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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, 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 1934    
|          
|           |  | For the fiscal year ended December 31, 2004                                                 
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For 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.)
|                                                                  
|909 Montgomery Street, Suite 500
    San Francisco, California     |  | 94133                                   
|(Address of principal executive offices)                           |  | (Zip Code)                              

Registrants telephone number, including area code:


(415) 486-2110


Securities registered pursuant to Section 12(b) of the
Act:


|                                         |  |                                          
|---------------------------------------- |  | -----------------------------------------
|Title of Each Class                      |  | Name of Each Exchange on Which Registered
|                                         |  |                                          
|Common Stock, par value $0.001 per share |  | New York Stock Exchange                  

Securities registered pursuant to Section 12(g) of the
Act:


None


þ o


þ


þ o






DOCUMENTS INCORPORATED BY REFERENCE












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INDEX


|              |  |                                                                                                                      |    |      |    | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|              |  |                                                                                                                      |    | Page |   
|              |  |                                                                                                                      |    |      |   
|PART I       
|Item 1.       |  | Business                                                                                                             |    |      | 1  | 
|Item 2.       |  | Properties                                                                                                           |    |      | 24 | 
|Item 3.       |  | Legal Proceedings                                                                                                    |    |      | 24 | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                                              |    |      | 24 | 
|             
|PART II      
|Item 5.       |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |    |      | 25 | 
|Item 6.       |  | Selected Financial Data                                                                                              |    |      | 28 | 
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |    |      | 29 | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |    |      | 62 | 
|Item 8.       |  | Financial Statements and Supplementary
    Data                                                                      |    |      | 66 | 
|Item 9.       |  | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure                             |    |      | 95 | 
|Item 9A.      |  | Controls and Procedures                                                                                              |    |      | 95 | 
|Item 9B.      |  | Other Information                                                                                                    |    |      | 95 | 
|             
|PART III     
|Item 10.      |  | Directors and Executive Officers of the
    Registrant                                                               |    |      | 96 | 
|Item 11.      |  | Executive Compensation                                                                                               |    |      | 96 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |    |      | 96 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                   |    |      | 96 | 
|Item 14.      |  | Principal Accountant Fees and Services                                                                               |    |      | 96 | 
|             
|PART IV      
|Item 15.      |  | Exhibits and Financial Statement
    Schedules                                                                       |    |      | 96 | 
|Signatures    |  |                                                                                                                      | 97 |     
|Exhibit Index |  |                                                                                                                      |    |     
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS








| |   |                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | interest rate mismatches between our mortgage-backed securities
    and the borrowings we use to fund our purchases of such
    securities;                                                                                                                                                               
|
| |  | changes in interest rates and mortgage prepayment rates;                                                                                                                                                                                                                                                  
|
| |  | our ability to obtain or renew sufficient funding to maintain
    our leverage strategies;                                                                                                                                                                                                                
|
| |  | potential impacts of our leveraging policies on our net income
    and cash available for distribution;                                                                                                                                                                                                   
|
| |  | our limited operating history and the limited experience of
    Seneca Capital Management LLC, or Seneca, our management
    company, in managing a real estate investment trust, or REIT;                                                                                                                
|
| |  | 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 mortgage-backed securities;                                                                                                                                                                                           
|
| |  | the degree to which our hedging strategies may or may not
    protect us from interest rate volatility;                                                                                                                                                                                                   
|
| |  | the fact that Seneca 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 Seneca, on the one hand, and Senecas relationships
    with other third parties, on the other hand;                                                                                                                             
|
| |  | our ability to invest up to 10% of our investment portfolio in
    lower-credit quality mortgage-backed securities that carry an
    increased likelihood of default or rating downgrade relative to
    investment-grade securities;                                                                     
|
| |  | your inability to review the assets that we will acquire with
    the net proceeds of any securities we offer; 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.



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iii



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PART I







|        |         
|------- | --------
|Item 1. | Business

Our Company


Background














Assets






1



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Borrowings






Hedging






2



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Business Strategy


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
    will generally be residential mortgage-related securities and
    short-term investments. Assets in this category are rated within
    one of the two highest rating categories by at least one
    nationally-recognized statistical rating organization, or will
    be obligations guaranteed by federal agencies or federally
    chartered agencies, such as Fannie Mae, Freddie Mac or Ginnie
    Mae.
|
| |  | Category II  At least 90% of our total
    assets will consist of Category I investments plus
    mortgage-related securities that are rated at least investment
    grade by at least one nationally-recognized statistical rating
    organization.                                                                                                                                                                                                        
|
| |  | Category III  No more than 10% of our
    total assets may be of a type not meeting any of the above
    criteria. Among the types of assets generally assigned to this
    category are mortgage-related securities rated below investment
    grade and leveraged mortgage derivative securities, shares of
    other REITs or other investments.                                                                                                          







| |                                         
| | ----------------------------------------
| | Capital/ Liquidity and Leverage Policies



3



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| |                              
| | -----------------------------
| | Credit Risk Management Policy





4



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| |                                  
| | ---------------------------------
| | Asset/Liability Management Policy

Interest Rate Risk Management.




| |   |                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | monitoring and adjusting, if necessary, the interest rate
    sensitivity of our mortgage-backed securities compared with the
    interest rate sensitivities of 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.









5



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Prepayment Risk Management.




Description of Mortgage-Related Assets




| |                           
| | --------------------------
| | Mortgage-Backed Securities

Pass-Through Certificates.








6



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Adjustable-Rate Mortgages. Adjustable-rate mortgages, or
    ARMs, are those for which the borrower pays an interest rate
    that varies over the term of the loan. The interest rate usually
    resets based on market interest rates, although the adjustment
    of such an interest rate may be subject to certain limitations.
    Traditionally, interest rate resets occur at fixed intervals
    (for example, once per year). We refer to such ARMs as
    traditional ARMs. Because the interest rates on ARMs
    fluctuate based on market conditions, ARMs tend to have interest
    rates that do not deviate from current market rates by a large
    amount. ARMs may therefore have less price sensitivity to
    interest rates.                                                                                                                                                                                                                     
|
| |  | Fixed-Rate Mortgages. Fixed-rate mortgages are those
    where the borrower pays an interest rate that is constant
    throughout the term of the loan. Traditionally, most fixed-rate
    mortgages have an original term of 30 years. However,
    shorter terms (also referred to as final maturity dates) have
    become common in recent years. Because the interest rate on the
    loan never changes, even when market interest rates change, over
    time there can be a divergence between the interest rate on the
    loan and current market interest rates, which in turn can make a
    fixed-rate mortgages price sensitive to market
    fluctuations in interest rates. In general, the longer the
    remaining term on the mortgage loan, the greater the price
    sensitivity. One way to attempt to lower the price sensitivity
    of a portfolio of fixed-rate mortgages is to buy those with
    shorter remaining terms or maturities.       
|
| |  | Hybrid Adjustable-Rate Mortgages. A recent development in
    the mortgage market has been the popularity of ARMs that do not
    reset at regular intervals. Many of these ARMs have a fixed-rate
    for the first few years of the loan  typically three,
    five, seven or 10 years  and thereafter reset
    periodically like a traditional ARM. Effectively such mortgages
    are hybrids, combining the features of a pure fixed-rate
    mortgage and a traditional ARM. Hybrid ARMs have a
    price sensitivity to interest rates similar to that of a
    fixed-rate mortgage during the period when the interest rate is
    fixed and similar to that of an ARM when the interest rate is in
    its periodic reset stage. However, because many hybrid ARMs are
    structured with a relatively short initial time span during
    which the interest rate is fixed, even during that segment of
    its existence, the price sensitivity may be low.
|
| |  | Balloon Maturity Mortgages. Balloon maturity mortgages
    are a type of fixed-rate mortgage. Thus, they have a static
    interest rate for the life of the loan. However the term of the
    loan is usually quite short and is less than the amortization
    schedule of the loan. Typically, this term or maturity is less
    than seven years. When the mortgage matures, the investor
    receives all of his principal back, which effectively is a price
    reset of the invested principal to par. As the balloon maturity
    mortgage approaches its maturity date, the price sensitivity of
    the mortgage declines. In fact, the price sensitivity for an
    agency balloon mortgage with a set maturity is actually lower
    than that for an agency hybrid ARM with the same time to
    interest rate reset.                                                                                                                                        

Collateralized Mortgage Obligations.




7



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Mortgage Derivative Securities.






Subordinated Interests.




| |               
| | --------------
| | Mortgage Loans







| |                  
| | -----------------
| | Other Investments



8



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Investment Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | origination year  the underwriting year for
    the mortgages comprising the mortgage-backed security. This
    characteristic helps to determine how seasoned the
    mortgage-backed security is and can influence our expectations
    for the investments future cash flows. In the current low
    interest rate environment, mortgages that were originated
    several years ago (when interest rates were higher) tend to have
    been refinanced. Those borrowers who did not refinance their
    homes during the period of lower interest rates may be
    relatively less likely than more recent borrowers to refinance
    during the remaining life of their mortgages. Therefore, the
    expected cash flows from a potential investment with an earlier
    origination year could exhibit less sensitivity to changes in
    interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | originator  the financial services entity that
    underwrites the mortgages comprising the mortgage-backed
    security. Originators do not have homogeneous underwriting
    standards. The particular underwriting standards utilized by an
    originator tend to influence the characteristics of the
    borrowers in its mortgage loan pools which, in turn, can
    influence the pools prepayment rates and other cash flows.
    When analyzing a pool of mortgages, it can be useful to review
    the historical cash flows exhibited by the originators
    prior mortgage loan pools. For example, we may limit the premium
    we would be willing to pay for a security if the originator has
    a history of early refinancings. The quality of the
    originators underwriting standards and the terms it offers
    borrowers can also be important to our purchase decisions. These
    variables potentially include the originators required
    loan documentation, FICO scores, loan-to-value ratios,
    prepayment penalties, cap rates and assumability terms. Any of
    these variables might influence our expectations regarding the
    timing of cash flows from an originators mortgage-backed
    securities and, thus, their attractiveness for our portfolio.
|
| |  | coupon  the weighted-average mortgage coupon
    of the mortgage-backed security. Higher coupons are initially
    attractive because they can generate more interest income for us
    than lower-coupon mortgage-backed securities. However, the
    sustainability of cash flows from higher-coupon pools is less
    predictable because, all else being equal, higher-coupon
    mortgages have a greater probability of being refinanced than
    lower-coupon mortgages. We generally analyze a mortgage-backed
    securitys coupon                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

9



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | in comparison to current market rates to form an expectation
    regarding how sustainable the interest income from the
    investment will be.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | margin  the spread between an adjustable-rate
    mortgages market index and the interest rate that the
    borrower must pay to service the mortgage. Similar to higher
    coupons, higher margins are attractive because they can generate
    more interest income for us than lower-margin mortgage-backed
    securities. However, higher-margin mortgage pools may be more
    prone to experience faster refinancing rates because high-margin
    borrowers are relatively more likely to find opportunities to
    refinance into mortgages with lower spreads to the index. As a
    result, the sustainability of the yield from an investment in a
    high-margin mortgage pool is less certain and the premium we
    would be willing to pay on such an investment, all else being
    equal, is less.                        
|
| |  | periodic cap  the amount by which the interest
    rate on an adjustable-rate mortgage can adjust during a
    specified period, usually six or 12 months. In rapidly
    rising interest rate environments, higher periodic caps are more
    attractive because they reduce the risk of the adjustable-rate
    mortgage coupon not being able to reset fully upwards to the
    current market rate. Conversely, in rapidly falling interest
    rate environments, lower periodic caps increase the probability
    that the mortgages coupon will reset to a level that
    remains above the current market rate.                                                                                                                                                                                                                       
|
| |  | lifetime cap  the maximum interest rate that a
    specific ARM can have during its lifetime. The lifetime cap of a
    mortgage is often correlated with market interest rates at the
    time of origination. An ARM originated in a low interest rate
    environment will frequently have a lower lifetime cap than a
    comparably structured mortgage originated in a high interest
    rate environment. If interest rates rise sufficiently, an ARM
    with a lifetime cap can effectively behave like a fixed-rate
    mortgage because the coupon of the ARM cannot adjust above the
    lifetime cap, and will thus remain effectively fixed at that
    level until rates fall. Higher lifetime caps tend to make
    particularly structured hybrid or adjustable-rate mortgage pools
    more attractive investment candidates.
|
| |  | time-to-reset  the number of months before the
    current coupon of the hybrid or adjustable-rate mortgage will
    reset. Time-to-reset is an important consideration as we
    structure the timing of interest rate adjustments on the
    mortgage-backed securities in our portfolio relative to changes
    in our borrowing costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | loan-to-value  the ratio between the original
    loan amount and the value of the collateral securing the
    mortgage loan. We consider this factor less important in a
    decision to purchase agency-backed mortgage securities but it
    can be an important factor when purchasing non-agency
    securities. This factor also influences the subordination levels
    required by the national rating agencies to receive AAA-rated
    status.                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | geographic dispersion  the degree to which the
    properties underlying the pooled mortgage loans are
    geographically dispersed. We prefer greater geographic
    dispersion because we seek to limit our exposure to specific
    states or regions, which might be experiencing relatively
    greater economic difficulties, to create a more stable portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | price and prepayment expectations  the
    expected yield of the mortgage-backed security under various
    assumptions about future economic conditions. A mortgage-backed
    securitys ultimate yield is determined by its price and
    its actual prepayment levels. We generally form expectations,
    based on the above factors, regarding how the mortgage
    pools prepayment levels will change over time, including
    in response to possible changes in prevailing interest rates and
    other economic conditions, so as to determine whether its
    offered price creates a yield that is attractive and fits well
    with the expected structure of our portfolio and our borrowing
    costs under those scenarios.                                                                                                  



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Financing Strategy






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.       

Industry Trends




Competition




11



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Certain United States Federal Income Tax Considerations




You are urged to consult with your own tax advisor regarding
the specific consequences to you of the purchase, ownership and
sale of stock in an entity electing to be taxed as a REIT,
including the federal, state, local, foreign and other tax
considerations of such purchase, ownership, sale and election
and the potential changes in applicable tax laws.


Recent Tax Legislation




General








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we will be required to pay tax at regular corporate rates on any
    undistributed REIT taxable net income, including undistributed
    net capital gain;                                                                                                                                                                                                                                                                                                                                                                
|
| |  | we may be required to pay the alternative minimum
    tax on our items of tax preference; and                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | if we have (1) net income from the sale or other
    disposition of foreclosure property which is held
    primarily for sale to customers in the ordinary course of
    business or (2) other non-qualifying income from
    foreclosure property, we will be required to pay tax at the
    highest corporate rate on this income. Foreclosure property is
    generally defined as property acquired through foreclosure or
    after a default on a loan secured by the property or on a lease
    of the property.



12



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| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the greater of (1) the amount by which 75% of our gross
    income exceeds the amount qualifying under the 75% gross income
    test described below, and (2) the amount by which 95% of
    our gross income exceeds the amount qualifying under the 95%
    gross income test described below, multiplied by,
|
| |  | a fraction intended to reflect our profitability.                                                                                                                                                                                                                                                              









| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | 85% of our real estate investment trust ordinary income for the
    year;            
|
| |  | 95% of our real estate investment trust capital gain net income
    for the year; and
|
| |  | any undistributed taxable income from prior periods.                                 







| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | the fair market value of the asset, over                                                                   
|
| |  | our adjusted basis in the asset, in each case determined as of
    the date on which we acquired the asset.





