##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
       FORM 10-K
  (Mark One)x

Annual report pursuant to
    Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended
    December 31, 2006o

Transition report pursuant to
    Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period
    from 
    to  .   001-31828
  LUMINENT MORTGAGE CAPITAL,
    INC.
   Maryland

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

(I.R.S. Employer Identification
    No.)101 California Street,
    Suite 1350, San Francisco, California

94111(Address of principal executive
    offices)

(Zip Code)   (415) 217-4500
   Title of each class

Name of each exchange on which
    registeredCommon Stock, par value
    $0.001 per share

New York Stock
    Exchange     o x
  o x
  x o
  Regulation S-K Form 10-K Form 10-K. x
  o x
  Rule 12b-2  x o
  o x o
  Rule 12b-2 o x
  $351,976,128
    DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K. Regulation S-K.




---



##### 



INDEX
  PAGEPART IITEM 1.


BUSINESS


1ITEM 1A.


RISK
    FACTORS


14ITEM 1B.


UNRESOLVED STAFF
    COMMENTS


30ITEM 2.


PROPERTIES


30ITEM 3.


LEGAL
    PROCEEDINGS


30ITEM 4.


SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS


30PART IIITEM 5.


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


31ITEM 6.


SELECTED FINANCIAL
    DATA


34ITEM 7.


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


36ITEM 7A.


QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISK


66ITEM 8.


FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA


71ITEM 9.


CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE


108ITEM 9A.


CONTROLS AND
    PROCEDURES


108ITEM 9B.


OTHER
    INFORMATION


108PART IIIITEM 10.


DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATED GOVERNANCE OF THE
    REGISTRANT


108ITEM 11.


EXECUTIVE
    COMPENSATION


108ITEM 12.


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


109ITEM 13.


CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
    INDEPENDENCE


109ITEM 14.


PRINCIPAL
    ACCOUNTANT FEES AND SERVICES


109PART IVITEM 15.


EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES


110SIGNATURES


111EXHIBIT
    INDEX


112EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   i




---



##### Table of Contents



CAUTIONARY
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Form 10-K Form 10-K
  
    the flattening of, or other changes in the yield curve, on our
    investment strategies;
    changes in interest rates and mortgage prepayment rates;
    our ability to obtain or renew sufficient funding to maintain
    our leverage strategies;
    continued creditworthiness of the holders of mortgages
    underlying our mortgage-related assets;
    the possible effect of negative amortization of mortgages on our
    financial condition and REIT qualification;
    potential impacts of our leveraging policies on our net income
    and cash available for distribution;
    the power of our board of directors to change our operating
    policies and strategies without stockholder approval;
    the effects of interest rate caps on our adjustable-rate and
    hybrid adjustable-rate loans and mortgage-backed securities;
    the degree to which our hedging strategies may or may not
    protect us from interest rate volatility;
    our ability to invest up to 10% of our investment portfolio in
    residuals, leveraged mortgage derivative securities and shares
    of other REITs as well as other investments;
    volatility in the timing and amount of our cash distributions;
    our ability to purchase sufficient mortgages for our
    securitization business; and
    the other important factors described in this
    Form 10-K,
    including those under the captions Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations, Risk Factors and
    Quantitative and Qualitative Disclosures about Market
    Risk.  Form 10-K,
  Form 10-K.
  Form 10-K
 ii




---



##### Table of Contents



PART I  ITEM 1.
    BUSINESS  Our
    Company
  Overview
          loan-to-value
 1




---



##### Table of Contents



agreed-upon
  Alt-A Alt-A loan-to-value loan-to-value
  loan-to-value
  loan-to-value
  110-115% loan-to-value negatively-amortizing negatively-amortizing loan-to-value
     2




---



##### Table of Contents



Form 10-K
    Assets
  Form 10-K
   3




---



##### Table of Contents



Borrowings
  held-for-investment available-for-sale,
        Form 10-K
   4




---



##### Table of Contents



Hedging
        Accounting for Derivative
    Instruments and Hedging Activities Form 10-K
  Business
    Strategy
  Investment
    Strategy
  loan-to-value loan-to-value
 5




---



##### Table of Contents



loan-to-value
   6




---



##### Table of Contents



time-to-reset, loan-to-value,
  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.  Our
    Operating Policies and Programs
    
    asset acquisition policy; 7




---



##### Table of Contents




    capital/liquidity and leverage policies;
    credit risk management policy; and
    asset/liability management policy.  Asset
    Acquisition Policy
    
    Category IAt least 75% of our total assets shall be
    residential mortgage-backed securities, or RMBS, residential
    real estate loans, and short-term investments. Residential real
    estate loans shall be prime credit quality loans,
    for example have FICO scores not less than 600, have a combined
    loan-to-value
    ratio not greater than 105% and be either in first or second
    lien position.
    Category IIAt least 90% of our total assets
    will consist of Category I investments plus residential
    real estate loans not meeting one or more of the criteria in
    Category I.
    Category IIINo more than 10% of our total
    assets shall be of a type not meeting any of the above criteria.
    Among the types of assets generally assigned to this category
    are residuals, leveraged mortgage derivative securities, shares
    of other REITs or other investments.    Capital/Liquidity
    and Leverage Policies
         8




---



##### Table of Contents



Credit
    Risk Management Policy
      Asset/Liability
    Management Policy
  Interest Rate Risk Management.
  
    monitoring and adjusting, if necessary, the reset index and
    interest rates of our mortgage-related assets and our borrowings;
    attempting to structure our borrowing agreements to have a range
    of different maturities, terms, amortizations and interest rate
    adjustment periods;
    using derivatives, financial futures, swaps, options, caps,
    floors and forward sales to adjust the interest rate sensitivity
    of our mortgage-related assets and our borrowings; and
    actively managing, on an aggregate basis, the interest rate
    indices, interest rate adjustment periods and gross reset
    margins of our mortgage-related assets and the interest rate
    indices and adjustment periods of our borrowings.           9




---



##### Table of Contents



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




---



##### Table of Contents



Other
    Investments
      Industry
    Trends
      Competition
   11




---



##### Table of Contents



Federal
    Income Tax Considerations
  General
          Requirements
    for Qualification as a REIT
    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, 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 12




---



##### Table of Contents



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 and certain qualified hedging
    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, or
    (3) any combination of the foregoing.    Asset
    Tests
      Annual
    Distribution Requirements
      Taxation
    of Stockholders
    non-United
   13




---



##### Table of Contents




    A stockholders share of the excess inclusion income is not
    allowed to be offset by any net operating losses otherwise
    available to the stockholder;
    A tax-exempt stockholders share of excess inclusion income
    generally is subject to tax as unrelated business taxable
    income; and
    A
    non-U.S. stockholders
    share of excess inclusion income is subject to
    U.S. withholding tax at the maximum rate (30%), without
    reduction for any otherwise applicable income tax treaty.  Relief
    Received from IRS Regarding Defective Taxable REIT Subsidiary
    Election
      Employees
    Website
    Access to Our Periodic SEC Reports
  www.luminentcapital.com. Forms 10-K 10-Q Form 8-K, Form 10-K.
  1-800-SEC-0330. www.sec.gov
    CEO/CFO
    Certifications
  Form 10-K.
  ITEM 1A.
    RISK FACTORS  The following risk factors describe many potential
    occurrences that could adversely impact our results of
    operations and financial condition.  We employ a number of
    strategies designed to counteract these
 14




---



##### Table of Contents



potential occurrences which we describe under
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations included in
    Item 7 of this Form 10-K.
  General
    Risks Related to Our Business
   We
    might not be able to purchase residential mortgage loans,
    mortgage-backed securities and other investments that meet our
    investment criteria or at favorable spreads over our borrowing
    costs.
    The
    acquisition and securitization of mortgage loans,
    mortgage-backed securities and investments is inherently complex
    and involves many risks.
    Another
    risk that we face is greater than projected prepayment rates of
    the residential mortgage loans and mortgage-backed securities we
    own.
     15




---



##### Table of Contents



Our
    stockholders equity, or book value, is
    volatile.
      marked-to-market
  marked-to-market
  Our
    residential mortgage loans, mortgage-backed securities and other
    investments are subject to the risks of delinquency, foreclosure
    and credit loss.
           16




---



##### Table of Contents



Our
    residential mortgage loans and mortgage-backed securities have
    material geographic concentrations.
    Our
    residential mortgage loans and mortgage-backed securities are
    subject to interest rate caps and payment caps with
    resets.
    The
    representations and warranties that we make as part of our
    securitizations may subject us to liability.
    The
    use of residential mortgage loan and mortgage-backed securities
    securitizations with over-
    collateralization requirements could restrict our cash
    flow.
  and/or
 17




---



##### Table of Contents



If we
    are unable to securitize our residential mortgage loans or
    mortgage-backed securities successfully, we may be unable to
    grow or execute our business strategies.
    We
    purchase subordinated mortgage-backed securities that are
    structured to absorb a disproportionate amount of any credit
    losses on the underlying residential mortgage
    loans.
    We
    invest in some mortgage-backed securities backed by mid-prime or
    sub-prime
    residential mortgage loans which are subject to higher
    delinquency, foreclosure and credit loss rates than the prime
    residential mortgage loans we typically purchase.
  sub-prime sub-prime
  The
    residential mortgage loans and mortgage-backed securities we
    hold are subject to potential illiquidity, which might prevent
    us from selling them at reasonable prices should we find it
    necessary or believe it is advisable to sell them.
    A
    significant portion of the mortgages we hold in our Residential
    Mortgage Credit portfolio permit negative amortization. Negative
    amortization can increase our overall risk.
     18




---



##### Table of Contents



loan-to-value loan-to-value 110-115% loan-to-value negatively-amortizing
  loan-to-value negatively-amortizing
  Performance
    of our residential mortgage loans and mortgage-backed securities
    are subject to the overall health of the U.S. economy, and
    a national or regional economic slowdown could adversely impact
    our results of operations or financial condition.
    We
    might not be able to obtain financing that allows us to purchase
    residential mortgage loans or mortgage-backed securities we
    would otherwise want to purchase.
     19




---



##### Table of Contents



Our
    investment strategies employ a significant amount of
    leverage.
        Another
    risk of our business is interest rate mismatches between the
    residential mortgage loans and mortgage-backed securities we own
    and the borrowings we use to acquire these assets.
   20




---



##### Table of Contents



Our
    use of certain types of financing may give our lenders greater
    rights in the event that either we or any of our lenders file
    for bankruptcy.
    We may
    not be able to acquire eligible securities for CDO issuances or
    other securitizations on favorable economic terms, and may not
    be able to structure CDOs and other securitizations on
    attractive terms. The assets acquired by our warehouse providers
    at our direction or financed using repurchase agreements may not
    be suitable for a future CDO transaction, which may require us
    to seek more costly financing for our investments or to
    liquidate assets.
    The
    use of CDO financings with over-collateralization requirements
    may have a negative impact on our cash flow and may trigger
    certain termination provisions in the related collateral
    management agreements.
  and/or
 21




---



##### Table of Contents



Our
    investments in the equity securities of CDOs involve significant
    risks, including that CDO equity holders receive distributions
    from the CDO only if the CDO generates enough income to first
    pay the holders of its debt securities and its
    expenses.
    Our
    hedging activities might be unsuccessful.
      mark-to-market
  We
    rely on assumptions and estimates when we calculate the fair
    values and projected cash flows for the residential mortgage
    loans, mortgage-backed securities and hedging instruments we
    hold. As a result, these fair values and projected cash flows
    could be subject to subsequent adjustment.
   22




