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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
  FOR ANNUAL AND TRANSITION
    REPORTS PURSUANT TO SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT
    OF 1934
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2005o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF
    THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          
    to   Commission file number
    001-31828
  LUMINENT MORTGAGE CAPITAL,
    INC.
 (Exact name of registrant as
    specified in its charter)
  Maryland

06-1694835(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)One Market, Spear Tower,
    30th Floor,
    San Francisco, California(Address of principal
    executive offices)

94105(Zip Code)   Registrants telephone number, including area code:
 (415) 978-3000
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Each Exchange on Which
    RegisteredCommon Stock, par value
    $0.001 per share

New York Stock Exchange   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 o þ o
  o
  o þ
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




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##### 



INDEX
  
  PagePART IITEM 1.

BUSINESS


1ITEM 1A.

RISK FACTORS


12ITEM 1B.

UNRESOLVED STAFF
    COMMENTS


24ITEM 2.

PROPERTIES


25ITEM 3.

LEGAL
    PROCEEDINGS


25ITEM 4.

SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS


25PART IIITEM 5.

MARKET FOR
    REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
    ISSUER PURCHASES OF EQUITY SECURITIES


25ITEM 6.

SELECTED FINANCIAL
    DATA


28ITEM 7.

MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS


29ITEM 7A.

QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISK


53ITEM 8.

FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA


58ITEM 9.

CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE


95ITEM 9A.

CONTROLS AND
    PROCEDURES


95ITEM 9B.

OTHER
    INFORMATION


95PART IIIITEM 10.

DIRECTORS AND
    EXECUTIVE OFFICERS OF THE REGISTRANT


95ITEM 11.

EXECUTIVE
    COMPENSATION


95ITEM 12.

SECURITY OWNERSHIP
    OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
    STOCKHOLDER MATTERS


95ITEM 13.

CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS


96ITEM 14.

PRINCIPAL
    ACCOUNTANT FEES AND SERVICES


96PART IVITEM 15.

EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES


96SIGNATURES


97EXHIBIT INDEX


98EXHIBIT 10.9EXHIBIT 10.13EXHIBIT 10.14EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   i




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CAUTIONARY
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Form 10-K
    
    the flattening of, or other changes in the yield curve, on our
    investment strategies;
    interest rate mismatches between our mortgage loans and
    mortgage-backed securities and the borrowings we use to fund our
    purchases of such loans and securities;
    changes in interest rates and mortgage prepayment rates;
    our ability to obtain or renew sufficient funding to maintain
    our leverage strategies;
    continued creditworthiness of the holders of mortgages
    underlying our mortgage-related assets;
    potential impacts of our leveraging policies on our net income
    and cash available for distribution;
    the ability of our Board of Directors to change our operating
    policies and strategies without stockholder approval or notice
    to you;
    Effects of interest rate caps on our adjustable-rate and hybrid
    adjustable-rate loans and mortgage-backed securities;
    the degree to which our hedging strategies may or may not
    protect us from interest rate volatility;
    the fact that our manager could be motivated to recommend
    riskier investments in an effort to maximize its incentive
    compensation under its management agreement with us;
    potential conflicts of interest arising out of our relationship
    with our manager, on the one hand, and our managers
    relationships with other third parties, on the other hand;
    our ability to invest up to 10% of our investment portfolio in
    residuals, leveraged mortgage derivative securities, and shares
    of other REITs as well as other investments;
    your inability to review the assets that we will acquire with
    the net proceeds of any securities we offer before you purchase
    our securities; and
    the other important factors described in this Annual Report on
    Form 10-K,
    including those under the captions Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations, Risk Factors and
    Quantitative and Qualitative Disclosures about Market
    Risk.  Form 10-Q
  Form 10-K
 ii




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PART I  ITEM 1.
    BUSINESS  Our
    Company
  Background
          Assets
  Form 10-K
   1




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Borrowings
  available-for-sale,
  Form 10-K
      Hedging
   2




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Accounting for Derivative Instruments and
    Hedging Activities Form 10-K
  Business
    Strategy
  Investment
    Strategy
  time-to-reset, loan-to-value,
    loan-to-value loan-to-value
 3




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loan-to-value
    Financing
    Strategy
     4




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Growth
    Strategy
    
    increasing the size of our balance sheet at a rate faster than
    the rate of increase in our operating expenses;
    using leverage to increase the size of our balance
    sheet; and
    lowering our effective borrowing costs over time by seeking
    direct funding with collateralized lenders.  Our
    Operating Policies and Programs
    
    asset acquisition policy;
    capital/liquidity and leverage policies;
    credit risk management policy; and
    asset/liability management policy.  Asset
    Acquisition Policy
    
    Category I  At least 75% of our total
    assets shall be residential mortgage-backed securities, or RMBS,
    residential real estate loans, or RRELoans, and short-term
    investments. RRELoans shall be prime credit quality
    loans, for example have FICO scores not less than 600, have a
    combined
    loan-to-value
    ratio not greater than 105% and be either in first or second
    lien position.
    Category II  At least 90% of our
    total assets will consist of Category I investments plus
    RRELoans not meeting one or more of the criteria in Category I.
    Category III  No more than 10% of
    our total assets shall be of a type not meeting any of the above
    criteria. Among the types of assets generally assigned to this
    category are residuals, leveraged mortgage derivative
    securities, shares of other REITs or other investments.   5




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##### Table of Contents



Capital/Liquidity
    and Leverage Policies
          Credit
    Risk Management Policy
      Asset/Liability
    Management Policy
  Interest Rate Risk Management.
  
    monitoring and adjusting, if necessary, the reset index and
    interest rates of our mortgage-related assets and our borrowings;
    attempting to structure our borrowing agreements to have a range
    of different maturities, terms, amortizations and interest rate
    adjustment periods;
    using derivatives, financial futures, swaps, options, caps,
    floors and forward sales to adjust the interest rate sensitivity
    of our mortgage-related assets and our borrowings; and
    actively managing, on an aggregate basis, the interest rate
    indices, interest rate adjustment periods and gross reset
    margins of our mortgage-related assets and the interest rate
    indices and adjustment periods of our borrowings. 6




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Form 10-K Form 10-K.
  Prepayment Risk Management. loan-to-value,
    Description
    of Mortgage-Related Assets
  Mortgage-Backed
    Securities
     7




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Mortgage
    Loans
      and/or
  Other
    Investments
      Industry
    Trends
   8




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Competition
    Federal
    Income Tax Considerations
  General
          Requirements
    for Qualification as a REIT
    Stock
    Ownership Tests
   9




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Income
    Tests
    
    under the 75% gross income test, we must derive at
    least 75% of our gross income, excluding gross income from
    prohibited transactions, from specified real estate sources,
    including rental income, interest on obligations secured by
    mortgages on real property or on interests in real property,
    gain from the disposition of qualified real estate
    assets, i.e., interests in real property, mortgages
    secured by real property or interests in real property, and some
    other assets, and income from certain types of temporary
    investments; and
    under the 95% gross income test, we must derive at
    least 95% of our gross income, excluding gross income from
    prohibited transactions, from (1) the sources of income
    that satisfy the 75% gross income test, (2) dividends,
    interest and gain from the sale or disposition of stock or
    securities, including some hedging transactions entered into to
    manage interest rate risk or price changes or currency
    fluctuations with respect to borrowings incurred to acquire or
    carry qualified real estate assets, or (3) any combination
    of the foregoing.    Asset
    Tests
      Annual
    Distribution Requirements
      Taxation
    of Stockholders
   10




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
    A stockholders share of the excess inclusion income is not
    allowed to be offset by any net operating losses otherwise
    available to the stockholder;
    A tax-exempt stockholders share of excess inclusion income
    generally is subject to tax as unrelated business taxable
    income; and
    A
    non-U.S. stockholders
    share of excess inclusion income is subject to
    U.S. withholding tax at the maximum rate (30%), without
    being eligible for reduction under any income tax treaty that
    otherwise might be applicable.  Employees
  day-to-day
  Website
    Access to our Periodic SEC Reports
  www.luminentcapital.com. Forms 10-K 10-Q Form 8-K, Form 10-K.
  1-800-SEC-0330. www.sec.gov
   11




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##### Table of Contents



ITEM 1A.
    RISK
    FACTORS  As used in this report, Luminent,
    Company, we, our, and
    us, refer to Luminent Mortgage Capital, Inc. and its
    subsidiaries, except where the context otherwise requires. The
    occurrence of one or more of these risk factors could adversely
    impact our results of operations or financial condition.
  General
    Risks Related to our Business
  We
    might not be able to find mortgage loans or mortgage-backed
    securities that meet our investment criteria or at favorable
    spreads over our borrowing costs, which would adversely impact
    our results of operations or financial condition.
        Our
    mortgage loans and mortgage-backed securities are subject to
    prepayments, and increased prepayment rates could adversely
    impact our results of operations or financial
    condition.
       12




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Our
    stockholders equity or book value is volatile and is
    subject to changes in interest rates.
    Our
    mortgage loans and mortgage-backed securities are subject to
    defaults, which could adversely impact our results of operations
    or financial condition.
          The
    representations and warranties that we will make in our
    securitizations may subject us to liability, which could
    adversely impact our results of operations or financial
    condition.
   13




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Our
    mortgage loans and mortgage-backed securities are subject to
    interest rate caps and resets that could adversely impact our
    results of operations or financial condition.
      The
    use of securitizations with over-collateralization requirements
    could restrict our cash flow and adversely impact our results of
    operations or financial condition.
  and/or and/or
  We
    purchase subordinated mortgage-backed securities that are
    structured to absorb a disproportionate amount of any losses on
    the underlying mortgage loans. These purchases could adversely
    impact our results of operations or financial
    condition.
   14




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Our
    mortgage loans and mortgage-backed securities are subject to
    potential illiquidity, which might prevent us from selling them
    at reasonable prices when we find it necessary to sell them.
    This factor could adversely impact our results of operations or
    financial condition.
    Our
    mortgage loans and mortgage-backed securities are subject to the
    overall health of the U.S. economy, and a national or
    regional economic slowdown could adversely impact our results of
    operations or financial condition.
    We
    might not be able to obtain financing for our mortgage loans or
    mortgage-backed securities, which would adversely impact our
    results of operations or financial condition.
    Our
    investment strategies employ a significant amount of leverage,
    and are subject to daily fluctuations in market pricing and
    margin calls, which could adversely impact our results of
    operations or financial condition.
       15