Requirements for Qualification as a REIT






| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | that is managed by one or more trustees or directors;                                             
|
| |  | that issues transferable shares or transferable certificates to
    evidence beneficial ownership;

13



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| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | that would be taxable as a domestic corporation but for
    Sections 856 through 859 of the Internal Revenue Code;                                                                                                       
|
| |  | that is not a financial institution or an insurance company
    within the meaning of the Internal Revenue Code;                                                                                                         
|
| |  | that is beneficially owned by 100 or more persons;                                                                                                                                                                       
|
| |  | not more than 50% in value of the outstanding stock of which is
    owned, actually or constructively, by five or fewer individuals,
    including specified entities, during the last half of each
    taxable year; and
|
| |  | that meets other tests, described below, regarding the nature of
    its income and assets and the amount of its distributions.                                                                                          



Stock Ownership Tests






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,

14



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 interest rate swap and cap
    agreements, options, futures and forward contracts entered into
    to hedge variable rate debt incurred to acquire qualified real
    estate assets, or (3) any combination of the foregoing.
    Amounts from qualified hedges will generally not constitute
    gross income and therefore will be disregarded for purposes of
    the 95% gross income test if certain identification and other
    requirements are satisfied, and will be treated as nonqualifying
    income for the 95% and 75% gross income tests if such
    requirements are not satisfied.









Asset Tests






| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | at least 75% of the value of our total assets must be
    represented by qualified real estate assets, cash, cash items
    and government securities;                                                              
|
| |  | not more than 25% of our total assets may be represented by
    securities, other than those securities included in the 75%
    asset test;                                                                         
|
| |  | of the investments included in the 25% asset class, the value of
    any one issuers securities may not exceed 5% of the value
    of our total assets (the 5% Asset Test), and we
    generally may not own more

15



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| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | than 10% by vote or value of any one issuers outstanding
    securities (the 10% Asset Test), in each case except
    with respect to stock of any taxable REIT subsidiaries; and
|
| |  | the value of the securities we own in any taxable REIT
    subsidiaries may not exceed 20% of the value of our total assets.                                                        













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Annual Distribution Requirements






| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | 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, as described below.





| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | the fair market value of the asset on the date we acquired the
    asset, over
|
| |  | our adjusted basis in the asset on the date we acquired the
    asset.        









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Failure to Qualify as a REIT






Taxation of Taxable United States Stockholders






| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a citizen or resident of the United States (as determined for
    U.S. federal income tax purposes);                                                                                                                         
|
| |  | a corporation, partnership, or other entity created or organized
    in or under the laws of the United States or of any state
    thereof or in the District of Columbia, unless Treasury
    regulations provide otherwise;
|
| |  | an estate the income of which is subject to U.S. federal
    income taxation regardless of its source; or                                                                                                                    
|
| |  | a trust whose administration is subject to the primary
    supervision of a U.S. court and which has one or more
    U.S. persons who have the authority to control all
    substantial decisions of the trust.              



| |                        
| | -----------------------
| | Distributions Generally



18



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##### Table of Contents







| |                           
| | --------------------------
| | Capital Gain Distributions





| |                               
| | ------------------------------
| | Retention of Net Capital Gains





| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | include their proportionate share of our undistributed net
    capital gains in their taxable income;                                                                              
|
| |  | receive a credit for their proportionate share of the tax paid
    by us in respect of such net capital gain; and                                                                  
|
| |  | increase the adjusted basis of their stock by the difference
    between the amount of their share of our undistributed net
    capital gain and their share of the tax paid by us.



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Passive Activity Losses, Investment Interest Limitations
    and Other Considerations of Holding Our Stock







| |                      
| | ---------------------
| | Dispositions of Stock



19



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##### Table of Contents





| |                                             
| | --------------------------------------------
| | Information Reporting and Backup Withholding



Taxation of Tax-Exempt Stockholders










| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | is described in Section 401(a) of the Internal Revenue
    Code; and
|
| |  | holds more than 10%, by value, of our equity interests.             



20



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##### Table of Contents







| |   |                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | it would not have qualified as a REIT but for the fact that
    Section 856(h)(3) of the Internal Revenue Code provides
    that stock owned by a qualified trust shall be treated, for
    purposes of the 5/50 rule, described above, as owned by the
    beneficiaries of the trust, rather than by the trust
    itself; and
|
| |  | either at least one qualified trust holds more than 25%, by
    value, of the interests in the REIT, or one or more qualified
    trusts, each of which owns more than 10%, by value, of the
    interests in the REIT, holds in the aggregate more than 50%, by
    value, of the interests in the REIT.                       





| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the UBTI earned by the REIT, less directly related expenses,
    treating the REIT as if it were a qualified trust and therefore
    subject to tax on UBTI, to
|
| |  | the total gross income, less directly related expenses, of the
    REIT.                                                                                       



Taxation of Non-United States Stockholders




PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT THEIR
TAX ADVISORS TO DETERMINE THE IMPACT OF FOREIGN, FEDERAL, STATE,
AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN OUR
STOCK AND OF OUR ELECTION TO BE TAXED AS A REAL ESTATE
INVESTMENT TRUST, INCLUDING ANY REPORTING REQUIREMENTS.


Distributions of Operating Income.




| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a lower treaty rate applies and any required form, for example
    IRS Form W-8BEN, evidencing eligibility for that reduced
    rate is filed by the non-United States stockholder with
    us; or
|
| |  | the non-United States stockholder files an IRS Form W-8ECI
    with us claiming that the distribution is effectively connected
    income.                                                        



21



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##### Table of Contents





Capital Gains Distributions.






Gains on the Sale of Our Stock.


22



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##### Table of Contents









Information Reporting and Backup Withholding for Non-United
States Stockholders




Possible Legislative or Other Action Affecting Tax
Consequences




State, Local and Foreign Taxation




23



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##### Table of Contents





Employees






Website Access to our Periodic SEC Reports


www.luminentcapital.com.


www.sec.gov









|        |           
|------- | ----------
|Item 2. | Properties








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings








|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to A Vote of Security Holders



24



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##### Table of Contents






PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities

Market Information






|               |  |              |       |  |     |   |       | 
|-------------- |  | ------------ | ----- |  | --- | - | ----- | 
|               |  | Common Stock |      
|               |  |              |      
|               |  | High         |       |  | Low |  
|               |  |              |       |  |     |  
|2004           |  |              |       |  |     |   |       | 
|First Quarter  |  | $            | 15.35 |  |     | $ | 13.77 | 
|Second Quarter |  |              | 14.35 |  |     |   | 11.45 | 
|Third Quarter  |  |              | 12.88 |  |     |   | 10.50 | 
|Fourth Quarter |  |              | 12.78 |  |     |   | 11.30 | 

|                                    |  |              |       |  |     |   |       | 
|----------------------------------- |  | ------------ | ----- |  | --- | - | ----- | 
|                                    |  | Common Stock |      
|                                    |  |              |      
|                                    |  | High         |       |  | Low |  
|                                    |  |              |       |  |     |  
|2003                                |  |              |       |  |     |   |       | 
|Second Quarter (from June 11, 2003) |  | $            | 15.35 |  |     | $ | 15.00 | 
|Third Quarter                       |  |              | 15.60 |  |     |   | 15.00 | 
|Fourth Quarter                      |  |              | 15.00 |  |     |   | 13.00 | 

Holders




25



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##### Table of Contents



Distributions and Distribution Policy




|                                    |  |               |      |  |                  |  |                    | 
|----------------------------------- |  | ------------- | ---- |  | ---------------- |  | ------------------ | 
|                                    |  | Cash          |      |  |                 
|                                    |  | Distributions |      |  |                 
|                                    |  | Declared per  |      |  |                 
|                                    |  | Share         |      |  | Declaration Date | 
|                                    |  |               |      |  |                  | 
|2004                                |  |               |      |  |                  |  |                    | 
|First Quarter                       |  | $             | 0.42 |  |                  |  | March 9, 2004      | 
|Second Quarter                      |  |               | 0.43 |  |                  |  | June 28, 2004      | 
|Third Quarter                       |  |               | 0.43 |  |                  |  | September 28, 2004 | 
|Fourth Quarter                      |  |               | 0.43 |  |                  |  | December 21, 2004  | 
|2003                                |  |               |      |  |                  |  |                    | 
|Second Quarter (from June 11, 2003) |  | $             |     |  |                  |  | N/A                | 
|Third Quarter                       |  |               | 0.50 |  |                  |  | October 1, 2003    | 
|Fourth Quarter                      |  |               | 0.45 |  |                  |  | November 24, 2003  | 











| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | 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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##### Table of Contents







Equity Compensation Plan






|                                             |  |                         |        |  |                      |                          |                       |                      |  |  |         |    
|-------------------------------------------- |  | ----------------------- | ------ |  | -------------------- | ------------------------ | --------------------- | -------------------- |  |  | ------- | ---
|                                             |  |                         |        |  |                      | (c) Number of Securities |                      
|                                             |  |                         |        |  |                      | Remaining Available for  |                      
|                                             |  | (a) Number of           |        |  |                      |                          | Future Issuance Under |                     
|                                             |  | Securities to Be Issued |        |  | (b) Weighted-Average |                          |                       | Equity Compensation  | 
|                                             |  | upon Exercise of        |        |  | Exercise Price of    |                          |                       | Plans (Excluding     | 
|                                             |  | Outstanding Options,    |        |  | Outstanding Options, |                          |                       | Securities Reflected | 
|Plan Category                                |  | Warrants and Rights     |        |  | Warrants and Rights  |                          |                       | in Column (a))       | 
|                                             |  |                         |        |  |                      |                          |                       |                      | 
|Incentive plans approved by stockholders     |  |                         | 55,000 |  |                      | $                        | 14.82                 |                      |  |  | 919,878 |    
|Incentive plans not approved by stockholders |  |                         |       |  |                      |                          |                      |                      |  |  |        |    
|                                             |  |                         |        |  |                      |                          |                       |                      | 
|Total                                        |  |                         | 55,000 |  |                      | $                        | 14.82                 |                      |  |  | 919,878 | (1)
|                                             |  |                         |        |  |                      |                          |                       |                      | 






|    |                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At December 31, 2004, the maximum number of shares of
    common stock that may be delivered pursuant to awards granted
    under both plans is 919,878 shares of our common stock.



Recent Sales of Unregistered Securities




|                  |  |               |                     |  |                  |                |        |                 |  |   |       | 
|----------------- |  | ------------- | ------------------- |  | ---------------- | -------------- | ------ | --------------- |  | - | ----- | 
|Date Issued       |  | Period Earned |                     |  | Number of Shares |                |        | Aggregate Value | 
|                  |  |               |                     |  |                  |                |        |                 | 
|                  |  |               |                     |  |                  | (In thousands) |       
|February 4, 2004  |  |               | Fourth quarter 2003 |  |                  |                | 25,651 |                 |  | $ | 357   | 
|April 26, 2004    |  |               | First quarter 2004  |  |                  |                | 55,849 |                 |  |   | 767   | 
|August 10, 2004   |  |               | Second quarter 2004 |  |                  |                | 97,297 |                 |  |   | 1,086 | 
|November 10, 2004 |  |               | Third quarter 2004  |  |                  |                | 95,092 |                 |  |   | 1,117 | 



27



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                           |                                                                        |                           |   |            |                |  |   |            |           | 
|---------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------- | - | ---------- | -------------- |  | - | ---------- | --------- | 
|                                                           |                                                                        |                           |   | For the    |               
|                                                           |                                                                        | For the                   |   |            | Period from    | 
|                                                           |                                                                        | Year Ended                |   |            | April 26, 2003 | 
|                                                           |                                                                        | Months Ended              |   |            | through        | 
|                                                           |                                                                        | December 31,              |   |            | December 31,   | 
|                                                           |                                                                        | 2004                      |   |            | 2003           | 
|(dollars in thousands, except share and per share amounts) |                                                                        |                           |   |            |                | 
|Statement of Operations Data:                              |                                                                        |                           |   |            |                |  |   |           
|                                                           | Interest income                                                        |                           | $ | 123,754    |                |  | $ | 22,654     |          
|                                                           | Interest expense                                                       |                           |   | 55,116     |                |  |   | 9,009      |          
|                                                           | Net interest income                                                    |                           |   | 68,638     |                |  |   | 13,645     |          
|                                                           | Other income                                                           |                           |   | 1,070      |                |  |   |           |          
|                                                           | Losses on sale of mortgage-backed securities                           |                           |   |           |                |  |   | (7,831     | )        
|                                                           | Expenses                                                               |                           |   | 12,596     |                |  |   | 3,053      |          
|                                                           | Net income                                                             |                           |   | 57,112     |                |  |   | 2,761      |          
|Per Common Share Data:                                     |                                                                        |                           |   |            |                |  |   |           
|                                                           | Net income  basic                                                     |                           | $ | 1.68       |                |  | $ | 0.27       |          
|                                                           | Net income  diluted                                                   |                           |   | 1.68       |                |  |   | 0.27       |          
|                                                           | Cash distributions declared(1)                                         |                           |   | 1.71       |                |  |   | 0.95       |          
|                                                           | Book value (end of period)(2)                                          |                           |   | 10.93      |                |  |   | 11.38      |          
|                                                           | Common shares outstanding (end of period)                              |                           |   | 37,113,011 |                |  |   | 24,814,000 |          
|                                                           | Weighted-average shares outstanding  basic                            |                           |   | 33,895,967 |                |  |   | 10,139,280 |          
|                                                           | Weighted-average shares outstanding  diluted                          |                           |   | 33,947,414 |                |  |   | 10,139,811 |          
|Balance Sheet Data (end of period):                        |                                                                        |                           |   |            |                |  |   |           
|                                                           | Mortgage-backed securities available-for-sale, at fair value           |                           | $ | 186,351    |                |  | $ | 352,123    |          
|                                                           | Mortgage-backed securities available-for-sale, pledged as              |                           |   |            |                |  |   |            |          
|                                                           |                                                                        | collateral, at fair value |   |            | 4,641,604      |  |   |            | 1,809,822 | 
|                                                           | Total mortgage-backed securities available-for-sale, at fair
    value |                           |   | 4,827,955  |                |  |   | 2,161,945  |          
|                                                           | Total assets                                                           |                           |   | 4,879,828  |                |  |   | 2,179,340  |          
|                                                           | Repurchase agreements                                                  |                           |   | 4,436,456  |                |  |   | 1,728,973  |          
|                                                           | Total liabilities                                                      |                           |   | 4,474,325  |                |  |   | 1,896,844  |          
|                                                           | Accumulated other comprehensive loss                                   |                           |   | (61,368    | )              |  |   | (26,510    | )        
|                                                           | Total stockholders equity                                             |                           |   | 405,503    |                |  |   | 282,496    |          
|Financial Ratios:                                          |                                                                        |                           |   |            |                |  |   |           
|                                                           | Leverage ratio (period end)(3)                                         |                           |   | 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 as of
    December 31, 2004 and 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | Leverage is calculated as total repurchase agreements 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 portfolio to within our target range of eight to 12
    times the amount of our equity. As a result, the total amount of
    mortgage-backed securities and repurchase agreement liabilities
    as of December 31, 2003 were lower than they were once our
    portfolio was fully levered through additional repurchase
    agreement liabilities and related mortgage-backed security
    purchases.

28



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##### 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 in 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
will, 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 and elsewhere in this document,
our actual results may differ materially from those anticipated
in such forward-looking statements.


