Tax Considerations of Two Harbors as a REIT— Gross Income Tests — Hedging Transactions.” As a result of these rules, Two Harbors may have to limit its use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than Two Harbors would otherwise incur.

The failure of a loan subject to a repurchase agreement to qualify as a real estate asset would adversely affect Two Harbors’ ability to qualify as a REIT.

Two Harbors may enter into repurchase agreements under which it will nominally sell certain of its loan assets to a counterparty and simultaneously enter into an agreement to repurchase the sold assets. Two Harbors believes that it will be treated for U.S. federal income tax purposes as the owner of the loan assets that are the subject of any such agreement notwithstanding that such agreements may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that Two Harbors did not own the loan assets during the term of the repurchase agreement, in which case it could fail to qualify as a REIT.

REIT distribution requirements could adversely affect Two Harbors’ ability to execute its business plan and may require it to incur debt, sell assets or take other actions to make such distributions.

In order to qualify as a REIT, Two Harbors must distribute to its stockholders, each calendar year, at least 90% of its REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that Two Harbors satisfies the 90% distribution requirement, but distributes less than 100% of its taxable income, it is subject to U.S. federal corporate income tax on Two Harbors’ undistributed income. In addition, Two Harbors will incur a 4% nondeductible excise tax on the amount, if any, by which its distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax law.

Two Harbors intends to distribute its net income to its stockholders in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% nondeductible excise tax. There is no requirement that Two Harbors’ TRSs distribute their after-tax net income to it and such TRSs that Two Harbors forms may, to the extent consistent with maintaining Two Harbors’ qualification as a REIT, determine not to make any current distributions to it.

Two Harbors’ taxable income may substantially exceed its net income as determined by generally accepted accounting principles (“GAAP”) or differences in timing between the recognition of taxable income and the actual receipt of cash may occur in which case Two Harbor may have taxable income in excess of cash flow from our operating activities. For example, capital losses will be deducted in determining Two Harbors’ GAAP net income, but may not be deductible in computing its taxable income. In addition, Two Harbors will likely invest in assets, including debt instruments requiring it to recognize market discount income or accrue original issue discount (“OID”), that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets, referred to as “phantom income.” Although some types of phantom income are excluded to the extent they exceed 5% of Two Harbors’ net income in determining the 90% distribution requirement, Two Harbors may incur corporate income tax and the 4% nondeductible excise tax with respect to any phantom income items if it does not distribute those items on an annual basis. Finally, Two Harbors may be required under the terms of the indebtedness that it incurs, whether to private lenders or pursuant to government programs, to use cash received from interest payments to make principal payment on that indebtedness, with the effect that Two Harbors will recognize income but will not have a corresponding amount of cash available for distribution to its stockholders.

As a result of the foregoing, Two Harbors may generate less cash flow than taxable income in a particular year and find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, in order to satisfy the distribution requirement and to avoid U.S. federal corporate income tax and the 4% nondeductible excise tax in that year, it may be required to: (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt or (iv) make a taxable distribution of its shares as part of a distribution in which stockholders may elect to receive shares or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with the REIT distribution requirements. Thus, compliance with the REIT distribution requirements may require Two Harbors to take actions that may not otherwise be advisable given existing market conditions and hinder Two Harbors’ ability to grow, which could adversely affect the value of its common stock or warrants.

Even if Two Harbors qualifies as a REIT, it may be required to pay certain taxes.

Even if Two Harbors qualifies for taxation as a REIT, it may be subject to certain U.S. federal, state and local taxes on its income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, franchise, property and transfer taxes, including mortgage recording taxes. In addition, Two Harbors will hold some of its assets through taxable subsidiary corporations, including Capitol and any other TRSs. Capitol and any other TRSs or other taxable corporations in which Two Harbors owns an interest will be subject to U.S. federal, state and local corporate taxes. Payment of these taxes generally would reduce Two Harbors’ cash flow and the amount available to distribute to its stockholders. See “ U.S. Federal Income Tax Considerations — U.S. Federal Income Tax Considerations of Two Harbors as a REIT — Taxation of REITs in General .”

Two Harbors may choose to pay dividends in its own stock, in which case you may be required to pay income taxes in excess of the cash dividends you receive.

Two Harbors may distribute taxable dividends that are payable in cash and shares of its common stock at the election of each stockholder. Under IRS Revenue Procedure 2009-15, up to 90% of any such taxable dividend for 2009 could be payable in Two Harbors’ stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of Two Harbors’ current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. stockholder may be

required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of Two Harbors’ stock at the time of the sale. For more information on the tax consequences of distributions with respect to Two Harbors common stock, see “ U.S. Federal Income Tax Considerations — U.S. Federal Income Tax Considerations of Two Harbors as a REIT — Taxation of Taxable U.S Stockholders,” “— Annual Distribution Requirements .” Furthermore, with respect to non-U.S. stockholders, Two Harbors may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of Two Harbors’ stockholders decide to sell shares of Two Harbors’ common stock in order to pay taxes owed on dividends, such sales may put downward pressure on the trading price of Two Harbors’ common stock.

Further, while Revenue Procedure 2009-15 applies only to taxable dividends payable in cash or stock in 2009, it is unclear whether and to what extent Two Harbors will be able to pay taxable dividends in cash and stock in later years. Moreover, various aspects of such a taxable cash/stock dividend are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable cash/stock dividends, including on a retroactive basis, or assert that the requirements for such taxable cash/stock dividends have not been met.

Two Harbors’ ability to invest in and dispose of “to be announced” securities could be limited by Two Harbors’ REIT qualification, and Two Harbors could fail to qualify as a REIT as a result of these investments.

Two Harbors may purchase Agency RMBS through TBAs, or dollar roll transactions. In certain instances, rather than take delivery of the Agency RMBS subject to a TBA, Two Harbors may dispose of the TBA through a dollar roll transaction in which it agrees to purchase similar securities in the future at a predetermined price or otherwise, which may result in the recognition of income or gains. Two Harbors will account for dollar roll transactions as purchases and sales. The law is unclear regarding whether TBAs will be qualifying assets for the 75% asset test and whether income and gains from dispositions of TBAs will be qualifying income for the 75% gross income test.

Unless Two Harbors is advised by counsel that TBAs should be treated as qualifying assets for purposes of the 75% asset test, it will limit its investment in TBAs and any other non-qualifying assets to no more than 25% of its total assets at the end of any calendar quarter. Furthermore, until Two Harbors is advised by counsel that income and gains from the disposition of TBAs should be treated as qualifying income for purposes of the 75% gross income test, it will limit its gains from dispositions of TBAs and any other non-qualifying income to no more than 25% of its total gross income for each calendar year. Accordingly, Two Harbors’ ability to purchase Agency RMBS through TBAs and to dispose of TBAs, through dollar roll transactions or otherwise, could be limited.

Moreover, even if Two Harbors is advised by counsel that TBAs should be treated as qualifying assets or that income and gains from dispositions of TBAs should be treated as qualifying income, it is possible that the IRS could successfully take the position that such assets are not qualifying assets and such income is not qualifying income. In that event, Two Harbors could be subject to a penalty tax or could fail to qualify as a REIT if (i) the value of Two Harbors’ TBAs, together with its non-qualifying assets for the 75% asset test, exceeded 25% of its gross assets at the end of any calendar quarter, or (ii) Two Harbors’ income and gains from the disposition of TBAs, together with its non-qualifying income for the 75% gross income test, exceeded 25% of its gross income for any taxable year.

Although Two Harbors’ use of TRSs may be able to partially mitigate the impact of meeting the requirements for qualification as a REIT, its ownership of and relationship with its TRSs is limited and a failure to comply with the limits would jeopardize its REIT qualification and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. Other than certain activities relating to lodging and healthcare facilities, a TRS generally may engage in any business and may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.

Capitol and other TRSs that Two Harbors may form will pay U.S. federal, state and local income tax on their taxable income, and their after-tax net income will be available for distribution to Two Harbors but are not required to be distributed to Two Harbors. Two Harbors anticipates that the aggregate value of the securities of its TRSs will be less than 25% of the value of its total assets (including Two Harbors’ TRS securities). Furthermore, Two Harbors intends to monitor the value of its respective investments in its TRSs for the purpose of ensuring compliance with TRS ownership limitations. In addition, it will review all of its transactions with TRSs to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that Two Harbors will be able to comply with the 25% limitation or to avoid application of the 100% excise tax discussed above.

Two Harbors may be required to report taxable income with respect to certain of its investments in excess of the economic income it ultimately realizes from them.

Two Harbors may acquire interests in debt instruments in the secondary market for less than their face amount. The discount at which such interests in debt instruments are acquired may reflect doubts about their ultimate collectability rather than current market interest rates. The amount of such discount will nevertheless generally be treated as “market discount” for U.S. federal income tax purposes. Market discount on a debt instrument accrues based generally on the assumption that all future payments on the debt instrument will be made. Accrued market discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made. In the case of residential mortgage loans, principal payments are ordinarily made monthly, and consequently, accrued market discount may have to be included in income each month as if the debt instrument were assured of ultimately being collected in full. If Two Harbors collects less on a debt instrument than its purchase price plus the market discount it had previously reported as income, it may not be able to benefit from any offsetting loss deduction in a subsequent taxable year.

Similarly, some of the mortgage-backed securities that Two Harbors purchases will likely have been issued with OID. Two Harbors will be required to report such OID based on a constant yield method and income will accrue based on the assumption that all future projected payments due on such mortgage-backed securities will be made. If such mortgage-backed securities turn out not to be fully collectible, an offsetting loss deduction will become available only in the later year in which uncollectibility is provable.

Finally, in the event that any debt instruments or mortgage-backed securities acquired by Two Harbors are delinquent as to mandatory principal and interest payments, or in the event a borrower with respect to a particular debt instrument acquired by Two Harbors encounters financial difficulty rendering it unable to pay stated interest as due, Two Harbors may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectibility. Similarly, Two Harbors may be required to accrue interest income with respect to subordinate mortgage-backed securities at their stated rate regardless of whether corresponding cash payments are received or are ultimately collectible. In each case, while Two Harbors would

in general ultimately have an offsetting loss deduction available to it when such interest was determined to be uncollectible, the utility of that deduction would depend on Two Harbors having taxable income in that later year or thereafter.

Dividends payable by REITs generally do not qualify for the reduced tax rates on dividend income from regular corporations, which could adversely affect the value of Two Harbors’ shares or warrants.

The maximum U.S. federal income tax rate for certain qualified dividends payable to domestic stockholders that are individuals, trusts and estates is 15% (through 2010). Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to a 35% maximum U.S. federal income tax rate on ordinary income. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including Two Harbors’ shares.

Two Harbors may be subject to adverse legislative or regulatory tax changes that could reduce the market price of its shares or warrants.

At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be changed, possibly with retroactive effect. Two Harbors cannot predict if or when any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect retroactively. Two Harbors and its stockholders or warrantholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

Your investment has various tax risks.

Although the provisions of the Code generally relevant to an investment in Two Harbors’ shares are described in “ U.S. Federal Income Tax Considerations ,” we urge you to consult your tax advisor concerning the effects of U.S. federal, state, local and foreign tax laws to you with regard to an investment in Two Harbors’ shares.

Risks Related to Capitol and the Merger and the Securities of Two Harbors Following the Merger

If Capitol is unable to effect a business combination and is forced to liquidate, its warrants will expire worthless.

If Capitol does not complete the merger or another business combination by November 8, 2009, its amended and restated certificate of incorporation provides that its corporate existence will automatically terminate and it will distribute to all holders of Public Shares, in proportion to the number of Public Shares held by them, an aggregate sum equal to the amount in the trust fund, inclusive of any interest, plus any remaining net assets. In such event, there will be no distribution with respect to Capitol’s outstanding warrants. Accordingly, the warrants will expire worthless.

Capitol’s stockholders may be held liable for claims by third parties against Capitol to the extent of distributions received by them.

Capitol’s amended and restated certificate of incorporation provides that Capitol will continue in existence only until November 8, 2009. If Capitol has not completed a business combination by such date and amended this provision in connection thereto, pursuant to the DGCL, its corporate existence will cease except for the

purposes of winding up its affairs and liquidating. Under Sections 280 through 282 of the DGCL, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the DGCL intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, it is Capitol’s intention to make liquidating distributions to its stockholders as soon as reasonably possible after November 8, 2009 and, therefore, it does not intend to comply with those procedures.

Because Capitol will not be complying with those procedures, it is required, pursuant to Section 281 of the DGCL, to adopt a plan that will provide for its payment, based on facts known to it at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against it within the subsequent 10 years. Accordingly, Capitol would be required to provide for any creditors known to it at that time or those that it believes could be potentially brought against it within the subsequent 10 years prior to distributing the funds held in the trust to stockholders. Capitol cannot make any assurance as to when such plan will be completed and when liquidation distributions will be made. As a result, liquidation distributions could take 60 days or more to be completed. Furthermore, Capitol cannot assure you that it will properly assess all claims that may be potentially brought against it. As such, Capitol’s stockholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of Capitol’s stockholders may extend well beyond the third anniversary of such date. Accordingly, there can be no assurance that third parties will not seek to recover from Capitol’s stockholders amounts owed to them by Capitol.

If Capitol is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it which is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover all amounts received by Capitol’s stockholders. Furthermore, because Capitol intends to distribute the proceeds held in the trust fund to its public stockholders promptly after November 8, 2009 if it has not completed a business combination by such date, this may be viewed or interpreted as giving preference to Capitol’s public stockholders over any potential creditors with respect to access to or distributions from Capitol’s assets. Furthermore, Capitol’s board may be viewed as having breached their fiduciary duties to Capitol’s creditors and/or may have acted in bad faith; thereby exposing itself and Capitol to claims of punitive damages, by paying public stockholders from the trust fund prior to addressing the claims of creditors. There can be no assurance that claims will not be brought against Capitol for these reasons.

The management of Capitol does not have substantial experience in making investments in real estate programs that invest in mortgage backed securities.

The management of Capitol, including members of its board of directors, has long and diverse experience in operational management, investments and financial management and analysis. However, they do not have substantial experience in making investments in real estate programs that invest in mortgage backed securities. Accordingly, they may not have properly analyzed the transaction with Two Harbors.

Future issuances and sales of shares of Two Harbors’ common stock may depress the market price of Two Harbors’ common stock or warrants or have adverse consequences for Two Harbors’ stockholders or warrantholders.

Two Harbors will issue up to 26,249,000 shares of common stock and warrants to purchase 33,249,000 shares of common stock in connection with the consummation of the merger. Two Harbors’ 2009 equity incentive plan provides for grants of restricted common stock and other equity-based awards, subject to a ceiling of 200,000 shares available for issuance under the plan. Each independent director will receive shares of Two

Harbors’ restricted common stock upon consummation of the merger with a market value of $50,000. The shares of restricted common stock to be granted to Two Harbors’ independent directors shall vest as follows: one-third on each of the date of the first anniversary of the consummation of the merger, the second anniversary of the consummation of the merger and the third anniversary of the consummation of the merger, provided in each case such director is serving as a board member on the vesting date.

Two Harbors cannot predict the effect, if any, of future sales of its common stock, or the availability of shares for future sales, on the market price of its common stock or warrants. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for Two Harbors’ common stock or warrants.

Also, Two Harbors may issue additional shares in subsequent public offerings or private placements to acquire new assets or for other purposes. Two Harbors is not required to offer any such shares to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future share issuances, which may dilute the existing stockholders’ interests in Two Harbors.

Two Harbors has not established a minimum distribution payment level and Two Harbors cannot assure you of its ability to pay distributions in the future.

Two Harbors intends to pay quarterly distributions and to make distributions to its stockholders in an amount such that Two Harbors distributes all or substantially all of its REIT taxable income in each year, subject to certain adjustments. Two Harbors has not established a minimum distribution payment level and its ability to pay distributions may be adversely affected by a number of factors, including the risk factors described in this proxy statement/prospectus. All distributions will be made, subject to Maryland law, at the discretion of Two Harbors’ board of directors and will depend on Two Harbors’ earnings, its financial condition, any debt covenants, maintenance of its REIT qualification and other factors as its board of directors may deem relevant from time to time. Two Harbors believes that a change in any one of the following factors could adversely affect its results of operations and impair its ability to pay distributions to its stockholders:

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the profitability of the assets acquired with of the funds to be released from the trust account upon consummation of the merger;

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Two Harbors’ ability to make profitable acquisitions;

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margin calls or other expenses that reduce Two Harbors’ cash flow;

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defaults in Two Harbors’ asset portfolio or decreases in the value of its portfolio; and

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the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.

Two Harbors cannot assure you that Two Harbors will achieve results that will allow Two Harbors to make a specified level of cash distributions or year-to-year increases in cash distributions in the future. In addition, some of Two Harbors’ distributions may include a return in capital.

Your ability to exercise your warrants may be limited by the ownership limits contained in Two Harbors’ charter.

Your ability to exercise your warrants may be limited by the ownership limits contained in Two Harbors’ charter. In particular, to assist Two Harbors in qualifying as a REIT, ownership of shares of Two Harbors’ common stock by any person is limited under the charter, with certain exceptions, to 9.8% by value or by number of shares, whichever is more restrictive, of Two Harbors’ outstanding shares of common stock and no more than 9.8% by value or by number of shares, whichever is more restrictive, of Two Harbors’ outstanding capital stock. Moreover, assuming the warrant amendment proposals are approved, the terms of the warrants will limit a holder’s ability to exercise warrants to ensure that such holder’s Beneficial Ownership or Constructive

Ownership as defined in Two Harbors’ charter does not exceed the restrictions contained in the charter limiting the ownership of shares of Two Harbors’ common stock. In addition, Two Harbors’ charter contains various other restrictions limiting the ownership and transfer of Two Harbors’ common stock. As a result, you may not be able to exercise your warrants if such exercise would cause you to own shares of Two Harbors common stock in excess of these ownership limits.

You will not be able to exercise your warrants if an effective registration statement is not in place when you desire to do so.

No public warrant will be exercisable and Two Harbors will not be obligated to issue shares of common stock unless, at the time a holder seeks to exercise such public warrant, a prospectus relating to the common stock issuable upon exercise of the warrant is current. Under the terms of the warrant agreement, Two Harbors will be required to use its best efforts to meet these conditions and to maintain a current prospectus relating to the shares of common stock issuable upon exercise of the warrants until the expiration of the warrants. However, there can be no assurance that Two Harbors will be able to do so, and if it does not maintain a current prospectus related to the shares of common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants. Additionally, Two Harbors will have no obligation to settle the warrants for cash or “net cash settle” any warrant exercise. Accordingly, if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current, the warrants may have no value, the market for the warrants may be limited and the warrants may expire worthless. If the warrants expire worthless, this would mean that a person who paid $10.00 for a unit in Capitol’s IPO and who did not sell the warrant included in the unit would have effectively paid $10.00 for one share of Two Harbors common stock.

An investor will only be able to exercise a warrant if the issuance of Two Harbors shares of common stock upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the warrants.

No warrants will be exercisable by a warrant holder and Two Harbors will not be obligated to issue shares of common stock unless the shares of common stock issuable upon such exercise have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. At the time that the warrants become exercisable (following completion of the merger), Two Harbors expects to become listed on the NYSE, which would provide an exemption from registration in every state. Accordingly, Two Harbors believes holders in every state will be able to exercise their warrants as long as its prospectus relating to the shares of common stock issuable upon exercise of the warrants is current. However, there can be no assurance of this fact. If a warrant holder is unable to exercise his warrants in a particular state, he may be forced to sell his warrant and therefore lose the benefit of purchasing Two Harbors stock. Furthermore, the price he receives for his warrant may not equal the difference between the exercise price and the stock price.

Two Harbors’ warrants may be exercised in the future, which would increase the number of shares eligible for future resale in the public market.

Outstanding redeemable warrants to purchase an aggregate of 26,249,000 shares of Two Harbors common stock (issued in connection with the conversion, pursuant to the merger, of the Capitol warrants issued in the IPO) and warrants to purchase an aggregate of 7,000,000 shares of common stock (issued in connection with the conversion, pursuant to the merger, of the warrants sold to the Capitol Founders simultaneously with the consummation of the IPO (“Sponsors’ Warrants”)) will become exercisable after the consummation of the merger. These warrants likely will be exercised if the market price of the shares of Two Harbors common stock equals or exceeds $11.00 per share (assuming the warrant amendment proposals are approved). Therefore, as long as warrants remain outstanding, there will be a drag on any increase in the price of Two Harbors’ common stock in excess of $11.00 per share. To the extent such warrants are exercised, additional shares of Two Harbors common stock will be issued, which would dilute the ownership of existing stockholders.

If Capitol stockholders fail to vote against the merger proposal and fail to deliver their shares in accordance with the conversion requirements specified in this proxy statement/prospectus, they will not be entitled to convert their shares of common stock of Capitol into a pro rata portion of the trust account.

Capitol stockholders holding Public Shares who affirmatively vote against the merger proposal may demand that Capitol convert their shares into a pro rata portion of the trust account, calculated as of two business days prior to the anticipated consummation of the merger. Capitol stockholders who seek to exercise this conversion right must affirmatively vote against the merger and deliver their stock (either physically or electronically) to Capitol’s transfer agent prior to the vote at the meeting. Any Capitol stockholder who fails to vote against the merger proposal and who fails to deliver his or her stock will not be entitled to convert his or her shares into a pro rata portion of the trust account for conversion of his or her shares. See the section entitled “The Merger Proposal — Conversion Rights” for the procedures to be followed if you wish to convert your shares to cash.

The NYSE may not list Two Harbors’ securities on its exchange, which could limit investors’ ability to make transactions in Two Harbors’ securities and subject Two Harbors to additional trading restrictions.

Two Harbors has applied to have its common stock and warrants listed on the NYSE as soon as practicable in connection with the merger. Two Harbors will be required to meet the initial listing requirements to be listed. Two Harbors may not be able to meet those initial listing requirements. Even if Two Harbors’ securities are so listed, Two Harbors may be unable to maintain the listing of its securities in the future.

If the NYSE does not list Two Harbors’ securities for trading on its exchange, Two Harbors could face significant material adverse consequences, including:

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a limited availability of market quotations for its securities;

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reduced liquidity with respect to its securities;

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a determination that its shares of common stock are “penny stock,” which will require brokers trading in its shares of common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the shares of common stock;

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a limited amount of news and analyst coverage for Two Harbors; and

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a decreased ability to issue additional securities or obtain additional financing in the future.

Two Harbors’ stock or warrant price could fluctuate and could cause you to lose a significant part of your investment.

Following consummation of the merger, the market price of Two Harbors’ securities may be influenced by many factors, some of which are beyond its control, including those described above and the following:

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changes in financial estimates by analysts;

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fluctuations in its quarterly financial results or the quarterly financial results of companies perceived to be similar to it;

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general economic conditions;

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changes in market valuations of similar companies;

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terrorist acts;

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changes in its capital structure, such as future issuances of securities or the incurrence of additional debt;

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future sales of its common stock;

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regulatory developments in the United States, foreign countries or both;

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litigation involving Two Harbors, its subsidiaries or its general industry; and

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additions or departures of key personnel at PRCM Advisers LLC or Pine River.

Capitol’s current directors and executive officers own shares of Capitol common stock and warrants that will be worthless if the merger is not approved. In addition, they will receive consideration under the sub-management agreement that is different than, and potentially more valuable than, the consideration that holders of Public Shares will receive for their shares if the merger is approved. Such interests may have influenced their decision to approve the business combination with Two Harbors.

Capitol’s Founders beneficially own Founders’ Shares that they purchased prior to its IPO and 7,000,000 Sponsors’ Warrants they purchased in a private placement that occurred simultaneously with Capitol’s IPO. Such persons are not entitled to receive any of the cash proceeds that may be distributed upon Capitol’s liquidation with respect to shares they acquired prior to its IPO. Therefore, if the merger is not approved and Capitol does not consummate another business combination by November 8, 2009 and is forced to liquidate, such Founders’ Shares and Sponsors’ Warrants held by such persons will be worthless. As of September 24, 2009, the record date for the special meeting, Capitol’s Founders held $64,769,476 in common stock (based on a market price of $9.87) and $3,710,000 in warrants (based on a market price of $0.53). The Capitol Founders have agreed to have their Founders’ Shares cancelled. Furthermore, Sub-Manager, an affiliate of the Capitol Founders, will be providing services to PRCM Advisers LLC upon consummation of the merger pursuant to which it will earn certain fees. See the section entitled “The Merger Proposal — Interests of Capitol’s Directors and Officers and Others in the Merger.”

These financial interests of Capitol’s Founders may have influenced their decision to approve Capitol’s merger with Two Harbors and to continue to pursue the merger. In considering the recommendations of Capitol’s board of directors to vote for the merger proposal and other proposals, you should consider these interests.

Capitol’s chief executive officer is liable to ensure that proceeds of the trust are not reduced by vendor claims in the event the merger is not consummated. Such liability may have influenced his decision to approve the merger with Two Harbors.

If Capitol liquidates prior to the consummation of a business combination, Mark D. Ein, Capitol’s chief executive officer, will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by Capitol for services rendered or contracted for or products sold to Capitol. However, this agreement entered into by Mr. Ein specifically provides for two exceptions to the personal indemnity he has given: Mr. Ein will have no personal liability (1) as to any claimed amounts owed to a target business or vendor or other entity who has executed a valid and enforceable agreement with Capitol waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, or (2) as to any claims under Capitol’s indemnity with the underwriters of the IPO against certain liabilities, including liabilities under the Securities Act. Neither Capitol nor Mr. Ein has any reason to believe that Mr. Ein will not be able to fulfill his indemnity obligations to Capitol if required to do so.

Additionally, if Capitol is required to be liquidated and there are no funds remaining to pay the costs associated with the implementation and completion of such liquidation, Mr. Ein has agreed to advance Capitol the funds necessary to pay such costs and complete such liquidation (currently anticipated to be no more than approximately $15,000) and not to seek repayment for such expenses. If Capitol consummates the merger, Mr. Ein will no longer be responsible for such expenses. See the section entitled “Other Information Related to Capitol — Capitol’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information.

These personal obligations may have influenced Mr. Ein’s decision to approve Capitol’s merger with Two Harbors and to continue to pursue the merger. In considering the recommendations of Capitol’s board of directors to vote for the merger proposal and other proposals, you should consider these interests.

The exercise of Capitol’s directors’ and officers’ discretion in agreeing to changes or waivers in the terms of the merger may result in a conflict of interest when determining whether such changes to the terms of the merger or waivers of conditions are appropriate and in Capitol’s stockholders’ best interest.

In the period leading up to the closing of the merger, events may occur that, pursuant to the Merger Agreement, would cause Capitol to agree to amend the Merger Agreement, to consent to certain actions taken by Two Harbors or to waive rights that Capitol is entitled to under the Merger Agreement. Such events could arise because of a request by Two Harbors to undertake actions that would otherwise be prohibited by the terms of the Merger Agreement or the occurrence of other events that would have a material adverse effect on Two Harbors’ business and would entitle Capitol to terminate the Merger Agreement. In any of such circumstances, it would be discretionary on Capitol, acting through its board of directors, to grant its consent or waive its rights. The existence of the financial and personal interests of the directors described in the preceding risk factors may result in a conflict of interest on the part of one or more of the directors between what he may believe is best for Capitol and what he may believe is best for himself in determining whether or not to take the requested action. As of the date of this proxy statement/prospectus, Capitol does not believe there will be any changes or waivers that its directors and officers would be likely to make after stockholder approval of the merger proposal has been obtained. Although certain changes could be made without further stockholder approval, Capitol will circulate a new or amended proxy statement/prospectus and resolicit its stockholders if changes to the terms of the transaction that would have a material impact on its stockholders are required prior to the stockholder vote on the merger proposal.

If the merger is completed, a large portion of the funds in the trust account established by Capitol in connection with its IPO for the benefit of the holders of the Public Shares may be used to pay converting stockholders or for the purchase, directly or indirectly, of Public Shares. As a consequence, if the merger is completed, such funds will not be available to Two Harbors for working capital and general corporate purposes and the number of beneficial holders of Capitol’s and Two Harbors’ securities may be reduced to a number that may preclude the quotation, trading or listing of Two Harbors’ securities other than on the Over-the-Counter Bulletin Board.

Pursuant to Capitol’s amended and restated certificate of incorporation, holders of Public Shares may vote against the merger proposal and demand that Capitol convert their shares, calculated as of two business days prior to the anticipated consummation of the merger, into a pro rata share of the trust account where a substantial portion of the net proceeds of the IPO are held. Capitol will not consummate the merger if holders of 7,874,699 or more Public Shares exercise these conversion rights. Furthermore, a large portion of the funds in the trust account may be used by Two Harbors, Capitol or their affiliates to acquire Public Shares from holders thereof who have indicated their intention to vote against the merger proposal and elect to convert their shares into cash so that such shares will be voted in favor of the merger proposal. As a consequence of such purchases:

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the funds in Capitol’s trust account that are so used will not be available to Two Harbors after the merger and the actual amount of such funds that Two Harbors may retain for its own use will be diminished; and

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the public “float” of Two Harbors’ common stock may be reduced and the number of beneficial holders of Capitol’s and Two Harbors’ securities may be reduced, which may make it difficult to obtain the quotation, listing or trading of Two Harbors’ securities on the NYSE or any other national securities exchange.

Because Two Harbors is a newly formed company with no operating history, no assets and will commence operations only upon consummation of the merger, its financial statements are not as relevant as ones for a company that has established historical operating results.

Two Harbors has no operating history, has no assets and will commence operations only upon consummation of the merger. Accordingly, you will have no basis upon which to evaluate Two Harbors’ ability to achieve its business objective as described in this proxy statement/prospectus. Although Capitol’s IPO

prospectus contemplated the possibility of Capitol acquiring a company in its development stage, and therefore such company’s financial statements would be similar to Two Harbors’ financial statements, Two Harbors’ financial statements are not as relevant to an investor as financial statements for a company that has established historical operating results.

Persons who purchased Public Shares in the IPO may have rights to rescind their purchases or assert a claim for damages therefor against Capitol and the former directors and officers of Capitol.