---



##### Table of Contents



Our
    operations are significantly dependent on our information
    technology platform.
    We are
    subject to the risks associated with inadequate or untimely
    services from third-party service providers.
    Legal and
    Tax Risks
  If we
    are disqualified as a REIT, we will be subject to tax as a
    regular corporation and face substantial tax
    liability.
    
    we would be taxed as a regular domestic corporation, which,
    among other things, means that we would be unable to deduct
    distributions to our stockholders in computing taxable income
    and we would be subject to U.S. federal income tax on our
    taxable income at regular corporate rates;
    any resulting tax liability could be substantial, would reduce
    the amount of cash available for distribution to our
    stockholders and could force us to liquidate assets at
    inopportune times, causing lower income or higher losses than
    would result if these assets were not liquidated; and
    unless we were entitled to relief under applicable statutory
    provisions, we would be disqualified from treatment as a REIT
    for the subsequent four taxable years following the year during
    which we lost our qualification and, thus, our cash available
    for distribution to our stockholders would be reduced for each
    of the years during which we did not qualify as a REIT.    Complying
    with REIT requirements might cause us to forego otherwise
    attractive opportunities.
   23




---



##### Table of Contents



Complying
    with REIT requirements may limit our ability to hedge
    effectively.
    Complying
    with REIT requirements may force us to liquidate otherwise
    attractive investments.
    In
    order to comply with REIT requirements we may be required to
    borrow to make distributions to our stockholders.
    If we
    do not make required distributions, we would be subject to tax,
    which would reduce the cash available for distribution to our
    stockholders.
   24




---



##### Table of Contents




    85% of our REIT ordinary income for that year;
    95% of our REIT capital gain net income for that year; and
    100% of our undistributed taxable income from prior years.    Our
    taxable income may substantially exceed our GAAP income and cash
    flow, which may require us to use cash reserves, incur debt or
    liquidate non-cash assets at unfavorable rates or times in order
    to satisfy the distribution requirement and to avoid corporate
    income and excise taxes.
    We may
    lose our REIT status if the IRS successfully challenges our
    characterization of our income from our future investments in
    CLO and CDO issuers.
    To the
    extent any of our taxable REIT subsidiaries that are CLO and CDO
    issuers and are subject to federal income tax at the entity
    level, the amounts those entities could distribute to us and pay
    their creditors would be reduced.
  non-U.S. corporations
  Our
    recognition of excess inclusion income could have adverse tax
    consequences to us and our stockholders.
   25




---



##### Table of Contents



Misplaced
    reliance on legal opinions or statements by issuers of
    mortgage-backed securities could adversely impact our results of
    operations or financial condition or result in our failure to
    comply with REIT income or assets tests.
    Failure
    to maintain an exemption from the Investment Company Act would
    harm our results of operations.
     26




---



##### Table of Contents



loan-to-value loan-to-value
                 27




---



##### Table of Contents



Rule 3a-7,
  Risks
    Related to Investing in Our Securities
  The
    timing and amount of our cash distributions may be
    volatile.
      Our
    declared cash distribution may force us to liquidate residential
    mortgage loans or mortgage-backed securities or borrow
    funds.
    If we
    were to offer debt securities, those securities would be senior
    to our common stock in the event of our
    liquidation.
    The
    market price and trading volume of our common stock may be
    volatile.
   28




---



##### Table of Contents



The
    market price of our common stock may be adversely affected by
    future sales of a substantial number of shares of our common
    stock, or securities convertible into our common stock, in the
    public market or the availability of such securities for
    sale.
      Restrictions
    on ownership of our capital stock might limit your opportunity
    to receive a premium on our stock.
    Certain
    provisions of Maryland law and our charter and bylaws could
    discourage, delay or prevent a change in our
    control.
   29




---



##### Table of Contents



ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES      ITEM 3.
    LEGAL
    PROCEEDINGS    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   30




---



##### Table of Contents



PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES  Market
    Information
    intra-day
  2006

High


LowFirst Quarter

$
8.70


$
7.18Second Quarter


9.26



7.58Third Quarter


10.50



8.98Fourth Quarter


10.84



9.60   2005

High


LowFirst Quarter

$
11.93


$
10.85Second Quarter


11.04



9.70Third Quarter


11.05



7.40Fourth Quarter


8.36



6.32   Holders
    Distributions
    and Distribution Policy
    Cash Distributions

DeclarationDeclared Per Share

Date2006First Quarter

$
0.05



March 31, 2006Second Quarter


0.20



June 12, 2006Third Quarter


0.30



September 28, 2006Special Dividend


0.075



October 10, 2006Fourth Quarter


0.30



December 18, 20062005First Quarter

$
0.36



March 31, 2005Second Quarter


0.27



June 29, 2005Third Quarter


0.11



September 30, 2005Fourth Quarter


0.03



December 20, 2005     held-for-investment.
 31




---



##### Table of Contents



Form 10-K.
    
    90% of our REIT taxable net income, plus
    90% of our after-tax net income, if any, from foreclosure
    property, minus
    the excess of the sum of specified items of our non-cash income
    items over 5% of
    REIT          
    taxable net income.      Form 10-K
  and/or
  Equity
    Compensation Plan
   32




---



##### Table of Contents



(a)





(c)Number of


(b)


Number ofsecurities to be


Weighted-


securities remainingissued upon


average


available for futureexercise of


exercise price


issuance under equityoutstanding


of outstanding


compensation plans -options, warrants


options, warrants


excluding securitiesPlan Category

and rights


and rights


reflected in column (a)Incentive plans approved by
    stockholders


55,000


$
14.82



1,218,834Incentive plans not approved by
    stockholders










Total


55,000


$
14.82



1,218,834   Form 10-K
  Purchases
    of Equity Securities
    (c)

(d)(a)



Total

MaximumTotal

(b)

Number of Shares

Number of SharesNumber of

Average

Purchased as Part of

that May Yet BeShares

Price Paid

Publicly Announced

Purchased UnderPeriod

Purchased

per Share

Program

the Program(1)October 1  31, 2006











2,405,715November 1  30, 2006











2,405,715December 1  31, 2006











2,405,715     (1)
    
    Our initial stock repurchase
    program was announced on November 7, 2005 and authorized us
    to repurchase up to a total of 2,000,000 of our common shares.
    In February 2006, we announced an additional stock repurchase
    program to repurchase up to 3,000,000 shares of our common
    stock. We can repurchase shares in the open market or through
    privately negotiated transactions from time to time at
    managements discretion until we repurchase a total of
    5,000,000 common shares or our Board of Directors determines to
    terminate the program. 33




---



##### Table of Contents



Share
    Price Performance Graph
    
  12/19/2003



12/31/2003



12/31/2004



12/31/2005



12/31/2006Luminent Mortgage Capital
    Inc



100




104




100




69




98S & P
    500



100




105




117




122




142BBG REIT Mortgage



100




102




130




109




130     ITEM 6.
    SELECTED
    FINANCIAL DATA   34




---



##### Table of Contents



Form 10-K.
 For the PeriodFor the Year


For the Year


For the Year


from April 26,Ended


Ended


Ended


2003 throughDecember 31,


December 31,


December 31,


December 31,2006


2005


2004


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

$
357,137


$
181,421


$
123,754


$
22,654Interest expense


268,618



137,501



55,116



9,009Net interest income


88,519



43,920



68,638



13,645Impairment losses on
    mortgage-backed securities


(7,010
)


(112,008
)






Realized and unrealized gains
    (losses) on derivative instruments, net


7,736



(808
)






Gains (losses) on sales of
    mortgage-backed securities


993



(69
)






(7,831
)Other income (expense)


(829
)






1,070



Expenses


42,443



14,026



12,596



3,053Net income (loss)


46,797



(82,991
)


57,112



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

$
1.15


$
(2.13
)

$
1.68


$
0.27Net income (loss) 
    diluted


1.14



(2.13
)


1.68



0.27Cash distributions declared(1)


0.925



0.77



1.71



0.95Book value (end of period)(2)


9.86



9.76



10.93



11.38Common shares outstanding (end of
    period)


47,808,510



40,587,245



37,113,011



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


40,788,778



39,007,953



33,895,967



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


41,003,620



39,007,953



33,947,414



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

$
141,556


$
219,148


$
186,351


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


2,789,382



4,140,455



4,641,604



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


2,930,938



4,359,603



4,827,955



2,161,945Loans
    held-for-investment


5,591,717



507,177







Total assets


8,613,795



4,933,471



4,879,828



2,179,340Repurchase agreements


2,707,915



3,928,505



4,436,456



1,728,973Mortgage-backed notes


3,917,677



486,302







Junior subordinated notes


92,788



92,788







Margin debt






3,548







Total liabilities


8,142,240



4,537,150



4,474,325



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


3,842



7,076



(61,368
)


(26,510
)Total stockholders equity


471,555



396,321



405,503



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


17.2



11.4



10.9



6.1Recourse leverage ratio
    (period end)(4)


7.4



8.2



10.9



6.1     (1)
    
    Cash distributions declared during
    the period from April 26, 2003 through December 31,
    2003 were payable to stockholders of the 11,704,000 shares
    outstanding on each of the record dates prior to the completion
    of our initial public offering. Cash distributions of
    $0.42 per share declared on March 9, 2004 were payable
    to stockholders of the 24,841,146 shares outstanding on the
    record date, which was prior to the completion of our follow-on
    public offering.(2)
    
    Book value is calculated as total
    stockholders equity divided by the number of shares issued
    and outstanding at December 31, 2006, 2005, 2004 and 2003.(3)
    
    Leverage is defined as total
    liabilities divided by total stockholders equity. At
    December 31, 2003, substantially all of the net offering
    proceeds from our initial public offering had been used to
    purchase mortgage-backed securities. However, at
    December 31, 2003, we had not fully levered our Spread
    portfolio to within our target range of eight to 12 times the
    amount of our equity.(4)
    
    Recourse leverage is defined as
    total recourse liabilities divided by stockholders equity
    plus long-term debt. 35




---



##### Table of Contents



ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  The following discussion of our financial condition and
    results of operations should be read in conjunction with the
    financial statements and notes to those statements included in
    Item 8 of this
    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. See
    Cautionary Note regarding Forward-looking
    Statements. As a result of many factors, such as those set
    forth under Risk Factors in Item 1A of this on
    Form 10-K
    and elsewhere in this
    Form 10-K,
    our actual results may differ materially from those anticipated
    in such forward-looking statements.
  Overview
  Executive
    Summary
           36




---



##### Table of Contents



loan-to-value
  agreed-upon
  loan-to-value loan-to-value
  loan-to-value
  loan-to-value
   37




---



##### Table of Contents




    interest rate trends and changes in the yield curve;
    the availability of a sufficient supply of mortgage loans and
    mortgage-backed securities for purchase that meet our standards;
    rates of prepayment on our mortgage loans and the mortgages
    underlying our mortgage-backed securities;
    continued creditworthiness of the holders of mortgages
    underlying our mortgage-related assets;
    highly competitive markets for investment opportunities; and
    other market developments.    
    credit risk as defined by prepayments, delinquencies and
    defaults on our mortgage loans and the mortgage loans underlying
    our mortgage-backed securities;
    overall leverage of our portfolio;
    access to funding and adequate borrowing capacity;
    negative amortization;
    increases in our borrowing costs;
    the ability to use derivatives to mitigate our interest rate and
    prepayment risks;
    the market value of our investments; and
    compliance with REIT requirements and the requirements we must
    meet to qualify for an exemption under the Investment Company
    Act of 1940.  Form 10-K Form 10-K
 38