Overview








| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | interest rate mismatches between our adjustable-rate and hybrid
    adjustable-rate mortgage-backed securities and our borrowings
    used to fund our purchases of mortgage-backed securities;
|
| |  | increasing or decreasing levels of prepayments on the mortgages
    underlying our mortgage-backed securities;                                                                                 
|
| |  | the potential for increased borrowing costs related to
    repurchase agreements;                                                                                                              
|
| |  | interest rate caps related to our adjustable-rate and hybrid
    adjustable-rate mortgage-backed securities;                                                                                   
|
| |  | the overall leverage of our portfolio;                                                                                                                                                         
|
| |  | our ability or inability to use derivatives to mitigate our
    interest rate and prepayment risks;                                                                                            
|
| |  | the impact that increases in interest rates would have on our
    book value;                                                                                                                  
|
| |  | maintaining adequate borrowing capacity so that we can purchase
    mortgage-related assets and reach our desired amount of leverage;                                                          
|
| |  | if we fail to obtain or renew sufficient funding on favorable
    terms or at all, we will be limited in our ability to acquire
    mortgage-related assets;                                   
|
| |  | possible market developments could cause our lenders to require
    us to pledge additional assets as collateral;                                                                              
|
| |  | if our assets are insufficient to meet the collateral
    requirements, we might be compelled to liquidate particular
    assets at inopportune times and at disadvantageous prices;           
|
| |  | competition might prevent us from acquiring mortgage-backed
    securities at favorable yields, which would harm our results of
    operations;                                                

29



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##### Table of Contents





| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | if we are disqualified as a REIT, we will be subject to tax as a
    regular corporation and face substantial tax liability; and
|
| |  | complying with REIT requirements might cause us to forego
    otherwise attractive opportunities.                               





Critical Accounting Policies






| |                                         
| | ----------------------------------------
| | Classifications of Investment Securities





| |                                         
| | ----------------------------------------
| | Valuations of Mortgage-backed Securities





30



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##### Table of Contents







| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | the length of the time and the extent to which the market value
    has been less than the amortized cost;                            
|
| |  | whether the security has been downgraded by a rating
    agency; and                                                                  
|
| |  | our intent and ability to hold the security for a period of time
    sufficient to allow for any anticipated recovery in market value.





| |                            
| | ---------------------------
| | Interest Income Recognition

Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases




| |                                                                           
| | --------------------------------------------------------------------------
| | Accounting for Derivative Financial Instruments and
    Hedging Activities







Accounting for Derivative Instruments
and Hedging Activities


31



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##### Table of Contents









| |                                          
| | -----------------------------------------
| | Management Incentive Compensation Expense





Accounting for Stock-based
Compensation Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services






32



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Financial Condition






| |                           
| | --------------------------
| | Mortgage-Backed Securities



33



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##### Table of Contents









|                                                  |  |               |      |  |            |  |      |  
|------------------------------------------------- |  | ------------- | ---- |  | ---------- |  | ---- | -
|                                                  |  | Average Final |      |  |           
|Asset                                             |  | Maturity      |      |  | % of Total | 
|                                                  |  |               |      |  |            | 
|Adjustable-Rate Mortgage-Backed Securities        |  |               | 2033 |  |            |  | 2.6  | %
|Hybrid Adjustable-Rate Mortgage-Backed Securities |  |               | 2034 |  |            |  | 96.3 | %
|Balloon Mortgage-Backed Securities                |  |               | 2008 |  |            |  | 1.1  | %
|Fixed-Rate Mortgage-Backed Securities             |  |               | N/A  |  |            |  | N/A  |  



|                                                  |  |               |      |  |            |  |      |  
|------------------------------------------------- |  | ------------- | ---- |  | ---------- |  | ---- | -
|                                                  |  | Average Final |      |  |           
|Asset                                             |  | Maturity      |      |  | % of Total | 
|                                                  |  |               |      |  |            | 
|Adjustable-Rate Mortgage-Backed Securities        |  |               | 2033 |  |            |  | 8.6  | %
|Hybrid Adjustable-Rate Mortgage-Backed Securities |  |               | 2033 |  |            |  | 88.9 | %
|Balloon Mortgage-Backed Securities                |  |               | 2008 |  |            |  | 2.5  | %
|Fixed-Rate Mortgage-Backed Securities             |  |               | N/A  |  |            |  | N/A  |  







34



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##### Table of Contents







|                                               |  |                |           |  |                |           |           |        |  |  |      |  
|---------------------------------------------- |  | -------------- | --------- |  | -------------- | --------- | --------- | ------ |  |  | ---- | -
|                                               |  |                |           |  |                | Weighted- |          
|                                               |  |                |           |  |                | Average   |          
|Weighted-Average Life                          |  | Fair Value     |           |  | Amortized 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 |        |  |  | 4.24 |  
|Greater than five years                        |  |                |          |  |                |           |          |        |  |  |     |  
|                                               |  |                |           |  |                |           |           |        | 
|Total                                          |  | $              | 4,827,955 |  |                | $         | 4,897,253 |        |  |  | 4.22 | %
|                                               |  |                |           |  |                |           |           |        | 



|                                               |  |                |           |  |                |           |           |        |  |  |      |  
|---------------------------------------------- |  | -------------- | --------- |  | -------------- | --------- | --------- | ------ |  |  | ---- | -
|                                               |  |                |           |  |                | Weighted- |          
|                                               |  |                |           |  |                | Average   |          
|Weighted-Average Life                          |  | Fair Value     |           |  | Amortized Cost |           |           | Coupon | 
|                                               |  |                |           |  |                |           |           |        | 
|                                               |  | (in thousands) |           |  |               
|Less than one year                             |  | $              | 299,685   |  |                | $         | 304,556   |        |  |  | 4.07 | %
|Greater than one year and less than five years |  |                | 1,829,471 |  |                |           | 1,850,899 |        |  |  | 4.09 |  
|Greater than five years                        |  |                | 32,789    |  |                |           | 32,843    |        |  |  | 3.96 |  
|                                               |  |                |           |  |                |           |           |        | 
|Total                                          |  | $              | 2,161,945 |  |                | $         | 2,188,298 |        |  |  | 4.09 | %
|                                               |  |                |           |  |                |           |           |        | 







| |                  
| | -----------------
| | Equity Securities





| |                               
| | ------------------------------
| | Unsettled Securities Purchases



35



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##### Table of Contents





| |             
| | ------------
| | Other Assets





| |                    
| | -------------------
| | Hedging Instruments









| |            
| | -----------
| | Liabilities



36



---



##### Table of Contents















| |                     
| | --------------------
| | Stockholders Equity







37



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##### Table of Contents







|                                                                                                                                                                        |                                                                            |               |         |        |              |   |       |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------- | ------- | ------ | ------------ | - | ----- | ----- | -
|                                                                                                                                                                        |                                                                            | Total         |         |        |             
|                                                                                                                                                                        |                                                                            | Stockholders |         |        | Book Value   |  
|                                                                                                                                                                        |                                                                            | Equity        |         |        | per Share(1) |  
|(dollars in thousands, except per share amounts)                                                                                                                        |                                                                            |               |         |        |              |  
|Total stockholders equity (GAAP)                                                                                                                                       |                                                                            | $             | 405,503 |        |              | $ | 10.93 |      
|Addback/ (Subtract)                                                                                                                                                     |                                                                            |               |         |        |              |   |       |      
|                                                                                                                                                                        | Accumulated other comprehensive loss on mortgage-backed
    securities     |               |         | 69,298 |              |   |       | 1.86  |  
|                                                                                                                                                                        | Accumulated other comprehensive income on interest rate swap
    contracts |               |         | (7,748 | )            |   |       | (0.21 | )
|                                                                                                                                                                        |                                                                            |               |         |        |              |  
|Total stockholders equity, excluding accumulated other
    comprehensive income and loss on mortgage-backed securities and
    interest rate swap contracts (NON-GAAP) |                                                                            | $             | 467,053 |        |              | $ | 12.58 |      
|                                                                                                                                                                        |                                                                            |               |         |        |              |  






|    |                                                                 
|--- | ----------------------------------------------------------------
|(1) | Based on 37,113,011 shares outstanding at December 31,
    2004.



|                                                                                                                        |                                                                        |               |         |        |              |   |       |      | 
|----------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------- | ------- | ------ | ------------ | - | ----- | ---- | 
|                                                                                                                        |                                                                        | Total         |         |        |             
|                                                                                                                        |                                                                        | Stockholders |         |        | Book Value   |  
|                                                                                                                        |                                                                        | Equity        |         |        | per Share(1) |  
|(dollars in thousands, except per share amounts)                                                                        |                                                                        |               |         |        |              |  
|Total stockholders equity (GAAP)                                                                                       |                                                                        | $             | 282,496 |        |              | $ | 11.38 |     
|Addback                                                                                                                 |                                                                        |               |         |        |              |   |       |     
|                                                                                                                        | Accumulated other comprehensive loss on mortgage-backed
    securities |               |         | 26,353 |              |   |       | 1.07 | 
|                                                                                                                        |                                                                        |               |         |        |              |  
|Total stockholders equity, excluding accumulated other
    comprehensive loss on mortgage-backed securities (NON-GAAP) |                                                                        | $             | 308,849 |        |              | $ | 12.45 |     
|                                                                                                                        |                                                                        |               |         |        |              |  






|    |                                                                 
|--- | ----------------------------------------------------------------
|(1) | Based on 24,814,000 shares outstanding on December 31,
    2003.



Results of Operations




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







38



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|                                                                                         |  |                |        |            |             |                |                |               |  |            |             |  |  |  |      |  
|---------------------------------------------------------------------------------------- |  | -------------- | ------ | ---------- | ----------- | -------------- | -------------- | ------------- |  | ---------- | ----------- |  |  |  | ---- | -
|                                                                                         |  |                |        |            |             | For the Period |                |               | 
|                                                                                         |  |                |        | Percentage |             |                | from           |               |  | Percentage |            
|                                                                                         |  | For the Year   |        |            | of Average  |                |                | June 23, 2003 |  |            | of Average  | 
|                                                                                         |  | Ended          |        |            | Repurchase  |                |                | through       |  |            | Repurchase  | 
|                                                                                         |  | December 31,   |        |            | Agreement   |                |                | December 31,  |  |            | Agreement   | 
|                                                                                         |  | 2004           |        |            | Liabilities |                |                | 2003          |  |            | Liabilities | 
|                                                                                         |  |                |        |            |             |                |                |               |  |            |             | 
|                                                                                         |  | (in thousands) |        |            |             |                | (in thousands) |               |  |           
|Interest expense on repurchase agreement liabilities                                     |  | $              | 56,309 |            |             |                | 1.60           | %             |  | $          | 8,999       |  |  |  | 1.14 | %
|Net hedge ineffectiveness (gains)/losses on futures and interest
    rate swap contracts |  |                | (2,268 | )          |             |                | (0.06          | )             |  |            |            |  |  |  |     |  
|Amortization of net realized gains on futures                                            |  |                | (2,803 | )          |             |                | (0.08          | )             |  |            |            |  |  |  |     |  
|Net interest expense on interest rate swap contracts                                     |  |                | 3,720  |            |             |                | 0.11           |               |  |            |            |  |  |  |     |  
|Other                                                                                    |  |                | 158    |            |             |                | nm             |               |  |            | 10          |  |  |  | nm   |  
|                                                                                         |  |                |        |            |             |                |                |               |  |            |             | 
|Total interest expense                                                                   |  | $              | 55,116 |            |             |                | 1.57           | %             |  | $          | 9,009       |  |  |  | 1.14 | %
|                                                                                         |  |                |        |            |             |                |                |               |  |            |             | 








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|                                |                                                                                           |                                    |        |                |                |   |        |       |       | 
|------------------------------- | ----------------------------------------------------------------------------------------- | ---------------------------------- | ------ | -------------- | -------------- | - | ------ | ----- | ----- | 
|                                |                                                                                           |                                    |        | For the Period |               
|                                |                                                                                           | For the Year                       |        |                | from April 26, |  
|                                |                                                                                           | Ended                              |        |                | 2003 through   |  
|                                |                                                                                           | December 31,                       |        |                | December 31,   |  
|                                |                                                                                           | 2004                               |        |                | 2003           |  
|                                |                                                                                           |                                    |        |                |                |  
|                                |                                                                                           | (in thousands)                     |       
|GAAP net income                 |                                                                                           | $                                  | 57,112 |                |                | $ | 2,761  |      
|Adjustments to GAAP net income: |                                                                                           |                                    |        |                |                |   |        |      
|                                | Addback of organizational costs expensed during the period                                |                                    |        |               |                |   |        | 163   |      
|                                | Amortization of organizational costs                                                      |                                    |        | (33            | )              |   |        | (19   | )    
|                                | Addback unvested stock compensation expense for unvested options                          |                                    |        | 5              |                |   |        | 3     |      
|                                | Addback unvested stock compensation expense for unvested
    restricted common stock      |                                    |        | 1,494          |                |   |        | 48    |      
|                                | Subtract net hedge ineffectiveness losses on futures and
    interest rate swap contracts |                                    |        | (308           | )              |   |        |      |      
|                                | Addback net realized gains on futures contracts                                           |                                    |        | 1,410          |                |   |        |      |      
|                                | Subtract dividend equivalent rights on restricted common stock                            |                                    |        | (258           | )              |   |        |      |      
|                                | Addback of net capital losses in the period                                               |                                    |        |               |                |   |        | 7,831 |      
|                                | Addback waived incentive compensation for the quarter ended
    September 30, 2003        |                                    |        |               |                |   |        | 613   |      
|                                |                                                                                           |                                    |        |                |                |  
|                                |                                                                                           | Net adjustments to GAAP net income |        |                | 2,310          |   |        |       | 8,640 | 
|                                |                                                                                           |                                    |        |                |                |  
|REIT taxable net income         |                                                                                           | $                                  | 59,422 |                |                | $ | 11,400 |      
|                                |                                                                                           |                                    |        |                |                |  



|                                                                                                       |  |              |         |                |                |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | -------------- | -------------- | - | ------- | -
|                                                                                                       |  |              |         | For the Period |               
|                                                                                                       |  | For the Year |         |                | from April 26, |  
|                                                                                                       |  | Ended        |         |                | 2003 through   |  
|                                                                                                       |  | December 31, |         |                | December 31,   |  
|                                                                                                       |  | 2004         |         |                | 2003           |  
|(in thousands, except per share data)                                                                  |  |              |         |                |                |  
|Undistributed REIT taxable net income, beginning of period                                             |  | $            | 281     |                |                | $ |        |  
|REIT taxable net income earned during period                                                           |  |              | 59,422  |                |                |   | 11,400  |  
|Distributions declared during period, net of dividend equivalent
    rights on restricted common stock |  |              | (57,912 | )              |                |   | (11,119 | )
|                                                                                                       |  |              |         |                |                |  
|Undistributed REIT taxable net income, end of period                                                   |  | $            | 1,791   |                |                | $ | 281     |  
|                                                                                                       |  |              |         |                |                |  
|Cash distributions per share declared during period                                                    |  | $            | 1.71    |                |                | $ | 0.95    |  
|                                                                                                       |  |              |         |                |                |  
|Percentage of REIT taxable net income distributed                                                      |  |              | 97.5    | %              |                |   | 97.5    | %
|                                                                                                       |  |              |         |                |                |  



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Contractual Obligations and Commitments




Off-Balance Sheet Arrangements




Liquidity and Capital Resources












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Inflation




Risk Factors


Risks Related to Our Business




| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest rate mismatches between our mortgage-backed
    securities and the borrowings used to fund our purchases of
    mortgage-backed securities might reduce our net income or result
    in losses during periods of changing interest rates.