Capitol’s amended and restated certificate of incorporation and IPO prospectus require Capitol to complete a business combination in which it acquires a target business having a fair market value equal to at least 80% of Capitol’s trust account balance (excluding deferred underwriting discounts and commissions) and, if the transaction is a related party transaction, to obtain the approval from disinterested independent directors and an opinion from an independent investment banking firm indicating that the transaction is fair to public stockholders from a financial point of view. Furthermore, Capitol’s IPO prospectus did not disclose that funds in its trust account might be used, directly or indirectly, to purchase Public Shares from holders who have indicated their intention to vote against the merger and seek conversion of their shares to cash (as Capitol may contemplate doing). Also, Capitol’s IPO prospectus stated that specific provisions in Capitol’s amended and restated certificate of incorporation may not be amended prior to the consummation of an initial business combination but that Capitol had been advised that such provision limiting its ability to amend its amended and restated certificate of incorporation may not be enforceable under Delaware law. Consequently, each person who purchased Public Shares in the IPO and still held such shares upon learning of these facts may seek rescission of the purchase of the units he acquired in the IPO (under which a successful claimant has the right to receive the total amount paid for his or her securities pursuant to an allegedly deficient prospectus, plus interest and less any income earned on the securities, in exchange for surrender of the securities) or bring an action for damages (compensation for loss on an investment caused by alleged material misrepresentations or omissions in the sale of a security).

If Capitol is unable to complete the merger with Two Harbors or another business combination by November 8, 2009, its amended and restated certificate of incorporation provides that its corporate existence will automatically terminate and will liquidate. In such event, third parties may bring claims against Capitol and, as a result, the proceeds held in trust could be reduced and the per share liquidation price received by stockholders could be less than $9.87 per share.

Capitol must complete a business combination with Two Harbors or another target business by November 8, 2009, when, pursuant to its amended and restated certificate of incorporation, its corporate existence will terminate and it will be required to liquidate. In such event, third parties may bring claims against Capitol. Although Capitol has obtained waiver agreements from certain vendors and service providers it has engaged and owe money to, and the prospective target businesses it has negotiated with, whereby such parties have waived any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they or other vendors who did not execute such waivers (representing approximately $ in liabilities owed by Capitol) will not seek recourse against the trust account notwithstanding such agreements. Furthermore, there is no guarantee that a court will uphold the validity of such agreements. Accordingly, the proceeds held in trust could be subject to claims which could take priority over those of Capitol’s public stockholders. Additionally, if Capitol is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in Capitol’s bankruptcy estate and subject to the claims of third parties with priority over the claims of Capitol’s stockholders. To the extent any bankruptcy or other claims deplete the trust account, there can be no assurance that Capitol will be able to return to its public stockholders at least $9.87 per share.

The transaction with Two Harbors was not approved by a majority of Capitol’s disinterested independent directors as required by Capitol’s amended and restated certificate of incorporation and IPO prospectus and

Capitol’s board of directors did not obtain a fairness opinion in determining whether or not to proceed with the transaction with Two Harbors and, as a result, no independent party has passed upon the fairness of the transaction from a financial point of view to Capitol’s public stockholders.

Because Capitol’s Founders, through Sub-Manager, will be entitled, pursuant to a sub-management agreement with PRCM Advisers LLC, to a portion of the management fee earned by PRCM Advisers LLC pursuant to the management agreement between Two Harbors and PRCM Advisers LLC, the Capitol Founders may be deemed to be affiliated with Two Harbors. Accordingly, the transaction might require approval by a majority of Capitol’s disinterested independent directors. However, because of the relationship described above, there are no disinterested independent directors on Capitol’s board. Accordingly, the transaction has not been approved by such a group of individuals. Furthermore, because of the relationship described above, a fairness opinion might be required to be obtained from an independent investment banking firm indicating the transaction is fair to the holders of Public Shares from a financial point of view. However, the absence of an existing business by Two Harbors precluded the use of customary analyses on which fairness opinions are based. Therefore, it was determined by Capitol’s board of directors that a fairness opinion was not necessary. Accordingly, an investor would be relying solely on the judgment of Capitol’s board of directors in determining whether or not the transaction is fair to the holders of Public Shares from a financial point of view. Capitol’s board of directors may be incorrect in its assessment of the transaction. See the section entitled “The Merger Proposal —Interests of Capitol’s Directors and Officers and Others in the Merger.”

FORWARD-LOOKING STATEMENTS

Capitol and Two Harbors believe that some of the information in this proxy statement/prospectus constitutes forward-looking statements. You can identify these statements by forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or similar words. You should read statements that contain these words carefully because they:

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discuss future expectations;

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contain projections of future results of operations or financial condition; or

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state other “forward-looking” information.

Capitol and Two Harbors believe it is important to communicate their expectations to their respective securityholders. However, there may be events in the future that they are not able to predict accurately or over which they have no control. The risk factors and cautionary language discussed in this proxy statement/prospectus provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by Capitol or Two Harbors in such forward-looking statements, including among other things:

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Capitol’s ability to complete its initial business combination within the specified time limits;

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the number and percentage of Capitol’s stockholders voting against the merger proposal and seeking conversion;

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delisting of Capitol’s securities from the NYSE Amex or the ability to have Two Harbors’ securities listed on the NYSE following the merger;

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the potential liquidity and trading of Capitol’s and Two Harbors’ public securities;

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Two Harbors’ projected operating results;

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Two Harbors’ ability to obtain financing arrangements, including under temporary programs established or proposed to be established by the U.S. government;

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general volatility of the securities markets in which Two Harbors invests;

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availability of investment opportunities in mortgage-related, real estate related and other securities;

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Two Harbors’ expected investments and the expected composition of its investment portfolio;

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interest rate mismatches between Two Harbors’ target assets and any borrowings used to fund such investments;

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changes in interest rates and the market value of Two Harbors’ target assets;

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changes in prepayment rates on Two Harbors’ target assets;

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effects of hedging instruments on Two Harbors’ target assets;

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rates of default or decreased recovery rates on Two Harbors’ target assets;

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the degree to which Two Harbors’ hedging strategies may or may not protect it from interest rate volatility;

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the impact of changes in governmental regulations, tax law and rates, bankruptcy law, accounting rules and guidance and similar matters;

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Two Harbors’ ability to maintain its qualification as a REIT for U.S. federal income tax purposes;

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Two Harbors’ ability to maintain its exemption from registration under the 1940 Act;

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availability of qualified personnel, including the continuing availability of Pine River’s Fixed Income investment team to provide services to Two Harbors;

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estimates relating to Two Harbors’ ability to make distributions to its stockholders in the future;

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Two Harbors’ understanding of its competition; and

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market trends in Two Harbors’ industry, interest rates, real estate values, the debt securities markets or the general economy.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement/prospectus.

All forward-looking statements included herein attributable to any of Capitol, Two Harbors or any person acting on either party’s behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, Capitol and Two Harbors undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect the occurrence of unanticipated events.

Before you grant your proxy or instruct how your vote should be cast or vote on the merger proposal or any of the other proposals, you should be aware that the occurrence of the events described in the “Risk Factors” section and elsewhere in this proxy statement/prospectus may adversely affect Capitol and/or Two Harbors.

SPECIAL MEETINGS OF CAPITOL STOCKHOLDERS AND WARRANTHOLDERS

General

Capitol is furnishing this proxy statement/prospectus to its stockholders and warrantholders as part of the solicitation of proxies by its board of directors for use at the special meetings of Capitol stockholders and warrantholders to be held on October 26, 2009, and at any adjournment or postponement thereof. This proxy statement/prospectus is first being furnished to Capitol stockholders and warrantholders on or about September , 2009 in connection with the vote on the proposals described herein. This proxy statement/prospectus provides you with information you need to know to be able to vote or instruct your vote to be cast at the special meetings.

Date, Time and Place

The special meetings of stockholders and warrantholders will be held on October 26, 2009, at 10:00 a.m., eastern time, at the offices of Graubard Miller, Capitol’s counsel, at The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York 10174.

Purpose of the Capitol Special Meetings

At the special meeting of stockholders, Capitol will ask holders of its common stock to:

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consider and vote upon separate proposals to amend Capitol’s amended and restated certificate of incorporation to allow Capitol to complete the merger with Merger Sub Corp. even though (i) Capitol will ultimately be acquired by Two Harbors, (ii) neither Two Harbors nor Merger Sub Corp. is an operating business, (iii) the fair market value of Two Harbors and Merger Sub Corp. on the date of the transaction is less than 80% of the balance of the trust account, (iv) the transaction will not be approved by disinterested independent directors and (v) Capitol will not be receiving a fairness opinion from an independent investment banking firm that the transaction is fair to public stockholders from a financial point of view (the initial charter proposals);

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consider and vote upon a proposal to (i) adopt the Merger Agreement among Capitol, Merger Sub Corp., Two Harbors and Pine River which, among other things, provides for the merger of Merger Sub Corp. with and into Capitol, with Capitol being the surviving entity and becoming a wholly-owned subsidiary of Two Harbors, and (ii) approve the business combination contemplated by the Merger Agreement (the merger proposal);

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consider and vote upon separate proposals to approve the following differences between the charter of Two Harbors and Capitol’s current amended and restated certificate of incorporation: (i) the name of the new public entity will be “Two Harbors Investment Corp.” as opposed to “Capitol Acquisition Corp.”; (ii) Two Harbors has 450,000,000 authorized shares of common stock and 50,000,000 authorized shares of preferred stock and may increase or decrease such amounts without stockholder approval, as opposed to Capitol having 75,000,000 authorized shares of common stock and 1,000,000 authorized shares of preferred stock and not being able to increase or decrease such amounts without stockholder approval; (iii) Two Harbors’ corporate existence is perpetual as opposed to Capitol’s corporate existence terminating on November 8, 2009; (iv) Two Harbors’ board of directors is not classified as opposed to Capitol’s which is classified; (v) Two Harbors’ charter does not include the various provisions applicable only to specified purpose acquisition corporations that Capitol’s amended and restated certificate of incorporation contains; (vi) Two Harbors’ charter includes a provision that will assist Two Harbors in qualifying to be treated as a REIT commencing with Two Harbors’ taxable year ending December 31, 2009, which provision is not included in Capitol’s amended and restated certificate of incorporation; this provision prevents stockholders or other persons from transferring, acquiring or holding Two Harbors stock if, as a result, (a) Two Harbors’ stock will not be beneficially owned by 100 or more persons, (b) more than 50% of the value of the outstanding shares of stock will be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code

to include certain entities), (c) any person will own more than 9.8% in value or in number of shares, whichever is more restrictive, of Two Harbors common stock, after applying certain attribution rules and subject to certain exceptions, or (d) any person will own more than 9.8% in value or in number of shares, whichever is more restrictive, of Two Harbors stock, after applying certain attribution rules and subject to certain exceptions; and (vii) Two Harbors’ charter includes a provision that provides that Two Harbors’ board of directors may revoke or otherwise terminate Two Harbors’ REIT election, without approval of Two Harbors’ stockholders, if it determines that it is no longer in Two Harbors’ best interests to continue to qualify as a REIT, which provision is not included in Capitol’s amended and restated certificate of incorporation (the secondary charter proposals); and

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consider and vote upon a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the special meeting, Capitol is not authorized to consummate the merger (the adjournment proposal).

At the special meeting of warrantholders, Capitol will ask holders of its warrants to:

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in connection with the transactions contemplated by the Merger Agreement, consider and vote upon separate proposals to amend the Warrant Agreement, dated as of November 8, 2007, between Capitol and Continental Stock Transfer & Trust Company which governs the terms of Capitol’s outstanding warrants to (i) increase the exercise price of Capitol’s warrants from $7.50 per share to $11.00 per share, (ii) extend the expiration date of the warrants from November 7, 2012 to November 7, 2013 and (iii) limit a holder’s ability to exercise warrants to ensure that such holder’s Beneficial Ownership or Constructive Ownership as defined in Two Harbors’ charter does not exceed the restrictions contained in the charter limiting the ownership of shares of Two Harbors’ common stock (the warrant amendment proposals); and

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Recommendation of Capitol Board of Directors

Capitol’s board of directors:

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has unanimously determined that each of the proposals is fair to and in the best interests of Capitol and its stockholders and warrantholders;

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has unanimously approved each of the proposals;

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unanimously recommends that Capitol’s common stockholders vote “FOR” the initial charter proposals;

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unanimously recommends that Capitol’s common stockholders vote “FOR” the merger proposal;

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unanimously recommends that Capitol’s common stockholders vote “FOR” the secondary charter proposals;

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unanimously recommends that Capitol’s common stockholders vote “FOR” the adjournment proposal;

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unanimously recommends that Capitol’s warrantholders vote “FOR” the warrant amendment proposals; and

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unanimously recommends that Capitol’s warrantholders vote “FOR” the adjournment proposal.

Record Date; Who is Entitled to Vote

Capitol has fixed the close of business on September 24, 2009, as the “record date” for determining Capitol stockholders and warrantholders entitled to notice of and to attend and vote at its special meetings. As of the close of business on September 24, 2009, there were 32,811,257 shares of Capitol’s common stock outstanding and entitled to vote and 33,249,000 warrants outstanding and entitled to vote. Each share of Capitol’s common stock is entitled to one vote per share at the special meeting of stockholders and each warrant is entitled to one vote per warrant at the special meeting of warrantholders.

Pursuant to agreements with Capitol, the 6,562,257 Founders’ Shares held by the Capitol Founders will be voted on the merger proposal in accordance with the majority of the votes cast at the special meeting of stockholders on such proposal by the holders of the Public Shares. Accordingly, the vote of such shares will not affect the outcome of the vote on the merger proposal. The Capitol Founders have agreed to vote any shares they purchase after the IPO in favor of the merger proposal.

The Capitol Founders, as well as Pine River, have executed lockup agreements whereby such parties have agreed to vote the 9,906,918 warrants held by such parties in favor of the warrant amendment proposals.

The Capitol Founders have indicated that they intend to vote their Founders’ Shares and Sponsors’ Warrants in favor of all other proposals being presented at the meeting.

Quorum

The presence, in person or by proxy, of a majority of all the outstanding shares of common stock entitled to vote constitutes a quorum at the special meeting of stockholders. The presence, in person or by proxy, of a majority of all the outstanding warrants entitled to vote constitutes a quorum at the special meeting of warrantholders.

Abstentions and Broker Non-Votes

Proxies that are marked “abstain” and proxies relating to “street name” shares or warrants that are returned to Capitol but marked by brokers as “not voted” will be treated as shares or warrants present for purposes of determining the presence of a quorum on all matters. The latter will not be treated as shares or warrants entitled to vote on the matter as to which authority to vote is withheld from the broker. If you do not give the broker voting instructions, under applicable self-regulatory organization rules, your broker may not vote your shares or warrants on “non-routine” proposals, such as the merger proposal and the warrant amendment proposals. Since a stockholder must affirmatively vote against the merger proposal to have conversion rights, individuals who fail to vote or who abstain from voting may not exercise their conversion rights. See the information set forth in “The Merger Proposal — Conversion Rights.”

Vote of Capitol’s Stockholders Required

The approval of the merger proposal will require (i) the affirmative vote of the holders of a majority of Capitol common stock outstanding on the record date and (ii) the affirmative vote for the proposal by the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote on the proposal at the meeting. For purposes of the vote of the holders of a majority of Capitol stock outstanding, abstentions and broker non-votes will have the same effect as a vote “AGAINST” the merger proposal. For purposes of the vote of the holders of a majority of the Public Shares present and entitled to vote on the proposal, abstentions and broker non-votes will have no effect on the vote on the merger proposal. You cannot seek conversion unless you affirmatively vote against the merger proposal.

Each of the initial charter proposals and secondary charter proposals will require the affirmative vote of the holders of a majority of Capitol common stock outstanding on the record date. Because these proposals require the affirmative vote of a majority of the shares of common stock outstanding for approval, abstentions and shares not entitled to vote because of a broker non-vote will have the same effect as a vote against these proposals.

The approval of the adjournment proposal will require the affirmative vote of the holders of a majority of Capitol’s common stock represented and entitled to vote thereon at the meeting. Abstentions are deemed entitled to vote on such proposal. Therefore, they have the same effect as a vote against the proposal. Broker non-votes are not deemed entitled to vote on such proposals and, therefore, they will have no effect on the vote on such proposal.

The approval of the initial charter proposals, the merger proposal and the warrant amendment proposals is a condition to the consummation of the merger. If any of the initial charter proposals, the merger proposal or warrant amendment proposals is not approved, the other proposals will not be presented to stockholders and/or warrantholders for a vote and the merger will not be consummated. Under the Merger Agreement, the approval of the secondary charter proposals is not a condition to the consummation of the merger and the vote on such proposal will not impact whether the merger is consummated.

Vote of Capitol’s Warrantholders Required

The approval of the warrant amendment proposals will require the affirmative vote of the holders of a majority of Capitol warrants outstanding on the record date. Because these proposals require the affirmative vote of a majority of the warrants outstanding for approval, abstentions and warrants not entitled to vote because of a broker non-vote will have the same effect as a vote against these proposals.

The approval of the adjournment proposal will require the affirmative vote of the holders of a majority of Capitol’s warrants represented and entitled to vote thereon at the meeting. Abstentions are deemed entitled to vote on such proposal. Therefore, they have the same effect as a vote against this proposal. Broker non-votes are not deemed entitled to vote on such proposal and, therefore, they will have no effect on the vote on such proposal.

The approval of the initial charter proposals, the merger proposal and the warrant amendment proposals are conditions to the consummation of the merger. If any of the initial charter proposals or the merger proposal is not approved, none of the proposals will be presented to warrantholders for a vote and the merger will not be consummated.

Voting Your Shares or Warrants

Each share of Capitol common stock or warrant of Capitol that you own in your name entitles you to one vote at the special meetings of stockholders and warrantholders, respectively. Your proxy card shows the number of shares of Capitol’s common stock or warrants that you own. If your shares or warrants are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares or warrants you beneficially own are properly counted.

There are two ways to vote your shares of Capitol common stock or warrants at the special meetings:

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You Can Vote By Signing and Returning the Enclosed Proxy Card. If you vote by proxy card, your “proxy,” whose name is listed on the proxy card, will vote your shares or warrants as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares or warrants, your shares or warrants will be voted as recommended by Capitol’s board “FOR” all of the proposals. Votes received after a matter has been voted upon at the special meetings will not be counted.

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You Can Attend the Special Meetings and Vote in Person. Capitol will give you a ballot when you arrive. However, if your shares or warrants are held in the name of your broker, bank or another nominee, you must get a proxy from the broker, bank or other nominee. That is the only way Capitol can be sure that the broker, bank or nominee has not already voted your shares or warrants.

Stockholders and warrantholders who hold their securities through a broker or bank will have the option to authorize their proxies to vote their securities electronically through the Internet or by telephone. If you hold your

securities through a broker, bank or other nominee, you should check your proxy card or voting instruction card forwarded by your broker, bank or other nominee who holds your securities for instructions on how to vote by these methods. Additionally, if you have any questions regarding how to vote, please contact Morrow & Co., LLC, Capitol’s proxy solicitor, at (800) 662-5200.

Revoking Your Proxy

If you give a proxy, you may revoke it at any time before it is exercised by doing any one of the following:

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you may send another proxy card with a later date;

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you may notify Mark D. Ein, Capitol’s chief executive officer and secretary, in writing before the special meetings that you have revoked your proxy; or

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you may attend the special meetings, revoke your proxy, and vote in person, as indicated above.

Who Can Answer Your Questions About Voting Your Shares or Warrants

If you have any questions about how to vote or direct a vote in respect of your shares of Capitol’s common stock or warrants, you may call Morrow & Co., LLC, Capitol’s proxy solicitor, at (800) 662-5200, or Mark D. Ein, Capitol’s chief executive officer, at (202) 654-7060.

Proxy Solicitation Costs

Capitol is soliciting proxies on behalf of its board of directors. All solicitation costs will be paid by Capitol. This solicitation is being made by mail but also may be made by telephone or in person. Capitol and its directors, officers and employees may also solicit proxies in person, by telephone or by other electronic means, including email and facsimile.

Capitol has hired Morrow & Co., LLC to assist in the proxy solicitation process. It will pay that firm a fee of $28,500 plus disbursements. Such payments will be made from non-trust account funds.

Capitol will ask banks, brokers and other institutions, nominees and fiduciaries to forward its proxy materials to their principals and to obtain their authority to execute proxies and voting instructions. Capitol will reimburse them for their reasonable expenses.

Capitol Founders

As of September 24, 2009, the record date for the Capitol special meetings, the Capitol Founders beneficially owned and were entitled to vote 6,562,257 Founders’ Shares. The Founders’ Shares constituted approximately 20% of the outstanding shares of Capitol’s common stock immediately after the IPO. In connection with Capitol’s IPO, Capitol and Citigroup entered into agreements with each of the Capitol Founders pursuant to which each Capitol Founder agreed to vote Founders’ Shares on the merger proposal in accordance with the majority of the votes cast by the holders of Public Shares. The Capitol Founders have agreed to vote any shares of Capitol common stock they purchase after the IPO in favor of the proposals being presented at the special meeting. The Capitol Founders have executed lockup agreements whereby such parties have agreed to vote the 7,000,000 Sponsors’ Warrants in favor of the warrant amendment proposals. The Capitol Founders have also indicated that they intend to vote their Founders’ Shares and Sponsors’ Warrants in favor of all other proposals being presented at the meetings. The Founders’ Shares have no liquidation rights and will be worthless if no business combination is effected by Capitol. In connection with the IPO, the Capitol Founders placed their Founders’ Shares in escrow with Continental Stock Transfer & Trust Company and agreed that they would not sell the Founders’ Shares until the earlier of twelve months after a business combination or Capitol’s liquidation, subject to earlier release within such twelve month period if (i) Capitol’s common stock has a last sales price equal to or exceeding $14.25 per share for any 20 trading days within any 30-trading day period commencing 90

days after the successful consummation of a business combination or (ii) Capitol consummates a subsequent liquidation, merger, stock exchange or other similar transaction that results in all of Capitol’s stockholders having the right to exchange their shares for cash, securities or other property. If the merger is consummated, the Capitol Founders have agreed to cancel all of the Founders’ Shares. Sub-Manager, an entity affiliated with the Capitol Founders, has agreed to provide certain services to PRCM Advisers LLC upon consummation of the transaction pursuant to a sub-management agreement. In exchange for such services, Sub-Manager will receive certain fees to be paid by Two Harbors to PRCM Advisers LLC. For a more detailed description of the interests of the Capitol Founders, see the section entitled “ The Merger Proposal — Interests of Capitol’s Directors and Officers and Others in the Merger .”

From the consummation of the IPO to October 8, 2009, no Capitol Founder has purchased any shares of Capitol common stock or warrants in the open market. If the Capitol Founders believe it would be desirable for them or their affiliates to purchase shares or warrants in advance of the special meetings, such determination would be based on factors such as the likelihood of approval or disapproval of the proposals, the number of shares for which conversion may be requested and the financial resources available to such prospective purchasers. Any additional shares or warrants purchased by the Capitol Founders will be voted by them in favor of the merger and the other proposals.

PROPOSALS TO BE CONSIDERED BY THE CAPITOL STOCKHOLDERS

THE INITIAL CHARTER PROPOSALS

Capitol is proposing the following three initial charter proposals:

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to amend the second paragraph of Article Seventh to revise the definition of a “business combination” to allow Capitol to complete the merger with Merger Sub Corp.;

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to delete all references to “fair market value”; and

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to delete the second sentence of Section F of Article Seventh relating to Capitol obtaining approval of its disinterested independent directors and obtaining a fairness opinion.

A “business combination” is defined in Capitol’s amended and restated certificate of incorporation as follows:

“A “Business Combination” shall mean the acquisition by the Corporation, whether by merger, capital stock exchange, asset, stock purchase, reorganization or other similar business combination, of one or more operating businesses or assets (“Target Business” or “Target Businesses”) having, individually or collectively, a fair market value equal to at least 80% of the balance in the Trust Account (excluding deferred underwriting discounts and commissions) at the time of such acquisition and resulting in ownership by the Corporation of more than 50% of the voting securities of the Target Business or Businesses and control by the Corporation of the majority of any governing body of the Target Business or Businesses. If the Corporation acquires less than 100% of a Target Business or Businesses in a Business Combination, the aggregate fair market value of the portion of the Target Business or Businesses acquired by the Corporation shall be equal to at least 80% of the balance in the Trust Account (excluding deferred underwriting discounts and commissions) at the time of such acquisition.

“Fair market value” for purposes of this Article Seventh shall be determined by the Board of Directors of the Corporation based upon one or more financial standards generally accepted by the financial community, such as actual and potential sales, the values of comparable businesses, earnings and cash flow, and/or book value. If the Corporation’s Board of Directors is not able to determine independently that the Target Business or Businesses has a sufficient fair market value to meet the threshold criterion, it will obtain an opinion in that regard from an unaffiliated, independent investment banking firm which is a member of the Financial Industry Regulatory Authority with respect to the satisfaction of such criterion. The Corporation is not required to obtain an opinion from an investment banking firm as to the fair market value of the Target Business or Businesses if its Board of Directors independently determines that the Target Business or Businesses have sufficient fair market value to meet the threshold criterion.”

Because (i) Capitol will ultimately be acquired by Two Harbors, (ii) neither Two Harbors nor Merger Sub Corp. is an operating business and (iii) the fair market value of Two Harbors and Merger Sub Corp. on the date of the transaction is less than 80% of the balance of the trust account, the proposed transaction does not meet the requirements as set forth above. Furthermore, because Capitol’s Founders, through Sub-Manager, will be entitled, pursuant to a sub-management agreement with PRCM Advisers LLC, to a portion of the management fee earned by PRCM Advisers LLC pursuant to the management agreement between Two Harbors and PRCM Advisers LLC, the Capitol Founders may be deemed to be affiliated with Two Harbors. Such an affiliation would require approval by Capitol’s disinterested independent directors, of which there are none, and a fairness opinion to be obtained from an independent investment banking firm indicating the transaction is fair to the holders of Public Shares from a financial point of view. See the section entitled “ The Merger Proposal — Interests of Capitol’s Directors and Officers and Others in the Merger .” However, the stockholders of Two Harbors after the business combination will be those of Capitol and the ownership percentage of Capitol’s stockholders who do not exercise their conversion rights will increase as a result of the cancellation of the Founders’ Shares. Additionally, the absence of an existing business by Two Harbors precluded the use of customary analyses on which fairness opinions are based. Therefore, it was determined that a fairness opinion was not necessary and Capitol did not

seek to obtain such an opinion. Accordingly, Capitol must amend its amended and restated certificate of incorporation immediately prior to consummation of the merger in order to allow for Capitol to complete the proposed merger.

Capitol’s amended and restated certificate of incorporation purports to prohibit amendment to certain of its provisions, including the definition of a business combination and the requirement to obtain approval of disinterested independent directors and a fairness opinion, prior to consummation of an initial business combination. The prospectus issued by Capitol in its IPO stated that Capitol had been advised that such provision limiting its ability to amend its amended and restated certificate of incorporation may not be enforceable under Delaware law. While Capitol’s IPO prospectus indicated that Capitol viewed the amended and restated certificate of incorporation provisions purporting to prohibit amendments to certain of its provisions as obligations to its stockholders and stated that its officers and directors would not recommend or take any action to waive or amend any of these provisions that would take effect prior to the consummation of an initial business combination, in light of the reasons for the proposed merger set forth below in this paragraph, Capitol believes it is in the best interest of its stockholders to proceed with the proposals set forth in this proxy statement/prospectus. Capitol believes that the proposed merger is an extremely attractive opportunity in the current market environment and therefore, public stockholders should be given the opportunity to consider the business combination. In considering the initial charter proposals, Capitol’s board of directors came to the conclusion that the potential benefits of the proposed merger with Two Harbors to Capitol and its stockholders outweighed the possibility of any liability described below as a result of the initial charter proposals being approved. Moreover, Capitol is still offering holders of Public Shares the right to affirmatively vote their Public Shares against the merger proposal and demand that such shares be converted into a pro rata portion of the trust account.

Capitol has also received an opinion from special Delaware counsel, Richards, Layton & Finger, P.A., concerning the validity of the initial charter proposals. Capitol did not request Richards, Layton & Finger to opine on whether the clause currently contained in Article Seventh of its amended and restated certificate of incorporation prohibiting amendment of Article Seventh prior to consummation of a business combination was valid when adopted and does not intend on seeking advice of counsel on that question from any other source. Richards, Layton & Finger concluded in its opinion, based upon the analysis set forth therein and its examination of Delaware law, and subject to the assumptions, qualifications, limitations and exceptions set forth in its opinion, that “the provision in Article Seventh of the Certificate of Incorporation which purports to eliminate the Company’s statutory power to amend Article Seventh is not a valid certificate of incorporation provision under the General Corporation Law” and “the initial charter amendment, if duly adopted by the board of directors of Capitol (by vote of the majority of the directors present at a meeting at which a quorum is present or, alternatively, by unanimous written consent) and duly approved by the holders of a majority of the outstanding stock of the Company entitled to vote thereon, all in accordance with Section 242(b) of the DGCL, would be valid and effective when filed with the Secretary of State in accordance with Sections 103 and 242 of the DGCL.” A copy of Richards, Layton & Finger’s opinion is included as Annex H to this proxy statement/prospectus, and stockholders are urged to review it in its entirety.

Because Capitol’s amended and restated certificate of incorporation in its current form does not allow for Capitol to complete the proposed merger, each person who purchased his or her Public Shares in the IPO and still held such shares upon learning of the facts set forth above may have securities law claims against Capitol for rescission (under which a successful claimant has the right to receive the total amount paid for his or her securities pursuant to an allegedly deficient prospectus, plus interest and less any income earned on the securities, in exchange for surrender of the securities) or damages (compensation for loss on an investment caused by alleged material misrepresentations or omissions in the sale of a security).

Such claims may entitle stockholders asserting them to as much as $10.00 or more per share, based on the initial offering price of the IPO units comprised of stock and warrants, less any amount received from sale of the original warrants purchased with them, plus interest from the date of Capitol’s IPO (which, in the case of holders of Public Shares, may be more than the pro rata share of the trust account to which they are entitled on conversion or liquidation).

In general, a person who purchased shares pursuant to a defective prospectus or other representation must make a claim for rescission within the applicable statute of limitations period, which, for claims made under Section 12 of the Securities Act and some state statutes, is one year from the time the claimant discovered or reasonably should have discovered the facts giving rise to the claim, but not more than three years from the occurrence of the event giving rise to the claim. A successful claimant for damages under federal or state law could be awarded an amount to compensate for the decrease in value of his or her shares caused by the alleged violation (including, possibly, punitive damages), together with interest, while retaining the shares. Claims under the anti-fraud provisions of the federal securities laws must generally be brought within two years of discovery, but not more than five years after occurrence. Rescission and damages claims would not necessarily be finally adjudicated by the time the merger with Two Harbors may be completed, and such claims would not be extinguished by consummation of that transaction.