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Interest
    rate mismatches between our mortgage loans and mortgage-backed
    securities and our borrowings could adversely impact our results
    of operations or financial condition.
    Our
    use of certain types of financing may give our lenders greater
    rights in the event that either we or any of our lenders file
    for bankruptcy.
    Our
    hedging activities might be unsuccessful and adversely impact
    our results of operations and book value.
    Accounting for
    Derivative Instruments and Hedging Activities mark-to-market
   16




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Our
    mortgage loans may not be serviced effectively, which might
    adversely impact our results of operations or financial
    condition.
    If we
    are unable to securitize our mortgage loans successfully, we may
    be unable to grow or fully execute our business strategies and
    our earnings may decrease.
  Accounting for Transfers and
    Servicing of Financial Assets and Extinguishments of
    Liabilities
  Risks
    Related to Seneca
  Seneca
    might fail to comply with the terms of the Amended Agreement,
    manage our Spread portfolio poorly or lose key personnel that
    are important to our Spread portfolio, which could adversely
    impact our results of operations or financial
    condition.
    Because
    Seneca is entitled to a fee that may be significant if we
    terminate the Amended Agreement without cause, economic
    considerations might preclude us from terminating the Amended
    Agreement in the event that Senecas performance fails to
    meet our expectations but does not constitute
    cause.
     17




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Senecas
    liability is limited under the Amended Agreement and we have
    agreed to indemnify Seneca against certain
    liabilities.
    Legal and
    Tax Risks
  If we
    are disqualified as a REIT, we will be subject to tax as a
    regular corporation and face substantial tax
    liability.
    
    we would be taxed as a regular domestic corporation, which,
    among other things, means that we would be unable to deduct
    distributions to our stockholders in computing taxable income
    and we would be subject to U.S. federal income tax on our
    taxable income at regular corporate rates;
    any resulting tax liability could be substantial, would reduce
    the amount of cash available for distribution to our
    stockholders and could force us to liquidate assets at
    inopportune times, causing lower income or higher losses than
    would result if these assets were not liquidated; and
    unless we were entitled to relief under applicable statutory
    provisions, we would be disqualified from treatment as a REIT
    for the subsequent four taxable years following the year during
    which we lost our qualification and, thus, our cash available
    for distribution to our stockholders would be reduced for each
    of the years during which we did not qualify as a REIT.    Complying
    with REIT requirements might cause us to forego otherwise
    attractive opportunities.
     18




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Complying
    with REIT requirements may limit our ability to hedge
    effectively.
    Complying
    with the REIT requirements may force us to borrow to make
    distributions to our stockholders.
    Recognition
    of excess inclusion income by us could have adverse tax
    consequences to us or our stockholders.
         19




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Complying
    with the REIT requirements may force us to liquidate otherwise
    attractive investments.
    Failure
    to maintain an exemption from the Investment Company Act would
    harm our results of operations.
      loan-to-value loan-to-value
       20




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Misplaced
    reliance on legal opinions or statements by issuers of
    mortgage-backed securities could result in a failure to comply
    with REIT income or assets tests.
    One-action
    rules may harm the value of the underlying
    property.
    We may
    be harmed by changes in various laws and
    regulations.
    Risks
    Related to Investing in Our Securities
  The
    timing and amount of our cash distributions may be volatile over
    time.
   21




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Our
    declared cash distributions may force us to liquidate mortgage
    loans or mortgage-backed securities or borrow additional
    funds.
    Future
    offerings of debt securities by us, which would be senior to our
    common stock upon liquidation, or equity securities, which would
    dilute our existing stockholders and may be senior to our common
    stock for the purposes of distributions, may harm the value of
    our common stock.
    Changes
    in yields may harm the market price of our common
    stock.
    The
    market price and trading volume of our common stock may be
    volatile; broad market fluctuations could harm the market price
    of our common stock.
      The
    market price of our common stock may be adversely affected by
    future sales of a substantial number of shares of our common
    stock in the public market or the availability of such shares
    for sale.
   22




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Issuance
    of large amounts of our stock could cause our price to
    decline.
    Restrictions
    on ownership of a controlling percentage of our capital stock
    might limit your opportunity to receive a premium on our
    stock.
    Certain
    provisions of Maryland law and our charter and bylaws could
    hinder, delay or prevent a change in control of our
    company.
    
    Classified Board of Directors.  Our Board of
    Directors is divided into three classes with staggered terms of
    office of three years each. The classification and staggered
    terms of office of our directors make it more difficult for a
    third party to gain control of our Board of Directors. At least
    two annual meetings of stockholders, instead of one, generally
    would be required to effect a change in a majority of our Board
    of Directors.
    Removal of Directors.  Under our charter,
    subject to the rights of one or more classes or series of
    preferred stock to elect one or more directors, a director may
    be removed only for cause and only by the affirmative vote of at
    least two-thirds of all votes entitled to be cast by our
    stockholders generally in the election of directors.
    Number of Directors, Board Vacancies, Term of
    Office.  We have elected to be subject to certain
    provisions of Maryland law that vest in our Board of Directors
    the exclusive power to determine the number of directors and the
    exclusive power, by the affirmative vote of a majority of the
    remaining directors, to fill vacancies on the board even if the
    remaining directors do not constitute a quorum. These provisions
    of Maryland law, which are applicable even if other provisions
    of Maryland law or our charter or bylaws provide to the
    contrary, also provide that any director elected to fill a
    vacancy shall hold office for the remainder of the full term of
    the class of directors in which the vacancy occurred, rather
    than the next annual meeting of stockholders as would otherwise
    be the case, and until his or her successor is elected and
    qualifies. 23




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
    Preferred Stock.  Under our charter, our Board
    of Directors has the power to issue preferred stock from time to
    time in one or more series and to establish the terms,
    preferences and rights of any such series of preferred stock,
    all without approval of our stockholders.
    Duties of Directors with Respect to Unsolicited
    Takeovers.  Maryland law provides protection for
    Maryland corporations against unsolicited takeovers by limiting,
    among other things, the duties of the directors in unsolicited
    takeover situations. The duties of directors of Maryland
    corporations do not require them to (1) accept, recommend
    or respond to any proposal by a person seeking to acquire
    control of the corporation, (2) authorize the corporation to
    redeem any rights under, or modify or render inapplicable, any
    stockholder rights plan, (3) make a determination under the
    Maryland Business Combination Act or the Maryland Control Share
    Acquisition Act or (4) act or fail to act solely because of
    the effect the act or failure to act may have on an acquisition
    or potential acquisition of control of the corporation or the
    amount or type of consideration that may be offered or paid to
    the stockholders in an acquisition. Moreover, under Maryland
    law, the act of the directors of a Maryland corporation relating
    to or affecting an acquisition or potential acquisition of
    control is not subject to any higher duty or greater scrutiny
    than is applied to any other act of a director. Maryland law
    also contains a statutory presumption that an act of a director
    of a Maryland corporation satisfies the applicable standards of
    conduct for directors under Maryland law.
    Ownership Limit.  In order to preserve our
    status as a REIT under the Code, our charter generally prohibits
    any single stockholder, or any group of affiliated stockholders,
    from beneficially owning more than 9.8% of our outstanding
    common and preferred stock unless our Board of Directors waives
    or modifies this ownership limit.
    Maryland Business Combination Act.  The
    Maryland Business Combination Act provides that, unless
    exempted, a Maryland corporation may not engage in business
    combinations, including mergers, dispositions of 10% or more of
    its assets, certain issuances of shares of stock and other
    specified transactions, with an interested
    stockholder or an affiliate of an interested stockholder
    for five years after the most recent date on which the
    interested stockholder became an interested stockholder, and
    thereafter unless specified criteria are met. An interested
    stockholder is generally a person owning or controlling,
    directly or indirectly, 10% or more of the voting power of the
    outstanding stock of a Maryland corporation. Our Board of
    Directors has adopted a resolution exempting us from this
    statute. However, our Board of Directors may repeal or modify
    this resolution in the future, in which case the provisions of
    the Maryland Business Combination Act would be applicable to
    business combinations between us and interested stockholders.
    Maryland Control Share Acquisition
    Act.  Maryland law provides that control
    shares of a corporation acquired in a control share
    acquisition shall have no voting rights except to the
    extent approved by a vote of two-thirds of the votes eligible to
    be cast on the matter under the Maryland Control Share
    Acquisition Act. Control shares means shares of
    stock that, if aggregated with all other shares of stock
    previously acquired by the acquirer, would entitle the acquirer
    to exercise voting power in electing directors within one of the
    following ranges of the voting power: one-tenth or more but less
    than one-third, one-third or more but less than a majority or a
    majority or more of all voting power. A control share
    acquisition means the acquisition of control shares,
    subject to certain exceptions. If voting rights of control
    shares acquired in a control share acquisition are not approved
    at a stockholders meeting, then, subject to certain
    conditions and limitations, the corporation may redeem any or
    all of the control shares for fair value. If voting rights of
    such control shares are approved at a stockholders meeting
    and the acquirer becomes entitled to vote a majority of the
    shares of stock entitled to vote, all other stockholders may
    exercise appraisal rights. Our bylaws contain a provision
    exempting acquisitions of our shares from the Maryland Control
    Share Acquisition Act. However, our Board of Directors may amend
    our bylaws in the future to repeal or modify this exemption, in
    which case any control shares of our company acquired in a
    control share acquisition will be subject to the Maryland
    Control Share Acquisition Act.  ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS   24




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ITEM 2.
    PROPERTIES  th
  st
  ITEM 3.
    LEGAL
    PROCEEDINGS    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES  Market
    Information
      Common Stock2005

High


LowFirst Quarter

$
11.93


$
10.85Second Quarter


11.04



9.70Third Quarter


11.05



7.40Fourth Quarter


8.36



6.32   2004

High


LowFirst Quarter

$
15.35


$
13.77Second Quarter


14.35



11.45Third Quarter


12.88



10.50Fourth Quarter


12.78



11.30   Holders
   25




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Distributions
    and Distribution Policy
    CashDistributionsDeclared per


DeclarationShare


Date2005First Quarter

$
0.36


March 31, 2005Second Quarter


0.27


June 29, 2005Third Quarter


0.11


September 30, 2005Fourth Quarter


0.03


December 20, 20052004First Quarter

$
0.42


March 9, 2004Second Quarter


0.43


June 28, 2004Third Quarter


0.43


September 28, 2004Fourth Quarter


0.43


December 21, 2004       Form 10-K.
    