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| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Increased levels of prepayments on the mortgages
    underlying our mortgage-backed securities might decrease our net
    interest income or result in a net loss.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We seek to purchase mortgage-backed securities that we believe
    to have favorable risk-adjusted expected returns relative to
    market interest rates at the time of purchase. If the coupon
    interest rate for a mortgage-backed security is higher than the
    market interest rate at the time it is purchased, then that
    mortgage-backed security will be acquired at a premium to its
    par value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | In accordance with applicable accounting rules, we are required
    to amortize any premiums or accrete discounts related to our
    mortgage-backed securities over their expected terms. The
    amortization of a premium reduces interest income, while the
    accretion of a discount increases interest income. The expected
    terms for mortgage-backed securities are a function of the
    prepayment rates for the mortgages underlying the
    mortgage-backed securities. Mortgage-backed securities that are
    at a premium to their par value are more likely to experience
    prepayment of some or all of their principal through
    refinancings. If the mortgages underlying our mortgage-backed
    securities purchased at a premium are prepaid in whole or in
    part more quickly than their respective maturity dates, then we
    must also amortize their respective premiums more quickly, which
    would decrease our net interest income and harm our
    profitability.
|
| |  | A substantial portion of our adjustable-rate mortgage-backed
    securities may bear interest at rates that are lower than their
    fully-indexed rates, which refers to their
    applicable index rates plus a margin. If an adjustable-rate
    mortgage-backed security is prepaid prior to or soon after the
    time of adjustment to a fully-indexed rate, we will have held
    that mortgage-backed security while it was less profitable and
    lost the opportunity to receive interest at the fully-indexed
    rate over the remainder of its expected life.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | If we are unable to acquire new mortgage-backed securities to
    replace the prepaid mortgage-backed securities, our financial
    condition, results of operations and cash flow may suffer and we
    could incur losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



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| |                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on short-term borrowings to purchase
    mortgage-related assets and reach our desired amount of
    leverage. If we fail to obtain or renew sufficient funding on
    favorable terms or at all, we will be limited in our ability to
    acquire mortgage-related assets, which will harm our results of
    operations.





| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our leverage strategy increases the risks of our
    operations, which could reduce our net income and the amount
    available for distributions or cause us to suffer a loss.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A majority of our borrowings are secured by our mortgage-backed
    securities, generally under repurchase agreements. A decline in
    the market value of our mortgage-backed securities used to
    secure these debt obligations could limit our ability to borrow
    or result in lenders requiring us to pledge additional
    collateral to secure our borrowings. In that situation, we could
    be required to sell mortgage-backed securities under adverse
    market conditions in order to obtain the additional collateral
    required by the lender. If these sales are made at prices lower
    than the carrying value of our mortgage-backed securities, we
    would experience losses.
|
| |  | A default under a mortgage-related asset that constitutes
    collateral for a loan could also result in an involuntary
    liquidation of the mortgage-related asset, including any
    cross-collateralized mortgage-backed securities. This
    circumstance would result in a loss to us to the extent that the
    value of our mortgage-related asset upon liquidation is less
    than the amount we borrowed against the mortgage-related asset.                                                                                                                                                                                                                                                     
|
| |  | To the extent we are compelled to liquidate qualified REIT
    assets to repay our debts or further collateralize them, our
    compliance with the REIT rules regarding our assets and our
    sources of income could be negatively affected, which could
    jeopardize our status as a REIT. Losing our REIT status would
    cause us to lose tax advantages applicable to REITs and would
    decrease our overall profitability and our distributions to our
    stockholders.                                                                                                                                                                                                                        
|
| |  | If we experience losses as a result of our leverage policy, such
    losses would reduce the amounts available for distribution to
    our stockholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | We may incur increased borrowing costs related to
    repurchase agreements that would harm our results of
    operations.





| |   |                                                           
| | - | ----------------------------------------------------------
| |  | the movement of interest rates;                           
|
| |  | the availability of financing in the market; and          
|
| |  | the value and liquidity of our mortgage-backed securities.





| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have only been in business since June 2003 and our
    implementation of our operating policies and strategies may not
    continue to be successful.





| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our board of directors may change our operating policies
    and strategies without stockholder approval or prior notice and
    such changes could harm our business and results of operations
    and the value of our stock.





| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | We depend on our key personnel, and the loss of any of our
    key personnel could severely and detrimentally affect our
    operations.



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| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Competition might prevent us from acquiring
    mortgage-backed securities at favorable yields, which would harm
    our results of operations.





| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest rate caps related to our mortgage-backed
    securities may reduce our net income or cause us to suffer a
    loss during periods of rising interest rates.









| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | We might experience reduced net interest income or a loss
    from holding fixed-rate investments during periods of rising
    interest rates.



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| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | We might not be able to use derivatives to mitigate our
    interest rate and prepayment risks.





| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may enter into ineffective derivative transactions or
    other hedging activities that may reduce our net interest rate
    spread or cause us to suffer losses.





Accounting for Derivative Instruments
and Hedging Activities




| |                                                                         
| | ------------------------------------------------------------------------
| | An increase in interest rates might adversely affect our
    book value.





| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may invest in leveraged mortgage derivative securities
    that generally experience greater volatility in market prices,
    and thus expose us to greater risk with respect to their rate of
    return.



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| |                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Possible market developments could cause our lenders to
    require us to pledge additional assets as collateral. If our
    assets are insufficient to meet the collateral requirements, we
    might be compelled to liquidate particular assets at inopportune
    times and at disadvantageous prices.





| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because the assets that we acquire might experience
    periods of illiquidity, we might be prevented from selling our
    mortgage-related assets at opportune times and prices.





| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | We remain subject to losses despite our strategy of
    investing in highly-rated mortgage-backed securities.





| |                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our investment guidelines permit us to invest up to 10% of
    our assets in unrated mortgage-related assets and
    mortgage-backed securities rated below investment-grade, which
    carry a greater likelihood of default or rating downgrade than
    investments in investment-grade mortgage-backed securities and
    may cause us to suffer losses.



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| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our use of repurchase agreements to borrow funds may give
    our lenders greater rights in the event that either we or any of
    our lenders file for bankruptcy.





| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Defaults on the mortgage loans underlying our
    mortgage-backed securities may reduce the value of our
    investment portfolio and may harm our results of
    operations.







| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Decreases in the value of the property underlying our
    mortgage-backed securities might decrease the value of our
    assets.





| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Insurance will not cover all potential losses on the
    underlying real property and the absence thereof may harm the
    value of our assets.



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| |                                                                    
| | -------------------------------------------------------------------
| | Distressed mortgage loans have a higher risk of future
    default.





| |                                                                   
| | ------------------------------------------------------------------
| | Subordinated loans on real estate are subject to higher
    risks.



Risks Related to Seneca




| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We pay Seneca incentive compensation based on our
    portfolios performance. This arrangement may lead Seneca
    to recommend riskier or more speculative investments in an
    effort to maximize its incentive compensation.





| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | 20% for the first $400 million of our average net invested
    assets; and
|
| |  | 10% of our average net invested assets in excess of
    $400 million.     





| |                                                                                      
| | -------------------------------------------------------------------------------------
| | We may be obligated to pay Seneca incentive compensation
    even if we incur a loss.



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| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because Seneca is entitled to a significant fee if we
    terminate the management agreement, economic considerations
    might preclude us from terminating the management agreement in
    the event that Seneca fails to meet our expectations.





| |   |                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we terminate the management agreement without cause in
    connection with a decision to manage our portfolio internally,
    in which case we will be obligated to pay to Seneca a fee equal
    to the highest amount of management fee incurred in a particular
    year during the then three most recent years; or                                   
|
| |  | our decision to terminate the management agreement without cause
    is for a reason other than our decision to manage our portfolio
    internally, in which case we will be obligated to pay Seneca an
    amount equal to two times the highest amount of management fee
    incurred in a particular year during the then three most recent
    years.





| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | Senecas liability is limited under the management
    agreement, and we have agreed to indemnify Seneca against
    certain liabilities.





| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Seneca might allocate mortgage-related opportunities to
    other entities, and thus might divert attractive investment
    opportunities away from us.



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| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Seneca may render services to other mortgage investors,
    which could reduce the amount of time and effort that Seneca
    devotes to us.





| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Seneca has significant influence over our affairs, and
    might cause us to engage in transactions that are not in our or
    our stockholders best interests.





| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Seneca has limited experience managing a REIT and we
    cannot assure you that Senecas past experience will be
    sufficient to manage our business as a REIT successfully.





| |                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During periods of declining market prices for our common
    stock, we may be required to issue greater numbers of shares to
    Seneca for the same amount of incentive compensation arising
    under the management agreement, which will have a dilutive
    effect on our stockholders that may harm the market price of our
    common stock.





| |                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Investors may not be able to estimate with certainty the
    aggregate fees and expense reimbursements that will be paid to
    Seneca under the management agreement and the cost-sharing
    agreement due to the time and manner in which Senecas
    incentive compensation and expense reimbursements are
    determined.



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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 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 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.





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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.





| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | 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.







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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.







| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | We may incur excess inclusion income that would increase
    the tax liability of our stockholders.





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Risks Related to Investing in Our Securities




| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have not established a minimum distribution payment
    level, and we cannot assure you of our ability to make
    distributions to our stockholders in the future.





| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Our declared cash distributions may force us to liquidate
    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.



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| |                                                                     
| | --------------------------------------------------------------------
| | 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.





| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in our quarterly operating
    results or distributions;                                                  
|
| |  | changes in our funds from operations or earnings estimates or
    publication of research reports about us or the real estate
    industry;
|
| |  | increases in market interest rates that lead purchasers of our
    shares to demand a higher yield;                                        
|
| |  | changes in market valuations of similar companies;                                                                                         
|
| |  | adverse market reaction to any indebtedness we incur in the
    future;                                                                    
|
| |  | additions or departures of key management personnel;                                                                                       
|
| |  | the termination of or resignation by Seneca as our manager;                                                                                
|
| |  | actions by institutional stockholders;                                                                                                     
|
| |  | speculation in the press or investment community; and                                                                                      
|
| |  | general market and economic conditions.                                                                                                    



| |                                                                             
| | ----------------------------------------------------------------------------
| | 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.



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| |                                                                               
| | ------------------------------------------------------------------------------
| | Broad market fluctuations could harm the market price of
    our common 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 right to
    determine the number of directors and the exclusive right, 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.
|
| |  | Limitation on Stockholder-Requested Special Meetings. Our
    bylaws provide that our stockholders have the right to call a
    special meeting only upon the written request of stockholders
    entitled to cast not less than a majority of all the votes
    entitled to be cast by our stockholders at such meeting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Advance Notice Provisions for Stockholder Nominations and
    Proposals. Our bylaws require advance written notice for
    stockholders to nominate persons for election as directors at,
    or to bring other business before, any meeting of our
    stockholders. This bylaw provision limits the ability of our
    stockholders to make nominations of persons for election as
    directors or to introduce other proposals unless we are notified
    in a timely manner prior to the meeting.                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Exclusive Authority of our Board to Amend our Bylaws. Our
    bylaws provide that our board of directors has the exclusive
    power to adopt, alter or repeal any provision of our bylaws or
    to make new bylaws. Thus, our stockholders may not effect any
    changes to our bylaws.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Preferred Stock. Under our charter, our board of
    directors has authority 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 Internal Revenue 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 our
    company 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 our company 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 acquiror, would
    entitle the acquiror 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 acquiror 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.

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| |                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The market price of our common stock may be adversely
    affected by future sales of a substantial number of shares of
    our common stock by our existing stockholders in the public
    market or the availability of such shares for sale.







| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Terrorist attacks and other acts of violence or war may
    affect the market for our common stock, the industry in which we
    operate and our operations and profitability.








|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk



Interest Rate Risk






| |                              
| | -----------------------------
| | Effect on Net Interest Income





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| |               
| | --------------
| | Extension Risk





| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Adjustable-Rate and Hybrid Adjustable-Rate Mortgage-Backed
    Security Interest Rate Cap Risk





| |                            
| | ---------------------------
| | Interest Rate Mismatch Risk





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| |                
| | ---------------
| | Prepayment Risk





| |                     
| | --------------------
| | Effect on Fair Value





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|                                                  |  |                |         |   |           |   |                |              |  |                |              |    |  |   |         |   
|------------------------------------------------- |  | -------------- | ------- | - | --------- | - | -------------- | ------------ |  | -------------- | ------------ | -- |  | - | ------- | --
|                                                  |  | Interest Rates |         |   |           |   | Interest Rates |              |  | Interest Rates |             
|                                                  |  | Fall 100       |         |   |           |   | Rise 100       |              |  | Rise 200       |             
|                                                  |  | Basis Points   |         |   | Unchanged |   |                | Basis Points |  |                | Basis Points |   
|(dollars in millions)                             |  |                |         |   |           |   |                |              |  |                |              |   
|Adjustable-Rate Mortgage-Backed Securities        |  |                |         |   |           |   |                |              |  |                |              |    |  |   |         |   
|Fair value                                        |  | $              | 126.0   |   |           | $ | 125.8          |              |  | $              | 125.4        |    |  | $ | 125.0   |   
|Change in fair value                              |  | $              | 0.2     |   |           |   |               |              |  | $              | (0.4         | )  |  | $ | (0.8    | ) 
|Change as a percent of fair value                 |  |                | 0.2     | % |           |   |               |              |  |                | (0.3         | )% |  |   | (0.6    | )%
|Hybrid Adjustable-Rate Mortgage-Backed Securities |  |                |         |   |           |   |                |              |  |                |              |    |  |   |         |   
|Fair value                                        |  | $              | 4,703.6 |   |           | $ | 4,648.2        |              |  | $              | 4,558.8      |    |  | $ | 4,458.2 |   
|Change in fair value                              |  | $              | 55.4    |   |           |   |               |              |  | $              | (89.4        | )  |  | $ | (190.0  | ) 
|Change as a percent of fair value                 |  |                | 1.2     | % |           |   |               |              |  |                | (1.9         | )% |  |   | (4.1    | )%
|Balloon Mortgage-Backed Securities                |  |                |         |   |           |   |                |              |  |                |              |    |  |   |         |   
|Fair value                                        |  | $              | 54.5    |   |           | $ | 54.0           |              |  | $              | 53.0         |    |  | $ | 51.8    |   
|Change in fair value                              |  | $              | 0.5     |   |           |   |               |              |  | $              | (1.0         | )  |  | $ | (2.2    | ) 
|Change as a percent of fair value                 |  |                | 0.9     | % |           |   |               |              |  |                | (1.9         | )% |  |   | (4.1    | )%
|Total Mortgage-Backed Securities                  |  |                |         |   |           |   |                |              |  |                |              |    |  |   |         |   
|Fair value                                        |  | $              | 4,884.1 |   |           | $ | 4,828.0        |              |  | $              | 4,737.2      |    |  | $ | 4,635.0 |   
|Change in fair value                              |  | $              | 56.1    |   |           |   |               |              |  | $              | (90.8        | )  |  | $ | (193.0  | ) 
|Change as a percent of fair value                 |  |                | 1.2     | % |           |   |               |              |  |                | (1.9         | )% |  |   | (4.0    | )%
|Repurchase Agreements(1)                          |  |                |         |   |           |   |                |              |  |                |              |    |  |   |         |   
|Fair value                                        |  | $              | 4,436.5 |   |           | $ | 4,436.5        |              |  | $              | 4,436.5      |    |  | $ | 4,436.5 |   
|Change in fair value                              |  |                |        |   |           |   |               |              |  |                |             |    |  |   |        |   
|Change as a percent of fair value                 |  |                |        |   |           |   |               |              |  |                |             |    |  |   |        |   
|Hedge Instruments                                 |  |                |         |   |           |   |                |              |  |                |              |    |  |   |         |   
|Fair value                                        |  | $              | (14.2   | ) |           | $ | 6.8            |              |  | $              | 27.6         |    |  | $ | 48.3    |   
|Change in fair value                              |  |                | (21.0   | ) |           |   |               |              |  |                | 20.8         |    |  |   | 41.5    |   
|Change as a percent of fair value                 |  |                | nm      |   |           |   |               |              |  |                | nm           |    |  |   | nm      |   






|    |                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------
|(1) | The fair value of the repurchase agreements would not change
    materially due to the short-term nature of these instruments.