Even if you do not pursue such claims, others, who may include all holders of Public Shares, may. Neither Capitol nor Two Harbors can predict whether stockholders will bring such claims, how many might bring them or the extent to which they might be successful.

The approval of each of the initial charter proposals requires the affirmative vote of the holders of a majority of the outstanding shares of Capitol common stock on the record date.

If the initial charter proposals are approved, Capitol will present the other proposals to stockholders and warrantholders for their approval. If all of such proposals are approved, the following will occur:

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Capitol will file an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware to amend the second paragraph of Article Seventh to revise the definition of a “business combination” as set forth below, to delete all references to “fair market value” and to delete the second sentence of Section F of Article Seventh relating to Capitol obtaining approval of its disinterested independent directors and obtaining a fairness opinion:

“A “Business Combination” shall mean the acquisition by the Corporation or its stockholders, whether by merger, capital stock exchange, asset, stock purchase, reorganization or other similar business combination, of one or more entities or assets (“Target Business” or “Target Businesses”) and resulting in ownership by the Corporation or its stockholders of more than 50% of the voting securities of the Target Business or Businesses.”

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Immediately after the filing of such amended and restated certificate of incorporation, Capitol will be authorized to complete the proposed transaction. Thereafter, Capitol will look to satisfy all necessary conditions to closing the merger.

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Once all conditions to closing the transaction are satisfied, Capitol will file all necessary documents with the Secretary of State of the State of Delaware to effectuate such transaction.

If any of initial charter proposals is not approved, the remaining proposals will not be submitted to stockholders and warrantholders for their approval.

CAPITOL’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CAPITOL’S STOCKHOLDERS VOTE “FOR” THE APPROVAL OF EACH OF THE INITIAL CHARTER PROPOSALS.

THE MERGER PROPOSAL

The discussion in this proxy statement/prospectus of the merger and the principal terms of the Merger Agreement by and among Capitol, Two Harbors, Merger Sub Corp. and Pine River is subject to, and is qualified in its entirety by reference to, the Merger Agreement. A copy of the Merger Agreement is attached as Annexes A-1, A-2 and A-3 to this proxy statement/prospectus and is incorporated into this proxy statement/prospectus by reference.

The Parties

Capitol

Capitol Acquisition Corp. is a specified purpose acquisition company (“SPAC”), formed on June 26, 2007 as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business.

On November 14, 2007, Capitol consummated its IPO of 25,000,000 units with each unit consisting of one share of common stock and one warrant, each to purchase one share of common stock at an exercise price of $7.50 per share. Simultaneously with the consummation of the IPO, Capitol consummated the private sale of 7,000,000 Sponsors’ Warrants at a price of $1.00 per Sponsors’ Warrant, generating total proceeds of $7,000,000. The underwriters in the IPO exercised a portion of their over-allotment option (1,249,000 units) on December 7, 2007 generating net proceeds of $12,021,625 after deducting $468,375 for underwriters’ discounts and commissions. The units from the IPO (including the 1,249,000 units pursuant to the over-allotment option) were sold at an offering price of $10.00 per unit, generating total gross proceeds of $262,490,000. After deducting the underwriting discounts and commissions and the offering expenses, the total net proceeds to Capitol from the offering (including the 1,249,000 units pursuant to the over-allotment option and the private sale) were $258,867,469, of which $258,346,625 was deposited into the trust account and the remaining proceeds of $520,844 became available to be used to provide for business, legal and accounting due diligence on prospective business combinations and continuing general and administrative expenses. Capitol also had an aggregate of up to $3,250,000 of interest earned on the proceeds in the trust account that was available to it to fund its working capital requirements. As of June 30, 2009, Capitol had drawn all of the $3,250,000 for working capital requirements and had $14,223 available to pay its current tax obligations. As of June 30, 2009, there was $259,064,422 of restricted capital in the trust account.

If the merger is consummated, Capitol intends to use the funds held in the trust account to pay up to approximately $7.3 million in transaction fees and expenses and up to approximately $5.9 million in deferred underwriting discounts and commissions, as well as to pay any tax liabilities and reimbursement of expenses of the Capitol Founders if either are incurred prior to the closing of the merger (although it is not currently anticipated that either will be incurred in any material amount) and to make purchases of Public Shares, if any. The balance will be delivered to Two Harbors to pay stockholders who properly exercise their conversion rights and for working capital and general corporate purposes of Two Harbors and Capitol. The merger is conditioned on Capitol’s trust account containing no less than $100 million after the closing after taking into account all of the payments described above. It is possible that the present holders of 30.0% or more of the Public Shares will affirmatively vote against the merger and seek conversion of their Public Shares into cash in accordance with Capitol’s amended and restated certificate of incorporation. If such event were to occur, the merger could not be completed. To preclude such possibility, as described in Capitol’s Current Reports on Form 8-K, Capitol has been holding presentations with certain of its stockholders and warrantholders, as well as other persons who might be interested in purchasing Capitol securities, to discuss the proposed merger with them and to seek to have them purchase shares and/or vote in favor of the merger proposal. Additionally, Capitol, the Capitol Founders, Two Harbors and their respective affiliates may negotiate arrangements (although no such negotiations have yet to take place) to provide for the purchase of the Public Shares from holders thereof who indicate their intention to vote against the merger and seek conversion or who otherwise wish to sell their Public Shares. As a consequence of such purchases, it is likely that the amount of funds available to Two Harbors for working capital and general corporate purposes from the trust account would be diminished. However, the maximum cash purchase price that will be offered to the holders of

Public Shares by Capitol and Two Harbors for their shares will be the per share conversion price at the time of the business combination. In addition, in no event will any person be reimbursed with funds from Capitol’s trust account for any amounts paid to holders of Public Shares in excess of the per share conversion price at the time of the business combination. Definitive arrangements have not yet been determined but some possible methods are described in the section titled “ The Merger Proposal — Actions That May Be Taken to Secure Approval of Capitol’s Stockholders .” Regardless of the specific arrangements that are made to purchase Public Shares, there will be sufficient funds from the trust account funds transferred to Capitol to pay the holders of all Public Shares that are properly converted and Capitol will use such funds for such purpose.

If the merger is not consummated by November 8, 2009, either party may terminate the Merger Agreement. If Capitol is unable to complete the merger or another business combination by November 8, 2009, its amended and restated certificate of incorporation provides that its corporate existence will automatically terminate and it will liquidate and promptly distribute to its public stockholders the amount in its trust account plus any remaining non-trust account funds after payment of its liabilities.

Capitol’s common stock, units and warrants are currently listed on the NYSE Amex under the symbols CLA, CLA.U and CLA.WS, respectively. Capitol’s common stock, units and warrants will cease trading upon consummation of the merger.

The mailing address of Capitol’s principal executive office is 509 7 ^th Street, N.W., Washington, D.C. 20004. Its telephone number is (202) 654-7060.

Two Harbors Investment Corp.

Upon consummation of the merger, Two Harbors will initially seek to invest in Agency RMBS, non-Agency RMBS and assets other than RMBS. Two Harbors was formed solely to complete the business combination with Capitol and has no material assets or liabilities. As of the date of this proxy statement/prospectus, Two Harbors owns no material assets other than the issued shares of Merger Sub Corp. and does not operate any business other than as the holding company of Merger Sub Corp. Its only assets following the business combination will be the funds released to it from Capitol’s trust account upon consummation of the business combination and its stock of Capitol. Immediately upon the completion of the merger, except for shares of restricted stock that will be issued to Two Harbors’ independent directors upon consummation of the merger, the former stockholders of Capitol will own all of the outstanding shares of Two Harbors common stock.

Two Harbors will be externally managed and advised by PRCM Advisers LLC, a subsidiary of Pine River. Founded in 2002, Pine River is a global multi-strategy asset management firm, with approximately $1.1 billion million in assets under management as of September 1, 2009, including $328 million in a private fund, the Nisswa Fixed Income Fund, dedicated to investments in RMBS and related strategies. Pine River began managing RMBS investments on February 1, 2008.

See the section entitled “ Business of Two Harbors ” for a more complete description of the business that Two Harbors will engage in upon completion of the merger.

Two Harbors’ principal executive office is currently located at 601 Carlson Parkway, Suite 330, Minnetonka, Minnesota 55305 and its telephone number is (612) 238-3300.

Merger Sub Corp.

Two Harbors Merger Corp. is a Delaware corporation that was organized in May 2009 for the sole purpose of merging with Capitol. All of Merger Sub Corp.’s capital stock is owned by Two Harbors. Merger Sub Corp. has no material assets and does not operate any business.

The mailing address of Merger Sub Corp.’s principal executive office is 601 Carlson Parkway, Suite 330, Minnetonka, Minnesota 55305. Its telephone number is (612) 238-3300.

Name; Headquarters; Stock Symbols

After completion of the merger:

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the name of the publicly-traded holding company will be Two Harbors Investment Corp.;

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the corporate headquarters and principal executive offices of Two Harbors will be located at 601 Carlson Parkway, Suite 330, Minnetonka, Minnesota 55305; and

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Two Harbors’ common stock and warrants will be listed for trading on the NYSE under the symbol TWO and TWO.WS, respectively, assuming approval of its listing application by the NYSE.

Background of the Merger

The terms of the Merger Agreement are the result of arms’-length negotiations between representatives of Two Harbors and Capitol. The following is a brief discussion of the background of these negotiations, the Merger Agreement and related transactions.

Capitol was formed on June 26, 2007 to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Capitol’s amended and restated certificate of incorporation provides that Capitol must liquidate unless it has consummated a business combination by November 8, 2009. As of June 30, 2009, $259,078,645 was held in deposit in the trust account.

Promptly following the IPO of Capitol, Capitol contacted several private equity firms, venture capital firms, numerous other business relationships, investment bankers and consulting firms, as well as, legal and accounting firms. Through these and further efforts, Capitol identified and reviewed information with respect to approximately 200 potential target companies. On several occasions described below, Capitol engaged in multiple meetings with potential targets and engaged in serious discussions with a select few profitable, rapidly expanding, domestic and global businesses.

In December 2007, Mr. Ein was informed by an investment banker about a high growth, privately held communications infrastructure provider that was seeking liquidity for its institutional investors. Soon after, Mr. Ein had a telephone conversation with the Chief Executive Officer of the target. On January 9, 2008, Capitol and the target executed a confidentiality and non-disclosure agreement. On January 11, 2008, Capitol received due diligence materials from the target. Capitol then held multiple discussions and meetings with the target and their advisors during January 2008 and conducted extensive due diligence. Capitol also utilized an investment bank to provide assistance with valuation and industry due diligence. Thereafter, Capitol submitted a non-binding letter of intent for a cash and stock transaction to the target’s advisors. However, the target’s advisors informed Mr. Ein that the target would not pursue Capitol’s proposal and discussions with the target ended. The target was ultimately acquired by a publicly held company.

Also in December 2007, Mr. Ein had a dinner meeting with the majority investor of a global supplier of industrial equipment. The investor informed Mr. Ein that the target had engaged an investment banker and was pursuing a dual path (initial public offering or acquisition) process for the target. Capitol thereafter reviewed the registration statement that the target had filed with the SEC and executed a confidentiality and non disclosure

agreement with the target. Mr. Ein and Ms. Eilian, along with Capitol’s financial advisors, attended a meeting with the target’s management team on February 5, 2008. On February 12, 2008, Capitol received a letter from the target’s investment bankers detailing procedures and requirements for submitting a non-binding letter of intent. From February 5, 2008 to February 21, 2008, Capitol and its financial advisors performed due diligence and financial analyses to develop a range of values and transaction structure for the target. During this time period, Capitol engaged outside legal counsel to provide advice regarding certain contingent liability issues with the target. On February 21, 2008, Capitol submitted a non-binding letter of intent for a cash and stock transaction to the target’s investment bankers. The parties then continued discussions regarding a proposed transaction. During the first week of March, Capitol researched, interviewed and retained an industry consultant to assist with due diligence on the target. The target provided Capitol and its financial and legal advisors access to an electronic data room on March 9, 2008. Capitol scheduled an on site due diligence visit at one of the target’s manufacturing facilities for March 20, 2008. However, the target’s investment bankers informed Mr. Ein that the target was going to exclusively pursue an initial public offering and transaction discussions with the target ended.

In May 2008, Mr. Ein was introduced by an advisor to the chief executive officer and majority shareholder of a privately held software company. Mr. Ein met with the target’s chief executive officer and held several subsequent phone conversations, meetings and email exchanges regarding the business, potential transaction structures, and ways to utilize Capitol to achieve his liquidity and growth objectives. On June 23, 2008, Capitol and the target executed a confidentiality and non disclosure agreement and Capitol was provided access to an electronic data room of the target to conduct due diligence. In late August 2008, the target’s chief executive officer informed Mr. Ein that a certain acquisition target was beginning to look promising and he wanted to discuss utilizing Capitol as a vehicle to finance the acquisition. In mid September 2008, Mr. Ein met with the target’s chief executive officer to discuss progress on the acquisition. In late September 2008, the target provided Capitol with revised financial information taking into account the proposed acquisition and Capitol and its financial advisors conducted more due diligence and financial analyses to develop a transaction structure. Mr. Ein continued to communicate with the target’s chief executive officer by phone and email through October providing different transaction scenarios. In late October 2008, the target’s chief executive officer called Mr. Ein and informed him that the target was in discussions with another potential financial partner. During late October and early November 2008, Capitol and its financial advisors developed several potential transaction structures designed to meet the target’s growth and liquidity objectives. In late November 2008, Mr. Ein held a phone call with the target’s chief executive officer proposing a transaction structure and valuation for a business combination between Capitol and the target. On December 8, 2008, Mr. Ein and Capitol’s financial advisor met with the target’s chief executive officer and provided discussion materials detailing the proposed business combination. On December 24, 2008, the target’s chief executive officer proposed a cash and stock transaction structure that reflected a valuation that equaled or exceeded the valuation multiples for comparable public companies that were of greater scale and had significantly less financial leverage than the target and therefore was not within a range that Capitol felt would be in the best interest of Capitol’s stockholders. Mr. Ein communicated this to the target’s chief executive officer and both agreed to not proceed with the proposed business combination. During January, February and April 2009, Mr. Ein and the target’s chief executive officer had several telephone conversations and email exchanges regarding potential transaction structures. However, the target’s valuations expectations continued to exceed the range of valuations that Capitol felt would be in the best interest of Capitol’s stockholders and further discussions with the target ended in April 2009.

In August 2008, Joseph Statter, a full time consultant to Capitol, received a call from an investment banker inquiring about Capitol’s interest in a potential business combination with a global company in the interactive entertainment software industry. On September 18, 2008, Capitol and the target executed a confidentiality and non disclosure agreement. On September 25, 2008, the target provided preliminary diligence information and historical and projected summary financial information to Capitol. On October 2, 2008, Mr. Ein, Ms. Eilian, Mr. Statter, and Jonathan Stolz, a full time consultant to Capitol, held a video conference with the target’s chief executive officer, the target’s majority shareholder and the target’s investment banker. During the remainder of October, Capitol received revised financial models from the target taking into account the use of the growth capital that would be provided by Capitol. Capitol worked with its financial advisors on various transaction

structures while conducting preliminary due diligence on the target. On October 24, 2008, the target’s chief executive officer, the target’s investment banker, Capitol and Capitol’s financial advisors held a conference call discussing the target’s use of proceeds and growth prospects. Capitol and its financial advisors developed transaction structures and valuation analyses and subsequently agreed to meet at the target’s headquarters to conduct extensive business due diligence on November 10 and 11, 2008. During November and early December 2008, Capitol and it’s financial advisors continued conducting financial and business due diligence on the target. On December 3, 2008, Mr. Ein discussed a stock based transaction structure and valuation for a business combination with the majority shareholder of the target. On December 7, 2008, Mr. Ein held a follow up conversation with the target’s majority shareholder and the majority shareholder agreed to discuss Capitol’s proposal with the target’s chief executive officer to the majority shareholder’s partners. At this time, the target’s majority shareholder requested additional time to revise their financial projections to reflect additional considerations raised by the partners of the majority shareholder. In mid March 2009, the parties resumed negotiations. However, the target eventually indicated that it was focusing its efforts on meeting certain product release schedules and the parties ceased negotiations.

In March 2009, Mr. Ein was contacted by an investment banker representing a global outsourcing company to original equipment manufacturers about recapitalizing the target. On March 20, 2009, Capitol and the target executed a confidentiality and non disclosure agreement and the investment banker provided by email a confidential information memorandum on the target. On March 23, 2009, Ms. Eilian, Andrew Sherman, a full time consultant to Capitol, Mr. Statter, and Mr. Stolz held a conference call with the target’s investment bankers to discuss the process and expected timing of the proposed transaction. The target’s investment bankers encouraged Capitol to schedule a meeting with the target’s chief executive officer and chief financial officer on March 26, 2009. Capitol contacted its financial advisor after the conference call, discussed the target and the opportunity and agreed to meet with the target’s chief executive officer and chief financial officer on March 26, 2009. From March 27 to March 31, 2009, Capitol and its financial advisor continued to conduct due diligence on the target and emailed a list of follow up questions to the target’s investment bankers. On April 2 and 3, 2009, the target’s investment bankers provided answers and supporting data to Capitol’s follow up questions. Between April 3 and April 7, 2009, Capitol and its financial advisors performed additional financial analyses, held conference call with the target’s investment bankers and began drafting a non-binding letter of intent for a stock based transaction proposing a recapitalization of the target. On April 7, 2009, Capitol sent a non-binding letter of intent to the target’s chief executive officer and investment bankers. On April 8, 2009, the target’s investment bankers had a conference call with Capitol for clarification on certain elements of the non-binding letter of intent and mentioned that the target’s management and controlling shareholders would be meeting the next day to discuss the proposal. On April 9, 2009, Capitol and Piyush Sodha, a director of Capitol, held a conference call with the target’s investment bankers. The target’s investment bankers suggested a meeting with the target’s management team at the target’s headquarters for additional due diligence and to spend time with the target’s founding and controlling shareholders. On April 16, 2009, Mr. Ein and Mr. Statter met with the target’s management and their investment bankers at the target’s headquarters to conduct additional due diligence and had a dinner meeting with the target’s investment bankers and the controlling shareholders’ financial advisor. On April 17, 2009, Mr. Ein and Mr. Statter met with the controlling shareholders’ financial advisor and the target’s investment bankers to establish a timeline for the proposed transaction. Also on April 17, 2009, Mr. Ein and Mr. Statter met with two of the controlling shareholders of the target to discuss their goals and expectations of the proposed recapitalization and to answer any questions they had regarding Capitol’s proposal. On April 21, 2009, Capitol held a conference call with the target’s investment bankers to discuss mutual interest and next steps for the proposed transaction. On April 23, 2009, Capitol held a conference call with the target’s chief executive officer and investment bankers to schedule joint meetings between Capitol and the target with certain key customers of the target. On May 5, 2009, Mr. Ein, Mr. Sodha, and Raul Fernandez, another director of Capitol, had a dinner meeting with a key customer of the target to discuss the proposed transaction. On May 6, 2009, Mr. Ein, Lawrence Calcano, a director of Capitol, and Capitol’s financial advisor held a meeting with another key customer of the target. On May 8, 2009, the target’s investment bankers requested a revised proposal from Capitol that provided more specificity regarding milestones impacting the target earning contingent consideration.

On May 8, 2009, Capitol’s board of directors met to discuss this transaction as well as the Two Harbors transaction and decided to continue discussions with both this target and Two Harbors. However, in further analyzing the transaction with the global outsourcing company, Capitol’s board of directors noted that the target (i) had a highly levered capital structure that would have likely required Capitol to significantly restructure the balance sheet and obtain concessions from its debt holders, (ii) had significant customer concentration and relied on such customers to significantly increase its order volume to meet financial projections that were significantly higher than recent performance, (iii) participated in a highly competitive and relatively low margin business with several well-capitalized global competitors and (iv) was located outside of the United States which would add complexities in completing a transaction. In addition, Capitol’s board of directors noted the positive aspects of a transaction with Two Harbors as described under the section titled “ The Merger Proposal — Capitol’s Board of Directors’ Reasons for the Approval of the Merger .” Based on the foregoing, Capitol’s board of directors ultimately determined that the proposed transaction with Two Harbors was the most attractive transaction for Capitol’s stockholders and decided that Capitol should not proceed with the transaction with the global outsourcing company and instead move forward only with the proposed transaction with Two Harbors.

On April 29, 2009, Andrew Garcia, Vice President — Business Development of Two Harbors and Head of SPAC Strategies at Pine River contacted Mark Ein to discuss a potential transaction involving Capitol. Pine River is a holder of Capitol’s warrants and therefore was familiar with Capitol. On April 30, 2009, the parties negotiated and executed a confidentiality agreement, Pine River provided summary information and a preliminary term sheet, and the parties began discussions regarding a proposed transaction.

During the week of May 4, 2009, representatives of Capitol and Pine River held numerous phone calls and in person meetings to discuss the opportunity and potential terms of a proposed transaction. On the evening of May 4, 2009, Mr. Garcia and Thomas Siering, Chief Executive Officer, President and Director of Two Harbors and Partner — Head of Fundamental Strategies at Pine River were introduced to and held brief discussions with Capitol director Raul Fernandez. On May 5, 2009, Messrs. Garcia and Siering were joined by Brian Taylor, Pine River’s Chief Executive Officer, with Steven Kuhn, Co-Chief Investment Officer of Two Harbors and Partner — Head of Fixed Income Trading at Pine River joining telephonically at Capitol’s offices to continue discussing the proposed transaction. Capitol director Richard Donaldson also attended this meeting. On May 6, 2009, Mr. Ein and other representatives of Capitol continued their discussions with Messrs. Garcia, Siering, and Taylor at the New York offices of Citigroup. Capitol director Lawrence Calcano also attended this meeting. On May 7, 2009, Pine River sent Capitol a revised term sheet outlining the proposed terms of the merger. Several rounds of negotiations then ensued over the next two days in which the term sheet was again revised. The main items of negotiation on the term sheet involved the overall structure of the transaction and the structure and terms of the management company that would operate the business of Two Harbors following the merger.

On May 8, 2009, Capitol held a board meeting to discuss the filing of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and to discuss Capitol’s search for prospective target businesses. At this meeting, the board discussed the proposed transaction with Pine River as well as another opportunity that Capitol was pursuing. Management was authorized to continue negotiations with both Pine River and the other opportunity in order to see if a transaction could be agreed upon that would be favorable to Capitol’s stockholders. Because Capitol proceeded with the transaction with Pine River, the other opportunity did not ultimately proceed.

On May 9, 2009, Capitol sent a revised term sheet to Pine River for its review. Negotiations continued over the weekend and on May 11, 2009, Pine River sent a draft of a non-binding letter of intent incorporating the proposed terms of the agreement. After further negotiations, Capitol and Pine River executed the letter of intent on May 12, 2009.

On May 14, 2009, the parties held an organizational meeting at which the structure of the transaction was discussed and the law firms were instructed to begin drafting the transactional documents.

On May 19, 2009, counsel for Two Harbors circulated drafts of the Merger Agreement. From May 19, 2009 and proceeding through June 11, 2009, Capitol and its advisors continued to conduct due diligence while Pine River and Capitol and their respective counsels continued to negotiate terms of the transaction and draft the Merger Agreement and all related transaction agreements. Numerous negotiating sessions and conference calls were held to resolve open items not covered in the initial letter of intent, including definitions of key terms and representations, warranties and covenants. During that same time period, Pine River and Capitol, and their respective counsel, negotiated the terms of the management agreement and the sub-management agreement. Numerous negotiations sessions and conference calls were held to resolve open items not covered in the initial letter of intent. During that same time period, Capitol and its advisers entered into negotiations with the underwriters in its IPO regarding the reduction of their deferred underwriting commissions payable at the consummation of the merger. Capitol and its underwriters agreed to a reduction of the underwriting commissions in exchange for certain rights to participate in future securities offerings of Two Harbors following consummation of the merger and executed letter agreements reflecting this agreement. Additionally, because (i) Capitol will ultimately be acquired by Two Harbors, (ii) neither Two Harbors nor Merger Sub Corp. is an operating business and (iii) the fair market value of Two Harbors and Merger Sub Corp. on the date of the transaction is less than 80% of the balance of the trust account, the proposed transaction does not meet the IPO and amended and restated certificate of incorporation requirements discussed elsewhere in this proxy statement/prospectus. Furthermore, because Capitol’s Founders, through Sub-Manager, will be entitled, pursuant to a sub-management agreement with PRCM Advisers LLC, to a portion of the management fee earned by PRCM Advisers LLC pursuant to the management agreement between Two Harbors and PRCM Advisers LLC, the Capitol Founders may be deemed to be affiliated with Two Harbors. Such an affiliation would require approval by Capitol’s disinterested independent directors, of which there are none, and a fairness opinion to be obtained from an independent investment banking firm indicating the transaction is fair to the holders of Public Shares from a financial point of view, which was not obtained. Therefore, Capitol and its advisers also entered into discussions with the underwriters to obtain their consent to any necessary amendments to the agreements entered into in connection with the IPO in order to consummate the transactions described herein. If Capitol is unable to obtain such consent but still determines to proceed with the transaction, Capitol will be exposing itself to a claim by the underwriters that it proceeded without their consent. Although the parties do not believe such a claim would be viable, because the underwriters have implicitly consented to the transactions by agreeing to the reduction in deferred underwriting fees described above and because it is unclear what damages the underwriters would be able to claim, we cannot assure you of this fact.

On June 7, 2009, a meeting of the Capitol board of directors was held. All directors attended, as did, by invitation, Amanda Eilian, Capitol’s Vice President, Messrs. Statter, Stolz and Sherman, full-time consultants to Capitol, David Alan Miller and Jeffrey M. Gallant of Graubard Miller, and Paul Sheridan and David Brown of Latham & Watkins LLP, special counsel to Capitol. Prior to the meeting, information summarizing the latest terms and structure of the transaction were delivered to the directors. Capitol’s management discussed its efforts to find a suitable candidate for a business combination, its rationale for selecting Two Harbors, its assessment of the attractiveness of the opportunity as well as its risks, and its strategy to secure approval from its securityholders. After considerable discussion, it was agreed that Capitol should proceed with the transaction.

On June 8, 2009, another meeting of the board of directors of Capitol was held. All directors attended, as did David Alan Miller and Jeffrey M. Gallant of Graubard Miller, Paul Sheridan and David Brown of Latham & Watkins LLP and C. Stephen Bigler of Richards, Layton & Finger, P.A., special counsel to Capitol. Prior to the meeting, copies of the most recent drafts of the significant transaction documents, in substantially final form, were delivered to all participants. At the meeting, Capitol’s management discussed various outstanding issues relating to the Merger Agreement, the management agreement, the sub-management agreement and other transactions documents. Mr. Bigler was also asked to provide the board with an analysis of his firm’s opinion relating to the initial charter proposals.

On June 10, 2009, another meeting of the board of directors of Capitol was held to consider approval of the transactions. All directors attended, as did David Alan Miller and Jeffrey M. Gallant of Graubard Miller, and

Paul Sheridan and David Brown of Latham & Watkins LLP. After considerable review and discussion, the Merger Agreement, the management agreement, the sub-management agreement and related documents were unanimously approved, subject to final negotiations and modifications, and the board determined to recommend the approval of the Merger Agreement.

The Merger Agreement was signed on June 11, 2009. Prior to the market open on June 11, 2009, Capitol issued a press release and subsequently filed a Current Report on Form 8-K on the same day announcing the execution of the Merger Agreement and discussing the terms of the Merger Agreement.

On August 17, 2009, the parties amended the Merger Agreement to extend the date after which either Two Harbors or Capitol could terminate the Merger Agreement from September 8, 2009 (or October 8, 2009 if the only obligation of the parties to effect the merger was the effectiveness of the registration statement of which this proxy statement/prospectus forms a part) to September 30, 2009 (or October 15, 2009 if the only obligation of the parties to effect the merger was the effectiveness of the registration statement of which this proxy statement/prospectus forms a part). On September 20, 2009, the parties amended the Merger Agreement to extend the date after which either Two Harbors or Capitol could terminate the Merger Agreement to November 8, 2009.

Capitol’s Board of Directors’ Reasons for the Approval of the Merger

Capitol’s board of directors carefully evaluated the agreements relating to the proposed merger and reviewed industry and financial data in order to determine that the transaction terms were reasonable and that the merger was in the best interests of Capitol’s stockholders.

Capitol conducted a due diligence review of Pine River and Two Harbors that included an industry analysis and a description of Two Harbors’ proposed business model and investment strategy in order to enable the board of directors to ascertain the reasonableness of the consideration.

The management of Capitol, including members of its board of directors, has long and diverse experience in operational management, investments and financial management and analysis. In the opinion of Capitol, its management is well qualified to conduct the due diligence and other investigations and analyses required in connection with the search for a merger partner. Capitol’s chief executive officer, Mark D. Ein, vice president Amanda Eilian, full-time consultants Andrew Sherman, Joseph Statter and Jonathan Stolz, members of Capitol’s board and Capitol’s special advisors all are highly experienced in the investment banking, securities, investment and/or capital management industries. Mr. Ein’s extensive experience is described in the section “Management of Two Harbors Following the Merger” and includes experience at Goldman, Sachs & Co. in its real estate and mortgage finance group. Ms. Eilian has actively worked in real estate, mergers and acquisitions and private equity for Merrill Lynch & Co. and other firms. Richard Donaldson, a director, is an attorney who has provided legal and transaction structuring for many REITs. Miles Gilburne, a special advisor, is presently on the board of directors of Maui Land and Pineapple, a real estate and agriculture company, and serves on the boards of a number of other public and private companies. However, the management of Capitol, including members of its board of directors, do not have substantial experience in making investments in real estate programs that invest in mortgage backed securities. Nevertheless, Capitol believes that its overall experience in analyzing and evaluating transactions makes Capitol’s management, board, special advisors and full-time consultants qualified to render an opinion on the merits of this transaction.

