**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.**  |
|------------|------------|-----------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                |
| ** ** | ** ** | **For the quarterly period ended: March 31, 2005**                                                   |
| ** ** | ** ** | ** **                                                                                                |
| **OR**     |
| ** ** | ** ** | ** **                                                                                                |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
| ** ** | ** ** | ** **                                                                                                |
| ** ** | ** ** | **Commission File Number: 1-13485**                                                                       |

 

**AMNET MORTGAGE, INC.**

(Exact name of registrant as specified in itscharter)

 
| **Maryland**                                                                        | ** ** | **33-0741174**                        |
|-------------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                    |       | (I.R.S. Employer  Identification No.) |
|                                                                                |       |                                  |
| **10421 Wateridge Circle,  Suite 250  San Diego, California**                  | ** ** | **92121**                             |
| (Address of principal  executive offices)                                           |       | (Zip Code)                            |
|                                                                                |       |                                  |
| **(858) 909-1200**                                                                  |
| (Registrant’s telephone  number, including area code)                          |
|                                                                                |       |                                  |
| ** **                                                                          |
| (Former name, former  address and former fiscal year, if changed since last report) |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

ý  YES    o  NO

 

Indicateby check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes oNo ý

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 
| Common Stock  ($0.01) |   | 7,433,407 as of April 26, 2005 |
|-----------------------|--------|-------------------------------------|

 

 

----

 
| INDEX                                                                                                                                           |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                            |   |
| PART I.  FINANCIAL INFORMATION                                                                                                             | 3      |
|                                                                                                                                            |   |
| Item 1.  Consolidated Financial Statements                                                                                                      | 3      |
|                                                                                                                                            |   |
| Consolidated  Balance Sheets at March 31, 2005 and December 31, 2004                                                                  | 3      |
|                                                                                                                                            |   |
| Consolidated  Statements of Operations and Comprehensive Income (Loss) for the three months  ended March 31, 2005 and March 31, 2004. | 4      |
|                                                                                                                                            |   |
| Consolidated  Statements of Cash Flows for the three months ended March 31, 2005 and  March 31, 2004.                                 | 5      |
|                                                                                                                                            |   |
| Notes to  Consolidated Financial Statements                                                                                                     | 6      |
|                                                                                                                                            |   |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                             | 14     |
|                                                                                                                                            |   |
| Item 3. Quantitative and  Qualitative Disclosures about Market Risk                                                                             | 35     |
|                                                                                                                                            |   |
| Item 4. Controls and Procedures                                                                                                                 | 36     |
|                                                                                                                                            |   |
| PART II.  OTHER INFORMATION                                                                                                                | 37     |
|                                                                                                                                            |   |
| Item 1. Legal Proceedings                                                                                                                       | 37     |
|                                                                                                                                            |   |
| Item  2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                            | 37     |
|                                                                                                                                            |   |
| Item 3. Defaults Upon  Senior Securities                                                                                                        | 37     |
|                                                                                                                                            |   |
| Item  4. Submission of Matters to a Vote of Security Holders                                                                                    | 37     |
|                                                                                                                                            |   |
| Item 5. Other Information                                                                                                                       | 37     |
|                                                                                                                                            |   |
| Item 6.  Exhibits                                                                                                                               | 37     |

 

2

----

 

PART I.  FINANCIAL INFORMATION

Item1.  Consolidated Financial Statements

 

AmNet Mortgage, Inc.and Subsidiaries

ConsolidatedBalance Sheets, unaudited

(in thousands, except share and per sharedata)

 
| ** **                                                                                                                                                                   | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                                                                                                                                                         |       |                    |       |                       |       |
| **ASSETS**                                                                                                                                                                   |       |                    |       |                       |       |
| Cash and cash equivalents                                                                                                                                                    |       | $                       | 37,286     |                       | $          | 50,600 |   |
| Cash and cash equivalents—restricted                                                                                                                                    |       | 2,850                   |       | 2,100                      |       |
| Mortgage loans held for sale, net, pledged  (lower of cost or market)                                                                                                        |       | 424,401                 |       | 238,440                    |       |
| Bond collateral, mortgage loans, net                                                                                                                                         |       | 13,274                  |       | 14,509                     |       |
| Bond collateral, real estate owned, net                                                                                                                                      |       | 471                     |       | 479                        |       |
| Accounts receivable—mortgage loans  sold/funded                                                                                                                         |       | 17,494                  |       | 16,167                     |       |
| Accounts receivable—derivative financial  instruments                                                                                                                   |       | 3,584                   |       | —                     |       |
| Derivative financial instruments                                                                                                                                             |       | 288                     |       | 616                        |       |
| Accrued interest receivable                                                                                                                                                  |       | 824                     |       | 819                        |       |
| Deferred taxes                                                                                                                                                               |       | 10,226                  |       | 10,694                     |       |
| Other assets                                                                                                                                                                 |       | 6,716                   |       | 6,055                      |       |
|                                                                                                                                                                         |       | $                       | 517,414    |                       | $          | 340,479 |   |
|                                                                                                                                                                         |       |                    |       |                       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                               |       |                    |       |                       |       |
| Liabilities:                                                                                                                                                                 |       |                    |       |                       |       |
| Short-term debt                                                                                                                                                              |       | $                       | 409,803    |                       | $          | 232,236 |   |
| Long-term debt, net                                                                                                                                                          |       | 12,155                  |       | 13,500                     |       |
| Accounts payable—derivative financial  instruments                                                                                                                      |       | —                  |       | 37                         |       |
| Accrued interest payable                                                                                                                                                     |       | 468                     |       | 515                        |       |
| Accrued commissions and payroll                                                                                                                                              |       | 5,608                   |       | 5,218                      |       |
| Recourse liabilities associated with loan  sales                                                                                                                             |       | 6,334                   |       | 5,480                      |       |
| Accrued expenses and other liabilities                                                                                                                                       |       | 5,189                   |       | 6,212                      |       |
| Total liabilities                                                                                                                                                            |       | 439,557                 |       | 263,198                    |       |
| Commitments and contingencies (Note 12)                                                                                                                                      |       |                    |       |                       |       |
| Minority interest                                                                                                                                                            |       | 100                     |       | 100                        |       |
| Stockholders’ Equity:                                                                                                                                                   |       |                    |       |                       |       |
| Preferred stock, par value $.01 per share;  100,000 shares authorized; no shares issued and outstanding                                                                      |       | —                  |       | —                     |       |
| Common stock, par value $.01 per share;  24,900,000 shares authorized; 7,401,883 shares issued and outstanding in  2005, and 7,875,634 shares issued and outstanding in 2004 |       | 73                      |       | 73                         |       |
| Additional paid-in-capital                                                                                                                                                   |       | 105,006                 |       | 103,718                    |       |
| Deferred compensation                                                                                                                                                        |       | (1,219                  | )          | —                     |       |
| Accumulated deficit                                                                                                                                                          |       | (26,103                 | )          | (26,610                    | )          |
| Total stockholders’ equity                                                                                                                                              |       | 77,757                  |       | 77,181                     |       |
|                                                                                                                                                                         |       | $                       | 517,414    |                       | $          | 340,479 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

3

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AmNet Mortgage, Inc. and Subsidiaries

ConsolidatedStatements of Operations and Comprehensive Income (Loss), unaudited

(in thousands, except per share data)

 
| ** **                                                                                                                         | ** ** | **For the Three Months  Ended March 31, 2005** | ** ** | **For the Three Months  Ended March 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                                                                                                               |       |                                                |       |                                                |       |
| **Revenues**                                                                                                                       |       |                                                |       |                                                |       |
| Gain on sales of loans                                                                                                             |       | $                                                   | 18,274     |                                                | $          | 15,515 |   |
| Derivative financial instruments and market  adjustments                                                                           |       |                                                |       |                                                |       |
| Derivative financial instruments—forward  sales of mortgage-backed securities and options to sell mortgage-backed  securities |       | 3,055                                               |       | (5,487                                              | )          |
| Market adjustment on interest rate lock  commitments                                                                               |       | 4                                                   |       | (1,157                                              | )          |
| Total derivative financial instruments and  market adjustments                                                                     |       | 3,059                                               |       | (6,644                                              | )          |
| Interest on mortgage assets                                                                                                        |       | 10,119                                              |       | 6,641                                               |       |
| Other income                                                                                                                       |       | 202                                                 |       | 296                                                 |       |
| Total revenue, net of derivative financial  instruments and adjustments                                                            |       | 31,654                                              |       | 15,808                                              |       |
| **Expenses**                                                                                                                       |       |                                                |       |                                                |       |
| Employee compensation and benefits                                                                                                 |       | 17,264                                              |       | 11,842                                              |       |
| Interest expense                                                                                                                   |       | 6,861                                               |       | 3,241                                               |       |
| Office and occupancy expense                                                                                                       |       | 1,104                                               |       | 836                                                 |       |
| Provision for loan losses (bond collateral)                                                                                        |       | 62                                                  |       | —                                              |       |
| Gain on sale of real estate owned, net                                                                                             |       | (3                                                  | )          | (259                                                | )          |
| Valuation adjustment-bond collateral held  for sale                                                                                |       | —                                              |       | 4,428                                               |       |
| Professional fees                                                                                                                  |       | 1,142                                               |       | 1,035                                               |       |
| Other operating expenses                                                                                                           |       | 4,319                                               |       | 4,253                                               |       |
| Total expenses                                                                                                                     |       | 30,749                                              |       | 25,376                                              |       |
| Income (loss) before income taxes                                                                                                  |       | 905                                                 |       | (9,568                                              | )          |
| Income tax provision (benefit)                                                                                                     |       | 398                                                 |       | (3,896                                              | )          |
| Net income (loss)                                                                                                                  |       | $                                                   | 507        |                                                | $          | (5,672 | ) |
|                                                                                                                               |       |                                                |       |                                                |       |
| Basic weighted average shares outstanding                                                                                          |       | 7,361,352                                           |       | 7,874,347                                           |       |
| Diluted weighted average shares outstanding                                                                                        |       | 8,161,138                                           |       | 7,874,347                                           |       |
|                                                                                                                               |       |                                                |       |                                                |       |
| Net income (loss) per share-basic                                                                                                  |       | $                                                   | 0.07       |                                                | $          | (0.72 | ) |
|                                                                                                                               |       |                                                |       |                                                |       |
| Net income (loss) per share-diluted                                                                                                |       | $                                                   | 0.06       |                                                | $          | (0.72 | ) |

 

See accompanying notes to consolidatedfinancial statements.

 

4

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AmNet Mortgage, Inc. and Subsidiaries

ConsolidatedStatements of Cash Flows, unaudited

(in thousands)

 
| ** **                                                                            | ** ** | **For the Three Months  Ended March 31, 2005** | ** ** | **For the three Months  Ended March 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |       |                                                |       |                                                |       |
| Net (loss) income                                                                     |       | $                                                   | 507        |                                                | $          | (5,672 | ) |
| Adjustments to reconcile net (loss) income  to net cash used in operating activities: |       |                                                |       |                                                |       |
| Amortization of mortgage assets premiums                                              |       | 5                                                   |       | 762                                                 |       |
| Amortization of capitalized costs                                                     |       | —                                              |       | 70                                                  |       |
| Amortization of deferred compensation                                                 |       | 46                                                  |       | —                                              |       |
| Provision for loan losses                                                             |       | 62                                                  |       | —                                              |       |
| Change in real estate owned provision                                                 |       | 32                                                  |       | 245                                                 |       |
| Gain on sale of real estate owned, net                                                |       | (3                                                  | )          | (259                                                | )          |
| Valuation adjustment—bond collateral                                             |       | —                                              |       | 4,428                                               |       |
| Proceeds from sale of mortgage loans held  for sale                                   |       | 2,527,290                                           |       | 1,641,555                                           |       |
| Mortgage loan originations                                                            |       | (2,713,251                                          | )          | (1,875,298                                          | )          |
| Increase in restricted cash                                                           |       | (750                                                | )          | —                                              |       |
| (Increase)/decrease in accounts receivable—mortgage  loans sold/funded           |       | (1,327                                              | )          | 674                                                 |       |
| Increase in accounts receivable—derivative  financial instruments                |       | (3,584                                              | )          | —                                              |       |
| Decrease/(increase) in derivative financial  instruments                              |       | 328                                                 |       | (1,019                                              | )          |
| (Increase)/decrease in accrued interest  receivable                                   |       | (5                                                  | )          | 397                                                 |       |
| Decrease/(Increase) in deferred taxes                                                 |       | 468                                                 |       | (2,053                                              | )          |
| Increase in other assets                                                              |       | (661                                                | )          | (702                                                | )          |
| Decrease in accrued interest payable                                                  |       | (47                                                 | )          | (7                                                  | )          |
| (Decrease)/increase in accounts payable—derivative  financial instruments        |       | (37                                                 | )          | 631                                                 |       |
| Increase in loss reserve, mortgage loans  sold                                        |       | 854                                                 |       | 206                                                 |       |
| Increase/(decrease) in accrued commissions  and payroll                               |       | 390                                                 |       | (1,414                                              | )          |
| Decrease in accrued expenses and other  liabilities                                   |       | (1,023                                              | )          | (4,426                                              | )          |
| Increase in minority interest                                                         |       | —                                              |       | 8                                                   |       |
| Net cash used in operating activities                                                 |       | (190,706                                            | )          | (241,874                                            | )          |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |       |                                                |       |                                                |       |
| Principal payments on bond collateral,  mortgage loans                                |       | 1,092                                               |       | 17,346                                              |       |
| Proceeds from sale of real estate owned                                               |       | 55                                                  |       | 1,289                                               |       |
| Net cash provided by investing activities                                             |       | 1,147                                               |       | 18,635                                              |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |       |                                                |       |                                                |       |
| Payments on long-term debt                                                            |       | (1,345                                              | )          | (2,151                                              | )          |
| Increase in net borrowings from short-term  debt                                      |       | 177,567                                             |       | 208,634                                             |       |
| Stock options exercised                                                               |       | 23                                                  |       | 3                                                   |       |
| Net cash provided by financing activities                                             |       | 176,245                                             |       | 206,486                                             |       |
| Net decrease in cash and cash equivalents                                             |       | (13,314                                             | )          | (16,753                                             | )          |
| Cash and cash equivalents at beginning of  year                                       |       | 50,600                                              |       | 44,400                                              |       |
| Cash and cash equivalents at end of period                                            |       | $                                                   | 37,286     |                                                | $          | 27,647 |   |
| Supplemental information:                                                             |       |                                                |       |                                                |       |
| Interest paid                                                                         |       | $                                                   | 6,908      |                                                | $          | 3,248 |   |
| Taxes paid                                                                            |       | $                                                   | 710        |                                                | $          | 2,720 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

5

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**AMNETMORTGAGE, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1.  Summary of SignificantAccounting Policies and Practices**

 

*Basis of Financial Statement Presentation*

 

The consolidated financial statements include theaccounts of AmNet Mortgage, Inc., a Maryland corporation, AmericanMortgage Network, Inc., a Delaware corporation and wholly-owned subsidiaryof AmNet Mortgage, Inc., American Residential Eagle, Inc., a Delawarespecial purpose corporation and wholly-owned subsidiary of AmNet Mortgage, Inc.and American Residential Eagle 2, Inc., a Delaware limited purpose corporationand wholly-owned subsidiary of American Residential Eagle, Inc.Substantially all of the assets of American Residential Eagle, Inc. arepledged to support long-term debt in the form of collateralized mortgage bondsand are not available for the satisfaction of general claims of AmNet Mortgage, Inc.American Residential Holdings, Inc. is an affiliate of AmNet Mortgage, Inc.that is consolidated in accordance with FASB Interpretation No. 46R “Consolidationof Variable Interest Entities.” All entities are together referred to as the “Company”or “AmNet.” The Company’s exposure to loss on the assets pledged as collateralis limited to its net investment, as the collateralized mortgage bonds arenon-recourse to the Company. All significant intercompany balances andtransactions have been eliminated in the consolidation of AmNet. Certainreclassifications have been made to prior period amounts to conform to thecurrent presentation.

 

In management’s opinion, all adjustments necessaryfor a fair statement are reflected in the interim period presented. Theseadjustments are of a normal recurring nature. The interim financial data as of March 31,2005 and March 31, 2004 is unaudited; however, in the opinion of theCompany, the interim data includes all adjustments, consisting only of normalrecurring adjustments, necessary for a fair statement of the results for theinterim periods.

 

Sales of mortgage loans are accounted for underStatement of Financial Accounting Standards (SFAS) No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities.” Mortgage loans are sold with the mortgage servicing rightsreleased. Gains or losses on sales of mortgage loans are recognized based onthe difference between the selling prices and the carrying value of the relatedmortgage loans sold. Deferred origination fees and expenses are recognized atthe time of sale.

 

Please refer to the Company’s Form 10-K for theyear ending December 31, 2004, for a detailed discussion of all significantaccounting policies.

 

*Stock Options and Restricted Stock*

 

The Company elected to apply APB Opinion No. 25,“Accounting for Stock Issued to Employees,” in accounting for its stock-basedcompensation plans: the 2004 Equity Incentive Plan and 1997 Employee StockPurchase Plan. Accordingly, no compensation cost has been recognized in thefinancial statements for stock options. Compensation in the form of restrictedstock will be recognized through amortization of deferred compensation. SFAS No. 123“Accounting for Stock Based Compensation” requires pro forma disclosures ofexpense computed as if the fair value-based method had been applied in thefinancial statements of companies that continue to account for sucharrangements under Opinion No. 25.

 

In December 2002, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 148, “Accounting For StockBased Compensation Transition and Disclosure,” which amends SFAS No. 123.SFAS No. 148 requires more prominent and frequent disclosures about theeffects of stock-based compensation. The Company continues to account for itsstock based compensation according to the provisions of APB Opinion No. 25.

 

The FASB amended SFAS No. 123, “Accounting forStock-Based Compensation,” which supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees” in December, 2004. The amendment requires theCompany to record compensation expense for all share-based compensationbeginning January 1, 2006. When adopted, this standard will have anegative impact on earnings of approximately $40 thousand per month in futureperiods since stock options already issued will vest in future periods and beexpensed.