    90% of our REIT taxable net income, plus
    90% of our after-tax net income, if any, from foreclosure
    property, minus
    the excess of the sum of specified items of our non-cash income
    items over 5% of REIT taxable net income.     26




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Equity
    Compensation Plan
      (c)(a)


(b)


Number ofNumber of


Weighted-


Securities RemainingSecurities to be


Average Exercise


Available for FutureIssued Upon Exercise


Price of


Issuance Under Equityof Outstanding


Outstanding


Compensation Plans-Options, Warrants


Options, Warrants


Excluding SecuritiesPlan Category

and Rights


and Rights


Reflected in Column
    (a)Incentive plans approved by
    stockholders


55,000


$
14.82



1,737,334Incentive plans not approved by
    stockholders










Total


55,000


$
14.82



1,737,334
(1)     (1)
    
    At December 31, 2005, the maximum number of shares of
    common stock that may be delivered in future periods pursuant to
    awards granted under both plans is 1,737,334 shares of our
    common stock.  Form 10-K
  Purchases
    of Equity Securities
    (c)


(d)(a)


(b)


Total Number of


MaximumTotal


Average


Shares Purchased as


Number of SharesNumber of


Price


Part of Publicly


That May yet beShares


Paid per


Announced


Purchased UnderPeriod

Purchased


Share


Program


the Program(1)November 1  30,
    2005














2,000,000December 1  31,
    2005


675,050


$
7.38



675,050



1,324,950     (1)
    
    Our stock repurchase program was announced on November 7,
    2005 and authorized us to repurchase up to a total of 2,000,000
    of our common shares. We can repurchase shares in the open
    market or through privately negotiated transactions from time to
    time at managements discretion until we repurchase a total
    of 2,000,000 common shares or our Board of Directors determines
    to terminate the program.   27




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ITEM 6.
    SELECTED
    FINANCIAL DATA  Form 10-K.
  For the PeriodFor the Year


For the Year


from April 26,Ended


Ended


2003 throughDecember 31,


December 31,


December 31,2005


2004


2003(Dollars in thousands, exceptshare and per share
    amounts)Statement of Operations
    Data:Interest income

$
181,421


$
123,754


$
22,654Interest expense


137,501



55,116



9,009Net interest income


43,920



68,638



13,645Other income (expense)


(808
)


1,070



Impairment losses on
    mortgage-backed securities


(112,008
)






Losses on sales of mortgage-backed
    securities


(69
)






(7,831
)Expenses


14,026



12,596



3,053Net income (loss)


(82,991
)


57,112



2,761Per Common Share Data:Net income
    (loss)  basic and diluted

$
(2.13
)

$
1.68


$
0.27Cash distributions declared(1)


0.77



1.71



0.95Book value (end of period)(2)


9.76



10.93



11.38Common shares outstanding (end of
    period)


40,587,245



37,113,011



24,814,000Weighted-average shares
    outstanding  basic


39,007,953



33,895,967



10,139,280Weighted-average shares
    outstanding  diluted


39,007,953



33,947,414



10,139,811Balance Sheet Data (end of
    period):Mortgage-backed securities
    available-for-sale, at fair value

$
219,148


$
186,351


$
352,123Mortgage-backed securities
    available-for-sale, pledged as collateral, at fair value


4,140,455



4,641,604



1,809,822Total mortgage-backed securities
    available-for-sale, at fair value


4,359,603



4,827,955



2,161,945Loans
    held-for-investment


507,177







Total assets


4,933,471



4,879,828



2,179,340Repurchase agreements


3,928,505



4,436,456



1,728,973Mortgage-backed notes


486,302







Junior subordinated notes


92,788







Margin debt


3,548







Total liabilities


4,537,150



4,474,325



1,896,844Accumulated other comprehensive
    income (loss)


7,076



(61,368
)


(26,510
)Total stockholders equity


396,321



405,503



282,496Financial Ratios:Leverage ratio (period end)(3)


11.4



10.9



6.1     (1)
    Cash distributions declared during the period from
    April 26, 2003 through December 31, 2003 were payable
    to stockholders of the 11,704,000 shares outstanding on
    each of the record dates prior to the completion of our initial
    public offering. Cash distributions of $0.42 per share
    declared on March 9, 2004 were payable to stockholders of
    the 24,841,146 shares outstanding on the record date, which
    was prior to the completion of our follow-on public offering.(2)
    Book value is calculated as total stockholders equity
    divided by the number of shares issued and outstanding at
    December 31, 2005, 2004 and 2003.(3)
    Leverage is calculated as total liabilities divided by total
    stockholders equity. At December 31, 2003,
    substantially all of the net offering proceeds from our initial
    public offering had been used to purchase mortgage-backed
    securities. However, at December 31, 2003, we had not fully
    levered our Spread portfolio to within our target range of eight
    to 12 times the amount of our equity. 28




---



##### Table of Contents



ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  The following discussion of our financial condition and
    results of operations should be read in conjunction with the
    financial statements and notes to those statements included in
    Item 8 of this Annual Report on
    Form 10-K.
    This discussion may contain certain forward-looking statements
    that involve risks and uncertainties. Forward-looking statements
    are those that are not historical in nature. The words
    anticipate, estimate,
    should, expect, believe,
    intend and similar expressions or the negatives of
    these words or phrases are intended to identify forward-looking
    statements. As a result of many factors, such as those set forth
    under Risk Factors in Item 1A of this Annual
    Report on
    Form 10-K
    and elsewhere in this Annual Report, our actual results may
    differ materially from those anticipated in such forward-looking
    statements.
  Overview
  Executive
    Summary
         29




---



##### Table of Contents




    Interest rate trends and changes in the yield curve;
    rates of prepayment on our mortgage loans and the mortgages
    underlying our mortgage-backed securities;
    continued creditworthiness of the holders of mortgages
    underlying our mortgage-related assets;
    highly competitive markets for investment opportunities; and
    other market developments.    
    Credit risk as defined by prepayments, delinquencies and
    defaults on our mortgage loans and the mortgage loans underlying
    our mortgage-backed securities;
    overall leverage of our portfolio;
    access to funding and adequate borrowing capacity;
    increases in our borrowing costs;
    the ability to use derivatives to mitigate our interest rate and
    prepayment risks;
    the market value of our investments; and
    compliance with REIT requirements and the requirements to
    qualify for an exemption under the Investment Company Act of
    1940.  Form 10-K Form 10-K
  Summary
    and Outlook
      Accounting for Derivative Instruments and Hedging
    Activities
     30




---



##### Table of Contents



Rule 10b-18
      loan-by-loan
    Alt-A
       31




---



##### Table of Contents



Form 10-K Form 10-K
  Critical
    Accounting Policies
  Form 10-K
  Classifications
    of Investment Securities
  available-for-sale available-for-sale available-for-sale period-to-period.
  Valuations
    of Mortgage-backed Securities
      available-for-sale other-than-temporary other-than-temporary other-than-temporary
  other-than-temporary
 32




---



##### Table of Contents



available-for-sale
  other-than-temporary other-than-temporary,
  Loans
    Held-for-Investment
  held-for-investment held-for-investment
  Allowance
    and Provision for Loan Losses
    Interest
    Income Recognition
  Accounting for Nonrefundable Fees and Costs Associated with
    Originating or Acquiring Loans and Initial Direct Costs of
    Leases. Recognition of Interest
    Income and Impairment on Purchased and Retained Beneficial
    Interests in Securitized Financial Assets.
   33




---



##### Table of Contents



Securitizations
  Accounting for Transfers
    and Servicing of Financial Assets and Extinguishments of
    Liabilities Consolidation of
    Variable Interest Entities
  Accounting
    for Derivative Financial Instruments and Hedging
    Activities
        Form 10-K
  
 Recent
    Accounting Pronouncements
  other-than-temporary
 34




---



##### Table of Contents



other-than-temporary other-than-temporary Accounting for Certain Investments in
    Debt and Equity Securities, Accounting for Certain Investments Held by
    Not-for-Profit
    Organizations The Equity
    Method of Accounting for Investments in Common Stock. No. 03-1, The Meaning of
    Other-Than-Temporary
    Impairment and Its Application to Certain Investments No. D-44, Recognition of
    Other-Than-Temporary
    Impairment upon the Planned Sale of a Security Whose Cost
    Exceeds Fair Value.
  SOP 94-6-1, Terms of Loan Products That May Give Rise to a Concentration
    of Risk.
  Accounting for Certain Hybrid Financial
    Instruments  an amendment of FASB Statements
    No. 133 and 140. instrument-by-instrument and/or
  Accounting Treatment for Certain Investments Financed with
    Repurchase Agreements
  available-for-sale.
  Accounting for Transfers and
    Servicing of Financial Assets and Extinguishments of
    Liabilities.
 35




---



##### Table of Contents



available-for-sale
  Results
    of Operations
  Year
    ended December 31, 2005 compared to the year ended
    December 31, 2004
        For the Year





For the YearEnded


Percentage


Ended


PercentageDecember 31,


of Average


December 31,


of Average2005


Liabilities


2004


Liabilities(In thousands)Interest expense on repurchase
    agreement liabilities

$
138,076



3.08
%

$
56,309



1.60
%Interest expense on
    mortgage-backed notes


3,719



0.08







Interest expense on warehouse
    lending facilities


1,507



0.03







Interest expense on junior
    subordinated notes


3,411



0.08







Net hedge ineffectiveness
    (gains)/losses on futures and interest rate swap contracts


258



0.01



(2,268
)


(0.06
)Amortization of net realized gains
    on futures contracts


(1,415
)


(0.03
)


(2,803
)


(0.08
)Net interest (income)/expense on
    interest rate swap contracts


(8,093
)


(0.18
)