The Capitol board of directors concluded that the Merger Agreement with Two Harbors is in the best interests of Capitol’s stockholders. In reaching this conclusion, it considered a wide variety of factors, including the materials prepared by Two Harbors and Pine River and presented to Capitol’s board of directors containing information illustrating the types and performance characteristics of asset portfolios that Two Harbors believed should be available for purchase in the market and the costs of borrowings that Two Harbors believed should be available upon completion of the merger. In light of the complexity of those factors, the board did not consider it practicable to quantify or otherwise assign relative weights to the specific factors it considered in reaching its decision. In addition, individual members of the board may have given different weight to different factors. In

light of these factors, Capitol’s board of directors felt it was in the best interests of its public stockholders to go forward with the transaction. Although the proposed transaction does not satisfy all the requirements of Capitol’s IPO prospectus and amended and restated certificate of incorporation, and Capitol indicated in its IPO prospectus that it would not seek to amend the provisions of its amended and restated certificate of incorporation to remove or alter such requirements, Capitol’s board of directors felt that the potential opportunity for appreciation for public stockholders who vote in favor of the transaction, and the fact that any public stockholder which did not find this to be an attractive investment opportunity could vote against the transaction and seek conversion, warranted making such amendments and alterations.

The following is a summary of all of the material factors that the Capitol board of directors considered:

Two Harbors’ Potential for Future Growth and Potential to Achieve Attractive Risk-Adjusted Returns . Capitol’s board of directors believes that Pine River and Two Harbors have the appropriate infrastructure in place and are competitively positioned in RMBS to achieve significant organic growth. The board’s belief in Two Harbors’ growth potential is based on: Pine River’s investment track record and historical growth in assets under management of its mortgage-backed securities strategy and fund; Two Harbors’ new formation free of any legacy assets; Two Harbors’ relative value strategy targeting all subsets of the RMBS market; and the overall industry dynamics and current investment opportunities in the U.S. residential mortgage market. Capitol’s board of directors believes that the business combination with Capitol and public listing will provide Two Harbors with access to capital to grow its assets and benefit from Capitol’s physical presence in Washington, D.C., and the relationships of members of its board of directors and special advisors. However, such relationships may not result in any specialized insight into federal government initiatives in the mortgage market.

Capitol’s board of directors believes that Two Harbors, free from the burden of legacy assets, will be positioned to capitalize upon severe dislocations in the $11.0 trillion U.S. mortgage market. A number of traditional providers of capital have either left or significantly curtailed their involvement in the market. For example, Fannie Mae and Freddie Mac, traditionally the overseers of relative value in the RMBS markets have limited capacity to participate in the massive price discrepancies in the market because of their weakened financial condition. The capital bases of other traditional market participants such as proprietary trading desks and hedge funds have been reduced. Remaining participants are expected to have continued forced selling due to ratings downgrades, CDO liquidations, investor redemptions and liquidity constraints. Private capital is expected to play an important role in financing the residential mortgage market in the future.

The Capitol board reviewed data regarding the RMBS markets. Based on this data, the Capitol board concluded that market conditions appeared to be favorable for Two Harbors to achieve attractive risk-adjusted returns from the funds released to Two Harbors upon consummation of the merger. As discussed below, the Capitol board also took into account the fact that Two Harbors, as a newly formed mortgage REIT, had no assets or operating or financial history. As a result, there is a risk that Two Harbors may not be able to operate its business successfully or implement its investment, financing and other policies and strategies. For additional details regarding the RMBS markets, see “ Two Harbors’ Market Opportunity .”

As part of its analysis of this factor, Capitol’s board of directors reviewed materials prepared by Two Harbors and Pine River, including information illustrating the types and performance characteristics of asset portfolios that Two Harbors believed should be available for purchase in the market and the costs of borrowings that Two Harbors believed should be available upon completion of the merger. This asset portfolio information represented an approximation of investment and financing strategies that PRCM Advisers LLC would have employed had the merger closed at the date the information was presented to the board of directors. In reviewing these materials, the Capitol board of directors took into account that (i) the information does not represent any actual assets held or borrowings made by Two Harbors, (ii) there is the risk that a portfolio of the type presented will not be available for purchase upon consummation of the merger at the prices assumed, (iii) borrowings may not be available on the assumed terms, (iv) the returns from the portfolio are based on a number of assumptions and (v) actual results will be impacted by the risks inherent in any mortgage-backed securities portfolio and will

vary from the amounts shown in the table below. Capitol’s board of directors concluded that it was reasonable to take into account the materials prepared by Two Harbors and Pine River based on the experience of the Pine River Fixed Income team in managing RMBS assets of the type included in the asset portfolios presented, notwithstanding the fact that Two Harbors would pursue an investment strategy that is different in many respects from the Pine River RMBS strategy managed by the team. In addition, although Capitol’s board of directors reviewed these materials, Capitol’s board of directors and management did not seek independent consultation or verification with respect to the information and assumptions provided in the materials prepared by Two Harbors and Pine River.

The following table summarizes such materials, except that the materials that Capitol’s board of directors reviewed only presented the asset portfolios assuming the maximum transaction size of the merger whereas the portfolios below have been revised to also show the asset portfolios assuming the minimum transaction size of $100 million.

Asset Portfolios ⁽¹⁾

($ in millions)


	% of Equity						Equity						Assets						Yield ⁽³⁾⁽⁴⁾		Finance Rate		Interest Income				Interest Expense						Return on Equity
Asset Type	Low		Mid		High		(assuming maximum transaction size)		(assuming minimum transaction size)		Haircut ⁽²⁾		(assuming maximum transaction size)			(assuming minimum transaction size)			Yield ⁽³⁾⁽⁴⁾		Finance Rate		(assuming maximum transaction size)		(assuming minimum transaction size)		(assuming maximum transaction size)			(assuming minimum transaction size)			(assuming maximum transaction size)		(assuming minimum transaction size)
Agency hybrids	15	%	20	%	25	%	$	50.2	$	20.0	10	%	$	502.1	⁽⁵⁾	$	200.0	⁽⁵⁾	4	%	1.0	% ⁽⁶⁾	$	20.1	$	8.0	$	(4.5	)	$	(1.8	)	31.0	%	31.0	%
Non-Agency super senior	35	%	45	%	55	%		113.0		45.0	100	%		113.0			45.0		16	%	–			18.1		7.2		–			–		16.0	%	16.0	%
Non-Agency mezzanine	10	%	20	%	30	%		50.2		20.0	100	%		50.2			20.0		30	%	–			15.1		6.0		–			–		30.0	%	30.0	%
MBS derivatives	5	%	15	%	25	%		37.7		15.0	100	%		37.7			15.0		40	%	–			15.1		6.0		–			–		40.0	%	40.0	%
			100	%			$	251.1	$	100.0			$	703.0		$	280.0						$	68.3	$	27.2	$	(4.5	)	$	(1.8	)	25.4	%	25.4	%

Total leverage: 1.8x ⁽⁷⁾

(1)

In the case of the maximum transaction size, based on estimated stockholder equity of $251.1 million, which assumes no stockholder conversions or other share purchases as described under “ The Merger Proposal — Actions That May be Taken to Secure Approval of Capitol’s Stockholders. ” In the case of the minimum transaction size of $100 million, based on estimated stockholder equity of $100 million, after stockholder conversions and/or such other share purchases.

(2)

Two Harbors intends to use repurchase agreements to finance the purchase of Agency RMBS. In a repurchase agreement transaction, the “haircut” refers to the difference between the market value of the securities being financed and the amount being advanced. The 10% haircut shown above for Agency Hybrids was based on (i) the 5% haircuts obtained in connection with repurchase agreement transactions effected by the Nisswa Fixed Income Fund involving Agency securities around the time the presentation was prepared, as adjusted to take into account the risk of potential further degradation in credit markets, and (ii) the fact that, since inception, haircuts for the Nisswa Fixed Income Fund’s repurchase agreement transactions have predominantly been between 3% and 5% and have never exceeded 10%. Two Harbors currently has two master repurchase agreements in place with two counterparties and expects additional master repurchase agreements will be executed after the mailing of the proxy statement/prospectus. The amount and terms of such financing will directly impact Two Harbors’ Agency Hybrid asset balance. The 100% haircut shown for the other asset types indicates that no leverage is employed.

(3)

The yields shown above for the respective asset types were based on market information obtained by members of the Pine River Fixed Income team around the time the presentation was prepared in connection with their daily research and trading activities, including quote, bid and offering data obtained from broker-dealers utilized by the team and information related to the securities actually traded by the team. In particular, for Non-Agency Super Senior, Non-Agency Mezzanine and MBS Derivatives, the yield information was based on yields on securities traded by the Nisswa Fixed Income Fund around the time the presentation was prepared (specifically, between April 1 and May 30, 2009, the fund made trades in five Non-Agency Super Senior bonds, 29 Non-Agency Mezzanine bonds and 41 MBS Derivatives). The yields presented were also consistent with the yields contained in quote, bid and offering data related to Non-Agency Super Senior bonds, Non-Agency Mezzanine bonds and MBS Derivatives and obtained from nine broker-dealers around the time the presentation was prepared. For Agency Hybrids, the Nisswa Fixed Income Fund did not make any trades in this asset type around the time the presentation was prepared; accordingly, the yield information was based on a dealer quote sheet obtained from a broker-dealer around the time the presentation was prepared. As Agency Hybrids are relatively fungible securities, Two Harbors believes the yields reflected in such quote sheet were reasonable and representative of such securities generally. The yields shown in the table were not adjusted from the yield data obtained from such sources.

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(4)

The following assumptions relating to prepayment, defaults and losses were used for each asset type: Agency Hybrids: 15 Constant Prepayment Rate (“CPR”); Non-Agency Super Senior: 1 CPR, 30 Constant Default Rate (“CDR”), 70 Loss Severity; Non-Agency Mezzanine: 4 CPR, 15 CDR, 70 Loss Severity; MBS Derivatives: 25 CPR. CPR refers to the rate, expressed as a percentage of a mortgage pool’s outstanding principal, at which loans are expected to be prepaid in a given year. CDR refers to the rate, expressed as a percentage of a mortgage pool’s outstanding principal, at which loans are expected to default in a given year. Loss Severity refers to the total expected principal loss of a loan, expressed as a percentage of the loan balance at the time of liquidation, including foreclosure and liquidation costs. The CPR assumption shown above for Agency Hybrids is, according to J.P.Morgan’s April 2009 Agency Hybrid ARMs Primer, market convention for valuing Agency Hybrid pools and, accordingly, Two Harbors believes that the use of such market convention was reasonable. The CPR, CDR and Loss Severity assumptions shown above for the other asset types were based on April 2009 historical mortgage loan performance data included in Bank of America/Merrill Lynch’s The Mortgage Credit Roundup, May 21, 2009, as adjusted to take into account then existing market conditions (as reflected in the prepayment, default and loss assumptions contained in the quote, bid and offering data described in footnote (3), and by the yields on securities traded by the Nisswa Fixed Income Fund described in footnote (3)) and the risk of potential further degradation in the residential mortgage market. Two Harbors believes that using the data from this report, as adjusted as described above, was reasonable. In the case of CPR, in general, when RMBS is purchased at a discount to par, faster prepayments will improve its yield, when RMBS is purchased at a premium, faster prepayments will reduce its yield and, when RMBS is purchased at par, its yield will be unaffected by prepayments. The yields for the securities within the listed asset classes assumed these securities were purchased at a discount to par. In the case of CDR and Loss Severity, in general, defaults and losses will reduce the yield of non-Agency RMBS.

(5)

Assumes borrowings of nine times invested equity. This assumed debt to invested equity ratio was based on (i) the fact that repurchase agreement transactions effected by the Nisswa Fixed Income Fund involving Agency securities around the time the presentation was prepared had a debt to invested equity ratio of 19:1 or higher, and (ii) the fact that, since inception, the debt to invested equity ratios of the Nisswa Fixed Income Fund’s repurchase agreement transactions have predominantly been between 32:1 and 19:1 and have never been less than 9:1.

(6)

Two Harbors expects that advances under most of the repurchase agreements it intends to utilize will bear interest at One Month LIBOR plus an applicable margin. The finance rate and corresponding interest expense shown above were based on (i) One Month LIBOR of 31 basis points and (ii) the 45 basis point interest rate obtained in connection with repurchase agreement transactions effected by the Nisswa Fixed Income Fund involving Agency securities, in each case, around the time the presentation was prepared, as adjusted to take into account the risk of potential further degradation in credit markets.

(7)	Total leverage shows the ratio of debt to equity. The ratio shown above assumes debt of $451.9 million in the case of the maximum transaction size, and $180 million in the case of the minimum transaction size of $100 million.

Increased support and involvement of the U.S. government may offer potential for attractive non-recourse financing alternatives improving investment returns including the TALF, if it is extended to RMBS. Under the TALF, the FRBNY provides non-recourse loans to borrowers to fund their purchase of eligible assets, which currently include certain ABS but not RMBS.

The Experience of Two Harbors’ Investment Team and Pine River Management . Another important criterion to Capitol’s board of directors in identifying an acquisition target was that the target business has a seasoned management team, or in the case of Two Harbors, investment team with specialized knowledge of the markets within which it operates. Capitol’s board of directors believes that the investment team at Pine River and management of Two Harbors has strong expertise in investing in both Agency and non-Agency RMBS. Steve Kuhn, a Pine River Partner and its Head of Fixed Income Trading, has more than 16 years experience trading mortgages and other fixed income securities for firms including Pine River, Goldman Sachs Asset Management, Citadel and Cargill. The Capitol board recognized that Pine River has earned a reputation as a leading global multi-asset management firm providing comprehensive portfolio management, transparency and liquidity to institutional and high net worth investors. In addition, the board valued the success of Pine River’s RMBS strategy conducted initially through the Nisswa Master Fund and later through the Nisswa Fixed Income Fund, which, under Mr. Kuhn’s management, had returned 95.6% return net of fees with no negative month since the strategy’s inception in February 2008 through May 31, 2009. In reviewing this performance information, Capitol’s board of directors took into account that Two Harbors would pursue an investment strategy that is different in many respects from the RMBS strategy conducted through these funds, but after due inquiry it was satisfied that the Pine River Fixed Income team had the knowledge and expertise to pursue the business strategy proposed for Two Harbors. For more information with respect to how this return net of fees is calculated and the differences between the investment strategies of Pine River’s RMBS strategy and Two Harbors, see “ Business of Two Harbors — Historical Performance of Pine River’s RMBS Strategy .”

Valuation . Capitol’s board of directors reviewed an indicated valuation range for Two Harbors, assuming Two Harbors invested the cash expected to be available to it upon consummation of the merger in its target asset classes in accordance with strategies described elsewhere in this proxy statement/prospectus, and based on comparable company analysis. Capitol’s board of directors did not consult with an independent third party regarding this valuation range. In analyzing Two Harbors from a comparable company basis, the board reviewed various public filings of residential mortgage REITs that focus on non-Agency (Chimera Investment Corp. and Redwood Trust) and Agency RMBS (Annaly Mortgage, MFA Mortgage, Hatteras Financial, Capstead Mortgage, Anworth Mortgage and American Capital Agency), as well as third party equity research reports regarding such companies. Capitol’s board also consulted with certain investment banking and capital markets professionals at Citigroup regarding valuation, comparable companies and overall market conditions. In reviewing the valuation, Capitol’s board found, based on information and estimates available at the board meetings (which are subject to change prior to consummation of the merger):

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Two Harbors was expected (assuming no stockholder conversions and after payment of estimated transaction costs and expenses and deferred underwriting discounts and commissions, but excluding other expenses occurred in connection with the IPO and other working capital expenses unrelated to the transaction) to have approximately 97% of the amounts held in the trust account as of March 31, 2009 available for investment in its target assets upon completion of the merger. This compared favorably to the 90% to 92% of offering proceeds that are typically available for investment upon closing of an initial public offering by a mortgage REIT. However, the impact of this benefit is reduced in the case of maximum stockholder conversions (or arrangements by Capitol to purchase Public Shares) because, the greater the percentage of stockholders that seek conversion (or Public Shares that are purchased by Capitol), the higher the transaction costs will be as a percentage of funds released from trust upon completion of the merger. Based on the parties’ current estimates of transaction costs, Two Harbors is expected to have between approximately 95% of the funds released from trust available for investment (assuming no stockholder conversions) and 92% of such amounts (assuming a minimum transaction size of $100 million and a maximum payment to aggregators of approximately $743,000).

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Two Harbors was expected (assuming no stockholder conversions) to be created at approximately 1.00x of book value (using Capitol’s share price as of June 9, 2009) or 1.03x book value (using a share price assumption of $9.87 which equals the per share value of cash in the trust account) versus 1.40x for the non-Agency REIT peer group mean, 1.09x for the Agency REIT mean and 1.25x for the overall REIT mean as of June 9, 2009; and

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Two Harbors was expected to have leverage (total assets/total capital) of 1.0x to 3.0x versus 3.6x for non-Agency REITs, 7.0x for Agency REITs and 5.3x for the overall REIT mean.

Potential for Warrants to Be an Additional Capital Source . In addition, the board of directors considered the fact that the public warrants that will be outstanding after the completion of the merger could provide an additional source of financing for Two Harbors.

Adverse Factors Considered by Capitol

Capitol’s board also evaluated several adverse factors in its consideration of the acquisition of Two Harbors. These included:

Two Harbors’ lack of operating history . Capitol’s board considered that Two Harbors, as a newly formed mortgage REIT, has no operating or financial history. Capitol determined, however, that the growth prospects of Two Harbors’ outweighed concerns based on the lack of operating history. In addition, Capitol believes that the lack of legacy assets in Two Harbors’ mortgage REIT provides a competitive advantage relative to public mortgage REIT peers. The board noted Two Harbors’ expected return on equity, net income, earnings per share and the overall growth opportunities presented by Two Harbors’ investment strategy in the residential mortgage market.

Adverse general economic conditions . In its evaluation of Two Harbors, Capitol’s board of directors considered the current adverse economic conditions and the impact such conditions could have on Two Harbors’ business. It was the board’s belief that the trends evidenced in Pine River’s mortgage-backed securities strategy since inception in February 2008 demonstrated potential resistance or minimal exposure to recessionary economic forces and that Two Harbors’ markets, investment strategy and growth strategy outweighed concerns about general economic conditions.

Increased number of competitive participants pursuing similar investment strategies . In its evaluation of Two Harbors, Capitol’s board of directors considered the fact that several funds are pursuing or considering pursuing similar investment and capital raising strategies addressing the RMBS market, including the government’s Public-Private Investment Program and Term Asset-Backed Securities Loan Facility initiatives. It was the board’s belief that the absolute size of the opportunity in the $11 trillion mortgage market coupled with the experience of the Pine River investment team outweighed concerns about competitive funds with similar investment strategies.

Lack of fairness opinion . Because Capitol’s Founders, through Sub-Manager, will be entitled, pursuant to a sub-management agreement with PRCM Advisers LLC, to a portion of the management fee earned by PRCM Advisers LLC pursuant to the management agreement between Two Harbors and PRCM Advisers LLC, the Capitol Founders may be deemed to be affiliated with Two Harbors. Accordingly, the transaction might require it to be approved by a majority of Capitol’s disinterested independent directors. However, because of the relationship described above, there are no disinterested independent directors on Capitol’s board. As a result, the transaction has not been approved by such a group of individuals. Furthermore, because of the relationship described above, a fairness opinion might be required to be obtained from an independent investment banking firm indicating the transaction is fair to the holders of Public Shares from a financial point of view. However, the absence of an existing business by Two Harbors precluded the use of customary analyses on which fairness opinions are based. Therefore, it was determined that a fairness opinion was not necessary and Capitol did not seek to obtain one. Accordingly, an investor would be relying solely on the judgment of Capitol’s board of directors in determining whether or not that the transaction is fair to the holders of Public Shares from a financial point of view. Capitol’s board of directors may be incorrect in its assessment of the transaction. In analyzing the

transaction with Two Harbors, the Capitol board conducted significant due diligence on Two Harbors’ proposed business model and investment strategy. The Capitol board of directors believes that, because of the financial skills and background of its directors, it was qualified to conclude that the business combination was fair from a financial perspective to its stockholders.

The board of Capitol was cognizant of Capitol’s liquidation date of November 8, 2009, but ultimately evaluated the potential business combination with Two Harbors strictly on the quantitative and qualitative information regarding Two Harbors and its business that was available. Since completion of Capitol’s IPO, the board has been regularly kept apprised of potential business combination targets and management’s discussions and evaluation of such targets. As discussed above, Capitol engaged in an ongoing and systematic search for potential business combination candidates, deciding on its own accord in various situations to terminate discussions with potential candidates when determined by management that such candidates did not ultimately represent the investment opportunity that Capitol wanted to present to its stockholders.

Interests of Capitol’s Directors and Officers and Others in the Merger

In considering the recommendation of the board of directors of Capitol to vote for approval of the merger proposal, you should be aware that Capitol’s directors and officers have agreements or arrangements that provide them with interests in the merger that differ from, or are in addition to, those of Capitol stockholders generally. In particular:

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If the merger is not consummated by November 8, 2009, Capitol’s amended and restated certificate of incorporation provides that it will automatically be liquidated. In such event, the 6,562,257 Founders’ Shares held by Capitol’s directors and officers that were acquired before the IPO for an aggregate purchase price of $25,000 would be worthless because Capitol’s directors and officers are not entitled to receive any of the liquidation proceeds with respect to such shares. Such shares had an aggregate market value of $64,769,477 based upon the common stock’s closing bid price of $9.87 on the NYSE Amex on September 24, 2009, the record date for the Capitol special meeting. If the merger is consummated, the Capitol Founders have agreed that the Founders’ Shares will be cancelled.

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Sub-Manager, an affiliate of the Capitol Founders, has agreed to provide certain services to PRCM Advisers LLC upon consummation of the transaction pursuant to a sub-management agreement pursuant to which Sub-Manager will be paid by PRCM Advisers LLC a percentage of the management fees to be paid by Two Harbors. See the section entitled “ — Sub-Management Agreement ” below for further details on this arrangement.

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An affiliate of Mark D. Ein is an investor in the Nisswa Fixed Income Fund. See the section entitled “ Management of Two Harbors Following the Merger — Conflicts of Interest Relating to Pine River and PRCM Advisers LLC ” for further details on potential conflicts of interest.

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The Capitol Founders also purchased 7,000,000 Sponsors’ Warrants, for an aggregate purchase price of $7,000,000 (or $1.00 per warrant), pursuant to agreements with Capitol and Citigroup that were entered into in connection with Capitol’s IPO. These purchases took place on a private placement basis simultaneously with the consummation of Capitol’s IPO. All of the proceeds Capitol received from these purchases were placed in Capitol’s trust account. The Sponsors’ Warrants are identical to the Capitol warrants except that (i) the warrants will not be transferable or salable by holders (except in certain limited circumstances such as to relatives and trusts for estate planning purposes, provided the transferee agrees to be bound by the transfer restrictions) until Capitol completes a business combination, (ii) they will be exercisable on a cashless basis and (iii) if Capitol calls the warrants for redemption, the Sponsors’ Warrants will not be redeemable so long as such warrants are held by the initial holders or their affiliates, including any permitted transferees. All of the Sponsors’ Warrants will become worthless if the merger is not consummated and Capitol is liquidated (as will the public warrants). Such Sponsors’ Warrants had an aggregate market value of $3,710,000, based on the warrants’ closing bid price of $0.53 on the NYSE Amex on September 24, 2009, the record date for the Capitol special meeting.

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If Capitol liquidates prior to the consummation of a business combination, Mark D. Ein, Capitol’s chief executive officer, will be personally liable in certain situations to pay debts and obligations to vendors and other entities that are owed money by Capitol for services rendered or products sold to Capitol, or to any target business, to the extent such creditors bring claims that would otherwise require payment from monies in the trust account. Although Capitol has obtained waiver agreements from certain vendors and service providers it has engaged and owes money to, and from the prospective target businesses it has negotiated with, whereby such parties have waived any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they will not seek recourse against the trust account notwithstanding such agreements or that other vendors who did not execute such waivers (representing approximately $80,000 for liabilities owed by Capitol) will not seek recourse against the trust account. However, based on Capitol’s available resources outside of the trust account, it is not anticipated that Mr. Ein will have any exposure under this arrangement.

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If Capitol is required to be liquidated and there are no funds remaining to pay the costs associated with the implementation and completion of such liquidation, Mr. Ein has agreed to advance Capitol the funds necessary to pay such costs and complete such liquidation (currently anticipated to be no more than approximately $15,000) and not to seek repayment for such expenses.

Additionally, upon consummation of the merger, the underwriters in Capitol’s IPO will be entitled to receive up to an aggregate of approximately $5.9 million of deferred underwriting commissions and have certain rights to participate in future securities offerings by Two Harbors following consummation of the merger. If the merger is not consummated and Capitol is required to be liquidated, the underwriters will not receive any such funds. Capitol is also obligated to pay an aggregate $650,000 of success fees upon the closing of the merger to three of its consultants. The consultants will not receive such fees if the merger is not consummated.

Furthermore, after the consummation of the merger, Pine River will receive a percentage of the management fees PRCM Advisers LLC will be paid pursuant to the management agreement. In addition, Pine River’s Nisswa Acquisition Master Fund Ltd. (the “Nisswa Acquisition Fund”) is the beneficial owner of 2,906,918 warrants of Capitol, which will be worthless if the merger is not consummated and Capitol does not complete a different business combination prior to November 8, 2009. These warrants were purchased in the open market in the period between December 2007 and March 2009 at prevailing market prices and had an aggregate market value of $1,540,667, based on Capitol’s warrants’ closing bid price of $0.53 on the NYSE Amex on September 24, 2009, the record date for the Capitol special meeting.

Sub-Management Agreement

The Sub-Manager, which is wholly-owned by the Capitol Founders, has agreed to provide certain services to PRCM Advisers LLC upon consummation of the transaction pursuant to a sub-management agreement. These services may include, upon reasonable request of PRCM Advisers LLC:

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serving as a consultant with respect to the periodic review of the investment guidelines;

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identifying for PRCM Advisers LLC potential new lines of business and investment opportunities for Two Harbors;

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identifying and advising PRCM Advisers LLC with respect to selection of independent contractors that provide investment banking, securities brokerage, mortgage brokerage, other financial services, due diligence services, underwriting review services, legal and accounting services, and all other services as may be required relating to Two Harbors’ investments;

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advising PRCM Advisers LLC with respect to Two Harbors’ stockholder and public relations matters;

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advising and assisting PRCM Advisers LLC with respect to Two Harbors’ capital structure and capital raising; and

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advising PRCM Advisers LLC on negotiating agreements relating to programs established by the U.S. government, including TALF.

Sub-Manager and its officers and employees will devote such portion of their time as is necessary to perform the services under the sub-management agreement; however, Sub-Manager is not authorized to advise or bind Two Harbors and has no authority or obligation under the management agreement, and PRCM Advisers LLC will remain primarily and directly responsible for the all services provided to Two Harbors under the management agreement.

In exchange for such services, Sub-Manager will receive, in addition to any applicable termination fee or final payment described below, a sub-management fee, calculated and paid quarterly in arrears, equal to (i) 20% of PRCM Advisers LLC’s base management fee with respect to the first $1 billion of Two Harbors’ stockholders’ equity (as defined in the management agreement), or 0.30% per annum of Two Harbors’ stockholders’ equity, plus (ii) 10% of PRCM Advisers LLC’s base management fee with respect to Two Harbors’ stockholders’ equity in excess of $1 billion, or 0.15% per annum of Two Harbors’ stockholders’ equity. Payment of the sub-management fee by PRCM Advisers LLC to the Sub-Manager for any quarter will be contingent upon the receipt of the base management fee by PRCM Advisers LLC for such quarter, so any waiver by PRCM Advisers LLC of its right to collect the base management fee will effectively waive the right of Sub-Manager to receive its quarterly sub-management fee. Sub-Manager is entitled to reimbursement of expenses in connection with its provision of services under the sub-management agreement on the same basis that PRCM Advisers LLC is entitled to reimbursement under the management agreement.

The sub-management agreement has a term of five years from the closing of the merger but will terminate earlier at such time as the management agreement is terminated by Two Harbors or a court of competent jurisdiction finally determines that Sub-Manager may be removed for cause, which generally consists of certain types of material breaches of the sub-management agreement by Sub-Manager. In case of certain terminations, Sub-Manager is entitled to either a termination fee or final payment in recognition of the level of the upfront effort and commitment of resources required by Sub-Manager in connection with the sub-management agreement.

If the management agreement is terminated under the circumstances described in this proxy statement/prospectus, PRCM Advisers LLC will be entitled to a termination fee from Two Harbors equal to three times the average annual management fee earned by PRCM Advisers LLC during the 24-month period immediately preceding the date of termination. Under the sub-management agreement, if the management agreement is terminated by Two Harbors, Sub-Manager would be entitled to (i) 20% of PRCM Advisers LLC’s termination fee with respect to the first $1 billion of Two Harbors’ stockholders’ equity, plus (ii) 10% of PRCM Advisers LLC’s termination fee with respect to Two Harbors’ stockholders’ equity in excess of $1 billion. See “ Management of Two Harbors Following the Merger — Management Agreement with PRCM Advisers LLC — Termination Fee .”

If the sub-management agreement expires at the end of its five-year term, Sub-Manager is entitled to receive all fees accrued through the date of termination, plus an additional final payment from PRCM Advisers LLC of 7.7 times the annualized rate of the last payment of the quarterly sub-management fee; provided that the last quarterly payment will be re-calculated to reverse the impact of any decrease in Two Harbors’ stockholders’ equity due to repurchases of Two Harbors common stock during the previous year. In addition, the final payment will be re-calculated to take into account any increase in Two Harbors’ stockholders’ equity due to additional equity capital raised by Two Harbors in the six months following the date of termination, less any reductions in Two Harbors’ stockholders’ equity during that period (other than as attributable to stock repurchases). If, at the end of the five-year term, PRCM Advisers LLC has in good faith initiated litigation with respect to a claim of cause against Sub-Manager, PRCM Advisers LLC may pay the final payment into a mutually acceptable escrow arrangement.

During the five-year term of the sub-management agreement, subject to various terms and conditions set forth in the sub-management agreement, if PRCM Advisers LLC or certain Pine River affiliates manage certain other public investment vehicles, PRCM Advisers LLC and Sub-Manager will enter into good faith negotiations

and PRCM Advisers LLC will offer Sub-Manager a sub-management agreement on substantially the same terms as the sub-management agreement or an alternative arrangement reasonably acceptable to PRCM Advisers LLC and Sub-Manager.

Sub-Manager is not permitted, without the prior written consent of PRCM Advisers LLC (not to be unreasonably withheld), to assign its rights to receive the fees and other amounts payable under the sub-management agreement. In addition, the sub-management agreement requires the consent of PRCM Advisers LLC (not to be unreasonably withheld) prior to any transfer of any membership interests in Sub-Manager that would result in Mr. Ein, and certain of his affiliates and other permitted transferees, no longer holding a majority-in-interest in Sub-Manager.