65



---





| |                
| | ---------------
| | 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.











|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS


Financial Statements of Luminent Mortgage Capital, Inc.


|                                                                                                                                             |  |   
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|Managements Report on Internal
    Control Over Financial Reporting                                                                         |  | 67
|Report of Independent Registered Public
    Accounting Firm                                                                                  |  | 68
|Balance Sheets as of December 31, 2004
    and 2003                                                                                          |  | 69
|Statements of Operations for the year ended
    December 31, 2004 and the period from April 26, 2003
    through December 31, 2003           |  | 70
|Statements of Stockholders Equity for
    the year ended December 31, 2004 and the period from
    April 26, 2003 through December 31, 2003 |  | 71
|Statements of Cash Flows for the year ended
    December 31, 2004 and the period from April 26, 2003
    through December 31, 2003           |  | 72
|Notes to Financial Statements                                                                                                                |  | 73
|Report of Independent Registered Public
    Accounting Firm                                                                                  |  | 94



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MANAGEMENTS REPORT ON


INTERNAL CONTROL OVER FINANCIAL REPORTING










/s/ GAIL P. SENECA




Chairman of the Board and Chief 
 Executive Officer


/s/ CHRISTOPHER J. ZYDA




Senior Vice President and Chief 
 Financial Officer




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






Internal Control 
Integrated Framework








Internal
Control  Integrated Framework Internal Control  Integrated
Framework










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LUMINENT MORTGAGE CAPITAL, INC.





BALANCE SHEETS


|                                                                                               |                                                             |                                                                                                                                                         |           |         |              |   |           |         |    | 
|---------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | ------- | ------------ | - | --------- | ------- | -- | 
|                                                                                               |                                                             | December 31,                                                                                                                                            |           |         | December 31, |  
|                                                                                               |                                                             | 2004                                                                                                                                                    |           |         | 2003         |  
|(in thousands, except share and per share amounts)                                             |                                                             |                                                                                                                                                         |           |         |              |  
|Assets:                                                                                       
|Cash and cash equivalents                                                                      |                                                             | $                                                                                                                                                       | 10,581    |         |              | $ | 7,219     |        
|Mortgage-backed securities available-for-sale, at fair value                                   |                                                             |                                                                                                                                                         | 186,351   |         |              |   | 352,123   |        
|Mortgage-backed securities available-for-sale, pledged as
    collateral, at fair value        |                                                             |                                                                                                                                                         | 4,641,604 |         |              |   | 1,809,822 |        
|Interest receivable                                                                            |                                                             |                                                                                                                                                         | 18,861    |         |              |   | 7,345     |        
|Principal receivable                                                                           |                                                             |                                                                                                                                                         | 13,426    |         |              |   | 2,313     |        
|Swap contracts, at fair value                                                                  |                                                             |                                                                                                                                                         | 7,900     |         |              |   |          |        
|Other assets                                                                                   |                                                             |                                                                                                                                                         | 1,105     |         |              |   | 518       |        
|                                                                                               |                                                             |                                                                                                                                                         |           |         |              |  
|Total assets                                                                                   |                                                             | $                                                                                                                                                       | 4,879,828 |         |              | $ | 2,179,340 |        
|                                                                                               |                                                             |                                                                                                                                                         |           |         |              |  
|                                                                                              
|Liabilities:                                                                                  
|Repurchase agreements                                                                          |                                                             | $                                                                                                                                                       | 4,436,456 |         |              | $ | 1,728,973 |        
|Unsettled security purchases                                                                   |                                                             |                                                                                                                                                         |          |         |              |   | 156,127   |        
|Cash distribution payable                                                                      |                                                             |                                                                                                                                                         | 15,959    |         |              |   | 5,267     |        
|Futures contracts, at fair value                                                               |                                                             |                                                                                                                                                         | 1,073     |         |              |   | 157       |        
|Accrued interest expense                                                                       |                                                             |                                                                                                                                                         | 17,333    |         |              |   | 3,777     |        
|Management fee payable, incentive compensation payable and other
    related party liabilities |                                                             |                                                                                                                                                         | 2,952     |         |              |   | 1,088     |        
|Insurance note payable                                                                         |                                                             |                                                                                                                                                         |          |         |              |   | 92        |        
|Accounts payable and accrued expenses                                                          |                                                             |                                                                                                                                                         | 552       |         |              |   | 1,363     |        
|                                                                                               |                                                             |                                                                                                                                                         |           |         |              |  
|Total liabilities                                                                              |                                                             |                                                                                                                                                         | 4,474,325 |         |              |   | 1,896,844 |        
|                                                                                               |                                                             |                                                                                                                                                         |           |         |              |  
|Stockholders Equity:                                                                          |                                                             |                                                                                                                                                         |           |         |              |   |           |        
|                                                                                               | Preferred stock, par value $0.001:                          |                                                                                                                                                         |           |         |              |   |           |         |   
|                                                                                               |                                                             | 10,000,000 shares authorized; no shares issued and
    outstanding at December 31, 2004 and December 31, 2003                                           |           |         |             |   |           |         |   | 
|                                                                                               | Common stock, par value $0.001:                             |                                                                                                                                                         |           |         |              |   |           |         |   
|                                                                                               |                                                             | 100,000,000 shares authorized; 37,113,011 and
    24,814,000 shares issued and outstanding at
    December 31, 2004 and December 31, 2003, respectively |           |         | 37           |   |           |         | 25 | 
|                                                                                               | Additional paid-in capital                                  |                                                                                                                                                         |           | 478,457 |              |   |           | 317,339 |   
|                                                                                               | Deferred compensation                                       |                                                                                                                                                         |           | (2,207  | )            |   |           |        |   
|                                                                                               | Accumulated other comprehensive loss                        |                                                                                                                                                         |           | (61,368 | )            |   |           | (26,510 | ) 
|                                                                                               | Accumulated distributions in excess of accumulated earnings |                                                                                                                                                         |           | (9,416  | )            |   |           | (8,358  | ) 
|                                                                                               |                                                             |                                                                                                                                                         |           |         |              |  
|Total stockholders equity                                                                     |                                                             |                                                                                                                                                         | 405,503   |         |              |   | 282,496   |        
|                                                                                               |                                                             |                                                                                                                                                         |           |         |              |  
|Total liabilities and stockholders equity                                                     |                                                             | $                                                                                                                                                       | 4,879,828 |         |              | $ | 2,179,340 |        
|                                                                                               |                                                             |                                                                                                                                                         |           |         |              |  



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LUMINENT MORTGAGE CAPITAL, INC.





STATEMENTS OF OPERATIONS


|                                                        |                                                   |                     |            |             |                |   |            |        |        | 
|------------------------------------------------------- | ------------------------------------------------- | ------------------- | ---------- | ----------- | -------------- | - | ---------- | ------ | ------ | 
|                                                        |                                                   |                     |            | For the     |               
|                                                        |                                                   |                     |            | Period from |               
|                                                        |                                                   | For the Year        |            |             | April 26, 2003 |  
|                                                        |                                                   | Ended               |            |             | through        |  
|                                                        |                                                   | December 31,        |            |             | December 31,   |  
|                                                        |                                                   | 2004                |            |             | 2003           |  
|(in thousands, except share and per share amounts)      |                                                   |                     |            |             |                |  
|Revenues:                                               |                                                   |                     |            |             |                |   |            |       
|Net interest income:                                    |                                                   |                     |            |             |                |   |            |       
|                                                        | Interest income                                   |                     | $          | 123,754     |                |   | $          | 22,654 |       
|                                                        | Interest expense                                  |                     |            | 55,116      |                |   |            | 9,009  |       
|                                                        |                                                   |                     |            |             |                |  
|                                                        |                                                   | Net interest income |            |             | 68,638         |   |            |        | 13,645 | 
|Other Income (Expenses):                                |                                                   |                     |            |             |                |   |            |       
|                                                        | Other income                                      |                     |            | 1,070       |                |   |            |       |       
|                                                        | Losses on sales of mortgage-backed securities     |                     |            |            |                |   |            | (7,831 | )     
|Expenses:                                               |                                                   |                     |            |             |                |   |            |       
|                                                        | Management fee expense to related party           |                     |            | 4,066       |                |   |            | 901    |       
|                                                        | Incentive compensation expense to related parties |                     |            | 4,915       |                |   |            | 980    |       
|                                                        | Salaries and benefits                             |                     |            | 593         |                |   |            | 99     |       
|                                                        | Professional services                             |                     |            | 1,348       |                |   |            | 477    |       
|                                                        | Board of directors expense                        |                     |            | 249         |                |   |            | 117    |       
|                                                        | Insurance expense                                 |                     |            | 631         |                |   |            | 291    |       
|                                                        | Custody expense                                   |                     |            | 383         |                |   |            | 115    |       
|                                                        | Other general and administrative expenses         |                     |            | 411         |                |   |            | 73     |       
|                                                        |                                                   |                     |            |             |                |  
|Total expenses                                          |                                                   |                     | 12,596     |             |                |   | 3,053      |       
|                                                        |                                                   |                     |            |             |                |  
|Net income                                              |                                                   | $                   | 57,112     |             |                | $ | 2,761      |       
|                                                        |                                                   |                     |            |             |                |  
|Net income per share  basic                            |                                                   | $                   | 1.68       |             |                | $ | 0.27       |       
|                                                        |                                                   |                     |            |             |                |  
|Net income per share  diluted                          |                                                   | $                   | 1.68       |             |                | $ | 0.27       |       
|                                                        |                                                   |                     |            |             |                |  
|Weighted-average number of shares outstanding  basic   |                                                   |                     | 33,895,967 |             |                |   | 10,139,280 |       
|                                                        |                                                   |                     |            |             |                |  
|Weighted-average number of shares outstanding  diluted |                                                   |                     | 33,947,414 |             |                |   | 10,139,811 |       
|                                                        |                                                   |                     |            |             |                |  



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LUMINENT MORTGAGE CAPITAL, INC.


STATEMENTS OF STOCKHOLDERS EQUITY


|                                                                         |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   |               |               |  |             |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------ | ------ | --- | ---------- | - | ------- | ------- | ----------- | -------- | ------------ | ---------------- | ------------- | ------------- | ------ | ----------- | -------- | - | ------------- | ------------- |  | ----------- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                         |  | Common |        |     |            |   |         |         |             |          |              |                  |               |               |       
|                                                                         |  | Stock  |        |     |            |   |         |         | Accumulated |          |              | Distributions in |               |               |        |             |         
|                                                                         |  |        |        |     | Additional |   |         |         |             | Other    |              |                  | Excess of     |               |        |             |          |  
|                                                                         |  |        |        | Par |            |   | Paid-In |         |             | Deferred |              |                  | Comprehensive |               |        | Accumulated |          |   | Comprehensive |               |  | Accumulated |        
|                                                                         |  | Shares |        |     | Value      |   |         | Capital |             |          | Compensation |                  |               | Income/(Loss) |        |             | Earnings |   |               | Income/(Loss) |  |             | Total   |  
|(in thousands)                                                           |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   |               |               |  |             |         |  
|Balance, April 26, 2003                                                  |  |        | 204    |     |            | $ | 1       |         |             | $        |             |                  |               | $             |       |             |          | $ |              |               |  | $           |        |   |  |   |         |   |  | $ | 1       |  
|Net income                                                               |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   |               |               |  |             | 2,761   |   |  | $ | 2,761   |   |  |   | 2,761   |  
|Mortgage-backed securities available-for-sale, fair value
    adjustment |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   | (26,353       | )             |  |             |         |   |  |   | (26,353 | ) |  |   | (26,353 | )
|Futures 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      |                  |               |               |        |             |          |   |               |               |  |             |         |   |  |   |         |   |  |   | 316,747 |  
|Capital contribution                                                     |  |        |        |     |            |   |         |         |             |          | 613          |                  |               |               |        |             |          |   |               |               |  |             |         |   |  |   |         |   |  |   | 613     |  
|Amortization of stock options                                            |  |        |        |     |            |   |         |         |             |          | 3            |                  |               |               |        |             |          |   |               |               |  |             |         |   |  |   |         |   |  |   | 3       |  
|                                                                         |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   |               |               |  |             |         |  
|Balance, December 31, 2003                                               |  |        | 24,814 |     |            |   | 25      |         |             |          | 317,339      |                  |               |               |       |             |          |   | (26,510       | )             |  |             | (8,358  | ) |  |   |         |   |  |   | 282,496 |  
|Net income                                                               |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   |               |               |  |             | 57,112  |   |  | $ | 57,112  |   |  |   | 57,112  |  
|Mortgage-backed securities available-for-sale, fair value
    adjustment |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   | (42,944       | )             |  |             |         |   |  |   | (42,944 | ) |  |   | (42,944 | )
|Futures contracts, fair value adjustment                                 |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   | (1,072        | )             |  |             |         |   |  |   | (1,072  | ) |  |   | (1,072  | )
|Futures contracts, net realized gains                                    |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   | 1,410         |               |  |             |         |   |  |   | 1,410   |   |  |   | 1,410   |  
|Swap contracts, fair value adjustment                                    |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   | 7,748         |               |  |             |         |   |  |   | 7,748   |   |  |   | 7,748   |  
|                                                                         |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   |               |               |  |             |         |  
|Comprehensive income                                                     |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   |               |               |  |             |         |   |  | $ | 22,254  |   |  |   |         |  
|                                                                         |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   |               |               |  |             |         |  
|Distributions to stockholders                                            |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   |               |               |  |             | (58,170 | ) |  |   |         |   |  |   | (58,170 | )
|Issuance of common stock                                                 |  |        | 12,299 |     |            |   | 12      |         |             |          | 161,113      |                  |               |               | (2,207 | )           |          |   |               |               |  |             |         |   |  |   |         |   |  |   | 158,918 |  
|Amortization of stock options                                            |  |        |        |     |            |   |         |         |             |          | 5            |                  |               |               |        |             |          |   |               |               |  |             |         |   |  |   |         |   |  |   | 5       |  
|                                                                         |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   |               |               |  |             |         |  
|Balance, December 31, 2004                                               |  |        | 37,113 |     |            | $ | 37      |         |             | $        | 478,457      |                  |               | $             | (2,207 | )           |          | $ | (61,368       | )             |  | $           | (9,416  | ) |  |   |         |   |  | $ | 405,503 |  
|                                                                         |  |        |        |     |            |   |         |         |             |          |              |                  |               |               |        |             |          |   |               |               |  |             |         |  



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LUMINENT MORTGAGE CAPITAL, INC.