3,720



0.11Other


38



nm



158



nmTotal interest expense

$
137,501



3.07
%

$
55,116



1.57
%    36




---



##### Table of Contents



nm
    
    = not meaningful            Form 10-K
     37




---



##### Table of Contents



Year
    ended December 31, 2004 compared to the period from
    April 26, 2003 through December 31, 2003
         38




---



##### Table of Contents



For the PeriodfromFor the Year





June 23, 2003Ended


Percentage


through


PercentageDecember 31,


of Average


December 31,


of Average2004


Liabilities


2003


Liabilities(In thousands)Interest expense on repurchase
    agreement liabilities

$
56,309



1.60
%

$
8,999



1.14
%Net hedge ineffectiveness gains on
    futures and interest rate swap contracts


(2,268
)


(0.06
)






Amortization of net realized gains
    on futures contracts


(2,803
)


(0.08
)






Net interest expense on interest
    rate swap contracts


3,720



0.11







Other


158



nm



10



nmTotal interest expense

$
55,116



1.57
%

$
9,009



1.14
%     nm
    
    = not meaningful           39




---



##### Table of Contents



start-up
      10-year
         40




---



##### Table of Contents



REIT
    taxable net income
    For the PeriodfromFor the Year


For the Year


April 26, 2003Ended


Ended


throughDecember 31,


December 31,


December 31,2005


2004


2003(In thousands)GAAP net income (loss)

$
(82,991
)

$
57,112


$
2,761Adjustments to GAAP net income
    (loss):Add back organizational costs
    expensed during period










163Amortization of organizational
    costs


(33
)


(33
)


(19
)Add back stock compensation
    expense for unvested stock options


2



5



3Add back stock compensation
    expense for unvested restricted common stock


1,594



1,494



48Subtract stock compensation
    expense for vested restricted common stock


(910
)






Subtract taxable REIT subsidiary
    activities, net


(38
)






Add back (subtract) net hedge
    ineffectiveness (gains)/losses on futures and interest rate swap
    contracts


114



(308
)


Subtract dividend equivalent
    rights on restricted common stock


(376
)


(255
)


Subtract amortization of net
    realized gains on futures contracts


(1,415
)






Add back net losses on sales of
    mortgage-backed securities


69







7,831Add back realized and unrealized
    losses on other derivative instruments


810







Add back impairment losses on
    mortgage-backed securities


112,008







Add back waived incentive
    compensation










613Add back net realized gains on
    futures contracts


2,480



1,410



Net adjustments to GAAP net income
    (loss)


114,305



2,313



8,639REIT taxable net income

$
31,314


$
59,425


$
11,400  41




---



##### Table of Contents



For thePeriod fromFor the


For the


April 26, 2003Year Ended


Year Ended


throughDecember 31,


December 31,


December 31,2005


2004


2003(In thousands, except per share
    data)Undistributed REIT taxable net
    income, beginning of period

$
1,794


$
281


$
REIT taxable net income during
    period


31,314



59,425



11,400Distributions declared during
    period, net of dividend equivalent rights on restricted common
    stock


(29,954
)


(57,912
)


(11,119
)Undistributed REIT taxable net
    income, end of period

$
3,154


$
1,794


$
281Cash distributions per share
    declared during period

$
0.77


$
1.71


$
0.95Percentage of REIT taxable net
    income distributed


95.7
%


97.5
%


97.5
%     Financial
    Condition
    and/or and/or at-the-market
  Form 10-K
      Mortgage-Backed
    Securities
   42




---



##### Table of Contents



other-than-temporary
  other-than-temporary other-than-temporary other-than-temporary
  available-for-sale other-than-temporarily
   43




---



##### Table of Contents



December 31, 2005


December 31, 2004Weighted-





Weighted-Average Final


% of


Average Final


% ofAsset

Maturity


Total


Maturity


TotalAdjustable-Rate MBS


2033



1.5
%


2033



2.6
%Hybrid Adjustable-Rate MBS


2034



91.3



2034



96.3Balloon MBS


2008



1.1



2008



1.1Other MBS


2038



6.1



n/a



n/a       Weighted-Amortized


AverageWeighted-Average Life

Fair Value


Cost


Coupon(In thousands)Less than one year

$
690,568


$
690,539



4.51
%Greater than one year and less
    than five years


3,489,302



3,489,179



4.35Greater than five years


179,733



184,205



6.15Total

$
4,359,603


$
4,363,923



4.46
%     Weighted-Amortized


AverageWeighted-Average Life

Fair Value


Cost


Coupon(In thousands)Less than one year

$
211,475


$
215,099



3.76
%Greater than one year and less
    than five years


4,616,480



4,682,154



4.24Greater than five years










Total

$
4,827,955


$
4,897,253



4.22
%        44




---



##### Table of Contents



Loans
    Held-for-Investment
  held-for-investment
  Form 10-K
 45




---



##### Table of Contents



held-for-investment
  DelinquentInterest


Interest


Maturity


Principal


BalanceRate Type


Rate


Date


Balance


(>90 Days)(In thousands)First Lien Adjustable-Rate
    Residential Mortgage Loans


3-Year Hybrid



4.00  5.00
%


2035


$
454


$
First Lien Adjustable-Rate
    Residential Mortgage Loans


3-Year Hybrid



5.01  6.00
%


2035



25,079



First Lien Adjustable-Rate
    Residential Mortgage Loans


3-Year Hybrid



6.01  7.00
%


2035



7,229



First Lien Adjustable-Rate
    Residential Mortgage Loans


3-Year Hybrid



7.01  7.50
%


2035



128



First Lien Adjustable-Rate
    Residential Mortgage Loans


5-Year Hybrid



4.00  5.00
%


2034



539



First Lien Adjustable-Rate
    Residential Mortgage Loans


5-Year Hybrid



4.00  5.00
%


2035



6,402



First Lien Adjustable-Rate
    Residential Mortgage Loans


5-Year Hybrid



5.01  6.00
%


2035



207,514



First Lien Adjustable-Rate
    Residential Mortgage Loans


5-Year Hybrid



6.01  7.00
%


2035



259,153



Total













$
506,498


$
   held-for-investment
  Unpaid principal balance

$
506,498,203Number of loans


1,163Average loan balance

$
435,510Weighted-average coupon rate


6.09
%Weighted-average lifetime mortgage
    rate


11.31
%Weighted-average original term, in
    months


360Weighted-average remaining term,
    in months


357Weighted-average
    loan-to-value
    ratio (LTV)


75.1
%Weighted-average FICO score


712Top five geographic concentrations
    (% exposure)California


38.9
%Virginia


11.1
%Florida


8.5
%Arizona


6.2
%Maryland


5.4
%Occupancy statusOwner occupied


88.8
%Second home


4.9
%Investor


6.3
%Property typeSingle-family


87.0
%Condominium


9.7
%Other residential


3.3
%  46




---



##### Table of Contents



five-year
  Securitizations
  held-for-investment
  Other
    Assets
    Hedging
    Instruments
    marked-to-market
 47




---



##### Table of Contents



Repurchase
    Agreements
      Mortgage-Backed
    Notes
   48




---



##### Table of Contents



Warehouse
    Lending Facilities
    Junior
    Subordinated Notes
  Form 10-K
  Margin
    Debt
     49




---



##### Table of Contents



Other
    Liabilities
    Stockholders
    Equity
  available-for-sale
    Liquidity
    and Capital Resources
         50




---



##### Table of Contents



Form S-3
  and/or and/or at-the-market
 51




---



##### Table of Contents



Form S-3 and/or
  Rule 10b-18
    Inflation
  and/or
  Contractual
    Obligations and Commitments
    Payments Due by PeriodLess








MoreThan 1


1 - 3


3 - 5


Than 5Total


Year


Years


Years


Years(In millions)Repurchase agreements

$
3,928.5


$
3,928.5


$



$



$
Mortgage-backed notes(1)


486.3



152.7



223.9



109.7



Junior subordinated notes


92.8















92.8Margin Debt


3.5



3.5











Total

$
4,511.1


$
4,084.7


$
223.9


$
109.7


$
92.8     (1)
    
    The mortgaged-backed notes have a stated maturity of 2035;
    however, the expected maturity is subject to change based on the
    prepayments and loan losses of the underlying mortgage loans. In
    addition, we may exercise a redemption option and thereby effect
    termination and early retirement of the mortgage-backed notes.
    The payments represented reflect our assumptions for prepayment
    and credit losses at December 31, 2005 and assume we will
    exercise our redemption option.  Form 10-K
 52




---



##### Table of Contents



Off-Balance
    Sheet Arrangements
  Form 10-K
  Payments Due by PeriodLess








MoreThan 1


1 - 3


3 - 5


Than 5Total


Year


Years


Years


Years(In millions)Junior subordinated notes

$
92.8














$
92.8   ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    Credit
    Risk
          Concentration
    Risk
    Interest
    Rate Risk
   53




---



##### Table of Contents



Effect
    on Net Interest Income
    sources-of-income
  Extension
    Risk
    Interest
    Rate Cap Risk
   54




---



##### Table of Contents



Interest
    Rate Mismatch Risk
  Form 10-K
    Prepayment
    Risk
    Effect
    on Fair Value
     55




---



##### Table of Contents



Interest Rates





Interest Rates


Interest RatesFall 100





Rise 100


Rise 200Basis Points


Unchanged


Basis Points


Basis Points(Dollars in millions)Adjustable-Rate Mortgage-Backed
    SecuritiesFair value

$
66.3


$
66.0


$
65.7


$
65.4Change in fair value

$
0.3






$
(0.3
)

$
(0.6
)Change as a percent of fair value


0.5
%






(0.5
)%


(0.9
)%Hybrid Adjustable-Rate
    Mortgage-Backed SecuritiesFair value

$
4,048.5


$
3,978.7


$
3,908.9


$
3,839.1Change in fair value

$
69.8






$
(69.8
)

$
(139.6
)Change as a percent of fair value


1.8
%






(1.8
)%


(3.5
)%Balloon Mortgage-Backed
    SecuritiesFair value

$
49.6


$
48.8


$
48.0


$
47.2Change in fair value

$
0.8






$
(0.8
)

$
(1.6
)Change as a percent of fair value


1.6
%






(1.6
)%


(3.3
)%Other Mortgage-Backed
    SecuritiesFair value

$
266.8


$
266.1


$
265.4


$
264.7Change in fair value

$
0.7






$
(0.7
)