Recommendation of Capitol’s Board of Directors

After careful consideration of the matters described above, Capitol’s board of directors determined unanimously that the merger proposal is fair to and in the best interests of Capitol and its stockholders. Capitol’s board of directors has unanimously approved and declared advisable and unanimously recommends that you vote or give instructions to vote “FOR” the merger proposal.

The foregoing discussion of the information and factors considered by the Capitol board of directors is not meant to be exhaustive, but includes the material information and factors considered by the Capitol board of directors.

Conversion Rights

Any of Capitol’s stockholders holding Public Shares as of the record date who affirmatively vote their Public Shares against the merger proposal may also demand that such shares be converted into a pro rata portion of the trust account, calculated as of two business days prior to the consummation of the merger. If demand is properly made and the merger is consummated, these shares will be converted into a pro rata portion of funds deposited in the trust account plus interest, calculated as of such date.

Capitol stockholders who seek to exercise this conversion right (“converting stockholders”) must affirmatively vote against the merger proposal. Abstentions and broker non-votes do not satisfy this requirement. Additionally, holders demanding conversion must deliver their shares (either physically or electronically using the Depository Trust Company’s DWAC (Deposit Withdrawal at Custodian) System) to Capitol’s transfer agent up to the vote at the meeting. Capitol has set a record date of September 24, 2009 for the special meetings of stockholders and warrantholders. Capitol expects to distribute electronic and paper copies of the definitive proxy materials to its stockholders and warrantholders no later than October 9, 2009 and estimates that electronic copies of the definitive proxy materials will be received on the same day they are distributed and paper copies of the definitive proxy materials mailed via the United States Postal Service will be received approximately two days after mailing. Capitol intends to provide its stockholders and warrantholders with a minimum of ten business days to review the definitive proxy materials. In addition, Capitol mailed the written notice of the special meetings of its stockholders and warrantholders on October 6, 2009. Accordingly, a holder will have at least twenty days from the date notice of the meeting was mailed to stockholders and ten business days from the date definitive proxy materials are mailed to obtain a certificate if such holder intends to comply with the conversion requirements by physically delivering their shares to Capitol’s transfer agent. As the delivery process can be accomplished by the stockholder, whether or not he is a record holder or holds his shares in “street name”, in a matter of hours by simply contacting the transfer agent or his broker and requesting, or having his broker request, delivery of his shares through the DWAC System, it is believed that this time period is sufficient for a typical investor. Shares that have not been tendered (either physically or electronically) in accordance with these procedures will not be converted into cash. There is a nominal cost associated with the above-referenced tendering process and the act of certificating the shares or delivering them through the DWAC System. The transfer agent will typically charge the tendering broker $35 per transaction and it would be up to the broker whether or not to pass this cost on to the converting holder. This fee may discourage stockholders

from seeking conversion rights and may make it more beneficial for such stockholders to try to sell their shares in the open market.

If the holders of at least 7,874,699 or more Public Shares (an amount equal to 30.0% or more of the Public Shares) vote against the merger proposal and properly demand conversion of their shares, Capitol will not be able to consummate the merger.

The closing bid price of Capitol’s common stock on September 24, 2009 (the record date for the Capitol special meeting) was $9.87. The cash held in the trust account on September 24, 2009 was approximately $259,000,000 ($9.87 per Public Share). Prior to exercising conversion rights, stockholders should verify the market price of Capitol’s common stock as they may receive higher proceeds from the sale of their common stock in the public market than from exercising their conversion rights if the market price per share is higher than the conversion price. Capitol cannot assure its stockholders that they will be able to sell their shares of Capitol common stock in the open market, even if the market price per share is higher than the conversion price stated above, as there may not be sufficient liquidity in Capitol’s securities when Capitol’s stockholders wish to sell their shares.

If you exercise your conversion rights, then you will be exchanging your shares of Capitol common stock for cash and will no longer own those shares. You will be entitled to receive cash for these shares only if you affirmatively vote against the merger proposal, properly demand conversion, and deliver your stock certificate (either physically or electronically) to Capitol’s transfer agent up to the vote at the meeting.

If Capitol is unable to complete the merger or another business combination by November 8, 2009, its amended and restated certificate of incorporation provides that its corporate existence will terminate on that date and, upon its resulting liquidation, the holders of Public Shares will receive an amount equal to the amount of funds in the trust account, inclusive of interest not previously released to Capitol, as well as any remaining net assets outside of the trust account, at the time of the liquidation distribution, divided by the number of Public Shares. Although both the per share liquidation price and the per share conversion price are equal to the amount in the trust account divided by the number of Public Shares, the amount a holder of Public Shares would receive at liquidation may be more or less than the amount such a holder would have received had it demanded conversion of its shares in connection with the merger because (i) there will be greater earned interest in the trust account at the time of a liquidation distribution since it would occur at a later date than a conversion and (ii) Capitol may incur expenses it otherwise would not incur if Capitol consummates the merger, including, potentially, claims requiring payment from the trust account by creditors who have not waived their rights against the trust account. Mark D. Ein, Capitol’s chief executive officer, will be personally liable under certain circumstances to ensure that the proceeds in the trust account are not reduced by the claims of prospective target businesses and vendors or other entities that are owed money by Capitol for services rendered or products sold to it. While Capitol has no reason to believe that Mr. Ein will not be able to satisfy those obligations, there cannot be any assurance to that effect. See the section entitled “Other Information Related to Capitol — Liquidation If No Business Combination” for additional information.

Actions That May Be Taken to Secure Approval of Capitol’s Stockholders

Based on recently completed business combinations by other similarly structured blank check companies, it is believed by Capitol that the present holders of 30.0% or more of the Public Shares may have the intention to vote against the merger and seek conversion of their Public Shares into cash in accordance with Capitol’s amended and restated certificate of incorporation. If such event were to occur, the merger could not be completed. To preclude such possibility, as described in Capitol’s Current Reports on Form 8-K, Capitol has been holding presentations with certain of its stockholders and warrantholders, as well as other persons who might be interested in purchasing Capitol securities, to discuss the proposed merger with them and to seek to have them purchase shares and/or vote in favor of the merger proposal. Additionally, Capitol, the Capitol Founders, Two Harbors and their respective affiliates may negotiate arrangements (although no such negotiations

have yet to take place) to provide for the purchase of the Public Shares from holders who indicate their intention to vote against the merger and seek conversion or who otherwise wish to sell their Public Shares. The maximum cash purchase price that will be offered to the holders of Public Shares by Capitol and Two Harbors for their shares will be the per share conversion price at the time of the business combination. In addition, in no event will any person be reimbursed with funds from Capitol’s trust account for any amounts paid to holders of Public Shares in excess of the per-share conversion price at the time of the business combination. Although holders of Public Shares that enter into these types of arrangements will not receive a higher purchase price than a holder that properly seeks conversion of his shares, entering into such arrangements (and agreeing to vote in favor of the merger) provides the holder with greater certainty that the transaction will be consummated, in which event such holder will receive his conversion proceeds promptly. If the transaction is not consummated, a holder would have to wait until Capitol liquidates in connection with its dissolution to receive liquidation proceeds, which liquidation could take 60 days or more to complete.

The Capitol Founders, Pine River and their respective affiliates may also enter into transactions with potential investors or existing holders of Public Shares in order to induce them to purchase Public Shares and/or vote in favor of the merger proposal with respect to currently owned Public Shares and, in each case, to remain a stockholder of Two Harbors following consummation of the merger. There would be no limit on the consideration paid pursuant to these arrangements and such consideration could be cash or non-cash consideration (such as the transfer of warrants held by the Capitol Founders). Because neither Capitol nor Two Harbors will enter into these types of transactions and neither Capitol nor Two Harbors will reimburse any of the Capitol Founders, Pine River or their respective affiliates who enter into these types of transactions, there will be no material economic cost to Capitol or Two Harbors as a result of such arrangements.

Two Harbors and its affiliates have had discussions with certain potential investors and existing holders of Public Shares in which Two Harbors or its affiliates, as applicable, have indicated a willingness on the part of Two Harbors to consider, on a case-by-case basis, granting such potential investors or existing holders of Public Shares, a waiver of the common stock ownership limits contained in Two Harbors’ charter, in a manner consistent with (i) the restrictions provided for in Two Harbors’ charter and (ii) the requirements for Two Harbors’ qualification as a REIT, in order to induce such potential investor or existing holder of Public Shares, as applicable, to purchase Public Shares and/or vote in favor of the merger proposal. In addition, as disclosed on June 29, 2009, Thomas Siering, the President and a Director of Two Harbors, entered into a written plan and purchased 100,000 shares of common stock of Capitol pursuant to Rules 10b5-1 and 10b-18 of the Exchange Act. No other negotiations or actions have been taken by Capitol, the Capitol Founders, Two Harbors or their respective affiliates to purchase Public Shares and no other negotiations have been entered into with potential investors or existing holders of Public Shares to induce them to purchase Public Shares and/or vote in favor of the merger proposal.

It is anticipated that Capitol and/or Two Harbors would approach a limited number of large holders of Capitol that have voted against the merger proposal and demanded conversion of their shares, or that have indicated an intention to do so, and engage in direct negotiations for the purchase of such holders’ positions. All holders approached in this manner would be institutional or sophisticated holders. Arrangements of such nature would only be entered into and effected with the prior approval of Two Harbors (with respect to shares purchased) in accordance with applicable law at a time when Capitol, the Capitol Founders, Two Harbors and/or their respective affiliates are not aware of any material nonpublic information regarding Capitol and its securities or pursuant to agreements between the buyer and seller of such shares in a form that would not violate insider trading rules. Definitive arrangements have not yet been determined but might include:

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Agreements between Capitol and the holders of Public Shares pursuant to which Capitol would agree to purchase Public Shares from such holders immediately after the closing of the merger for the price and fees specified in the arrangements.

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Agreements with third parties to be identified pursuant to which the third parties would purchase Public Shares during the period beginning on the date that the registration statement of which this proxy

statement/prospectus is a part is declared effective. Such arrangements would also provide for Capitol, immediately after the closing of the merger, to purchase from the third parties all of the Public Shares purchased by them for the price and fees specified in the arrangements.

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Agreements with third parties pursuant to which the Capitol Founders, Pine River and their respective affiliates would borrow funds to make purchases of Public Shares for their own account. Capitol and/or Two Harbors, as applicable, would then purchase the shares from such parties using funds held in Capitol’s trust account upon closing of the merger and such parties would repay such borrowings with the funds received from Capitol and/or Two Harbors, as applicable. Neither Capitol nor Two Harbors would reimburse the Capitol Founders, Pine River and/or their respective affiliates for the borrowing costs incurred by them pursuant to such transactions, if any.

As a result of the purchases that may be effected through such arrangements, it is likely that the number of shares of common stock of Capitol in its public float will be reduced and that the number of beneficial holders of Capitol’s and Capitol’s securities also will be reduced. This may make it difficult to obtain the quotation, listing or trading of Capitol’s securities on the NYSE or any other national securities exchange.

The purpose of such arrangements would be to increase the likelihood of satisfaction of the requirements that the holders of a majority of Capitol common stock outstanding vote in favor of the merger proposal, the merger proposal is approved by the necessary vote of the holders of the Public Shares and that holders of fewer than 30.0% of the Public Shares vote against the merger proposal and demand conversion of their Public Shares into cash where it appears that such requirements would otherwise not be met. The maximum cash purchase price that will be offered by Capitol and Two Harbors to holders of Public Shares for their shares will be the per share conversion price at the time of the business combination. In addition, in no event will any person be reimbursed with funds from Capitol’s trust account for any amounts paid to holders of Public Shares in excess of the per share conversion price at the time of the business combination. However, if holders refuse to enter into arrangements with Capitol to sell their Public Shares, Capitol or Two Harbors may determine to engage a third party “aggregator” to buy shares prior to the meeting from such holders that have already indicated an intention to sell their shares and/or vote against the merger proposal. In such a case, the aggregator would purchase the shares from the original holder and then subsequently sell such shares to Capitol or Two Harbors, as applicable. The agreement between Capitol or Two Harbors, as applicable, and any aggregator will provide that, to the extent purchases are made by such aggregator in private transactions, as opposed to open market purchases where the seller is not known to the aggregator, such aggregator will notify the seller that it is acting on behalf of Capitol or Two Harbors, as applicable, in purchasing such shares. The maximum purchase price that will be offered by such aggregators to holders of Public Shares for their shares will be the per share conversion price at the time of the business combination. Capitol or Two Harbors, as applicable, would, in addition to paying the purchase price of such shares (which would be the per share conversion price) to this aggregator, pay it a fee. Such fee will not be greater than 1% of the aggregator’s total purchase price for such shares. Although the parties do not anticipate needing to engage the services of such an aggregator, if one is needed, the parties believe it will be in the best interests of stockholders that are voting in favor of the transaction since the retention of the aggregator can help ensure that the transaction will be completed. Assuming the purchase by aggregators of up to 7,430,466 shares (the maximum number of shares that would be purchased by aggregators), the maximum fee payable to such aggregators would be approximately $743,000, resulting in a decrease of the per share book value following the transaction of $0.07 to $9.09 per share assuming a minimum transaction size of $100 million. All shares purchased pursuant to such arrangements would remain outstanding until the closing of the transaction and would be voted in favor of the merger proposal. Any agreement between the parties will provide for the holder to withdraw or revoke any exercise of its conversion exercise and grant a proxy to Capitol’s or Two Harbors’, as applicable, designees to vote such shares in favor of the merger proposal at the meeting. Accordingly, this will effectively render the 30.0% threshold established in Capitol’s IPO prospectus and amended and restated certificate of incorporation ineffective and make it easier for the parties to complete the transaction because such purchased shares would no longer be counted towards the 30.0% threshold. If, for some reason, the merger is not closed despite such purchases, the purchasers would be entitled to participate in liquidation distributions from Capitol’s trust account with respect to such shares.

Capitol or Two Harbors, as applicable, will file a Current Report on Form 8-K to disclose arrangements entered into or significant purchases or transfers made by any of the aforementioned persons, including aggregators, that would affect the vote on the merger proposal or the conversion threshold. Any such report will include descriptions of any arrangements entered into, including the names of the parties involved and the roles such parties will play in the arrangements, or significant purchases or transfers by any of the aforementioned persons. If members of Capitol’s board of directors or officers make purchases or transfer warrants pursuant to such arrangements, they will be required to report these purchases or transfers on beneficial ownership reports filed with the SEC. Capitol will not, however, provide holders of Public Shares with additional time to reconsider their vote should such arrangements be entered into prior to the meeting because (i) a condition to the consummation of the merger is that there be at least $100 million contained in Capitol’s trust account (after payment of transaction fees and expenses, deferred underwriting discounts and commissions, tax liabilities and reimbursement of expenses of the Capitol Founders and to make purchases of Public Shares, if any, as described above) for use by Two Harbors in its business and (ii) holders of Public Shares have been made aware that the minimum book value per share as a result of the maximum aggregate amount of fees payable to third party purchasers pursuant to such arrangements is $9.09. As holders of Public Shares are making their decision to vote for or against the merger with the knowledge that there will be as little as $100 million available to Two Harbors to operate its business, as well as the fact that a maximum fee paid to aggregators of approximately $743,000 will result in a decrease of the per share book value following the transaction of $0.07 to $9.09 per share assuming a minimum transaction size of $100 million, the entry into such arrangements will not further impact this analysis.

Purchases pursuant to such arrangements ultimately paid for with funds in Capitol’s trust account would diminish the funds available to Capitol after the merger for working capital and general corporate purposes. However, in no event will funds from Capitol’s trust account be used to (i) pay a holder of Public Shares an amount greater than the per share conversion price at the time of the business combination for their shares or (ii) reimburse any person for any amounts paid to holders of Public Shares in excess of the per-share conversion price at the time of the business combination. In all events there will be sufficient funds available to Capitol from the trust account to pay the holders of all Public Shares that are properly converted.

It is possible that the special meetings could be adjourned to provide time to seek out and negotiate such transactions if, at the time of the meetings, it appears that the requisite vote will not be obtained or that the limitation on conversion will be exceeded, assuming that an adjournment proposal is approved. Also, under Delaware law, the board of directors may postpone the meetings at any time prior to it being called to order in order to provide time to seek out and negotiate such transactions.

Rescission Rights

The prospectus issued by Capitol in its IPO (i) disclosed that Capitol was required to complete a business combination in which it acquired a target business having a fair market value equal to at least 80% of Capitol’s trust account balance (excluding deferred underwriting discounts and commissions) and, if the transaction is a related party transaction, to obtain approval of its disinterested independent directors and an opinion from an independent investment banking firm indicating that the transaction is fair to public stockholders from a financial point of view, (ii) did not disclose that funds in the trust account might be used to purchase Public Shares from holders thereof who have indicated their intention to vote against the merger and convert their shares into cash, and (iii) stated that specific provisions in Capitol’s amended and restated certificate of incorporation may not be amended prior to the consummation of an initial business combination but that Capitol had been advised that such provision limiting its ability to amend its amended and restated certificate of incorporation may not be enforceable under Delaware law. Accordingly, each person who purchased Public Shares in the IPO and still held such shares upon learning of these facts may have securities law claims against Capitol for rescission (under which a successful claimant has the right to receive the total amount paid for his or her securities pursuant to an allegedly deficient prospectus, plus interest and less any income earned on the securities, in exchange for surrender of the securities) or damages (compensation for loss on an investment caused by alleged material misrepresentations or omissions in the sale of a security).

In general, a person who purchased shares pursuant to a defective prospectus or other representation must make a claim for rescission within the applicable statute of limitations period, which, for claims made under Section 12 of the Securities Act and some state statutes, is one year from the time the claimant discovered or reasonably should have discovered the facts giving rise to the claim, but not more than three years from the occurrence of the event giving rise to the claim. A successful claimant for damages under federal or state law could be awarded an amount to compensate for the decrease in value of his or her shares caused by the alleged violation (including, possibly, punitive damages), together with interest, while retaining the shares. Claims under the anti-fraud provisions of the federal securities laws must generally be brought within two years of discovery, but not more than five years after occurrence. Rescission and damages claims would not necessarily be finally adjudicated by the time the merger may be completed, and such claims would not be extinguished by consummation of that transaction.

Even if you do not pursue such claims, others, who may include all holders of Public Shares, may. Neither Capitol nor Two Harbors can predict whether Capitol stockholders will bring such claims, how many might bring them or the extent to which they might be successful.

Appraisal Rights

In the event Two Harbors’ securities are not listed on a national securities exchange at the time the merger of Merger Sub Corp. and Capitol is consummated, appraisal rights will be available to all Capitol stockholders pursuant to Section 262 of the DGCL. Appraisal rights are not available to holders of Capitol warrants. If appraisal rights are available, holders of shares of Capitol common stock who do not vote in favor of the merger proposal and who properly demand appraisal of their shares will be entitled to appraisal rights in connection with the merger under Section 262 of the DGCL. If the common stock of Two Harbors is listed on a national securities exchange at the time the merger of Merger Sub Corp. and Capitol is consummated, Capitol stockholders will not be entitled to assert appraisal rights under Section 262.

Holders of Public Shares electing to exercise conversion rights will not be entitled to appraisal rights.

The following discussion is not a complete statement of the law pertaining to appraisal rights under the DGCL and is qualified in its entirety by the full text of Section 262, which is attached to this proxy statement/prospectus as Annex J. The following summary does not constitute any legal or other advice nor does it constitute a recommendation that stockholders exercise their appraisal rights, if any, under Section 262. All references in Section 262 and in this summary to a “stockholder” are to the record holder of the shares of common stock of Capitol as to which appraisal rights are asserted. A person having a beneficial interest in shares of common stock of Capitol held of record in the name of another person, such as a broker, fiduciary, depositary or other nominee, must act promptly to cause the record holder to follow the steps summarized below properly and in a timely manner to perfect appraisal rights, if available.

In the event that appraisal rights are available, under Section 262, holders of shares of common stock of Capitol who do not vote in favor of the merger proposal and who otherwise follow the procedures set forth in Section 262 will be entitled to have their shares appraised by the Delaware Court of Chancery and to receive payment in cash of the “fair value” of the shares, exclusive of any element of value arising from the accomplishment or expectation of the merger of Merger Sub Corp. and Capitol, together with a fair rate of interest, if any, as determined by the court.

Under Section 262, where a merger or consolidation agreement is to be submitted for adoption at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, must notify each of its stockholders entitled to appraisal rights that appraisal rights are available and include in the notice a copy of Section 262. To the extent appraisal rights are available in connection with the merger of Merger Sub Corp. and Capitol, this proxy statement/prospectus shall constitute the notice, and the full text of Section 262 is attached to this proxy statement as Annex J. In the event appraisal rights are available in connection with the merger of Merger Sub Corp. and Capitol, any holder of common stock of Capitol who wishes to exercise appraisal rights, or who wishes to preserve such holder’s right to do so, should review the following discussion and Annex J carefully because failure to timely and properly comply with the procedures specified will result in the loss of appraisal rights. Moreover, because of the complexity of the procedures for exercising the right to seek appraisal of shares of common stock, Capitol believes that if a stockholder considers exercising such rights, such stockholder should seek the advice of legal counsel.

Filing Written Demand

If appraisal rights are available in connection with the merger of Merger Sub Corp. and Capitol, any holder of common stock of Capitol wishing to exercise appraisal rights must deliver to Capitol, before the vote on the merger proposal, a written demand for the appraisal of the stockholder’s shares, and that stockholder must not vote in favor of the adoption of the merger agreement. A holder of shares of Capitol common stock wishing to exercise appraisal rights must hold of record the shares on the date the written demand for appraisal is made and must continue to hold the shares of record through the effective time of the merger of Merger Sub Corp. and Capitol. The stockholder must not vote in favor of the merger proposal. A proxy that is submitted and does not contain voting instructions will, unless revoked, be voted in favor of the merger proposal, and it will constitute a waiver of the stockholder’s right of appraisal and will nullify any previously delivered written demand for appraisal. Therefore, a stockholder who submits a proxy and who wishes to exercise appraisal rights must submit a proxy containing instructions to vote against the merger proposal or abstain from voting on the adoption of the merger agreement. Neither voting against the adoption of the merger agreement nor abstaining from voting or failing to vote on the merger proposal will, in and of itself, constitute a written demand for appraisal satisfying the requirements of Section 262. The written demand for appraisal must be in addition to and separate from any proxy or vote on the merger proposal. The demand must reasonably inform Capitol of the identity of the holder, as well as the intention of the holder to demand an appraisal of the “fair value” of the shares held by the holder. A stockholder’s failure to make the written demand prior to the taking of the vote on the merger proposal will constitute a waiver of appraisal rights.

If appraisal rights are available in connection with the merger of Merger Sub Corp. and Capitol, only a holder of record of shares of Capitol common stock is entitled to assert appraisal rights for the shares registered in that holder’s name. A demand for appraisal in respect of shares of common stock of Capitol should be executed by or on behalf of the holder of record, fully and correctly, as the holder’s name appears on the holder’s stock certificates, should specify the holder’s name and mailing address and the number of shares registered in the holder’s name and must state that the person intends thereby to demand appraisal of the holder’s shares in connection with the merger of Merger Sub Corp. and Capitol. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of the demand should be made in that capacity, and if the shares are owned of record by more than one person, as in a joint tenancy and tenancy in common, the demand should be executed by or on behalf of all joint owners. An authorized agent, including an agent for two or more joint owners, may execute a demand for appraisal on behalf of a holder of record; however, the agent must identify the record owner or owners and expressly disclose that, in executing the demand, the agent is acting as agent for the record owner or owners. If the shares are held in “street name” by a broker, bank or nominee, the broker, bank or nominee may exercise appraisal rights with respect to the shares held for one or more beneficial owners while not exercising the rights with respect to the shares held for other beneficial owners; in such case, however, the written demand should set forth the number of shares as to which appraisal is sought, and where no number of shares is expressly mentioned, the demand will be presumed to cover all shares of common stock of Capitol held in the name of the record owner. Stockholders who hold their shares in brokerage

accounts or other nominee forms and who wish to exercise appraisal rights are urged to consult with their brokers to determine the appropriate procedures for the making of a demand for appraisal by such a nominee.

All written demands for appraisal pursuant to Section 262 should be sent or delivered to Capitol Acquisition Corp. at 509 7th Street, N.W., Washington, D.C. 20004, Attention: Mark D. Ein.

Any holder of common stock of Capitol may withdraw his, her or its demand for appraisal and accept the consideration offered pursuant to the merger agreement by delivering to Capitol as the surviving entity of the merger, a written withdrawal of the demand for appraisal. However, any such attempt to withdraw the demand made more than 60 days after the effective date of the merger will require written approval of the surviving corporation. No appraisal proceeding in the Delaware Court of Chancery will be dismissed without the approval of the Delaware Court of Chancery, and such approval may be conditioned upon such terms as the Court deems just.

Notice by the Surviving Corporation

If appraisal rights are available in connection with the merger of Merger Sub Corp. and Capitol, within 10 days after the effective time of the merger, Capitol, as the surviving corporation, must notify each holder of common stock of Capitol who has made a written demand for appraisal pursuant to Section 262, and who has not voted in favor of the merger proposal, that the merger has become effective.

Filing a Petition for Appraisal

Within 120 days after the effective time of the merger of Merger Sub Corp. and Capitol, but not thereafter, Capitol, as the surviving entity of the merger, or any holder of common stock of Capitol who has so complied with Section 262 and is entitled to appraisal rights under Section 262 may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares held by all dissenting holders. Capitol, as the surviving entity is under no obligation to and has no present intention to file a petition, and holders should not assume that Capitol will file a petition. Accordingly, it is the obligation of the holders of common stock of Capitol to initiate all necessary action to perfect their appraisal rights in respect of shares of common stock of Capitol within the time prescribed in Section 262.

Within 120 days after the effective time of the merger, any holder of common stock of Capitol who has complied with the requirements for exercise of appraisal rights will be entitled, upon written request, to receive from Capitol a statement setting forth the aggregate number of shares not voted in favor of the merger proposal and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. The statement must be mailed within 10 days after a written request therefor has been received by the surviving corporation.

If a petition for an appraisal is timely filed by a holder of shares of common stock of Capitol and a copy thereof is served upon the surviving corporation, the surviving corporation will then be obligated within 20 days to file with the Delaware Register in Chancery a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares and with whom agreements as to the value of their shares have not been reached. After notice to the stockholders as required by the court, the Delaware Court of Chancery is empowered to conduct a hearing on the petition to determine those stockholders who have complied with Section 262 and who have become entitled to appraisal rights thereunder. The Delaware Court of Chancery may require the stockholders who demanded payment for their shares to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceeding, and if any stockholder fails to comply with the direction, the Court of Chancery may dismiss the proceedings as to such stockholder.

Determination of Fair Value

After determining the holders of common stock of Capitol entitled to appraisal, the Delaware Court of Chancery will appraise the “fair value” of their shares, exclusive of any element of value arising from the accomplishment or expectation of the merger of Merger Sub Corp. and Capitol, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining fair value and, if applicable, a fair rate of interest, the Delaware Court of Chancery will take into account all relevant factors. In Weinberger v. UOP, Inc. , the Supreme Court of Delaware discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods that are generally considered acceptable in the financial community and otherwise admissible in court” should be considered, and that “fair price obviously requires consideration of all relevant factors involving the value of a company.” The Delaware Supreme Court stated that, in making this determination of fair value, the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts that could be ascertained as of the date of the merger that throw any light on future prospects of the merged corporation. Section 262 provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the merger.” In Cede & Co. v. Technicolor, Inc. , the Delaware Supreme Court stated that such exclusion is a “narrow exclusion that does not encompass known elements of value,” but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Supreme Court of Delaware also stated that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.”

Stockholders considering seeking appraisal should be aware that the fair value of their shares as so determined could be more than, the same as or less than the consideration they would receive pursuant to the merger if they did not seek appraisal of their shares and that an investment banking opinion as to the fairness from a financial point of view of the consideration payable in a merger is not an opinion as to fair value under Section 262. Although Capitol believes that the exchange of Capitol common stock for Two Harbors common stock is fair, no representation is made as to the outcome of the appraisal of fair value as determined by the Delaware Court of Chancery, and stockholders should recognize that such an appraisal could result in a determination of a value higher or lower than, or the same as, this consideration. Neither Capitol nor Two Harbors anticipate offering more than the applicable shares of common stock of Two Harbors to any stockholder of Capitol exercising appraisal rights, and each of Capitol and Two Harbors reserves the right to assert, in any appraisal proceeding, that for purposes of Section 262, the “fair value” of a share of common stock of Capitol is less than the applicable shares of common stock of Two Harbors, and that the methods which are generally considered acceptable in the financial community and otherwise admissible in court should be considered in the appraisal proceedings. In addition, Delaware courts have decided that the statutory appraisal remedy, depending on factual circumstances, may or may not be a dissenter’s exclusive remedy. The Delaware Court of Chancery will also determine the amount of interest, if any, to be paid upon the amounts to be received by persons whose shares of common stock of Capitol have been appraised. If a petition for appraisal is not timely filed, then the right to an appraisal will cease. The costs of the action (which do not include attorneys’ fees or the fees and expenses of experts) may be determined by the Court and taxed upon the parties as the Court deems equitable under the circumstances. The Court may also order that all or a portion of the expenses incurred by a stockholder in connection with an appraisal, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all the shares entitled to be appraised.

If any stockholder who demands appraisal of shares of common stock of Capitol under Section 262 fails to perfect, or successfully withdraws or loses, such holder’s right to appraisal, the stockholder’s shares of common stock of Capitol will be deemed to have been converted at the effective time of the merger into the right to receive common stock of Two Harbors. A stockholder will fail to perfect, or lose or withdraw, the holder’s right to appraisal if no petition for appraisal is filed within 120 days after the effective time of the merger or if the stockholder delivers to the surviving corporation a written withdrawal of the holder’s demand for appraisal and an acceptance of the common stock of Two Harbors in accordance with Section 262.

From and after the effective time of the merger of Merger Sub Corp. and Capitol, no dissenting stockholder shall have any rights of a stockholder of Capitol with respect to that holder’s shares for any purpose, except to receive payment of fair value and to receive payment of dividends or other distributions on the holder’s shares of common stock of Capitol, if any, payable to stockholders of Capitol of record as of a time prior to the effective time of the merger; provided, however, that if a dissenting stockholder delivers to the surviving company a written withdrawal of the demand for an appraisal within 60 days after the effective time of the merger, or subsequently with the written approval of the surviving company, then the right of that dissenting stockholder to an appraisal will cease and the dissenting stockholder will be entitled to receive only the merger consideration in accordance with the terms of the merger agreement. Once a petition for appraisal is filed with the Delaware court, however, the appraisal proceeding may not be dismissed as to any stockholder of Capitol without the approval of the court.