 

During the three month period ending March 31,2005 the Company authorized the issuance of 92,684 shares of restricted stockto executives within the Company which will vest over a three year periodbeginning in February of 2005. The value of these shares is being expensedover the vesting period.  The restrictedshares were issued in April of 2005.  OnMarch 31, 2005 the Company authorized 47,900 restricted stock units to eleven seniorexecutives of the Company with 50% vesting on December 31, 2008 and 2009respectively.

 

Had compensation cost for the Company’s stockoptions been recognized based upon the estimated fair value on the grant dateunder the fair value methodology, the Company’s net income (loss) would havebeen as follows (in thousands except income per share) (unaudited):

 

6

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| ** **                                                                                                                  | ** ** | **Three Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                  | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
|                                                                                                                        |       |                    |       |   |   |
| Net income (loss) as reported                                                                                               |       | $                       | 507        |   | $ | (5,672 | ) |
| Deduct: Total stock-based compensation  expense determined under fair value-based method, net of tax effects (See  Note 10) |       | (426                    | )          | (283 | ) |
| Pro forma net (loss) income                                                                                                 |       | $                       | 81         |   | $ | (5,955 | ) |
| (Loss) income per share:                                                                                                    |       |                    |       |   |   |
| Basic as reported                                                                                                           |       | $                       | 0.07       |   | $ | (0.72 | ) |
| Basic pro forma                                                                                                             |       | $                       | 0.01       |   | $ | (0.76 | ) |
| Diluted as reported                                                                                                         |       | $                       | 0.06       |   | $ | (0.72 | ) |
| Diluted pro forma                                                                                                           |       | $                       | 0.01       |   | $ | (0.76 | ) |

 

The assumptions used to calculate the fair value of optionsgranted are evaluated and revised as necessary to reflect market conditions andthe Company’s experience. There have been no changes in these assumptions from December 31,2004.

 

**Note 2.  Concentrations**

 

For the three months ending March 31, 2005, theCompany sold the majority of its loans (by volume) to three correspondentinvestors, Countrywide Home Loans, Inc. (47.0%), Wells Fargo Funding, Inc.(18.5%) and Morgan Stanley Mortgage Capital Inc. (15.7%). The Company’sconsiderations in deciding where to sell loans are price and operationalefficiency.  The Company also considersspeed of execution and loan product guidelines. The Company believes that all of the loans it sells currently could besold to a number of other investors.

 

In addition, approximately 30% of the dollar valueof loans generated was derived from loans originated in California.  While the Company generates loans on a nationwidebasis, it is anticipated that the Company will continue to have a significantconcentration of loans originated from California.

 

**Note 3.  Income Per Share**

 

The following table illustrates the computation ofbasic and diluted income per share (in thousands, except share and per sharedata) (unaudited):

 
| ** **                                                                                                              | ** ** | **For the Three  Months Ended  March 31, 2005** | ** ** | **For the Three  Months Ended  March 31, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| Numerator:                                                                                                              |       |                                                 |       |                                                 |       |
| Numerator for basic income (loss) per share                                                                             |       | $                                                    | 507        |                                                 | $          | (5,672 | ) |
| Denominator:                                                                                                            |       |                                                 |       |                                                 |       |
| Denominator for basic income (loss) per  share - weighted average number of common shares outstanding during the period |       | 7,361,352                                            |       | 7,874,347                                            |       |
| Denominator for diluted income (loss) per  share                                                                        |       | 8,161,138                                            |       | 7,874,347                                            |       |
|                                                                                                                    |       |                                                 |       |                                                 |       |
| Income (loss) per share - basic                                                                                         |       | $                                                    | 0.07       |                                                 | $          | (0.72 | ) |
| Income (loss) per share - diluted                                                                                       |       | $                                                    | 0.06       |                                                 | $          | (0.72 | ) |

 

For the three months ended March 31, 2005 and2004 there were 1,189,221 and 1,411,917options, respectively, that were antidilutive and, therefore, not included inthe calculations above.

 

**Note 4.  Mortgage Loans Held forSale, net, pledged**

 

AmNet has pledged loans held for sale totaling approximately$424.4 million to secure credit lines(warehouse facilities) from fourfinancial institutions. (See Note 7. “Short-TermDebt.”). Mortgage loans held for sale at March 31, 2005 consist of loanswhich have been committed for sale of approximately$313.0 million and loans available for sale of approximately $111.4 million,all of which are carried at the lower of cost or market value.

 

7

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**Note 5.  Bond Collateral,Mortgage Loans, net**

 

AmNet has pledged collateral in order to secure thelong-term debt issued in the form of CMOs. Bond Collateral Mortgage Loansconsist primarily of subprime credit, 30-year mortgage loans secured by firstliens on one-to-four family residential properties. As of March 31, 2005and 2004, 0% and 17.17%, respectively, ofthe bond collateral mortgage loans were fixed rate loans. The balance of thebond collateral mortgage loans are adjustable-rate mortgages. All BondCollateral Mortgage Loans are pledged to secure repayment of the relatedlong-term debt obligation. All principal and interest (less servicing andrelated fees) on the bond collateral is remitted to a trustee and is availablefor payment of the long-term debt obligation. The obligations under thelong-term debt are payable solely from the bond collateral and are otherwisenon-recourse to AmNet.

 

In March of 2004, approximately $113.9million in Bond Collateral Mortgage Loans and approximately $2.3 million in REObond collateral were reclassified as held for sale.  By September 30, 2004 all of thesemortgage loans including real estate owned, had been sold.  One remaining portfolio (CMO/FASIT 1998-1)was not sold.  Bond collateral for thisstructure is shown as Bond collateral, mortgage loans, net and Bond collateral,real estate owned, net.

 

**Note 6.  Derivative FinancialInstruments**

 

AmNet makes commitments to fund mortgages at setinterest rates, which are referred to as rate locked loan commitments.Additionally, most of the Company’s loans are not yet committed for sale at thetime of funding. Collectively, rate locked loan commitments and funded loansnot yet committed for sale (closed loans) are the Company’s pipeline.  The value of the pipeline will vary dependingon changes in market interest rates between the time that a rate locked loancommitment is made and the time that the loan funds and is committed for saleto an investor.

 

AmNet estimates the number of rate locked loancommitments in the pipeline that will not close in order to calculate itsinterest rate exposure on a daily basis. AmNet then purchases hedginginstruments in order to try to protect profit margins on the pipeline. Thehedging instruments typically used are forward sales of mortgage-backedsecurities (“TBA”) and options on forward sales of mortgage-backed securities.Historically, changes in the price of these instruments closely relate tochanges in the value (price) of loans in the pipeline. The Company has electednot to apply hedge accounting on the loan pipeline.

 

At March 31, 2005 and December 31, 2004AmNet had the following commitments to originate loans and loans not yetcommitted for sale to investors, and offsetting hedge coverage; (dollars inthousands) (unaudited).  (Note thatinterest rate exposure does not directly correspond to the notional amounts of hedgecoverage without applying an option adjusted spread factor to the pipeline andhedges):

 
| ** **                                                                                      | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **Interest rate exposure:**                                                                     |       |                    |       |                       |       |
|                                                                                            |       |                    |       |                       |       |
| Commitments to originate loans at set  interest rates (after applying estimated fallout)        |       | $                       | 582,025    |                       | $          | 471,884 |   |
|                                                                                            |       |                    |       |                       |       |
| Funded loans not yet committed for sale to  investors (closed loans)                            |       | 111,423                 |       | 138,250                    |       |
|                                                                                            |       | 693,448                 |       | 610,134                    |       |
| **Hedge coverage:**                                                                             |       |                    |       |                       |       |
|                                                                                            |       |                    |       |                       |       |
| Forward sales of To Be Announced  mortgage-backed securities (“TBA”)(notional amount) |       | 551,500                 |       | 511,000                    |       |
|                                                                                            |       |                    |       |                       |       |
| Options on forward sales of mortgage-backed  securities (notional amount)                       |       | 90,000                  |       | 100,000                    |       |
|                                                                                            |       | 641,500                 |       | 611,000                    |       |
|                                                                                                 |            |                         |            |                            |            |  |  |

 

The fair value of forward sales of mortgage-backedsecurities and options on forward sales of mortgage-backed securities are basedon quoted market prices for these instruments. The rate locked loan commitmentsare also considered a derivative instrument and are assigned fair values basedon the change in the quoted market value of the underlying loans due to marketmovements, less an estimated factor for loans that will not close (falloutratio). The fallout ratio is affected by the Company’s recent fallout history,interest rate changes and loan characteristics.

 

8

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The following is a summary of the carrying value ofAmNet’s derivative instruments as of March 31, 2005 and December 31,2004 (dollars in thousands) (unaudited):

 
| **March 31, 2005**                                    | ** ** | **Range of Coupon  Rate** | ** ** | **Range of Notional  Amount** | ** **    | **Fair Value** | ** ** | **Range of Expiration  Dates**   | ** ** |
|------------------------------------------------------------|------------|---------------------------|------------|-------------------------------|---------------|----------------|------------|----------------------------------|------------|
| ***Forward sales of mortgage-backed securities  (TBAs):*** |       |                      |       |                          |          |           |       |                             |       |
| Fifteen year Fannie Mae                                    |       | 4.5-5.5 MBS               |       | $                             | 3,000 -11,500 |           | $          | 93                               |       | May 17-Jun 16, 2005 |   |
| Thirty year Fannie Mae                                     |       | 5.0-6.0 MBS               |       | 500 - 25,000                  |          | (1,039         | )          | Apr. 13-Jun 13, 2005        |       |
| Thirty year Ginnie Mae                                     |       | 5.0-6.0 MBS               |       | 500 - 5,000                   |          | (147           | )          | May 19-Jun 20, 2005         |       |
| Forward commitments by investor                            |       | 5.25-5.875                |       | 2,000 - 15,000                |          | 165            |       | Apr.-May 31, 2005           |       |
| ***Options on TBAs:***                                     |       |                      |       |                          |          |           |       |                             |       |
| Thirty year Fannie Mae                                     |       | 5.5 Puts                  |       | 10,000 - 25,000               |          | 774            |       | Apr. 13 - May 12, 2005 |       |
| ***Rate locked loan commitments***                         |       |                      |       |                          |          | 442            |       |                             |       |
| ***Total derivative financial instruments***               |       |                      |       |                          |          | $              | 288        |                             |       |   |
|                                                            |            |                           |            |                               |               |                |            |                                  |            |  |  |

 
| **December  31, 2004**             | ** ** | **Range of Coupon  Rate** | ** ** | **Range of Notional  Amount** | ** **     | **Fair Value** | ** ** | **Range of Expiration  Dates** | ** ** |
|----------------------------------------------|------------|---------------------------|------------|-------------------------------|----------------|----------------|------------|--------------------------------|------------|
| ***TBA***                                    |       |                      |       |                          |           |           |       |                           |       |
| Fifteen year Fannie Mae                      |       | 4.5-5.5 MBS               |       | $                             | 1,000 - 20,000 |           | $          | (101                           | )          | Jan 19-Mar 17, 2005 |   |
| Thirty year Fannie Mae                       |       | 5.0-6.0 MBS               |       | 500 - 20,000                  |           | (224           | )          | Jan 3-Mar 14, 2005             |       |
| Thirty year Ginnie Mae                       |       | 5.0-5.5 MBS               |       | 500 - 6,000                   |           | (82            | )          | Jan 20-Mar 22, 2005            |       |
| Forward commitments by an investor           |       | 4.625-5.75                |       | 2,000 - 20,000                |           | 584            |       | Jan 14-Feb 15, 2005            |       |
| ***Options on TBAs:***                       |       |                      |       |                          |           |           |       |                           |       |
| Thirty year Fannie Mae                       |       | 5.0-5.5 Puts              |       | 20,000 - 30,000               |           | 2              |       | Jan 13, 2005                   |       |
| ***Rate locked loan commitments***           |       |                      |       |                          |           | 437            |       |                           |       |
| ***Total derivative financial instruments*** |       |                      |       |                          |           | $              | 616        |                           |       |   |
|                                              |            |                           |            |                               |                |                |            |                                |            |  |  |

 

Thefollowing is a summary of the components within Total derivative financialinstruments and market adjustments income (expense) (dollars in thousands)(unaudited):

 
| ** **                                                                       | ** ** | **For the Three  Months Ended  March 31, 2005** | ** ** | **For the Three  Months Ended  March 31, 2004** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| Derivative financial instruments and market  adjustments:                        |       |                                                 |       |                                                 |       |
| TBA gain/(loss) - closed positions                                               |       | $                                                    | 3,968      |                                                 | $          | (5,995 | ) |
| Options gain - closed positions                                                  |       | 31                                                   |       | —                                               |       |
| Change in value of TBAs - open positions                                         |       | (1,104                                               | )          | 1,468                                                |       |
| Change in value of Options - open positions                                      |       | 160                                                  |       | (960                                                 | )          |
| Change in market adjustment on interest  rate locked loan commitments            |       | 4                                                    |       | (1,157                                               | )          |
|                                                                             |       |                                                 |       |                                                 |       |
| Total derivative financial instruments and  market adjustments (expense) income: |       | $                                                    | 3,059      |                                                 | $          | (6,644 | ) |

 

**Note7.  Short-Term Debt**

 

As of March 31, 2005, mortgage loans held forsale totaling $424.4 million werepledged as collateral for warehouse facility borrowings of $409.8 million with four financialinstitutions. At March 31, 2005, the Company’s maximum borrowing capacitycombined from these four financial institutions was $1.4 billion.  The table below shows the age of pledgedmortgage loans as of March 31, 2005 (in thousands) (unaudited):

 

9

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| **Aging Range**     | ** ** | **Number of Loans** | ** ** | **Warehouse Line Usage** | ** ** | **% of Total** | ** ** |
|---------------------|------------|---------------------|------------|--------------------------|------------|----------------|------------|
| ** **          | ** ** | ** **          | ** ** | ** **               | ** ** | ** **     | ** ** |
| Less than 30 days   |       | 1,911               |       | $                        | 384,525    |           | 93.8       | % |
| 30 to 60 days       |       | 10                  |       | 896                      |       | 0.2            | %          |
| 61 days to 90 days  |       | 130                 |       | 23,749                   |       | 5.8            | %          |
| 91 days to 120 days |       | 18                  |       | 633                      |       | 0.2            | %          |
| Total               |       | 2,069               |       | $                        | 409,803    |           | 100.0      | % |

 

Of the $409.8 million of warehouse line usage at March 31,2005, $145.9 million was funded throughuncommitted warehouse facilities.

 

The warehouse facilities mature on various dates in2005 and 2006, and generally bear interest at one-month LIBOR plus spread. Theweighted average borrowing rates were 4.14% and 3.65% at March 31, 2005and December 31, 2004 respectively. The weighted-average borrowing ratewas 3.97% for the three months ending March 31, 2005 and 3.65% for the threemonths ending December 31, 2004. The weighted-average facility fee was..23% for the three months ending March 31, 2005 and 0.23% for the threemonths ending December 31, 2004 on the aggregate committed amount of thewarehouse facilities. The warehouse facilities are repaid as principal paymentson mortgage loans are received, or as the mortgage loans are sold. We aregenerally allowed to borrow from 96% to 99% of the lesser of par or marketvalue of the loans, and must comply with various lender covenants restricting,among other things, the absolute level of leverage, requiring minimum levels ofcash reserves, profitability and stockholders’ equity. We are also, in acertain instance, required to maintain a restricted cash account with one ofour warehouse lenders. During the quarter ending March 31, 2005 we wererequired to add $750 thousand to our cash account due to general businessconditions.  As of March 31, 2005the Company was in compliance with all warehouse line facility covenants. Webelieve we are in good standing with all of our warehouse lenders.

 

**Note 8.  Long-Term Debt Relatedto Securitizations, net**

 

The components of the long-term debt at March 31,2005 and December 31, 2004, along with selected other information aresummarized below (dollars in thousands) (unaudited):

 
| ** **                          | ** ** | **CMO/FASIT  1998-1  Securitization** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| **At March 31, 2005**          | ** ** | ** **                            | ** ** |
| Long-term debt                      |       | $                                     | 12,155     |   |
| Capitalized costs on long-term debt |       | —                                |       |
| Total long-term debt                |       | $                                     | 12,155     |   |
| ** **                          | ** ** | ** **                            | ** ** |
| Weighted average financing rates    |       | 3.54                                  | %          |
| ** **                          | ** ** | ** **                            | ** ** |
| **At December 31, 2004**       | ** ** | ** **                            | ** ** |
| Long-term debt                      |       | $                                     | 13,500     |   |
| Capitalized costs on long-term debt |       | —                                |       |
| Total long-term debt                |       | $                                     | 13,500     |   |
| ** **                          | ** ** | ** **                            | ** ** |
| Weighted average financing rates    |       | 3.46                                  | %          |

 

Thetable below shows the Company’s expected future payments for future obligationsunder long-term debt agreements (000’s):

 
| ** **                                             | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|
| **Contractual Obligations as of  March 31, 2005** | ** ** | **Total**                  | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than 5  Years** | ** ** |
|                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Long-Term Debt                                         |       | $                          | 12,155     |   | $ | 6,338 |   | $ | 4,512 |   | $ | 1,305 |   | $ | — |   |
|                                                        |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 9. Recourse Liabilities Associated With Loan Sales**

 

We sell loans to private investors and otherfinancial institutions. Each loan sale is subject to certain terms andconditions, which generally require us to repurchase loans or indemnify andhold the investor harmless against any loss arising from early payoff defaultactivity and errors and omissions in the origination, processing and/orunderwriting of the loans. We are subject to this risk for loans that weoriginate as well as loans we acquire from brokers and correspondents. At March 31,2005 and December 31, 2004, we had approximately $5.6 million and $4.6 million,respectively, recorded as an estimate for losses that may occur as a result ofthe guarantees described above based on trends in repurchase andindemnification requests, actual loss experience, known and inherent risks inthe loans, and current economic

 

10

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conditions. The length of the indemnificationperiod, which varies by investor and the nature of the potential defect, mayextend to the life of the loan.

 

Under most of our loan sale agreements, we are also obligatedto refund premiums to investors if loans pay off within a certain number ofdays after the settlement of our loan sale. These refunds are referred to asearly prepayment premiums or (“EPPs”). The EPP exposure period generally rangesfrom 60-120 days after the settlement date. At March 31, 2005 and December 31,2004, we had approximately $772 and $894 thousand, respectively, recordedas an estimated reserve for premium refunds that may occur as a result of loanssales which were still subject to EPP liability.

