Table of Contents

As filed with the Securities and Exchange Commission on June 24, 2009

Registration No.             

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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)

Copies to:

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):

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)  ¨

Table of Contents

CALCULATION OF REGISTRATION FEE

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.

Table of Contents

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                     , 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                     , 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 a proposal 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 and (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 — this proposal is referred to as the “initial charter proposal”;

(2) to consider and vote upon a proposal to (i) adopt the Agreement and Plan of Merger, dated as of June 11, 2009, 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 such Agreement and Plan of Merger — 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 to be in effect following the merger 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 will have 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 will be perpetual as opposed to Capitol’s corporate existence terminating on November 8, 2009; (iv) Two Harbors’ board of directors will not be classified as opposed to Capitol’s which is classified; (v) Two Harbors’ charter will not include the various provisions applicable only to specified purpose acquisition corporations that Capitol’s amended and restated certificate of incorporation contains; and (vi) Two Harbors’ charter will include various provisions relating to Two Harbors’ intention 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, which are 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                     , 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.

Table of Contents

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 execution of the merger agreement 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 proposal 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.

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.

Table of Contents

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                     , 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                     , 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 a proposal 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, 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 amendment to the Warrant Agreement will provide that (i) the exercise price of Capitol’s warrants will be increased to $11.00 per share and (ii) the expiration date of the warrants will be extended from November 7, 2012 to November 7, 2013 — this proposal is referred to as the “warrant amendment proposal”;

(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 the warrant amendment proposal — 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                     , 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 the warrant amendment proposal 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 proposal 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 proposal.

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.

Table of Contents

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.

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.

Table of Contents

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 JUNE 24, 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

OF

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 among Capitol, Two Harbors Investment Corp., a Maryland corporation (“Two Harbors”), Two Harbors Merger Corp., a Delaware corporation (“Merger Sub Corp.”), 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 be 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”).

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 (the “Two Harbors Manager”), a subsidiary of Pine River.

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 of shares of common stock of Capitol by its founders immediately prior to the consummation of the merger and (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 (ii) decreased by the issuance of shares of restricted stock to Two Harbors’ independent directors upon consummation of the transaction, all as described in more detail in this proxy statement/prospectus.

Table of Contents

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                     , 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 intend to seek to have the common stock and warrants of Two Harbors listed on the New York Stock Exchange or the NYSE Amex following consummation of the merger under the symbols             and             .WS, respectively. However, there is no assurance that the common stock and warrants will be listed on any exchange following consummation of the merger.

To assist Two Harbors in qualifying as a REIT, ownership of shares of Two Harbors’ common stock by any person is limited, 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. In addition, Two Harbors’ charter contains various other restrictions limiting the ownership and transfer of Two Harbors’ common stock.

Capitol is providing this proxy statement/prospectus and accompanying proxy card to its stockholders and warrantholders in connection with the solicitation of proxies to be voted at the special meetings of stockholders and warrantholders of Capitol and at any adjournments or postponements of the special meetings. Unless the context requires otherwise, references to “you” are references to Capitol stockholders and warrantholders, as the case may be, and references to “we”, “us” and “our” are to Capitol.

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, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 14.

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                     , 2009, and is first being mailed on or about                     , 2009.

This proxy statement/prospectus incorporates important business and financial information about Capitol and Two Harbors that is not included in or delivered with this document. This information is available without charge to security holders upon written or oral request. To make this request, or if you would like additional copies of this proxy statement/prospectus or have questions about the merger, you should contact Mark D. Ein, Chief Executive Officer, Capitol Acquisition Corp., 509 7^th Street, N.W., Washington, D.C. 20004, (202) 654-7060.

To obtain timely delivery of requested materials, security holders must request the information no later than five business days before the date they submit their proxies or attend the special meetings. The latest date to request the information to be received timely is                     , 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 up to an aggregate of approximately $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. 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.

Table of Contents

TABLE OF CONTENTS

i

Table of Contents

1

Table of Contents

2

Table of Contents

3

Table of Contents

4

Table of Contents

5

Table of Contents

6

Table of Contents

7

Table of Contents

8

Table of Contents

9

Table of Contents

10

Table of Contents

11

Table of Contents

12

Table of Contents

13

Table of Contents

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. Other REITs may raise significant amounts of capital, and may have investment objectives that overlap with Two Harbors’, which may create additional competition for opportunities to acquire assets. Some competitors may have a lower cost of funds and access to funding sources that may not be available to Two Harbors, such as funding from the U.S. government, if Two Harbors is not eligible to participate in certain programs established by the U.S. government. Many of Two Harbors’ competitors are not subject to the operating constraints associated with REIT qualification or maintenance of an exemption from the 1940 Act. In addition, some of Two Harbors’ competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of assets and establish more relationships than Two Harbors. 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. Two Harbors cannot assure you that the competitive pressures Two Harbors faces will not have a material adverse effect on its business, financial condition and results of operations. 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. The results of its operations depend on several factors, including the availability of opportunities for the acquisition of assets, the level and volatility of interest rates, the availability of adequate short and long-term financing, conditions in the financial markets and economic conditions. Additionally, the past performance of the Two Harbors Manager’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

14

Table of Contents

Harbors will have similar opportunities to invest in assets that generate similar returns. Further, differences between the structure, term and investment objectives and policies of Two Harbors and the Two Harbors Manager’s affiliates may affect their respective returns.