Failure to comply strictly with all of the procedures set forth in Section 262 of the DGCL may result in the loss of a stockholder’s statutory appraisal rights. Consequently, any stockholder wishing to exercise appraisal rights is urged to consult legal counsel before attempting to exercise those rights.

Anticipated Accounting Treatment

The merger will be accounted for as an acquisition by Capitol under Financial Accounting Standards Board Statement No. 141R, “Business Combinations” (“SFAS 141R”) for accounting purposes. The determination was primarily based upon Capitol having all of the ownership of the newly merged entity. The acquisition has not changed the control of Capitol; therefore, Capitol’s balance sheet accounts will be reflected at their historical carryover basis. Two Harbors’ balance sheet accounts will be recorded at estimated fair value which is expected to approximate their carrying value.

Regulatory Matters

The merger and the transactions contemplated by the Merger Agreement are not subject to any additional federal or state regulatory requirement or approval, including the HSR Act, except for filings with the State of Delaware necessary to effectuate the merger.

Required Vote

Recommendation

THE CAPITOL BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE CAPITOL STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE MERGER PROPOSAL.

THE MERGER AGREEMENT

For a discussion of the merger structure, merger consideration and indemnification provisions of the Merger Agreement, see the section entitled “The Merger Proposal.” Such discussion and the following summary of other material provisions of the Merger Agreement is qualified by reference to the complete text of the Merger Agreement, a copy of which is attached as Annexes A-1, A-2 and A-3 to this proxy statement/prospectus and is incorporated herein by reference. All stockholders are encouraged to read the Merger Agreement in its entirety for a more complete description of the terms and conditions of the merger. The Merger Agreement has been included as an annex to this proxy statement/prospectus to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about Capitol, Two Harbors or their respective subsidiaries and affiliates. The representations, warranties and covenants contained in the Merger Agreement were made only for purposes of that agreement and as of specific dates, were solely for the benefit of the parties to the Merger Agreement, may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Merger Agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Stockholders are not third-party beneficiaries under the Merger Agreement and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of Capitol or Two Harbors or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in public disclosures by Two Harbors and Capitol.

Structure of the Merger

The Merger Agreement provides for (i) the merger of Merger Sub Corp. with and into Capitol with Capitol surviving the merger and becoming a wholly-owned subsidiary of Two Harbors, (ii) Two Harbors to become the new publicly-traded corporation of which the holders of Capitol securities will be security holders and (iii) the contribution by Pine River of the 1,000 shares it owns in Two Harbors to Two Harbors and the cancellation and retirement of such shares for no consideration. Upon consummation of the merger, Capitol’s outstanding common stock and warrants will be converted into like securities of Two Harbors, on a one-to-one basis. The holders of Capitol’s common stock and warrants will be holders of the securities of Two Harbors after the merger in the same proportion as their current holdings in Capitol, except as (i) increased by (A) the cancellation by the Capitol Founders of their Founders’ Shares upon consummation of the transaction, (B) conversion of any Public Shares and (C) the purchase of Public Shares pursuant to arrangements that provide for Capitol to purchase such shares after the closing of the merger (as described under “ The Merger Proposal — Actions That May Be Taken to Secure Approval of Capitol’s Stockholders ”) and (ii) decreased by the issuance of shares of restricted stock to Two Harbors’ independent directors upon consummation of the transaction.

Closing and Effective Time of the Merger

The closing of the merger will take place promptly following the satisfaction of the conditions described below under the subsection entitled “— Conditions to Closing of the Merger,” unless Capitol and Two Harbors agree in writing to another time. The merger is expected to be consummated promptly after the special meetings of Capitol’s stockholders and warrantholders described in this proxy statement/prospectus.

Representations and Warranties

The Merger Agreement contains representations and warranties of Capitol relating, among other things, to:

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proper organization and similar corporate matters;

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capital structure;

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the authorization, performance and enforceability of the Merger Agreement;

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permits and compliance with applicable laws;

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tax matters;

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SEC reports, financial statements and Sarbanes-Oxley Act;

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absence of undisclosed liabilities;

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contracts;

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assets and properties;

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absence of certain changes or events;

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employee matters;

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compliance with laws;

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litigation;

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transactions with affiliates;

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Capitol’s trust account; and

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regulatory matters and compliance.

The Merger Agreement contains representations and warranties of each of Two Harbors and Merger Sub Corp. relating, among other things, to:

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proper organization and similar corporate matters;

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capital structure;

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the authorization, performance and enforceability of the Merger Agreement;

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litigation;

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tax matters;

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REIT matters; and

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regulatory matters and compliance.

Indemnification of Officers and Directors; Insurance

Following the closing of the merger, Two Harbors and Capitol will, to the extent Capitol was obligated to do so as of June 11, 2009, indemnify current and former directors and officers of Capitol in their capacities as such against any costs or expenses (including reasonable attorneys’ fees), judgments, fines, settlements, losses, claims, damages or liabilities incurred in connection with any threatened, pending, completed action, suit or proceeding, whether civil, criminal or administrative or investigative, arising out of matters existing or occurring at or prior to the closing, including actions taken in connection with the merger. Two Harbors and Capitol also agree to cause Capitol’s organizational documents to include provisions for elimination of liability of directors and officers and indemnification of directors and officers after the merger that are at least as advantageous to such persons as the provisions in effect prior to the merger.

Prior to the consummation of the merger, Capitol is also required to obtain and fully pay for six-year “tail” insurance policies for its officers and directors. The terms of such policies must be at least as favorable to its officers and directors as their current coverage. If Capitol does not obtain such “tail” insurance policies prior to the merger, Two Harbors will cause Capitol to do so after the merger. If neither Two Harbors nor the Company is able to obtain such “tail” insurance policies, Capitol is required to continue to maintain, for six years after the merger, directors’

and officers’ and fiduciary liability insurance that is at least as favorable as the insurance in place as of June 11, 2009, provided that the obligations of Capitol and Two Harbors will not be required to pay an annual premium amount in excess of 250% of the annual premiums currently in effect for such coverage.

Two Harbors and Capitol further agree that the indemnification and insurance provisions with respect to Capitol’s officers and directors will survive any consolidation, merger or sale of all or substantially all of Capitol’s assets, so that any surviving entity will be required to honor these indemnification and insurance provisions after such transaction. The Merger Agreement also provides that these provisions are in addition to, and not in replacement of, indemnification rights in Capitol’s organizational documents that may apply to Capitol’s officers, directors, employees and agents. Further information about such rights can be found in the section entitled “ Comparison of Rights of Capitol and Two Harbors ” of this proxy statement/prospectus.

Covenants

The parties have each agreed to use commercially reasonable efforts to take such actions as are necessary, proper or advisable to consummate the merger. Capitol and Two Harbors have each also agreed to continue to operate their respective businesses in the ordinary course prior to the closing and, unless otherwise required or permitted under the Merger Agreement, not to take the following actions, among others, without the prior written consent of the other party:

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except with respect to Capitol in connection with the initial charter proposals, amend its certificate of incorporation or bylaws (whether by merger, consolidation or otherwise);

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split, combine or reclassify any shares of capital stock or other equity securities or declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of the capital stock or other equity securities, or redeem, repurchase or otherwise acquire or offer to redeem, repurchase, or otherwise acquire any capital stock or other equity securities;

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(x) issue, deliver or sell, or authorize the issuance, delivery or sale of, any capital stock, warrant or other equity securities, or (y) amend any term of any capital stock or other equity securities (in each case, whether by merger, consolidation or otherwise);

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except as set forth in the Merger Agreement, acquire (by merger, consolidation, acquisition of stock or assets or otherwise), directly or indirectly, any assets, securities, properties, or businesses, and with respect to Capitol, other than in the ordinary course of business;

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sell, lease or otherwise transfer, or create or incur any lien on, any assets, securities, properties, or businesses (in the case of Capitol, other than in the ordinary course of business);

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make any loans, advances or capital contributions to, or investments in, any other person or entity;

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create, incur, assume, suffer to exist or otherwise be liable with respect to any indebtedness for borrowed money or guarantees thereof;

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enter into any hedging arrangements;

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enter into or amend any material contract or enter into any agreement or arrangement that limits or otherwise restricts in any respect the company, or any successor thereto or that could, after the consummation of the merger, limit or restrict in any respect the parties from engaging or competing in any line of business, in any location or with any person or, except in the case of Capitol in the ordinary course of business, otherwise waive, release or assign any material rights, claims or benefits;

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increase compensation, bonus or other benefits payable to any director, officer or employee;

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change the methods of accounting, except as required by concurrent changes in law or generally accepted accounting principles;

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settle, or offer or propose to settle, any material litigation, investigation, arbitration, proceeding or other claim, including any litigation, arbitration, proceeding or dispute that relates to the merger;

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make or change any material tax election, change any annual tax accounting period, adopt or change any method of tax accounting, materially amend any tax returns or file claims for material tax refunds, enter any material closing agreement, settle any material tax claim, audit or assessment, or surrender any right to claim a material tax refund, offset or other reduction in tax liability, and with respect to Capitol, take any action or fail to take any action that could prevent Two Harbors from qualifying as a REIT; or

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agree, resolve or commit to do any of the foregoing.

Capitol has also agreed to cease, and to cause its officers, directors, employees, representatives and agents, including the Capitol Founders, to cease negotiations or discussions with any other party with respect to an alternative transaction, to return or destroy all related confidential information, and to avoid entering into any such negotiations or discussions until the closing of the merger. However, the Merger Agreement provides that Capitol’s board of directors may, at any time prior to the meeting of stockholders, furnish information and participate in discussions or negotiations with respect to a proposal that the board determines in good faith, upon consultation with legal and financial advisors, could lead to a “superior proposal” (as defined in the Merger Agreement), so long as such proposal was not obtained pursuant to a breach of the Merger Agreement by Capitol. The Merger Agreement provides that Capitol’s board of directors may make a “change in recommendation” (as defined in the Merger Agreement) or terminate the Merger Agreement and enter into a definitive agreement with respect to a superior proposal if it determines in good faith that such action is required by the board’s fiduciary duties to Capitol. Capitol must promptly advise Two Harbors of any request for information or receipt of any “acquisition proposal” (as defined in the Merger Agreement).

The Merger Agreement also contains additional covenants of the parties, including covenants providing for:

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the protection of confidential information of the parties and, subject to the confidentiality requirements, the provision of reasonable access to information;

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Capitol and Two Harbors to prepare and file a proxy statement and registration statement, which shall contain this proxy statement/prospectus, to solicit proxies from the Capitol stockholders and warrantholders to vote on the proposals that will be presented for consideration at the special meeting and to register, under the Securities Act, the Two Harbors shares and warrants that will be issued to the securityholders of Capitol pursuant to the Merger Agreement;

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Two Harbors to waive its rights to make claims against Capitol to collect from the trust fund established for the benefit of the holders of the Public Shares for any monies that may be owed to it by Capitol;

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Two Harbors to make an election to qualify as a real estate investment trust within the meaning of Section 856 of the Code in connection with the filing of its initial tax return;

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Two Harbors to file a registration statement, at Capitol’s expense, relating to the resale of the warrants (and underlying shares) held by the Capitol Founders and Pine River and to use its commercially reasonable efforts to have such registration statement declared effective at, or as soon as reasonably practicable after, the closing of the merger;

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Two Harbors and Capitol to take all reasonable steps that are required or permitted under Section 16(a) of the Exchange Act to cause any dispositions of Capitol’s common stock and warrants that may occur or are deemed to occur in connection with the merger to be exempt under Rule 16b-3 of the Exchange Act; and

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Two Harbors to use its reasonable best efforts to cause the Two Harbors shares issued in the merger to be listed on the NYSE or NYSE Amex, subject to official notice of issuance, as of or prior to the effective time of the merger.

Conditions to Closing of the Merger

General Conditions

Consummation of the merger is conditioned on (i) the holders of (a) a majority of the Public Shares present and entitled to vote at a meeting called for this and other related purposes approving the merger and (b) a

majority of Capitol’s common stock on the record date, at a meeting called for this and other related purposes approving the merger proposal, (ii) the holders of fewer than 30.0% of the Public Shares voting against the merger and properly demanding that their Public Shares be converted into a pro rata portion of the trust account, calculated as of two business days prior to the anticipated consummation of the merger, (iii) the holders of a majority of Capitol’s common stock outstanding on the record date approving the initial charter proposals and the subsequent filing of Capitol’s second amended and restated certificate of incorporation and (iv) the holders of a majority of Capitol’s warrants approving the warrant amendment proposals.

In addition, the consummation of the transactions contemplated by the Merger Agreement is conditioned upon, among other things:

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no statute, rule, ruling, regulation, judgment, decision, order, injunction, writ or decree shall have been enacted, entered, ordered, promulgated, issued or enforced by any court or other governmental authority that is in effect and prohibits, enjoins or restricts the consummation of the transactions;

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the execution by and delivery to each party of each of the various transaction documents;

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the delivery by each party to the other party of a certificate to the effect that the representations and warranties of each party are true and correct as of the closing, except as would not reasonably be expected to have a material adverse effect, and all covenants contained in the Merger Agreement have been materially complied with by each party;

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receipt by each of Capitol and Two Harbors of an opinion from its counsel, in form and substance reasonably satisfactory to such party to the effect that (a) the merger will be treated as a contribution governed by Section 351 of the Code or a reorganization under Section 368(a) of the Code and (b) the holders of Capitol’s stock will recognize no gain or loss on the exchange of those shares for shares of Two Harbors common stock (except to the extent that a holder of Capitol’s stock receives cash in exchange for any portion of its stock);

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the trust account containing at least $100 million of funds (after payment of transaction fees and expenses, deferred underwriting discounts and commissions, tax liabilities, reimbursement of expenses of the Capitol Founders and purchases of Public Shares, if any, as set forth in the Merger Agreement);

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receipt by Capitol of an opinion from Richards, Layton & Finger P.A. relating to the initial charter amendment, which opinion has been obtained and is attached as Annex H to this proxy statement/prospectus;

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amendment of Capitol’s amended and restated certificate of incorporation to provide for the initial charter amendment; and

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the registration statement, of which this proxy statement/prospectus forms a part, shall have become effective and no stop order suspending its effectiveness, or proceeding to that effect, shall have been implemented by the SEC.

Two Harbors’ and Merger Sub Corp.’s Conditions to Closing

The obligations of Two Harbors and Merger Sub Corp. to consummate the transactions contemplated by the Merger Agreement also are conditioned upon, among other things, there being no material adverse effect on Capitol since June 11, 2009.

Capitol’s Conditions to Closing

The obligations of Capitol to consummate the transactions contemplated by the Merger Agreement also are conditioned upon each of the following, among other things:

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there shall have been no material adverse effect on Two Harbors since June 11, 2009; and

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receipt by Capitol of an opinion of Clifford Chance US LLP regarding the qualification of Two Harbors as REIT under the Code.

Waiver

If permitted under applicable law, either Capitol or Two Harbors may waive any inaccuracies in the representations and warranties made to such party contained in the Merger Agreement or in any document delivered pursuant to the Merger Agreement and waive compliance with any agreements or conditions for the benefit of itself or such party contained in the Merger Agreement or in any document delivered pursuant to the Merger Agreement. The condition requiring that the holders of fewer than 30.0% of the Public Shares affirmatively vote against the merger proposal and demand conversion of their shares into cash may not be waived. Capitol would file a Current Report on Form 8-K and issue a press release to disclose any waiver of any representation, warranty or condition to the Merger Agreement. If such waiver is material to investors, a proxy statement/prospectus supplement would also be sent to holders of Public Shares as promptly as practicable. There can be no assurance that all of the conditions will be satisfied or waived.

At any time prior to the closing, either Capitol or Two Harbors may, in writing, to the extent legally allowed, extend the time for the performance of any of the obligations or other acts of the other parties to the Merger Agreement.

The existence of the financial and personal interests of the directors may result in a conflict of interest on the part of one or more of them between what he may believe is best for Capitol and what he may believe is best for himself in determining whether or not to grant a waiver in a specific situation.

Termination

The Merger Agreement may be terminated at any time, but not later than the closing, as follows:

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by mutual written agreement of Capitol and Two Harbors;

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by either Capitol or Two Harbors if:

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at the Capitol stockholder meeting, or any adjournment or postponement, the Merger Agreement shall fail to be approved by the affirmative vote of the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote at the meeting or the holders of 30.0% or more of the Public Shares exercise conversion rights;

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the merger is not consummated by November 8, 2009;

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a governmental entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, which order, decree, judgment, ruling or other action is final and non-appealable; or

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if the other party has breached or failed to perform any of its covenants or representations and warranties in any material respect that would constitute a failure of the applicable closing conditions and has not cured its breach within thirty days of the notice of an intent to terminate, provided that the terminating party is itself not in material breach;

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by Two Harbors if:

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Capitol’s board of directors or any committee makes or publicly proposes to make a “change in recommendation” (defined in the Merger Agreement) to stockholders with respect to the merger proposal; or

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Capitol’s board of directors or any committee approve or recommends, within two days of receiving an inquiry, proposal, offer or expression with respect to an “alternative transaction” (defined in the Merger Agreement), takes no position with respect to an alternative transaction; and

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by Capitol if its board of directors or any committee causes Capitol to enter into an alternative transaction as a result of it receiving a “superior proposal” (defined in the Merger Agreement) for a transaction (provided Capitol has complied in all material respects with its applicable obligations under the Merger Agreement, including paying the termination fee described below).

Effect of Termination

In the event of proper termination by either Capitol or Two Harbors, the Merger Agreement will become void and have no effect, without any liability or obligation on the part of Capitol or Two Harbors, except that:

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if the Merger Agreement is terminated (i) by Pine River as a result of Capitol entering into an alternative transaction and such alternative transaction is consummated within 12 months following such termination or (ii) by Capitol if it enters into an alternative transaction as a result of it receiving a superior proposal for a transaction, Capitol has agreed to pay a termination fee to Pine River in the amount of $5 million (x) at closing of the alternative transaction or (y) upon termination of the Merger Agreement, respectively;

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The confidentiality obligations set forth in the Merger Agreement will survive;

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The waiver by Two Harbors of all rights against Capitol to collect from the trust account any monies that may be owed to it by Capitol for any reason whatsoever, including but not limited to a breach of the Merger Agreement, and the acknowledgement that Two Harbors will not seek recourse against the trust account for any reason whatsoever, will survive;

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the rights of the parties to bring actions against each other for breach of the Merger Agreement will survive; and

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the fees and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby will be paid by the party incurring such expenses.

Fees and Expenses

All fees and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby will be paid by the party incurring such expenses whether or not the merger is consummated, except that Capitol and Two Harbors have agreed to reimburse Pine River for its costs incurred in connection with the transaction in the event the merger is consummated.

Confidentiality; Access to Information

Capitol and Two Harbors will afford to the other party and its financial advisors, accountants, counsel and other representatives prior to the completion of the merger reasonable access during normal business hours, upon reasonable notice, to all of their respective properties, books, records and personnel to obtain all information concerning the business, including the status of product development efforts, properties, results of operations and personnel, as each party may reasonably request. Capitol and Two Harbors will maintain in confidence any non-public information received from the other party, and use such non-public information only for purposes of consummating the transactions contemplated by the Merger Agreement, subject to customary exceptions.

Amendments

The Merger Agreement may be amended by the parties thereto at any time by execution of an instrument in writing signed on behalf of each of the parties. Capitol would file a Current Report on Form 8-K and issue a press release to disclose any amendment to the Merger Agreement entered into by the parties. If such amendment is material to investors, a proxy statement/prospectus supplement would also be sent to holders of Public Shares as promptly as practicable.

Public Announcements

The parties have agreed that until closing or termination of the Merger Agreement, the parties will:

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cooperate in good faith to jointly prepare all press releases and public announcements pertaining to the Merger Agreement and the transactions governed by it; and

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not issue or otherwise make any public announcement or communication pertaining to the Merger Agreement or the transaction without the prior consent of the other party, which shall not be unreasonably withheld by the other party, except as may be required by applicable law or court process.

U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of the material U.S. federal income tax considerations relating to the merger to holders of Capitol common stock and warrants, of the acquisition, holding, and disposition of Two Harbors common stock and of Two Harbors’ qualification and taxation as a REIT. This summary is based upon the Internal Revenue Code of 1986, as amended, or the Code, the regulations promulgated by the U.S. Treasury Department, or the Treasury regulations, current administrative interpretations and practices of the IRS (including administrative interpretations and practices expressed in private letter rulings which are binding on the IRS only with respect to the particular taxpayers who requested and received those rulings) and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax considerations described below. No advance ruling has been or will be sought from the IRS regarding any matter discussed in this summary. The summary is also based upon the assumption that the operation of Capitol and Two Harbors, and of their subsidiaries and other lower-tier and affiliated entities will, in each case, be in accordance with such entity’s applicable organizational documents. This summary does not discuss the impact that U.S. state and local taxes and taxes imposed by non-U.S. jurisdictions could have on the matters discussed in this summary. This summary is for general information only, and does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular stockholder in light of its investment or tax circumstances or to stockholders subject to special tax rules, such as:

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U.S. expatriates;

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persons who mark-to-market Capitol or Two Harbors common stock;

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subchapter S corporations;

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U.S. stockholders (as defined below) whose functional currency is not the U.S. dollar;

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financial institutions;

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insurance companies;

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broker-dealers;

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regulated investment companies (or RICs);

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REITs;

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trusts and estates;

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holders who receive Two Harbors common stock through the exercise of employee stock options or otherwise as compensation;

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persons holding Capitol or Two Harbors common stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment;

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persons subject to the alternative minimum tax provisions of the Internal Revenue Code;

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persons holding their interest in Capitol or Two Harbors through a partnership or similar pass-through entity;

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persons holding a 10% or more (by vote or value) beneficial interest in Capitol or Two Harbors;

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tax-exempt organizations; and

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non-U.S. stockholders (as defined below, and except as otherwise discussed below).

This summary assumes that securityholders hold Capitol common stock and warrants and will hold Two Harbors common stock and warrants as capital assets, which generally means as property held for investment.

THE U.S. FEDERAL INCOME TAX TREATMENT OF THE MERGER AND THE U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF TWO HARBORS COMMON STOCK DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S. FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY

BE AVAILABLE. IN ADDITION, THE U.S. FEDERAL INCOME TAX TREATMENT OF THE MERGER AND THE U.S. FEDERAL INCOME TAX TREATMENT OF HOLDING TWO HARBORS COMMON STOCK TO ANY PARTICULAR STOCKHOLDER WILL DEPEND ON THE STOCKHOLDER’S PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU, IN LIGHT OF YOUR PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES, OF ACQUIRING, HOLDING, AND DISPOSING OF TWO HARBORS COMMON STOCK.

U.S. Federal Income Tax Considerations of the Merger

Capitol’s and Two Harbors’ obligations to complete the merger are conditioned upon the receipt by each of Capitol and Two Harbors of opinions of their respective counsel that the merger will be treated as a contribution governed by either Section 351 of the Code or a reorganization within the meaning of Section 368 of the Code and that Capitol stockholders will recognize no gain or loss on the exchange of their Capitol shares for shares of Two Harbors. Such opinions of counsel will rely on customary representations made by Capitol and Two Harbors and applicable factual assumptions. If any of the factual assumptions or representations relied upon in the opinions of counsel is inaccurate, the opinions may not accurately describe the U.S. federal income tax treatment of the merger, and this discussion may not accurately describe the tax considerations arising from the merger. It is possible that the IRS would challenge the conclusions in the above-described opinions or the statements in this discussion, which do not bind the IRS or the courts and that a court would agree with the IRS.

The income tax considerations summarized below are based upon the assumption that the merger will qualify either as a contribution governed by either Section 351 of the Code or a reorganization within the meaning of Section 368(a) of the Code.

U.S. Federal Income Tax Considerations of the Merger to U.S. Capitol Stockholders

This section summarizes the U.S. federal income tax considerations of the merger for U.S. stockholders holding Capitol stock or warrants. For these purposes, a U.S. stockholder is a beneficial owner of Capitol or Two Harbors stock or warrants who for U.S. federal income tax purposes is:

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a citizen or resident of the U.S.;

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a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S. or of a political subdivision thereof (including the District of Columbia);

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an estate whose income is subject to U.S. federal income taxation regardless of its source; or

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any trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person.

The merger of Capitol and Merger Sub Corp will constitute a tax-deferred transaction pursuant to either Section 351 or Section 368 of the Code and no gain or loss will be recognized by the U.S. stockholders of Capitol who exchange Capitol shares solely for Two Harbors shares as a result of the merger (except to the extent that such a stockholder also transfers Capitol warrants in the transaction, as further discussed below). The U.S. federal tax basis of the shares of Two Harbors received by such a holder of Capitol shares in the merger will be the same as the adjusted tax basis of the Capitol shares surrendered in exchange therefor. The holding period of the shares of Two Harbors received in the merger by such a holder of Capitol shares will include the period during which such Capitol shares was held on the date of the merger.

U.S. stockholders who exercise conversion rights and elect to receive cash in exchange for their Capitol shares in the merger will recognize gain or loss on such exchange equal to the difference between the amount of cash received and such holder’s adjusted basis in the Capitol stock exchanged therefor. Such gain or loss will be long-term capital gain or loss if the holder’s holding period of such shares is more than one year at the time of the

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exchange. Holders who hold different blocks of Capitol stock (generally, shares of Capitol stock purchased or acquired on different dates or at different prices) and holders of Capitol stock who receive a mixture of cash and Two Harbors stock in exchange for their Capitol stock should consult their tax advisors to determine how the above rules apply to them.

Provided the merger is governed by Section 351 of the Code, a U.S. stockholder who exchanges Capitol warrants for Two Harbor warrants in the merger will recognize gain or loss upon such exchange equal to the difference between the fair market value of the Two Harbors warrants received and such holder’s adjusted basis in the Capitol warrants exchanged therefor. Such gain or loss will generally be long-term capital gain or loss if the warrantholder’s holding period in the Capitol warrants is over a year at the time of the exchange. The holder’s basis in the Two Harbors warrants received in the exchange will be equal to the fair market value of such warrants at the time of the exchange. However, if the merger qualifies as a reorganization within the meaning of Section 368 of the Code, a U.S. stockholder who exchanges Capitol warrants for Two Harbor warrants in the merger will not recognize any gain or loss on such exchange. In such case, a holder’s basis in the Two Harbor warrants received in the exchange will be equal to the holder’s basis in the Capitol warrants exchanged therefor.

U.S. Federal Income Tax Considerations of the Merger to Non-U.S. Capitol Stockholders

This section summarizes the U.S. federal income tax considerations of the merger for non-U.S. stockholders holding Capitol stock or warrants. For these purposes, a non-U.S. stockholder is a beneficial owner of Capitol or Two Harbors stock or warrants who is neither a U.S. stockholder nor an entity that is treated as a partnership for U.S. federal income tax purposes.

A non-U.S. stockholder who exchanges Capitol shares solely for Two Harbors shares as a result of the merger will generally be treated in the same manner as a U.S. stockholder for U.S. federal income tax purposes. A non-U.S. stockholder who exercises conversion rights and elects to receive cash in exchange for Capitol shares in the merger, and a non-U.S. stockholder who exchanges Capitol warrants for Two Harbors warrants in the exchange, will generally be treated in the same manner as a U.S. stockholder for U.S. federal income tax purposes except that any such non-U.S. stockholder will not be subject to U.S. federal income tax on the exchange unless (i) such holder is engaged in a trade or business within the United States and any gain recognized in the exchange is treated as effectively connected with such trade or business (in which case the non-U.S. stockholder will generally be subject to the same treatment as a U.S. stockholder with respect to the exchange) or (ii) such holder is an individual who is present in the United States for 183 days or more during the taxable year in which the merger takes place and has a “tax home” in the United States (in which case the non-U.S. stockholder will be subject to a 30% tax on the individual’s net capital gain for the year).

Backup Withholding

In order to avoid “backup withholding” on a payment of cash to a holder of Capitol shares, pursuant to holder’s election to receive cash in exchange for their Capitol shares, a U.S. stockholder must, unless an exception applies under applicable law and regulations, provide us with his or her correct taxpayer identification number on a Substitute Form W-9, and certify under penalty of perjury that such holder is not subject to backup withholding and that his or her taxpayer identification number is correct, and a non U.S. stockholder must, unless an exception applies under applicable law and regulations, certify that he or she is a non U.S. stockholder on an applicable IRS Form W-8. A Substitute Form W-9 will be included with the letter of transmittal to be sent to Capitol stockholders and warrantholders by the exchange agent. If a Capitol stockholder fails to provide his or her correct taxpayer identification number or the required certifications, such holder may be subject to penalty by the IRS and any cash payments such holder would otherwise receive in consideration for shares of Capitol in the merger may be subject to backup withholding at a rate of 28%. Any amount withheld under the backup withholding rules may be allowed as a refund or credit against such holder’s U.S. federal income tax liability provided that such holder timely furnishes certain required information to the IRS.

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U.S. Federal Income Tax Considerations of Two Harbors as a REIT

For purposes of this section, references to “Two Harbors” mean only Two Harbors Investment Corp. and not any of its subsidiaries or other lower-tier entities except as otherwise indicated.

Taxation of Two Harbors — General

Two Harbors intends to elect to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with its taxable year ending December 31, 2009. Two Harbors believes that it has been organized and intends to operate in a manner that allows it to qualify for taxation as a REIT under the Code.

The law firm of Clifford Chance US LLP has acted as Two Harbors’ counsel in connection with this offering. Two Harbors expects to receive at the closing of the merger an opinion of Clifford Chance US LLP to the effect that, commencing with Two Harbors’ taxable year ending December 31, 2009, it has been organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and its proposed method of operation will enable its to meet the requirements for qualification and taxation as a REIT under the Code. It must be emphasized that the opinion of Clifford Chance US LLP is based on various assumptions relating to Two Harbors’ organization and operation, including that all factual representations and statements set forth in all relevant documents, records and instruments are true and correct, all actions described in this proxy statement are completed in a timely fashion and that Two Harbors will at all times operate in accordance with the method of operation described in its organizational documents and this prospectus. Additionally, the opinion of Clifford Chance US LLP is conditioned upon factual representations and covenants made by the management of Two Harbors and PRCM Advisers LLC, regarding Two Harbors’ organization, assets, present and future conduct of its business operations and other items regarding its ability to meet the various requirements for qualification as a REIT, and assumes that such representations and covenants are accurate and complete and that Two Harbors will take no action that could adversely affect its qualification as a REIT. While Two Harbors believes that it is organized and intends to operate so that it will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations and the possibility of future changes in Two Harbors’ circumstances or applicable law, no assurance can be given by Clifford Chance US LLP or Two Harbors that Two Harbors will so qualify for any particular year. Clifford Chance US LLP will have no obligation to advise Two Harbors or the holders of its shares of common stock of any subsequent change in the matters stated, represented or assumed or of any subsequent change in the applicable law. You should be aware that opinions of counsel are not binding on the IRS, or any court, and no assurance can be given that the IRS will not challenge the conclusions set forth in such opinions.