 

Reserveactivity for the periods presented is as follows (dollars in thousands):

 
| ** **                     | ** ** | **Reserve For  Repurchase  Obligations** | ** ** | **Premium  Prepayment  Reserve** | ** ** | **Total** | ** ** |
|--------------------------------|------------|------------------------------------------|------------|----------------------------------|------------|-----------|------------|
| Balance at December 31, 2003   |       | $                                        | 2,841      |                             | $          | 298       |       | $ | 3,139 |   |
| Payments                       |       | (1,784                                   | )          | (2,519                           | )          | (4,303    | )          |
| Provisions                     |       | 3,529                                    |       | 3,115                            |       | 6,644     |       |
| Balance at December 31, 2004   |       | 4,586                                    |       | 894                              |       | 5,480     |       |
| Payments                       |       | (142                                     | )          | (617                             | )          | (759      | )          |
| Provisions                     |       | 1,118                                    |       | 495                              |       | 1,613     |       |
| Balance at March 31, 2005 |       | $                                        | 5,562      |                             | $          | 772       |       | $ | 6,334 |   |

 

The balances for the Reserve For RepurchaseObligations and Premium Prepayment Reserve are included in the ConsolidatedBalance Sheets in the Recourse liabilities associated with loan sales line item.The payments and provisions represent the yearly change of the balance sheet accounts.The related expense for the three months ending March 31, 2005 and March 31,2004 is included in the Consolidated Statements of Operations and Comprehensie Income (Loss) in the revenue section, gainon sales of loans line item.

 

**Note 10.  StockPlans**

 

As of March 31, 2005, shares of common stockwere reserved for issuance under the Company’s stock option plans as follows(unaudited):

 
| ** **                                                      | ** ** | **1997  Employee  Stock  Purchase  Plan** | ** ** | **2004  Equity  Incentive  Plan** | ** ** | **1997 Stock  Plans  (New  issuances  terminated  in 2004*)** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------------------|------------|-----------|------------|
|                                                            |       |                                      |       |                              |       |                                                          |       |      |       |
| Total Stock Authorized at 1/1/2005                              |       | 20,000                                    |       | 600,504                           |       | 1,899,496                                                     |       | 2,520,000 |       |
| Total Options, Restricted Stock, Restricted  Stock Units Issued |       | —                                    |       | 340,584                           |       | 1,899,496                                                     |       | 2,240,080 |       |
| Shares Reserved For Issuance at 3/31/05                         |       | 20,000                                    |       | 259,920                           |       | —                                                        |       | 279,920   |       |

 

----

* The 1997 Stock Plan continues until alloptions outstanding under it are terminated or exercised. No new options willbe granted.

** Includes 92,684 shares of restricted stockauthorized February 2005 and issued April 2005.

 

Stock option activity during the three months endingMarch 31, 2005 was as follows (unaudited):

 
| ** **                        | ** ** | **Number of Options** | ** ** | **Weighted-Average Exercise Price** | ** ** |
|-----------------------------------|------------|-----------------------|------------|-------------------------------------|------------|
|                              |       |                  |       |                                |       |
| Balance at December 31, 2004 |       | 1,829,271             |       | $                                   | 8.12       |   |
| Granted                           |       | 200,000               |       | 10.50                               |       |
| Forfeited                         |       | (34,963               | )          | 7.34                                |       |
| Exercised                         |       | (5,374                | )          | 4.23                                |       |
| Balance at March 31, 2005    |       | 1,988,934             |       | $                                   | 8.38       |   |

 

11

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At March 31, 2005, the range of exercise pricesfor outstanding options was $1.75 to $15.00 and the weighted-average remainingcontractual life of outstanding options was 6.11 years.The weighted average exercise price of exercisable outstanding options was $8.79. The table below shows options and prices for all outstanding options at March 31,2005 (unaudited):

 
| **Option Exercise Price Range** | ** ** | **Vested** | ** ** | **Unvested** | ** ** | **Number of Options** | ** ** |
|---------------------------------|------------|------------|------------|--------------|------------|-----------------------|------------|
|                            |       |       |       |         |       |                  |       |
| $1.75 to $3.00                  |       | 125,968    |       | 38,366       |       | 164,334               |       |
| $3.01 to $5.00                  |       | 276,894    |       | 177,356      |       | 454,250               |       |
| $5.01 to $7.50                  |       | 309,760    |       | 39,440       |       | 349,200               |       |
| $7.51 to $10.00                 |       | 141,803    |       | 118,947      |       | 260,750               |       |
| $10.01 to $12.50                |       | 291,008    |       | 213,292      |       | 504,300               |       |
| $12.51 to $15.00                |       | 256,100    |       | —       |       | 256,100               |       |
|                            |       | 1,401,533  |       | 587,401      |       | 1,988,934             |       |

 

For the first quarter ending March 31, 2005 theper share weighted-average fair value of stock options granted was $2.13. Thisvalue was calculated using the Black-Scholes option-pricing model, using thefollowing weighted-average assumptions (unaudited):

 

| ** **              | ** ** | **Three Months  Ending  March 31, 2005** | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|
| Expected dividend yield |       | 0.00                                          | %          |
| Risk-free interest rate |       | 4.18                                          | %          |
| Expected volatility     |       | 9.67                                          | %          |
| Expected life (years)   |       | 5                                             |       |

 

On February 7, 2005 the Company’s CompensationCommittee authorized payments under the Long-Term Incentive Cash Plan. However,the Committee determined that it is in the best interests of the Company to payhalf of each award value in cash and half in restricted stock of the Company.Consequently, 92,684 restricted shares of the Company’s stock were authorizedto be issued to the executives of the Company with a three year vesting period. Issuance of the restricted stock wasmade in April 2005.  The cost to theCompany will be approximately $278 thousand per year for three years beginningin 2005. On March 31, 2005 the Committee authorized 47,900 restrictedstock units to eleven senior executives of the Company with 50% vesting on December 31,2008 and 2009 respectively. The result of both awards was $1.3 million ofdeferred compensation, which was reduced during the quarter ending March 31,2005 to $1.2 million by monthly amortization and included in the equity sectionof the Consolidated Balance Sheets.

 

**Note 11.  Income Taxes**

 

During 1997, the Company elected to be taxed as areal estate investment trust (“REIT”) under the Internal Revenue Code of 1986,as amended. As a result of this election, the Company was not, with certainexceptions, taxed at the corporate level on the net income distributed to theCompany’s stockholders. On July 19, 2002, the stockholders of the Companyapproved two proposals that allowed for the conversion of the Company from aREIT to a fully taxable entity. On February 7, 2003, the Company filed anotice with the Internal Revenue Service of its decision to relinquish its REITstatus, effective January 1, 2003.

 

As a result of the conversion to a fully taxablestatus, an income tax benefit and related deferred tax asset of$5.7 million was recorded in 2003. As of March 31, 2005, our deferredtax asset amounts to $10.2 million which reflects a change in the taxprovision from December 31, 2004. The tax provision was calculated basedon an assumed income tax rate of 44% for 2005.

 

At March 31, 2005, in determining the possiblefuture realization of deferred tax assets, management considers future taxableincome from the following sources: (a) reversal of taxable temporarydifferences, (b) future operations exclusive of reversing temporarydifferences, and (c) tax planning strategies that, if necessary, would beimplemented to accelerate taxable income into years in which net operatinglosses might otherwise expire.

 

As the Company’s net income and its projections ofnet income vary over time, the expected realizability of its deferred taxassets may change. If the Company determines that its ability to realize all ofits deferred taxes is unlikely, the Company will set up certain valuationallowances against those assets, which would negatively affect its net income.However, currently, we expect to fully utilize our deferred tax assets.

 

12

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**Note 12.  Commitments andContingencies**

 

*Lease Commitments*

 

The Company rents certain premises and equipmentunder non-cancelable operating leases expiring at various dates through theyear 2010. Rental expense under such leases is included in office and occupancyexpense, and other operating expenses. Lease costs totaled $985 thousand in the three months ending March 31, 2005 and$913 thousand in the three months ending March 31, 2004. Futureminimum lease payments under these leases as of March 31, 2005, are asfollows (dollars in thousands) (unaudited):

 
| **Year ending March 31:** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|
| 2006                           |       | $          | 3,882      |   |
| 2007                           |       | 2,681      |       |
| 2008                           |       | 2,059      |       |
| 2009                           |       | 1,413      |       |
| 2010                           |       | 588        |       |
| After March 31, 2010      |       | —     |       |
|                           |       | $          | 10,623     |   |

 

13

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ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

*The statements contained in this Form 10-Qthat are not purely historical are forward looking statements, includingstatements regarding our expectations, hopes, beliefs, intentions, orstrategies regarding the future. Such statements use words such as “expect,” “will,”“may,” “anticipate,” “goal,” “intend,” “seek,” “believe, “target”, “ “plan,” “strategy”and derivatives of such words. Forward looking statements in this reportinclude those statements regarding:*

 

•                  *Our future results ofoperations and the factors that could impact our results;*

 

•                  *The factors that may impactour future liquidity;*

 

•                  *Our strategies;*

 

•                  *Changes in the mortgagemarket and competitive factors;*

 

•                  *The estimates we use inpreparing our financial statements and the impact of accounting standards;*

 

•                  *The risks that may impactour business.*

 

*These forward looking statementsare based on information available to us on the date hereof, and we assume noobligation to update any such forward looking statements. It is important tonote that our actual results and timing of certain events could differmaterially from those in such forward looking statements.  Some of the most significant risks that weface that could harm our future operating results or prevent us from meetingour goals and objectives are the following:*

 

•                  *We are maximizing the utilizationof our existing infrastructure while managing our staffing levels and growingour sales presence in existing and new markets. Due to market contraction, ourstrategy requires us to capture an increasing percentage of the market in ahighly competitive environment, which will put pressure on our gross margins.If we are not able to do this, we would likely experience losses (due to ourincreased level of expenses or lower gross margins).*

 

•                  *We have expanded our branchsystem and fixed expenses over the past year in a contracting market.  Additionally, our market share increases aredependent on retaining and expanding our sales force and broker customer base,which is more challenging in a highly competitive market environment. Inparticular we must remain competitive relative to our pricing of loans, whichcould cause us to lower our gross margins.*

 

•                  *We sell a substantialportion of our loans to two of our competitors. If these competitors stop purchasing our loans on favorable terms, wecould be required to find alternate purchasers and/or accept unfavorableterms.  In either case, this could reduceour revenues and earnings.*

 

•                  *In 2004 we made thestrategic decision to create a correspondent lending operating platform and in2005 we began purchasing closed loans from small mortgage bankers and otherfinancial institutions.  Some of therisks associated with this channel are different from our wholesale lendingbusiness, and our Company has no experience competing in this highlycompetitive segment of the mortgage market. We have committed overhead to this new channel, and expect to makeadditional investments in 2005 to try to build this new source of revenue.  However it is difficult to evaluate ourcompetitive posture and growth prospects for this channel, and we may not beable to compete effectively against larger, well established correspondentlenders.*

 

•                  *In 2004 we began offeringsubprime loans to wholesale brokers, and we intend to increase our proportionof subrpime loans significantly in 2005 as we hire dedicated account executivesto call on mortgage brokers who specialize in subprime loans.  While we have a centralized underwriting andfunding center to process these loans and have hired experienced personnel,subprime loans are more complex and any errors we make in underwriting orfunding these loans could cause loans to be un-saleable or to be sold at asignificant loss.  Additionally subprimelending is extremely competitive making it difficult to evaluate the potentialgrowth prospects and profit margins for this product line.*

 

•                  *We are dependent on ourwarehouse lending facilities to operate our business.  We must maintain, renew or replace ourwarehouse lines of credit in order to continue to fund loans.  We believe we are in good standing with ourwarehouse lenders, however, any future reductions or restrictions in ourwarehouse capacity would reduce the volume of loans that we could fund andwould therefore reduce our revenues and earnings.*

 

•                  *A large portion of theloans we fund are concentrated in California and therefore our results aresubject to adverse economic conditions in California.*

 

•                  *Our hedging strategies maynot be successful in mitigating risks associated with interest ratechanges.  In particular, for new loan productswith shorter terms and loan products with adjustable rates, hedging strategiesmay not be effective at certain times.*

 

*Other factors that may impact ourresults, include but are not limited to, general economic conditions, the worldpolitical climate, unexpected expense increases, overall interest rates,volatility in interest rates, the shape of the yield curve,  changes in accounting rules or theirapplication, changes in the margins for gains on sale of originated loans,changes in the demand of mortgage brokers for our loan products and services orof loan purchasers for originated loans, undetected fraud on the part of*

 

14

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*borrowers,brokers, appraisers or our employees, changes in the mortgage industryregulatory environment, increases in prepayment rates and default rates,changes in the requirements of correspondent loan programs or our ability tomeet such requirements and changes in our anticipated cash requirements. Theseand other risk factors that could cause actual results to differ materially areset forth in more detail in this item under the heading “Business Risk Factors.”*

 

15

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**Introduction**

 

Our Company was founded in 1997 as an externallymanaged Real Estate Investment Trust. Until 2001, substantially all of ouroperations consisted of the acquisition of residential mortgages for investmentpurposes. In mid-2001, our Board of Directors and management determined that itwas in the best interest of the stockholders to fundamentally shift ourstrategic direction to mortgage banking. We started the transition in 2001 byforming a subsidiary, American Mortgage Network, Inc., to engage in thewholesale lending segment of the mortgage banking industry. Effective January 1,2002 we began reporting our financial results in two segments: the MortgageBanking Business and the Mortgage Asset Portfolio Business. In January of2003 we elected to relinquish our REIT status with the Internal Revenue Service,which had previously been approved by our stockholders. In order to moreclosely align our name with our mortgage banking focus, we changed our namefrom American Residential Investment Trust, Inc. to AmNet Mortgage, Inc.,as of May 5, 2004. On September 29, 2004 our Company’s stock begantrading on the NASDAQ National Market System under the trading symbol AMNT.Previously we were listed on the American Stock Exchange under the tradingsymbol INV and prior to that we were listed on the NYSE.

 

In March of 2004, we began providing loanprograms tailored to sub-prime borrowers with credit that does not meetconventional guidelines or who require non-conventional loan terms with respectto loan-to-value, debt ratio, cash-out or documentation. We offer sub-primeloans through several different loan programs. However, our Company policy isnot to provide high cost loans which are defined as mortgage loans that featureeither an interest rate or points and fees charged in connection with loansthat exceed certain thresholds prescribed by federal or state law or localordinances. Sub-prime lending provides loan solutions for borrowers with creditproblems who would not qualify for other lending products we offer. The unitcost to originate these loans is higher due to more labor intensiveunderwriting and funding processes, higher sales commission rates and a higherpercentage of loan applications that are not approved or funded. As a result ofhigher credit risk and cost, we must charge higher interest rates for assumingthis risk. To help mitigate the additional risks, underwriting for these loansis performed at our centralized sub-prime operations center located in our SanDiego headquarters office as opposed to the regional underwriting and funding weutilize for all other wholesale loan products we offer. Our long-term strategyis to grow this segment of our business to up to 20% of our loan fundingvolume. Our subprime volume was one percent of total loan volume funded in the firstquarter of 2005 and is expected to reach four percent of total loan volume bythe end of 2005. We have hired seasoned staff to augment our expertise in thisarea of lending. We also have negotiated with investors to buy the loans wegenerate and amended our agreements with existing warehouse lenders to financethese loans.

 

In the second half of 2004 we made a strategicdecision to create a correspondent lending channel. Incremental revenues fromthis channel will help us to more fully leverage our wholesale lendinginfrastructure, particularly our headquarter administrative costs.Correspondents are larger brokers, mortgage bankers or other financialinstitutions who originate and fund loans and sell closed loans on a servicing-releasedbasis. We have hired an experienced sales team and established an operationscenter in Columbia Maryland to process these loan purchases. We began originatingloans through this channel in the first quarter of 2005.

 

We originate mortgage loans predominately to primequality borrowers (except our subprime division) secured by first trust deedsthrough a network of independent mortgage brokers. A concentration of ourbusiness is in California (30% of loans originated in the three months ending March 31,2005); however, we do business on a nationwide basis. We sell the loans that weoriginate to institutional purchasers on a servicing-released basis.

 

We use a dedicated sales force to offer our loanproducts to approved wholesale mortgage brokers, who refer their clients’ loansto us for underwriting and funding. Loans meeting our underwriting criteria aregenerally approved and funded at our regional underwriting loan centers. Ourheadquarters office performs various functions through multiple departmentsincluding establishment of policy, risk management, secondary marketing, loandelivery to investors, finance, accounting, administration, marketing, humanresources, and information technology.

 

At March 31,2005, we are operational in thirty office locations which represents a netreduction of two offices from December 31, 2004. We had a total of 784employees at March 31, 2005 which is an increase of 25 employees from December 31,2004.

 

We borrow funds under our warehouse creditfacilities to fund and accumulate loans prior to sale to correspondent investorson a servicing-released basis. Currently we have four warehouse facilities thatenable us to borrow up to an aggregate of $1.4 billion. We have also beenpreapproved by one lender for an additional $200 million in borrowing capacityas we need it. We are generally allowed to borrow from 96% to 99% of the lesserof par or market value of the loans, and must comply with various lendercovenants requiring, among other things, minimum levels of cash reserves,certain levels of profitability and restricting our leverage ratios.

 

16

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We generate revenue in our mortgage banking businessin three principal ways:

 

•                                          *Gain on loan sales*. Loan rates, fees and discount points areset based on our targeted gain on sale. This is referred to as our pricingmargin. We currently sell the loans that we originate to institutionalpurchasers on a servicing-released basis for cash. We record the differencebetween the sale price of loans that we have sold and our cost to originate theloans sold as gain on loan sales. We recognize revenue at the time that wecomplete the loan sale, which is generally when we receive loan sale proceedsfrom the purchaser.  Gain on loan salesalso includes fees we charge for loan origination such as underwriting fees,loan document preparation fees and wiring fees, net of premiums we pay tobrokers.

 

•                                          *Hedging and market adjustments.*Hedging instruments are used to help mitigateexposure to interest rate fluctuations and protect our pricing margins. Thegains or losses from this activity will be highly negatively correlated torevenue derived from loan sales. Typically higher than expected gains from thesale of loans will be offset by hedging losses and market adjustments, whilelower than expected gains from the sale of loans will be offset by hedginggains. The value of our rate lock loan commitments are measured at the end ofeach accounting period. The change from the prior period is recorded as amarket adjustment. Hedging gains or losses and market adjustments are includedin the consolidated statements of operation and comprehensive income asderivative financial instruments and market adjustments.