STATEMENTS OF CASH FLOWS


|                                                   |                                                                                                         |                                                                                                            |                                           |                                           |                |            |        |            |       |            |        | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | -------------- | ---------- | ------ | ---------- | ----- | ---------- | ------ | 
|                                                   |                                                                                                         |                                                                                                            |                                           | For the Period                            |               
|                                                   |                                                                                                         | For the Year                                                                                               |                                           |                                           | from April 26, |           
|                                                   |                                                                                                         | Ended                                                                                                      |                                           |                                           | 2003 through   |           
|                                                   |                                                                                                         | December 31,                                                                                               |                                           |                                           | December 31,   |           
|                                                   |                                                                                                         | 2004                                                                                                       |                                           |                                           | 2003           |           
|(in thousands)                                     |                                                                                                         |                                                                                                            |                                           |                                           |                |           
|Cash flows from operating activities:              |                                                                                                         |                                                                                                            |                                           |                                           |                |            |        |           
|                                                   | Net income                                                                                              |                                                                                                            | $                                         | 57,112                                    |                |            | $      | 2,761      |      
|                                                   | Adjustments to reconcile net income to net cash provided by
    operating activities:                   |                                                                                                            |                                           |                                           |                |            |        |            |      
|                                                   | Amortization of premium and discount on mortgage-backed
    securities, net                             |                                                                                                            |                                           | 28,496                                    |                |            |        | 9,189      |      
|                                                   | Amortization of stock options                                                                           |                                                                                                            |                                           | 5                                         |                |            |        | 3          |      
|                                                   | Ineffectiveness of cash flow hedges                                                                     |                                                                                                            |                                           | (308                                      | )              |            |        |           |      
|                                                   | Losses on sales of mortgage-backed securities                                                           |                                                                                                            |                                           |                                          |                |            |        | 7,831      |      
|                                                   | Waiver of incentive compensation by related party                                                       |                                                                                                            |                                           |                                          |                |            |        | 613        |      
|                                                   | Changes in operating assets and liabilities:                                                            |                                                                                                            |                                           |                                           |                |            |        |            |      
|                                                   |                                                                                                         | Increase in interest receivable, net of purchased interest                                                 |                                           |                                           | (1,611         | )          |        |            | (116  | )         
|                                                   |                                                                                                         | Increase in other assets                                                                                   |                                           |                                           | (2,794         | )          |        |            | (518  | )         
|                                                   |                                                                                                         | Increase (decrease) in accounts payable and accrued expenses                                               |                                           |                                           | (811           | )          |        |            | 1,363 |           
|                                                   |                                                                                                         | Increase in accrued interest expense                                                                       |                                           |                                           | 13,556         |            |        |            | 3,777 |           
|                                                   |                                                                                                         | Increase in management fee payable, incentive compensation
    payable and other related party liabilities |                                           |                                           | 5,482          |            |        |            | 1,088 |           
|                                                   |                                                                                                         |                                                                                                            |                                           |                                           |                |           
|                                                   |                                                                                                         |                                                                                                            |                                           | Net cash provided by operating activities |                |            | 99,127 |            |       |            | 25,991 | 
|                                                   |                                                                                                         |                                                                                                            |                                           |                                           |                |           
|Cash flows from investing activities:              |                                                                                                         |                                                                                                            |                                           |                                           |                |            |        |           
|                                                   | Purchase of mortgage-backed securities                                                                  |                                                                                                            |                                           | (4,040,790                                | )              |            |        | (2,797,073 | )    
|                                                   | Proceeds from sales of mortgage-backed securities                                                       |                                                                                                            |                                           |                                          |                |            |        | 538,780    |      
|                                                   | Principal payments of mortgage-backed securities                                                        |                                                                                                            |                                           | 1,126,194                                 |                |            |        | 199,560    |      
|                                                   |                                                                                                         |                                                                                                            |                                           |                                           |                |           
|                                                   |                                                                                                         |                                                                                                            | Net cash used in investing activities     |                                           |                | (2,914,596 | )      |            |       | (2,058,733 | )     
|                                                   |                                                                                                         |                                                                                                            |                                           |                                           |                |           
|Cash flows from financing activities:              |                                                                                                         |                                                                                                            |                                           |                                           |                |            |        |           
|                                                   | Net proceeds from issuance of common stock                                                              |                                                                                                            |                                           | 157,508                                   |                |            |        | 316,747    |      
|                                                   | Borrowings under repurchase agreements                                                                  |                                                                                                            |                                           | 29,460,116                                |                |            |        | 10,097,957 |      
|                                                   | Principal payments on repurchase agreements                                                             |                                                                                                            |                                           | (26,752,633                               | )              |            |        | (8,368,984 | )    
|                                                   | Payment of cash distributions to stockholders                                                           |                                                                                                            |                                           | (47,478                                   | )              |            |        | (5,852     | )    
|                                                   | Borrowings under margin loan                                                                            |                                                                                                            |                                           | 2,278                                     |                |            |        | 4,266      |      
|                                                   | Paydown of margin loan                                                                                  |                                                                                                            |                                           | (2,278                                    | )              |            |        | (4,266     | )    
|                                                   | Borrowings under note payable                                                                           |                                                                                                            |                                           | 439                                       |                |            |        | 92         |      
|                                                   | Repayment of note payable                                                                               |                                                                                                            |                                           | (531                                      | )              |            |        |           |      
|                                                   | Net realized gains on Eurodollar futures contracts                                                      |                                                                                                            |                                           | 1,410                                     |                |            |        |           |      
|                                                   |                                                                                                         |                                                                                                            |                                           |                                           |                |           
|                                                   |                                                                                                         |                                                                                                            | Net cash provided by financing activities |                                           |                | 2,818,831  |        |            |       | 2,039,960  |       
|                                                   |                                                                                                         |                                                                                                            |                                           |                                           |                |           
|Net increase in cash and cash equivalents          |                                                                                                         |                                                                                                            | 3,362                                     |                                           |                |            | 7,218  |           
|Cash and cash equivalents, beginning of the period |                                                                                                         |                                                                                                            | 7,219                                     |                                           |                |            | 1      |           
|                                                   |                                                                                                         |                                                                                                            |                                           |                                           |                |           
|Cash and cash equivalents, end of the period       |                                                                                                         | $                                                                                                          | 10,581                                    |                                           |                | $          | 7,219  |           
|                                                   |                                                                                                         |                                                                                                            |                                           |                                           |                |           
|Supplemental disclosure of cash flow information:  |                                                                                                         |                                                                                                            |                                           |                                           |                |            |        |           
|                                                   | Interest paid                                                                                           |                                                                                                            | $                                         | 42,760                                    |                |            | $      | 5,222      |      
|Non-cash investing and financing activities:       |                                                                                                         |                                                                                                            |                                           |                                           |                |            |        |           
|                                                   | Increase (decrease) in unsettled security purchases                                                     |                                                                                                            | $                                         | (156,127                                  | )              |            | $      | 156,127    |      
|                                                   | Increase in principal receivable                                                                        |                                                                                                            |                                           | (11,113                                   | )              |            |        | (2,313     | )    
|                                                   | Incentive compensation payable settled through issuance of
    restricted common stock                  |                                                                                                            |                                           | 3,617                                     |                |            |        |           |      
|                                                   | Deferred compensation reclassified to stockholders equity
    upon issuance of restricted common stock |                                                                                                            |                                           | (2,207                                    | )              |            |        |           |      



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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS







|         |             
|-------- | ------------
|NOTE 1  | ORGANIZATION









|         |                    
|-------- | -------------------
|NOTE 2  | ACCOUNTING POLICIES

Cash and Cash Equivalents




Securities






Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial
Direct Costs of Leases




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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


Derivative Financial Instruments


Accounting for
Derivative Instruments and Hedging Activities


Repurchase Agreements




Income Taxes






Stock Compensation




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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


Accounting for Stock-Based
Compensation


Incentive Compensation




Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services






Net Income Per Share




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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


Use of Estimates




Concentrations of Credit Risk and Other Risks and
Uncertainties






Recent Accounting Pronouncements


The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments Accounting for
Certain Investments in Debt and Equity Securities


Share-Based Payment Accounting for Stock-Based


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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




NOTE 3  MORTGAGE-BACKED SECURITIES




|                  |  |                 |         |        |                 |   |           |            |  |       |                 |   |  |   |           |  
|----------------- |  | --------------- | ------- | ------ | --------------- | - | --------- | ---------- |  | ----- | --------------- | - |  | - | --------- | -
|                  |  |                 |         | Hybrid |                 |   | Balloon   |            |  | Total |                
|                  |  | Adjustable-Rate |         |        | Adjustable-Rate |   |           | Maturity   |  |       | Mortgage-Backed |  
|                  |  | Securities      |         |        | Securities      |   |           | Securities |  |       | Securities      |  
|                  |  |                 |         |        |                 |   |           |            |  |       |                 |  
|                  |  | (in thousands)  |        
|Amortized cost    |  | $               | 127,360 |        |                 | $ | 4,714,759 |            |  | $     | 55,134          |   |  | $ | 4,897,253 |  
|Unrealized gains  |  |                 | 33      |        |                 |   | 739       |            |  |       |                |   |  |   | 772       |  
|Unrealized 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     | %



|                  |  |                 |         |        |                 |   |           |            |  |       |                 |   |  |   |           |  
|----------------- |  | --------------- | ------- | ------ | --------------- | - | --------- | ---------- |  | ----- | --------------- | - |  | - | --------- | -
|                  |  |                 |         | Hybrid |                 |   | Balloon   |            |  | Total |                
|                  |  | Adjustable-Rate |         |        | Adjustable-Rate |   |           | Maturity   |  |       | Mortgage-Backed |  
|                  |  | Securities      |         |        | Securities      |   |           | Securities |  |       | Securities      |  
|                  |  |                 |         |        |                 |   |           |            |  |       |                 |  
|                  |  | (in thousands)  |        
|Amortized cost    |  | $               | 187,769 |        |                 | $ | 1,944,707 |            |  | $     | 55,822          |   |  | $ | 2,188,298 |  
|Unrealized gains  |  |                 | 7       |        |                 |   | 1,061     |            |  |       |                |   |  |   | 1,068     |  
|Unrealized losses |  |                 | (2,463  | )      |                 |   | (23,828   | )          |  |       | (1,130          | ) |  |   | (27,421   | )
|                  |  |                 |         |        |                 |   |           |            |  |       |                 |  
|Fair value        |  | $               | 185,313 |        |                 | $ | 1,921,940 |            |  | $     | 54,692          |   |  | $ | 2,161,945 |  
|                  |  |                 |         |        |                 |   |           |            |  |       |                 |  
|% of total        |  |                 | 8.6     | %      |                 |   | 88.9      | %          |  |       | 2.5             | % |  |   | 100.0     | %



|                                               |  |                |           |           |      |           |           |        |  |  |      |  
|---------------------------------------------- |  | -------------- | --------- | --------- | ---- | --------- | --------- | ------ |  |  | ---- | -
|                                               |  |                |           |           |      | Weighted- |          
|                                               |  |                |           | Amortized |      |           | Average   |       
|Weighted-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 |        |  |  | 4.24 |  
|Greater than five years                        |  |                |          |           |      |           |          |        |  |  |     |  
|                                               |  |                |           |           |      |           |           |        | 
|Total                                          |  | $              | 4,827,955 |           |      | $         | 4,897,253 |        |  |  | 4.22 | %
|                                               |  |                |           |           |      |           |           |        | 

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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                               |  |                |           |           |      |           |           |        |  |  |      |  
|---------------------------------------------- |  | -------------- | --------- | --------- | ---- | --------- | --------- | ------ |  |  | ---- | -
|                                               |  |                |           |           |      | Weighted- |          
|                                               |  |                |           | Amortized |      |           | Average   |       
|Weighted-Average Life                          |  | Fair Value     |           |           | Cost |           |           | Coupon | 
|                                               |  |                |           |           |      |           |           |        | 
|                                               |  | (in thousands) |           |           |     
|Less than one year                             |  | $              | 299,685   |           |      | $         | 304,556   |        |  |  | 4.07 | %
|Greater than one year and less than five years |  |                | 1,829,471 |           |      |           | 1,850,899 |        |  |  | 4.09 |  
|Greater than five years                        |  |                | 32,789    |           |      |           | 32,843    |        |  |  | 3.96 |  
|                                               |  |                |           |           |      |           |           |        | 
|Total                                          |  | $              | 2,161,945 |           |      | $         | 2,188,298 |        |  |  | 4.09 | %
|                                               |  |                |           |           |      |           |           |        | 











|                                                      |  |                     |           |            |                   |   |         |            |            |   |         |  |  |            |         |   |        |   |           |  |  |   |         |  
|----------------------------------------------------- |  | ------------------- | --------- | ---------- | ----------------- | - | ------- | ---------- | ---------- | - | ------- |  |  | ---------- | ------- | - | ------ | - | --------- |  |  | - | ------- | -
|                                                      |  | Less than 12 Months |           |            | 12 Months or More |   |         | Total      |           
|                                                      |  |                     |           |            |                   |   |         |            |           
|                                                      |  |                     |           | Gross      |                   |   |         |            | Gross      |   |         |  |  | Gross      |        
|                                                      |  |                     |           | Unrealized |                   |   |         |            | Unrealized |   |         |  |  | Unrealized |        
|                                                      |  | Fair Value          |           |            | Losses            |   |         | Fair Value |            |   | Losses  |  |  | Fair 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 | )
|                                                      |  |                     |           |            |                   |   |         |            |            |   |         |  |  |            |         |   |        |  

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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                                      |  |                     |           |            |                   |   |         |       |       |            |        |  |  |            |            |  |        |   |           |  |  |   |         |  
|----------------------------------------------------- |  | ------------------- | --------- | ---------- | ----------------- | - | ------- | ----- | ----- | ---------- | ------ |  |  | ---------- | ---------- |  | ------ | - | --------- |  |  | - | ------- | -
|                                                      |  | Less than 12 Months |           |            | 12 Months or More |   |         | Total |      
|                                                      |  |                     |           |            |                   |   |         |       |      
|                                                      |  |                     |           | Gross      |                   |   |         |       | Gross |            |        |  |  | Gross      |           
|                                                      |  |                     |           | Unrealized |                   |   | Fair    |       |       | Unrealized |        |  |  |            | Unrealized | 
|                                                      |  | Fair Value          |           |            | Losses            |   |         | Value |       |            | Losses |  |  | Fair Value |            |  | Losses |  
|                                                      |  |                     |           |            |                   |   |         |       |       |            |        |  |  |            |            |  |        |  
|                                                      |  | (in thousands)      |          
|Agency-backed mortgage-backed securities              |  | $                   | 1,109,858 |            |                   | $ | (17,261 | )     |       |            |       |  |  |            |           |  |        | $ | 1,109,858 |  |  | $ | (17,261 | )
|Non-agency-backed mortgage-backed securities          |  |                     | 644,448   |            |                   |   | (10,160 | )     |       |            |       |  |  |            |           |  |        |   | 644,448   |  |  |   | (10,160 | )
|                                                      |  |                     |           |            |                   |   |         |       |       |            |        |  |  |            |            |  |        |  
|Total temporarily impaired mortgage-backed securities |  | $                   | 1,754,306 |            |                   | $ | (27,421 | )     |       |            |       |  |  |            |           |  |        | $ | 1,754,306 |  |  | $ | (27,421 | )
|                                                      |  |                     |           |            |                   |   |         |       |       |            |        |  |  |            |            |  |        |  



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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|         |                                           
|-------- | ------------------------------------------
|NOTE 4  | REPURCHASE AGREEMENTS AND OTHER BORROWINGS





|                                              |                                                                        |                |   |        |          |  |   |           |   |  |            |           |   |       |   |           |   |  |   |           |  
|--------------------------------------------- | ---------------------------------------------------------------------- | -------------- | - | ------ | -------- |  | - | --------- | - |  | ---------- | --------- | - | ----- | - | --------- | - |  | - | --------- | -
|                                              |                                                                        | Overnight      |   |        | Between  |  |   | Between   |   |  | Between    |           |   |      
|                                              |                                                                        | (1 Day         |   |        | 2 and 30 |  |   | 31 and 90 |   |  | 91 and 602 |           |   |      
|                                              |                                                                        | or Less)       |   |        | 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 |   |  | $ | 2,894,339 |  
|                                              | Fair market value of securities sold, including accrued interest       |                |   | 20,010 |          |  |   | 152,100   |   |  |            | 1,005,208 |   |       |   | 1,677,425 |   |  |   | 2,854,743 |  
|                                              | Repurchase agreement liabilities associated with these securities      |                |   | 19,058 |          |  |   | 144,512   |   |  |            | 956,307   |   |       |   | 1,596,914 |   |  |   | 2,716,791 |  
|                                              | Weighted-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   |   |  | $ | 1,833,484 |  
|                                              | Fair market value of securities sold, including accrued interest       |                |   | 17,555 |          |  |   | 52,706    |   |  |            | 982,301   |   |       |   | 752,376   |   |  |   | 1,804,938 |  
|                                              | Repurchase agreement liabilities associated with these securities      |                |   | 16,719 |          |  |   | 50,132    |   |  |            | 936,901   |   |       |   | 715,913   |   |  |   | 1,719,665 |  
|                                              | Weighted-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 |   |  | $ | 4,727,823 |  
|                                              | Fair market value of securities sold, including accrued interest       |                |   | 37,565 |          |  |   | 204,806   |   |  |            | 1,987,509 |   |       |   | 2,429,801 |   |  |   | 4,659,681 |  
|                                              | Repurchase agreement liabilities associated with these securities      |                |   | 35,777 |          |  |   | 194,644   |   |  |            | 1,893,208 |   |       |   | 2,312,827 |   |  |   | 4,436,456 |  
|                                              | Weighted-average interest rate of repurchase agreement
    liabilities |                |   | 2.36   | %        |  |   | 2.28      | % |  |            | 2.43      | % |       |   | 2.35      | % |  |   | 2.38      | %