$
(1.4
)Change as a percent of fair value


0.3
%






(0.3
)%


(0.5
)%Total Mortgage-Backed
    SecuritiesFair value

$
4,431.2


$
4,359.6


$
4,288.0


$
4,216.4Change in fair value

$
71.6






$
(71.6
)

$
(143.2
)Change as a percent of fair value


1.6
%






(1.6
)%


(3.3
)%Mortgage Loans
    Held-for-InvestmentFair value

$
514.7


$
507.2


$
499.7


$
492.2Change in fair value

$
7.5






$
(7.5
)

$
(15.0
)Change as a percent of fair value


1.5
%






(1.5
)%


(3.0
)%Repurchase
    Agreements(1)Fair value

$
3,298.5


$
3,298.5


$
3,298.5


$
3,298.5Change in fair value














Change as a percent of fair value














Mortgage-Backed
    Notes(1)Fair value

$
486.3


$
486.3


$
486.3


$
486.3Change in fair value














Change as a percent of fair value














Junior Subordinated
    NotesFair value

$
95.6


$
91.8


$
88.1


$
84.6Change in fair value

$
3.8






$
(3.7
)

$
(7.2
)Change as a percent of fair value


4.1
%






(4.0
)%


(7.8
)%Hedge InstrumentsFair value

$
(5.7
)

$
10.7


$
29.4


$
48.5Change in fair value

$
(16.4
)





$
18.7


$
37.8Change as a percent of fair value


nm







nm



nm     (1)
    
    The fair value of the repurchase agreements and mortgage-backed
    notes would not change materially due to the short-term nature
    of these instruments.  nm = not meaningful 56




---



##### Table of Contents



Risk
    Management
    
    monitoring and adjusting, if necessary, the reset index and
    interest rate related to our mortgage-backed securities and our
    borrowings;
    attempting to structure our borrowing agreements to have a range
    of different maturities, terms, amortizations and interest rate
    adjustment periods;
    using derivatives, financial futures, swaps, options, caps,
    floors and forward sales to adjust the interest rate sensitivity
    of our mortgage-backed securities and our borrowings; and
    actively managing, on an aggregate basis, the interest rate
    indices, interest rate adjustment periods and gross reset
    margins of our mortgage-backed securities and the interest rate
    indices and adjustment periods of our borrowings. 57




---



##### Table of Contents



ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  INDEX TO
    FINANCIAL STATEMENTS
  Consolidated Financial
    Statements of Luminent Mortgage Capital, Inc.Managements
    Report on Internal Control Over Financial Reporting


59Report of
    Independent Registered Public Accounting Firm


60Report of
    Independent Registered Public Accounting Firm


61Consolidated
    Balance Sheets as of December 31, 2005 and 2004


62Consolidated
    Statements of Operations for the years ended December 31,
    2005 and 2004 and the period from April 26, 2003 through
    December 31, 2003


63Consolidated
    Statements of Stockholders Equity for the years ended
    December 31, 2005 and 2004 and the period from
    April 26, 2003 through December 31, 2003


64Consolidated
    Statements of Cash Flows for the years ended December 31,
    2005 and 2004 and the period from April 26, 2003 through
    December 31, 2003


65Notes to
    Consolidated Financial Statements


66  58




---



##### Table of Contents

MANAGEMENTS
    REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





Rule 13a-15(f)
















59



---



##### Table of Contents

REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











Internal Control  Integrated Framework
















Internal
    Control  Integrated Framework Internal Control  Integrated
    Framework
















60



---



##### Table of Contents

REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM























Internal
    Control  Integrated Framework












61



---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  CONSOLIDATED BALANCE SHEETS
  December 31,


December 31,2005


2004(In thousands, except share and
    per share amounts)Assets:Cash and cash equivalents

$
11,466


$
10,581Restricted cash


794



Mortgage-backed securities
    available-for-sale,
    at fair value


219,148



186,351Mortgage-backed securities
    available-for-sale,
    pledged as collateral, at fair value


4,140,455



4,641,604Loans
    held-for-investment


507,177



Interest receivable


21,543



18,861Principal receivable


13,645



13,426Derivative contracts, at fair value


10,720



7,900Other assets


8,523



1,105Total assets

$
4,933,471


$
4,879,828Liabilities:Repurchase agreements

$
3,928,505


$
4,436,456Mortgage-backed notes


486,302



Junior subordinated notes


92,788



Margin debt


3,548



Derivative contracts, at fair value






1,073Cash distributions payable


1,218



15,959Accrued interest expense


21,123



17,333Management compensation payable,
    incentive compensation payable and other related party
    liabilities


1,282



2,952Accounts payable and accrued
    expenses


2,384



552Total liabilities


4,537,150



4,474,325Stockholders
    Equity:Preferred stock, par value $0.001:10,000,000 shares authorized;
    no shares issued and outstanding at December 31, 2005 and
    December 31, 2004






Common stock, par value $0.001:100,000,000 shares
    authorized; 40,587,245 and 37,113,011 shares issued and
    outstanding at December 31, 2005 and December 31,
    2004, respectively


41



37Additional paid-in capital


511,941



476,250Accumulated other comprehensive
    income (loss)


7,076



(61,368
)Accumulated distributions in
    excess of accumulated losses


(122,737
)


(9,416
)Total stockholders equity


396,321



405,503Total liabilities and
    stockholders equity

$
4,933,471


$
4,879,828    62




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  CONSOLIDATED STATEMENTS OF OPERATIONS
  For the PeriodFor the Year


For the Year


from April 26,Ended


Ended


2003 throughDecember 31,


December 31,


December 31,2005


2004


2003(In thousands, except share and
    per share amounts)Revenues:Net interest income:Interest income

$
181,421


$
123,754


$
22,654Interest expense


137,501



55,116



9,009Net interest income


43,920



68,638



13,645Other Income
    (Expense):Other income (expense)


(808
)


1,070



Impairment losses on
    mortgage-backed securities


(112,008
)






(7,831
)Losses on sales of mortgage-backed
    securities


(69
)






Other income (expense)


(112,885
)


1,070



(7,831
)Expenses:Management compensation expense to
    related party


4,193



4,066



901Incentive compensation expense to
    related parties


1,250



4,915



980Salaries and benefits


2,998



593



99Professional services


2,225



1,348



477Board of directors expense


473



249



117Insurance expense


556



631



291Custody expense


415



383



115Other general and administrative
    expenses


1,916



411



73Total expenses


14,026



12,596



3,053Net income (loss)

$
(82,991
)

$
57,112


$
2,761Net income (loss) per
    share  basic

$
(2.13
)

$
1.68


$
0.27Net income (loss) per
    share  diluted

$
(2.13
)

$
1.68


$
0.27Weighted-average number of shares
    outstanding  basic


39,007,953



33,895,967



10,139,280Weighted-average number of shares
    outstanding  diluted


39,007,953



33,947,414



10,139,811    63




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY
  AccumulatedAccumulated


DistributionsCommon Stock


Additional


Other


in Excess ofPar


Paid-In


Comprehensive


Accumulated


ComprehensiveShares


Value


Capital


Income/(Loss)


Losses


Income/(Loss)


Total(In thousands)Balance, April 26, 2003


204


$
1


$



$



$



$



$
1Net income


















2,761


$
2,761



2,761Mortgage-backed securities
    available-for-sale,
    fair value adjustment














(26,353
)






(26,353
)


(26,353
)Derivative contracts, fair value
    adjustment














(157
)






(157
)


(157
)Comprehensive loss





















$
(23,749
)Distributions to stockholders


















(11,119
)






(11,119
)Issuance of common stock


24,610



24



316,723















316,747Capital contribution










613















613Amortization of stock options










3















3Balance, December 31, 2003


24,814



25



317,339



(26,510
)


(8,358
)






282,496Net income


















57,112


$
57,112



57,112Mortgage-backed securities
    available-for-sale,
    fair value adjustment














(42,944
)






(42,944
)


(42,944
)Derivative contracts, fair value
    adjustment














6,676







6,676



6,676Futures contracts, net realized
    gains














1,410







1,410



1,410Comprehensive income





















$
22,254Distributions to stockholders


















(58,170
)






(58,170
)Issuance of common stock


12,299



12



158,906















158,918Amortization of stock options










5















5Balance, December 31, 2004


37,113



37



476,250



(61,368
)


(9,416
)






405,503Net loss


















(82,991
)

$
(82,991
)


(82,991
)Mortgage-backed securities
    available-for-sale,
    fair value adjustment














64,977







64,977



64,977Derivative contracts, fair value
    adjustment














2,402







2,402



2,402Futures contracts, net realized
    gains














1,065







1,065



1,065Comprehensive loss





















$
(14,547
)Distributions to stockholders


















(30,330
)






(30,330
)Issuance of common stock


4,149



4



39,095















39,099Repurchase of common stock


(675
)






(5,000
)














(5,000
)Amortization of stock options










2















2Amortization of restricted stock










1,594















1,594Balance, December 31, 2005


40,587


$
41


$
511,941


$
7,076


$
(122,737
)





$
396,321    64




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  For the Year


For the Year


For the PeriodEnded


Ended


from April 26, 2003December 31,


December 31,


through December 31,2005


2004


2003(In thousands)Cash flows from operating
    activities:Net income (loss)

$
(82,991
)

$
57,112


$
2,761Adjustments to reconcile net income
    (loss) to net cash provided by operating activities:Amortization of premium/discount on
    loans
    held-for-investment
    and mortgage-backed securities
    available-for-sale


27,066



28,496



9,189Impairment losses on
    mortgage-backed securities


112,008







Amortization of stock options


2



5



3Ineffectiveness (gains)/losses on
    cash flow hedges


114



(308
)


Losses on other derivative
    instruments


1,792







Net loss on sales of
    mortgage-backed securities
    available-for-sale


69







7,831Waiver of incentive compensation by
    related party










613Changes in operating assets and
    liabilities:Decrease (increase) in interest
    receivable, net of purchased interest


4,448



(1,611
)


(116
)Increase in other assets


(3,079
)


(2,794
)


(518
)Increase (decrease) in accounts
    payable and accrued expenses


1,001



(811
)


1,363Increase in accrued interest expense


3,790



13,556



3,777Increase in management compensation
    payable, incentive compensation payable and other related party
    liabilities