 

•                                          *Interest income*. We earn interest on a loan from the time wefund it until the time we sell it. The interest that we earn is partiallyoffset by the interest we pay under our warehouse credit facilities used tofinance our mortgage originations.

 

Relativeto our Mortgage Asset Portfolio, we made a strategic decision to sell the vastmajority of our mortgage portfolio assets in the first quarter of 2004 and wecompleted the sales in the third quarter of 2004. The remaining mortgage assetsof approximately $13.7 million are pledged to secure long term debt totalingapproximately $12.2 million.  These assetsare referred to as our CMO/FASIT 1998-1 Securitization and are referred to onthe balance sheet as bond collateral. Our Company over-collateralized the bonds at the time of issuance bypledging assets in excess of new liabilities.  These bond collateral assets are carried at the lower of cost or netrealizable value.   At March 31,2005, our bond collateral assets were carried on our balance sheet atapproximately $1.5 million more than our remaining long term debt.

 

On a cash basis, we continue to receive principal and interest paymentson the bond collateral assets and these proceeds are used by the bond trusteeto service and pay down the long term debt. Any excess cash flow is remitted tous on a monthly basis. The long term debt is non-recourse to our Company,meaning that only the principal and interest received from the bond collateralassets, combined with any proceeds from the sale of REO loans, can be used toservice the bond liabilities.  As such,while we do generally receive some net cash flow from the bond collateralassets each month, we will never be required to have any cash outlay associatedwith these assets and the related long term liability.

 

The expenses of our business include variable costssuch as commissions, loan expenses and contract labor, as well as fixedoverhead expenses such as personnel, rent, supplies and utilities.

 

Due to the immateriality of our mortgageasset portfolio business, we are discontinuing our segment reporting.  As such, management’s discussion and analysisof financial condition and our results of operations will be presented on aconsolidated basis beginning with the three months ended March 31, 2005.

 

***Our 1st Quarter 2005 Highlights (Executive Overview)***

 

Our consolidated operating results for the firstquarter of 2005 were dominated by the following:

 

•                  We funded approximately $2.7 billion inloan volume for the period while fundings for the same period in 2004 were $1.9billion.  This represents an increase ofapproximately 44.9% while the overall mortgage market declined fromapproximately $619 billion for the quarter ending March 31, 2004 toapproximately $588 billion for the quarter ending March 31, 2005,according to the Mortgage Bankers Association (“MBA”). Key reasons for this increaseare: a sales force increase (90 account executives at March 31, 2004 comparedto 168 at March 31, 2005), a maturing of our branch network resulting inbetter market penetration and a broader range of loan products offered by theCompany. The graph below shows monthly loan production comparisons between the firstquarters of 2005 and 2004.

 

17

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| ** **                                  | ** ** | **(in millions)** | ** ** |
|---------------------------------------------|------------|-------------------|------------|
| ** **                                  | ** ** | **2005**          | ** ** | **2004** | ** ** |
| January                                     |       | $                 | 727        |   | $ | 436 |   |
| February                                    |       | 816               |       | 557 |   |
| March                                       |       | 1,164             |       | 877 |   |
| Totals – Quarters ending March 31 |       | $                 | 2,707      |   | $ | 1,870 |   |

 

•                                          Revenues, net of derivative financialinstruments and market adjustments, totaled $31.7 million. This revenue was sufficientto cover variable and fixed expenses totaling $30.8 million resulting in apretax profit of $0.9 million.

 

•                                          Unrestricted cash and cash equivalentsdecreased by $13.3 million during the first quarter of 2005 from $50.6 millionat December 31, 2004, to $37.3 million at March 31, 2005. The key factors in the decrease were cash invested inwarehouse haircuts (1% to 4% of loans held for sale) and advances made tomortgage brokers until loans are sold and loans which are held for sale andfunded entirely with Company cash (approximately $4.3 million at March 31,2005).

 

•                                          Our mortgage asset portfolio receivedapproximately $1.1 million in principal and REO sale proceeds. The Companyreduced related long term debt by approximately $1.3 million.

 

**Critical Accounting Policies**

 

The following analysis of financial condition andresults of operations are based upon our consolidated financial statements andthe notes thereto, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”). Thepreparation of these consolidated financial statements requires us to make anumber of estimates and assumptions that affect the reported amounts anddisclosures in the consolidated financial statements. On an ongoing basis, weevaluate our estimates and assumptions based upon historical experience andvarious other factors and circumstances. We believe that our estimates andassumptions are reasonable in the circumstances; however, actual results maydiffer significantly from these estimates and assumptions, which could have amaterial impact on the carrying value of assets and liabilities at the balancesheet dates and our results of operations for the reporting periods.

 

We believe that estimates and assumptions areimportant factors in the portrayal of our financial condition and results ofoperations. Our critical accounting policies that require management’s mostsubjective judgments include the following:

 

•                  Derivative hedging activities / determinationof fair values

•                  Fair value of mortgage loans held for sale

•                  Income taxes and benefits

 

18

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•                  Recourse liabilities associated with loansales

 

Pleaserefer to the Company’s Form 10-K for the year ending December 31, 2004,for a detailed discussion of these policies.

 

**Management’s Financial Analysis**

 

We presentnon-GAAP financial measures in this report. We believe that these measures arehelpful in understanding our business and operating results. You should notconsider our non-GAAP financial measures as a replacement for any GAAPfinancial measures. The non-GAAP financial measures that we present are asfollows:

 

*Gross Margins -*Gainsfrom the sale of loans are a function of the volume of loans sold in theperiod, and the value of the loans at the time these loans are committed forsale to an investor.  We also generategains and losses on the derivative financial instruments that we acquire tohedge our targeted gain on sale of the loans. We consider our gross margin to be the sum of our (i) gain on saleof loans and (ii) total derivative financial instruments and marketadjustments.  This sum expressed as apercentage of our loan sales volume is our gross margin percentage (or basispoint gross margin).

 

When we develop the pricing of our loans, weincorporate a target gross margin percentage that we expect to obtain.  We then provide rate lock commitments toborrowers based on that pricing and the related target gross marginpercentage.  However, if market interestrates increase between the time we make a rate lock commitment and commit aloan for sale, then the market value of the loan would be reduced and we wouldnot achieve our target margin percentage. If interest rates decrease, then the opposite would be true.Accordingly, we acquire derivative financial instruments to hedge, or protect ourtarget margins from interest rate increases. We hedge our loans from the time of a rate lock commitment to the timethe loan is committed for sale to an investor.

 

If our hedging is effective, as the value ofour pipeline decreases and we record a lower gain on sale, our hedgeinstruments increase in value to offset the reduced gain.  Alternatively, as the value of our pipelineincreases, we record a larger gain on sale but the larger gain is offset by aloss on our hedges.  Accordingly, if wesuccessfully hedge our pipeline, the gross margin percentage that we ultimatelyearn will be close to our target gross margin percentage and we will not besignificantly impacted by interest rate changes.  In order to evaluate the effectiveness of ourhedging program, management believes that it is important to evaluate our grossmargins and then compare our actual gross margin percentage against our targetgross margin percentage.

 

*Net Interest Income*- We earn interest income and incurinterest expense in our operations. We earn interest on a loan from the datethe loan is funded until its sale to an investor. Accordingly, interest incomeis a function of the volume of loans funded, the interest rate on the loans andthe length of time the loans are held prior to sale. To the extent we fundloans with borrowings under our warehouse facilities, we record interestexpense based on the same factors. We also generate revenue from the interestwe receive on the bond collateral mortgage loans we hold for investment and weincur interest expense on the borrowings used to finance our loan fundings andbond collateral.

 

Because the interest income and interest expense ofour business are closely related and dependant on many of the same factors, inparticular the volume of loans we originate, management believes that it ishelpful in understanding our operations to analyze the impact of interestincome on mortgage loans held for sale and related short term debt expensetogether. For this reason, the discussion below provides information regardingthe net interest income (interest income less interest expense). Managementbelieves that this is consistent with how financial analysts typically considerinterest in analyzing mortgage banking operations.

 

*Fixed and Variable Operating Expenses*— For the same reasons described in “NetInterest Income” above, the explanation of expenses includes a discussion ofour operating expenses, excluding interest expense. Because certain otherexpenses we incur in the mortgage banking business, such as commissions andcontract labor, also vary with the volume of our loan originations, managementbelieves that it is important in understanding our business to consider thevariable and fixed expenses separately. Accordingly, we have included anestimated breakdown between variable and fixed amounts for each category of ouroperating expenses. Management believes that this will enable a betterunderstanding of our results and the likely impact of future changes in ourorigination volumes.

 

**InterestRate Risk Management And The Relationship Between Our Hedging Instruments AndThe Market Adjustments And Gain On Sale That We May Record For A Period**

 

Our mortgage banking business is subject to the riskof changing interest rates between the time we commit to extend credit at a setinterest rate (rate lock) and the time we commit the mortgage loans for sale.Our pipeline consists of loans for which we have provided a rate lock but whichwe have not yet closed (rate locked loan commitments) and closed loans thathave not yet been committed for sale (closed loans). Generally, as marketinterest rates rise, our pipeline, which then has lower interest rates than theprevailing market, is not as attractive to investors and therefore we losevalue in the pipeline. Conversely, as market interest rates fall, our pipelineis more attractive to investors and we gain value in the pipeline. However,some of this gain in value may be offset by an increase in the fallout of ourrate locked loans as borrowers chose not to fund their loan with us and seekalternative loans with the new, lower interest rates.

 

19

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Tomitigate the risk of rising interest rates and protect our pricing margins, wepurchase hedge instruments.  The gains orlosses from this activity will generally correlate to losses or gains derivedfrom market adjustments on our rate locked loan commitments and losses or gainsthat we record on sales of our closed loans. Typically, higher than expectedmarket adjustments and gains from the sale of loans will be offset by hedginglosses, while lower than expected market adjustments and gains from the sale ofloans will be offset by hedging gains. However, we will at times have timing differences between the time werecognize hedge losses and the time we are able to recognize correspondingincreases in the value of our closed loans as we do not apply hedge accountingas defined by SFAS 133.  These timingdifferences may impact some of our quarterly operating results and aretherefore explained in detail in this section.

 

Utilizing past loan fallout history, we estimate thepercentage of our loan rate lock loan commitments that will close, but theseprojections are difficult, especially during periods of volatile interestrates. We hedge (or protect) our loan sale margin in the pipeline using forwardsales of mortgage-backed securities (“TBA’s”), options on mortgage-backedsecurities (“MBS”) and similar agreements.

 

We generally adjust our hedge coverage on a dailybasis based upon changes in the size and composition of the pipeline andresultant changes to our estimated pipeline exposure, seeking to protect ourloan sale margin targets. Since August of 2002, we have used an outsidecompany, Mortgage Capital Management, Inc. (“MCM”), to help us manage ourinterest rate risks. MCM is a quantitative software and advisory service firmthat currently serves a number of clients in the mortgage banking industry. MCMperforms pipeline exposure analysis and provides hedging recommendations on adaily basis. Our loan pipeline at March 31, 2005 was approximately $1.1billion, at December 31, 2004 was approximately 0.8 billion and at March 31,2004 was approximately $1.6 billion. We believe our hedges have correlated toboth increases and decreases in the value of our loan rate locked loans anduncommitted closed loans. In the future, as our loan products change and oursubprime and correspondent channels increase production, our hedgingstrategies, fallout assumptions and hedging instruments may change to bettermitigate the risk of interest rate changes.

 

Theaggregate gains or losses that we ultimately recognize on our rate lockedloans, closed loans and hedge instruments, is our gross margin. We record gains or losses on the three componentsof our gross margin as follows:

 

•                  **Rate locked loan commitments.**  Any changein the value of our rate locked loan commitments, from the expected value ofthe loan at the time the rate lock commitment was made to the end of the periodis measured at the end of each accounting period, and is recorded as a marketadjustment. Both increases and decreases in value are recorded at the end of aperiod. These changes are recorded as a “market adjustment on interest ratelock commitments” in our Statement of Operations.

 

•                  **Closed loans.**  We do not recognize any increase in value inour closed loan inventory until a true sale has taken place. However, if thecost basis of the loan is more than could be obtained by sale in themarketplace, a market adjustment is recorded (referred to as the lower of costor market, or “LOCOM”). Accordingly, increases in value are not recorded at theend of a period, but decreases are. Any declines in value are recorded in ourStatement of Operations as an adjustment to our “gain on sale of loans” revenueat the time they are recognized.

 

•                  **Hedge instruments.**  Our hedging instruments (forwardsales of mortgage backed securities and options on forward sales of mortgagebacked securities) are marked to market at the end of each period and bothincreases and decreases in value are recorded. These changes in value arerecorded as “derivative financial instruments” in our Statement of Operations.

 

Withrespect to these three related components of our revenue, the only change invalue that is not recorded at the end of each period is an increase invalue of our closed loans.  A drop inmarket interest rates will generate an increase in the value of these loans,but this increase is not recognized in our operating income until the loansales have settled.  Accordingly, we may have increased value attributable toour closed loans at the end of a period which may not be recognized until thenext period.  Nevertheless, the relateddecrease in value of any hedge instrumentswe purchased to hedge these closed loans will be recorded at the end ofthe period.  As a result, we mayrecognize hedge loss in one quarter and not recognize the correspondingincrease in the value of loans until the next quarter.

 

Wehave provided a more detailed description of the methods and estimates we useto calculate the value of our derivative instruments and gain on sale in ourAnnual Report on form 10-K under the heading “*Derivativeand Hedging Activities / Determination of Fair Values”*.

 

20

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**Results of Operations**

 

***Three Month Results***

 

We recorded net income of $507 thousand for thethree-month period ending March 31, 2005 as compared to a net loss of $5.7million in 2004 for the same period. These results were due in large part to (i) a47.3% increase in loan sales volume from the same period in 2004, (ii) anincrease in our gross margin from 52.3 basis points to 85.4 basis points (loansfunded basis) and (iii) for the three month period ending March 31,2004 we recorded a $4.4 million loss on the sale of portfolio assets.  Note that in the chart below we compare ourrevenue categories to basis points of loans sold.  This provides a direct correlation of revenueto our main source of revenue (loans sold).

 

**($ amounts in 000’s) (unaudited)**

 
| ** **     | ** ** | **Three Months Ended March 31, 2005** | ** **    | **Three Months Ended March 31, 2004** | ** ** | **2005 Increase (Decrease)** | ** ** |
|----------------|------------|--------------------------------------------|---------------|--------------------------------------------|------------|------------------------------|------------|
| ** **     | ** ** | ** **                                 | ** **    | ** **                                 | ** ** | ** **                   | ** ** |
| **Loans sold** | ** ** | **$**                                      | **2,496,540** | ** **                                 | **$**      | **1,695,051**                | ** ** | ** ** | ** ** |
|                |            |                                            |               |                                            |            |                              |            |  |  |

 
| ** **                                                                                                            | ** ** | **Amount Income  (Expense)** | ** ** | **Basis Points  (Loans Sold)** | ** ** | **Amount Income  (Expense)** | ** ** | **Basis Points  (Loans Sold)** | ** ** | **Amount** | ** ** | **Basis Points  (Loans  Sold)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------------------|------------|--------------------------------|------------|------------|------------|---------------------------------|------------|
|                                                                                                                  |       |                         |       |                           |       |                         |       |                           |       |       |       |                            |       |
| Revenues:                                                                                                             |       |                         |       |                           |       |                         |       |                           |       |       |       |                            |       |
| Premiums                                                                                                              |       | $                            | 45,638     |                           | 182.81     |                         | $          | 38,742                         |       | 228.56     |       | $                               | 6,896      |   | (45.75 | ) |
| Broker fees                                                                                                           |       | 6,710                        |       | 26.88                          |       | 4,182                        |       | 24.67                          |       | 2,528      |       | 2.21                            |       |
| Mortgage broker premiums                                                                                              |       | (30,192                      | )          | (120.94                        | )          | (23,653                      | )          | (139.54                        | )          | (6,539     | )          | 18.60                           |       |
| Premium recapture and loan loss provisions                                                                            |       | (1,010                       | )          | (4.05                          | )          | (1,325                       | )          | (7.82                          | )          | 315        |       | 3.77                            |       |
| Deferred origination costs                                                                                            |       | (2,872                       | )          | (11.50                         | )          | (2,431                       | )          | (14.34                         | )          | (441       | )          | 2.84                            |       |
| **Gain on sales of loans**                                                                                            | ** ** | **$**                        | **18,274** | ** **                     | **73.20**  | ** **                   | **$**      | **15,515**                     | ** ** | **91.53**  | ** ** | **$**                           | **2,759**  | ** ** | **(18.33** | **)** |
| Derivative financial instruments and market  adjustments                                                              |       | 3,059                        |       | 12.25                          |       | (6,644                       | )          | (39.20                         | )          | 9,703      |       | 51.45                           |       |
| **Gain on sales of loans, after derivative  financial instruments and market adjustments (“gross margin”)** | ** ** | **$**                        | **21,333** | ** **                     | **85.45**  | ** **                   | **$**      | **8,871**                      | ** ** | **52.33**  | ** ** | **$**                           | **12,462** | ** ** | **33.12** | ** ** |
| Interest on mortgage loans held for sale                                                                              |       | 9,833                        |       | 39.38                          |       | 5,013                        |       | 29.57                          |       | 4,820      |       | 9.81                            |       |
| Interest on bond collateral                                                                                           |       | 286                          |       | 1.15                           |       | 1,628                        |       | 9.60                           |       | (1,342     | )          | (8.45                           | )          |
| **Total interest income**                                                                                             |       | **10,119**                   | ** ** | **40.53**                      | ** ** | **6,641**                    | ** ** | **39.17**                      | ** ** | **3,478**  | ** ** | **1.36**                        |       |
| ** **                                                                                                            |       |                         |       |                           |       |                         |       |                           |       |       |       |                            |       |
| Other income                                                                                                          |       | 202                          |       | 0.81                           |       | 296                          |       | 1.75                           |       | (94        | )          | (0.94                           | )          |
| **Total revenue**                                                                                                     | ** ** | **$**                        | **31,654** | ** **                     | **126.79** | ** **                   | **$**      | **15,508**                     | ** ** | **93.25**  | ** ** | **$**                           | **15,846** | ** ** | **33.54** | ** ** |

 

Theoverall mortgage loan market is expected to contract from $2.7 trillion in 2004to $2.5 trillion in 2005 according to the MBA. Our strategy is to capture anincreasing percentage of the market through sales force expansion. In the firstquarter of 2005, we increased loan production 8.7%, from $2.5 billion for thequarter ending December 31, 2004, to $2.7 billion for the quarter ending March31, 2005. If we are not able to do this, we would likely experience losses dueto our current level of operating expenses.