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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                              |                                                                        |                |   |        |          |  |   |           |   |  |            |         |   |       |   |           |   |  |   |           |  
|--------------------------------------------- | ---------------------------------------------------------------------- | -------------- | - | ------ | -------- |  | - | --------- | - |  | ---------- | ------- | - | ----- | - | --------- | - |  | - | --------- | -
|                                              |                                                                        | Overnight      |   |        | Between  |  |   | Between   |   |  | Between    |         |   |      
|                                              |                                                                        | (1 Day or      |   |        | 2 and 30 |  |   | 31 and 90 |   |  | 91 and 238 |         |   |      
|                                              |                                                                        | Less)          |   |        | Days     |  |   | Days      |   |  | Days       |         |   | Total |  
|                                              |                                                                        |                |   |        |          |  |   |           |   |  |            |         |   |       |  
|                                              |                                                                        | (in thousands) |  
|Agency-backed mortgage-backed securities:     |                                                                        |                |   |        |          |  |   |           |   |  |            |         |   |       |   |           |   |  |   |          
|                                              | Amortized cost of securities sold, including accrued interest          |                | $ |       |          |  | $ | 14,299    |   |  | $          | 302,538 |   |       | $ | 1,010,586 |   |  | $ | 1,327,423 |  
|                                              | Fair market value of securities sold, including accrued interest       |                |   |       |          |  |   | 14,065    |   |  |            | 302,272 |   |       |   | 994,545   |   |  |   | 1,310,882 |  
|                                              | Repurchase agreement liabilities associated with these securities      |                |   |       |          |  |   | 12,865    |   |  |            | 281,870 |   |       |   | 952,532   |   |  |   | 1,247,267 |  
|                                              | Weighted-average interest rate of repurchase agreement
    liabilities |                |   | 0.00   | %        |  |   | 1.20      | % |  |            | 1.11    | % |       |   | 1.19      | % |  |   | 1.17      | %
|Non-agency-backed mortgage-backed securities: |                                                                        |                |   |        |          |  |   |           |   |  |            |         |   |       |   |           |   |  |   |          
|                                              | Amortized cost of securities sold, including accrued interest          |                | $ | 18,475 |          |  | $ | 329,592   |   |  | $          |        |   |       | $ | 165,608   |   |  | $ | 513,675   |  
|                                              | Fair market value of securities sold, including accrued interest       |                |   | 18,431 |          |  |   | 324,769   |   |  |            |        |   |       |   | 161,881   |   |  |   | 505,081   |  
|                                              | Repurchase agreement liabilities associated with these securities      |                |   | 17,490 |          |  |   | 306,911   |   |  |            |        |   |       |   | 157,305   |   |  |   | 481,706   |  
|                                              | Weighted-average interest rate of repurchase agreement
    liabilities |                |   | 1.20   | %        |  |   | 1.21      | % |  |            | 0.00    | % |       |   | 1.29      | % |  |   | 1.23      | %
|Total:                                        |                                                                        |                |   |        |          |  |   |           |   |  |            |         |   |       |   |           |   |  |   |          
|                                              | Amortized cost of securities sold, including accrued interest          |                | $ | 18,475 |          |  | $ | 343,891   |   |  | $          | 302,538 |   |       | $ | 1,176,194 |   |  | $ | 1,841,098 |  
|                                              | Fair market value of securities sold, including accrued interest       |                |   | 18,431 |          |  |   | 338,834   |   |  |            | 302,272 |   |       |   | 1,156,426 |   |  |   | 1,815,963 |  
|                                              | Repurchase agreement liabilities associated with these securities      |                |   | 17,490 |          |  |   | 319,776   |   |  |            | 281,870 |   |       |   | 1,109,837 |   |  |   | 1,728,973 |  
|                                              | Weighted-average interest rate of repurchase agreement
    liabilities |                |   | 1.20   | %        |  |   | 1.21      | % |  |            | 1.11    | % |       |   | 1.20      | % |  |   | 1.19      | %

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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                                                                        |  |                |         |                  |            |  |     | 
|--------------------------------------------------------------------------------------- |  | -------------- | ------- | ---------------- | ---------- |  | --- | 
|                                                                                        |  |                |         | Weighted-Average |           
|                                                                                        |  |                |         | Maturity of      |           
|                                                                                        |  | Amount at      |         |                  | Repurchase | 
|Repurchase Agreement Counterparties                                                     |  | Risk(1)        |         |                  | Agreements | 
|                                                                                        |  |                |         |                  |            | 
|                                                                                        |  | (in thousands) |         |                  | (in days)  | 
|Banc of America Securities LLC                                                          |  | $              | 11,970  |                  |            |  | 61  | 
|Bear Stearns & Co.                                                                      |  |                | 60,106  |                  |            |  | 100 | 
|Countrywide Securities Corporation                                                      |  |                | 4,534   |                  |            |  | 115 | 
|Deutsche Bank Securities Inc.                                                           |  |                | 42,589  |                  |            |  | 142 | 
|Goldman Sachs & Co.                                                                     |  |                | 23,489  |                  |            |  | 51  | 
|Lehman Brothers Inc.                                                                    |  |                | 4,244   |                  |            |  | 151 | 
|Merrill Lynch Government Securities Inc./ Merrill Lynch Pierce,
    Fenner & Smith Inc. |  |                | 8,509   |                  |            |  | 125 | 
|Morgan Stanley & Co. Inc.                                                               |  |                | 2,039   |                  |            |  | 124 | 
|Nomura Securities International, Inc.                                                   |  |                | 9,355   |                  |            |  | 114 | 
|Salomon Smith Barney                                                                    |  |                | 12,151  |                  |            |  | 69  | 
|UBS Securities LLC                                                                      |  |                | 23,413  |                  |            |  | 314 | 
|Wachovia Securities, LLC                                                                |  |                | 3,493   |                  |            |  | 154 | 
|                                                                                        |  |                |         |                  |            | 
|Total                                                                                   |  | $              | 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.



|                                                                                        |  |                |        |                  |            |  |     | 
|--------------------------------------------------------------------------------------- |  | -------------- | ------ | ---------------- | ---------- |  | --- | 
|                                                                                        |  |                |        | Weighted-Average |           
|                                                                                        |  |                |        | Maturity of      |           
|                                                                                        |  | Amount at      |        |                  | Repurchase | 
|Repurchase Agreement Counterparties                                                     |  | Risk(1)        |        |                  | Agreements | 
|                                                                                        |  |                |        |                  |            | 
|                                                                                        |  | (in thousands) |        |                  | (in days)  | 
|Bear Stearns & Co.                                                                      |  | $              | 8,423  |                  |            |  | 138 | 
|Banc of America Securities LLC                                                          |  |                | 9,762  |                  |            |  | 26  | 
|Countrywide Securities Corporation                                                      |  |                | 2,358  |                  |            |  | 23  | 
|Credit Suisse First Boston LLC                                                          |  |                | 14,350 |                  |            |  | 130 | 
|Deutsche Bank Securities Inc.                                                           |  |                | 2,350  |                  |            |  | 146 | 
|Federal Home Loan Mortgage Corporation                                                  |  |                | (279   | )                |            |  | 61  | 
|Goldman Sachs & Co.                                                                     |  |                | (390   | )                |            |  | 58  | 
|J.P. Morgan Securities Inc.                                                             |  |                | 1,649  |                  |            |  | 177 | 
|Merrill Lynch Government Securities Inc./ Merrill Lynch Pierce,
    Fenner & Smith Inc. |  |                | 6,352  |                  |            |  | 189 | 
|Morgan Stanley & Co. Inc.                                                               |  |                | 972    |                  |            |  | 61  | 
|Salomon Smith Barney                                                                    |  |                | 20,287 |                  |            |  | 163 | 
|UBS Securities LLC                                                                      |  |                | 17,379 |                  |            |  | 189 | 
|                                                                                        |  |                |        |                  |            | 
|Total                                                                                   |  | $              | 83,213 |                  |            |  | 145 | 
|                                                                                        |  |                |        |                  |            | 






|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








|         |                                     
|-------- | ------------------------------------
|NOTE 5  | CAPITAL STOCK AND EARNINGS PER SHARE













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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                                              |                                                                                                         |       |            |   |         |   |            |        | 
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ----- | ---------- | - | ------- | - | ---------- | ------ | 
|                                                              |                                                                                                         | Basic |            |   | Diluted |  
|                                                              |                                                                                                         |       |            |   |         |  
|Net income (in thousands)                                     |                                                                                                         | $     | 57,112     |   |         | $ | 57,112     |       
|Weighted-average number of common shares outstanding          |                                                                                                         |       | 33,895,967 |   |         |   | 33,895,967 |       
|Additional shares due to:                                     |                                                                                                         |       |            |   |         |   |            |       
|                                                              | Assumed conversion of dilutive common stock options and vesting
    of unvested restricted common stock |       |            |  |         |   |            | 51,447 | 
|                                                              |                                                                                                         |       |            |   |         |  
|Adjusted weighted-average number of common shares outstanding |                                                                                                         |       | 33,895,967 |   |         |   | 33,947,414 |       
|                                                              |                                                                                                         |       |            |   |         |  
|Net income per share                                          |                                                                                                         | $     | 1.68       |   |         | $ | 1.68       |       
|                                                              |                                                                                                         |       |            |   |         |  



|                                                              |                                                     |       |            |   |         |   |            |     | 
|------------------------------------------------------------- | --------------------------------------------------- | ----- | ---------- | - | ------- | - | ---------- | --- | 
|                                                              |                                                     | Basic |            |   | Diluted |  
|                                                              |                                                     |       |            |   |         |  
|Net income (in thousands)                                     |                                                     | $     | 2,761      |   |         | $ | 2,761      |    
|Weighted-average number of common shares outstanding          |                                                     |       | 10,139,280 |   |         |   | 10,139,280 |    
|Additional shares due to:                                     |                                                     |       |            |   |         |   |            |    
|                                                              | Assumed conversion of dilutive common stock options |       |            |  |         |   |            | 531 | 
|                                                              |                                                     |       |            |   |         |  
|Adjusted weighted-average number of common shares outstanding |                                                     |       | 10,139,280 |   |         |   | 10,139,811 |    
|                                                              |                                                     |       |            |   |         |  
|Net income per share                                          |                                                     | $     | 0.27       |   |         | $ | 0.27       |    
|                                                              |                                                     |       |            |   |         |  



|         |                           
|-------- | --------------------------
|NOTE 6  | 2003 STOCK INCENTIVE PLANS





|                             |  |                |        |              |                |  |   |       |  |  |           |    
|---------------------------- |  | -------------- | ------ | ------------ | -------------- |  | - | ----- |  |  | --------- | ---
|                             |  |                |        | 2003 Outside |                |  |  
|                             |  | 2003 Stock     |        |              | Advisors Stock |  |   |      
|                             |  | Incentive Plan |        |              | Incentive Plan |  |   | Total | 
|                             |  |                |        |              |                |  |   |       | 
|Shares reserved for issuance |  |                |        |              |                |  |   |       |  |  | 1,000,000 | (1)
|Granted                      |  |                | 80,122 |              |                |  |  |       |  |  | 80,122    |    
|Forfeited                    |  |                |       |              |                |  |  |       |  |  |          |    
|Expired                      |  |                |       |              |                |  |  |       |  |  |          |    
|                             |  |                |        |              |                |  |   |       | 
|Total available for grant    |  |                |        |              |                |  |   |       |  |  | 919,878   | (2)
|                             |  |                |        |              |                |  |   |       | 






|    |                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | At June 4, 2003, adoption date of both stock incentive
    plans, the maximum number of shares of common stock that may be
    delivered pursuant to awards granted under these combined plans
    is 1,000,000 shares.
|   
|   
|(2) | At December 31, 2004, the maximum number of shares of
    common stock that may be delivered pursuant to awards granted
    under these combined plans is 919,878 shares.                                              

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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                 |  |           |        |           |          |   |       |           |           |  |          |  |  |   |       | 
|-------------------------------- |  | --------- | ------ | --------- | -------- | - | ----- | --------- | --------- |  | -------- |  |  | - | ----- | 
|                                 |  | 2004      |        |           | 2003     |  
|                                 |  |           |        |           |          |  
|                                 |  |           |        | Weighted- |          |   |       |           | Weighted- | 
|                                 |  |           |        | Average   |          |   |       |           | Average   | 
|                                 |  | Number of |        |           | Exercise |   |       | Number of |           |  | Exercise | 
|                                 |  | Options   |        |           | Price    |   |       | Options   |           |  | Price    | 
|                                 |  |           |        |           |          |   |       |           |           |  |          | 
|Outstanding, beginning of period |  |           | 55,000 |           |          | $ | 14.82 |           |           |  |         |  |  |   |      | 
|Granted                          |  |           |       |           |          |   |      |           |           |  | 55,000   |  |  | $ | 14.82 | 
|Exercised                        |  |           |       |           |          |   |      |           |           |  |         |  |  |   |      | 
|Forfeited                        |  |           |       |           |          |   |      |           |           |  |         |  |  |   |      | 
|                                 |  |           |        |           |          |   |       |           |           |  |          | 
|Outstanding, end of period       |  |           | 55,000 |           |          | $ | 14.82 |           |           |  | 55,000   |  |  | $ | 14.82 | 
|                                 |  |           |        |           |          |   |       |           |           |  |          | 





|              |  |             |        |           |             |  |           |          |  |   |         |           |  |          |        |  |  |   |       | 
|------------- |  | ----------- | ------ | --------- | ----------- |  | --------- | -------- |  | - | ------- | --------- |  | -------- | ------ |  |  | - | ----- | 
|              |  | Outstanding |        |           | Exercisable | 
|              |  |             |        |           |             | 
|              |  |             |        | Weighted- |             |  |           |          | 
|              |  |             |        | Average   |             |  | Weighted- |          |  |   |         | Weighted- | 
|Range of      |  | Number      |        |           | Remaining   |  |           | Average  |  |   | Number  |           |  | Average  |       
|Exercise      |  | of          |        |           | Life        |  |           | Exercise |  |   | of      |           |  | Exercise |       
|Prices        |  | Options     |        |           | (in years)  |  |           | Price    |  |   | Options |           |  | Price    |       
|              |  |             |        |           |             |  |           |          |  |   |         |           |  |          |       
|$13.00-$14.00 |  |             | 5,000  |           |             |  | 8.8       |          |  | $ | 13.00   |           |  |          | 1,667  |  |  | $ | 13.00 | 
|$14.01-$15.00 |  |             | 50,000 |           |             |  | 8.6       |          |  | $ | 15.00   |           |  |          | 16,667 |  |  | $ | 15.00 | 
|              |  |             |        |           |             |  |           |          |  |   |         |           |  |          |       
|$13.00-$15.00 |  |             | 55,000 |           |             |  |           |          |  | $ | 14.82   |           |  |          | 18,334 |  |  | $ | 14.82 | 
|              |  |             |        |           |             |  |           |          |  |   |         |           |  |          |       









|                               |  |               |        |  |               |   |       | 
|------------------------------ |  | ------------- | ------ |  | ------------- | - | ----- | 
|                               |  | Number of     |        |  | Weighted-     |  
|                               |  | Restricted    |        |  | Average Issue |  
|                               |  | Common Shares |        |  | Price         |  
|                               |  |               |        |  |               |  
|Outstanding, beginning of year |  |               |       |  |               |   |      | 
|Issued                         |  |               | 25,122 |  |               | $ | 12.18 | 
|Repurchased                    |  |               |       |  |               |   |      | 
|                               |  |               |        |  |               |  
|Outstanding, end of year       |  |               | 25,122 |  |               | $ | 12.18 | 
|                               |  |               |        |  |               |  

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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






|         |                         
|-------- | ------------------------
|NOTE 7  | THE MANAGEMENT AGREEMENT





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a base management fee equal to a percentage of average net worth
    during each fiscal year as defined in the Management Agreement
    (1% of the first $300 million plus 0.8% of the amount in
    excess of $300 million);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | incentive compensation based on the excess of a tiered
    percentage (as defined in the Management Agreement as the
    weighted-average of the following rates based upon average net
    invested assets: (1) 20% for the first $400 million of
    average net invested assets; and (2) 10% for the average
    net invested assets in excess of $400 million) of the
    difference between the Companys net income (defined in the
    Management Agreement as taxable income before incentive
    compensation, net operating losses from prior periods and items
    permitted by the Code when calculating taxable income for a
    REIT) and the threshold return (the amount of net
    income for the period that would produce an annualized return on
    equity, calculated by dividing the net income, as defined in the
    Management Agreement, by the average net invested assets, as
    defined in the Management Agreement, equal to the 10-year
    U.S. Treasury rate for the period plus 2.0%) for the fiscal
    period; and
|
| |  | out-of-pocket expenses and certain other costs incurred by the
    Manager and related directly to the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If the Company terminates the Management Agreement without cause
    in connection with a decision to manage its portfolio
    internally, rather than by an external manager, the amount of
    the termination fee shall be equal to the amount of the highest
    annual base fee and the highest annual incentive compensation,
    for a particular year, earned by the Manager during any of the
    three years (or on an

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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | annualized basis if a lesser period) preceding the effective
    date of the termination, plus accelerated vesting on the equity
    component of all incentive compensation.                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | If the Company terminates the Management Agreement without cause
    for any other reason, the amount of the termination fee shall be
    equal to two times the amount of the highest annual base fee and
    the highest annual incentive compensation, for a particular
    year, earned by the Manager during any of the three years (or on
    an annualized basis if a lesser period) preceding the effective
    date of the termination, plus all deferred payments, including
    accelerated vesting on the equity component of all incentive
    compensation.