Qualification and taxation as a REIT depend on Two Harbors’ ability to meet, on a continuing basis, through actual results of operations, distribution levels, diversity of share ownership and various qualification requirements imposed upon REITs by the Code, the compliance with which will not be reviewed by Clifford Chance US LLP. In addition, Two Harbors’ ability to qualify as a REIT may depend in part upon the operating results, organizational structure and entity classification for U.S. federal income tax purposes of certain entities in which Two Harbors invests. Two Harbors’ ability to qualify as a REIT also requires that Two Harbors satisfies certain asset and income tests, some of which depend upon the fair market values of assets directly or indirectly owned by Two Harbors or which serve as security for loans made by Two Harbors. Such values may not be susceptible to a precise determination. Accordingly, no assurance can be given that the actual results of Two Harbors’ operations for any taxable year will satisfy the requirements for qualification and taxation as a REIT.

Taxation of REITs in General

As indicated above, qualification and taxation as a REIT depend on Two Harbors’ ability to meet, on a continuing basis, through actual results of operations, distribution levels, diversity of share ownership and various qualification requirements imposed upon REITs by the Code. The material qualification requirements are summarized below, under “ — Requirements for Qualification as a REIT .” While Two Harbors believes that it will operate so that it qualifies as a REIT, no assurance can be given that the IRS will not challenge its

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qualification as a REIT or that it will be able to operate in accordance with the REIT requirements in the future. See “ — Failure to Qualify .”

Provided that Two Harbors qualifies as a REIT, it will generally be entitled to a deduction for dividends that it pays and, therefore, will not be subject to U.S. federal corporate income tax on its net taxable income that is currently distributed to its stockholders. This treatment substantially eliminates the “double taxation” at the corporate and stockholder levels that results generally from investment in a corporation. Rather, income generated by a REIT generally is taxed only at the stockholder level, upon a distribution of dividends by the REIT.

For tax years through 2010, stockholders who are individual U.S. stockholders (as defined below) are generally taxed on corporate dividends at a maximum rate of 15% (the same as long-term capital gains), thereby substantially reducing, though not completely eliminating, the double taxation that has historically applied to corporate dividends. With limited exceptions, however, dividends received by individual U.S. stockholders from Two Harbors or from other entities that are taxed as REITs will continue to be taxed at rates applicable to ordinary income, which will be as high as 35% through 2010. Net operating losses, foreign tax credits and other tax attributes of a REIT generally do not pass through to the stockholders of the REIT, subject to special rules for certain items, such as capital gains, recognized by REITs. See “ — Taxation of Taxable U.S. Stockholders .”

Even if Two Harbors qualifies for taxation as a REIT, however, it will be subject to U.S. federal income taxation as follows:

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It will be taxed at regular corporate rates on any undistributed income, including undistributed net capital gains.

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It may be subject to the “alternative minimum tax” on its items of tax preference, if any.

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If Two Harbors has net income from prohibited transactions, which are, in general, sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than foreclosure property, such income will be subject to a 100% tax. See “ — Prohibited Transactions ” and “ — Foreclosure Property ” below.

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If Two Harbors elects to treat property that it acquires in connection with a foreclosure of a mortgage loan or from certain leasehold terminations as “foreclosure property,” it may thereby avoid (a) the 100% tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction) and (b) the inclusion of any income from such property not qualifying for purposes of the REIT gross income tests discussed below, but the income from the sale or operation of the property may be subject to corporate income tax at the highest applicable rate (currently 35%).

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If Two Harbors fails to satisfy the 75% gross income test or the 95% gross income test, as discussed below, but nonetheless maintains its qualification as a REIT because other requirements are met, it will be subject to a 100% tax on an amount equal to (a) the greater of (1) the amount by which it fails the 75% gross income test or (2) the amount by which it fails the 95% gross income test, as the case may be, multiplied by (b) a fraction intended to reflect its profitability.

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If Two Harbors fails to satisfy any of the REIT asset tests, as described below, other than a failure of the 5% or 10% REIT asset tests that does not exceed a statutory de minimis amount as described more fully below, but its failure is due to reasonable cause and not due to willful neglect and Two Harbors nonetheless maintains its REIT qualification because of specified cure provisions, it will be required to pay a tax equal to the greater of $50,000 or the highest corporate tax rate (currently 35%) of the net income generated by the nonqualifying assets during the period in which it failed to satisfy the asset tests.

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If Two Harbors fails to satisfy any provision of the Code that would result in its failure to qualify as a REIT (other than a gross income or asset test requirement) and the violation is due to reasonable cause, it may retain its REIT qualification but it will be required to pay a penalty of $50,000 for each such failure.

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excise tax on the excess of the required distribution over the sum of (1) the amounts actually distributed (taking into account excess distributions from prior years), plus (2) retained amounts on which income tax is paid at the corporate level.

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Two Harbors may be required to pay monetary penalties to the IRS in certain circumstances, including if it fails to meet record-keeping requirements intended to monitor its compliance with rules relating to the composition of its stockholders, as described below in “ — Requirements for Qualification as a REIT .”

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A 100% excise tax may be imposed on some items of income and expense that are directly or constructively paid between Two Harbors and any TRSs Two Harbors may own if and to the extent that the IRS successfully adjusts the reported amounts of these items.

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If Two Harbors acquires appreciated assets from a corporation that is not a REIT in a transaction in which the adjusted tax basis of the assets in its hands is determined by reference to the adjusted tax basis of the assets in the hands of the non-REIT corporation, Two Harbors will be subject to tax on such appreciation at the highest corporate income tax rate then applicable if it subsequently recognizes gain on a disposition of any such assets during the 10-year period following their acquisition from the non-REIT corporation. The results described in this paragraph assume that the non-REIT corporation will not elect, in lieu of this treatment, to be subject to an immediate tax when the asset is acquired by Two Harbors.

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Two Harbors will generally be subject to tax on the portion of any excess inclusion income derived from an investment in residual interests in real estate mortgage investment conduits or REMICs to the extent its stock is held by specified tax-exempt organizations not subject to tax on unrelated business taxable income. Similar rules will apply if it owns an equity interest in a taxable mortgage pool. To the extent that it owns a REMIC residual interest or a taxable mortgage pool through a TRS, it will not be subject to this tax.

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Two Harbors may elect to retain and pay income tax on its net long-term capital gain. In that case, a stockholder would include its proportionate share of Two Harbors’ undistributed long-term capital gain (to the extent Two Harbors makes a timely designation of such gain to the stockholder) in its income, would be deemed to have paid the tax that Two Harbors paid on such gain, and would be allowed a credit for its proportionate share of the tax deemed to have been paid, and an adjustment would be made to increase the stockholder’s basis in its Two Harbors common stock. Stockholders that are U.S. corporations will also appropriately adjust their earnings and profits for the retained capital gains in accordance with Treasury Regulations to be promulgated.

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Two Harbors may have subsidiaries or own interests in other lower-tier entities that are subchapter C corporations, the earnings of which could be subject to U.S. federal corporate income tax.

In addition, Two Harbors may be subject to a variety of taxes other than U.S. federal income tax, including payroll taxes and state, local, and foreign income, franchise property and other taxes. Two Harbors could also be subject to tax in situations and on transactions not presently contemplated.

Requirements for Qualification as a REIT

The Code defines a REIT as a corporation, trust or association:

(1) that is managed by one or more trustees or directors;

(2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest;

(3) that would be taxable as a domestic corporation but for the special Code provisions applicable to REITs;

(4) that is neither a financial institution nor an insurance company subject to specific provisions of the Code;

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(5) the beneficial ownership of which is held by 100 or more persons during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months;

(6) in which, during the last half of each taxable year, not more than 50% in value of the outstanding stock is owned, directly or indirectly, by five or fewer “individuals” (as defined in the Code to include specified entities);

(7) which meets other tests described below, including with respect to the nature of its income and assets and the amount of its distributions; and

(8) that makes an election to be a REIT for the current taxable year or has made such an election for a previous taxable year that has not been terminated or revoked.

The Code provides that conditions (1) through (4) must be met during the entire taxable year, and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a shorter taxable year. Conditions (5) and (6) do not need to be satisfied for the first taxable year for which an election to become a REIT has been made. Two Harbors’ charter provides restrictions regarding the ownership and transfer of its shares, which are intended, among other purposes to assist in satisfying the share ownership requirements described in conditions (5) and (6) above. For purposes of condition (6), an “individual” generally includes a supplemental unemployment compensation benefit plan, a private foundation or a portion of a trust permanently set aside or used exclusively for charitable purposes, but does not include a qualified pension plan or profit sharing trust.

To monitor compliance with the share ownership requirements, Two Harbors is generally required to maintain records regarding the actual ownership of its shares. To do so, it must demand written statements each year from the record holders of significant percentages of its shares of stock, in which the record holders are to disclose the actual owners of the shares ( i.e. , the persons required to include in gross income the dividends paid by it). A list of those persons failing or refusing to comply with this demand must be maintained as part of its records. Failure by Two Harbors to comply with these record-keeping requirements could subject it to monetary penalties. If Two Harbors satisfies these requirements and after exercising reasonable diligence would not have known that condition (6) is not satisfied, it will be deemed to have satisfied such condition. A stockholder that fails or refuses to comply with the demand is required by Treasury Regulations to submit a statement with its tax return disclosing the actual ownership of the shares and other information.

In addition, a corporation generally may not elect to become a REIT unless its taxable year is the calendar year. Two Harbors satisfies this requirement.

Effect of Subsidiary Entities

Ownership of Partnership Interests

In the case of a REIT that is a partner in a partnership, Treasury regulations provide that the REIT is deemed to own its proportionate share of the partnership’s assets and to earn its proportionate share of the partnership’s gross income based on its pro rata share of capital interests in the partnership for purposes of the asset and gross income tests applicable to REITs, as described below. However, solely for purposes of the 10% value test, described below, the determination of a REIT’s interest in partnership assets will be based on the REIT’s proportionate interest in any securities issued by the partnership, excluding for these purposes, certain excluded securities as described in the Code. In addition, the assets and gross income of the partnership generally are deemed to retain the same character in the hands of the REIT. Thus, Two Harbors’ proportionate share of the assets and items of income of partnerships in which it owns an equity interest is treated as assets and items of income of Two Harbors for purposes of applying the REIT requirements described below. Consequently, to the extent that Two Harbors directly or indirectly holds a preferred or other equity interest in a partnership, the partnership’s assets and operations may affect Two Harbors’ ability to qualify as a REIT, even though it may have no control or only limited influence over the partnership.

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Disregarded Subsidiaries

If a REIT owns a corporate subsidiary that is a “qualified REIT subsidiary,” that subsidiary is disregarded for U.S. federal income tax purposes, and all assets, liabilities and items of income, deduction and credit of the subsidiary are treated as assets, liabilities and items of income, deduction and credit of the REIT itself, including for purposes of the gross income and asset tests applicable to REITs, as summarized below. A qualified REIT subsidiary is any corporation, other than a TRS, that is wholly-owned by a REIT, by other disregarded subsidiaries or by a combination of the two. Single member limited liability companies that are wholly-owned by a REIT are also generally disregarded as separate entities for U.S. federal income tax purposes, including for purposes of the REIT gross income and asset tests. Disregarded subsidiaries, along with partnerships in which Two Harbors holds an equity interest, are sometimes referred to herein as “pass-through subsidiaries.”

In the event that a disregarded subsidiary ceases to be wholly-owned by Two Harbors (for example, if any equity interest in the subsidiary is acquired by a person other than Two Harbors or another disregarded subsidiary of Two Harbors), the subsidiary’s separate existence would no longer be disregarded for U.S. federal income tax purposes. Instead, it would have multiple owners and would be treated as either a partnership or a taxable corporation. Such an event could, depending on the circumstances, adversely affect Two Harbors’ ability to satisfy the various asset and gross income tests applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of the value or voting power of the outstanding securities of another corporation. See “— Asset Tests ” and “— Gross Income Tests .”

Taxable REIT Subsidiaries

A REIT, in general, may jointly elect with a subsidiary corporation, whether or not wholly-owned, to treat the subsidiary corporation as a TRS. The separate existence of a TRS or other taxable corporation, unlike a disregarded subsidiary as discussed above, is not ignored for U.S. federal income tax purposes. Accordingly, such an entity would generally be subject to corporate income tax on its earnings, which may reduce the cash flow generated by Two Harbors and its subsidiaries in the aggregate and its ability to make distributions to its stockholders.

Two Harbors and Capitol intend to elect for Capitol to be treated as a TRS. This will allow Capitol to invest in assets and engage in activities that could not be held or conducted directly by Two Harbors without jeopardizing its qualification as a REIT.

A REIT is not treated as holding the assets of a TRS or other taxable subsidiary corporation or as receiving any income that the subsidiary earns. Rather, the stock issued by the subsidiary is an asset in the hands of the REIT, and the REIT generally recognizes as income the dividends, if any, that it receives from the subsidiary. This treatment can affect the gross income and asset test calculations that apply to the REIT, as described below. Because a parent REIT does not include the assets and income of such subsidiary corporations in determining the parent’s compliance with the REIT requirements, such entities may be used by the parent REIT to undertake indirectly activities that the REIT rules might otherwise preclude it from doing directly or through pass-through subsidiaries or render commercially unfeasible (for example, activities that give rise to certain categories of income such as non-qualifying hedging income or inventory sales). If dividends are paid to Two Harbors by one or more TRSs it may own, then a portion of the dividends that Two Harbors distributes to stockholders who are taxed at individual rates generally will be eligible for taxation at preferential qualified dividend income tax rates rather than at ordinary income rates. See “ — Taxation of Taxable U.S. Stockholders ” and “ — Annual Distribution Requirements. ”

Certain restrictions imposed on TRSs are intended to ensure that such entities will be subject to appropriate levels of U.S. federal income taxation. First, a TRS may not deduct interest payments made in any year to an affiliated REIT to the extent that such payments exceed, generally, 50% of the TRS’s adjusted taxable income for that year (although the TRS may carry forward to, and deduct in, a succeeding year the disallowed interest amount if the 50% test is satisfied in that year). In addition, if amounts are paid to a REIT or deducted by a TRS

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due to transactions between a REIT, its tenants and/or the TRS, that exceed the amount that would be paid to or deducted by a party in an arm’s-length transaction, the REIT generally will be subject to an excise tax equal to 100% of such excess.

Gross Income Tests

In order to maintain its qualification as a REIT, Two Harbors annually must satisfy two gross income tests. First, at least 75% of Two Harbors’ gross income for each taxable year, excluding gross income from sales of inventory or dealer property in “prohibited transactions” and certain hedging and foreign currency transactions, must be derived from investments relating to real property or mortgages on real property, including “rents from real property,” dividends received from and gains from the disposition of other shares of REITs, interest income derived from mortgage loans secured by real property (including certain types of mortgage-backed securities), and gains from the sale of real estate assets, as well as income from certain kinds of temporary investments. Second, at least 95% of Two Harbors’ gross income in each taxable year, excluding gross income from prohibited transactions and certain hedging and foreign currency transactions, must be derived from some combination of income that qualifies under the 75% income test described above, as well as other dividends, interest, and gain from the sale or disposition of stock or securities, which need not have any relation to real property.

For purposes of the 75% and 95% gross income tests, a REIT is deemed to have earned a proportionate share of the income earned by any partnership, or any limited liability company treated as a partnership for U.S. federal income tax purposes, in which it owns an interest, which share is determined by reference to its capital interest in such entity, and is deemed to have earned the income earned by any qualified REIT subsidiary.

Interest Income

Interest income constitutes qualifying mortgage interest for purposes of the 75% gross income test to the extent that the obligation is secured by a mortgage on real property. If Two Harbors receives interest income with respect to a mortgage loan that is secured by both real property and other property and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date that it acquired the mortgage loan, the interest income will be apportioned between the real property and the other property, and Two Harbors’ income from the arrangement will qualify for purposes of the 75% gross income test only to the extent that the interest is allocable to the real property. Even if a loan is not secured by real property or is undersecured, the income that it generates may nonetheless qualify for purposes of the 95% gross income test. If Two Harbors acquires or originates a construction loan, for purposes of the foregoing apportionment, the fair market value of the real property includes the fair market value of the land plus the reasonably estimated cost of improvement or developments (other than personal property) which secure the construction loan.

To the extent that the terms of a loan provide for contingent interest that is based on the cash proceeds realized upon the sale of the property securing the loan (or a shared appreciation provision), income attributable to the participation feature will be treated as gain from sale of the underlying property, which generally will be qualifying income for purposes of both the 75% and 95% gross income tests, provided that the property is not inventory or dealer property in the hands of the borrower or Two Harbors.

To the extent that Two Harbors derives interest income from a loan where all or a portion of the amount of interest payable is contingent, such income generally will qualify for purposes of the gross income tests only if it is based upon the gross receipts or sales and not the net income or profits of any person. This limitation does not apply, however, to a mortgage loan where the borrower derives substantially all of its income from the property from the leasing of substantially all of its interest in the property to tenants, to the extent that the rental income derived by the borrower would qualify as rents from real property had it been earned directly by Two Harbors.

Any amount includible in Two Harbors’ gross income with respect to a regular or residual interest in a REMIC generally is treated as interest on an obligation secured by a mortgage on real property. If, however, less

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than 95% of the assets of a REMIC consists of real estate assets (determined as if Two Harbors held such assets), Two Harbors will be treated as receiving directly its proportionate share of the income of the REMIC for purposes of determining the amount which is treated as interest on an obligation secured by a mortgage on real property. In addition, some REMIC securitizations include embedded interest rate swap or cap contracts or other derivative instruments that potentially could produce nonqualifying income to the holder of the related REMIC securities.

Two Harbors believes that the interest, original issue discount, and market discount income that Two Harbors receives from its mortgage-related securities generally will be qualifying income for purposes of both the 75% and 95% gross income tests. However, to the extent that it owns non-REMIC collateralized mortgage obligations or other debt instruments secured by mortgage loans (rather than by real property) or secured by non-real estate assets, or debt securities that are not secured by mortgages on real property or interests in real property, the interest income received with respect to such securities generally will be qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. In addition, the loan amount of a mortgage loan that it owns may exceed the value of the real property securing the loan. In that case, income from the loan will be qualifying income for purposes of the 95% gross income test, but the interest attributable to the amount of the loan that exceeds the value of the real property securing the loan will not be qualifying income for purposes of the 75% gross income test.

As described in “ Business of Two Harbors — Two Harbors’ Target Assets — TBAs ,” Two Harbors may purchase Agency RMBS through TBAs and may recognize income or gains from the disposition of those TBAs through dollar roll transactions. There is no direct authority with respect to the qualifications of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test. Two Harbors will not treat these items as qualifying for purposes of the 75% gross income test unless it receives advice of counsel that such income and gains should be treated as qualifying for purposes of the 75% gross income test. As a result, Two Harbors’ ability to enter into TBAs could be limited. Moreover, even if Two Harbors were to receive advice of counsel as described in the preceding sentence, it is possible that the IRS could assert that such income is not qualifying income. In the event that such income were determined not to be qualifying for the 75% gross income test, Two Harbors could be subject to a penalty tax or could fail to qualify as a REIT if such income when added to any other non-qualifying income exceeded 25% of its gross income.

Fee Income

Two Harbors may receive various fees in connection with its operations. The fees will be qualifying income for purposes of both the 75% and 95% gross income tests if they are received in consideration for entering into an agreement to make a loan secured by real property and the fees are not determined by income or profits. Other fees are not qualifying income for purposes of either gross income test. Any fees earned by a TRS will not be included for purposes of the gross income tests.

Dividend Income

Two Harbors may receive distributions from TRSs or other corporations that are not REITs or qualified REIT subsidiaries. These distributions are generally classified as dividend income to the extent of the earnings and profits of the distributing corporation. Such distributions generally constitute qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. Any dividends received by Two Harbors from a REIT is qualifying income in its hands for purposes of both the 95% and 75% gross income tests.

Foreign Investments

To the extent that Two Harbors holds or acquire foreign investments, such investments may generate foreign currency gains and losses. Foreign currency gains are generally treated as income that does not qualify under the 95% or 75% gross income tests. However, in general, if foreign currency gain is recognized with

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respect to specified assets or income which otherwise qualifies for purposes of the 95% or 75% gross income tests, then such foreign currency gain will generally not constitute gross income for purposes of either the 95% or 75% gross income tests, respectively, provided Two Harbors does not deal or engage in substantial and regular trading in securities, which it does not intend to do. No assurance can be given that any foreign currency gains recognized by Two Harbors directly or through pass-through subsidiaries will not adversely affect its ability to satisfy the REIT qualification requirements.

Hedging Transactions

Two Harbors may enter into hedging transactions with respect to one or more of its assets or liabilities. Hedging transactions could take a variety of forms, including interest rate swap agreements, interest rate cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. Except to the extent provided by Treasury regulations, any income from a hedging transaction Two Harbors enters into (1) in the normal course of its business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, which is clearly identified as specified in Treasury regulations before the close of the day on which it was acquired, originated, or entered into, including gain from the sale or disposition of such a transaction, or (2) primarily to manage risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% income tests which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into, will not constitute gross income for purposes of the 75% or 95% gross income test. To the extent that Two Harbors enters into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the 75% and 95% gross income tests. Two Harbors intends to structure any hedging transactions in a manner that does not jeopardize its qualification as a REIT.

Rents from Real Property

To the extent that Two Harbors owns real property or interests therein, rents it receives will qualify as “rents from real property” in satisfying the gross income tests described above, only if several conditions are met, including the following. If rent attributable to personal property leased in connection with real property is greater than 15% of the total rent received under any particular lease, then all of the rent attributable to such personal property will not qualify as rents from real property. The determination of whether an item of personal property constitutes real or personal property under the REIT provisions of the Code is subject to both legal and factual considerations and is therefore subject to different interpretations.

In addition, in order for rents received by Two Harbors to qualify as “rents from real property,” the rent must not be based in whole or in part on the income or profits of any person. However, an amount will not be excluded from rents from real property solely by being based on a fixed percentage or percentages of sales or if it is based on the net income of a tenant which derives substantially all of its income with respect to such property from subleasing of substantially all of such property, to the extent that the rents paid by the subtenants would qualify as rents from real property, if earned directly by Two Harbors. Moreover, for rents received to qualify as “rents from real property,” Two Harbors generally must not operate or manage the property or furnish or render certain services to the tenants of such property, other than through an “independent contractor” who is adequately compensated and from which Two Harbors derives no income or through a TRS. Two Harbors is permitted, however, to perform services that are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not otherwise considered rendered to the occupant of the property. In addition, Two Harbors may directly or indirectly provide non-customary services to tenants of its properties without disqualifying all of the rent from the property if the greater of 150% of the direct cost of Two Harbors in furnishing or rendering the service or the payment for such services does not exceed 1% of the total gross income from the property. In such a case, only the amounts for non-customary services are not treated as rents from real property and the provision of the services does not disqualify the related rent.

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Rental income will qualify as rents from real property only to the extent that Two Harbors does not directly or constructively own, (1) in the case of any tenant which is a corporation, stock possessing 10% or more of the total combined voting power of all classes of stock entitled to vote, or 10% or more of the total value of shares of all classes of stock of such tenant, or (2) in the case of any tenant which is not a corporation, an interest of 10% or more in the assets or net profits of such tenant.

Failure to Satisfy the Gross Income Tests

Two Harbors intends to monitor its sources of income, including any non-qualifying income received by it, so as to ensure its compliance with the gross income tests. If Two Harbors fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may still qualify as a REIT for the year if Two Harbors is entitled to relief under applicable provisions of the Code. These relief provisions will generally be available if the failure of Two Harbors to meet these tests was due to reasonable cause and not due to willful neglect and, following the identification of such failure, Two Harbors sets forth a description of each item of its gross income that satisfies the gross income tests in a schedule for the taxable year filed in accordance with the Treasury regulation. It is not possible to state whether Two Harbors would be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions are inapplicable to a particular set of circumstances involving Two Harbors, it will not qualify as a REIT. As discussed above under “— Taxation of REITs in General,” even where these relief provisions apply, a tax would be imposed upon the profit attributable to the amount by which Two Harbors fails to satisfy the particular gross income test.

Phantom Income

Due to the nature of the assets in which Two Harbors will invest, it may be required to recognize taxable income from certain of its assets in advance of its receipt of cash flow on or proceeds from disposition of such assets, and it may be required to report taxable income in early periods that exceeds the economic income ultimately realized on such assets.

Two Harbors may acquire mortgage-backed securities in the secondary market for less than their face amount. For example, it is likely that Two Harbors will invest in assets, including mortgage-backed securities, requiring Two Harbors to accrue original issue discount, or OID, or recognize market discount income, that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets referred to as “phantom income.” Two Harbors may also be required under the terms of the indebtedness that it incurs to use cash received from interest payments to make principal payment on that indebtedness, with the effect that Two Harbors will recognize income but will not have a corresponding amount of cash available for distribution to its shareholders.

Due to each of these potential differences between income recognition or expense deduction and related cash receipts or disbursements, there is a significant risk that Two Harbors may have substantial taxable income in excess of cash available for distribution. In that event, Two Harbors may need to borrow funds or take other actions to satisfy the REIT distribution requirements for the taxable year in which this “phantom income” is recognized. See “ — Annual Distribution Requirements .”

Asset Tests

Two Harbors, at the close of each calendar quarter, must also satisfy four tests relating to the nature of its assets. First, at least 75% of the value of its total assets must be represented by some combination of “real estate assets,” cash, cash items, U.S. government securities and, under some circumstances, stock or debt instruments purchased with new capital. For this purpose, real estate assets include interests in real property, such as land, buildings, leasehold interests in real property, stock of other corporations that qualify as REITs and certain kinds of mortgage-backed securities and mortgage loans. A regular or residual interest in a REMIC is generally treated as a real estate asset. If, however, less than 95% of the assets of a REMIC consists of real estate assets (determined as if Two Harbors held such assets), Two Harbors will be treated as owning its proportionate share

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of the assets of the REMIC. Assets that do not qualify for purposes of the 75% test are subject to the additional asset tests described below. Second, the value of any one issuer’s securities owned by Two Harbors may not exceed 5% of the value of its gross assets. Third, Two Harbors may not own more than 10% of any one issuer’s outstanding securities, as measured by either voting power or value. Fourth, the aggregate value of all securities of TRSs held by Two Harbors may not exceed 25% of the value of its gross assets.

The 5% and 10% asset tests do not apply to securities of TRSs and qualified REIT subsidiaries. The 10% value test does not apply to certain “straight debt” and other excluded securities, as described in the Code, including but not limited to any loan to an individual or an estate, any obligation to pay rents from real property and any security issued by a REIT. In addition, (a) a REIT’s interest as a partner in a partnership is not considered a security for purposes of applying the 10% value test; (b) any debt instrument issued by a partnership (other than straight debt or other excluded security) will not be considered a security issued by the partnership if at least 75% of the partnership’s gross income is derived from sources that would qualify for the 75% REIT gross income test; and (c) any debt instrument issued by a partnership (other than straight debt or other excluded security) will not be considered a security issued by the partnership to the extent of the REIT’s interest as a partner in the partnership.

For purposes of the 10% value test, “straight debt” means a written unconditional promise to pay on demand on a specified date a sum certain in money if (i) the debt is not convertible, directly or indirectly, into stock, (ii) the interest rate and interest payment dates are not contingent on profits, the borrower’s discretion, or similar factors other than certain contingencies relating to the timing and amount of principal and interest payments, as described in the Code and (iii) in the case of an issuer which is a corporation or a partnership, securities that otherwise would be considered straight debt will not be so considered if Two Harbors, and any of Two Harbors’ “controlled taxable REIT subsidiaries” as defined in the Code, hold any securities of the corporate or partnership issuer which (a) are not straight debt or other excluded securities (prior to the application of this rule), and (b) have an aggregate value greater than 1% of the issuer’s outstanding securities (including, for the purposes of a partnership issuer, its interest as a partner in the partnership).

After initially meeting the asset tests at the close of any quarter, Two Harbors will not lose its qualification as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values (including a failure caused solely by change in the foreign currency exchange rate used to value a foreign asset). If Two Harbors fails to satisfy the asset tests because it acquires or increases its ownership interest in securities during a quarter, it can cure this failure by disposing of sufficient non-qualifying assets within 30 days after the close of that quarter. If Two Harbors fails the 5% asset test, or the 10% vote or value asset tests at the end of any quarter and such failure is not cured within 30 days thereafter, it may dispose of sufficient assets (generally within six months after the last day of the quarter in which its identification of the failure to satisfy these asset tests occurred) to cure such a violation that does not exceed the lesser of 1% of its assets at the end of the relevant quarter or $10,000,000. If Two Harbors fails any of the other asset tests or its failure of the 5% and 10% asset tests is in excess of the de minimis amount described above, as long as such failure was due to reasonable cause and not willful neglect, it is permitted to avoid disqualification as a REIT, after the 30 day cure period, by taking steps including the disposition of sufficient assets to meet the asset test (generally within six months after the last day of the quarter in which its identification of the failure to satisfy the REIT asset test occurred) and paying a tax equal to the greater of $50,000 or the highest corporate income tax rate (currently 35%) of the net income generated by the non-qualifying assets during the period in which it failed to satisfy the asset test.