 

Gain on sales of loans after derivative financial instruments andmarket adjustments, increased for the quarter ended March 31, 2005 overthe quarter ended March 31, 2004 due to a higher level of loans sold andbetter gross margins. Note that increasing interest rates for the quarter endedMarch 31, 2005 increased the gain on derivative financial instruments andmarket adjustments and reduced the gain on sale margins. For the quarter ended March 31,2004 decreasing interest rates during the quarter also decreased the value ofderivative financial instruments but increased our gain on sale margins.

 

Ourgain on the sale of loans was made up of a combination of various accountcategories which are summarized in the chart above, and quantified in basispoints of loan sales volume. Premiums represent the price at which we sell theloans to investors in excess of the principal balance of loans sold. Brokerfees represent various charges to brokers for services rendered by us which aredeferred and recognized as part of the gain on the sales of the loans. Premiumsand broker fees are offset by capitalized (deferred) loan origination costs.The largest deferred cost associated with loan production is mortgage brokerpremiums, or yield spread premiums. Other offsets to gain on sale include (i) loanpremiums repaid to investors (“premium recapture”) and loan loss provisions and(ii) deferred origination costs, which are recognized at the time of loansale. Premium recapture expenses represent repayment of a portion of certainloan sale premiums to investors on previously sold loans which subsequentlypayoff within six months of loan sale. We sell a substantial portion of ourloans to two of our competitors.  If thesecompetitors stop purchasing our loans on favorable terms, we could be requiredto find alternate purchasers and/or accept  less favorable terms.  In either case, this could reduce ourrevenues and earnings.

 

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Premium recapture and loan loss provisionsdecreased by $315 thousand in the first quarter of 2005 compared to the sameperiod in 2004. The decrease was mainly due to a reduction in premium recaptureexpense in the first quarter of 2005 which was the result of rising interestrates and the anticipated reduction in early payoffs. Going forward wegenerally expect premium recapture expense to decline due to anticipated risinginterest rates and less refinance activity. However, this decrease may bepartially offset by the anticipated increase in our loan volume. Converselywhile we believe that our underwriting process is sound and effective, loanloss provisions may increase in the future due to a higher mix of Alt-A andsub-prime loans which have more complex underwriting criteria and are morelikely to be rejected by investors if we sell them loans which do not meet theirunderwriting guidelines. The increase in deferred origination costs was aresult of increased loan volume.

 

The use of hedges (recorded as derivative financialinstruments) is key to protecting our profit margins between the time of theinterest rate lock and when the loan is committed for sale to an investor. Generallywhen mortgage interest rates rise, the value of loans we have in our pipelinedeclines, and when interest rates decline the opposite is true.  We utilize hedge instruments to help protectthe value of loans in our pipeline from increases in interest rates.  Consequently, basis point loan premiums, andgain on sales of loans, are best analyzed in conjunction with the basis pointgain or loss from our derivative financial instruments and market adjustmentson our pipeline. We continued to use forward sales of mortgage-backedsecurities (TBA) and options on forward sales of mortgage-backed securities asour primary hedging instruments. Due to increases in mortgage interest ratesduring the first quarter of 2005 we recorded gains on derivative financialinstruments of $3.1 million. For the first quarter of 2004 we recorded netlosses of $6.6 million due to decreasing mortgage interest rates during thequarter.

 

Our gross margins were $21.3 million for thethree months ended March 31, 2005 or 85 basis points on $2.5 billion inloan sales volume, representing an increase of $12.4 million from $8.9 millionon $1.7 billion in loan sales volume for the comparable period in 2004. Loansales volume increased $0.8 billion. Overall competitive pressure remainsintense although not at levels seen in 2004. There can be no assurances that marginswill remain at current levels and accordingly our gross margins would be affectedif competitive pressures increase or decrease.

 

Our actual gross margin percentages adjustedfor timing differences,  in the quarterending March 31, 2005 exceeded our target gross margin percentages on someloan categories due to the following: (i) We achieved higher than targetedmargins on certain loan categories including second mortgages, adjustable ratemortgages and home equity lines of credit. These loans are generally hedged using ‘best efforts’ forward salecoverage.  However the actual sales aresometimes completed using ‘mandatory’ sales, if this sale execution is greater. (ii) A certain portion  (approximately $1.6 million) of our gainsrecorded in the quarter were not entirely offset by a reduction in the value ofthe hedged loans.  This can occur withthe portion of our non-conforming loans “cross-hedged” with TBA’s. We believethat our hedging program was generally successful in protecting profit marginson our loan originations. However, our hedging strategies may not be successfulin mitigating our risks associated with interest rate changes in futureperiods. In particular, for new loan products with large loan balances, shortterms, and loan products with adjustable rates, our hedging process may not beeffective at certain times.

 

Excluding interest income earned on bond collateral,we recorded interest income of $9.8 million for the three months ended March 31,2005. For our mortgage loans held for sale we earn interest on a loan from thedate the loan is funded until sale. Accordingly, interest income related to loansheld for sale is a function of the volume of loan production, the interest rateon the loans and the length of time the loans are held prior to sale. To theextent we fund loans with borrowings under our warehouse facilities, we recordinterest expense based on the same factors. Interest expense on our warehouseborrowings for the period was $6.7 million. The resulting net interestincome earned on loan inventories was $3.1 million (interest income of$9.8 million less $6.7 million of interest expense), representing 11 basispoints on first quarter 2005 loan production of $2.7 billion. For thecomparable period ended March 31, 2004 interest income was $5.0 millionand interest expense was $2.3 million. This resulted in net interestearned of $2.7 million, representing 14 basis points on first quarter 2004loan production of $1.9 billion. The reason for the net interest decrease for2005 was a flattening of the yield curve. Interest income on bond collateral decreased in the three month periodending March 31, 2005 to approximately $.29 million from $1.6 million in thethree month period ending March 31, 2004. This reduction was a direct result of the sale of the majority of bondcollateral in 2004.

 

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The table below provides the relationship betweenestimated fixed, variable and total consolidated expenses to loan production forthe three months ended March 31, 2005 and 2004. This provides a directcorrelation of the components of total consolidated expenses to our product(loan production).

 

**($ amounts in 000’s) (unaudited)**

 
| ** **          | ** ** | **Three months ending March 31, 2005** | ** **    |
|---------------------|------------|---------------------------------------------|---------------|
| **Loan production** | ** ** | **$**                                       | **2,707,650** | ** ** |
|                     |            |                                             |               |  |

 
| ** **                                  | ** ** | **Estimated  Variable  Expenses** | ** ** | **Estimated  Variable  Expenses Bpts.** | ** ** | **Estimated  Fixed  Expenses** | ** ** | **Estimated  Fixed  Expenses Bpts.** | ** ** | **Total  Expenses** | ** ** | **Total  Expenses  Bpts.** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|---------------------|------------|----------------------------|------------|
|                                        |       |                              |       |                                    |       |                           |       |                                 |       |                |       |                       |       |
| Employee compensation and benefits          |       | $                                 | 7,225      |                                    | 26.68      |                           | $          | 10,039                               |       | 37.08               |       | $                          | 17,264     |   | 63.76 |   |
| Office and occupancy expense                |       | —                            |       | —                                  |       | 1,104                          |       | 4.08                                 |       | 1,104               |       | 4.08                       |       |
| Professional fees and contract labor        |       | 267                               |       | 0.99                                    |       | 875                            |       | 3.23                                 |       | 1,142               |       | 4.22                       |       |
| Other operating expense                     |       | 1,387                             |       | 5.12                                    |       | 2,932                          |       | 10.82                                |       | 4,319               |       | 15.94                      |       |
| **Total operating expenses**                | ** ** | **8,879**                         | ** ** | **32.79**                               | ** ** | **14,950**                     | ** ** | **55.21**                            | ** ** | **23,829**          | ** ** | **88.00**                  | ** ** |
| Interest expense – short term debt     |       | 6,749                             |       | 24.93                                   |       | —                         |       | —                               |       | 6,749               |       | 24.93                      |       |
| Interest expense – long term debt      |       | 112                               |       | 0.41                                    |       | —                         |       | —                               |       | 112                 |       | 0.41                       |       |
| **Total interest expense**                  | ** ** | **6,861**                         | ** ** | **25.34**                               | ** ** | **—**                     | ** ** | **—**                           | ** ** | **6,861**           | ** ** | **25.34**                  |       |
| Provision for loan losses                   |       | —                            |       | —                                  |       | 62                             |       | 0.23                                 |       | 62                  |       | 0.23                       |       |
| Gain on REO, net                            |       | —                            |       | —                                  |       | (3                             | )          | (0.01                                | )          | (3                  | )          | (0.01                      | )          |
| Valuation adjustment – Bond Collateral |       | —                            |       | —                                  |       | —                         |       | —                               |       | —              |       | —                     |       |
| **Total consolidated expenses**             | ** ** | **$**                             | **15,740** | ** **                              | **58.13**  | ** **                     | **$**      | **15,009**                           | ** ** | **55.43**           | ** ** | **$**                      | **30,749** | ** ** | **113.56** | ** ** |

 
| ** **          | ** ** | **Three months ending March 31, 2004** | ** **    |
|---------------------|------------|---------------------------------------------|---------------|
| **Loan production** | ** ** | **$**                                       | **1,870,960** | ** ** |
|                     |            |                                             |               |  |

 
| ** **                                  | ** ** | **Estimated  Variable  Expenses** | ** ** | **Estimated  Variable  Expenses  Bpts.** | ** ** | **Estimated  Fixed  Expenses** | ** ** | **Estimated  Fixed  Expenses  Bpts.** | ** ** | **Total  Expenses** | ** ** | **Total  Expenses  Bpts.** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|------------------------------------------|------------|--------------------------------|------------|---------------------------------------|------------|---------------------|------------|----------------------------|------------|
|                                        |       |                              |       |                                     |       |                           |       |                                  |       |                |       |                       |       |
| Employee compensation and benefits          |       | $                                 | 3,801      |                                     | 20.32      |                           | $          | 8,041                                 |       | 42.98               |       | $                          | 11,842     |   | 63.30 |   |
| Office and occupancy expense                |       | —                            |       | —                                   |       | 836                            |       | 4.47                                  |       | 836                 |       | 4.47                       |       |
| Professional fees and contract labor        |       | 161                               |       | 0.86                                     |       | 874                            |       | 4.67                                  |       | 1,035               |       | 5.53                       |       |
| Other operating expense                     |       | 1,383                             |       | 7.39                                     |       | 2,870                          |       | 15.34                                 |       | 4,253               |       | 22.73                      |       |
| **Total operating expenses**                | ** ** | **5,345**                         | ** ** | **28.57**                                | ** ** | **12,621**                     | ** ** | **67.46**                             | ** ** | **17,966**          | ** ** | **96.03**                  | ** ** |
| Interest expense – short term debt     |       | 2,346                             |       | 12.54                                    |       | —                         |       | —                                |       | 2,346               |       | 12.54                      |       |
| Interest expense – long term debt      |       | 895                               |       | 4.78                                     |       | —                         |       | —                                |       | 895                 |       | 4.78                       |       |
| **Total interest expense**                  | ** ** | **3,241**                         | ** ** | **17.32**                                | ** ** | **—**                     | ** ** | **—**                            | ** ** | **3,241**           | ** ** | **17.32**                  | ** ** |
| Provision for loan losses                   |       | —                            |       | —                                   |       | —                         |       | —                                |       | —              |       | —                     |       |
| Gain on REO, net                            |       | —                            |       | —                                   |       | (259                           | )          | (1.38                                 | )          | (259                | )          | (1.38                      | )          |
| Valuation adjustment – Bond Collateral |       | —                            |       | —                                   |       | 4,428                          |       | 23.67                                 |       | 4,428               |       | 23.67                      |       |
| **Total consolidated expenses**             | ** ** | **$**                             | **8,586**  | ** **                               | **45.89**  | ** **                     | **$**      | **16,790**                            | ** ** | **89.75**           | ** ** | **$**                      | **25,376** | ** ** | **135.64** | ** ** |

 

Total expenses incurred for the three months ended March 31,2005 were approximately $30.8 million. Operating expenses, which included allexpenses except interest expense (employee compensation and benefits, officeand occupancy expense and other operating expenses), were approximately $23.8 millionfor the three months ended March 31, 2005. For the comparable period endedMarch 31, 2004, there were approximately $25.4 million of totalexpenses, of which approximately $18.0 million were operating expenses(which excludes interest expense, gain on REO and valuation adjustment) . The increasein operating expenses in 2005 was primarily due to; the increase in loan productionand loan production-related expenses; and increases in the number of branchoffices and corporate headquarters personnel. For the three months ended March 31,2005, expenses included approximately $6.0 million in sales commissions,which vary in proportion to the volume of loan production, or approximately 22basis points (.22%) on $2.7 billion in funded loans. The basis pointcommissions expense increased in 2005 due to a higher proportion of new accountexecutives receiving guaranteed commissions during their first three monthswith our Company.

 

Operating expenses totaled $23.8 million orapproximately 88 basis points (.88%), on $2.7 billion in loan productionin the first quarter of 2005. Total operating expenses in basis points of loanproduction sold (which is a measurement of the cost per loan) decreased for thethree months ended March 31, 2005 compared to the same period in 2004(from 15 basis points (.15%) in 2004 to 12 basis points (.12%) in 2005). Theoperating cost per loan produced decreased from $1,690 in the first quarter of2004 to $1,665 per loan in the first quarter of 2005. The decreased cost perloan reflects reduced loan production cost mainly related to scaleefficiencies. Although greater efficiencies may have been expected with a 44.9%increase in loan production, our branch system is still maturing. New branchesbeing less efficient offset volume efficiency gains by mature branches.  Also, our new Correspondent and Subprimelending channels continue to incur losses while building loan productionvolume.

 

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The effective federal and state tax rate is estimatedto be 44%.  In 2004, losses increased ourdeferred income tax benefit to approximately $10.7 million at December 31,2004.At March 31, 2005 our deferred income tax benefit balance was reduced to $10.2million.  This benefit is expected to berealized in future periods through the utilization of net operating losscarryforwards; however should the Company not generate sufficient operatingprofits, our deferred tax benefits may have to be reversed.  There can be no assurances that all of theCompany’s deferred tax assets, totaling $10.2 million, will be realized infuture periods.

 

Interest rate movements are difficult to predict,but mortgage interest rates generally rose during the first quarter of 2005.Projections by the MBA (April 2005) for the remainder of 2005 indicate an increase in interest rates and areduction of mortgage loan originations from 2004 levels. Wherever possible weare managing staffing levels and utilizing as much of our existinginfrastructure to process our loan production (adjust staffing size to anoptimal level of efficiency) while growing our sales presence in existing andnew markets. We have been investingin growth and expanding and will continue to expand our business operations,primarily in sales areas, while we focus on controlling our fixed expenses incontracting markets.  Our strategyrequires us to capture an increasing percentage of the market in a highlycompetitive environment, which will put pressure on our gross margins.  If we are not able to do this, we wouldlikely experience losses due to our current level of operating expenses.

 

We continue to hold a small portfolio of bondcollateral mortgage loans [assets] ($13.7 million) and related debt ($12.2million). Revenue and expenses as a result of these holdings represent lessthan one percent of net income.

 

We held mortgage assets of approximately$185.9 million as of March 31, 2004. The reduction from March 31,2004 to March 31, 2005 was based on a strategic decision to liquidate themajority of our remaining portfolio in May 2004. As of September 30,2004, we have received approximately $26.4 million in cash from the salesof portfolio assets, net of repayment of related long-term debt (bonds). Thesale resulted in a valuation allowance expense of $4.4 million at March 31,2004.

 

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***Liquidity andCapital Resources***

 

*General*

 

Our sources of liquidity during the threemonths ended March 31, 2005 primarily consisted of the following:

 

•                                          borrowingsunder our warehouse facilities;

 

•                                          revenuesgenerated by our mortgage banking operating activities including interestincome, broker fees, loan sale proceeds and hedge proceeds;

 

•                                          hedging gains;

 

•                                          excessinterest spread in the Mortgage Asset Portfolio Business, net of repayments toservicers for past principal and interest advances on completed real estateowned dispositions.

 

Our primary cash requirements included:

 

•                                          fundingour mortgage loan originations;

 

•                                          interestexpense under our warehouse facilities;

 

•                                          operatingexpenses, including commissions;

 

•                                          repaymentof our warehouse borrowings;

 

•                                          increasing and maintaining a “restrictedcash” account, which includes amounts required to be held by certain warehouseline providers that may not be used in our operations or as equity for otherwarehouse lines of credit and;

 

•                                          fundingcertain mortgage originations without the use of warehouse financing.

 

*Cash Generated By and Used In Our Operations*

 

During the three months ended March 31,2005, on a consolidated basis we had net negative cash flow of $13.3 million.The principal factors impacting our negative cash flow are:

 

•                  Netincreases in our cash investment in loan inventories and loan sale receivables totaledapproximately $12.2 million.  Ourwarehouse line lending agreements typically allow us to borrow from 96% to 99%of the lesser of par or market value for each mortgage loan. We pay anadditional 1% to 2% of the loan principal amount in fees or yield spreadpremium to the mortgage brokers. Lastly, a small portion of our loan inventoryis funded entirely with equity capital. We typically have cash investedtotaling between 2% to 4% of the principal amount of loans held for sale, whichis recouped when the loans are purchased by investors. Mortgage loans held forsale increased from approximately $238.4 million at December 31, 2004 toapproximately $424.4 million at March 31, 2005. An increase in the amountof loan inventory, either by holding loans for longer periods, or due toincreased loan funding volume, will cause cash utilization to carry loaninventories to increase in direct proportion to the inventory held.