---



##### Table of Contents



Summary
    and Outlook
    Accounting
    for Derivative Instruments and Hedging Activities,
    Form S-3
      loan-by-loan
   39




---



##### Table of Contents



Form 10-K Form 10-K
  Critical
    Accounting Policies
  Form 10-K
  Classifications
    of Investment Securities
  available-for-sale available-for-sale available-for-sale period-to-period.
 40




---



##### Table of Contents



Valuations
    of Mortgage-backed Securities
      available-for-sale other-than-temporary other-than-temporary other-than-temporary
  other-than-temporary other-than-temporary available-for-sale
  other-than-temporary other-than-temporary,
  Loans
    Held-for-Investment
  held-for-investment held-for-investment
  Allowance
    and Provision for Loan Losses
   41




---



##### Table of Contents



Interest
    Income Recognition
  Accounting for
    Nonrefundable Fees and Costs Associated with Originating or
    Acquiring Loans and Initial Direct Costs of Leases. 99-20, Recognition of Interest Income and Impairment on Purchased
    and Retained Beneficial Interests in Securitized Financial
    Assets.
    Securitizations
   42




---



##### Table of Contents



Accounting for Transfers and
    Servicing of Financial Assets and Extinguishments of
    Liabilities Consolidation
    of Variable Interest Entities
  Accounting
    for Derivative Financial Instruments and Hedging
    Activities
      Form 10-K
  Recent
    Accounting Pronouncements
  available-for-sale.
     43




---



##### Table of Contents



available-for-sale
  Accounting for Certain Hybrid Financial
    Instruments  an Amendment of FASB Statements
    No. 133 and 140 instrument-by-instrument , Embedded
    Derivatives: Application of Paragraph 13(b) to Securitized
    Interests in Prepayable Financial Assets (B40)
  Accounting for Uncertainty in Income Taxes. Accounting for Income
    Taxes.
  Fair Value Measurements
  Financial StatementsConsidering the
    Effect of Prior Year Misstatements
 44




---



##### Table of Contents



The
    Fair Value Option for Financial Assets and Financial
    Liabilities.
  Results
    of Operations
  Year
    ended December 31, 2006 compared to the year ended
    December 31, 2005
      For the Year EndedDecember 31,2006


2005Weighted-average yield on average
    earning assets, net of premium amortization or discount accretion


6.57
%


3.79
%Weighted-average cost of financing
    liabilities


5.13



3.07Net interest spread


1.44
%


0.72
%     year-over-year
 45




---



##### Table of Contents



For the Year


Percentage


For the Year


PercentageEnded


of Average


Ended


of AverageDecember 31,


Financing


December 31,


Financing2006


Liabilities


2005


LiabilitiesInterest expense on mortgage-backed
    notes


$     132,107



2.53
%

$
3,719



0.08
%Interest expense on repurchase
    agreement liabilities


116,465



2.23



138,076



3.08Interest expense on commercial
    paper facility


4,786



0.09







Interest expense on warehouse
    lending facilities


16,459



0.31



1,507



0.03Interest expense on junior
    subordinated notes


7,768



0.15



3,411



0.08Amortization of net realized gains
    on futures and interest rate swap contracts


(7,468
)


(0.14
)


(1,415
)


(0.03
)Net interest (income)/expense on
    interest rate swap contracts


(1,676
)


(0.04
)


(8,093
)


(0.18
)Net hedge ineffectiveness
    (gains)/losses on futures and interest rate swap contracts










258



0.01Other


177



nm



38



nmTotal interest expense


$     268,618



5.13
%

$
137,501



3.07
%     nm = not meaningful
     46




---



##### Table of Contents



For the Years EndedDecember 31,2006


2005Realized gains (losses) on
    derivative instruments, net(1):Sales of derivative contracts

$
2.6


$
1.0Purchase commitment derivatives


3.7



(1.4
)Unrealized gains (losses) on
    derivative instruments, net(1):Change in fair value of derivative
    contracts


1.4



(0.4
)Sub-total


7.7



(0.8
)Other-than-temporary
    impairment losses


(7.0
)


(112.0
)Sales of mortgage-backed securities:Gains


10.0



Losses


(9.0
)


(0.1
)Sub-total


1.0



(0.1
)Other expense


(0.8
)


Total

$
0.9


$
(112.9
)
   
  (1)
    
    Prior to January 1, 2006,
    certain derivative instruments were accounted for in accordance
    with SFAS No. 133 and the related gains
    and losses were recognized in interest expense.  other-than-temporary
  year-over-year
    Form 10-K
   47




---



##### Table of Contents



held-for-investment, held-for-investment
  Year
    ended December 31, 2005 compared to the year ended
    December 31, 2004
      For the Year EndedDecember 31,2005


2004Weighted-average yield on average
    earning assets, net of premium amortization or discount accretion


3.79
%


3.28
%Weighted-average cost of financing
    liabilities


3.07



1.57Net interest spread


0.72
%


1.71
%     year-over-year
 48




---



##### Table of Contents



For the Year


Percentage


For the Year


PercentageEnded


of Average


Ended


of AverageDecember 31,


Financing


December 31,


Financing2005


Liabilities


2004


LiabilitiesInterest expense on repurchase
    agreement liabilities

$
138,076



3.08
%

$
56,309



1.60
%Interest expense on mortgage-backed
    notes


3,719



0.08







Interest expense on warehouse
    lending facilities


1,507



0.03







Interest expense on junior
    subordinated notes


3,411



0.08







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


258



0.01



(2,268
)


(0.06
)Amortization of net realized gains
    on futures contracts


(1,415
)


(0.03
)


(2,803
)


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


(8,093
)


(0.18
)


3,720



0.11Other


38



nm



158



nmTotal interest expense

$
137,501



3.07
%

$
55,116



1.57
%     nm = not meaningful
           49




---



##### Table of Contents



Form 10-K
            REIT
    taxable net income
     50




---



##### Table of Contents



For the Year


For the Year


For the YearEnded


Ended


EndedDecember 31,


December 31,


December 31,2006


2005


2004GAAP net income (loss)

$
46,797


$
(82,991
)

$
57,112Adjustments to GAAP net income
    (loss):Interest income and expenses, net


(26,676
)


1,142



1,102Impairment losses on
    mortgage-backed securities


7,010



112,008



Provision for loan losses


5,193







Servicing expense


10,263







Sales of mortgage-backed
    securities, net


(993
)


69



Other, net


(695
)


1,086



1,211Net adjustments to GAAP net income
    (loss)


(5,898
)


114,305



2,313REIT taxable net income

$
40,899


$
31,314


$
59,425REIT taxable net income per share

$
0.97


$
0.77


$
1.75Average shares outstanding on
    dividend record dates during the year


42,163,918



40,667,532



33,957,143     For the


For the


For theYear Ended


Year Ended


Year EndedDecember 31,


December 31,


December 31,2006


2005


2004Undistributed REIT taxable net
    income, beginning of period

$
3,154


$
1,794


$
281REIT taxable net income during
    period


40,899



31,314



59,425Distributions declared during
    period, net of dividend equivalent rights on restricted common
    stock


(39,410
)


(29,954
)


(57,912
)(214
)






Undistributed REIT taxable net
    income, end of period

$
4,429


$
3,154


$
1,794Cash distributions per share
    declared during period

$
0.925


$
0.77


$
1.71Percentage of REIT taxable net
    income distributed, including dividends paid deduction


89.9
%


90.5
%


97.0
%Percentage of REIT taxable net
    income distributed, excluding dividends paid deduction


91.0
%


91.6
%


97.4
%     Financial
    Condition
       51




---



##### Table of Contents



Form S-3 and/or and/or at-the-market
    Mortgage-Backed
    Securities
   52




---



##### Table of Contents



and/or
  December 31, 2006


December 31, 2005Percentage





Percentageof Total





of TotalMarket


Mortgage-backed


Market


Mortgage-backedValue


Securities


Value


SecuritiesResidential Mortgage Credit
    PortfolioInvestment-grade MBS:AA/Aa rating

$
129,096



4.4
%

$
30,623



0.7
%A/A rating


238,623



8.1



64,957



1.5BBB/Baa rating


273,359



9.3



28,546



0.6Total Investment-grade MBS


641,078



21.8



124,126



2.8Weighted-average credit rating


A−







ANon-investment-grade MBS:BB/Ba rating


145,741



5.0



121,128



2.8Not rated


11,196



0.4



20,818



0.5Total non-investment-grade MBS


156,937



5.4



141,946



3.3
%Weighted-average credit rating(1)


BB







BB+Total Residential Mortgage Credit
    portfolio


798,015



27.2



266,072



6.1Weighted-average credit rating(1)


BBB+







BBBSpread PortfolioAgency MBS


106,648



3.7



1,203,255



27.6AAA/Aaa rating


2,026,275



69.1



2,890,276



66.3Total Spread portfolio


2,132,923



72.8



4,093,531



93.9Weighted-average credit rating


AAA







AAATotal mortgage-backed securities

$
2,930,938



100.0
%

$
4,359,603



100.0
%Weighted-average credit rating


AA







AA+   
  (1)
    Weighted-average credit rating excludes non-rated
    mortgage-backed securities of $11.2 million and
    $20.8 million at December 31, 2006 and 2005,
    respectively.  Loans
    held-for-investment
  held-for-investment held-for-investment
 53




---



##### Table of Contents



held-for-investment
  Weighted-AverageMonths toReset ofLoans After





Principal


Loans





Number ofWeighted-


Weighted-


Weighted-


Effect of





Amount of


Delinquent





DelinquentAverage


Average


Average


Cost of





Loans


> 90 days as a


Number of


Loans as aInterest


Maturity


Months to


Funds


Principal


Delinquent


Percentage of


Delinquent


Percentage ofDescription

Rate


Date


Reset


Hedging (1)


Balance


> 90 days


Total Principal


Loans


Total LoansFloating rate mortgage


8.02
%


2037



1



1


$
4,089,015


$
20,830



0.38
%


45



0.33
%Hybrid mortgage


6.57
%


2036



54



33



1,383,310



13,053



0.24



30



0.21
%Total


7.65
%


2037



14



9


$
5,472,325


$
33,883



0.62
%


75



0.54
%     (1)
    
    We attempt to mitigate our interest
    rate risk by hedging the cost of liabilities related to our
    hybrid residential mortgage loans. Amounts reflect the effect of
    these hedges on the months to reset of our residential mortgage
    loans. In addition, the financing for $263.3 million of our
    hybrid residential mortgage loans is, like the underlying
    collateral, fixed for a period of three to five years then
    becomes variable based upon the average rates of the underlying
    loans which will adjust based on LIBOR. The weighted-average
    period to reset of the debt we use to acquire residential
    mortgage loans was match funded approximately six months at
    December 31, 2006.  held-for-investment
  Weighted-AverageMonths toReset ofLoans AfterWeighted-


Weighted-


Weighted-


Effect of





PrincipalAverage


Average


Average


Cost of





Amount of LoansInterest


Maturity


Months to


Funds


Principal


DelinquentDescription

Rate


Date


Reset


Hedging (1)


Balance


> 90 daysHybrid mortgage


6.09
%


2035



56



2


$
506,498


$
     (1)
    
    We attempt to mitigate our interest
    rate risk by hedging the cost of liabilities related to our
    hybrid residential mortgage loans. Amounts reflect the effect of
    these hedges on the months to reset of our residential mortgage
    loans. The weighted-average period to reset of the debt we use
    to acquire residential mortgage loans was match funded
    approximately one month at December 31, 2005. 54