Two Harbors expects that the assets and mortgage-related securities that it owns generally will be qualifying assets for purposes of the 75% asset test. However, to the extent that it owns non-REMIC collateralized mortgage obligations or other debt instruments secured by mortgage loans (rather than by real property) or secured by non-real estate assets, or debt securities issued by C corporations that are not secured by mortgages on real property, those securities may not be qualifying assets for purposes of the 75% asset test. In addition, as described in “ Business of Two Harbors — Two Harbors’Target Assets — TBAs, ” Two Harbors may purchase Agency RMBS through TBAs. There is no direct authority with respect to the qualification of TBAs as real estate assets or Government securities for purposes of the 75% asset test and Two Harbors will not treat TBAs as such unless it receives advice of our counsel that TBAs should be treated as qualifying assets for purposes of the 75%

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asset test. As a result, Two Harbors’ ability to purchase TBAs could be limited. Moreover, even if Two Harbors were to receive advice of counsel as described in the preceding sentence, it is possible that the IRS could assert that TBAs are not qualifying assets in which case Two Harbors could be subject to a penalty tax or fail to qualify as a REIT if such assets, when combined with other non-real estate assets, exceed 25% of its gross assets. Two Harbors believes that its holdings of securities and other assets will be structured in a manner that will comply with the foregoing REIT asset requirements and intends to monitor compliance on an ongoing basis. There can be no assurance, however, that it will be successful in this effort. Moreover, values of some assets may not be susceptible to a precise determination and are subject to change in the future. Furthermore, the proper classification of an instrument as debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT asset tests. Accordingly, there can be no assurance that the IRS will not contend that Two Harbors’ interests in subsidiaries or in the securities of other issuers (including REIT issuers) cause a violation of the REIT asset tests.

In addition, Two Harbors may enter into repurchase agreements under which it will nominally sell certain of its assets to a counterparty and simultaneously enter into an agreement to repurchase the sold assets. Two Harbors believes that it will be treated for U.S. federal income tax purposes as the owner of the assets that are the subject of any such agreement notwithstanding that it may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that Two Harbors did not own the assets during the term of the repurchase agreement, in which case it could fail to qualify as a REIT.

Annual Distribution Requirements

In order to qualify as a REIT, Two Harbors is required to distribute dividends, other than capital gain dividends, to its stockholders in an amount at least equal to:

(a) the sum of:

•

90% of its “REIT taxable income” (computed without regard to the deduction for dividends paid and its net capital gains); and

•

90% of the net income (after tax), if any, from foreclosure property (as described below); minus

(b) the sum of specified items of non-cash income that exceeds a percentage of its income.

These distributions must be paid in the taxable year to which they relate or in the following taxable year if such distributions are declared in October, November or December of the taxable year, are payable to stockholders of record on a specified date in any such month and are actually paid before the end of January of the following year. Such distributions are treated as both paid by Two Harbors and received by each stockholder on December 31 of the year in which they are declared. In addition, at Two Harbors’ election, a distribution for a taxable year may be declared before it timely files its tax return for the year and be paid with or before the first regular dividend payment after such declaration, provided that such payment is made during the 12-month period following the close of such taxable year. These distributions are taxable to Two Harbors’ stockholders in the year in which paid, even though the distributions relate to its prior taxable year for purposes of the 90% distribution requirement.

In order for distributions to be counted towards Two Harbors’ distribution requirement and to give rise to a tax deduction by Two Harbors, they must not be “preferential dividends.” A dividend is not a preferential dividend if it is pro rata among all outstanding shares of stock within a particular class and is in accordance with the preferences among different classes of stock as set forth in the organizational documents.

To the extent that Two Harbors distributes at least 90%, but less than 100%, of its “REIT taxable income,” as adjusted, Two Harbors will be subject to tax at ordinary corporate tax rates on the retained portion. In addition, Two Harbors may elect to retain, rather than distribute, its net long-term capital gains and pay tax on such gains. In this case, Two Harbors could elect to have its stockholders include their proportionate share of such undistributed long-term capital gains in income and receive a corresponding credit for their proportionate share

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of the tax paid by Two Harbors. Two Harbors’ stockholders would then increase the adjusted basis of their stock in Two Harbors by the difference between the designated amounts included in their long-term capital gains and the tax deemed paid with respect to their proportionate shares.

If Two Harbors fails to distribute during each calendar year at least the sum of (a) 85% of its REIT ordinary income for such year, (b) 95% of its REIT capital gain net income for such year and (c) any undistributed taxable income from prior periods, it will be subject to a 4% excise tax on the excess of such required distribution over the sum of (x) the amounts actually distributed (taking into account excess distributions from prior periods) and (y) the amounts of income retained on which it has paid corporate income tax. Two Harbors intends to make timely distributions so that it is not subject to the 4% excise tax.

It is possible that Two Harbors, from time to time, may not have sufficient cash to meet the distribution requirements due to timing differences between (a) the actual receipt of cash, including receipt of distributions from Two Harbors’ subsidiaries and (b) the inclusion of items in income by Two Harbors for U.S. federal income tax purposes. For example, Two Harbors may acquire debt instruments or notes whose face value may exceed its issue price as determined for U.S. federal income tax purposes (such excess, “original issue discount,” or OID), such that Two Harbors will be required to include in its income a portion of the OID each year that the instrument is held before it receives any corresponding cash. In the event that such timing differences occur, in order to meet the distribution requirements, it might be necessary to arrange for short-term, or possibly long-term, borrowings or to pay dividends in the form of taxable in-kind distributions of property, including taxable stock dividends. In the case of a taxable stock dividend, stockholders would be required to include the dividend as income and would be required to satisfy the tax liability associated with the distribution with cash from other sources including sales of Two Harbors common stock. Both a taxable stock distribution and sale of common stock resulting from such distribution could adversely affect the price of Two Harbors’ common stock.

Two Harbors may be able to rectify a failure to meet the distribution requirements for a year by paying “deficiency dividends” to stockholders in a later year, which may be included in its deduction for dividends paid for the earlier year. In this case, Two Harbors may be able to avoid losing its qualification as a REIT or being taxed on amounts distributed as deficiency dividends. However, Two Harbors will be required to pay interest and a penalty based on the amount of any deduction taken for deficiency dividends.

Recordkeeping Requirements

Two Harbors is required to maintain records and request on an annual basis information from specified stockholders. These requirements are designed to assist Two Harbors in determining the actual ownership of its outstanding stock and maintaining its qualifications as a REIT.

Prohibited Transactions

Net income Two Harbors derives from a prohibited transaction is subject to a 100% tax. The term “prohibited transaction” generally includes a sale or other disposition of property (other than foreclosure property) that is held as inventory or primarily for sale to customers, in the ordinary course of a trade or business by a REIT, by a lower-tier partnership in which the REIT holds an equity interest or by a borrower that has issued a shared appreciation mortgage or similar debt instrument to the REIT. Two Harbors intends to conduct its operations so that no asset owned by it or its pass-through subsidiaries will be held as inventory or primarily for sale to customers, and that a sale of any assets owned by Two Harbors directly or through a pass-through subsidiary will not be in the ordinary course of business. However, whether property is held as inventory or “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular facts and circumstances. No assurance can be given that any particular asset in which Two Harbors holds a direct or indirect interest will not be treated as property held as inventory or primarily for sale to customers or that certain safe harbor provisions of the Code that prevent such treatment will apply. The 100% tax will not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate income tax rates.

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Foreclosure Property

Foreclosure property is real property and any personal property incident to such real property (1) that is acquired by a REIT as a result of the REIT having bid on the property at foreclosure or having otherwise reduced the property to ownership or possession by agreement or process of law after there was a default (or default was imminent) on a lease of the property or a mortgage loan held by the REIT and secured by the property, (2) for which the related loan or lease was acquired by the REIT at a time when default was not imminent or anticipated and (3) for which such REIT makes a proper election to treat the property as foreclosure property. REITs generally are subject to tax at the maximum corporate rate (currently 35%) on any net income from foreclosure property, including any gain from the disposition of the foreclosure property, other than income that would otherwise be qualifying income for purposes of the 75% gross income test. Any gain from the sale of property for which a foreclosure property election has been made will not be subject to the 100% tax on gains from prohibited transactions described above, even if the property would otherwise constitute inventory or dealer property in the hands of the selling REIT. Two Harbors does not anticipate that it will receive any income from foreclosure property that is not qualifying income for purposes of the 75% gross income test, but, if it does receive any such income, it intends to elect to treat the related property as foreclosure property.

Failure to Qualify

In the event that Two Harbors violates a provision of the Code that would result in its failure to qualify as a REIT, it may nevertheless continue to qualify as a REIT. Specified relief provisions will be available to it to avoid such disqualification if (1) the violation is due to reasonable cause and not due to willful neglect, (2) Two Harbors pays a penalty of $50,000 for each failure to satisfy a requirement for qualification as a REIT and (3) the violation does not include a violation under the gross income or asset tests described above (for which other specified relief provisions are available). This cure provision reduces the instances that could lead to Two Harbors’ disqualification as a REIT for violations due to reasonable cause. If Two Harbors fails to qualify for taxation as a REIT in any taxable year and none of the relief provisions of the Code apply, it will be subject to tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates. Distributions to Two Harbors’ stockholders in any year in which it is not a REIT will not be deductible by it, nor will they be required to be made. In this situation, to the extent of current and accumulated earnings and profits, and, subject to limitations of the Code, distributions to its stockholders will generally be taxable in the case of Two Harbors’ stockholders who are individual U.S. stockholders (as defined below), at a maximum rate of 15% (through 2010), and dividends in the hands of its corporate U.S. stockholders may be eligible for the dividends received deduction. Unless Two Harbors is entitled to relief under the specific statutory provisions, it will also be disqualified from re-electing to be taxed as a REIT for the four taxable years following a year during which qualification was lost. It is not possible to state whether, in all circumstances, Two Harbors will be entitled to statutory relief.

Taxation of Taxable U.S. Stockholders

This section summarizes the taxation of U.S. stockholders who hold Two Harbors stock that are not tax-exempt organizations.

If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds Two Harbors stock, the U.S. federal income tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partner of a partnership holding Two Harbors common stock should consult its own tax advisor regarding the U.S. federal income tax consequences to the partner of the acquisition, ownership and disposition of Two Harbors stock by the partnership.

Distributions

Provided that Two Harbors qualifies as a REIT, distributions made to Two Harbors’ taxable U.S. stockholders out of Two Harbors’ current or accumulated earnings and profits, and not designated as capital gain dividends, will generally be taken into account by them as ordinary dividend income and will not be eligible for

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the dividends received deduction for corporations. In determining the extent to which a distribution with respect to Two Harbors common stock constitutes a dividend for U.S. federal income tax purposes, Two Harbors’ earnings and profits will be allocated first to distributions with respect to its preferred stock, if any, and then to its common stock. Dividends received from REITs are generally not eligible to be taxed at the preferential qualified dividend income rates applicable (through 2010) to individual U.S. stockholders who receive dividends from taxable subchapter C corporations.

In addition, distributions from Two Harbors that are designated as capital gain dividends will be taxed to U.S. stockholders as long-term capital gains, to the extent that they do not exceed the actual net capital gain of Two Harbors for the taxable year, without regard to the period for which the U.S. stockholder has held its stock. To the extent that Two Harbors elects under the applicable provisions of the Code to retain its net capital gains, U.S. stockholders will be treated as having received, for U.S. federal income tax purposes, its undistributed capital gains as well as a corresponding credit for taxes paid by it on such retained capital gains. U.S. stockholders will increase their adjusted tax basis in Two Harbors common stock by the difference between their allocable share of such retained capital gain and their share of the tax paid by Two Harbors. Corporate U.S. stockholders may be required to treat up to 20% of some capital gain dividends as ordinary income. Long-term capital gains are generally taxable at maximum federal rates of 15% (through 2010) in the case of U.S. stockholders who are individuals, and 35% for corporations. Capital gains attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% maximum U.S. federal income tax rate for individual U.S. stockholders who are individuals, to the extent of previously claimed depreciation deductions.

Distributions in excess of Two Harbors’ current and accumulated earnings and profits will not be taxable to a U.S. stockholder to the extent that they do not exceed the adjusted tax basis of the U.S. stockholder’s shares in respect of which the distributions were made, but rather will reduce the adjusted tax basis of these shares. To the extent that such distributions exceed the adjusted tax basis of an individual U.S. stockholder’s shares, they will be included in income as long-term capital gain, or short-term capital gain if the shares have been held for one year or less. In addition, any dividend declared by Two Harbors in October, November or December of any year and payable to a U.S. stockholder of record on a specified date in any such month will be treated as both paid by Two Harbors and received by the U.S. stockholder on December 31 of such year, provided that the dividend is actually paid by Two Harbors before the end of January of the following calendar year.

With respect to U.S. stockholders who are taxed at the rates applicable to individuals, Two Harbors may elect to designate a portion of its distributions paid to such U.S. stockholders as “qualified dividend income.” A portion of a distribution that is properly designated as qualified dividend income is taxable to non-corporate U.S. stockholders as capital gain, provided that the U.S. stockholder has held the common stock with respect to which the distribution is made for more than 60 days during the 121-day period beginning on the date that is 60 days before the date on which such common stock became ex-dividend with respect to the relevant distribution. The maximum amount of Two Harbors’ distributions eligible to be designated as qualified dividend income for a taxable year is equal to the sum of:

(a) the qualified dividend income received by Two Harbors during such taxable year from non-REIT C corporations (including any TRS in which it may own an interest);

(b) the excess of any “undistributed” REIT taxable income recognized during the immediately preceding year over the U.S. federal income tax paid by Two Harbors with respect to such undistributed REIT taxable income; and

(c) the excess of any income recognized during the immediately preceding year attributable to the sale of a built-in-gain asset that was acquired in a carry-over basis transaction from a non-REIT C corporation over the U.S. federal income tax paid by Two Harbors with respect to such built-in gain.

Generally, dividends that Two Harbors receives will be treated as qualified dividend income for purposes of (a) above if the dividends are received from a domestic C corporation (other than a REIT or a RIC), any TRS Two Harbors may form, or a “qualifying foreign corporation” and specified holding period requirements and other requirements are met.

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To the extent that Two Harbors has available net operating losses and capital losses carried forward from prior tax years, such losses may reduce the amount of distributions that must be made in order to comply with the REIT distribution requirements. See “— Taxation of Two Harbors — General” and “— Annual Distribution Requirements .” Such losses, however, are not passed through to U.S. stockholders and do not offset income of U.S. stockholders from other sources, nor do they affect the character of any distributions that are actually made by Two Harbors, which are generally subject to tax in the hands of U.S. stockholders to the extent that Two Harbors has current or accumulated earnings and profits.

Dispositions of Two Harbors’ Common Stock

In general, a U.S. stockholder will realize gain or loss upon the sale, redemption or other taxable disposition of Two Harbors common stock in an amount equal to the difference between the sum of the fair market value of any property and the amount of cash received in such disposition and the U.S. stockholder’s adjusted tax basis in the common stock at the time of the disposition. In general, a U.S. stockholder’s adjusted tax basis will equal the U.S. stockholder’s acquisition cost, increased by the excess of net capital gains deemed distributed to the U.S. stockholder (discussed above) less tax deemed paid on it and reduced by returns of capital. In general, capital gains recognized by individuals and other non-corporate U.S. stockholders upon the sale or disposition of shares of Two Harbors common stock will be subject to a maximum U.S. federal income tax rate of 15% for taxable years through 2010, if Two Harbors’ common stock is held for more than 12 months, and will be taxed at ordinary income rates (of up to 35% through 2010) if its common stock is held for 12 months or less. Gains recognized by U.S. stockholders that are corporations are subject to U.S. federal income tax at a maximum rate of 35%, whether or not classified as long-term capital gains. The IRS has the authority to prescribe, but has not yet prescribed, regulations that would apply a capital gain tax rate of 25% (which is generally higher than the long-term capital gain tax rates for non-corporate holders) to a portion of capital gain realized by a non-corporate holder on the sale of REIT stock or depositary shares that would correspond to the REIT’s “unrecaptured Section 1250 gain.”

Holders are advised to consult with their tax advisors with respect to their capital gain tax liability. Capitol losses recognized by a U.S. stockholder upon the disposition of Two Harbors common stock held for more than one year at the time of disposition will be considered long-term capital losses, and are generally available only to offset capital gain income of the U.S. stockholder but not ordinary income (except in the case of individuals, who may offset up to $3,000 of ordinary income each year). In addition, any loss upon a sale or exchange of shares of Two Harbors common stock by a U.S. stockholder who has held the shares for six months or less, after applying holding period rules, will be treated as a long-term capital loss to the extent of distributions received from Two Harbors that were required to be treated by the U.S. stockholder as long-term capital gain.

Passive Activity Losses and Investment Interest Limitations

Distributions made by Two Harbors and gain arising from the sale or exchange by a U.S. stockholder of Two Harbors common stock will not be treated as passive activity income. As a result, U.S. stockholders will not be able to apply any “passive losses” against income or gain relating to Two Harbors common stock. Distributions made by Two Harbors, to the extent they do not constitute a return of capital, generally will be treated as investment income for purposes of computing the investment interest limitation. A U.S. stockholder that elects to treat capital gain dividends, capital gains from the disposition of stock or qualified dividend income as investment income for purposes of the investment interest limitation will be taxed at ordinary income rates on such amounts.

Taxation of Tax-Exempt U.S. Stockholders

U.S. tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from U.S. federal income taxation. However, they are subject to taxation on their unrelated business taxable income, which is referred to in this prospectus as UBTI. While many investments in real estate may generate UBTI, the IRS has ruled that dividend distributions from a REIT to a

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tax-exempt entity do not constitute UBTI. Based on that ruling, and provided that (1) a tax-exempt U.S. stockholder has not held Two Harbors common stock as “debt financed property” within the meaning of the Code ( i.e. , where the acquisition or holding of the property is financed through a borrowing by the tax-exempt stockholder), (2) Two Harbors common stock is not otherwise used in an unrelated trade or business and (3) Two Harbors does not hold an asset that gives rise to excess inclusion income, distributions from Two Harbors and income from the sale of Two Harbors common stock generally should not give rise to UBTI to a tax-exempt U.S. stockholder.

Tax-exempt U.S. stockholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from U.S. federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, are subject to different UBTI rules, which generally will require them to characterize distributions from Two Harbors as UBTI unless they are able to properly claim a deduction for amounts set aside or placed in reserve for specific purposes so as to offset the income generated by its investment in Two Harbors common stock. These prospective investors should consult their tax advisors concerning these “set aside” and reserve requirements.

In certain circumstances, a pension trust (1) that is described in Section 401(a) of the Code, (2) is tax exempt under Section 501(a) of the Code, and (3) that owns more than 10% of Two Harbors’ stock could be required to treat a percentage of the dividends from Two Harbors as UBTI if Two Harbors is a “pension-held REIT.” Two Harbors will not be a pension-held REIT unless (1) either (A) one pension trust owns more than 25% of the value of Two Harbors stock, or (B) a group of pension trusts, each individually holding more than 10% of the value of Two Harbors’ stock, collectively owns more than 50% of such stock; and (2) Two Harbors would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code provides that stock owned by such trusts shall be treated, for purposes of the requirement that not more than 50% of the value of the outstanding stock of a REIT is owned, directly or indirectly, by five or fewer “individuals” (as defined in the Code to include certain entities), as owned by the beneficiaries of such trusts. Certain restrictions limiting ownership and transfer of Two Harbors stock should generally prevent a tax-exempt entity from owning more than 10% of the value of Two Harbors’ stock, or Two Harbors from becoming a pension-held REIT.

Tax-exempt U.S. stockholders are urged to consult their tax advisors regarding the U.S. federal, state, local and foreign tax consequences of owning Two Harbors stock.

Taxation of Non-U.S. Stockholders

The following is a summary of certain U.S. federal income tax consequences of the acquisition, ownership and disposition of Two Harbors common stock applicable to non-U.S. stockholders of Two Harbors common stock. The discussion is based on current law and is for general information only. It addresses only selective and not all aspects of U.S. federal income taxation.

General

For most foreign investors, investment in a REIT that invests principally in mortgage loans and mortgage-backed securities is not the most tax-efficient way to invest in such assets. That is because receiving distributions of income derived from such assets in the form of REIT dividends subjects most foreign investors to withholding taxes that direct investment in those asset classes, and the direct receipt of interest and principal payments with respect to them, would not. The principal exceptions are foreign sovereigns and their agencies and instrumentalities, which may be exempt from withholding taxes on REIT dividends under the Code, and certain foreign pension funds or similar entities able to claim an exemption from withholding taxes on REIT dividends under the terms of a bilateral tax treaty between their country of residence and the United States.

Ordinary Dividends

The portion of dividends received by non-U.S. stockholders payable out of Two Harbors’ earnings and profits that are not attributable to gains from sales or exchanges of U.S. real property interests and which are not effectively connected with a U.S. trade or business of the non-U.S. stockholder will generally be subject to U.S.

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federal withholding tax at the rate of 30.0%, unless reduced or eliminated by an applicable income tax treaty. Under some treaties, however, lower rates generally applicable to dividends do not apply to dividends from REITs. In addition, any portion of the dividends paid to non-U.S. stockholders that are treated as excess inclusion income will not be eligible for exemption from the 30.0% withholding tax or a reduced treaty rate. In the case of a taxable stock dividend with respect to which any withholding tax is imposed, Two Harbors may have to withhold or dispose of part of the shares otherwise distributable in such dividend and use such shares or the proceeds of such disposition to satisfy the withholding tax imposed.

In general, non-U.S. stockholders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of Two Harbors stock. In cases where the dividend income from a non-U.S. stockholder’s investment in Two Harbors’ common stock is, or is treated as, effectively connected with the non-U.S. stockholder’s conduct of a U.S. trade or business, the non-U.S. stockholder generally will be subject to U.S. federal income tax at graduated rates, in the same manner as U.S. stockholders are taxed with respect to such dividends, and may also be subject to the 30.0% branch profits tax on the income after the application of the income tax in the case of a non-U.S. stockholder that is a corporation.

Non-Dividend Distributions

Unless (A) Two Harbors’ common stock constitutes a U.S. real property interest (or USRPI) or (B) either (1) the non-U.S. stockholder’s investment in Two Harbors’ common stock is effectively connected with a U.S. trade or business conducted by such non-U.S. stockholder (in which case the non-U.S. stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain) or (2) the non-U.S. stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the U.S. (in which case the non-U.S. stockholder will be subject to a 30.0% tax on the individual’s net capital gain for the year), distributions by Two Harbors which are not dividends out of its earnings and profits will not be subject to U.S. federal income tax. If Two Harbors cannot determine at the time at which a distribution is made whether or not the distribution will exceed current and accumulated earnings and profits, the distribution will be subject to withholding at the rate applicable to dividends. However, the non-U.S. stockholder may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the distribution was, in fact, in excess of Two Harbors’ current and accumulated earnings and profits. If Two Harbors’ common stock constitutes a USRPI, as described below, distributions by Two Harbors in excess of the sum of its earnings and profits plus the non-U.S. stockholder’s adjusted tax basis in its common stock will be taxed under the Foreign Investment in Real Property Tax Act of 1980 (or FIRPTA) at the rate of tax, including any applicable capital gains rates, that would apply to a U.S. stockholder of the same type ( e.g. , an individual or a corporation, as the case may be), and the collection of the tax will be enforced by a refundable withholding at a rate of 10% of the amount by which the distribution exceeds the stockholder’s share of Two Harbors’ earnings and profits plus the non U.S. stockholder’s adjusted tax basis in its common stock.

Capital Gain Dividends

Under FIRPTA, a distribution made by Two Harbors to a non-U.S. stockholder, to the extent attributable to gains from dispositions of USRPIs held by Two Harbors directly or through pass-through subsidiaries (or USRPI capital gains), will be considered effectively connected with a U.S. trade or business of the non-U.S. stockholder and will be subject to U.S. federal income tax at the rates applicable to U.S. stockholders, without regard to whether the distribution is designated as a capital gain dividend. In addition, Two Harbors will be required to withhold tax equal to 35% of the amount of capital gain dividends to the extent the dividends constitute USRPI capital gains. Distributions subject to FIRPTA may also be subject to a 30.0% branch profits tax in the hands of a non-U.S. holder that is a corporation. However, the 35% withholding tax will not apply to any capital gain dividend with respect to any class of Two Harbors stock which is regularly traded on an established securities market located in the U.S. if the non-U.S. stockholder did not own more than 5% of such class of stock at any time during the one-year period ending on the date of such dividend. Instead any capital gain dividend will be treated as a distribution subject to the rules discussed above under “ — Taxation of Non-U.S. Stockholders — Ordinary Dividends .” Also, the branch profits tax will not apply to such a distribution. A distribution is not a

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USRPI capital gain if Two Harbors held the underlying asset solely as a creditor, although the holding of a shared appreciation mortgage loan would not be solely as a creditor. Capital gain dividends received by a non-U.S. stockholder from a REIT that are not USRPI capital gains are generally not subject to U.S. federal income or withholding tax, unless either (1) the non-U.S. stockholder’s investment in Two Harbors common stock is effectively connected with a U.S. trade or business conducted by such non-U.S. stockholder (in which case the non-U.S. stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain) or (2) the non-U.S. stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the U.S. (in which case the non-U.S. stockholder will be subject to a 30.0% tax on the individual’s net capital gain for the year).

Dispositions of Two Harbors Common Stock

Unless Two Harbors common stock constitutes a USRPI, a sale of the stock by a non-U.S. stockholder generally will not be subject to U.S. federal income taxation under FIRPTA. The stock will not be treated as a USRPI if less than 50% of Two Harbors’ assets throughout a prescribed testing period consist of interests in real property located within the U.S., excluding, for this purpose, interests in real property solely in a capacity as a creditor. Two Harbors does not expect that more than 50% of its assets will consist of interests in real property located in the U.S.

Even if Two Harbors’ shares of common stock otherwise would be a USRPI under the foregoing test, its shares of common stock will not constitute a USRPI if it is a “domestically controlled REIT.” A domestically controlled REIT is a REIT in which, at all times during a specified testing period (generally the lesser of the five year period ending on the date of disposition of its shares of common stock or the period of its existence), less than 50% in value of its outstanding shares of common stock is held directly or indirectly by non-U.S. stockholders. Two Harbors believes it will be a domestically controlled REIT and, therefore, the sale of its common stock should not be subject to taxation under FIRPTA. However, because Two Harbors’ stock will be widely held, it cannot assure its investors that it will be a domestically controlled REIT. Even if Two Harbors does not qualify as a domestically controlled REIT, a non-U.S. stockholder’s sale of Two Harbors’ common stock nonetheless will generally not be subject to tax under FIRPTA as a sale of a USRPI, provided that (a) Two Harbors’ common stock owned is of a class that is “regularly traded,” as defined by the applicable Treasury regulation, on an established securities market, and (b) the selling non-U.S. stockholder owned, actually or constructively, 5% or less of Two Harbors’ outstanding stock of that class at all times during a specified testing period.

If gain on the sale of Two Harbors’ common stock were subject to taxation under FIRPTA, the non-U.S. stockholder would be subject to the same treatment as a U.S. stockholder with respect to such gain, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals, and the purchaser of the stock could be required to withhold 10% of the purchase price and remit such amount to the IRS.

Gain from the sale of Two Harbors’ common stock that would not otherwise be subject to FIRPTA will nonetheless be taxable in the U.S. to a non-U.S. stockholder in two cases: (a) if the non-U.S. stockholder’s investment in Two Harbors’ common stock is effectively connected with a U.S. trade or business conducted by such non-U.S. stockholder, the non-U.S. stockholder will be subject to the same treatment as a U.S. stockholder with respect to such gain, or (b) if the non-U.S. stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the U.S., the nonresident alien individual will be subject to a 30.0% tax on the individual’s capital gain.

Backup Withholding and Information Reporting

Two Harbors will report to its U.S. stockholders and the IRS the amount of dividends paid during each calendar year and the amount of any tax withheld. Under the backup withholding rules, a U.S. stockholder may be subject to backup withholding with respect to dividends paid unless the holder is a corporation or comes within

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other exempt categories and, when required, demonstrates this fact or provides a taxpayer identification number or social security number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A U.S. stockholder that does not provide his or her correct taxpayer identification number or social security number may also be subject to penalties imposed by the IRS. Backup withholding is not an additional tax. In addition, Two Harbors may be required to withhold a portion of capital gain distribution to any U.S. stockholder who fails to certify their non-foreign status.

Two Harbors must report annually to the IRS and to each non-U.S. stockholder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. stockholder resides under the provisions of an applicable income tax treaty. A non-U.S. stockholder may be subject to backup withholding unless applicable certification requirements are met.

Payment of the proceeds of a sale of Two Harbors common stock within the U.S. is subject to both backup withholding and information reporting unless the beneficial owner certifies under penalties of perjury that it is a non-U.S. stockholder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a U.S. person) or the holder otherwise establishes an exemption. Payment of the proceeds of a sale of Two Harbors common stock conducted through certain U.S. related financial intermediaries is subject to information reporting (but not backup withholding) unless the financial intermediary has documentary evidence in its records that the beneficial owner is a non-U.S. stockholder and specified conditions are met or an exemption is otherwise established.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against such holder’s U.S. federal income tax liability provided the required information is furnished to the IRS.

State, Local and Foreign Taxes

Two Harbors and its stockholders may be subject to state, local or foreign taxation in various jurisdictions, including those in which it or they transact business, own property or reside. The state, local or foreign tax treatment of Two Harbors and its stockholders may not conform to the U.S. federal income tax treatment discussed above. Any foreign taxes incurred by Two Harbors would not pass through to stockholders as a credit against their U.S. federal income tax liability. Prospective stockholders should consult their tax advisors regarding the application and effect of state, local and foreign income and other tax laws on an investment in Two Harbors common stock.

Legislative or Other Actions Affecting REITs

The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. No assurance can be given as to whether, when, or in what form, U.S. federal income tax laws applicable to Two Harbors and its stockholders may be enacted. Changes to the U.S. federal income tax laws and interpretations of U.S. federal income tax laws could adversely affect an investment in Two Harbors’ shares of common stock.

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

Two Harbors and Capitol are providing the following unaudited pro forma condensed combined financial information to aid you in your analysis of the financial aspects of the merger.

The following unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2009, statement of operations for the year ended December 31, 2008 and balance sheet at June 30, 2009 are based on the historical financial statements of Capitol and Two Harbors after giving effect to the merger.

The unaudited condensed combined pro forma statement of operations for the six months ended June 30, 2009 was derived from Capitol’s unaudited condensed financial statements for the six months ended June 30, 2009, and the unaudited condensed combined pro forma statement of operations for the year ended December 31, 2008 was derived from Capitol’s audited financial statements for the year ended December 31, 2008. The unaudited pro forma condensed combined balance sheet at June 30, 2009 was derived from Capitol’s unaudited condensed financial statements and Two Harbors’ audited financial statements as of June 30, 2009 and June 11, 2009, respectively.