 

•                  Cashusage for capital expenditures totaled approximately $0.5 million.

 

•                  Transfers of cash to restricted cash accountstotaled $0.8 million.  Restricted cash increasedto $2,850 million at March 31, 2005, representing  Company cash accounts required to be maintainedunder certain warehouse lending agreements.

 

•                  Other significant operating expenditures wereapproximately $3.6 million for increases in derivative financial instruments(representing amounts receivable on hedging transactions closed during theperiod) and approximately $1.8 million was allocated to fund loan originationswithout warehouse financing.

 

Forthe remainder of 2005, wherever possible, we are attempting to utilize ourcurrent staffing levels and existing infrastructure to balance our loanproduction while growing our sales presence in existing and new markets. Ourmarket share growth strategy is designed to generate loan volumes from newcustomers and increased business with existing customers in order to increaseloan production, despite a continued contraction in the overall loanorigination market. We will attempt to increase the proportion of variablecosts while controlling fixed costs to minimize total expenses and maximizecapacity utilization as we execute our market share growth strategy. For theremainder of 2005, we expect to average greater than one billion dollars permonth of new mortgage loans and fund these originations with equity capital andwarehouse facility borrowings. We expect our loan inventory balances to increasegradually during the remainder of 2005. We also expect to continue to engage in hedging transactions that mayrequire cash investment to maintain or adjust hedged positions. If our fundingvolumes do not generate sufficient revenues, we may utilize cash to fundoperating losses. We intend to use cash reserves, borrowings under thewarehouse facilities as well as cash flow generated from the origination andsale of mortgage loans, to fund our operations which will include continuedsupport for Sub-prime and Correspondent Lending activities which are notexpected to be profitable until the fourth quarter of 2005. We are thereforedependent on significant levels of warehouse financing to help execute ourmortgage banking strategy. Ignoring investments in Correspondent

 

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and Subprime lending activities we must generateapproximately $750 million to $850 million in loan sales per month, assuminghistorical gross margins and  withoutextraordinary charges, to avoid negative operating cash flow.  During the three months ending March 31,2005 we averaged $903 million per month in loan production.  See Business Risk Factors in this Item 2below. Management believes that our Company has sufficient sources of liquidityat March 31, 2005 to meet anticipated business requirements for theforeseeable future.

 

*Short-Term Debt*

 

As of March 31, 2005, short-term debtconsists of $409.8 million of revolving credit lines (warehouse facilities)used to fund our lending activities. As of March 31, 2005, mortgage loansheld for sale totaling $424.4 million were pledged as collateral for thewarehouse facilities. We are dependent on our warehouse lending facilities tooperate our business.  We must maintain,renew or replace our warehouse lines of credit in order to continue to fundloans.  Our warehouse facilities consistof borrowings of $409.8 million with four financial institutions. At March 31,2005, our maximum available borrowings combined from these four financialinstitutions is $1.4 billion. These facilities typically advance 96% to99% of the lesser of par or market value of the loans pledged as collateral.Such financing is currently provided primarily under (i) a 364-day securedmortgage warehousing revolving credit agreement, originally dated as of November 26,2001 (current expiration date is May 23, 2005 and our company expects thiswarehouse line facility will be renewed on this date), (the “Bank CreditAgreement”) with JPMorgan/Chase Bank; (ii) a secured mortgage warehousingrevolving credit agreement, originally dated as of March 28, 2002 (thereis no expiration date as this is an uncommitted facility), (the “UBS WarburgAgreement”) with UBS Warburg Real Estate Securities Inc.; (iii) asecured mortgage warehousing revolving credit agreement, originally dated as ofOctober 11, 2002 (current expiration date of December 31, 2005), (the“Countrywide Agreement”) with Countrywide Warehouse Lending; and (iv) a 729-daysecured mortgage warehousing revolving credit agreement, originally dated as ofSeptember 15, 2003 (current expiration date of July 31, 2006), (the “Agreement”)with Residential Funding Corporation. Each warehouse facility is entered intoby our subsidiary American Mortgage Network, Inc. and guaranteed by AmNetMortgage, Inc. These warehouse facilities are repaid as principal paymentson mortgage loans are received, or as the mortgage loans are sold. Theagreements governing these facilities contain a number of covenants, includingcovenants based on tangible net worth, cash flows, net income, and liquidity ofour Company. As of March 31, 2005 the Company was in compliance with allwarehouse line facility covenants. We believe we are in good standing with allof our warehouse lenders.

 

*Long-Term Debt—Non Recourse Mortgage-Backed Notes*

 

Our long-term debt consists of CMO/FASIT 1998-1mortgage-backed notes, which are collateralized by bond collateral mortgageloans and bond collateral real estate owned. Obligations under themortgage-backed notes are payable solely from the proceeds from the bondcollateral and are otherwise non-recourse to the Company.

 

*Rate Lock Loan Commitments to Borrowers andCommitments to Sell Loans and Mortgage Backed Securities*

 

In the ordinary course of business, we make ratelock commitments to borrowers which obligate us to fund mortgages at setinterest rates. The values of the underlying loans, and thus our expected gainon the subsequent funding and sale of these loans, may be impacted bysubsequent changes in market interest rates. Accordingly, we attempt to protect(or hedge) our pricing margins by utilizing forward sales of TBAs and optionson TBAs. The hedges typically increase or decrease in value in correlation tooffsetting decreases or increases in the value of the loans. For the purposesof hedging our interest rate exposure on our pipeline, we make variousassumptions in order to estimate the rate lock commitments which will not close(fallout ratio). The fallout ratio is applied to the total rate lockcommitments to arrive at the net exposure to interest rate changes in themarket. As loans fund, we typically sell or assign our hedges and enter intomandatory loan sale commitments with our correspondent investors. The followingis a summary of our commitments to fund and commitments to sell loans andmortgage backed securities at March 31, 2005 and December 31, 2004(dollars in thousands):

 
| ** **                                                                                | ** ** | **March 31,  2004** | ** ** | **December  31, 2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------|------------|
| **Commitments to Fund Loans:**                                                            |       |                     |       |                   |       |
| Commitments to originate loans at set  interest rates (before applying estimated fallout) |       | $                        | 1,022,247  |                   | $          | 813,081 |   |
| Commitments to originate loans at set rates  (after applying estimated fallout)           |       | 582,025                  |       | 471,884                |       |
| **Commitment to Sell Loans or Mortgage Backed  Securities:**                              |       |                     |       |                   |       |
| Mandatory commitments to sell mortgage  loans held for sale                               |       | 312,978                  |       | 100,798                |       |
| Forward sales of mortgage backed securities  (TBA) and options on forward sales           |       | 641,500                  |       | 611,000                |       |
|                                                                                           |            |                          |            |                        |            |  |  |

 

The above table merely lists the commitments we haveto fund loans and sell loans or mortgage backed securities. In Note 6 toour audited financial statements we have quantified the interest rate exposurewe have on our pipeline and compare this exposure to our hedge coverage.

 

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*Lease and Long-TermDebt Commitments*

 

In order to better understand our futureobligations under our leases and long-term debt agreements, the table belowshows our expected future payments for these debt instruments.

 
| ** **                                             | ** ** | **Payments Due by Period  (dollars in thousands) (unaudited)** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **Contractual Obligations as of  March 31, 2005** | ** ** | **Total**                                                      | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than 5  Years** | ** ** |
|                                                   |       |                                                           |       |   |   |   |   |   |   |   |   |
| Long-Term Debt                                         |       | $                                                              | 12,155     |   | $ | 6,338 |   | $ | 4,512 |   | $ | 1,305 |   | $ | — |   |
| Operating Leases                                       |       | 10,623                                                         |       | 3,882 |   | 4,740 |   | 2,001 |   | — |   |
| Total                                                  |       | $                                                              | 22,778     |   | $ | 10,220 |   | $ | 9,252 |   | $ | 3,306 |   | $ | — |   |

 

Long-termdebt is in the form of bonds which are directly tied to bond collateral(assets) in the form of mortgage loans.

 

**Business Risk Factors**

 

*Failure to Achieve and Maintain Effective InternalControls In Accordance With Section 404 of the Sarbanes-Oxley Act CouldHave a Material Adverse Effect on Our Business, Operating Results and StockPrice*

 

We are in the process of documenting and testing ourinternal control procedures in order to satisfy the requirements of Section 404of the Sarbanes-Oxley Act. Under Section 404 our management will berequired to assess the effectiveness of our internal controls over financialreporting and our independent auditors will be required to issue an attestationreport on management’s assessment. Our loan origination software consists ofproprietary programs which are not completely documented, and we are currentlyimplementing additional control measures in order to strengthen various aspectsof our technology infrastructure. During the course of our testing we mayidentify deficiencies which we may not be able to remediate in time to meet thedeadline imposed by the Sarbanes-Oxley Act for compliance with the requirementsof Section 404. In addition, if we fail to maintain adequate internalcontrols, we may not be able to ensure that we can conclude on an ongoing basisthat we have effective internal controls over financial reporting in accordancewith Section 404 of the Sarbanes-Oxley Act. Failure to achieve andmaintain an effective internal control environment could have a materialadverse effect on our business, operating results and the trading price of ourstock.

 

*We Have a Limited Operating History in CorrespondentLending, Which Makes it Difficult to Predict our Future Prospects for thisLending Channel*

 

In 2001 we began our mortgage banking operations andoperated exclusively as a wholesale lender. As such we have worked with ourapproved broker clients, who refer loans to the Company for underwriting andfunding. In 2004 we made a strategic decision to create a correspondent lendingchannel. Incremental revenues from this channel will help us to more fullyleverage our wholesale lending infrastructure, particularly our headquarteradministrative costs. Correspondents are larger brokers, mortgage bankers orother financial institutions who originate and fund loans and sell closed loanson a service released basis. We have hired an experienced sales team andestablished an operations center in Columbia Maryland to process these loanpurchases. We began operations in the first quarter of 2005. The correspondentsegment of the mortgage banking market is highly competitive, particularlyrelative to the pricing of loans, and is dominated by large financialinstitutions that have large and well established correspondent lending salesand operating platforms. Additionally, many of these competitors retain theservicing on the loans they purchase, and may offer their clients moreoperational flexibility than we intend to offer since we sell all of the loanswe fund or purchase on a servicing released basis. As a result of our Company’slimited experience in correspondent lending, it is difficult to evaluate ourgrowth prospects for this new channel. Overhead expenses directly attributableto the correspondent channel are currently in the range of $150,000 to $300,000per month. While we continue to dedicate overhead expense to create additionalcapabilities and build our market presence in this new channel, we may not beable to achieve the level of anticipated loan fundings to cover our directoverhead, or it may take longer than we have anticipated.

 

*We Have a Limited Operating History in SubprimeLending, Which Makes it Difficult to Predict our Future Prospects for thisLending Channel*

 

In 2004 we made a strategic decision to build theinfrastructure and hire executives to enable our Company to build our subprimevolume to 20% of total volume by the end of 2006. We created a subprime loanunderwriting center and began to hire dedicated subprime wholesale accountexecutives. Incremental revenues from this channel will help us to more fully leverageour existing lending infrastructure, particularly our headquarteradministrative costs. The subprime segment of the mortgage banking market ishighly competitive, and is dominated by large, well-established firms whospecialize in this segment of the market. Additionally, many of these subprimelenders have portfolio capabilities and may offer their clients moreoperational flexibility that we intend to offer since we sell all of the loanswe fund or purchase on a servicing released basis. As a result of thecompetitive nature of this market segment and our Company’s limited experiencein subprime lending, it is difficult to evaluate our growth prospects for thisproduct line. Overhead expense directly attributable to the subprime businessis currently in the range of $250,000 to $350,000 per month. While we willcontinue to

 

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dedicate overhead expense and intend toincrease our overhead expenses in the first half of 2005 to recruit salesprofessionals and build our market presence in this new channel, we may not beable to achieve the level of anticipated fundings to cover our direct overhead,or it may take longer than we have anticipated.

 

*We Have a Limited Operating History in the MortgageOrigination Industry, Which Makes it Difficult to Evaluate Our Current BusinessPerformance and Future Prospects*

 

Our Company was formed in 1997 and operated as amortgage REIT (mortgage portfolio investment) until the fourth quarter of 2001,at which time we began originating and selling residential mortgages (mortgagebanking). As a result, comparisons between financial performance in currentquarters and past quarters may not be helpful in evaluating our currentperformance or our future prospects. The market for mortgage originations wasdominated by unprecedented levels of refinances in 2002 and 2003 due tohistorically low interest rates. While our executive officers have extensivemortgage origination and mortgage banking experience, and we have hiredexperienced personnel in our mortgage banking subsidiary, the Company does nothave a significant history as a mortgage banking company and many uncertaintiesexist as competitors address the significant contraction of the mortgageorigination market. This may limit our ability to evaluate our currentperformance and project our future performance.

 

*We Expect Our Fixed Operating Expenses to Continue toIncrease, Which May Adversely Affect Our Results of Operations*

 

We expect to incur additional costs and expenses relatedto the expansion of our sales force, development of our correspondent andsubprime lending channels, and investment in our information technologycapabilities. If this expansion does not result in adequate revenues, ourfinancial performance will suffer. We must generate approximately$1.1 billion to $1.2 billion in sales volume per month in 2005,absent further deterioration in pricing margins due to competitive pressures,to meet our expense obligations. We are expanding our business operations and increasingour fixed expenses in a contracting market. Our strategy requires us to capturean increasing percentage of the market in wholesale lending, correspondentlending and subprime lending, in a highly competitive environment which willput pressure on our gross margins. If we are not able to do this, we wouldlikely experience losses due to our increased level of expenses. In addition,we expect to utilize income tax benefits against future profits and taxes. Someof the tax benefits may have to be reversed (valuation account established) inthe future if significant operating losses occur, or if we determine at afuture date that forecasted operating profits may not be sufficient to fullyutilize deferred tax assets. See “Overhead Expenses May Not Be Covered bySufficient Revenues to Sustain Profitable Operations.”

 

*We May Not Be Able to Effectively Manage theGrowth of Our Business*

 

Over the past three years, we have experienced rapidgrowth. In the beginning of 2001, we had approximately 20 employees. As of December 31,2004, we had approximately 759 employees. Many of these employees have verylimited experience with us and a limited understanding of our systems. Many ofour financial, operational and managerial systems were designed for a small businessand have only recently been upgraded or replaced to support larger scaleoperations. If we fail to manage our growth effectively, our expenses couldincrease, negatively affecting our financial results.

 

*Expanding Our Market Presence and Market Share in theFace of a Contracting Market May Not Be Successful*

 

The origination market was an estimated $2.7trillion in 2004. Mainly as a result of rising interest rates, 2005 originationmarket volume is estimated to be $2.5 trillion. Competitiveness will increasein this shrinking mortgage market, putting pressure on the market competitorsto reduce revenues to sustain origination volumes and market share. Whereverpossible we are managing staffing levels and utilizing our existinginfrastructure to load balance our loan production while growing our salespresence in existing and new markets. Our expansion is based upon increasing aproportion of variable costs while reducing the fixed cost per loan. There canbe no assurance that this strategy will be successful in the face of stiffeningcompetition and a contracting marketplace.

 

*Competition in the Mortgage Banking Industry andDemand for Mortgages May Hinder Our Ability to Achieve or SustainProfitable Origination Levels*

 

Our success depends, in large part, on our abilityto originate loans in sufficient quantity such that the gain on sales of loansnet of hedges and other revenue are in excess of both fixed and variableoverhead costs. There can be no assurance that we will be able to originatesufficient levels of mortgages to achieve and sustain profitability. Inoriginating and selling loans, we compete with investment banking firms,savings and loan associations, banks, mortgage bankers and other entitiesoriginating residential 1-4 unit mortgages, many of which have greaterfinancial resources than us. We also face competition from companies alreadyestablished in these markets. In addition to the level of home purchaseactivity, the mortgage loan origination market is directly tied to, the generallevel of interest rates, and refinance activity. The origination market was [anestimated] $3.8 trillion in 2003, due to strong home sales, low interest ratesand strong refinance demand. In 2004 the origination market contracted to $2.7trillion. Competitiveness has increased in this shrinking mortgage market,putting pressure on the market competitors to reduce revenues to sustainorigination volumes and market share. We believe that the variety and the pricecompetitiveness of our loan products and customer service levels will allow usto gain market share

 

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over the next several years, even as theoverall market for mortgages declines; however, there can be no assurance thatwe will be able to successfully and profitably compete.

 

*Overhead Expenses May Not Be Covered BySufficient Revenues To Generate Profitable Operations*

 

We have made a number of fixed overhead commitmentsto establish the operational and administrative infrastructure necessary tosupport our loan origination business. At March 31, 2004, leasecommitments for headquarter and regional offices totaled approximately 206,700square feet. There were 784 employees including 168 employees who are paidsolely by commissions. The balance of employees is salaried or hourlyemployees. In order to achieve profitability at this staffing level plusexpected staffing levels in 2005, our monthly loan sales volume must beapproximately $1.1 to $1.2 billion, absent further deterioration inpricing margins due to competitive pressures, but there can be no assurancethis can be accomplished. Since our revenues are tied directly to the level ofloan production and subsequent sale, it is imperative that we achieve aprofitable level of originations, and the level of future profitability frommortgage banking will be in direct correlation to the level of loan originationvolume. Furthermore, should competitive pressures require us to reduce targetedgains on the sale of loans, the volume required to sustain profitability wouldincrease. There can be no assurances that we will be able to maintain loanorigination volumes sufficient to cover our fixed overhead costs, and should weincur significant operating losses, our capital base and cash reserves could bematerially adversely impacted.

 

*Revenues Can Fluctuate From Period to Period Based ona Number of Factors*

 

Our operating results have and may in the futurefluctuate significantly from period to period as a result of a number offactors, including; the volume of loan origination, interest rates and thelevel of unrealized gains/losses in unsold loans, the value of funded loans notyet committed for sale or positions in derivative securities. Accordingly, theconsolidated net income of our Company may fluctuate from period to period.

 

Further, if the closing of a sale of loans ispostponed, the recognition of gain from the sale is also postponed. If such adelay causes us to recognize income in the subsequent quarter, our results ofoperations for the previous quarter could be significantly depressed.