214



5,482



1,088Net cash provided by operating
    activities


64,434



99,127



25,991Cash flows from investing
    activities:Purchase of mortgage-backed
    securities


(1,310,133
)


(4,040,790
)


(2,797,073
)Proceeds from sales of
    mortgage-backed securities
    available-for-sale


136,549







538,780Principal payments of
    mortgage-backed securities
    available-for-sale


1,560,480



1,126,194



199,560Purchases of loans
    held-for-investment


(532,508
)






Principal payments of loans
    held-for-investment


23,854







Purchase of other derivative
    instruments


(1,975
)






Net change in restricted cash


(794
)






Net cash used in investing
    activities


(124,527
)


(2,914,596
)


(2,058,733
)Cash flows from financing
    activities:Net proceeds from issuance of
    common stock


38,909



157,508



316,747Repurchases of common stock


(4,114
)






Borrowings under repurchase
    agreements


19,419,024



29,460,116



10,097,957Principal payments on repurchase
    agreements


(19,926,975
)


(26,752,633
)


(8,368,984
)Borrowings under warehouse lending
    facilities


473,285







Paydown of warehouse lending
    facilities


(473,285
)






Distributions to stockholders


(45,071
)


(47,478
)


(5,852
)Borrowings under note payable






439



92Repayment of note payable






(531
)


Borrowings under junior
    subordinated notes


89,968







Proceeds from issuance of
    mortgage-backed notes


498,589







Principal payments on
    mortgage-backed notes


(13,965
)






Borrowings under margin debt


3,548



2,278



4,266Principal payments on margin debt






(2,278
)


(4,266
)Amortization of net realized gains
    on Eurodollar futures contracts


(1,415
)






Net realized gains on Eurodollar
    futures contracts


2,480



1,410



Net cash provided by financing
    activities


60,978



2,818,831



2,039,960Net increase in cash and cash
    equivalents


885



3,362



7,218Cash and cash equivalents,
    beginning of the period


10,581



7,219



1Cash and cash equivalents, end
    of the period

$
11,466


$
10,581


$
7,219Supplemental disclosure of cash
    flow information:Interest paid

$
142,825


$
42,760


$
5,222Non-cash investing and financing
    activities:Increase (decrease) in unsettled
    security purchases

$



$
(156,127
)

$
156,127(Increase) decrease in principal
    receivable


(219
)


(11,113
)


(2,313
)Incentive compensation payable
    settled through issuance of restricted common stock


1,884



3,617



Deferred compensation reclassified
    to stockholders equity upon issuance of restricted common
    stock


(159
)


(2,207
)


Accounts payable and accrued
    expenses settled through issuance of restricted common stock


55







Unsettled repurchases of common
    stock


(886
)






    65




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 1 
    ORGANIZATION          NOTE 2 
    ACCOUNTING
    POLICIES  Basis
    of Presentation
    Consolidation
    of Variable Interest Entities.
  Cash
    and Cash Equivalents
    Restricted
    Cash
    Securities
  available-for-sale held-to-maturity available-for-sale. available-for-sale
 66




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  other-than-temporarily other-than-temporary
  Accounting for
    Nonrefundable Fees and Costs Associated with Originating or
    Acquiring Loans and Initial Direct Costs of Leases.
    Purchased
    Beneficial Interests
  Recognition of Interest Income and Impairment on Purchased
    and Retained Beneficial Interests in Securitized Financial
    Assets. available-for-sale.
    Loans
    Held-for-Investment
  held-for-investment held-for-investment
   67




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Allowance
    and Provision for Loan Losses
    Securitizations
  Accounting for
    Transfers and Servicing of Financial Assets and Extinguishments
    of Liabilities Consolidation
    of Variable Interest Entities
  Borrowings
  held-for-investment
  Investment
    in Subsidiary Trust and Junior Subordinated Notes
       68




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Share-based
    Compensation
  Share-Based Payment.
  Derivative
    Financial Instruments
  Accounting for Derivative Instruments and Hedging
    Activities
    Income
    Taxes
       69




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Incentive
    Compensation
    Accounting for Equity Instruments That Are
    Issued to Other Than Employees for Acquiring, or in Conjunction
    with Selling, Goods or Services.
  30-day
    Net
    Income Per Share
   70




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Use of
    Estimates
  held-for-investment
  Recent
    Accounting Pronouncements
  other-than-temporary other-than-temporary other-than-temporary Accounting for Certain Investments in
    Debt and Equity Securities Accounting for Certain Investments Held by
    Not-for-Profit
    Organizations The Equity
    Method of Accounting for Investments in Common Stock. No. 03-1, The Meaning of
    Other-Than-Temporary
    Impairment and Its Application to Certain Investments No. D-44, Recognition of
    Other-Than-Temporary
    Impairment upon the Planned Sale of a Security Whose Cost
    Exceeds Fair Value.
  SOP 94-6-1, Terms of Loan Products That May Give Rise to a Concentration
    of Risk.
  Accounting for Certain Hybrid Financial
    Instruments  an amendment of FASB Statements
    No. 133 and 140. instrument-by-instrument
 71




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    available-for-sale.
  Accounting for Transfers and
    Servicing of Financial Assets and Extinguishments of
    Liabilities.
    available-for-sale
  NOTE 3 
    MORTGAGE-BACKED
    SECURITIES  available-for-sale
  TotalAdjustable-


Hybrid


Balloon





Mortgage-Rate


Adjustable-Rate


Maturity


Other


BackedSecurities


Securities


Securities


Securities


Securities(In thousands)Amortized cost

$
65,981


$
3,978,669


$
48,852


$
270,421


$
4,363,923Unrealized gains






29







8,328



8,357Unrealized losses














(12,677
)


(12,677
)Fair value

$
65,981


$
3,978,698


$
48,852


$
266,072


$
4,359,603% of total


1.5
%


91.3
%


1.1
%


6.1
%


100.0
%  72




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   available-for-sale
  HybridAdjustable-


Balloon


Total Mortgage-Adjustable-


Rate


Maturity


BackedRate Securities


Securities


Securities


Securities(In thousands)Amortized cost

$
127,360


$
4,714,759


$
55,134


$
4,897,253Unrealized gains


33



739







772Unrealized losses


(1,618
)


(67,340
)


(1,112
)


(70,070
)Fair value

$
125,775


$
4,648,158


$
54,022


$
4,827,955% of total


2.6
%


96.3
%


1.1
%


100.0
%       Weighted-Amortized


AverageWeighted-Average Life

Fair Value


Cost


Coupon(In thousands)Less than one year

$
690,568


$
690,539



4.51
%Greater than one year and less
    than five years


3,489,302



3,489,179



4.35Greater than five years


179,733



184,205



6.15Total

$
4,359,603


$
4,363,923



4.46
%     Weighted-Amortized


AverageWeighted-Average Life

Fair Value


Cost


Coupon(In thousands)Less than one year

$
211,475


$
215,099



3.76
%Greater than one year and less
    than five years


4,616,480



4,682,154



4.24Greater than five years










Total

$
4,827,955


$
4,897,253



4.22
%      73




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Less Than 12 Months


12 Months or More


TotalGross





Gross





GrossFair


Unrealized


Fair


Unrealized


Fair


UnrealizedValue


Losses


Value


Losses


Value


Losses(In thousands)Agency-backed mortgage-backed
    securities

$



$



$



$



$



$
Non-agency-backed mortgage-backed
    securities


172,646



(12,677
)










172,646



(12,677
)Total temporarily impaired
    mortgage-backed securities

$
172,646


$
(12,677
)

$



$



$
172,646


$
(12,677
)     Less Than 12 Months


12 Months or More


TotalGross





Gross





GrossFair


Unrealized


Fair


Unrealized


Fair


UnrealizedValue


Losses


Value


Losses


Value


Losses(In thousands)Agency-backed mortgage-backed
    securities

$
2,473,670


$
(35,605
)

$
379,814


$
(5,701
)

$
2,853,484


$
(41,306
)Non-agency-backed mortgage-backed
    securities


1,468,329



(22,189
)


251,452



(6,575
)


1,719,781



(28,764
)Total temporarily impaired
    mortgage-backed securities

$
3,941,999


$
(57,794
)

$
631,266


$
(12,276
)

$
4,573,265


$
(70,070
)      74




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  other-than-temporary
  other-than-temporary other-than-temporary other-than-temporary
  available-for-sale other-than-temporarily
  NOTE 4 
    LOANS
    HELD-FOR-INVESTMENT  held-for-investment
  Unamortized


AmortizedPrincipal


Premium


Cost(In thousands)Residential mortgage loans

$
506,498


$
679


$
507,177    75




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   held-for-investment
  PrincipalAmount ofLoansDelinquentNumber








Carrying


as toof





Maturity


Amount of


PrincipalDescription

Loan Balance


Loans


Interest Rate


Date


Mortgages


and Interest3-Year
    Hybrid

$
0



-


$
250



52



5.00
%


-



7.13
%


2035


$
8,820



251



-



500



42



4.75



-



6.88



2035



15,169



501



-



750



11



5.20



-



6.25



2035



6,001



751



-



1,000



3



5.75



-



5.88



2035



2,900



108



















32,890



5-Year
    Hybrid

$
0



-


$
250



212



5.00
%


-



7.00
%


2035


$
32,236



251



-



500



517



4.50



-



7.00



2035



208,017



501



-



750



1



4.00



-



4.00



2034



539



501



-



750



236



4.25



-



7.00



2035



139,170



751



-



1,000



63



4.50



-



6.88



2035



56,313



over







1,000



26



5.00



-



6.88



2035



37,333



1,055



















473,608



Unamortized Premium


































679



1,163


















$
507,177



   held-for-investment
  CarryingAmountof Mortgages(In thousands)Balance at December 31, 2004

$
Additions during the period:Loan purchases, net


531,086Deductions during the period:Collections of principal


23,854Amortization of premium


5523,909Balance at December 31, 2005

$
507,177  76




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   held-for-investment
  Number of