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, including the market for mortgage loans that generally conform to Agency underwriting guidelines (“Prime Mortgage Loans”) and 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 (“Alt-A Mortgage Loans”), 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. The severity of the liquidity limitation was largely unanticipated by the markets. For now (and for the foreseeable future), access to mortgages has been substantially limited. While the limitation on financing was initially in the sub-prime mortgage market, the liquidity issues have now also affected prime and Alt-A non-Agency lending, with lending standards significantly more stringent than in recent periods and many product types being severely curtailed. 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.

Dramatic declines in the housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant asset write-downs by financial institutions, which have caused many financial institutions to seek additional capital, to merge with other institutions and, in some cases, to fail. Institutions from which Two Harbors may seek to obtain financing may have owned or financed residential mortgage loans, real estate-related securities and real estate loans, which have declined in value and caused them to suffer losses as a result of the recent downturn in the residential mortgage market. Many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers, including other financial institutions. If these conditions persist, these institutions may become insolvent or tighten their lending standards, which could make it more difficult for Two Harbors to obtain financing on favorable terms or at all. Two Harbors’ profitability may be adversely affected if it is unable to obtain cost-effective financing for its assets.

15

Table of Contents

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.

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 the Two Harbors Manager.

Two Harbors intends to conduct its operations so as not to become required to register as an investment company under the 1940 Act. Two Harbors will be organized as a holding company that conducts its businesses primarily through majority-owned subsidiaries, and certain of its 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 RMBS that represent the entire ownership in a pool of mortgage loans and other interests in real estate that constitute qualifying assets in accordance with SEC staff guidance and approximately an additional 25% of its assets in other types of mortgages, RMBS and other real estate-related assets. As a result of the foregoing restrictions, Two Harbors will be limited in its ability to make certain investments.

In addition, if Two Harbors organizes special purpose subsidiaries in the future that will borrow under the Federal Reserve System’s Term Asset-Backed Securities Loan Facility (“TALF”) or otherwise engages in asset securitization, Two Harbors anticipates that some of these subsidiaries may be organized to rely on the 1940 Act exemption provided to certain structured financing vehicles by Rule 3a-7 under the 1940 Act. To the extent that Two Harbors organizes subsidiaries that rely on Rule 3a-7 for an exemption from the 1940 Act, these subsidiaries will need to comply with the restrictions contained in this Rule. In general, Rule 3a-7 exempts from the 1940 Act issuers that limit their activities as follows:

16

Table of Contents

In addition, in certain circumstances, compliance with Rule 3a-7 may also require that the indenture governing the subsidiary’s securities 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 level of transactions that may occur.

There can be no assurance that the laws and regulations governing REITs, including the Division of Investment Management of the SEC providing more specific or different guidance regarding the treatment of assets as qualifying real estate assets or real estate-related assets, will not change in a manner that adversely affects Two Harbors’ operations. Further, although Two Harbors intends to monitor its portfolio, 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 this 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 exemption would also permit the Two Harbors Manager 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 asset securitization 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.

The amount of leverage Two Harbors may deploy for particular assets will depend upon the availability of financing and the Two Harbors Manager’s assessment of the credit and other risks of those assets. The

17

Table of Contents

percentage of leverage will vary over time depending on Two Harbors’ ability to enter into financing agreements, available credit limits and financing rates, type and/or amount of collateral required to be pledged, and Two Harbors’ assessment of the appropriate amount of leverage for the particular assets Two Harbors is funding.

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.

Disruptions in the credit and financial markets may limit or prevent Two Harbors from accessing sources of leverage, which may have a material adverse effect on its results of operations, financial condition and business.

The capital and credit markets have experienced extreme volatility and disruption for more than 12 months. Two Harbors’ access to capital depends upon a number of factors over which Two Harbors has little or no control, including:

The current weakness in the financial markets, the residential mortgage markets and the economy generally 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 or to increase the costs of that financing. Current market conditions have affected different types of financing for mortgage-related assets to varying degrees, with some sources generally being unavailable, others being available but at a higher cost, while others being largely unaffected. For example, in the repurchase agreement market, non-Agency RMBS have been

18

Table of Contents

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. In some cases, margin calls have forced borrowers to liquidate collateral in order to meet the capital requirements of these margin calls, resulting in losses.

Two Harbors’ ability to fund its acquisitions may be impacted by its ability to secure repurchase agreements, warehouse facilities and bank credit facilities (including term loans and revolving facilities) on acceptable terms. Two Harbors currently does not have any commitments for any of its proposed financing arrangements and can provide no assurance that lenders will be willing or able to provide Two Harbors with sufficient financing. In addition, because repurchase agreements and warehouse facilities 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 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 and warehouse facilities will be directly related to the lenders’ valuation of the assets that secure the outstanding borrowings. Typically repurchase and warehouse facilities 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 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. 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. This could increase Two Harbors’ financing costs and reduce its access to liquidity. If one or more major market participants fails or otherwise experiences a major liquidity crisis, as was the case for Bear Stearns & Co. in March 2008 and Lehman Brothers Holdings Inc. in September 2008, it could negatively impact the marketability of all fixed income securities, including Two Harbors’ target

19

Table of Contents

assets, and this could negatively impact the value of the assets Two Harbors acquire, thus reducing its 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.