---



##### Table of Contents



held-for-investment
  Unpaid principal balance

$
5,472,325Number of loans


13,942Average loan balance

$
393Weighted-average coupon rate


7.65
%Weighted-average lifetime cap


10.64
%Weighted-average original term, in
    months


375Weighted-average remaining term, in
    months


366Weighted-average
    loan-to-value
    ratio (LTV)(1)


72.6
%Weighted-average FICO score


713Top five geographic concentrations
    (% exposure):California


57.4
%Florida


8.6
%Arizona


4.1
%Virginia


3.7
%Nevada


3.4
%Occupancy status:Owner occupied


86.5
%Investor


13.5
%Property type:Single-family


83.6
%Condominium


9.7
%Other residential


6.7
%Collateral type:Alt A  first lien


100.0
%   
  (1)
    
    effect after mortgage insurance  held-for-investment
  Unpaid principal balance

$
506,498Number of loans


1,163Average loan balance

$
436Weighted-average coupon rate


6.09
%Weighted-average lifetime cap


11.31
%Weighted-average original term, in
    months


360Weighted-average remaining term, in
    months


357Weighted-average
    loan-to-value
    ratio (LTV)(1)


75.0
%Weighted-average FICO score


712Top five geographic concentrations
    (% exposure):California


38.9
%Virginia


11.1
%Florida


8.5
%Arizona


6.2
%Maryland


5.4
%Occupancy status:Owner occupied


93.7
%Investor


6.3
%Property type:Single-family


87.0
%Condominium


9.7
%Other residential


3.3
%Collateral type:Alt A-first lien


100.0
%   
  (1)
    
    effect after mortgage insurance 55




---



##### Table of Contents



loan-to-value
  FICO Scores<620


620-659


660-699


700-739


740+


AllFull Documentation:(1)LTV:60%


0.0
%


0.2
%


0.2
%


0.2
%


0.5
%


1.1
%60.01  70%


0.0



0.8



1.2



1.2



1.5



4.770.01  80%


0.0



1.6



3.1



2.5



3.1



10.3> 80%


0.0



0.0



0.0



0.0



0.0



0.0Total Full Documentation


0.0
%


2.6
%


4.5
%


3.9
%


5.1
%


16.1
%Reduced
    Documentation:(2)LTV:60%


0.0
%


0.6
%


1.3
%


1.5
%


2.4
%


5.8
%60.01  70%


0.0



2.0



7.9



7.3



6.7



23.970.01  80%


0.1



3.7



18.1



16.0



13.8



51.7> 80%


0.0



0.0



0.0



0.0



0.0



0.0Total Reduced Documentation


0.1
%


6.3
%


27.3
%


24.8
%


22.9
%


81.4
%No Documentation:(3)LTV:60%


0.0
%


0.0
%


0.2
%


0.2
%


0.4
%


0.8
%60.01  70%


0.0



0.1



0.3



0.3



0.4



1.170.01  80%


0.0



0.0



0.1



0.3



0.2



0.6> 80%


0.0



0.0



0.0



0.0



0.0



0.0Total No Documentation


0.0
%


0.1
%


0.6
%


0.8
%


1.0
%


2.5
%Total Portfolio:LTV:60%


0.0
%


0.8
%


1.7
%


1.9
%


3.3
%


7.7
%60.01  70%


0.0



2.9



9.4



8.8



8.6



29.770.01  80%


0.1



5.3



21.3



18.8



17.1



62.6> 80%


0.0



0.0



0.0



0.0



0.0



0.0Total Portfolio


0.1
%


9.0
%


32.4
%


29.5
%


29.0
%


100.0
%     (1)
    
    Full documentation includes
    verification of the borrowers income, employment, assets
    and liabilities.(2)
    
    Reduced documentation, sometimes
    referred to as Alt-A, includes mortgages that comply with most,
    but not all, of the Federal National Mortgage Association and
    Federal Home Loan Mortgage Corporation criteria for a conforming
    mortgage. Alt-A mortgages are generally high quality, with less
    than full documentation verified.(3)
    
    No documentation excludes
    verification of borrowers income, employment or assets. 56




---



##### Table of Contents



loan-to-value
  FICO Scores<620


620-659


660-699


700-739


740+


AllFull Documentation:(1)LTV:60%


0.0
%


0.0
%


0.1
%


0.0
%


0.0
%


0.1
%60.01  70%


0.0



0.7



0.5



0.7



0.9



2.870.01  80%


0.0



2.7



3.0



3.1



3.8



12.6> 80%


0.0



0.0



0.0



0.0



0.0



0.0Total Full Documentation


0.0
%


3.4
%


3.6
%


3.8
%


4.7
%


15.5
%Reduced
    Documentation:(2)LTV:60%


0.0
%


0.9
%


0.8
%


0.3
%


1.0
%


3.0
%60.01  70%


0.0



2.1



4.7



4.9



4.6



16.370.01  80%


0.1



4.6



19.5



19.0



16.8



60.0> 80%


0.0



0.0



0.0



0.0



0.0



0.0Total Reduced Documentation


0.1
%


7.6
%


25.0
%


24.2
%


22.4
%


79.3
%No Documentation:(3)LTV:60%


0.0
%


0.2
%


0.1
%


0.8
%


0.4
%


1.5
%60.01  70%


0.0



0.8



0.3



0.3



1.1



2.570.01  80%


0.0



0.1



0.3



0.4



0.4



1.2> 80%


0.0



0.0



0.0



0.0



0.0



0.0Total No Documentation


0.0
%


1.1
%


0.7
%


1.5
%


1.9
%


5.2
%Total Portfolio:LTV:60%


0.0
%


1.1
%


1.0
%


1.1
%


1.4
%


4.6
%60.01  70%


0.0



3.6



5.5



5.9



6.6



21.670.01  80%


0.1



7.4



22.8



22.5



21.0



73.8> 80%


0.0



0.0



0.0



0.0



0.0



0.0Total Portfolio


0.1
%


12.1
%


29.3
%


29.5
%


29.0
%


100.0
%     (1)
    
    Full documentation includes
    verification of the borrowers income, employment, assets
    and liabilities.(2)
    
    Reduced documentation, sometimes
    referred to as Alt-A, includes mortgages that comply with most,
    but not all, of the Federal National Mortgage Association and
    Federal Home Loan Mortgage Corporation criteria for a conforming
    mortgage. Alt-A mortgages are generally high quality, with less
    than full documentation verified.(3)
    
    No documentation excludes
    verification of borrowers income, employment or assets.       57




---



##### Table of Contents



Mortgage-Backed
    Notes
     58




---



##### Table of Contents



LUM


LUM


LUM


LUM


LUM


LUM


LUM


LUM


Total2005-1


2006-1


2006-2


2006-3


2006-4


2006-5


2006-6


2006-7


PortfolioTransaction execution
    date


11/2/05



1/26/06



2/23/06



4/28/06



5/28/06



6/29/06



9/28/06



12/27/06Loans, unpaid principal balance

$
520,568


$
576,122


$
801,474


$
682,535


$
497,220


$
508,789


$
772,732


$
799,655


$
5,159,095Mortgage-backed notes issued to
    third parties


500,267



536,657



746,973



654,270



376,148







753,415



756,450



4,324,180Debt retained


20,301



39,465



54,501



28,265



121,072



508,789



19,317



43,205



834,915Retained investment grade %(1)


3.1
%


3.9
%


3.7
%


2.9
%


21.1
%


97.2
%


1.0
%


4.6
%


14.2
%Retained non-investment grade %(1)


0.8
%


3.0
%


3.1
%


1.3
%


3.2
%


2.8
%


1.5
%


0.8
%


2.0
%Cost of debt on AAA-rated
    mortgage-backed notes  spread to LIBOR(2)


0.27
%


0.28
%


0.22
%


0.23
%


0.21
%


0.21
%


0.22
%


0.19
%


0.23
%     (1)
    
    Retained tranches as a percentage
    of total mortgage-backed notes issued.(2)
    
    LUM
    2006-3 cost
    of debt excludes $267.4 million of AAA mortgage-backed
    notes which, like the underlying loan collateral, are fixed for
    three to five years then become variable based upon the average
    rates of the underlying loans which will adjust based on LIBOR. 59




---



##### Table of Contents



LUM


LUM


LUM


LUM


LUM


LUM


LUM


LUM


Total2005-1


2006-1


2006-2


2006-3


2006-4


2006-5


2006-6


2006-7


PortfolioTransaction execution
    date


11/2/05



1/26/06



2/23/06



4/28/06



5/28/06



6/29/06



9/28/06



12/27/06Mortgage-backed notes issued to
    third-party investorsAAA/Aaa rating

$
482,307


$
517,069


$
717,320


$
597,700


$
376,148


$



$
712,846


$
725,289


$
4,128,679AA/Aa rating


17,960



19,588



29,653



56,570











29,364



20,597



173,732A/A rating


























11,205



7,923



19,128BBB/Baa rating






























2,641



2,641Total mortgage-backed notes issued
    to third-party investors

$
500,267


$
536,657


$
746,973


$
654,270


$
376,148


$



$
753,415


$
756,450


$
4,324,180Percentage of total collateral


96.1
%


93.1
%


93.2
%


95.9
%


75.7
%






97.5
%


94.6
%


83.8
%Debt retainedAAA/Aaa rating

$



$



$



$



$
66,378


$
457,910


$



$
27,153


$
551,441AA/Aa rating


6,767















18,397



21,369







2,580



49,113A/A rating


4,165



13,251



18,434



9,852



12,430



9,667



3,864



1,358



73,021BBB/Bbb rating


5,206



8,930



11,221



9,649



7,707



5,851



3,864



5,357



57,785BB/Ba rating


1,301



7,202



10,419



1,879



6,215



6,614



6,954







40,584B/B rating






5,761



8,015



1,569



5,469



3,816











24,630Not rated






4,321



6,412



1,257



4,476



3,562



4,635



6,757



31,420Total mortgage- backed notes
    retained


17,439



39,465



54,501



24,206



121,072



508,789



19,317



43,205



827,994Overcollateralization


2,862











4,059



















6,921Total debt retained

$
20,301


$
39,465


$
54,501


$
28,265


$
121,072


$
508,789


$
19,317


$
43,205


$
834,915Percentage of total collateral


3.9
%


6.9
%


6.8
%


4.1
%


24.3
%


100.0
%


2.5
%


5.4
%


16.2
%  60




---



##### Table of Contents



Asset
    Repricing Characteristics
    December 31, 2006


December 31, 2005Carrying


Portfolio


Carrying


PortfolioValue


Mix


Value


MixResidential Mortgage Credit
    PortfolioARM residential loans:Reset 1 month or less

$
4,089,015



48.0
%

$





%Reset >1 month but <
    12 months


284



nm







Reset >12 months but <
    60 months


1,180,727



13.9



506,498



10.4Reset > 60 months


202,299



2.4







Unamortized premium


124,412



1.5



679



nmAllowance for loan losses


(5,020
)


(0.1
)






Sub-total


5,591,717



65.7



507,177



10.4ARM residential mortgage-backed
    securities:Reset 1 month or less


796,539



9.3



266,072



5.5Reset >1 month but <
    12 months














Reset >12 months but <
    60 months














Reset > 60 months














Sub-total


796,539



9.3



266,072



5.5Fixed-rate residential
    mortgage-backed securities:


1,476



nm







Spread PortfolioResidential mortgage-backed
    securities:Reset 1 month or less


2,024,275



23.7



8,610



0.2Reset >1 month but <
    12 months


108,648



1.3



476,828



9.8Reset >12 months but <
    60 months










2,756,195



56.6Reset > 60 months










851,898



17.5Sub-total


2,132,923



25.0



4,093,531



84.1Total Mortgage Assets

$
8,522,655



100.0
%

$
4,866,780



100.0
%     nm = not meaningful
      held-for-investment
   61




---



##### Table of Contents



3-year 5-year
    LIBOR


Treasury


MTA


COFIMortgage-backed securities


98
%


2
%



%



%Loans
    held-for-investment


26







74



nm   nm = not meaningful
    LIBOR


Treasury


MTA


COFIMortgage-backed securities


65
%


35
%



%



%Loans
    held-for-investment


100











     Liquidity
    and Capital Resources
       62




---



##### Table of Contents



110-115% loan-to-value negatively-amortizing
        Principal payments received on
    residential mortgage loans

$
394,667Principal distributed to
    mortgage-backed note holders(1)


(322,647
)Principal receipts used for
    interest payments on mortgage-backed notes


72,020Interest cash receipts on
    residential mortgage loans for interest and other fee income,
    net of servicing and other reimbursements


89,594Interest payments to
    mortgage-backed note holders(1)


(161,614
)Interest payments on
    mortgage-backed notes in excess of interest cash receipts


(72,020
)Net cash flow

$
     (1)
    Amount includes principal and
    interest distributed on bonds retained by us.         63




---



##### Table of Contents



LUM


LUM


LUM


LUM


LUM


LUM


LUM2006-1


2006-2


2006-3


2006-4


2006-5


2006-6


2006-7Transaction execution date:


1/26/06



2/23/06



4/28/06



5/28/06



6/29/06



9/28/06



12/27/06Loans, unpaid principal balance

$
576,122


$
801,474


$
682,535


$
497,220


$
508,789


$
772,732


$
799,655Mortgage-backed notes issued to
    third parties


536,657



746,973



654,270



376,148







753,415



756,450Debt retained


39,465



54,501



28,265



121,072



508,789



19,317



43,205                64




---



##### Table of Contents



Form S-3 and/or and/or at-the-market
  Form S-3 and/or
  Rule 10b-18
  Form S-3 2006-6 2006-7 2007-1
   65




---



##### Table of Contents



Inflation
  and/or
  Contractual
    Obligations and Commitments
    Payments Due by PeriodLess than


1 - 3


3 - 5


More thanTotal


1 year


years


years


5 yearsMortgage-backed notes(1)

$
3,914.9


$
1,022.0


$
1,785.2


$
1,020.9


$
86.8Repurchase agreements


2,707.9



2,272.9



435.0







Warehouse lending facilities


752.8



752.8











Commercial paper


637.7



637.7











Junior subordinated notes(2)


92.8















92.8Facilities leases


1.1



0.3



0.4



0.3



0.1Total

$
8,107.2


$
4,685.7


$
2,220.6


$
1,021.2


$
179.7     (1)
    
    The mortgage-backed notes have a
    stated maturity through 2046; however, the expected maturity is
    subject to change based on the prepayments and loan losses of
    the underlying mortgage loans. In addition, we may exercise a
    redemption option and thereby effect termination and early
    retirement of the mortgage-backed notes. The payments
    represented reflect our assumptions for prepayment and credit
    losses at December 31, 2006 and assume we will exercise our
    redemption option.(2)
    
    Certain of our junior subordinated
    notes bear interest at a fixed rate per annum through
    March 30, 2010 and, thereafter, at a variable rate.
    Payments due by period reflect total principal due on all junior
    subordinated notes plus interest payments due during the fixed
    rate period of certain of the notes. See Note 5 to our
    consolidated financial statements in Part 2, Item 8 of
    this
    Form 10-K
    for further discussion about the preferred securities of
    subsidiary trusts and junior subordinated notes.  Off-Balance
    Sheet Arrangements
  Form 10-K
  ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    Credit
    Risk
   66




---



##### Table of Contents



Concentration
    Risk
    Interest
    Rate Risk
    Effect
    on Net Interest Income
  held-for-investment held-for-investment,
     67




---



##### Table of Contents



sources-of-income
  Extension
    Risk
        Interest
    Rate Cap Risk
   68




---



##### Table of Contents



Prepayment
    Risk
    Effect
    on Fair Value
     69




---



##### Table of Contents



Interest Rates





Interest Rates


Interest RatesFall 100





Rise 100


Rise 200Basis Points


Unchanged


Basis Points


Basis PointsMortgage-Backed
    SecuritiesFair value

$
2,933.3


$
2,930.9


$
2,928.6


$
2,926.1Change in fair value


2.4







(2.4
)


(4.8
)Change as a percent of fair value


0.1
%






(0.1
)%


(0.2
)%Hedge Instruments(1)Fair value

$
(14.8
)

$
13.0


$
32.3


$
64.4Change in fair value


(27.8
)






19.3



51.4Change as a percent of fair value


nm







nm



nmMortgage Loans
    Held-for-Investment(2)Fair value

$
5,655.3


$
5,586.9


$
5,518.5


$
5,451.1Change in fair value


68.4







(68.4
)


(136.8
)Change as a percent of fair value


1.2
%






(1.2
)%


(2.4
)%Mortgage-backed Notes (float
    monthly)(2)(3)Fair value

$
3,651.6


$
3,651.6


$
3,651.6


$
3,651.6Change in fair value














Change as a percent of fair value














Mortgage-backed Notes
    (hybrid)(2)(4)Fair value

$
269.3


$
263.5


$
258.0


$
252.5Change in fair value


5.8







(5.5
)


(11.0
)Change as a percent of fair value


2.2
%






(2.1
)%


(4.2
)%Repurchase
    Agreements(2)(5)Fair value

$
2,707.9


$
2,707.9


$
2,707.9


$
2,707.9Change in fair value














Change as a percent of fair value














Commercial Paper
    Facility(2)(5)Fair value

$
637.7


$
637.7


$
637.7


$
637.7Change in fair value














Change as a percent of fair value














Warehouse Lending
    Facilities(2)(5)Fair value

$
752.8


$
752.8


$
752.8


$
752.8Change in fair value














Change as a percent of fair value














Junior Subordinated
    Notes(2)Fair value

$
95.1


$
91.3


$
87.7


$
84.3Change in fair value


3.8







(3.6
)


(7.0
)Change as a percent of fair value


4.2
%






(3.9
)%


(7.7
)%     (1)
    
    We invest in credit default swaps,
    or CDS. Due to the complex nature of CDS, we are unable to model
    the fair value of these instruments when rates change, and
    therefore, no impact is reflected in the sensitivity analysis.(2)
    
    This asset or liability is carried
    on the consolidated balance sheet at amortized cost and
    therefore a change in interest rates would not affect the
    carrying value of the asset or liability.(3)
    
    Represents mortgage-backed notes
    which have interest rates that reset monthly.(4)
    
    Represents mortgage-backed notes
    which have interest rates that are fixed for a specific period
    of time and then reset monthly.(5)
    
    The fair value of the repurchase
    agreements, commercial paper facility and warehouse lending
    facilities would not change materially due to the short-term
    nature of these instruments.  nm = not meaningful
 70




---



##### Table of Contents



Risk
    Management
    
    monitoring and adjusting, if necessary, the reset index and
    interest rate related to our mortgage-backed securities and our
    borrowings;
    attempting to structure our borrowing agreements to have a range
    of different maturities, terms, amortizations and interest rate
    adjustment periods;
    using derivatives, financial futures, swaps, options, caps,
    floors and forward sales to adjust the interest rate sensitivity
    of our mortgage-backed securities and our borrowings; and
    actively managing, on an aggregate basis, the interest rate
    indices, interest rate adjustment periods and gross reset
    margins of our mortgage-backed securities and the interest rate
    indices and adjustment periods of our borrowings.   ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  INDEX TO
    FINANCIAL STATEMENTS
  Consolidated Financial
    Statements of Luminent Mortgage Capital, Inc.Managements
    Report on Internal Control Over Financial Reporting


72Reports of
    Independent Registered Public Accounting Firm


73Consolidated
    Balance Sheets as of December 31, 2006 and 2005


75Consolidated
    Statements of Operations for the years ended December 31,
    2006, 2005 and 2004


76Consolidated
    Statements of Stockholders Equity for the years ended
    December 31, 2006, 2005 and 2004


77Consolidated
    Statements of Cash Flows for the years ended December 31,
    2006, 2005 and 2004


78Notes to
    Consolidated Financial Statements


80  71




---



##### Table of Contents



MANAGEMENTS
    REPORT ON
    INTERNAL CONTROL OVER FINANCIAL REPORTING  Rule 13a-15(f) Internal Control 
    Integrated Framework
          72




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     Internal ControlIntegrated Framework
        Internal
    ControlIntegrated Framework Internal ControlIntegrated Framework
        73




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            Internal ControlIntegrated
    Framework
  DELOITTE &
    TOUCHE LLP
    74




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.

CONSOLIDATED BALANCE SHEETS  December 31,


December 31,2006


2005(in thousands, except share andper share amounts)Assets:Cash and cash equivalents

$
5,902


$
11,466Restricted cash


7,498



794Mortgage-backed securities
    available-for-sale,
    at fair value


141,556



219,148Mortgage-backed securities
    available-for-sale,
    pledged as collateral, at fair value


2,789,382



4,140,455Equity securities
    available-for-sale,
    at fair value


1,098



Loans
    held-for-investment,
    net of allowance for loan losses of $5,020 at December 31,
    2006 and zero at December 31, 2005


5,591,717



507,177Interest receivable


36,736



21,543Principal receivable


1,029



13,645Derivatives, at fair value


13,021



10,720Other assets


25,856



8,523Total assets

$
8,613,795


$
4,933,471Liabilities:Mortgage-backed notes

$
3,917,677


$
486,302Repurchase agreements


2,707,915



3,928,505Commercial paper


637,677



Warehouse lending facilities


752,777



Junior subordinated notes


92,788



92,788Margin debt






3,548Cash distributions payable


14,343



1,218Accrued interest expense


12,094



21,123Management compensation payable






939Accounts payable and other
    liabilities


6,969



2,727Total liabilities


8,142,240



4,537,150Stockholders
    Equity:Preferred stock, par value $0.001:10,000,000 shares authorized;
    no shares issued and outstanding at December 31, 2006 and
    December 31, 2005






Common stock, par value $0.001:100,000,000 shares authorized;
    47,808,510 and 40,587,245 shares issued and outstanding at
    December 31, 2006 and December 31, 2005, respectively


48



41Additional paid-in capital


583,492



511,941Accumulated other comprehensive
    income


3,842



7,076Accumulated distributions in excess
    of accumulated earnings


(115,827
)


(122,737
)Total stockholders equity


471,555



396,321Total liabilities and
    stockholders equity

$
8,613,795


$
4,933,471   See notes to the consolidated
    financial statements
 75




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS  For the Year


For the Year


For the YearEnded


Ended


EndedDecember 31,


December 31,


December 31,2006


2005


2004(in thousands, except share and per share amounts)Revenues:Interest income:Mortgage loan and securitization
    portfolio

$
220,990


$
6,740


$
Spread portfolio


94,738



167,073



123,754Credit sensitive bond portfolio


41,409



7,608



Total interest income


357,137



181,421



123,754Interest expense


268,618



137,501



55,116Net interest income


88,519



43,920



68,638Other Income
    (Expense):Realized and unrealized gains
    (losses) on derivative instruments, net