%State or Territory

Loans


Carrying Amounts


of Portfolio(In thousands)CA


385


$
196,988



38.8
%FL


135



43,035



8.5VA


122



55,996



11.0AZ


64



31,245



6.2MD


57



27,296



5.4NJ


49



17,491



3.5MN


31



9,595



1.9NV


30



14,530



2.9GA


28



10,848



2.1PA


27



7,109



1.4CO


25



10,583



2.1Other states fewer than 25 loans
    each


210



81,782



16.1Unamortized Premium






679



0.1Total


1,163


$
507,177



100.0
%   NOTE 5 
    REPURCHASE
    AGREEMENTS   77




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Overnight


Between


Between


Between1 Day or


2 and 30


31 and 90


91 and 237Less


Days


Days


Days


Total(In thousands)Agency-backed mortgage-backed
    securities:Amortized cost of securities sold,
    including accrued interest

$



$
1,416,872


$
641,530


$
672,816


$
2,731,218Fair market value of securities
    sold, including accrued interest






1,416,879



641,535



672,830



2,731,244Repurchase agreement liabilities
    associated with these securities






1,339,152



604,904



633,659



2,577,715Weighted-average interest rate of
    repurchase agreement liabilities


0.00
%


4.26
%


4.47
%


3.73
%


4.18
%Non-agency-backed
    mortgage-backed securities:Amortized cost of securities sold,
    including accrued interest

$



$
610,822


$
345,516


$
474,392


$
1,430,730Fair market value of securities
    sold, including accrued interest






607,452



344,764



473,610



1,425,826Repurchase agreement liabilities
    associated with these securities






563,577



324,119



448,609



1,336,305Weighted-average interest rate of
    repurchase agreement liabilities


0.00
%


4.34
%


4.47
%


4.36
%


4.38
%Total:Amortized cost of securities sold,
    including accrued interest

$



$
2,027,694


$
987,046


$
1,147,208


$
4,161,948Fair market value of securities
    sold, including accrued interest






2,024,331



986,299



1,146,440



4,157,070Repurchase agreement liabilities
    associated with these securities






1,902,729



929,023



1,082,268



3,914,020Weighted-average interest rate of
    repurchase agreement liabilities


0.00
%


4.28
%


4.47
%


3.99
%


4.25
%  78




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Overnight


Between


Between


Between(1 Day or


2 and 30


31 and 90


91 and 602Less)


Days


Days


Days


Total(In thousands)Agency-backed mortgage-backed
    securities:Amortized cost of securities sold,
    including accrued interest

$
20,203


$
153,656


$
1,017,753


$
1,702,727


$
2,894,339Fair market value of securities
    sold, including accrued interest


20,010



152,100



1,005,208



1,677,425



2,854,743Repurchase agreement liabilities
    associated with these securities


19,058



144,512



956,307



1,596,914



2,716,791Weighted-average interest rate of
    repurchase agreement liabilities


2.36
%


2.28
%


2.41
%


2.35
%


2.37
%Non-agency-backed
    mortgage-backed securities:Amortized cost of securities sold,
    including accrued interest

$
17,795


$
53,278


$
998,982


$
763,429


$
1,833,484Fair market value of securities
    sold, including accrued interest


17,555



52,706



982,301



752,376



1,804,938Repurchase agreement liabilities
    associated with these securities


16,719



50,132



936,901



715,913



1,719,665Weighted-average interest rate of
    repurchase agreement liabilities


2.36
%


2.27
%


2.44
%


2.35
%


2.35
%Total:Amortized cost of securities sold,
    including accrued interest

$
37,998


$
206,934


$
2,016,735


$
2,466,156


$
4,727,823Fair market value of securities
    sold, including accrued interest


37,565



204,806



1,987,509



2,429,801



4,659,681Repurchase agreement liabilities
    associated with these securities


35,777



194,644



1,893,208



2,312,827



4,436,456Weighted-average interest rate of
    repurchase agreement liabilities


2.36
%


2.28
%


2.43
%


2.35
%


2.38
%      79




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Weighted-AverageMaturity ofRepurchaseAmount at


AgreementsRepurchase Agreement
    Counterparties

Risk(1)


(In Days)(In thousands)Banc of America Securities LLC

$
6,992



153Barclays Capital


3,656



27Bear Stearns & Co.


63,412



46Citigroup


8,367



172Countrywide Securities Corporation


9,618



129Credit Suisse First Boston


3,293



17Deutsche Bank Securities Inc.


28,326



63Goldman Sachs & Co.


17,421



28Greenwich Capital Markets
    Inc.


7,618



15Merrill Lynch Government
    Securities Inc./Merrill Lynch Pierce, Fenner & Smith
    Inc.


24,018



78Morgan Stanley & Co.
    Inc.


5,922



21Nomura Security International,
    Inc.


16,682



86UBS Securities LLC


22,331



170Wachovia Securities, LLC


3,950



19Washington Mutual


3,478



27Total

$
225,084



76     (1)
    
    Equal to the sum of fair value of securities sold plus accrued
    interest income and the fair market value of loans pledged as
    collateral minus the sum of repurchase agreement liabilities
    plus accrued interest expense. 80




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Weighted-AverageMaturity ofRepurchaseAmount at


AgreementsRepurchase Agreement
    Counterparties

Risk(1)


(In Days)(In thousands)Banc of America Securities LLC

$
11,970



61Bear Stearns & Co.


60,106



100Countrywide Securities Corporation


4,534



115Deutsche Bank Securities Inc.


42,589



142Goldman Sachs & Co.


23,489



51Lehman Brothers Inc.


4,244



151Merrill Lynch Government
    Securities Inc./Merrill Lynch Pierce, Fenner & Smith
    Inc.


8,509



125Morgan Stanley & Co.
    Inc.


2,039



124Nomura Securities International,
    Inc.


9,355



114Salomon Smith Barney


12,151



69UBS Securities LLC


23,413



314Wachovia Securities, LLC


3,493



154Total

$
205,892



133     (1)
    
    Equal to the sum of fair value of securities sold plus accrued
    interest income minus the sum of repurchase agreement
    liabilities plus accrued interest expense.  NOTE 6 
    MORTGAGE-BACKED
    NOTES AND OTHER BORROWINGS         81




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      NOTE 7 
    CAPITAL
    STOCK AND EARNINGS PER SHARE      Form S-3
  and/or and/or at-the-market
  Form S-3 and/or
   82




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Rule 10b-18
      For the Year EndedDecember 31, 2004


For the Period from
    April 26, 2003 through December 31, 2003Basic


Diluted


Basic


Diluted(In thousands)Net income

$
57,112


$
57,112


$
2,761


$
2,761Weighted-average number of common
    shares outstanding


33,895,967



33,895,967



10,139,280



10,139,280Additional shares due to:Assumed conversion of dilutive
    common stock options and vesting of unvested restricted common
    stock






51,447







531Adjusted weighted-average number
    of common shares outstanding


33,895,967



33,947,414



10,139,280



10,139,811Net income per share

$
1.68


$
1.68


$
0.27


$
0.27   NOTE 8 
    2003
    STOCK INCENTIVE PLANS   83




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2003 Outside2003 Stock


Advisors StockIncentive Plan


Incentive Plan


TotalShares reserved for issuance


1,850,000



150,000



2,000,000Granted


262,666







262,666Forfeited










Expired










Total available for grant


1,587,334



150,000



1,737,334     2005Weighted-Number


Averageof


ExerciseOptions


PriceOutstanding, beginning of period


55,000


$
14.82Granted






Exercised






Forfeited






Outstanding, end of period


55,000


$
14.82     Outstanding


ExercisableWeighted-








Weighted-Average


Weighted-





Average


Weighted-Number


Remaining


Average


Number


Remaining


Averageof


Life


Exercise


of


Life


ExerciseRange of Exercise
    Prices

Options


(In Years)


Price


Options


(In Years)


Price$13.00-$14.00


5,000



7.8


$
13.00



3,334



7.8


$
13.00$14.01-$15.00


50,000



7.6



15.00



33,333



7.6



15.00$13.00-$15.00


55,000






$
14.82



36,667






$
14.82       Weighted-AverageNumber of


Grant-DateOptions


Fair ValueNonvested, beginning of the period


36,666


$
0.22Granted






Vested


(18,333
)


0.22Forfeited






Nonvested, end of the period


18,333


$
0.22  84




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           Number of


Weighted-Common


Average IssueShares


PriceOutstanding, beginning of period


25,122


$
12.06Issued


177,707



10.31Repurchased






Outstanding, end of period


202,829


$
10.53       Weighted-Number of


AverageCommon


Grant-DateShares


Fair ValueNonvested, beginning of the period


25,122


$
12.06Granted


177,707



10.31Vested


(8,378
)


12.06Repurchased






Nonvested, end of the period


194,453


$
10.46        85




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 9 
    PREFERRED
    SECURITIES OF SUBSIDIARY TRUST AND JUNIOR SUBORDINATED
    NOTES                NOTE 10 
    THE
    MANAGEMENT AGREEMENT   86




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    
    base management compensation equal to a percentage of the
    Companys applicable average net worth, as defined in the
    Amended Agreement, payable quarterly in arrears, calculated at
    the following rates per annum: (1) 0.90% of the first
    $750 million; plus (2) 0.70% of the next
    $750 million; plus (3) 0.50% of the amount in excess
    of $1.5 billion;
    incentive management compensation equal to a percentage of
    applicable average net worth, as defined in the Amended
    Agreement, payable annually, calculated at the following rates
    per annum: (1) 0.35% for the first $750 million of
    applicable average net worth; (2) 0.20% for the next
    $750 million of applicable average net worth; and
    (3) 0.15% for the applicable average net worth in excess of
    $1.5 billion if the return on assets, as defined in the
    Amended Agreement, for any such fiscal year exceeds the
    threshold return, defined as the average of the weekly values
    for any period of the sum of (i) the
    10-year U.S.
    Treasury rate for such period and (ii) two percent
    (2%); and
    out-of-pocket
    expenses and certain other costs incurred by the Manager and
    related directly to the Company.          10-year
   87




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      NOTE 11 
    RELATED
    PARTY TRANSACTIONS    day-to-day
  NOTE 12 
    FAIR
    VALUE OF FINANCIAL INSTRUMENTS  Disclosure About Fair Value of
    Financial Instruments available-for-sale held-for-investment held-for-investment
 88




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 13 
    ACCUMULATED
    OTHER COMPREHENSIVE INCOME (LOSS)    December 31,