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.

Two Harbors’ rights under its repurchase agreements may be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of its lenders under the repurchase agreements.

In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and Two Harbors’ claim against the lender for damages may be treated simply as an unsecured creditor. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, Two Harbors’ ability to exercise its rights to recover its securities under a repurchase agreement or to be compensated for any damages resulting from the lender’s insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages Two Harbors actually incurs.

20

Table of Contents

Two Harbors expects that certain of its financing facilities may contain covenants that restrict its operations and may inhibit its ability to grow its business and increase revenues.

Two Harbors expects that certain of its financing facilities may contain restrictions, covenants, and representations and warranties that, among other things, may require Two Harbors to satisfy specified financial, asset quality, loan eligibility and loan performance tests. If Two Harbors fails to meet or satisfy any of these covenants or representations and warranties, Two Harbors would be in default under these agreements and its lenders could elect to declare all amounts outstanding under the agreements to be immediately due and payable, enforce their respective interests against collateral pledged under such agreements and restrict Two Harbors’ ability to make additional borrowings. Two Harbors also expects its financing agreements will contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under Two Harbors’ other agreements could also declare a default.

The covenants and restrictions Two Harbors expects in its financing facilities may restrict Two Harbors’ ability to, among other things:

In addition, if market conditions were to improve, it is possible that Two Harbors will consider private securitizations of its assets and other forms of private borrowings, and these financing arrangements may also include restrictions on Two Harbors’ ability to operate. In particular, securitization structures generally contain over-collateralization requirements that the principal amount of the securitized assets exceed the principal balance of the bonds issued in the securitization by a certain amount and cash flow release mechanisms with respect to the net income from assets collateralizing the bonds.

These restrictions may interfere with Two Harbors’ ability to obtain financing, including the financing needed to qualify as a REIT, or to engage in other business activities, which may significantly limit or harm Two Harbors’ business, financial condition, liquidity and results of operations. A default and resulting repayment acceleration could significantly reduce Two Harbors’ liquidity, which could require Two Harbors to sell its assets to repay amounts due and outstanding. This could also significantly harm Two Harbors’ business, financial condition, results of operations, and its ability to make distributions, which could cause the value of Two Harbors’ common stock or warrants to decline. A default will also significantly limit Two Harbors’ financing alternatives such that Two Harbors will be unable to pursue its leverage strategy, which could curtail the returns on its assets.

There can be no assurance that the actions of the U.S. government, Federal Reserve System, 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 Emergency Economic Stabilization Act of 2008

21

Table of Contents

(“EESA”) was signed into law on October 3, 2008. The EESA provides the U.S. Treasury Secretary with the authority to use up to $700 billion to establish a Troubled Asset Relief Program to purchase from financial institutions residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages, that were originated or issued on or before March 14, 2008, and any other financial instrument that the U.S. Treasury Secretary, in consultation with the Chairman of the Federal Reserve System, determines necessary to promote financial stability. In addition, the U.S. Treasury Secretary has the authority to establish a program to guarantee, upon request of a financial institution, the timely payment of principal and interest on these financial assets.

The recent economic challenges in the residential mortgage markets have significantly affected the Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”). The Housing and Economic Recovery Act of 2008 (“HERA”), which established a new regulator for Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (“FHFA”), was signed into law on July 30, 2008. Under HERA, the FHFA has been appointed as conservator of both Fannie Mae and Freddie Mac, allowing the FHFA to direct and control the actions of Fannie Mae and Freddie Mac without forcing them to liquidate, which would occur if Fannie Mae and Freddie Mac were placed under receivership. Importantly, the primary focus of the plan appears to be to increase the availability of mortgage finance by allowing these companies to continue to grow their guarantee business without limit, while limiting net purchases of RMBS to a more modest amount through the end of 2009.

In addition, in an effort to further stabilize the U.S. mortgage market, the U.S. Treasury took three additional actions. First, the U.S. Treasury entered into a preferred stock purchase agreement with each of Fannie Mae and Freddie Mac, pursuant to which $100 billion (subsequently increased to $200 billion) will be available to each entity. Second, it established a new secured credit facility, the Government Sponsored Enterprise Credit Facility (“GSECF”), available to each of Fannie Mae and Freddie Mac (as well as Federal Home Loan Banks) through December 31, 2009, when other funding sources are unavailable. Third, it has established an Agency RMBS purchase program, under which the U.S. Treasury may purchase Agency RMBS in the open market. This latter program will also expire on December 31, 2009. Furthermore, the Federal Reserve has created the RMBS Purchase Program to purchase and hold up to $500 billion of fixed-rate Agency RMBS from Fannie Mae, Freddie Mac, and the Government National Mortgage Association (“Ginnie Mae”) and up to $100 billion of their direct obligations. All purchases are to be made by the end of 2009, but the program may be extended.