7,736



(808
)


Impairment losses on
    mortgage-backed securities


(7,010
)


(112,008
)


Gains (losses) on sales of
    mortgage-backed securities, net


993



(69
)


Other income (expense)


(829
)






1,070Total other income (expense)


890



(112,885
)


1,070Expenses:Management compensation expense to
    related party


6,921



4,193



4,066Incentive compensation expense to
    related parties


791



1,250



4,915Salaries and benefits


9,470



2,998



593Servicing expense


11,951



434



Provision for loan losses


5,176







Due diligence expense


876



68



Professional services


3,133



2,225



1,348Board of directors expense


399



473



249Insurance expense


611



556



631Custody expense


444



415



383Other general and administrative
    expenses


2,671



1,318



411Total expenses


42,443



13,930



12,596Income (loss) before income taxes


46,966



(82,895
)


57,112Income tax expense


169



96



Net income (loss)

$
46,797


$
(82,991
)

$
57,112Net income (loss) per
    share  basic

$
1.15


$
(2.13
)

$
1.68Net income (loss) per
    share  diluted

$
1.14


$
(2.13
)

$
1.68Weighted-average number of shares
    outstanding  basic


40,788,778



39,007,953



33,895,967Weighted-average number of shares
    outstanding  diluted


41,003,620



39,007,953



33,947,414Dividends declared per common share

$
0.925


$
0.77


$
1.71   See notes to the consolidated
    financial statements
 76




---



##### Table of Contents



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


DistributionsCommon Stock


Additional


Other


in Excess ofPar


Paid-in


Comprehensive


Accumulated


ComprehensiveShares


Value


Capital


Income/(Loss)


Earnings


Income/(Loss)


Total(in thousands)Balance, December 31, 2003


24,814


$
25


$
317,339


$
(26,510
)

$
(8,358
)





$
282,496Net income


















57,112


$
57,112



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














(42,944
)






(42,944
)


(42,944
)Derivative contracts, fair value
    adjustment














6,676







6,676



6,676Futures contracts, net realized
    gains














1,410







1,410



1,410Comprehensive income





















$
22,254Distributions to stockholders


















(58,170
)






(58,170
)Issuances of common stock


12,299



12



158,906















158,918Amortization of stock options










5















5Balance, December 31, 2004


37,113



37



476,250



(61,368
)


(9,416
)






405,503Net loss


















(82,991
)

$
(82,991
)


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














64,977







64,977



64,977Derivative contracts, fair value
    adjustment














2,402







2,402



2,402Futures contracts, net realized
    gains














1,065







1,065



1,065Comprehensive loss





















$
(14,547
)Distributions to stockholders


















(30,330
)






(30,330
)Issuances of common stock


4,149



4



39,095















39,099Repurchases of common stock


(675
)






(5,000
)














(5,000
)Amortization of stock options










2















2Amortization of restricted stock










1,594















1,594Balance, December 31, 2005


40,587



41



511,941



7,076



(122,737
)






396,321Net income


















46,797


$
46,797



46,797Securities
    available-for-sale,
    fair value adjustment














4,380







4,380



4,380Amortization of derivative gains














(7,614
)






(7,614
)


(7,614
)Comprehensive income





















$
43,563Distributions to stockholders


















(39,887
)






(39,887
)Issuances of common stock


9,141



9



84,405















84,414Repurchases of common stock


(1,919
)


(2
)


(15,830
)














(15,832
)Amortization of restricted common
    stock










2,976















2,976Balance, December 31, 2006


47,809


$
48


$
583,492


$
3,842


$
(115,827
)





$
471,555   See notes to the consolidated
    financial statements
 77




---



##### Table of Contents



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


For the Year


For the YearEnded


Ended


EndedDecember 31,


December 31,


December 31,2006


2005


2004(in thousands)Cash flows from operating
    activities:Net income (loss)

$
46,797


$
(82,991
)

$
57,112Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating activities:Amortization of premium/discount on
    loans
    held-for-investment
    and mortgage-backed securities
    available-for-sale


671



27,066



28,496Impairment losses on
    mortgage-backed securities


7,010



112,008



Provision for loan losses


5,176







Negative amortization of loans
    held-for-investment


(71,236
)






Share-based compensation


2,976



2



5Realized and unrealized (gains)
    losses on derivative instruments, net


(9,664
)


1,906



(308
)Net (gains) loss on sales of
    mortgage-backed securities
    available-for-sale


(993
)


69



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


(25,735
)


4,448



(1,611
)Increase in other assets


(3,418
)


(3,079
)


(2,794
)Increase (decrease) in accounts
    payable and accrued expenses


3,688



1,001



(811
)Increase (decrease) in accrued
    interest expense


(9,029
)


3,790



13,556Increase (decrease) in management
    compensation payable, incentive compensation payable and other
    related party liabilities


(939
)


214



5,482Net cash provided by (used in)
    operating activities


(54,696
)


64,434



99,127Cash flows from investing
    activities:Purchases of mortgage-backed
    securities
    available-for-sale


(2,735,103
)


(1,310,133
)


(4,040,790
)Proceeds from sales of
    mortgage-backed securities
    available-for-sale


3,755,557



136,549



Principal payments of
    mortgage-backed securities
    available-for-sale


434,321



1,560,480



1,126,194Purchases of loans
    held-for-investment,
    net


(5,543,538
)


(532,508
)


Principal payments of loans
    held-for-investment


519,247



23,854



Purchase of derivative instruments


(9,560
)


(1,975
)


Proceeds from derivative instruments


5,536







Net change in restricted cash


(6,704
)


(794
)


Net cash used in investing
    activities


(3,580,244
)


(124,527
)


(2,914,596
)Cash flows from financing
    activities:Net proceeds from issuance of
    common stock


84,414



38,909



157,508Repurchases of common stock


(15,832
)


(4,114
)


Capitalized financing costs


(10,966
)






Borrowings under repurchase
    agreements


39,099,107



19,419,024



29,460,116Principal payments on repurchase
    agreements


(40,319,697
)


(19,926,975
)


(26,752,633
)Borrowings under warehouse lending
    facilities


5,340,240



473,285



Paydown of warehouse lending
    facilities


(4,587,463
)


(473,285
)


Borrowings under commercial paper
    facility


2,123,904







Paydown of commercial paper facility


(1,486,227
)






Distributions to stockholders


(26,762
)


(45,071
)


(47,478
)Borrowings under note payable










439Repayment of note payable










(531
)Borrowings under junior
    subordinated notes






89,968



Proceeds from issuance of
    mortgage-backed notes


3,827,489



498,589



Principal payments on
    mortgage-backed notes


(395,283
)


(13,965
)


Borrowings under margin debt






3,548



2,278Principal payments on margin debt


(3,548
)






(2,278
)Net realized gains on Eurodollar
    futures contracts






1,065



1,410Net cash provided by financing
    activities


3,629,376



60,978



2,818,831Net increase (decrease) in cash
    and cash equivalents


(5,564
)


885



3,362Cash and cash equivalents,
    beginning of the period


11,466



10,581



7,219Cash and cash equivalents, end
    of the period

$
5,902


$
11,466


$
10,581   See notes to the consolidated
    financial statements
 78




---



##### Table of Contents



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


For the Year


For the YearEnded


Ended


EndedDecember 31,


December 31,


December 31,2006


2005


2004(in thousands)Supplemental disclosure of cash
    flow information:Interest paid

$
276,216


$
142,825


$
42,760Taxes paid


1,036







Non-cash investing and financing
    activities:(Increase) decrease in principal
    receivable

$
12,616


$
(219
)

$
(11,113
)Increase (decrease) in cash
    distributions payable to stockholders


13,125



(14,741
)


10,692Transfer of loans
    held-for-investment
    to real estate owned


3,602







Decrease in unsettled security
    purchases










(156,127
)Incentive compensation payable
    settled through issuance of restricted common stock






1,884



3,617Deferred compensation reclassified
    to stockholders equity upon issuance of restricted common
    stock






(159
)


(2,207
)Accounts payable and accrued
    expenses settled through issuance of restricted common stock






55



Unsettled repurchases of common
    stock






(886
)


   See notes to the consolidated
    financial statements
 79




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1ORGANIZATION
      Disclosures about segments of an
    Enterprise and Related Information.
    NOTE 2ACCOUNTING
    POLICIES
  Basis
    of Presentation
    Consolidation
    of Variable Interest Entities.
  Cash
    and Cash Equivalents
    Restricted
    Cash
   80




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
   Securities
  available-for-sale held-to-maturity. available-for-sale. available-for-sale other-than-temporarily other-than-temporary
  Accounting for Nonrefundable Fees and Costs Associated with
    Originating or Acquiring Loans and Initial Direct Costs of
    Leases.
    Purchased
    Beneficial Interests
  99-20, Recognition of Interest Income and Impairment on Purchased
    and Retained Beneficial Interests in Securitized Financial
    Assets. available-for-sale.
    Loans
    Held-for-Investment
  held-for-investment
 81




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
  held-for-investment
    Allowance
    and Provision for Loan Losses
      60-day
    Securitizations
   82




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
  Accounting
    for Transfers and Servicing of Financial Assets and
    Extinguishments of Liabilities
  Borrowings
  held-for-investment
  Investment
    in Subsidiary Trust and Junior Subordinated Notes
        Share-based
    Compensation
  Share-Based Payment.
  Derivative
    Financial Instruments
  Accounting for Derivative Instruments and Hedging
    Activities
 83




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
   Real
    Estate Owned
    Premiums
    and Discounts on Mortgage-Backed Notes Issued
    Income
    Taxes
          Incentive
    Compensation
   84




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
   EITF 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services.
  EITF 96-18, EITF 96-18, 30-day EITF 96-18,
  Net
    Income Per Share
    Use of
    Estimates
  held-for-investment,
  Recent
    Accounting Pronouncements
   85




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
  available-for-sale.
      available-for-sale
  Accounting for Certain Hybrid Financial
    Instruments  an Amendment of FASB Statements
    No. 133 and 140. instrument-by-instrument ,
    Embedded Derivatives: Application of Paragraph 13(b) to
    Securitized Interests in Prepayable Financial Assets
    (B40).
 86




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
   Accounting for Uncertainty in Income Taxes. Accounting for Income
    Taxes.
  Fair Value Measurements
  Financial Statements 
    Considering the Effect of Prior Year Misstatements
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities.
  NOTE 3AVAILABLE-FOR-SALE
    SECURITIES
  Mortgage-backed
    securities
  available-for-sale
  December 31,


December 31,2006


2005Amortized cost

$
2,930,878


$
4,363,923Unrealized gains


7,549



8,357Unrealized losses


(7,489
)


(12,677
)Fair value

$
2,930,938


$
4,359,603      87




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
     Weighted-AverageWeighted-Average Life

Fair Value


Amortized Cost


CouponLess than one year

$
235,186


$
234,932



5.52
%Greater than one year and less than
    five years


2,612,020



2,608,627



5.89Greater than five years


83,732



87,319



6.46Total

$
2,930,938


$
2,930,878



5.88
%     Weighted-AverageWeighted-Average Life

Fair Value


Amortized Cost


CouponLess than one year

$
690,568


$
690,539



4.51
%Greater than one year and less than
    five years


3,489,302



3,489,179



4.35Greater than five years


179,733



184,205



6.15Total

$
4,359,603


$
4,363,923



4.46
%           Less than 12 Months


12 Months or More


TotalGross





Gross





GrossFair


Unrealized


Fair


Unrealized


Fair


UnrealizedValue


Losses


Value


Losses


Value


LossesAgency-backed mortgage-backed
    securities

$
8,850


$
(66
)