December 31,2005


2004(In thousands)Unrealized holding losses on
    mortgage-backed securities
    available-for-sale

$
(116,397
)

$
(69,297
)Reclassification adjustment for
    net losses on mortgage-backed securities
    available-for-sale
    included in net income


112,077



Net unrealized losses on
    mortgage-backed securities
    available-for-sale


(4,320
)


(69,297
)Net deferred realized and
    unrealized gains on cash flow hedges


11,396



7,929Accumulated other comprehensive
    income (loss)

$
7,076


$
(61,368
)   NOTE 14 
    CREDIT
    RISK AND INTEREST RATE RISK           89




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      NOTE 15 
    DERIVATIVE
    INSTRUMENTS AND HEDGING ACTIVITIES      EstimatedFair Value(In thousands)Eurodollar futures contracts sold
    short

$
4,895Interest rate swap contracts


4,220Swaption contracts


1,531Interest rate cap contracts


74     EstimatedFair Value(In thousands)Eurodollar futures contracts sold
    short

$
(1,073
)Interest rate swap contracts


7,900   Cash
    Flow Hedging Strategies
    Hedging
    Strategies for Short-Term Debt
   90




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Hedging
    Strategies for Long-Term Debt
       91




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Free
    Standing Derivatives
   92




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##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 16 
    SUMMARY
    OF QUARTERLY INFORMATION (UNAUDITED)    For the


For the


For the


For theQuarter


Quarter


Quarter


QuarterEnded


Ended


Ended


EndedMarch 31,


June 30,


September 30,


December 31,2005


2005


2005


2005(In thousands, except share and
    per share amounts)Interest income

$
42,515


$
42,463


$
46,346


$
50,097Interest expense


20,539



32,098



38,241



46,623Net interest income


21,976



10,365



8,105



3,474Other income (expenses)






(899
)


519



(112,505
)Expenses


3,007



3,292



3,395



4,332Net income (loss)

$
18,969


$
6,174


$
5,229


$
(113,363
)Net income (loss) per
    share  basic

$
0.51


$
0.16


$
0.13


$
(2.79
)Net income (loss) per
    share  diluted

$
0.51


$
0.16


$
0.13


$
(2.79
)Weighted-average shares
    outstanding  basic


37,207,135



38,176,274



40,021,698



40,578,516Weighted-average shares
    outstanding  diluted


37,376,107



38,351,238



40,226,523



40,578,516     For the


For the


For the


For theQuarter


Quarter


Quarter


QuarterEnded


Ended


Ended


EndedMarch 31,


June 30,


September 30,


December 31,2004


2004


2004


2004(In thousands, except share and
    per share amounts)Interest income

$
20,204


$
27,218


$
34,261


$
42,071Interest expense


6,827



9,190



16,632



22,467Net interest income


13,377



18,028



17,629



19,604Other income














1,070Expenses


2,577



3,074



3,135



3,810Net income

$
10,800


$
14,954


$
14,494


$
16,864Net income per
    share  basic

$
0.43


$
0.41


$
0.39


$
0.46Net income per
    share  diluted

$
0.43


$
0.41


$
0.39


$
0.46Weighted-average shares
    outstanding  basic


25,077,736



36,814,000



36,814,000



36,814,000Weighted-average shares
    outstanding  diluted


25,085,784



36,843,531



36,867,233



36,928,978  93




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 17 
    SUBSEQUENT
    EVENTS    Trust 2006-1 Trust 2006-2.
  Rules 10b-18
 94




---



##### Table of Contents



ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES  Conclusion
    Regarding Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
  Internal
    Control Over Financial Reporting
  Form 10-K Form 10-K.
  Changes
    in Internal Control Over Financial Reporting
  Rule 13a-15(f)
  ITEM 9B.
    OTHER
    INFORMATION  Form 10-K
 PART III  ITEM 10.
    DIRECTORS
    AND EXECUTIVE OFFICERS OF THE REGISTRANT  Form 10-K, Regulation 14-A.
  ITEM 11.
    EXECUTIVE
    COMPENSATION  Form 10-K, Regulation 14-A.
  ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS  Form 10-K, Regulation 14-A.
 95




---



##### Table of Contents



ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS  Form 10-K, Regulation 14-A.
  ITEM 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES  Form 10-K, Regulation 14-A.
 PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES  (a)1. and
    (a)2. Documents filed as part of this report:
  1. and
    2.
  Form 10-K.
  (a)3.
    Exhibits
  Form 10-K.
 96




---



##### Table of Contents



SIGNATURES       By:
    /s/  GAIL
    P. SENECA          By:
    /s/  CHRISTOPHER
    J. ZYDA            Signature

Title

Date/s/  GAIL
    P. SENECAGail
    P. Seneca

Chief Executive Officer and
    Chairman of the Board, Director (Principal Executive Officer)

March 9, 2006/s/  CHRISTOPHER
    J. ZYDAChristopher
    J. Zyda

Chief Financial Officer (Principal
    Financial and Accounting Officer)

March 9, 2006/s/  S.
    TREZEVANT MOORE, JR.S.
    Trezevant Moore, Jr.

President and Chief Operating
    Officer, Director

March 9, 2006/s/  BRUCE
    A. MILLERBruce
    A. Miller

Director

March 9, 2006/s/  LEONARD
    A. AUERBACHLeonard
    A. Auerbach

Director

March 9, 2006/s/  ROBERT
    B. GOLDSTEINRobert
    B. Goldstein

Director

March 9, 2006/s/  JOHN
    MCMAHANJohn
    McMahan

Director

March 9, 2006/s/  DONALD
    H. PUTNAMDonald
    H. Putnam

Director

March 9, 2006/s/  JOSEPH
    E. WHITTERSJoseph
    E. Whitters

Director

March 9, 2006  97




---



##### Table of Contents



EXHIBIT INDEX  Regulation S-K,
  Form 10-K Regulation S-K).
  ExhibitNumber

Description3
.1

Second Articles of Amendment and
    Restatement (4)3
.2

Third Amended and Restated
    Bylaws (9)4
.1

Form of Common Stock
    Certificate (1)4
.2

Registration Rights Agreement,
    dated as of June 11, 2003, by and between the Registrant
    and Friedman, Billings, Ramsey & Co., Inc. (for itself
    and for the benefit of the holders from time to time of
    registrable securities issued in the Registrants June
    2003, private offering)(1)10
.1

Amended and Restated Management
    Agreement, dated as of March 1, 2005, by and between the
    Registrant and Seneca Capital Management LLC
    (Seneca) (7)10
.2

Cost-Sharing Agreement, dated as
    of June 11, 2003, by and between the Registrant and
    Seneca (1)10
.3

2003 Stock Incentive Plan, as
    amended (10)10
.4

Form of Incentive Stock Option
    under the 2003 Stock Incentive Plan (1)10
.5

Form of Non Qualified Stock Option
    under the 2003 Stock Incentive Plan (1)10
.6

2003 Outside Advisors Stock
    Incentive Plan, as amended (10)10
.7

Form of Non Qualified Stock Option
    under the 2003 Outside Advisors Stock Incentive Plan (1)10
.8

Form of Indemnity
    Agreement (1)10
.9*

Employment Agreement dated as of
    December 20, 2005, by and between the Registrant and
    Christopher J. Zyda10
.10

Form of Restricted Stock Award
    Agreement for Christopher J. Zyda (1)10
.11

Form of Restricted Stock Award
    Agreement for Seneca (3)10
.12

Controlled Equity Offering Sales
    Agreement dated February 7, 2005, between the Registrant
    and Cantor Fitzgerald & Co. (6)10
.13*

Employment Agreement dated
    December 20, 2005, between the Registrant and S. Trezevant
    Moore, Jr.10
.14*

Employment Agreement dated
    December 20, 2005, between the Registrant and Gail P. Seneca10
.15

Direct Stock Purchase and Dividend
    Reinvestment Plan dated June 29, 2005 (11)14
.1

Code of Business Conduct and
    Ethics (1)14
.2

Corporate Governance
    Guidelines (5)23
.1*

Consent of Deloitte &
    Touche LLP31
.1*

Certification of Gail P. Seneca,
    Chairman of the Board of Directors and Chief Executive Officer
    of the Registrant, pursuant to
    Rules 13a-14(a)
    and
    15d-14(a),
    as adopted pursuant to Section 302 of the Sarbanes-Oxley
    Act of 200231
.2*

Certification of Christopher J.
    Zyda, Chief Financial Officer of the Registrant, pursuant to
    Rules 13a-14(a)
    and
    15d-14(a),
    as adopted pursuant to Section 302 of the Sarbanes-Oxley
    Act of 200232
.1*

Certification of Gail P. Seneca,
    Chairman of the Board of Directors and Chief Executive Officer
    of the Registrant, pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 200232
.2*

Certification of Christopher J.
    Zyda, Chief Financial Officer of the Registrant, pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 200299
.1

Charter of the Audit Committee of
    the Board of Directors (1)99
.2

Charter of the Compensation
    Committee of the Board of Directors (1)99
.3

Charter of the Governance and
    Nominating Committee of the Registrants Board of
    Directors (1)  98




---



##### Table of Contents



(1)
    
    Incorporated by reference to our Registration Statement on
    Form S-11
    (Registration
    No. 333-107984)
    which became effective under the Securities Act of 1933, as
    amended, on December 18, 2003.(2)
    
    Incorporated by reference to our Current Report
    Form 8-K
    filed on December 23, 2003.(3)
    
    Incorporated by reference to our Registration Statement on
    Form S-11
    (Registration
    No. 333-107981)
    which became effective under the Securities Act of 1933, as
    amended, on February 13, 2004.(4)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2004.(5)
    
    Incorporated by reference to our Registration Statement on
    Form S-11
    (Registration
    No. 333-113493)
    which became effective under the Securities act of 1933, as
    amended, on March 30, 2004.(6)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on February 8, 2005.(7)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on April 1, 2005.(8)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on March 14, 2005.(9)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on August 9, 2005.(10)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2005.(11)
    
    Incorporated by reference to our Registration Statement on
    Form S-3
    (Registration
    No. 333-125479)
    which became effective under the Securities act of 1933, as
    amended, on June 28, 2005.  *
    
    Filed herewith.
    
    Denotes a management contract or compensatory plan. 99