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.

On November 25, 2008, the U.S. Treasury and the Federal Reserve Bank of New York (“FRBNY”) announced the creation of the TALF. Under the TALF, the FRBNY provides non-recourse loans to borrowers to fund their purchase of eligible assets, which currently include certain asset-backed securities (“ABS”). On March 23, 2009, the FRBNY announced preliminary plans to expand the TALF to include certain highly rated non-Agency RMBS, as well as highly rated commercial mortgage-backed securities (“CMBS”). On May 1, 2009, the FRBNY provided more details as to how the TALF is to be expanded to include recently issued CMBS and announced that, beginning in June 2009, up to $100 billion of TALF loans will be available to finance purchases of CMBS created on or after January 1, 2009. In addition, on May 19, 2009, the FRBNY announced that certain high quality legacy CMBS, including CMBS issued before January 1, 2009, would become eligible collateral under the TALF starting in July 2009.

On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve, announced the establishment of the Public-Private Investment Program (the “PPIP”). The PPIP is designed to encourage the transfer of certain legacy assets, including real estate-related assets, off of the balance sheets of financial

22

Table of Contents

institutions, restarting the market for these assets and supporting the flow of credit and other capital into the broader economy. The PPIP is expected to be $500 billion to $1 trillion in size and has two primary components: a Legacy Loans Program and a Legacy Securities Program. Based on a preliminary description, Legacy Loans Public-Private Investment Funds (“PPIFs”) will be established to purchase troubled loans from insured depository institutions. Acquisitions of these troubled loans will be funded by equity capital from both the U.S. Treasury and private investors and non-recourse debt issued by the Legacy Loans PPIF and guaranteed by the FDIC, with the FDIC guarantee collateralized by the assets acquired by the Legacy Loans PPIF. Based on a preliminary description, Legacy Securities PPIFs will be established to purchase from financial institutions certain originally highly rated non-Agency RMBS as well as CMBS. Legacy Securities PPIFs will be funded with equity capital from both the U.S. Treasury and private investors as well as debt financing from one or more of the U.S. Treasury, the TALF and private sources.

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 may seek to obtain financing through the temporary programs established or proposed to be established by the U.S. government, which could subject Two Harbors to certain risks.

To acquire its non-Agency RMBS and residential mortgage loan portfolio, Two Harbors may seek to obtain U.S. government equity and debt financing through, or otherwise participate in, the temporary programs established or proposed to be established by the U.S. government, including the TALF and the PPIP. Participation in such programs could subject Two Harbors to certain risks, including the following:

23

Table of Contents

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 the Two Harbors Manager and, through the shared facilities and services agreement, Pine River. Any failure or interruption of the systems of the Two Harbors Manager 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:

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.

24

Table of Contents

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

25

Table of Contents

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 the Two Harbors Manager and Pine River

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

Two Harbors has executive officers provided by the Two Harbors Manager but no other employees. Two Harbors has no separate facilities and is completely reliant on the Two Harbors Manager, 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 the Two Harbors Manager should not invest in Two Harbors’ common stock or warrants. The employees, systems and facilities of the Two Harbors Manager and Pine River may be utilized by other funds and companies advised by the Two Harbors Manager and by its affiliates, and the Two Harbors Manager 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 the Two Harbors Manager 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 the Two Harbors Manager 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 the Two Harbors Manager, 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 the Two Harbors Manager. Each of Two Harbors’ executive officers and certain of its non-independent

26

Table of Contents

directors is also an employee or partner of Pine River; they will not be exclusively dedicated to Two Harbors’ business. Furthermore, the Two Harbors Manager 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 the Two Harbors Manager under a sub-management agreement, is entitled to receive a percentage of the management fee earned by the Two Harbors Manager. As a result, the management agreement with the Two Harbors Manager was negotiated between related parties, and its terms, including fees payable to the Two Harbors Manager, 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 the Two Harbors Manager. The Two Harbors Manager maintains a contractual as opposed to a fiduciary relationship with Two Harbors. The management agreement with the Two Harbors Manager does not prevent the Two Harbors Manager 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 the Two Harbors Manager, 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 the Two Harbors Manager 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 the Two Harbors Manager and Pine River and their respective officers and employees to engage in other business activities may reduce the time the Two Harbors Manager 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 the Two Harbors Manager 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 the Two Harbors Manager 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 securities, collateralized mortgage obligations (“CMOs”), “to-be-announced” forward contracts (“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 the Two Harbors Manager will allocate the most attractive investment opportunities to Two Harbors.

27

Table of Contents

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.

The Two Harbors Manager 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 the Two Harbors Manager 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 the Two Harbors Manager 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 the Two Harbors Manager’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 the Two Harbors Manager will remain the Two Harbors Manager 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 the Two Harbors Manager 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 the Two Harbors Manager continue to act in such capacity. If the Two Harbors Manager 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.