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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)












|         |                           
|-------- | --------------------------
|NOTE 8  | RELATED PARTY TRANSACTIONS





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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






|         |                                    
|-------- | -----------------------------------
|NOTE 9  | FAIR VALUE OF FINANCIAL INSTRUMENTS

Disclosure About Fair Value of
Financial Instruments




|          |                                     
|--------- | ------------------------------------
|NOTE 10  | ACCUMULATED OTHER COMPREHENSIVE LOSS



|                                                                                |  |                |         |   |              |   |         |  
|------------------------------------------------------------------------------- |  | -------------- | ------- | - | ------------ | - | ------- | -
|                                                                                |  | December 31,   |         |   | December 31, |  
|                                                                                |  | 2004           |         |   | 2003         |  
|                                                                                |  |                |         |   |              |  
|                                                                                |  | (in thousands) |        
|Net unrealized losses on mortgage-backed securities
    available-
    for-sale |  | $              | (69,297 | ) |              | $ | (26,353 | )
|Net deferred realized and unrealized gains (losses) on cash flow
    hedges     |  |                | 7,929   |   |              |   | (157    | )
|                                                                                |  |                |         |   |              |  
|Accumulated other comprehensive loss                                            |  | $              | (61,368 | ) |              | $ | (26,510 | )
|                                                                                |  |                |         |   |              |  



|          |                   
|--------- | ------------------
|NOTE 11  | INTEREST RATE RISK





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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)












|          |                                              
|--------- | ---------------------------------------------
|NOTE 12  | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES





|                                        |  |                |       |  |            |   |        |            |  |   |        |  
|--------------------------------------- |  | -------------- | ----- |  | ---------- | - | ------ | ---------- |  | - | ------ | -
|                                        |  | Unrealized     |       |  | Unrealized |   |        | Estimated  | 
|                                        |  | Gains          |       |  | Losses     |   |        | Fair Value | 
|                                        |  |                |       |  |            |   |        |            | 
|                                        |  | (in thousands) |      
|Eurodollar futures contracts sold short |  | $              | 368   |  |            | $ | (1,441 | )          |  | $ | (1,073 | )
|Interest rate swap contracts            |  |                | 7,900 |  |            |   |       |            |  |   | 7,900  |  
|                                        |  |                |       |  |            |   |        |            | 
|Total derivative instruments            |  | $              | 8,268 |  |            | $ | (1,441 | )          |  | $ | 6,827  |  
|                                        |  |                |       |  |            |   |        |            | 

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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                        |  |                |   |  |            |   |      |            |  |   |      |  
|--------------------------------------- |  | -------------- | - |  | ---------- | - | ---- | ---------- |  | - | ---- | -
|                                        |  | Unrealized     |   |  | Unrealized |   |      | Estimated  | 
|                                        |  | Gains          |   |  | Losses     |   |      | Fair Value | 
|                                        |  |                |   |  |            |   |      |            | 
|                                        |  | (in thousands) |  
|Eurodollar futures contracts sold short |  | $              | 3 |  |            | $ | (160 | )          |  | $ | (157 | )
|                                        |  |                |   |  |            |   |      |            | 



| |                             
| | ----------------------------
| | Cash Flow Hedging Strategies













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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








|          |                                             
|--------- | --------------------------------------------
|NOTE 13  | SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)



|                                              |                     |                                                    |            |        |          |   |            |               |  |   |              |        |  |   |            |        | 
|--------------------------------------------- | ------------------- | -------------------------------------------------- | ---------- | ------ | -------- | - | ---------- | ------------- |  | - | ------------ | ------ |  | - | ---------- | ------ | 
|                                              |                     | For the                                            |            |        | For the  |   |            | For the       |  |   | For the      |       
|                                              |                     | Quarter                                            |            |        | Quarter  |   |            | Quarter       |  |   | Quarter      |       
|                                              |                     | Ended                                              |            |        | Ended    |   |            | Ended         |  |   | Ended        |       
|                                              |                     | March 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       |        |  | $ | 42,071     |       
|Interest expense                              |                     |                                                    | 6,827      |        |          |   | 9,190      |               |  |   | 16,632       |        |  |   | 22,467     |       
|                                              |                     |                                                    |            |        |          |   |            |               |  |   |              |       
|                                              | Net interest income |                                                    |            | 13,377 |          |   |            | 18,028        |  |   |              | 17,629 |  |   |            | 19,604 | 
|Other income                                  |                     |                                                    |           |        |          |   |           |               |  |   |             |        |  |   | 1,070      |       
|Expenses                                      |                     |                                                    | 2,577      |        |          |   | 3,074      |               |  |   | 3,135        |        |  |   | 3,810      |       
|                                              |                     |                                                    |            |        |          |   |            |               |  |   |              |       
|Net income                                    |                     | $                                                  | 10,800     |        |          | $ | 14,954     |               |  | $ | 14,494       |        |  | $ | 16,864     |       
|                                              |                     |                                                    |            |        |          |   |            |               |  |   |              |       
|Net income per share  basic                  |                     | $                                                  | 0.43       |        |          | $ | 0.41       |               |  | $ | 0.39         |        |  | $ | 0.46       |       
|                                              |                     |                                                    |            |        |          |   |            |               |  |   |              |       
|Net income per share  diluted                |                     | $                                                  | 0.43       |        |          | $ | 0.41       |               |  | $ | 0.39         |        |  | $ | 0.46       |       
|                                              |                     |                                                    |            |        |          |   |            |               |  |   |              |       
|Weighted-average shares outstanding  basic   |                     |                                                    | 25,077,736 |        |          |   | 36,814,000 |               |  |   | 36,814,000   |        |  |   | 36,814,000 |       
|                                              |                     |                                                    |            |        |          |   |            |               |  |   |              |       
|Weighted-average shares outstanding  diluted |                     |                                                    | 25,085,784 |        |          |   | 36,843,531 |               |  |   | 36,867,233   |        |  |   | 36,928,978 |       
|                                              |                     |                                                    |            |        |          |   |            |               |  |   |              |       

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LUMINENT MORTGAGE CAPITAL, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                              |                     |                                                    |           |     |               |   |            |               |  |   |            |       | 
|--------------------------------------------- | ------------------- | -------------------------------------------------- | --------- | --- | ------------- | - | ---------- | ------------- |  | - | ---------- | ----- | 
|                                              |                     | For the Period                                     |           |     | For the       |   |            | For the       | 
|                                              |                     | from April 26,                                     |           |     | Quarter Ended |   |            | Quarter Ended | 
|                                              |                     | 2003 through                                       |           |     | September 30, |   |            | December 31,  | 
|                                              |                     | June 30, 2003                                      |           |     | 2003          |   |            | 2003          | 
|                                              |                     |                                                    |           |     |               |   |            |               | 
|                                              |                     | (in thousands, except share and per share amounts) |          
|Interest income                               |                     | $                                                  | 672       |     |               | $ | 10,777     |               |  | $ | 11,205     |      
|Interest expense                              |                     |                                                    | 164       |     |               |   | 4,327      |               |  |   | 4,518      |      
|                                              |                     |                                                    |           |     |               |   |            |               | 
|                                              | Net interest income |                                                    |           | 508 |               |   |            | 6,450         |  |   |            | 6,687 | 
|Losses on sales of mortgage-backed securities |                     |                                                    |          |     |               |   | (7,831     | )             |  |   |           |      
|Expenses                                      |                     |                                                    | 371       |     |               |   | 1,399      |               |  |   | 1,283      |      
|                                              |                     |                                                    |           |     |               |   |            |               | 
|Net income (loss)                             |                     | $                                                  | 137       |     |               | $ | (2,780     | )             |  | $ | 5,404      |      
|                                              |                     |                                                    |           |     |               |   |            |               | 
|Net income (loss) per share  basic           |                     | $                                                  | 0.04      |     |               | $ | (0.24      | )             |  | $ | 0.40       |      
|                                              |                     |                                                    |           |     |               |   |            |               | 
|Net income (loss) per share  diluted         |                     | $                                                  | 0.04      |     |               | $ | (0.24      | )             |  | $ | 0.40       |      
|                                              |                     |                                                    |           |     |               |   |            |               | 
|Weighted-average shares outstanding  basic   |                     |                                                    | 3,393,394 |     |               |   | 11,704,000 |               |  |   | 13,414,000 |      
|                                              |                     |                                                    |           |     |               |   |            |               | 
|Weighted-average shares outstanding  diluted |                     |                                                    | 3,393,394 |     |               |   | 11,704,000 |               |  |   | 13,414,260 |      
|                                              |                     |                                                    |           |     |               |   |            |               | 



|          |                  
|--------- | -----------------
|NOTE 14  | SUBSEQUENT EVENTS





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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














Internal Control 
Integrated Framework


DELOITTE &
TOUCHE LLP






94



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



| |                                                            
| | -----------------------------------------------------------
| | Conclusion Regarding Disclosure Controls and
    Procedures





| |                                          
| | -----------------------------------------
| | Internal Control Over Financial Reporting





| |                                                         
| | --------------------------------------------------------
| | Changes in Internal Control Over Financial
    Reporting








|         |                  
|-------- | -----------------
|Item 9B. | Other Information



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##### Table of Contents






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

(a)1. and (a)2.     Documents filed
as part of this report:






(a)3.     Exhibits




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SIGNATURES






| |                                
| | -------------------------------
| | LUMINENT MORTGAGE CAPITAL, INC.
| | (Registrant)                   



| |     |                  
| | --- | -----------------
| | By: | /s/GAIL P. SENECA

| |                              
| | -----------------------------
| |                              
| | Gail P. Seneca               
| | Chief Executive Officer      
| | (Principal Executive Officer)
|
| | Date: March 14, 2005         



| |     |                       
| | --- | ----------------------
| | By: | /s/CHRISTOPHER J. ZYDA

| |                         
| | ------------------------
| |                         
| | Christopher J. Zyda     
| | Chief Financial Officer 
| | (Principal Financial and
| | Accounting Officer)     
|
| | Date: March 14, 2005    



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pursuant to the requirements of the Securities Exchange Act of
    1934, this report has been signed by the following persons in
    the capacities and on the dates indicated.

|                                               |  |                                                                                                      |  |                |  | 
|---------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                      |  | Title                                                                                                |  | Date          
|                                               |  |                                                                                                      |  |               
|                                              
|/s/ GAIL P. SENECAGail
    P. Seneca           |  | Chief Executive Officer and Chairman of the Board and
    Director
    (Principal Executive Officer) |  | March 14, 2005
|                                              
|/s/ CHRISTOPHER J. ZYDAChristopher
    J. Zyda |  | Chief Financial Officer
    (Principal Financial and Accounting Officer)                             |  | March 14, 2005
|                                              
|/s/ ALBERT J. GUTIERREZAlbert
    J. Gutierrez |  | Director                                                                                             |  | March 14, 2005
|                                              
|/s/ BRUCE A. MILLERBruce
    A. Miller         |  | Director                                                                                             |  | March 14, 2005
|                                              
|/s/ JOHN MCMAHANJohn
    McMahan               |  | Director                                                                                             |  | March 14, 2005
|                                              
|/s/ ROBERT B. GOLDSTEINRobert
    B. Goldstein |  | Director                                                                                             |  | March 14, 2005
|                                              
|/s/ DONALD H. PUTNAMDonald
    H. Putnam       |  | Director                                                                                             |  | March 14, 2005
|                                              
|/s/ JOSEPH E. WHITTERSJoseph
    E. Whitters   |  | Director                                                                                             |  | March 14, 2005

97



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EXHIBIT INDEX






|        |    |      |             |                                                                                                                                                                                                                                                                                                        
|------- | -- | ---- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|Number  |    |      | Description
|        |    |      |            
|        | 3  | .1   |             | Second Articles of Amendment and Restatement(4)                                                                                                                                                                                                                                                        
|        | 3  | .2   |             | Second Amended and Restated Bylaws(1)                                                                                                                                                                                                                                                                  
|        | 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   |             | Management Agreement, dated as of June 11, 2003, by and
    between the Registrant and Seneca Capital Management LLC
    (Seneca) (1)                                                                                                                                                                
|        | 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(1)                                                                                                                                                                                                                                                                           
|        | 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 of the Registrant(1)                                                                                                                                                                                                                                        
|        | 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 August 4, 2003 by and
    between the Registrant and Christopher J. Zyda(1)                                                                                                                                                                                           
|        | 10 | .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 Luminent Mortgage Capital, Inc.
    and Cantor Fitzgerald & Co.(6)                                                                                                                                                       
|        | 14 | .1   |             | Code of Business Conduct and Ethics(1)                                                                                                                                                                                                                                                                 
|        | 14 | .2   |             | Corporate Governance Guidelines(5)                                                                                                                                                                                                                                                                     
|        | 23 | .1*  |             | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                                       
|        | 31 | .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 2002                                                         
|        | 31 | .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 2002                                                                                           
|        | 32 | .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 2002                                                                
|        | 32 | .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 2002                                                                                                  
|        | 99 | .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)                                                                                                                                                                                                       






|    |                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference from 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 from our Form 8-K filed on
    December 23, 2003.                                                                                                                                
|   
|(3) | Incorporated by reference from 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 from our Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2004.                                                                                                  
|   
|(5) | Incorporated by reference from 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 from our Form 8-K filed on
    February 8, 2005.                                                                                                                                 



| |   |                
| | - | ---------------
| | * | Filed herewith.



|  |                                                    
|- | ---------------------------------------------------
| | Denotes a management contract or compensatory plan.