$



$



$
8,850


$
(66
)Non-agency-backed mortgage-backed
    securities


971,034



(3,058
)


138,210



(4,365
)


1,109,244



(7,423
)Total temporarily impaired
    mortgage-backed securities

$
979,884


$
(3,124
)

$
138,210


$
(4,365
)

$
1,118,094


$
(7,489
)  88




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
    Less than 12 Months


12 Months or More


TotalGross





Gross





GrossFair


Unrealized


Fair


Unrealized


Fair


UnrealizedValue


Losses


Value


Losses


Value


LossesAgency-backed mortgage-backed
    securities

$



$



$



$



$



$
Non-agency-backed mortgage-backed
    securities


172,646



(12,677
)










172,646



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

$
172,646


$
(12,677
)

$



$



$
172,646


$
(12,677
)         other-than-temporary
  other-than-temporarily
  EITF 99-20. EITF 99-20, other-than-temporary other-than-temporary
 89




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
  other-than-temporary EITF 99-20.
  available-for-sale other-than-temporarily
  Equity
    securities
  available-for-sale
  December 31,2006Amortized cost

$
1,050
(1)Unrealized gains


48Fair value

$
1,098     (1)
    Prior to December 31, 2006,
    this security was a restricted investment recorded in other
    assets.  NOTE 4LOANS
    HELD-FOR-INVESTMENT
  held-for-investment
  December 31,


December 31,2006


2005Principal

$
5,472,325


$
506,498Unamortized premium


124,412



679Amortized cost


5,596,737



507,177Allowance for loan losses


(5,020
)


Total residential loans, net of
    allowance for loan losses

$
5,591,717


$
507,177    90




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
   held-for-investment
  For the Year


For the YearEnded


EndedDecember 31,


December 31,2006


2005Balance, beginning of period

$
507,177


$
Additions during the period:Loan purchases, net


5,545,103



531,086Negative amortization


71,236



5,616,339



531,086Deductions during the period:Collections of principal


519,247



23,854Transfers to real estate owned


3,602



Amortization of premium


3,930



55526,779



23,909Balance, end of period

$
5,596,737


$
507,177     For the YearEndedDecember 31,2006Balance, beginning of period

$
Provision for loan losses


5,176Charge-offs


(156
)Balance, end of period

$
5,020    91




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
  held-for-investment
  Principal


Delinquent





Number ofWeighted-


Weighted-





Amount of


Loans as a





DelinquentAverage


Average


Carrying


Loans


Percentage


Number of


Loans as aNumber


Interest


Maturity


Amount of


Delinquent


of Total


Delinquent


Percentage ofDescription

Loan Balance


of Loans


Rate


Date


Mortgages


> 90 Days


Principal


Loans


Total LoansFloating Rate

$
0 -  250



2,802



8.12
%


2046


$
498,180


$
1,976



0.04
%


10



0.07
%251 -  500



4,752



8.07



2046



1,775,980



7,825



0.14



22



0.16501 -  750



1,990



7.98



2046



1,177,712



4,520



0.08



8



0.06751 - 1,000



355



7.86



2046



302,649



995



0.02



1



0.01over  1,000



265



7.83



2046



334,494



5,514



0.10



4



0.0310,164











4,089,015



20,830



0.38



45



0.33Hybrid

$
0 -  250



1,452



6.68



2036



242,512



605



0.01



5



0.04251 -  500



1,570



6.49



2036



591,917



7,114



0.13



18



0.13501 -  750



548



6.51



2036



328,982



1,670



0.03



4



0.03751 - 1,000



152



6.67



2036



135,481



2,657



0.05



2



0.01over  1,000



56



6.75



2036



84,418



1,007



0.02



1



nm3,778











1,383,310



13,053



0.24



30



0.21Unamortized Premium


















124,41213,942



7.65
%





$
5,596,737


$
33,883



0.62
%


75



0.54
%     nm = not meaningful
  held-for-investment
  Principal


Delinquent





Number ofWeighted-


Weighted-





Amount of


Loans as a





DelinquentAverage


Average


Carrying


Loans


Percentage


Number of


Loans as aNumber


Interest


Maturity


Amount of


Delinquent


of Total


Delinquent


Percentage ofDescription

Loan Balance


of Loans


Rate


Date


Mortgages


> 90 Days


Principal


Loans


Total LoansHybrid

$
0-250



264



6.04
%


2035


$
41,056


$





%







%251-500



559



6.05



2035



223,186















501-750



248



6.11



2035



145,710















751-1,000



66



6.22



2035



59,213















over 1,000



26



6.07



2035



37,333















1,163











506,498















Unamortized Premium


















6791,163



6.09
%





$
507,177


$





%







%  92




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
  held-for-investment
  December 31, 2006Number of


CarryingState or Territory

Loans


AmountCA


6,626


$
3,138,575FL


1,507



470,360AZ


722



225,893VA


516



201,714NV


554



186,763WA


463



146,142MD


337



118,116NJ


302



109,255IL


351



102,664CO


311



92,484NY


179



87,681MA


155



63,130Other states, individually less
    than 1% of aggregate current balance


1,919



529,548Unamortized Premium






124,412Allowance for Loan Losses






(5,020
)Total


13,942


$
5,591,717     NOTE 5BORROWINGS
  held-for-investment
 93




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
     December 31, 2006


December 31, 2005Weighted-








Weighted-Borrowings


Average


Fair Value of


Borrowings


Average


Fair Value ofOutstanding(1)


Interest Rate


Collateral(2)


Outstanding(1)


Interest Rate


Collateral(2)Repurchase agreements

$
2,707,915



5.45
%

$
2,909,895


$
3,928,505



4.25
%

$
4,157,117LUM
    2005-1


368,203



5.63



368,891



486,302



4.66



486,304LUM
    2006-1


495,453



5.64



496,176











LUM
    2006-2


668,049



5.58



668,303











LUM
    2006-3


588,999



5.69



591,802











LUM
    2006-4


324,819



5.55



324,819











LUM
    2006-6


712,959



5.58



712,959











LUM
    2006-7


756,450



5.55



756,404











Margin debt














3,548



3.85



3,548Commercial paper facility


637,677



5.36



643,823











Warehouse lending facilities


752,777



5.80



794,420











Junior subordinated notes


92,788



8.58



none



92,788



8.18



noneTotal

$
8,104,089



5.58
%

$
8,267,492


$
4,511,143



4.37
%

$
4,646,969     (1)
    
    Outstanding balances for
    mortgage-backed notes exclude $2.7 million in unamortized
    premium for the year ended December 31, 2006. There was no
    unamortized premium excluded from the outstanding balances of
    mortgage-backed notes for the year ended December 31, 2005.(2)
    
    Collateral for borrowings consist
    of mortgage-backed securities
    available-for-sale
    and loans
    held-for-investment.  Repurchase
    Agreements
      Overnight 1 day or less

$
Between 2 and 30 days


2,070,939Between 31 and 90 days


201,976Between 91 days and
    636 days


435,000Total

$
2,707,915  94




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
    Overnight 1 day or less

$
Between 2 and 30 days


1,917,214Between 31 and 90 days


929,023Between 91 and 237 days


1,082,268Total

$
3,928,505     Weighted-AverageDays toMaturity ofAmount at


RepurchaseRepurchase Agreement Counterparties

Risk(1)


AgreementsBarclays Capital

$
17,437



483Bear Stearns & Co.


61,884



16Cantor Fitzgerald


16,287



15Citigroup


2,517



29Countrywide Securities Corporation


19,056



19Credit Suisse First Boston


2,733



5Deutsche Bank Securities Inc.


1,155



10Greenwich Capital Markets Inc.


40,267



13HSBC Securities


7,002



19Merrill Lynch Government Securities
    Inc./Merrill Lynch Pierce, Fenner & Smith Inc.


7,530



5Nomura Security International,
    Inc.


2,171



25UBS Securities LLC


3,423



16Washington Mutual


18,321



21Total

$
199,783



108     (1)
    
    Equal to the sum of fair value of
    securities sold plus accrued interest income and the fair market
    value of loans pledged as collateral minus the sum of repurchase
    agreement liabilities plus accrued interest expense. 95




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
     Weighted-AverageDays toMaturity ofAmount at


RepurchaseRepurchase Agreement Counterparties

Risk(1)


AgreementsBanc of America Securities LLC

$
6,992



153Barclays Capital


3,656



27Bear Stearns & Co.


63,412



46Citigroup


8,367



172Countrywide Securities Corporation


9,618



129Credit Suisse First Boston


3,293



17Deutsche Bank Securities Inc.


28,326



63Goldman Sachs & Co.


17,421



28Greenwich Capital Markets Inc.


7,618



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


24,018



78Morgan Stanley & Co.
    Inc.


5,922



21Nomura Security International,
    Inc.


16,682



86UBS Securities LLC


22,331



170Wachovia Securities, LLC


3,950



19Washington Mutual


3,478



27Total

$
225,084



76     (1)
    
    Equal to the sum of fair value of
    securities sold plus accrued interest income and the fair market
    value of loans pledged as collateral minus the sum of repurchase
    agreement liabilities plus accrued interest expense.  Mortgage-backed
    Notes
     96




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
   Commercial
    Paper Facility
    Warehouse
    Lending Facilities
  Mortgage Loan Financing.
    Asset-backed Securities Financing.
      Weighted-Borrowing


Borrowings


AverageCounterparty

Capacity


Outstanding


Interest RateMortgage loan
    financingGreenwich Capital Financial
    Products, Inc.

$
1,000.0


$
455.2



5.80
%Barclays Bank plc


1,000.0



290.1



5.78Bear Stearns Mortgage Capital
    Corp.


500.0



7.5



5.77Asset-backed securities
    financingGreenwich Capital Financial
    Products, Inc.