The Two Harbors Manager 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

28

Table of Contents

unexpected taxes and penalties. The Two Harbors Manager is newly formed with no experience in managing a portfolio of assets under these complex rules and regulations. Although the Two Harbors Manager’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 the Two Harbors Manager described above may hinder Two Harbors’ ability to achieve its investment objectives or result in loss of Two Harbors’ qualification as a REIT.

The Two Harbors Manager’s failure to make investments on favorable terms that satisfy Two Harbors’ investment strategy and otherwise generate attractive risk-adjusted returns initially and consistently from time to time in the future would materially and adversely affect Two Harbors.

Two Harbors’ ability to achieve its investment objective depends on the Two Harbors Manager’s and Pine River’s personnel and their ability to make investments on favorable terms that satisfy Two Harbors’ investment strategy and otherwise generate attractive risk-adjusted returns initially and consistently from time to time in the future. Accomplishing this result is also a function of the Two Harbors Manager’s ability to execute Two Harbors’ financing strategy on favorable terms.

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 the Two Harbors Manager. As a result, the Two Harbors Manager 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.

The Two Harbors Manager 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 the Two Harbors Manager 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 the Two Harbors Manager. Furthermore, the Two Harbors Manager may use complex strategies, and transactions entered into by the Two Harbors Manager may be costly, difficult or impossible to unwind by the time they are reviewed by Two Harbors’ board of directors. The Two Harbors Manager 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 the Two Harbors Manager 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 the Two Harbors Manager 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.

The Two Harbors Manager 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 the Two Harbors Manager for a given quarter despite the fact that Two Harbors could experience a net loss during that quarter. The Two Harbors Manager’s entitlement to such significant nonperformance-based compensation may not provide sufficient incentive to the Two Harbors Manager 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 the Two Harbors Manager the incentive to maximize stockholders’ equity by the issuance of new Two Harbors shares of common stock or the retention of existing

29

Table of Contents

equity, regardless of the effect of these actions on existing stockholders. In other words, the management fee structure will reward the Two Harbors Manager 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 the Two Harbors Manager.

Termination of the management agreement with the Two Harbors Manager 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 the Two Harbors Manager.” 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) the Two Harbors Manager’s unsatisfactory performance that is materially detrimental to Two Harbors, or (ii) a determination that the management fees payable to the Two Harbors Manager are not fair, subject to the Two Harbors Manager’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. The Two Harbors Manager 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 the Two Harbors Manager due to Two Harbors’ material breach), the management agreement provides that Two Harbors will pay the Two Harbors Manager a termination payment equal to three times the sum of the annual management fee received by the Two Harbors Manager 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 the Two Harbors Manager, even if Two Harbors believes the Two Harbors Manager’s performance is not satisfactory.

The Two Harbors Manager 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 the Two Harbors Manager 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.

The Two Harbors Manager’s, Pine River’s and Sub-Manager’s liability is limited under the management agreement, and Two Harbors has agreed to indemnify the Two Harbors Manager, 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 the Two Harbors Manager would not be liable.

Pursuant to the management agreement, the Two Harbors Manager 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. The Two Harbors Manager maintains a contractual as opposed to a fiduciary relationship with Two Harbors. The Two Harbors Manager, Sub-Manager, their respective officers, stockholders, members, managers, personnel and directors, any person controlling or controlled by the Two Harbors Manager or Sub-Manager and any person providing sub-advisory services to the Two Harbors Manager 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 the Two Harbors Manager’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 the Two Harbors Manager, 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 the Two Harbors Manager’s duties under the management

30

Table of Contents

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 the Two Harbors Manager 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 the Two Harbors Manager 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, the Two Harbors Manager 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 the Two Harbors Manager’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

31

Table of Contents

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 and Alt-A Mortgage Loans. 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

32

Table of Contents

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.

33

Table of Contents

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.

34

Table of Contents

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 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’ real estate assets are subject to risks particular to real property.

Two Harbors owns assets secured by real estate and may own real estate directly in the future, either through direct acquisitions or upon a default of mortgage loans. Real estate investments are subject to various risks, including:

35

Table of Contents

If any of these or similar events occurs, it may reduce its return from an affected property or asset and reduce or eliminate Two Harbors’ ability to make distributions to stockholders.

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 between 5% and 10% of its assets in 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

36

Table of Contents

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,

37

Table of Contents

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:

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’ 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.

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.

38

Table of Contents

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 Two Harbors 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, its 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 (1) all or a portion of Two Harbors’ assets are subject to the rules relating to taxable mortgage pools, (2) Two Harbors is a “pension held REIT,” (3) a tax exempt stockholder has incurred debt to purchase or hold Two Harbors’ common stock, or (4) the 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 (3), 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

39

Table of Contents

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. 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.

40

Table of Contents

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 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 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 determine 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 its 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.

41

Table of Contents

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.

42

Table of Contents

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 on the basis of the constant yield to maturity of the debt instrument 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 of common stock 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

43

Table of Contents

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 of common stock 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 of common stock.

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 Delaware General Corporation Law (“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 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

44

Table of Contents

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.

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:

45

Table of Contents

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, 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. 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 New York Stock Exchange or the NYSE Amex, 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.