 

*Our Financial Results Fluctuate As a Result ofSeasonality*

 

Although the refinance portion of our business isnot seasonal, our purchase business is generally subject to seasonal trends.During 2003, our refinance business grew to a high of 90% of our activity. In2004 and the first quarter of 2005, as we returned to more normal markets andpurchase and refinance activity became more equal, seasonality became asignificant factor in our business. Seasonality trends reflect the generalpattern of housing sales, which typically peak during the spring and summerseasons. Our quarterly operating results have fluctuated in the past and areexpected to fluctuate in the future, reflecting the seasonality of theindustry.

 

*Our Hedging Strategies May Not Be Successful inMitigating Our Risks Associated With Interest Rate Changes*

 

We use forward sales of mortgage-backed securities(TBA) and options on mortgage-backed securities (MBS), which are classified asderivative financial instruments, to provide a level of protection againstinterest rate risk. When rates change we expect to record a gain or loss onderivatives which would be offset by an inverse change in the value of our ratelocked loan commitments and closed loans. However, our use of derivatives maynot offset all of our risk related to changes in interest rates. In the past wehave incurred, and in the future we may incur losses after accounting for ourderivative financial instruments. The derivative financial instruments weselect may not have the desired effect of reducing our interest rate risk. Inaddition, the nature and timing of hedging transactions may influence theeffectiveness of these strategies. If we poorly design strategies or improperlyexecute transactions we could actually increase our exposure to interest raterisk and potential losses. In addition, hedging strategies involve transactionand other costs. We cannot assure you that our hedging strategy and thederivatives that we use will adequately offset the risk of interest ratevolatility or that our hedging transactions will not result in losses.

 

We offer loan programs of many terms, from thirtyyear fixed interest rate loans to one year adjustable rate loans. The hedginginstruments used, on balance, correlate satisfactorily with the thirty andfifteen year loan programs. The hedging instruments used for our shorter termloan programs and adjustable interest rate loans have a somewhat lowercorrelation to changes in market interest rates than do thirty year termprograms. Consequently, the design of our hedge strategy may not be effectiveat certain times and this occurrence could be amplified for these shorter termloan programs.

 

*Volatility in Interest Rates May AdverselyAffect Our Results of Operations and Our Financial Position*

 

Our primary source of revenue is from gains on salesof loans, net of gains or losses on derivative financial instruments. We setrates and pay broker premiums for loans we fund based on a pricing processdesigned to create a targeted profit margin on each loan. Appropriately pricingthese loans can be complex, and we may not always successfully price our loanswith adequate margin to compensate us for the risk of interest rate volatility.

 

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The value of the mortgage loans that we originate isat risk due to fluctuations in interest rates during two time periods: (1) theperiod beginning when we have committed to funding the loan (rate locked loancommitments) and ending when the loan closes, or funds; and (2) the timeperiod beginning when the loan closes and ending when we commit to sell, orsell the loans to third-party purchasers of closed loans. These rate lockedloan commitments and closed loans are collectively referred to as our pipeline.To manage the interest rate risk of our pipeline, we continuously project thepercentage of rate locked loan commitments on loans we expect to close. Becauseprojecting a percentage of rate lock commitment loans that will close is especiallydifficult during periods of volatile interest rates, we cannot assure that ourprojections will be accurate. On the basis of such projections, we use forwardsales of mortgage-backed securities (TBA) and options on MBS, which areclassified as derivative instruments. These “hedges” are designed to mitigatethe adverse impact interest rate fluctuations may have on the value of thepipeline. Use of hedges is based in part on our estimates as to the percentageof loans that will close, and therefore we cannot assure you that our use ofderivative instruments will offset the risk of changes in interest rates.

 

If interest rates change, the actual percentage ofrate lock commitment loans that close may differ from the projected percentage.A sudden significant increase in interest rates can cause a higher percentageof rate lock commitment loans to close than projected. We may not have madeforward sales commitments to sell these additional loans and consequently mayincur significant losses upon their sale at current market prices, which maynot be offset by gains in the value of derivative instruments, adverselyaffecting results of operations. Likewise, if a lower percentage of rate lockcommitment loans close than was projected, due to a sudden decrease in interestrates or otherwise; we have and may in the future adjust our hedge positions ormandatory sales commitments at a significant cost, adversely affecting ourresults of operations. This risk is greater during times of interest ratevolatility. Also, as our loan product list changes over time, our assumptionsconcerning rate locked loan closings may change. Incorrect assumptions willadversely affect results of operations.

 

*We Are Subject to Counterparty Risks on Loan SaleCommitments and Hedging Transactions*

 

In connection with our mortgage loan sales, whichinvolve the sale of mortgage loans and mortgage-backed securities on a forwardor other deferred delivery and payment basis, we may enter into forward salesof mortgage-backed securities (TBA) and options on MBS in connection with ourhedging activities. We have credit risk exposure to the extentpurchasers/sellers are unable to meet the terms of their forward purchase/salecontracts. As is customary in the marketplace, none of the forward payment obligationsof any of our counterparties is currently secured or subject to marginrequirements. We attempt to limit our credit exposure on forward salesarrangements on mortgage loans and mortgage-backed securities by entering intoforward contracts only with institutions that we believe are acceptable creditrisks, and which have substantial capital and an established track record incorrespondent lending. We further attempt to limit our credit exposure onhedging transactions by dealing with a wide variety of firms. If counterpartiesdo not perform, our results of operations may be adversely affected.

 

*Failure to Renew and Obtain Adequate Financing May AdverselyAffect Results Of Operations*

 

We currently have four revolving warehouse borrowingfacilities in place totaling $1.4 billion. These facilities enable AmNetto fund up to approximately $1.6 billion on a monthly basis. In order tocontinue our operations, we must maintain, renew or replace warehouse lines ofcredit. There are a number of financial institutions which specialize inlending to mortgage banking companies and these types of secured borrowings. Weexpect to renew our current warehouse facilities with JP Morgan/Chase Bank, UBSWarburg Real Estate Securities, Countrywide Warehouse Lending, Inc. andResidential Funding Corporation. Failure to renew facilities would limit ourpotential to fund loans and may adversely affect our financial results. Amongthe factors that will affect our ability to renew and expand our warehouse lineborrowings are financial market conditions and the value and performance of ourCompany prior to the time of such financing. There can be no assurance that anysuch financing can be successfully completed at advantageous rates or at all.Our warehouse credit facilities contain extensive restrictions and covenantsthat, among other things, require us to satisfy specified financial, assetquality and loan performance tests. Certain agreements require the Company torecord a combined profit for the second and third quarter of 2005. While theCompany expects to be able to meet their covenants, if we fail to meet orsatisfy any of these covenants, we would be in default under these agreementsand our lenders could elect to declare all amounts outstanding under theagreements to be immediately due and payable, enforce their interests againstcollateral pledged under such agreements and restrict our ability to makeadditional borrowings. These agreements also contain cross-default provisions,so that if a default occurs, under one agreement, the lenders under our otheragreements could also declare a default. Any uncured default under our creditfacilities could have a materially adverse effect on our financial results. Asof March 31, 2005 the Company was in compliance with all warehouse linefacility covenants. We believe we are in good standing with all of ourwarehouse lenders.

 

The covenants and restrictions in our warehousecredit facilities may restrict our ability to, among other things:

 

•                  incur additional debt by virtue of havingwarehouse loan covenants;

 

•                  make certain investments or acquisitions;

 

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•                  repurchase or redeem capital stock;

 

•                  engage in mergers or consolidations;

 

•                  finance loans with certain attributes;

 

•                  reduce liquidity below certain levels; and

 

•                  hold loans for longer than established timeperiods.

 

These restrictions may interfere with our ability toobtain financing or to engage in other business activities, which maysignificantly harm our business financial condition, liquidity and results ofoperations.

 

*We Sell a Substantial Portion of Loans We Originateto Competitors*

 

We have warehouse line facilities with CountrywideHome Loans, Inc. (“Countrywide”). We also sell a substantial portion ofour loans to Countrywide as well as other competitors. For the three monthsending March 31, 2005 we sold (by loan volume) to Countrywide 47.0%, WellsFargo Funding Inc. (“Wells Fargo”) 18.5% and Morgan Stanley MortgageCapital Inc. (“Morgan Stanley”) 15.7% of all loan sales. If Countrywide,Wells Fargo or Morgan Stanley changes its correspondent lending strategy orprocedures, or stops purchasing our loans on favorable terms, we could berequired to find alternate purchasers and/or accept unfavorable terms. We couldalso be forced to find other sources of warehouse line borrowing. Any of theseevents may have an adverse effect on our results of operations.

 

*Dependency on Correspondent Investors, SecondaryMarkets*

 

Our ability to generate gains on the sales of mortgagesis largely dependent upon the continuation of correspondent lending programsoffered by large correspondent lenders, as well as our continued eligibility toparticipate in such programs. Although we are in good standing with a number oflarge correspondent lenders and are not aware of any proposed discontinuationof, or significant reduction in, the operation of such programs, any suchchanges could have a material adverse effect on our operations. We anticipatethat we will continue to remain eligible to participate in such programs, butany significant impairment of such eligibility would materially adverselyaffect our operations.

 

*Our Origination Activity Is Concentrated InCalifornia, Making Our Results Subject to Adverse Economic Conditions In California*

 

A large proportion of loans we fund are concentratedin California (30% by loan volume) of all loans closed for the three monthperiod ended March 31, 2005). Although we have expanded our operations onthe East Coast of the United States, a significant portion of our loanorigination volume is likely to be based in California for the foreseeablefuture. Consequently, our results of operations and financial condition aredependent upon general trends in the California economy and its residential realestate market. Residential real estate market declines may adversely affect thelevels of new mortgages in California or the value paid by correspondentinvestors for loans in California, potentially adversely affecting our resultsof operations and financial condition.

 

*Repurchased or Non-saleable Loans May AdverselyImpact Results of Operations and Our Financial Position*

 

In connection with the sale of loans tocorrespondent investors, we make a variety of representations and warrantiesregarding the loans, including those that are customary in the industryrelating to, among other things, compliance with laws, regulations and investorprogram standards and the accuracy of information on the loan documents and inthe loan file. In the event that an investor finds that a loan or group ofloans violates our representations, the investor may require us to repurchasethe loan or loan group and bear any potential related loss on the dispositionof the loans, or provide an indemnification for any losses sustained by theinvestor on the loans. Additionally, we may originate a loan that does not meetinvestor underwriting criteria or has some other defect, requiring us to sellthe loans at a significant discount. We have hired experienced personnel at alllevels and have established significant controls to ensure that all loans areoriginated to our underwriting standards, and are maintained in compliance withall of the representations made by us in connection with our loan saleagreements. However, there can be no assurances that mistakes will not be madeor that certain employees will not deliberately violate our lending policiesand, accordingly, we are subject to repurchase risk and losses on unsaleableloans. Typically, with respect to any loan that might be repurchased orunsaleable, we would correct the flaws if possible and re-sell the loan in themarket. We have created repurchase reserves to provide for this contingency onour financial statements, but there can be no assurances that these reservesare adequate, or that loan losses associated with repurchased or unsaleableloans will not adversely impact results of operations or the financialcondition of our Company. Additionally, should an investor or group ofinvestors experience an adverse trend of non-compliant loans from our Company,we could lose the privilege of selling loans to the investor(s), which couldhave a material adverse impact on our ability to sell our loans and thusadversely impact the results of operations or the financial condition of theCompany.

 

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*The Company Provides Loans to Subprime Borrowerswhich May Adversely Affect Earnings*

 

Credit risks associated with sub-prime mortgageloans will be greater than those associated with mortgage loans that conform toFNMA and FHLMC guidelines. The principle difference between sub-prime mortgageloans and conforming mortgage loans is that sub-prime mortgage loans typicallyinclude one or more of the following: worse credit and income histories of themortgagors, higher loan-to-value ratios, reduced or alternative documentationrequired for approval of the mortgagors, different types of properties securingthe mortgage loans, higher loan sizes and the mortgagor’s non-owner occupancystatus with respect to the mortgaged property. We have added personnel in acentralized sub-prime underwriting and funding center to help mitigate therisks associated with these loans, however there can be no assurance that allsub-prime loans will be able to be sold to investors at a profit. If we are notsuccessful, higher overhead incurred to produce these loans may not be coveredby the income derived from sub-prime lending.

 

*The Nationwide Scope of Our Operations Exposes Us toRisks of Noncompliance with an Increasing and Inconsistent Body of Complex Lawsand Regulations at the Federal, State and Local Levels*

 

We originate mortgage loans in many states. We mustcomply with the laws and regulations, as well as judicial and administrativedecisions, of all of these jurisdictions, as well as an extensive body offederal laws and regulations. The volume of new or modified laws andregulations has increased in recent years and in addition, individual citiesand counties have begun to enact laws that restrict loan origination activitiesin those cities and counties. The laws and regulations of each of thesejurisdictions are different, complex and, in some cases, in direct conflictwith each other. As our operations continue to grow, it may be more difficultto comprehensively identify, to accurately interpret and to properly programour technology systems and effectively train our personnel with respect to allof these laws and regulations, thereby potentially increasing our exposure tothe risks of noncompliance with these laws and regulations.

 

Our failure to comply with these laws can lead tothe following consequences, any of which could have an adverse effect on ourability to operate our business and our financial results:

 

•                  civil and criminal liability;

 

•                  loss of approved status;

 

•                  demands for indemnification or loan repurchases frompurchasers of our loans;

 

•                  class action lawsuits;

 

•                  assignee liability, which may make our loans unsaleable;and

 

•                  administrative enforcement actions.

 

*The Increasing Number of State and Local “Anti-predatoryLending” Laws May Restrict Our Ability to Originate or Increase Our Riskof Liability With Respect To Certain Mortgage Loans and Could Increase OurCosts of Doing Business*

 

In recent years, several federal, state and locallaws, rules and regulations have been adopted, or are under consideration,that are intended to eliminate so-called “predatory” lending practices. Theselaws, rules and regulations impose certain restrictions on loans on whichcertain points and fees or the annual percentage rate (“APR”) exceeds specifiedthresholds. Some of these restrictions expose a lender to risks of litigationand regulatory sanction no matter how carefully a loan is underwritten. Inaddition, an increasing number of these laws, rules and regulations seekto impose liability for violations on purchases of loans, regardless of whethera purchaser knew of or participated in the violation.

 

It is against our policy to engage in predatorylending practices and /or high cost loans which are defined as mortgage loansthat feature either an interest rate or points and fees charged in connectionwith loans that exceed certain thresholds prescribed by federal or state law orlocal ordinances. We have generally avoided originating loans that exceed the APRor “points and fees” thresholds of these laws, rules and regulations. Thecompanies that buy our loans and/or provide financing for our loan originationoperations generally do not want to buy or finance such loans. The continuedenactment of these laws, rules and regulations may prevent us from makingcertain loans. In addition, the difficulty of managing the risks presented bythese laws, rules and regulations may decrease the availability ofwarehouse financing and the overall demand for loans, making it difficult tofund, sell or securitize any of our loans. If we relax our restrictions onloans subject to these laws, rules and regulations because the companieswhich buy our loans and/or provide financing for our loan originationoperations relax their restrictions, we will be subject to greater risks foractual or perceived non-compliance with such laws, rules and regulations,including demands for indemnification or loan repurchases from our lenders andloan purchasers, class action lawsuits, increased defenses to foreclosure ofindividual loans in default, individual claims for significant monetary damagesand administrative enforcement actions. The growing number of these laws, rules andregulations will likely increase our cost of doing

 

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business as we are required to developsystems and procedures to ensure that we do not violate any aspect of these newrequirements. Any of the foregoing could materially and adversely affect ourbusiness, financial condition, liquidity and results of operations.

 

*An Interruption In or Breach of Our InformationSystems May Result In Lost Business*

 

We rely heavily upon communications and informationsystems to conduct our business. As we implement our growth strategy andincrease our volume of loan production, that reliance will increase. Anyfailure or interruption or breach in security of our information systems or thethird-party information systems on which we rely could cause underwriting orother delays and could result in fewer loan applications being received, slowerprocessing of applications and reduced efficiency in loan servicing. We utilizeproprietary software for our main loan origination system. This software is notfully documented and we have a limited number of employees who areknowledgeable about this application. We cannot assure you that systems failureor interruptions will not occur, or if they do occur that they will beadequately addressed by us or the third parties on which we rely. The occurrenceof any failures or interruptions could significantly harm our business.

 

*The Success and Growth of Our Business Will DependUpon Our Ability to Adapt to, Implement and Maintain Technological Changes*

 

Our mortgage loan origination business is currentlydependent upon our ability to effectively interface with our brokers, borrowersand other third parties and to efficiently process loan applications and fundloans. The origination process is becoming more dependent upon technologicaladvancement, such as the ability to process applications over the internet,accept electronic signatures, and provide process status updates instantly andother customer-expected conveniences that are cost-efficient to our process.Implementing this new technology and becoming proficient with it may alsorequire significant capital expenditures. As these requirements increase in thefuture, we will have to fully develop these technological capabilities toremain competitive or our business could be significantly harmed.

 

*We Must Attract and Retain Qualified AccountExecutives and Qualified Personnel to Produce Our Desired Level of Revenues*

 

The Company relies on commissioned accountexecutives to generate loan referrals from professional mortgage brokers. Theseaccount executives typically have established relationships with brokers. TheCompany’s overall loan fundings are dependent upon the number of accountexecutives, and as such, sustained loan production and market share growth aredependent on the successful retention and recruitment of the sales force.Similarly, the Company relies on the expertise of its employees in other facetsof operations, including underwriting, capital markets, risk management, andfinance and accounting. Given the dependency on the job market for qualifiedemployees, to continue our growth poses the potential risk that the Companywill not be able to attract and retain qualified employees.

 

*Capital Shortages Could Impede the Ability to ExecuteOur Mortgage Banking Strategy*

 

Our mortgage banking activities require asignificant level of cash reserves and capital to support loan inventories andoverhead exposure. Additionally, while we utilize warehouse credit facilitiesto fund our loan origination activity, we must invest cash equity in our loan inventoriesapproximating 0.5% to 4.0% of the cost basis of these loans. While we believeour capital base, cash reserves and cash flow from mortgage banking revenueswill be sufficient to enable us to execute our mortgage banking strategy, therecan be no assurances that capital shortages will not occur, requiring us toraise additional debt or equity capital or decrease or cease our originationactivities.