500.0







Total

$
3,000.0


$
752.8



5.80
%  97




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
    Junior
    Subordinated Notes
  30-year
  December 31, 2006


December 31, 2005Borrowings


Interest


Borrowings


InterestOutstanding


Rate


Outstanding


RateJunior subordinated notes:DST I

$
51,550



8.16
%

$
51,550



8.16
%DST II


41,238



9.11



41,238



8.21Total

$
92,788



8.58
%

$
92,788



8.18
%     Margin
    Lending Facility
    Capitalized
    Financing Costs
   98




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
    NOTE 6CAPITAL
    STOCK AND EARNINGS PER SHARE
    Form S-3 and/or and/or at-the-market
  Form S-3 and/or
  Rule 10b-18
   99




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
     For the Year Ended


For the Year Ended


For the Year EndedDecember 31, 2006


December 31, 2005


December 31, 2004Basic


Diluted


Basic


Diluted


Basic


DilutedNet income (loss)

$
46,797


$
46,797


$
(82,991
)

$
(82,991
)

$
57,112


$
57,112Weighted-average number of common
    shares outstanding


40,788,778



40,788,778



39,007,953



39,007,953



33,895,967



33,895,967Additional shares due to:Assumed conversion of dilutive
    common stock options and vesting of unvested restricted common
    stock






214,842








(1)






51,447Adjusted weighted-average number of
    common shares outstanding


40,788,778



41,003,620



39,007,953



39,007,953



33,895,967



33,947,414Net income (loss) per share

$
1.15


$
1.14


$
(2.13
)

$
(2.13
)

$
1.68


$
1.68     (1)
    
    Conversion of common stock options
    and unvested restricted common stock is considered anti-dilutive.  NOTE 72003
    STOCK INCENTIVE PLANS
      2003 Outside2003 Stock


Advisors StockIncentive Plan


Incentive Plan


TotalShares reserved for issuance


1,850,000



150,000



2,000,000Granted


781,166







781,166Forfeited










Expired










Total available for grant


1,068,834



150,000



1,218,834  100




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
    Weighted-AverageNumber of


ExerciseOptions


PriceOutstanding, beginning of period


55,000


$
14.82Granted






Exercised






Forfeited






Outstanding, end of period


55,000


$
14.82     Outstanding


ExercisableWeighted-








Weighted-Average








AverageRemaining


Weighted-





Remaining


Weighted-Range of Exercise

Number of


Life


Average


Number of


Life


AveragePrices

Options


(in years)


Exercise Price


Options


(in years)


Exercise Price$13.00-$14.00


5,000



6.8


$
13.00



5,000



6.8


$
13.00$14.01-$15.00


50,000



6.6



15.00



50,000



6.6



15.00$13.00-$15.00


55,000






$
14.82



55,000






$
14.82       Weighted-AverageNumber of


Grant-DateOptions


Fair ValueNonvested, beginning of the period


18,333


$
0.22Granted






Vested


(18,333
)


0.22Forfeited






Nonvested, end of the period





$
    101




---



##### Table of Contents



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


Weighted-AverageCommon Shares


Issue PriceOutstanding, beginning of period


202,829


$
10.53Issued


518,500



8.58Repurchased






Outstanding, end of period


721,329


$
9.13       Weighted-AverageNumber of


Grant-Date FairCommon Shares


ValueNonvested, beginning of the period


194,453


$
10.46Granted


518,500



8.58Vested


(157,028
)


8.71Repurchased






Nonvested, end of the period


555,923


$
9.20       NOTE 8THE
    MANAGEMENT AGREEMENT
       102




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
        NOTE 9RELATED
    PARTY TRANSACTIONS
    NOTE 10FAIR
    VALUE OF FINANCIAL INSTRUMENTS
  Disclosure About Fair Value of
    Financial Instruments available-for-sale, available-for-sale held-for-investment held-for-investment
 103




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
   NOTE 11ACCUMULATED
    OTHER COMPREHENSIVE INCOME
    December 31,


December 31,2006


2005Unrealized holding losses on
    mortgage-backed securities
    available-for-sale

$
(5,957
)

$
(116,397
)Reclassification adjustment for net
    (gains) losses on mortgage-backed securities
    available-for-sale
    included in net income


(993
)


69Impairment losses on
    mortgage-backed securities


7,010



112,008Net unrealized gains (losses) on
    mortgage-backed securities
    available-for-sale


60



(4,320
)Net deferred realized and
    unrealized gains on cash flow hedges


3,734



11,396Net unrealized gains on equity
    securities


48



Accumulated other comprehensive
    income

$
3,842


$
7,076   NOTE 12CREDIT
    RISK AND INTEREST RATE RISK
      loan-to-value
  loan-to-value
 104




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
   NOTE 13DERIVATIVE
    INSTRUMENTS AND HEDGING ACTIVITIES
      2006


2005Estimated


EstimatedFair Value


Fair ValueEurodollar futures contracts sold
    short

$
149


$
4,895Interest rate swap contracts


4,383



4,220Swaption contracts






1,531Interest rate cap contracts


1,531



74Credit default swaps


6,958



   Free
    Standing Derivatives
          Cash
    Flow Hedging Strategies
   105




---



##### Table of Contents



LUMINENT
    MORTGAGE CAPITAL, INC.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    (CONTINUED)
           Purchase
    Commitment Derivatives
    NOTE 14SUMMARY
    OF QUARTERLY INFORMATION (UNAUDITED)
    For the


For the


For the


For theQuarter


Quarter


Quarter


QuarterEnded


Ended


Ended


EndedMarch 31,


June 30,


September 30,


December 31,2006


2006


2006


2006Interest income

$
61,592


$
74,910


$
95,098


$
125,537Interest expense


45,971



53,513



73,149



95,985Net interest income


15,621



21,397



21,949



29,552Other income (expenses)


8,462



5,350



(11,522
)


(1,400
)Expenses


6,293



8,542



16,617



10,991Income tax expense (benefit)


11



641



405



(888
)Net income (loss)

$
17,779


$
17,564


$
(6,595
)

$
18,049Net income (loss) per
    share  basic

$
0.45


$
0.45


$
(0.17
)

$
0.39Net income (loss) per
    share  diluted

$
0.45


$
0.45


$
(0.17
)

$
0.39Weighted-average shares
    outstanding  basic


39,491,786



38,609,963



38,695,800



46,282,380Weighted-average shares
    outstanding  diluted


39,718,552



38,834,435



38,695,800



46,519,251Dividends declared per common share

$
0.05


$
0.20


$
0.30


$
0.375  106




---



##### Table of Contents



For the


For the


For the


For theQuarter


Quarter


Quarter


QuarterEnded


Ended


Ended


EndedMarch 31,


June 30,


September 30,


December 31,2005


2005


2005


2005Interest income

$
42,515


$
42,463


$
46,346


$
50,097Interest expense


20,539



32,098



38,241



46,623Net interest income


21,976



10,365



8,105



3,474Other income (expenses)






(899
)


519



(112,505
)Expenses


3,007



3,292



3,395



4,236Income tax expense














96Net income (loss)

$
18,969


$
6,174


$
5,229


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

$
0.51


$
0.16


$
0.13


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

$
0.51


$
0.16


$
0.13


$
(2.79
)Weighted-average shares
    outstanding  basic


37,207,135



38,176,274



40,021,698



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


37,376,107



38,351,238



40,226,523



40,578,516Dividends declared per common share

$
0.36


$
0.27


$
0.11


$
0.03   NOTE 15SUBSEQUENT
    EVENTS
  Trust 2007-1.
 107




---



##### Table of Contents



ITEM 9.  CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE   ITEM 9A.  CONTROLS
    AND PROCEDURES  Disclosure
    Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
  Internal
    Control Over Financial Reporting
  Form 10-K. Form 10-K
  Changes
    in Internal Control Over Financial Reporting
  Rule 13a-15(f)
 ITEM 9B.  OTHER
    INFORMATION  Form 10-K
 PART III ITEM 10.  DIRECTORS
    AND EXECUTIVE OFFICERS OF THE REGISTRANT  Form 10-K, Regulation 14-A.
 ITEM 11.  EXECUTIVE
    COMPENSATION  Form 10-K, Regulation 14-A.
 108




---



##### Table of Contents



ITEM 12.  SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS  Form 10-K, Regulation 14-A.
 ITEM 13.  CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS  Form 10-K, Regulation 14-A.
 ITEM 14.  PRINCIPAL
    ACCOUNTANT FEES AND SERVICES  Form 10-K, Regulation 14-A.
 109




---



##### Table of Contents



PART IV ITEM 15.  EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES  (a)1. and
    (a)2. Documents filed as part of this report:
    Form 10-K.
  (a)3.
    Exhibits
  Form 10-K.
 110




---



##### Table of Contents



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

Title

Date/s/
    GAIL P.
    SENECAGail
    P. Seneca

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

March 16, 2007/s/
    CHRISTOPHER J.
    ZYDAChristopher
    J. Zyda

Chief Financial Officer (Principal
    Financial and Accounting Officer)

March 16, 2007/s/
    S. TREZEVANT MOORE,
    JR.S.
    Trezevant Moore, Jr.

President and Chief Operating
    Officer, Director

March 16, 2007/s/
    BRUCE A.
    MILLERBruce
    A. Miller

Director

March 16, 2007/s/
    LEONARD A.
    AUERBACHLeonard
    A. Auerbach

Director

March 16, 2007/s/
    ROBERT B.
    GOLDSTEINRobert
    B. Goldstein

Director

March 16, 2007/s/
    DONALD H.
    PUTNAMDonald
    H. Putnam

Director

March 16, 2007/s/
    FRANK L.
    RAITERFrank
    L. Raiter

Director

March 16, 2007/s/
    JOSEPH E.
    WHITTERSJoseph
    E. Whitters

Director

March 16, 2007  111




---



##### Table of Contents



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

Description3
.1

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

Third Amended and Restated
    Bylaws(9)4
.1

Form of Common Stock Certificate(1)4
.2

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

2003 Stock Incentive Plan, as
    amended(10)10
.2

Form of Incentive Stock Option
    under the 2003 Stock Incentive Plan(1)10
.3

Form of Non Qualified Stock Option
    under the 2003 Stock Incentive Plan(1)10
.4

2003 Outside Advisors Stock
    Incentive Plan, as amended(10)10
.5

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

Form of Indemnity Agreement(1)10
.7

Employment Agreement dated
    December 20, 2005, between the Registrant and Gail P.
    Seneca(12)10
.8

Employment Agreement dated
    December 20, 2005, between the Registrant and S. Trezevant
    Moore, Jr.(12)10
.9

Employment Agreement dated as of
    December 20, 2005, by and between the Registrant and
    Christopher J. Zyda(12)10
.10

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

Controlled Equity Offering Sales
    Agreement dated February 7, 2005, between the Registrant
    and Cantor Fitzgerald & Co.(6)10
.12

Direct Stock Purchase and Dividend
    Reinvestment Plan dated June 29, 2005(11)10
.13

Underwriting Agreement dated
    October 12, 2006, between the Registrant and UBS Securities
    LLC,(13)14
.1

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

Corporate Governance Guidelines(5)23
.1*

Consent of Deloitte &
    Touche LLP31
.1*

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

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

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

Certification of Christopher J.
    Zyda, Chief Financial Officer of the Registrant, pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002     (1)
    
    Incorporated by reference to our Registration Statement on
    Form S-11
    (Registration
    No. 333-107984)
    which became effective under the Securities Act of 1933, as
    amended, on December 18, 2003.(2)
    
    Incorporated by reference to our
    Form 8-K
    filed on December 23, 2003.(3)
    
    Incorporated by reference to our Registration Statement on
    Form S-11
    (Registration
    No. 333-107981)
    which became effective under the Securities Act of 1933, as
    amended, on February 13, 2004.(4)
    
    Incorporated by reference to our
    Form 10-Q
    for the quarter ended June 30, 2004. 112




---



##### Table of Contents



(5)
    
    Incorporated by reference to our Registration Statement on
    Form S-11
    (Registration
    No. 333-113493)
    which became effective under the Securities act of 1933, as
    amended, on March 30, 2004.(6)
    
    Incorporated by reference to our
    Form 8-K
    filed on February 8, 2005.(7)
    
    Incorporated by reference to our
    Form 8-K
    filed on April 1, 2005.(8)
    
    Incorporated by reference to our
    Form 8-K
    filed on March 14, 2005.(9)
    
    Incorporated by reference to our
    Form 8-K
    filed on August 9, 2005.(10)
    
    Incorporated by reference to our
    Form 10-Q
    for the quarter ended June 30, 2005.(11)
    
    Incorporated by reference to our Registration Statement on
    Form S-3
    (Registration
    No. 333-125479)
    which became effective under the Securities Act of 1933, as
    amended, on June 28, 2005.(12)
    
    Incorporated by reference to our
    Form 10-K
    filed on March 9, 2006.(13)
    
    Incorporated by reference to our
    Form 8-K
    filed on October 17, 2006.*
    
    Filed herewith.
    
    Denotes a management contract or compensatory plan. 113