46

Table of Contents

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 proposal is 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 New York Stock Exchange or NYSE Amex 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 will seek listing of its common stock and warrants on the New York Stock Exchange or the NYSE Amex 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 such application is accepted and Two Harbors’ securities are so listed, Two Harbors may be unable to maintain the listing of its securities in the future.

If either the New York Stock Exchange or NYSE Amex do not list Two Harbors’ securities for trading on its exchange, Two Harbors could face significant material adverse consequences, including:

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:

47

Table of Contents

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             , 2009, the record date for the special meeting, Capitol’s Founders held $            in common stock (based on a market price of $            ) and $            in warrants (based on a market price of $            ). 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 the Two Harbors Manager 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

48

Table of Contents

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,

49

Table of Contents

Holders of Public Shares at the time of the merger who purchased their units in the IPO and have not converted their shares into cash may have rights to rescind their purchases and assert a claim for damages therefor against Capitol and the former directors and officers of Capitol.

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 obtain disinterested independent director approval and a fairness opinion if such business combination involved a related party target and (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. Consequently, a holder of Public Shares who purchased them in the IPO and still held them at the time of the merger without seeking to convert them into cash may seek rescission of the purchase of the units he acquired in the IPO. 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.

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 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.

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, the terms may not be fair from a financial point of view to Capitol’s public stockholders.

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. Capitol’s board of directors did not obtain a fairness opinion to assist it in its determination. Accordingly, 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.”

50

Table of Contents

FORWARD-LOOKING STATEMENTS

Capitol and Two Harbors believe that some of the information in this proxy statement/prospectus constitutes forward-looking statements within the definition of the Private Securities Litigation Reform Act of 1995. 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:

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:

51

Table of Contents

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.

52

Table of Contents

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                     , 2009, and at any adjournment or postponement thereof. This proxy statement/prospectus is first being furnished to Capitol stockholders and warrantholders on or about                     , 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                     , 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:

53

Table of Contents

The approval of the initial charter proposal 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.

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

Recommendation of Capitol Board of Directors

Capitol’s board of directors:

Record Date; Who is Entitled to Vote

Capitol has fixed the close of business on                     , 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                     , 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 execution of the merger agreement 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 proposal.

54

Table of Contents

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 proposal. 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 proposal 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 proposal, the merger proposal and the warrant amendment proposal is a condition to the consummation of the merger. If either the initial charter proposal, the merger proposal or warrant amendment proposal 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 proposal will require the affirmative vote of the holders of a majority of Capitol warrants outstanding on the record date. Because this proposal requires 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 this proposal.

55

Table of Contents

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 proposal, the merger proposal and the warrant amendment proposal are conditions to the consummation of the merger. If either the initial charter proposal 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:

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:

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 [            , Capitol’s proxy solicitor, at             , 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.

56

Table of Contents

[Capitol has hired             to assist in the proxy solicitation process. It will pay that firm a fee of $            plus disbursements. Such payments will be made from non-trust account funds. If the merger is successfully closed, Capitol will pay             an additional contingent fee of $            .]

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                     , 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 his, her or its 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 execution of the merger agreement 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 proposal. 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 the Two Harbors Manager 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 the Two Harbors Manager. 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                     , 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.

At any time prior to the special meetings, during a period when they are not then aware of any material nonpublic information regarding Capitol or its securities or pursuant to agreements between the buyer and seller of such securities in a form that would not violate insider trading rules, the Capitol Founders may purchase shares or warrants from institutional and other investors, or execute agreements to purchase such shares or warrants from them in the future, or they or Capitol may enter into transactions with such persons and others to provide them with incentives to acquire Capitol’s securities or vote their securities in favor of the merger proposal and the other proposals. The purpose of such share and warrant purchases and other transactions would

57

Table of Contents

be to increase the likelihood of satisfaction of the requirements that the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote on the merger proposal vote in its favor, 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 and that the other proposals are approved.

If such transactions are effected, the consequence could be to cause the merger and the other proposals to be approved in circumstances where such approvals could not otherwise be obtained. Purchases of shares or warrants by the persons described above would allow them to exert more influence over the approval of the merger proposal and other proposals and would likely increase the chances that such proposals would be approved. Moreover, any such purchases may make it less likely that the holders of 30.0% or more of the Public Shares will vote against the merger proposal and exercise their conversion rights.

As of the date of this proxy statement/prospectus, no such discussions have been held and no agreements to such effect have been entered into with any such investor or holder. Capitol will file a Current Report on Form 8-K to disclose arrangements entered into or significant purchases made by any of the aforementioned persons that would affect the vote on the merger proposal or the other proposals or the conversion threshold. Any such report will include descriptions of any arrangements entered into or significant purchases by any of the aforementioned persons.

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 presented and 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.