 

*We Are Subject To Losses Due To Errors or FraudulentActs On The Part Of Loan Applicants, Employees or Mortgage Brokers*

 

Mortgage brokers who assist loan applicants inobtaining mortgage loans refer all of the mortgage loans originated orpurchased by us. As such, the loan application, property appraisal, creditreport and other supporting documentation are furnished by the mortgage brokerand used by our underwriters to make approval or denial decisions. There couldalso be the potential of collusion between the broker and an employee toproduce a fraudulent loan. Our employees usually have little contact with loanapplicants, and rely on the mortgage broker to obtain and furnish all of thedocumentation supporting the mortgage loan application. Mortgage brokers maymake mistakes in completing the documentation for a loan leading to anincreased risk of our holding a non-saleable loan or of indemnifying orrepurchasing loans from investors.

 

Further, in rare cases, the mortgage broker mayknowingly or unknowingly submit an application wherein multiple parties to thetransaction (borrower, appraiser, seller, or title insurer) work in collusionto inflate the property value and/or falsify other documentation in order toobtain a mortgage loan. These types of fraudulent mortgage loans will have ahigh risk of default, and will likely not be fully recoverable throughdisposition of the underlying property securing the mortgage loans.Additionally, in the case of Alternative A loans, which in some cases permitthe borrower to “state” their income but not have to provide incomedocumentation, the mortgage broker may intentionally coach a borrower to makematerial misrepresentations in order to qualify for a loan.

 

Should material fraud be detected on a mortgage loanprior to sale to an investor, the mortgage loan may have to be sold at asignificant discount or may not be saleable. Should material fraud or mistakesin loan documentation be detected after a mortgage loan is sold to acorrespondent investor, we may be required to repurchase the loan or indemnifythe investor. While the investor and/or we can

 

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initiate foreclosure proceedings on any loandeemed to be fraudulently obtained, we could incur significant losses on thesefraudulent mortgage loans if principal or interest is not fully recoveredthrough the foreclosure and disposition of the underlying property securing themortgage loan.

 

We have established risk management and qualitycontrol committees to set policy and manage exposure to credit losses due tofraud, compliance errors or non-compliance with our underwriting standards. Wehave representations and warranties agreed upon by our correspondent lendingcustomers to repurchase loans which do not meet certain standards. Regularquality control audits are done on representative samples of mortgage loans andall mortgage loans submitted by brokers who come under suspicion in the normalcourse of business. Additionally, we have numerous controls and processes toensure that all of the mortgage loans applications submitted through mortgagebrokers are not based on fraudulent or intentionally misrepresenteddocumentation. However, there can be no assurances that the broker and/orborrowers do not submit fraudulent or inaccurate documentation that is notdetected by our personnel or by electronic fraud checks utilized by us. Shouldwe originate a significant number of fraudulent loans or loans based oninaccurate documentation, and incur costs or losses that cannot be recoveredthrough contractual remedies we have with our brokers, correspondents or othervendors, our results of operations and financial condition could be materiallyadversely affected.

 

*If We Are Unable to Maintain and Expand Our Networkof Independent Brokers, Our Loan Origination Business Will Decrease*

 

All of our mortgage loan originations come fromindependent brokers. Our brokers are not contractually obligated to do businesswith us. Many of our brokers have not been in business more than a few years.Further, our competitors also have relationships with our brokers and activelycompete with us in our efforts to expand our broker networks. Accordingly, wecannot assure you that we will be successful in maintaining our existingrelationships or expanding our broker networks, the failure of which wouldsignificantly harm our business, financial condition, liquidity and results ofoperations.

 

*We May be Subject to Fines or Other PenaltiesBased Upon the Conduct of Our Independent Brokers*

 

The mortgage brokers from which we obtain loans havelegal obligations to which they are subject. While these laws may notexplicitly hold the originating lenders responsible for the legal violations ofmortgage brokers, increasingly federal and state agencies have sought to imposesuch assignee liability. Recently, for example, the United States Federal TradeCommission (“FTC”) entered into a settlement agreement with a mortgage lenderin which the FTC characterized a broker that had placed all of its loanproduction with a single lender as the “agent” of the lender, and the FTCimposed a fine on the lender in part because, as “principal,” the lender waslegally responsible for the mortgage broker’s unfair and deceptive acts andpractices. The United States Justice Department in the past has sought to holda mortgage lender responsible for the pricing practices of its mortgagebrokers, alleging that the mortgage lender was directly responsible for thetotal fees and charges paid by the borrower under the Fair Housing Act even ifthe lender neither dictated what the mortgage broker could charge nor kept themoney for its own account. Accordingly, we may be subject to fines or otherpenalties based upon the conduct of our independent mortgage brokers.

 

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ITEM 3.

QUANTITATIVEAND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

A primary market risk facing our Company is interestrate risk, which is highly sensitive to many factors, including governmentalmonetary and tax policies, domestic and international economic and politicalconsiderations and other factors beyond our control. We attempt to manage thisrisk on a daily basis.

 

*Mortgage Origination – Interest Rate Risk*

 

Rate lock commitments and mortgage loans held forsale are subject to market price fluctuation until committed for sale. Thesefluctuations are primarily tied to changes in market interest rates and therelationship of short-term rates to long-term rates. In order to mitigate thisrisk, a variety of financial derivative instruments (including forwardmandatory mortgage security sales (TBA) and options on TBA sales) are utilizedto hedge or mitigate market price fluctuations. These instruments areclassified as derivative financial instruments on our financial statements. Ourhedge positions are continually adjusted based on routine and ongoingquantification of our risk, but hedges may or may not be fully successful incomplete risk mitigation. In particular, our capital markets personnel mustmake estimates of the percentage of rate lock commitments expected to closeunder different interest rate changes. Losses on the sale of mortgage loans notoffset by corresponding gains on hedge positions, or hedging activity notoffset by corresponding gains on the sale of mortgages, could adversely impactresults of operations and ourfinancial position.

 

*Other Risks*

 

Our ability to generate gains on the sales ofmortgages is largely dependent upon the continuation of correspondent investorprograms offered by large institutions. Typically these institutions havemortgage banking operations with which we compete. At any point in time aninvestor could discontinue our business relationship and therefore narrow thescope of our investor loan sale

 

**Sensitivity Analysis**

 

The methods we have used in our sensitivity analysishave not changed significantly since December 31, 2004.  We have performed various sensitivityanalyses that quantify the net financial impact of changes in interest rates onour interest rate-sensitive assets, liabilities and commitments. These analysespresume an instantaneous parallel shift of the yield curve. Various techniquesare employed to value the underlying financial instruments, and thesetechniques rely upon a number of critical assumptions. The scenarios presentedin the table below are illustrative. Actual experience may differ materially fromthe estimated amounts presented for each scenario. To the extent that yieldcurve shifts are non-parallel, and to the extent that actual variations insignificant assumptions differ from those applied for purposes of thevaluations, the resultant valuations can also be expected to vary. Suchvariances may prove material.

 
| ** **                                                             | ** ** | **(dollars in thousands)** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                             | ** ** | ** **                 | ** ** | ** ** | ** ** | **If Interest Rates Were To** | ** ** |
| ** **                                                             | ** ** | **March 31, 2005**    | ** ** | **Increase** | ** ** | **Decrease** | ** ** | **Increase** | ** ** | **Decrease** | ** ** |
| ** **                                                             | ** ** | **Carrying Amount**        | ** ** | **Estimated  Fair Value** | ** ** | **50 Basis Points  Estimated Fair Value** | ** ** | **100 Basis Points  Estimated Fair Value** | ** ** |
| Interest-earning assets:                                               |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                              |       | $                          | 37,286     |   | $ | 37,286 |   | $ | 37,286 |   | $ | 37,286 |   | $ | 37,286 |   | $ | 37,286 |   |
| Mortgage loans held for sale, net, pledged,  (lower of cost or market) |       | 424,401                    |       | 425,909 |   | 424,355 |   | 427,199 |   | 422,758 |   | 428,450 |   |
| Derivative financial instruments                                       |       | 288                        |       | 288 |   | 1,011 |   | (1,176 | ) | 282 |   | (3,630 | ) |
| Bond collateral and real estate owned, net                             |       | 13,745                     |       | 14,426 |   | 14,390 |   | 14,476 |   | 14,366 |   | 14,534 |   |
| Total interest-earning assets                                          |       | $                          | 475,720    |   | $ | 477,909 |   | $ | 477,042 |   | $ | 477,785 |   | $ | 474,692 |   | $ | 476,640 |   |
|                                                                   |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                          |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Short-term debt                                                        |       | $                          | 409,803    |   | $ | 409,803 |   | $ | 409,803 |   | $ | 409,803 |   | $ | 409,803 |   | $ | 409,803 |   |
| Long-term debt, net                                                    |       | 12,155                     |       | 12,155 |   | 12,155 |   | 12,155 |   | 12,155 |   | 12,155 |   |
| Total interest-bearing liabilities                                     |       | $                          | 421,958    |   | $ | 421,958 |   | $ | 421,958 |   | $ | 421,958 |   | $ | 421,958 |   | $ | 421,958 |   |

 

The following describes the methods and assumptionsused by the Company in estimating fair values.

 

*Cash and Cash Equivalents*

 

The carrying amount for cash and cash equivalentsapproximates fair value because these instruments are demand deposits and moneymarket accounts and do not present unanticipated interest rate or creditconcerns.

 

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*Mortgage Loans Held For Sale, net, pledged, (lower of cost or market)*

 

The fair value is estimated based on quoted marketprices from institutional investors for similar types of mortgage loans. Aportion of mortgage loans held for sale are committed for sale under mandatorysale arrangements and as such are not re-valued for subsequent changes ininterest rates.

 

*Bond Collateral, Mortgage Loans and Real Estate Owned, Net*

 

The fair value of Bond Collateral is estimated basedon quoted market prices from dealers and brokers for similar types of mortgageloans in the bulk mortgage market. Market prices reflect various assumptions asto prepayment rates, loan losses and financing costs.

 

*Derivatives*

 

Fair values of forward sales of mortgage-backedsecurities and options on mortgage-backed securities are based on quoted marketprices for these instruments. Fair values of our commitments to originate loansare based on any difference in the value of the loans expected to close betweenthe time of the rate lock commitment and the current market value.

 

*Short-Term Debt*

 

The fair value of the warehouse line debt andshort-term debt related to bond collateral held for sale approximates thecarrying amounts because of the short-term nature of the debt and interest onthe debt fluctuates with market interest rates.

 

*Long-Term Debt*

 

The fair value of long-term debt is estimated basedupon all long-term debt being at variable rates and therefore cost approximatesfair market value.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

(a) Under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we evaluated theeffectiveness of our disclosure controls and procedures, as such term isdefined under Rule 13a-15(e) promulgated under the SecuritiesExchange Act of 1934, as amended. Based on this evaluation, our principalexecutive officer and principal financial officer concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis quarterly report.

 

(b) Therehas been no change in our internal control over financial reporting identifiedin connection with the evaluation required by paragraph (d) of ExchangeAct Rule 13a-15 that occurred during the period covered by this quarterlyreport that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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| PART II. |   | OTHER  INFORMATION                                                                                                                                                                                                                                                                                        |
|---------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                                                                                                                                                                                                      |
| ITEM  1.      |   | LEGAL PROCEEDINGS                                                                                                                                                                                                                                                                                         |
|          |   |                                                                                                                                                                                                                                                                                                      |
|          |   | None.                                                                                                                                                                                                                                                                                                     |
|          |   |                                                                                                                                                                                                                                                                                                      |
| ITEM  2.      |   | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                                                                                                                                                                                              |
|          |   | The  Company did not repurchase any of its shares in the quarter ended  March 31, 2005. The Company’s repurchase program announced May 13,  2004 authorized the repurchase of 400,000 shares of which 294,610 remain  available to be repurchased with no expiration date on this program. |

 
| ITEM 3. |   | DEFAULTS  UPON SENIOR SECURITIES                    |
|---------|--------|-----------------------------------------------------|
|    |   | Not applicable.                                     |
|    |   |                                                |
| ITEM 4. |   | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|    |   |                                                |
|    |   | None                                                |
|    |   |                                                |
| ITEM 5. |   | OTHER INFORMATION                                   |
|    |   |                                                |
|    |   | (a) None                                            |
|    |   | (b) None                                            |
|    |   |                                                |
| ITEM 6. |   | EXHIBITS                                            |

 
|   | (a)    |   | Exhibits | ** **                                                                                                                                                                                      |
|--------|--------|--------|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | (1)    | 3.1      | Second  Articles of Amendment and Restatement of the Registrant                                                                                                                                 |
|   |   | (2)    | 3.1A     | Articles  of Amendment (regarding name change)                                                                                                                                                  |
|   |   | (3)    | 3.2      | Fourth  Amended and Restated Bylaws of the Registrant                                                                                                                                           |
|   |   | (4)    | 4.1      | Registration  Rights Agreement dated February 11, 1997                                                                                                                                     |
|   |   | (3)    | 4.3      | First  Amended and Restated Rights Agreement by and between the Company and American  Stock Transfer and Trust Company dated as of February 2, 1999 and  amended as of March 4, 2004. |
|   |   | (4)    | 10.6     | 1997  Stock Incentive Plan                                                                                                                                                                      |
|   |   | (4)    | 10.7     | Form of  1997 Stock Option Plan, as amended                                                                                                                                                |
|   |   | (4)    | 10.8     | Form of  1997 Outside Directors Stock Option Plan                                                                                                                                          |
|   |   | (4)    | 10.9     | Form of  Employee Stock Purchase Plan                                                                                                                                                      |
|   |   | (4)    | 10.14    | Form of  Indemnity Agreement                                                                                                                                                               |
|   |   | (5)    | 10.17    | The  Termination and Release Agreement, dated as of December 20, 2001                                                                                                                      |
|   |   | (5)    | 10.18    | Amendment  No. 1 to the Securities Purchase Agreement, dated as of  December 20, 2001                                                                                                 |

 

37

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|   |   | (5)    | 10.19 | Amendment  No. 1 to the Registration Rights Agreement, dated as of  December 20, 2001                                     |
|--------|--------|--------|-------|-------------------------------------------------------------------------------------------------------------------------------------|
|   |   | (6)    | 10.20 | Lease  between American Residential Investment Trust, Inc. and Sorrento Wateridge  Partners, L.P. dated November 30, 2001 |
|   |   | (7)    | 10.21 | Executive  Employment Agreement between AmNet Mortgage, Inc. and John Robbins dated  September 30, 2004.                  |
|   |   | (7)    | 10.22 | Executive  Employment Agreement between AmNet Mortgage, Inc. and Jay Fuller dated September 30,  2004.                    |
|   |   | (7)    | 10.23 | Executive  Employment Agreement between AmNet Mortgage, Inc. and Judith A. Berry  dated September 30, 2004.               |
|   |   | (7)    | 10.24 | Executive  Employment Agreement between AmNet Mortgage, Inc. and Lisa Faulk dated  September 30, 2004.                    |
|   |   | (8)    | 10.25 | Long  Term Incentive Cash Plan for Executive Officers                                                                               |
|   |   | (8)    | 10.26 | 2004  Executive Bonus Plan Description                                                                                              |
|   |   | (9)    | 10.27 | 2004  Equity Incentive Plan                                                                                                         |
|   |   | (9)    | 10.28 | Stock  Repurchase Agreement dated June 24, 2004 with Home Asset Management  Corp.                                              |
|   |   | (10)   | 10.29 | Form of  Restricted Stock Agreement                                                                                            |
|   |   | (10)   | 10.30 | Form of  Long Term Incentive Plan Restricted Stock Agreement                                                                   |
|   |   | (10)   | 10.31 | Form of  Standard Restricted Stock Unit Agreement                                                                              |
|   |   | (10)   | 10.32 | Form of  Executive Restricted Stock Unit Agreement                                                                             |
|   |   | (10)   | 10.33 | Form of  Stock Option Agreement                                                                                                |
|   |   | (10)   | 10.34 | Executive  Officer Annual Cash Bonus Program – 2005                                                                            |
|   |   | (10)   | 10.35 | Cash  Long Term Incentive Program (2005-2006)                                                                                       |
|   |   | (10)   | 10.36 | Cash  Long Term Incentive Program (2005-2007)                                                                                       |
|   |   | (10)   | 10.37 | Form of  Director Stock Option Agreement                                                                                       |
|   |   | (10)   | 10.38 | Form of  Director Restricted Stock Agreement                                                                                   |
|   |   | (10)   | 10.39 | Schedule of  Director Compensation                                                                                             |
|   |   |   | 31.1  | Certification of Chief Executive Officer                                                                                            |
|   |   |   | 31.2  | Certification of Chief Financial Officer                                                                                            |
|   |   |   | 32.1  | Certification of Chief Executive Officer                                                                                            |
|   |   |   | 32.2  | Certification of Chief Financial Officer                                                                                            |

 

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|   | (1) | Incorporated by reference  to the Company’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2002 filed March 31, 2003. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2) | Incorporated by reference  to the Company’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2004 filed May 17, 2004.       |

 
|   | (3)  | Incorporated by reference  to the Company’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2003 filed March 30, 2004.                |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (4)  | Incorporated by reference  to Registration Statement on Form S-11 filed September 25, 1997  (File No. 333-33679).                                             |
|   | (5)  | Incorporated by reference  to the Company’s current Report on Form 8-K filed January 9, 2002  (File No. 001-13485).                                      |
|   | (6)  | Incorporated by reference  to the Company’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2003 filed May 15, 2003.                      |
|   | (7)  | Incorporated by reference  to the Company’s Current Report on Form 8-K filed October 6, 2004.                                                                 |
|   | (8)  | Incorporated by reference  to the Company’s Amendment to Annual Report on Form 10-K/A for the  fiscal year ended December 31, 2003 filed April 29, 2004. |
|   | (9)  | Incorporated by reference  to the Company’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2004 filed August 16, 2004.                    |
|   | (10) | Incorporated by reference to the Company’s Current Report on  Form 8-K filed April 7, 2005.                                                                   |

 

38

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                     | AMNET MORTGAGE, INC. |
|--------------------------|----------------------|
|                     |                 |
| Dated: May 16, 2005 | By:                  | /s/ Judith A. Berry |   |
|                     |                 | Judith A. Berry, |
|                     |                 | Executive Vice President  Chief Financial Officer |

 

39

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