58

Table of Contents

PROPOSALS TO BE CONSIDERED BY THE CAPITOL STOCKHOLDERS

THE INITIAL CHARTER PROPOSAL

Capitol is proposing to amend its amended and restated certificate of incorporation to revise the definition of a “business combination” and to remove the requirement that Capitol obtain the approval of its disinterested independent directors and an opinion from an independent investment banking firm that the business combination is fair to the holders of Public Shares from a financial point of view when Capitol’s insiders are affiliated with the target business. 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 the Two Harbors Manager, to a portion of the management fee earned by the Two Harbors Manager pursuant to the management agreement between Two Harbors and the Two Harbors Manager, the Capitol Founders may be deemed to be affiliated with Two Harbors which might 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. 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

59

Table of Contents

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. 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 proposal, 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 proposal 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. Accordingly, Capitol believes that the proposed amendment to its amended and restated certificate of incorporation is consistent with the spirit in which Capitol offered its securities to the public.

Capitol has also received an opinion from special Delaware counsel, Richards, Layton & Finger, P.A., concerning the validity of the initial charter proposal. 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 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 holder of Public Shares at the time of the merger who purchased his or her Public Shares in the IPO and who has not converted his or her shares into cash 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.

60

Table of Contents

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 the initial charter proposal 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 proposal is 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:

“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.”

If the initial charter proposal 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 THE INITIAL CHARTER PROPOSAL.

61

Table of Contents

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 Annex A 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 March 31, 2009, Capitol had drawn all of the $3,250,000 for working capital requirements and have $37,443 available to pay its current tax obligations. As of March 31, 2009, there was $259,132,290 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 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. 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, 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 who otherwise wish to sell their Public Shares or other arrangements that would induce holders of Public Shares not to vote against the merger proposal. It is likely that such arrangements would involve the purchase by Capitol, after the merger, of the Public Shares that are held by the persons or entities who enter into such arrangements using funds transferred to Capitol from Capitol’s trust account. As a consequence, 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. 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.

62

Table of Contents

If the merger is not consummated by September 8, 2009, subject to extension in certain instances, 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.

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 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 the Two Harbors Manager, a subsidiary of Pine River. Founded in 2002, Pine River is a global multi-strategy asset management firm, with approximately $800 million in assets under management as of June 1, 2009, including $202 million in a private fund, the Nisswa Fixed Income Fund, dedicated to investments in RMBS and related strategies.

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.

63

Table of Contents

Name; Headquarters; Stock Symbols

After completion of the merger:

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 March 31, 2009, $259,094,847 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. Capitol conducted extensive due diligence and held numerous meetings with the target. Thereafter, Capitol submitted a non-binding letter of intent 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. Capitol subsequently received a letter from the target’s investment bankers detailing procedures and requirements for submitting a non-binding letter of intent. 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 to the target’s investment bankers. However, the target’s investment bankers subsequently 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. 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. Intermittent negotiations with this target continued but the parties could not agree on valuation terms. As a result, Capitol decided to focus its efforts on other transaction opportunities.

64

Table of Contents

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. In September 2008, Capitol and the target executed a confidentiality and non disclosure agreement. From September 2008 to December 2008, Capitol and its financial advisor conducted due diligence on the target, including meetings at the target’s headquarters, and the parties continued to negotiate the proposed terms of a transaction. 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. 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. Throughout March and April 2009, Capitol and its financial advisor conducted due diligence on and met with the target and its investment bankers. On April 7, 2009, Capitol sent a non-binding letter of intent to the target’s chief executive officer and investment bankers. Throughout April and May 2009, the parties continued due diligence, negotiations and discussions on the proposed terms of a transaction. However, Capitol determined not to proceed with this transaction as it was moving forward 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.

65

Table of Contents

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 counsels, 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. 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.

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 proposal.

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.

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.

66

Table of Contents

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. Capitol believes that this experience makes Capitol’s management, board, special advisors and full-time consultants highly 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. The following is a summary of all of the material factors that the Capitol board of directors considered:

Two Harbors’ Potential for Future Growth. 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 expertise and 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 indicating that non-Agency RMBS were trading at relatively low prices, and that Agency RMBS were trading at wide spreads to LIBOR and were likely to remain wide for some time.

Non-Agency securities are trading at low prices. Agency securities are trading at wide spreads to LIBOR and are likely to remain wide for some time. As a result, market conditions appear to be favorable to achieve attractive risk-adjusted returns from the funds released to it upon consummation of the merger. 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. The following table summarizes such material. In reviewing these materials, the Capitol board of directors took into account that (i) the information does not represent any

67

Table of Contents

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.

Asset Portfolios⁽¹⁾

($ in millions)

Total leverage: 1.8x

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 mortgage-backed securities strategy which, under Mr. Kuhn’s management, has returned 95.6% return net of fees with no negative month since the strategy’s inception in February 2008 through May 31, 2009. For more information with respect to how this return net of fees is calculated, 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 based on comparable company analysis. In analyzing Two Harbors from a comparable company basis, the board reviewed

68

Table of Contents

various public 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). In reviewing this 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):

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.

Potential Adverse Factors Considered by Capitol

Capitol’s board also evaluated several potential 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. 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

69

Table of Contents

conclude that the business combination was fair from a financial perspective to its stockholders. Capitol’s board of directors did not obtain a fairness opinion to assist it in its determination. Accordingly, Capitol’s board of directors may be incorrect in its assessment of the transaction. Furthermore, as described in more detail below, Sub-Manager, an affiliate of the Capitol Founders, will be providing services to the Two Harbors Manager pursuant to a sub-management agreement and will be receiving a percentage of the gross management fees earned by the Two Harbors Manager. As a result, the Capitol Founders are receiving consideration in the merger that is different than the consideration to be received by the holders of Public Shares.

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 the proposal to approve 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:

70

Table of Contents

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 the Two Harbors Manager will be paid pursuant to the management agreement. In addition, Pine River’s 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.

Sub-Management Agreement

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

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 the Two Harbors Manager will remain primarily and directly responsible for the all services provided to Two Harbors under the management agreement.

71

Table of Contents

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 the Two Harbors Manager’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 the Two Harbors Manager’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. 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 the Two Harbors Manager 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 this Agreement.

If the management agreement is terminated under the circumstances described in this proxy statement/prospectus, the Two Harbors Manager will be entitled to a termination fee from Two Harbors equal to three times the average annual management fee earned by the Two Harbors Manager 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 the Two Harbors Manager’s termination fee with respect to the first $1 billion of Two Harbors’ stockholders’ equity, plus (ii) 10% of the Two Harbors Manager’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 the Two Harbors Manager — 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 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, the Two Harbors Manager has in good faith initiated litigation with respect to a claim of cause against Sub-Manager, the Two Harbors Manager 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 the Two Harbors Manager or certain Pine River affiliates manage certain other public investment vehicles, the Two Harbors Manager and Sub-Manager will enter into good faith negotiations and the Two Harbors Manager 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 the Two Harbors Manager and Sub-Manager.

Sub-Manager is not permitted, without the prior written consent of the Two Harbors Manager (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 the Two Harbors Manager (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.

72

Table of Contents

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 recommend 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. If you hold the shares in street name, you will have to coordinate with your broker to have your shares certificated or delivered electronically. Shares that have not been tendered (either physically or electronically) in accordance with these procedures will not be converted into cash.

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                     , 2009 (the record date for the Capitol special meeting) was $            . The cash held in the trust account on                     , 2009 was approximately $            ($            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 sought conversion

73

Table of Contents

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, Capitol, the Capitol Founders, Two Harbors and their respective affiliates may negotiate arrangements 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. These arrangements might also include arrangements to provide such holders of Public Shares with incentives to vote in favor of the merger proposal.

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:

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 New York Stock Exchange or any other national securities exchange.

Capitol will file a Current Report on Form 8-K to disclose arrangements entered into or significant purchases made by any of the aforementioned persons that would affect the vote on the merger proposal or the conversion threshold. Any such report will include descriptions of any arrangements entered into or significant purchases by any of the aforementioned persons. If members of Capitol’s board of directors or officers make purchases pursuant to such arrangements, they will be required to report these purchases on beneficial ownership reports filed with the SEC.

74

Table of Contents

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. All shares purchased pursuant to such arrangements would be voted in favor of the merger proposal. 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.

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. Nevertheless, 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, if the merger is consummated or if funds in the trust account are used to purchase Public Shares, each holder of Public Shares at the time of the merger who purchased his or her Public Shares in the IPO and who has not converted his or her shares into cash 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

75

Table of Contents

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

Capitol stockholders and warrantholders do not have appraisal rights under the DGCL in connection with the merger or the issuance of Two Harbors common stock and warrants pursuant to the merger.

Anticipated Accounting Treatment

The merger will be accounted for as a reverse merger accompanied by a recapitalization of Two Harbors as the merger agreement does not result in an acquisition of a business under SFAS 141R. Two Harbors is considered to be the acquirer for accounting purposes because it will obtain effective control of Capitol as a result of the merger. The determination was primarily based on Two Harbors comprising the ongoing operations of the combined entity, Two Harbors’ senior management serving as the senior management of the combined entity and Two Harbors’ former equity members having the right to appoint a majority of the combined entity’s board of directors. However, because Capitol, the acquiree for accounting purposes, does not meet the definition of a “business” provided in SFAS 141R, the recognition and measurement provisions of SFAS 141R do not apply. The share exchange transaction utilizes the capital structure of Capitol and the assets and liabilities of Two Harbors are recorded at historical cost. Although Two Harbors will be deemed to be the acquiring company for accounting and financial reporting purposes, Merger Sub Corp., a newly-formed subsidiary of Two Harbors, is intended to be merged with and into Capitol, and Two Harbors will become the parent entity of both Capitol and Merger Sub Corp.

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 Hart-Scott-Rodino Antitrust Improvements Act of 1976, except for filings with the State of Delaware necessary to effectuate the merger.

Required Vote

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 of the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote at the Capitol special meeting.

76

Table of Contents

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

77

Table of Contents

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 Annex A 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 and (B) conversion of any Public Shares 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:

78

Table of Contents

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

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 the date of the merger agreement, 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 the date of the merger agreement, 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

79

Table of Contents

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:

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

80

Table of Contents

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:

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 proposal 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 proposal.

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

81

Table of Contents

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 the date of the merger agreement.

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,

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. There can be no assurance that all of the conditions will be satisfied or waived.

82

Table of Contents

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: