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UNITEDSTATES SECURITIES AND EXCHANGECOMMISSION

Washington, D.C. 20549

FORM10-Q

|        |                                                                                        |
|--------|----------------------------------------------------------------------------------------|
|   | QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |

For the quarterlyperiod ended: June  30,2006

OR

|        |                                                                                         |
|--------|-----------------------------------------------------------------------------------------|
|   | TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |

Forthe transition period from                     to    

Commission FileNumber: 001-32213

MORTGAGEIT HOLDINGS,INC.

(Exact name of registrant as specified in itscharter)

|                                                             |  |  |                                    |
|-------------------------------------------------------------|--|--|------------------------------------|
| Maryland                                                    |  |  | 20-0947002                         |
| (Stateor other jurisdiction ofincorporation ororganization) |  |  | (IRS EmployerIdentificationNumber) |
| 33 Maiden LaneNew York, NewYork                             |  |  | 10038                              |
| (Addressof principal executive offices)                     |  |  | (ZipCode)                          |
|                                                             |

Registrant's telephonenumber, including area code: (212) 651-7700

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

Yes     No

Indicate by check mark whether the Registrant isa large accelerated filer, an accelerated filer, or a non-acceleratedfiler. See definition of ‘‘accelerated and largeaccelerated filer’’ in Rule 12b-2 of the Exchange Act.(Check one):

Large accelerated filer            Accelerated filer            Non-accelerated filer

Indicate by check mark whether the Registrant isa shell company (as defined in Rule 12b-2 of the ExchangeAct).

Yes     No 

Indicatethe number of shares outstanding of each of the issuer's classesof common stock, as of the latest practicable date:

COMMONSTOCK, $0.01 PAR VALUE PER SHARE: 29,097,057 SHARES OUTSTANDING AS OFJULY 31, 2006.

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TABLE OFCONTENTS

|                           |  |  |                                                                                     |  |   |      |  |        |  |
|---------------------------|--|--|-------------------------------------------------------------------------------------|--|---|------|--|--------|--|
|                      |  |  |                                                                                |  |   | PAGE |
| Forward-LookingStatements |  |  |                                                                                     |  | 3 |      |
| PartI                     |  |  | FinancialInformation                                                                |  |   |      |  | 4      |  |
| Item1.                    |  |  | FinancialStatements                                                                 |  |   |      |  | 4      |  |
|                      |  |  | Consolidated BalanceSheets                                                          |  |   |      |  | 4      |  |
|                      |  |  | Consolidated Statements ofOperations (Unaudited)                                    |  |   |      |  | 5      |  |
|                      |  |  | ConsolidatedStatements of Comprehensive Income (Loss)(Unaudited)                    |  |   |      |  | 6      |  |
|                      |  |  | Consolidated Statementsof Changes in Stockholders' Equity(Unaudited)                |  |   |      |  | 7      |  |
|                      |  |  | Consolidated Statementsof Cash Flows (Unaudited)                                    |  |   |      |  | 8      |  |
|                      |  |  | Notes toConsolidated FinancialStatements                                            |  |   |      |  | 9      |  |
| Item2.                    |  |  | Management's Discussion and Analysis of FinancialCondition and Results ofOperations |  |   |      |  | 32     |  |
| Item3.                    |  |  | Quantitative and Qualitative Disclosures About MarketRisk                           |  |   |      |  | 56     |  |
| Item 4.                   |  |  | ControlsAnd Procedures                                                              |  |   |      |  | 61     |  |
| PartII.                   |  |  | OtherInformation                                                                    |  |   |      |  | 62     |  |
| Item1.                    |  |  | LegalProceedings                                                                    |  |   |      |  | 62     |  |
| Item1A.                   |  |  | Risk Factors                                                                        |  |   |      |  | 62     |  |
| Item2.                    |  |  | Unregistered Sales of Equity Securities and Use ofProceeds                          |  |   |      |  | 63     |  |
| Item3.                    |  |  | Defaults Upon SeniorSecurities                                                      |  |   |      |  | 63     |  |
| Item4.                    |  |  | Submission of Matters to a Vote of SecurityHolders                                  |  |   |      |  | 63     |  |
| Item 5.                   |  |  | OtherInformation                                                                    |  |   |      |  | 63     |  |
| Item6.                    |  |  | Signatures                                                                          |  |   |      |  | 65     |  |
|                      |  |  | Exhibits                                                                            |  |   |      |  |   |  |
|                           |

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FORWARD-LOOKINGSTATEMENTS

This quarterly report on Form 10-Q containscertain ‘‘forward-looking statements,’’which are based on management's current expectations. Suchforward-looking statements include information concerning possible orassumed future results of operations, trends, financial results andbusiness plans, including, among other things, the Company'sability to fund a fully-leveraged, self-originated loan portfolio, itsanticipated loan funding volume and its ability to pay dividends. Forthese statements, the Company claims the protection of the safe harborfor forward-looking statements contained in Section 21E of theSecurities Exchange Act of 1934, as amended. Forward-looking statementsare statements that relate to future events and are generallyidentifiable by use of forward-looking terminology such as‘‘may,’’‘‘will,’’‘‘should,’’‘‘potential,’’‘‘intend,’’‘‘expect,’’‘‘endeavor,’’‘‘seek,’’‘‘anticipate,’’‘‘estimate,’’‘‘overestimate,’’‘‘underestimate,’’‘‘believe,’’‘‘could,’’‘‘project,’’‘‘predict,’’‘‘continue’’ or other similar words orexpressions. Forward-looking statements are based on the currenteconomic environment and management's current expectations andbeliefs, and are subject to a number of trends and uncertainties thatcould cause actual results to differ materially from those described inthe forward-looking statements. Forward-looking statements areinherently subject to significant economic, competitive, and othercontingencies that are beyond the control of management. The Companycan give no assurance that its expectations will be attained. Factorsthat could cause actual results to differ materially from theCompany's expectations include, but are not limited to, itsmortgage bank subsidiary’s continued ability to originate newloans, including loans that the Company deems suitable for itssecuritization portfolio; changes in the capital markets, includingchanges in interest rates and/or credit spreads; and the risk factorsor other uncertainties described from time to time in theCompany's filings with the Securities and Exchange Commission,including the Company’s annual report on Form 10-K and thisquarterly report on Form 10-Q.

Readers are cautioned notto place undue reliance on any of these forward-looking statements,which reflect management's views as of the date of this report.Although the Company believes that the expectations reflected in theforward-looking statements are reasonable, the Company cannot guaranteefuture results, levels of activity, performance or achievements. TheCompany does not undertake, and specifically disclaims, any obligationto update or revise any of the forward-looking statements after thedate of this quarterly report on Form 10-Q, to conform theseforward-looking statements to actual results or to update the reasonswhy actual results could differ from those projected in theforward-looking statements.

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PART I.    FINANCIALINFORMATION

ITEM 1.    FINANCIALSTATEMENTS

MortgageIT Holdings, Inc. andSubsidiaries

CONSOLIDATED BALANCE SHEETS(Dollars inthousands)

|                                                                                                                                                                      |  |  |             |   |           |                  |  |  |  |   |           |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|-------------|---|-----------|------------------|--|--|--|---|-----------|---|
|                                                                                                                                                                 |  |  | June30,2006 |   |           | December 31,2005 |
|                                                                                                                                                                 |  |  | (Unaudited) |   |           |             |
| ASSETS                                                                                                                                                               |  |  |             |   |      |                  |  |  |  |   |      |   |
| Cashand cashequivalents                                                                                                                                              |  |  |             | $ | 55,928    |                  |  |  |  | $ | 36,757    |   |
| Restrictedcash                                                                                                                                                       |  |  |             |   | 2,666     |                  |  |  |  |   | 712       |   |
| Marketable securitiesheld tomaturity                                                                                                                                 |  |  |             |   | 3,677     |                  |  |  |  |   | 3,675     |   |
| PortfolioARM Loans                                                                                                                                                   |  |  |             |   |      |                  |  |  |  |   |      |   |
| ARM loanscollateralizing debt obligations,net                                                                                                                        |  |  |             |   | 4,923,027 |                  |  |  |  |   | 4,681,554 |   |
| ARMloans held for securitization,net                                                                                                                                 |  |  |             |   | —   |                  |  |  |  |   | 282       |   |
| TotalPortfolio ARMLoans                                                                                                                                              |  |  |             |   | 4,923,027 |                  |  |  |  |   | 4,681,836 |   |
| Mortgageloans held forsale                                                                                                                                           |  |  |             |   | 3,426,886 |                  |  |  |  |   | 3,378,197 |   |
| Mortgage-backedsecurities – available forsale                                                                                                                  |  |  |             |   | 22,178    |                  |  |  |  |   | 23,357    |   |
| Hedginginstruments                                                                                                                                                   |  |  |             |   | 84,390    |                  |  |  |  |   | 54,472    |   |
| Accountsreceivable, net ofallowance                                                                                                                                  |  |  |             |   | 104,753   |                  |  |  |  |   | 146,043   |   |
| Prepaidsand otherassets                                                                                                                                              |  |  |             |   | 54,485    |                  |  |  |  |   | 31,262    |   |
| Goodwill                                                                                                                                                             |  |  |             |   | 11,639    |                  |  |  |  |   | 11,639    |   |
| Propertyand equipment,net                                                                                                                                            |  |  |             |   | 15,282    |                  |  |  |  |   | 13,941    |   |
| Totalassets                                                                                                                                                          |  |  |             | $ | 8,704,911 |                  |  |  |  | $ | 8,381,891 |   |
| LIABILITIESAND STOCKHOLDERS'EQUITY                                                                                                                                   |  |  |             |   |      |                  |  |  |  |   |      |   |
| Liabilities:                                                                                                                                                         |  |  |             |   |      |                  |  |  |  |   |      |   |
| Collateralizeddebtobligations                                                                                                                                        |  |  |             | $ | 4,713,147 |                  |  |  |  | $ | 4,485,197 |   |
| Warehouselinespayable                                                                                                                                                |  |  |             |   | 3,227,072 |                  |  |  |  |   | 3,177,990 |   |
| Repurchaseagreements                                                                                                                                                 |  |  |             |   | 100,300   |                  |  |  |  |   | 87,058    |   |
| Hedginginstruments                                                                                                                                                   |  |  |             |   | 187       |                  |  |  |  |   | 8,801     |   |
| Juniorsubordinateddebentures                                                                                                                                         |  |  |             |   | 128,871   |                  |  |  |  |   | 77,324    |   |
| Notespayable and otherdebt                                                                                                                                           |  |  |             |   | 30,000    |                  |  |  |  |   | 15,000    |   |
| Accounts payable,accrued expenses and otherliabilities                                                                                                               |  |  |             |   | 136,862   |                  |  |  |  |   | 176,619   |   |
| Totalliabilities                                                                                                                                                     |  |  |             |   | 8,336,439 |                  |  |  |  |   | 8,027,989 |   |
| STOCKHOLDERS'EQUITY:                                                                                                                                                 |  |  |             |   |      |                  |  |  |  |   |      |   |
| Common stock, $.01 parvalue: 125,000,000 shares authorized; 29,189,124 issued and 29,098,724outstanding in 2006; 28,889,540 issued and 28,799,140 outstanding in2005 |  |  |             |   | 292       |                  |  |  |  |   | 289       |   |
| Treasurystock                                                                                                                                                        |  |  |             |   | (1,178    | )                |  |  |  |   | (1,178    | ) |
| Additionalpaid-in capital                                                                                                                                            |  |  |             |   | 393,551   |                  |  |  |  |   | 393,304   |   |
| Unearnedcompensation – restrictedstock                                                                                                                         |  |  |             |   | (4,097    | )                |  |  |  |   | (5,889    | ) |
| Accumulatedother comprehensive income(loss)                                                                                                                          |  |  |             |   | 40,242    |                  |  |  |  |   | 13,225    |   |
| Accumulateddeficit                                                                                                                                                   |  |  |             |   | (60,338   | )                |  |  |  |   | (45,849   | ) |
| Totalstockholders' equity                                                                                                                                            |  |  |             |   | 368,472   |                  |  |  |  |   | 353,902   |   |
| Totalliabilities and stockholders'equity                                                                                                                             |  |  |             | $ | 8,704,911 |                  |  |  |  | $ | 8,381,891 |   |
|                                                                                                                                                                      |

Theaccompanying notes are an integral part of the consolidated financialstatements.

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MortgageIT Holdings, Inc. andSubsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited) (Dollars and shares in thousands, except per sharedata)

|                                                    |  |  |                           |   |          |                         |  |  |      |   |         |      |  |  |  |   |          |   |  |  |  |   |         |   |
|----------------------------------------------------|--|--|---------------------------|---|----------|-------------------------|--|--|------|---|---------|------|--|--|--|---|----------|---|--|--|--|---|---------|---|
|                                               |  |  | Threemonthsended June 30, |   |          | Six monthsended June30, |
|                                               |  |  | 2006                      |   |          | 2005                    |  |  | 2006 |   |         | 2005 |
| Revenues:                                          |  |  |                           |   |     |                         |  |  |      |   |    |      |  |  |  |   |     |   |  |  |  |   |    |   |
| Gainon sale of mortgageloans                       |  |  |                           | $ | 68,873   |                         |  |  |      | $ | 46,985  |      |  |  |  | $ | 114,625  |   |  |  |  | $ | 79,092  |   |
| Brokeragerevenues                                  |  |  |                           |   | 5,810    |                         |  |  |      |   | 6,275   |      |  |  |  |   | 12,248   |   |  |  |  |   | 12,673  |   |
| Interestincome                                     |  |  |                           |   | 116,635  |                         |  |  |      |   | 67,900  |      |  |  |  |   | 230,543  |   |  |  |  |   | 121,652 |   |
| Interestexpense                                    |  |  |                           |   | (116,342 | )                       |  |  |      |   | (49,255 | )    |  |  |  |   | (221,323 | ) |  |  |  |   | (80,741 | ) |
| Netinterestincome                                  |  |  |                           |   | 293      |                         |  |  |      |   | 18,645  |      |  |  |  |   | 9,220    |   |  |  |  |   | 40,911  |   |
| Realizedand unrealized gain on hedginginstruments  |  |  |                           |   | 3,013    |                         |  |  |      |   | 820     |      |  |  |  |   | 3,433    |   |  |  |  |   | 9,742   |   |
| Other                                              |  |  |                           |   | 619      |                         |  |  |      |   | 243     |      |  |  |  |   | 857      |   |  |  |  |   | 506     |   |
| Totalrevenues                                      |  |  |                           |   | 78,608   |                         |  |  |      |   | 72,968  |      |  |  |  |   | 140,383  |   |  |  |  |   | 142,924 |   |
| Operatingexpenses:                                 |  |  |                           |   |     |                         |  |  |      |   |    |      |  |  |  |   |     |   |  |  |  |   |    |   |
| Compensationand employeebenefits                   |  |  |                           |   | 35,404   |                         |  |  |      |   | 32,225  |      |  |  |  |   | 72,646   |   |  |  |  |   | 60,014  |   |
| Processingexpenses                                 |  |  |                           |   | 22,868   |                         |  |  |      |   | 13,687  |      |  |  |  |   | 46,786   |   |  |  |  |   | 24,050  |   |
| Generaland administrativeexpenses                  |  |  |                           |   | 8,144    |                         |  |  |      |   | 6,187   |      |  |  |  |   | 15,724   |   |  |  |  |   | 13,005  |   |
| Rent                                               |  |  |                           |   | 3,506    |                         |  |  |      |   | 2,282   |      |  |  |  |   | 7,194    |   |  |  |  |   | 4,557   |   |
| Marketing,loan acquisition and businessdevelopment |  |  |                           |   | 1,274    |                         |  |  |      |   | 1,025   |      |  |  |  |   | 2,544    |   |  |  |  |   | 1,920   |   |
| Professionalfees                                   |  |  |                           |   | 3,845    |                         |  |  |      |   | 2,517   |      |  |  |  |   | 6,442    |   |  |  |  |   | 4,827   |   |
| Depreciationandamortization                        |  |  |                           |   | 1,642    |                         |  |  |      |   | 841     |      |  |  |  |   | 3,189    |   |  |  |  |   | 1,637   |   |
| Totaloperatingexpenses                             |  |  |                           |   | 76,683   |                         |  |  |      |   | 58,764  |      |  |  |  |   | 154,525  |   |  |  |  |   | 110,010 |   |
| Income(loss) before incometaxes                    |  |  |                           |   | 1,925    |                         |  |  |      |   | 14,204  |      |  |  |  |   | (14,142  | ) |  |  |  |   | 32,914  |   |
| Incometax (benefit) expense                        |  |  |                           |   | (3,918   | )                       |  |  |      |   | 5,784   |      |  |  |  |   | (15,258  | ) |  |  |  |   | 8,766   |   |
| Netincome                                          |  |  |                           | $ | 5,843    |                         |  |  |      | $ | 8,420   |      |  |  |  | $ | 1,116    |   |  |  |  | $ | 24,148  |   |
| Persharedata:                                      |  |  |                           |   |     |                         |  |  |      |   |    |      |  |  |  |   |     |   |  |  |  |   |    |   |
| Basic                                              |  |  |                           | $ | 0.21     |                         |  |  |      | $ | 0.43    |      |  |  |  | $ | 0.04     |   |  |  |  | $ | 1.24    |   |
| Diluted                                            |  |  |                           | $ | 0.20     |                         |  |  |      | $ | 0.42    |      |  |  |  | $ | 0.04     |   |  |  |  | $ | 1.21    |   |
| Weightedaverage number of shares – basic     |  |  |                           |   | 28,375   |                         |  |  |      |   | 19,486  |      |  |  |  |   | 28,364   |   |  |  |  |   | 19,446  |   |
| Weightedaverage number of shares – diluted   |  |  |                           |   | 28,532   |                         |  |  |      |   | 19,905  |      |  |  |  |   | 28,522   |   |  |  |  |   | 19,900  |   |
|                                                    |

Theaccompanying notes are an integral part of the consolidated financialstatements.

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MortgageIT Holdings, Inc. andSubsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(LOSS) (Unaudited) (Dollars inthousands)

|                                                                                                   |  |  |                            |   |        |                        |  |  |      |   |         |      |  |  |  |   |        |   |  |  |  |   |         |   |
|---------------------------------------------------------------------------------------------------|--|--|----------------------------|---|--------|------------------------|--|--|------|---|---------|------|--|--|--|---|--------|---|--|--|--|---|---------|---|
|                                                                                              |  |  | Threemonths ended June 30, |   |        | Six monthsended June30 |
|                                                                                              |  |  | 2006                       |   |        | 2005                   |  |  | 2006 |   |         | 2005 |
| Netincome                                                                                         |  |  |                            | $ | 5,843  |                        |  |  |      | $ | 8,420   |      |  |  |  | $ | 1,116  |   |  |  |  | $ | 24,148  |   |
| Othercomprehensiveincome:                                                                         |  |  |                            |   |   |                        |  |  |      |   |    |      |  |  |  |   |   |   |  |  |  |   |    |   |
| Realizedand unrealized gain (loss) on hedging instruments arising during theperiod                |  |  |                            |   | 16,170 |                        |  |  |      |   | (25,691 | )    |  |  |  |   | 32,056 |   |  |  |  |   | (11,246 | ) |
| Unrealized(loss) gain on mortgage-backed securities – availablefor sale, net ofamortization |  |  |                            |   | (82    | )                      |  |  |      |   | — |      |  |  |  |   | 684    |   |  |  |  |   | — |   |
| Reclassificationof (gain) loss included in net income                                             |  |  |                            |   | (4,578 | )                      |  |  |      |   | 873     |      |  |  |  |   | (5,723 | ) |  |  |  |   | 873     |   |
| Netrealized and unrealized gain (loss) during theperiod                                           |  |  |                            |   | 11,510 |                        |  |  |      |   | (24,818 | )    |  |  |  |   | 27,017 |   |  |  |  |   | (10,373 | ) |
| Comprehensiveincome(loss)                                                                         |  |  |                            | $ | 17,353 |                        |  |  |      | $ | (16,398 | )    |  |  |  | $ | 28,133 |   |  |  |  | $ | 13,775  |   |
|                                                                                                   |

Theaccompanying notes are an integral part of the consolidated financialstatements.

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MortgageIT Holdings, Inc. andSubsidiaries

CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS' EQUITY (Unaudited) Six months endedJune  30,  2006 (Dollars and shares inthousands)

|                                                                   |  |  |             |  |         |        |  |  |               |   |         |                |  |  |                    |   |         |                  |  |  |                    |   |         |                 |  |  |  |   |         |   |  |  |  |   |         |   |  |  |  |   |         |  |  |  |  |   |         |   |
|-------------------------------------------------------------------|--|--|-------------|--|---------|--------|--|--|---------------|---|---------|----------------|--|--|--------------------|---|---------|------------------|--|--|--------------------|---|---------|-----------------|--|--|--|---|---------|---|--|--|--|---|---------|---|--|--|--|---|---------|--|--|--|--|---|---------|---|
|                                                              |  |  | CommonStock |  |         |   |  |  | Additional    |   |         |           |  |  | UnamortizedCostof  |   |         | AccumulatedOther |  |  | TotalStockholders' |
|                                                              |  |  | Shares      |  |         | Amount |  |  | TreasuryStock |   |         | Paid-InCapital |  |  | AccumulatedDeficit |   |         | RestrictedStock  |  |  | ComprehensiveLoss  |   |         | Equity(Deficit) |
|                                                              |  |  |             |  |    |        |  |  |               |   |    |                |  |  |                    |   |    |                  |  |  |                    |   |    |                 |  |  |  |   |    |   |  |  |  |   |    |   |  |  |  |   |    |  |  |  |  |   |    |   |
| Balanceat December  31,2005                                       |  |  |             |  | 28,799  |        |  |  |               | $ | 289     |                |  |  |                    | $ | (1,178  | )                |  |  |                    | $ | 393,304 |                 |  |  |  | $ | (45,849 | ) |  |  |  | $ | (5,889  | ) |  |  |  | $ | 13,225  |  |  |  |  | $ | 353,902 |   |
| Issuanceof common stock in connection with restricted stockgrants |  |  |             |  | 317     |        |  |  |               |   | 3       |                |  |  |                    |   | — |                  |  |  |                    |   | 299     |                 |  |  |  |   | — |   |  |  |  |   | — |   |  |  |  |   | — |  |  |  |  |   | 302     |   |
| Restrictedstockforfeitures                                        |  |  |             |  | (17     | )      |  |  |               |   | — |                |  |  |                    |   | — |                  |  |  |                    |   | (200    | )               |  |  |  |   | — |   |  |  |  |   | 200     |   |  |  |  |   | — |  |  |  |  |   | — |   |
| Amortizationof the cost of restrictedstock                        |  |  |             |  | — |        |  |  |               |   | — |                |  |  |                    |   | — |                  |  |  |                    |   | — |                 |  |  |  |   | — |   |  |  |  |   | 1,592   |   |  |  |  |   | — |  |  |  |  |   | 1,592   |   |
| Stockbasedcompensation                                            |  |  |             |  | — |        |  |  |               |   | — |                |  |  |                    |   | — |                  |  |  |                    |   | 148     |                 |  |  |  |   | — |   |  |  |  |   | — |   |  |  |  |   | — |  |  |  |  |   | 148     |   |
| Othercomprehensive (loss)income                                   |  |  |             |  | — |        |  |  |               |   | — |                |  |  |                    |   | — |                  |  |  |                    |   | — |                 |  |  |  |   | — |   |  |  |  |   | — |   |  |  |  |   | 27,017  |  |  |  |  |   | 27,017  |   |
| Dividendsdeclared on common stock – $.55 pershare           |  |  |             |  | — |        |  |  |               |   | — |                |  |  |                    |   | — |                  |  |  |                    |   | — |                 |  |  |  |   | (15,605 | ) |  |  |  |   | — |   |  |  |  |   | — |  |  |  |  |   | (15,605 | ) |
| Netloss                                                           |  |  |             |  | — |        |  |  |               |   | — |                |  |  |                    |   | — |                  |  |  |                    |   | — |                 |  |  |  |   | 1,116   |   |  |  |  |   | — |   |  |  |  |   | — |  |  |  |  |   | 1,116   |   |
| Balanceat June  30,2006                                           |  |  |             |  | 29,099  |        |  |  |               | $ | 292     |                |  |  |                    | $ | (1,178  | )                |  |  |                    | $ | 393,551 |                 |  |  |  | $ | (60,338 | ) |  |  |  | $ | (4,097  | ) |  |  |  | $ | 40,242  |  |  |  |  | $ | 368,472 |   |
|                                                                   |

Theaccompanying notes are an integral part of the consolidated financialstatements.

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MortgageIT Holdings, Inc. andSubsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited) (Dollars inthousands)

|                                                                               |  |  |                         |   |          |      |  |  |  |   |            |   |
|-------------------------------------------------------------------------------|--|--|-------------------------|---|----------|------|--|--|--|---|------------|---|
|                                                                          |  |  | Sixmonths ended June30, |
|                                                                          |  |  | 2006                    |   |          | 2005 |
| Cashflows from operatingactivities:                                           |  |  |                         |   |     |      |  |  |  |   |       |   |
| Netincome                                                                     |  |  |                         | $ | 1,116    |      |  |  |  | $ | 24,148     |   |
| Adjustmentsto reconcile net income to net cash used in operatingactivities:   |  |  |                         |   |     |      |  |  |  |   |       |   |
| Depreciation andamortization                                                  |  |  |                         |   | 5,031    |      |  |  |  |   | 4,522      |   |
| Stock basedcompensation                                                       |  |  |                         |   | 2,041    |      |  |  |  |   | 1,665      |   |
| Unrealizedgain on hedginginstruments                                          |  |  |                         |   | (13,927  | )    |  |  |  |   | (6,889     | ) |
| Netamortization of mortgage backedsecurities                                  |  |  |                         |   | 1,846    |      |  |  |  |   | —    |   |
| Impairmentof mortgage backedsecurities                                        |  |  |                         |   | 95       |      |  |  |  |   | —    |   |
| Changesin operating assets:                                                   |  |  |                         |   |     |      |  |  |  |   |       |   |
| Increase inrestrictedcash                                                     |  |  |                         |   | (1,954   | )    |  |  |  |   | (656       | ) |
| Increase inmortgage loans held forsale                                        |  |  |                         |   | (48,689  | )    |  |  |  |   | (1,600,838 | ) |
| Decrease(increase) in accountsreceivable                                      |  |  |                         |   | 41,290   |      |  |  |  |   | (22,591    | ) |
| Increasein prepaids and otherassets                                           |  |  |                         |   | (22,776  | )    |  |  |  |   | (4,182     | ) |
| Changesin operatingliabilities:                                               |  |  |                         |   |     |      |  |  |  |   |       |   |
| (Decrease) increasein accounts payable, accrued expenses and otherliabilities |  |  |                         |   | (34,677  | )    |  |  |  |   | 28,591     |   |
| Netcash used in operatingactivities                                           |  |  |                         |   | (70,604  | )    |  |  |  |   | (1,576,230 | ) |
| Cashflows from investingactivities:                                           |  |  |                         |   |     |      |  |  |  |   |       |   |
| Increase in ARMloans                                                          |  |  |                         |   | (241,190 | )    |  |  |  |   | (1,205,950 | ) |
| Purchasesof property andequipment                                             |  |  |                         |   | (4,531   | )    |  |  |  |   | (2,373     | ) |
| Proceedsfrom maturities of marketablesecurities                               |  |  |                         |   | 9,600    |      |  |  |  |   | 14,192     |   |
| Purchases ofmarketablesecurities                                              |  |  |                         |   | (9,602   | )    |  |  |  |   | (10,332    | ) |
| Netcash used in investingactivities                                           |  |  |                         |   | (245,723 | )    |  |  |  |   | (1,204,463 | ) |
| Cashflows from financingactivities:                                           |  |  |                         |   |     |      |  |  |  |   |       |   |
| Net proceeds fromissuance of junior subordinateddebentures                    |  |  |                         |   | 48,451   |      |  |  |  |   | 72,618     |   |
| Proceedsfrom collateralized debtobligations                                   |  |  |                         |   | 733,093  |      |  |  |  |   | 2,353,165  |   |
| Paymentsmade on collateralized debtinstruments                                |  |  |                         |   | (505,142 | )    |  |  |  |   | (224,442   | ) |
| Netborrowings from repurchaseagreements                                       |  |  |                         |   | 13,242   |      |  |  |  |   | 14,475     |   |
| Netproceeds (payments) on hedginginstruments                                  |  |  |                         |   | 2,458    |      |  |  |  |   | (19,005    | ) |
| Distributionspaid                                                             |  |  |                         |   | (20,686  | )    |  |  |  |   | (17,852    | ) |
| Proceeds fromnotespayable                                                     |  |  |                         |   | 15,000   |      |  |  |  |   | —    |   |
| Proceedsfrom issuance of commonstock                                          |  |  |                         |   | —  |      |  |  |  |   | 4          |   |
| Net proceeds ofwarehouse linespayable                                         |  |  |                         |   | 49,082   |      |  |  |  |   | 558,659    |   |
| Netcash provided by financingactivities                                       |  |  |                         |   | 335,498  |      |  |  |  |   | 2,737,622  |   |
| Netincrease (decrease) in cash and cashequivalents                            |  |  |                         |   | 19,171   |      |  |  |  |   | (43,071    | ) |
| Cashand cash equivalents at beginning ofperiod                                |  |  |                         |   | 36,757   |      |  |  |  |   | 70,224     |   |
| Cashand cash equivalents at end ofperiod                                      |  |  |                         | $ | 55,928   |      |  |  |  | $ | 27,153     |   |
|                                                                               |

Theaccompanying notes are an integral part of the consolidated financialstatements.

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NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Theaccompanying unaudited consolidated financial statements have beenprepared in accordance with generally accepted accounting principlesfor interim financial information.

In the opinion ofmanagement, all material adjustments, consisting of normal recurringadjustments, considered necessary for a fair presentation have beenincluded. The operating results for the three and six months endedJune  30,  2006 are not necessarily indicative of theresults that may be expected for the year ending December31,  2006. The interim financial information should be read inconjunction with MortgageIT Holdings, Inc.'s 2005 Annual Reporton Form 10-K.

Basis of Presentation

MortgageITHoldings, Inc. (‘‘Holdings’’ or the‘‘Company’’) is a residential mortgagelender that was formed in March  2004 to continue and expand thebusiness of MortgageIT, Inc.(‘‘MortgageIT’’ or the‘‘TRS’’). Holdings is organized andconducts its operations to qualify as a real estate investment trust(‘‘REIT’’) for federal income tax purposesand is focused on earning net interest income from mortgage loansoriginated by MortgageIT, Holdings' taxable REIT subsidiary.MortgageIT was incorporated in New York on February  1,1999 and began marketing mortgage loan services on May  4,1999. MortgageIT originates, sells and brokers residential mortgageloans in 50 states and the District of Columbia, and is an approvedU.S. Department of Housing and Urban Development(‘‘HUD’’) Title II Nonsupervised DelegatedMortgagee.

As discussed further in Note 11, the Companyoperates its business in two primary segments, mortgage investmentoperations and mortgage banking operations. Mortgage investmentoperations are driven by the net interest income generated on itsinvestment loan portfolio. Mortgage banking operations include loanorigination, underwriting, funding, secondary marketing and loanbrokerage, title and insurance activities.

Theconsolidated financial statements included herein contain results forHoldings, Holdings' wholly owned subsidiaries, MHL Funding Corp.,Next at Bat Lending, Inc., MHL Reinsurance, Ltd. and MortgageIT, andMortgageIT's wholly owned subsidiary Home Closer LLC(‘‘Home Closer’’). Home Closer providestitle, settlement and other mortgage related services to the Companyand its customers. All material intercompany account balances andtransactions have been eliminated inconsolidation.

Reclassification

Certain amounts inthe consolidated financial statements for prior periods have beenreclassified to conform to the current year presentation.

Use ofEstimates

The preparation of financial statements inconformity with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and theaccompanying notes. Management bases its estimates on certainassumptions, which it believes are reasonable under the circumstances,and does not believe that any change in those assumptions would have asignificant effect on the financial position or results of operationsof the Company. Actual results could differ materially from thoseestimates.

Adjustable Rate Mortgage(‘‘ARM’’) Loan InvestmentPortfolio

The Company's ARM loan investmentportfolio is comprised of ARM loans collateralizing debt obligationsand ARM loans held for securitization (collectively referred to as‘‘Portfolio ARM Loans’’ or‘‘ARM Loans’’). All of the Company'sPortfolio ARM Loans are traditional ARM Loans, meaning they haveinterest rates that reprice in one year or less(‘‘Traditional ARMs’’ or‘‘Traditional ARM 

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loans’’), hybrid ARM Loans thathave a fixed interest rate for an initial period of not more than fiveyears and then convert to Traditional ARMs for their remaining terms tomaturity (‘‘Hybrid ARMs’’ or‘‘Hybrid ARM loans’’), or pay option ARMLoans (‘‘POAs’’) that have a lowintroductory rate for the first 30-90 days and, thereafter, repricemonthly on the basis of an index, such as the 12-month Treasuryaverage.

Portfolio ARM Loans are designated as held tomaturity because the Company has the intent and ability to hold themuntil maturity or payoff. Portfolio ARM Loans are carried at cost,which includes unpaid principal balances, unamortized loan originationcosts and fees, and the allowance for loan losses.

ARMloans collateralizing debt obligations are mortgage loans the Companyhas securitized into rated classes with the lower rated classesproviding credit support for higher rated certificates issued to thirdparty investors or retained by the Company in structured financingarrangements.

ARM loans held for securitization aremortgage loans the Company has originated and intends to securitize andretain.

Mortgage Loans Held for Sale

UnallocatedMortgage Loans Held For Sale

Unallocated mortgage loansheld for sale represent loans that have not yet been allocated to aforward sales commitment. At June  30,  2006 andDecember  31,  2005, unallocated mortgage loans held forsale are carried at the lower of adjusted cost or market value.Determining market value requires judgment by management in determininghow the market would value a particular mortgage loan based oncharacteristics of the loan and available marketinformation.

Allocated Mortgage Loans Held ForSale

Allocated mortgage loans held for sale representloans that have been allocated to a forward sales commitment. For thesix months ended June  30,  2006 and the year endedDecember  31,  2005, the Company qualified and elected toapply Statement of Financial Accounting Standards(‘‘SFAS’’) No. 133‘‘Accounting for Derivative Instruments and HedgingActivities’’ (‘‘SFAS No.133’’) fair value hedge accounting for allocated loansheld for sale. Allocated mortgage loans held for sale are carried atthe lower of adjusted cost or market value. Determining market valuerequires judgment by management in determining how the market wouldvalue a particular mortgage loan based on characteristics of the loanand available market information. Adjusted cost includes the loanprincipal amount outstanding, deferred direct origination costs andfees, and any adjustment to the carrying amount of loans resulting fromthe application of hedge accounting.

Mortgage-Backed Securities– Available for Sale

Mortgage-backed securities– available for sale represent beneficial interests the Companypurchased in the MortgageIT real estate mortgage investment conduit(‘‘REMIC’’)securitization.

Mortgage-backed securities classified asavailable for sale are reported at their estimated fair value withunrealized gains and losses reported in accumulated other comprehensiveincome (loss)(‘‘OCI’’). 

Mortgage-backedsecurities represent the retained interests in certain components ofthe cash flows of the underlying mortgage loans or mortgage securitiestransferred to securitization trusts. As payments are received, thepayments are applied to the cost basis of the mortgage relatedsecurity. Each period, the accretable yield for each mortgage securityis evaluated and, to the extent there has been a change in theestimated cash flows, it is adjusted and applied prospectively. Theestimated cash flows change as assumptions for credit losses, borrowerprepayments and interest rates are updated. The accretable yield isrecorded as interest income with a corresponding increase to the costbasis of the mortgage security.

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At each reporting period subsequentto the initial valuation of the purchased securities, the fair value ofmortgage securities is estimated based on different methods, includingindependent valuations from broker dealers. Management’s bestestimate of key assumptions, including credit losses, prepaymentspeeds, the market discount rates and forward yield curves commensuratewith the risks involved, are used in estimating future cash flows. Tothe extent that the cost basis of mortgage securities exceeds the fairvalue and the unrealized loss is considered to be other than temporary,an impairment charge is recognized and the amount recorded in OCI isreclassified to earnings as a realized loss.

LoanSecuritizations

The Company securitizes mortgage loans bytransferring them to independent trusts that issue securitiescollateralized by the transferred mortgage loans. The Company generallyretains interests in all or some of the securities issued by thetrusts. Certain of the securitization agreements may require theCompany to repurchase loans that are found to have legal deficienciesafter the date of transfer. The accounting treatment for transfers ofassets upon securitization depends on whether or not the Company hasretained control over the transferred assets. The Company'saccounting policy for ARM loan securitizations complies with theprovisions of SFAS No. 140 ‘‘Accounting for Transfers andServicing of Financial Assets and Extinguishments ofLiabilities’’ (‘‘SFAS No.140’’). Depending on the structure of the securitization,the accounting for securitizations is treated as either a sale orsecured financing for financial statement purposes. The securitizationtransactions in the Company's mortgage investment operationssegment are treated as secured financings under SFAS No. 140 as theCompany has retained control over the transferred assets. TheMortgageIT REMIC securitization completed in February  2006 wastreated as a financing under SFAS No. 140. The MortgageIT REMICsecuritization completed in November  2005 was treated as a saleunder SFAS No. 140.

Mortgage ServicingRights

Mortgage servicing rights retained in the REMICsecuritization are recorded at allocated cost based upon the relativefair values of the transferred loans and the servicing rights. Mortgageservicing rights are amortized in proportion to and over the projectednet servicing revenues. Periodically, the Company evaluates thecarrying value of mortgage servicing rights based on their estimatedfair value. If the estimated fair value is less than the carryingamount of the mortgage servicing rights, the mortgage servicing rightsare written down to the amount of the estimated fair value. Forpurposes of evaluating and measuring impairment of mortgage servicingrights the Company stratifies the mortgage servicing rights based ontheir predominant risk characteristics.

Mortgage servicingrights are recorded in other assets in the consolidated balance sheets.The servicing fee income associated with the mortgage servicing rightsis reported in other income in the consolidated statements ofoperations.

Derivative Instruments and HedgingActivities

The Company manages its interest rate riskexposure through the use of derivatives, including interest rate swaps,Eurodollar futures, forward delivery contracts on mortgage-backedsecurities (‘‘TBA Securities’’), options onTBA Securities, forward sale commitments and interest rate caps. Inaccordance with SFAS No. 133, all derivative instruments are recordedon the balance sheets at fair value.

If certain conditionsare met, the Company may designate a derivative as a fair value hedge(the hedge of the exposure to changes in the fair value of a recognizedasset, liability or commitment), or a cash flow hedge (a hedge of theexposure to variability in the cash flows related to a forecasted orrecognized liability).

Certain derivatives used inconjunction with interest rate risk management activities qualify forhedge accounting under SFAS No. 133. For derivative hedging activitiesto qualify for hedge accounting, the Company formally documents, at theinception of each hedge, the hedging relationship and its riskmanagement objective and strategy for undertaking the hedge, thehedging instrument, the item or, 

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the nature of the risk being hedged, how thehedging instrument's effectiveness in offsetting the hedged riskwill be assessed, and a description of the method of measuringineffectiveness. The Company also formally assesses, both at thehedge's inception and on an ongoing basis, whether thederivatives that are used in hedging transactions are highly effectivein offsetting changes in fair values or cash flows of hedgeditems.

The Company's fair value hedges are primarilyfor mortgage loans held for sale. Changes in the fair value of aderivative that is highly effective and that is designated andqualifies as a fair value hedge, along with the change in fair valueattributable to the hedged risk, are recorded in earnings. Derivativesthat are utilized as fair value hedges and that qualify for hedgeaccounting are carried at fair value with changes in value included ingain on sale of mortgage loans in the accompanying consolidatedstatements of operations.

The Company's cash flowhedges, which are used for LIBOR based borrowings, have the effect offixing the interest rate on LIBOR based liabilities in the event thatLIBOR based funding costs change. Gains and losses on a derivative thatis highly effective and that is designated and qualifies as a cash flowhedge are recorded in OCI to the extent that the derivative iseffective as a hedge, until earnings are affected by the variability incash flows of the designated hedged item.

The ineffectiveportion of the change in fair value of a derivative instrument thatqualifies as either a fair value hedge or a cash flow hedge wasapproximately $2.5  million for the six months ended June30,  2006. The change in value of a derivative instrument thatdoes not qualify for hedge accounting, is reported in earnings underthe caption realized and unrealized gain (loss) on hedginginstruments.

The Company employs a number of riskmanagement monitoring procedures that are designed to ensure that itshedging arrangements are demonstrating, and are expected to continue todemonstrate, a high level of effectiveness. Hedge accounting isdiscontinued on a prospective basis if it is determined that thehedging relationship is no longer highly effective or expected to behighly effective in offsetting changes in fair value or cash flows ofthe hedged item. Additionally, the Company may elect, pursuant to SFASNo. 133, to re-designate a hedge relationship during an interim periodand re-designate upon the rebalancing of a hedgerelationship.

The Company's committed mortgagepipeline includes interest rate lock commitments(‘‘IRLCs’’) that have been extended toborrowers who have applied for loan funding and meet certain definedcredit and underwriting criteria. The Company classifies and accountsfor the IRLCs associated with loans expected to be sold asfree-standing derivatives. The Company does not assign fair value toIRLCs at inception of the loan commitment, but does record subsequentchanges in fair value in gain on sale of mortgage loans on theconsolidated statements of operations.

RepurchaseAgreements

Repurchase agreements represent legal sales ofthe Company's mortgage assets and an agreement to repurchase theassets at a future date. Repurchase agreements are accounted for ascollateralized financing transactions since the Company still hascontrol of the transferred assets and is both entitled and obligated torepurchase the transferred assets. They are carried at the amount atwhich the assets will be repurchased, including accruedinterest.

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Other ComprehensiveIncome

SFAS No. 130, ‘‘ReportingComprehensive Income,’’ divides comprehensive income intonet income and other comprehensive income (loss), which consists ofunrealized gains and losses on derivative financial instruments thatqualify for cash flow hedge accounting under SFAS No. 133, andmortgage-backed securities – available for sale. Accumulated OCIis comprised of thefollowing:

|                                                              |  |  |                                                                            |   |      |                                                                         |  |      |                                           |   |        |  |  |      |   |   |        |  |
|--------------------------------------------------------------|--|--|----------------------------------------------------------------------------|---|------|-------------------------------------------------------------------------|--|------|-------------------------------------------|---|--------|--|--|------|---|---|--------|--|
|                                                         |  |  | NetUnrealized Loss on Mortgage-Backed Securities –Available for Sale |   |      | Net Realized andUnrealized Gain(Loss) on DerivativeFinancialInstruments |  |      | AccumulatedOtherComprehensiveIncome(Loss) |
| Balance at December  31,2004                                 |  |  | $    —                                           |   |      |                                                                         |  | (387 | )                                         |   |        |  |  | (387 | ) |
| Netchange                                                    |  |  |                                                                            |   | (948 | )                                                                       |  |      |                                           |   | 14,560 |  |  |      |   |   | 13,612 |  |
| Balanceat December  31,2005                                  |  |  |                                                                            | $ | (948 | )                                                                       |  |      |                                           | $ | 14,173 |  |  |      |   | $ | 13,225 |  |
| Balanceat January  1,2006                                    |  |  |                                                                            |   | (948 | )                                                                       |  |      |                                           |   | 14,173 |  |  |      |   |   | 13,225 |  |
| Netchange                                                    |  |  |                                                                            |   | 684  |                                                                         |  |      |                                           |   | 26,333 |  |  |      |   |   | 27,017 |  |
| Balanceat June  30,  2006(unaudited)     |  |  |                                                                            | $ | (264 | )                                                                       |  |      |                                           | $ | 40,506 |  |  |      |   | $ | 40,242 |  |
|                                                              |

RevenueRecognition

Mortgage InvestmentOperations

Interest income is accrued based on theoutstanding principal amount and contractual terms of the loans. Directloan origination costs and fees associated with the loans are amortizedinto interest income over the lives of the loans using the effectiveyield method, adjusted for the effects of estimated prepayments.Estimating prepayments and estimating the remaining lives of the loansrequires judgment by management, which involves consideration ofpossible future interest rate environments. The actual lives could bemore or less than the amount estimated by management.

MortgageBanking Operations

Gain on sale of loans represents thedifference between the net sales proceeds and the carrying values ofthe mortgage loans sold, and is recognized at the time of sale. Directloan origination costs and fees associated with the loans are initiallyrecorded as an adjustment of the cost of the loans held for sale andare recognized in earnings when the loans aresold.

Brokerage fees represent revenues earned for thebrokering of mortgage loans to third party lenders and are earned andrecognized at the time the loan is closed by the third party lender.Revenues are primarily comprised of borrower application and/oradministrative fees and brokerage fees paid to the Company by thirdparty lenders.

Interest income is accrued as earned.Interest on mortgage loans held for sale accrues on loans from the dateof funding through the date of sale. Interest on loans is computedbased on the contractual loan note rate.

Generally, theCompany is not exposed to significant credit risk on its loans sold toinvestors. In the normal course of business, the Company is obligatedto repurchase loans from investors consistent with the terms of itsinvestor contracts. In connection with the sale of loans, the Companyrecords a repurchase reserve for potential future losses applicable toloans sold. The repurchase reserve is included in accrued expenses onthe Company's balance sheets.

Loan LossReserves

The Company maintains an allowance for loanlosses based on management's estimate of credit losses inherentin the Company's Portfolio ARM Loans. The estimation of theallowance is based on a variety of factors including, but not limitedto, industry statistics, current economic conditions, loan

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portfolio composition, delinquency trends,credit losses to date on underlying loans and remaining creditprotection. If the credit performance of the Company's PortfolioARM Loans is different than expected, the Company adjusts the allowancefor loan losses to a level deemed appropriate by management to providefor estimated losses inherent in the Company's ARM loanportfolio. Two critical assumptions used in estimating the loan lossreserves are an assumed rate of default, which is the expected rate atwhich loans go into foreclosure over the life of the loans, and anassumed rate of loss severity, which represents the expected rate ofrealized loss upon disposition of the properties that have gone intoforeclosure. The Company’s estimated loan loss reserves arecomprised of baseline expected credit losses for the next four to sixquarters and a stress component which considers the effects ofalternative economic scenarios. In addition, once a loan is 90days or more delinquent or a borrower declares bankruptcy, the Companyadjusts the value of its accrued interest receivable to what itbelieves to be collectible and stops accruing interest on that loan.The Company will charge off losses against the credit loss reserve atthe time of loan disposition. The following table summarizes changes inthereserve:

|                                      |  |  |                             |   |       |                           |  |  |  |   |         |  |
|--------------------------------------|--|--|-----------------------------|---|-------|---------------------------|--|--|--|---|---------|--|
|                                 |  |  | Sixmonthsended June 30,2006 |   |       | Year endedDecember31,2005 |
|                                 |  |  | (unaudited)                 |   |       |                      |
| Loanloss reserve, beginning ofperiod |  |  |                             | $ | 4,123 |                           |  |  |  | $ | 674     |  |
| Loan lossprovision                   |  |  |                             |   | 513   |                           |  |  |  |   | 3,449   |  |
| Writeoffs                            |  |  |                             |   | (362  | )                         |  |  |  |   | — |  |
| Loanloss reserve, end ofperiod       |  |  |                             | $ | 4,274 |                           |  |  |  | $ | 4,123   |  |
|                                      |

StockCompensation

As of June  30,  2006, theCompany had in effect the 2004 Long-Term Incentive Plan (the‘‘2004 Plan’’) and the Amended Long-TermIncentive Plan (the ‘‘Amended Plan’’),which are described more fully in Note 8.

EffectiveJanuary  1,  2006, the Company adopted the provisions ofStatement of Financial Accounting Standards No. 123 (revised 2004),‘‘Share-Based Payment’’ (SFAS No. 123R),requiring that compensation cost relating to share-based paymenttransactions be recognized in the financial statements. The cost ismeasured at the grant date, based on the calculated fair value of theaward, and is recognized as an expense over the employee’srequisite service period (generally the vesting period of the equityaward). We adopted SFAS No. 123R using the modified prospective methodand, accordingly, financial statement amounts for prior periodspresented in this Form 10-Q have not been restated to reflect the fairvalue method of recognizing compensation cost relating to stockoptions.          

Therewas approximately $74,000 and $148,000 of before tax compensation costrelated to stock options recognized in operating results during thethree and six months ended June  30,  2006, respectively.The associated future income tax benefit recognized was approximately$30,000 and $60,000 during the three and six months ended June30,  2006, respectively.

At June  30,2006, there was approximately $338,000 of total unrecognizedcompensation cost related to non-vested stock option awards which isexpected to be recognized over a weighted-average period of 1.1years.

Through December  31,  2005, theCompany accounted for all transactions under which employees receivedshares of stock or other equity instruments in the Company based on theprice of its stock in accordance with the provisions of AccountingPrinciples Board Opinion No. 25, ‘‘Accounting for StockIssued to Employees.’’ Pursuant to these accountingstandards, the Company recorded deferred compensation for stock awardsat the date of grant based on the estimated values of the shares onthat date. There was no stock option-based employee compensation costreflected in net incomebecause all options granted had an exerciseprice equal to the market value of the underlying common stock on thedate of grant. The following table illustrates the effect on net incomeif the 

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Company had applied the fair valuerecognition provisions of SFAS No. 123, ‘‘Accounting forStock-Based Compensation — Transition andDisclosure’’ (‘‘SFAS No.123’’) for the three and six months ended June30,  2005. (Dollars in thousands, except per sharedata):

|                                                                                                           |  |  |                              |   |        |                           |  |  |  |   |        |   |
|-----------------------------------------------------------------------------------------------------------|--|--|------------------------------|---|--------|---------------------------|--|--|--|---|--------|---|
|                                                                                                      |  |  | ThreemonthsendedJune 30,2005 |   |        | SixmonthsendedJune30,2005 |
|                                                                                                      |  |  | (unaudited)                  |   |        | (unaudited)               |
| Netincome attributable to commonstockholders                                                              |  |  |                              |   | 8,420  |                           |  |  |  | $ | 24,148 |   |
| Amortizationof restricted stock, including forfeitures, net of taxeffects                                 |  |  |                              |   | 595    |                           |  |  |  |   | 1,149  |   |
| Stock-basedemployee compensation expense determined under the fair value method,net of related taxeffects |  |  |                              |   | (649   | )                         |  |  |  |   | (1,259 | ) |
| Proforma netincome                                                                                        |  |  |                              | $ | 8,366  |                           |  |  |  | $ | 24,038 |   |
| Netincome per share attributable to commonstock:                                                          |  |  |                              |   |   |                           |  |  |  |   |   |   |
| Basic – Asreported                                                                                  |  |  |                              | $ | 0.43   |                           |  |  |  | $ | 1.24   |   |
| Basic –Proforma                                                                                     |  |  |                              | $ | 0.43   |                           |  |  |  | $ | 1.24   |   |
| Netincome per share for diluted earnings pershare:                                                        |  |  |                              |   |   |                           |  |  |  |   |   |   |
| Diluted – Asreported                                                                                |  |  |                              | $ | 0.42   |                           |  |  |  | $ | 1.21   |   |
| Diluted –Proforma                                                                                   |  |  |                              | $ | 0.42   |                           |  |  |  | $ | 1.21   |   |
|                                                                                                           |

Underthe 2004 Plan, the fair value for each option granted was estimated atthe date of grant using the Black-Scholes option-pricing model, withthe following assumptions: risk-free interest rate of 3.75%,expected option lives of five years, 26% volatility and9% dividend rate.

The weighted average fair valueof options issued under the 2004 Plan, for the six months endedJune  30,  2005, under the Black-Scholes option-pricingmodel, was $1.01 per option.

No stock options have beengranted under the Amended Plan.

Restricted stock awardsgranted to employees under the 2004 Plan and the Amended Plan aresubject to certain sale and transfer restrictions. Unvested awards arealso subject to forfeiture if employment terminates prior to the end ofthe prescribed restriction period. The value of restricted stock awardsis expensed over the vesting period, generally threeyears.

Income Taxes

Income taxes are determinedusing the liability method under SFAS No. 109,‘‘Accounting for Income Taxes.’’ Under thismethod, deferred income taxes reflect the net tax effect of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts reported for federal andstate income tax purposes.

The Company has elected to betaxed as a REIT and believes it complies with the provisions of theInternal Revenue Code of 1986, as amended (the‘‘Code’’), with respect thereto.Accordingly, the Company is not subject to federal income tax on thatportion of its income that is distributed to stockholders, as long ascertain asset, income and stock ownership tests are met. To maintainits REIT status, the Company is required to distribute a minimum of90% of its annual taxable income to itsstockholders.

MortgageIT made the election to be treatedas a taxable REIT subsidiary and, therefore, is subject to both federaland state corporate income taxes. Accordingly, the Company records atax provision based primarily on the taxable income of theTRS.

Fair Value of Financial Instruments

Cash andcash equivalents, marketable securities and accounts receivable arecarried at amounts approximating fair value. Unallocated and allocatedmortgage loans held for sale are carried at the lower of adjusted costor market value, or at market value.

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Mortgage-backed securities –available for sale are carried at fair value.

Derivativeinstruments related to the hedging of the Company's financingcosts, including interest rate swap agreements, Eurodollar futurescontracts and interest rate cap agreements (collectively‘‘Portfolio Hedging Instruments’’) arecarried at fair value and are classified as hedging instruments on thebalance sheets.

Derivative instruments, including IRLCsand those related to the hedging of the Company's locked pipelineloans and mortgage loans held for sale, including TBA Securities,options on TBA Securities, forward sale commitments and Eurodollarfutures contracts, are carried at fair value and are classified ashedging instruments on the balance sheets.

Liabilities,including warehouse lines payable, collateralized debt obligations,notes payable and other debt, are carried at their contractual notionalamounts which approximate fair value. Portfolio ARM Loans are carriedat cost, as more fully described in Note 2.

The followingtable presents information as to the carrying amount and estimated fairvalue of certain of the Company's market risk sensitive assets,liabilities and hedging instruments at June  30,  2006 andDecember  31,2005:

|                                                     |  |  |                       |   |           |                    |  |  |  |   |           |  |
|-----------------------------------------------------|--|--|-----------------------|---|-----------|--------------------|--|--|--|---|-----------|--|
|                                                |  |  | June30,2006           |
|                                                |  |  | CarryingAmount        |   |           | EstimatedFairValue |
|                                                |  |  | (Dollars inthousands) |
|                                                |  |  | (unaudited)           |
| Assets:                                             |  |  |                       |   |      |                    |  |  |  |   |      |  |
| Mortgageloans held forsale                          |  |  |                       | $ | 3,426,886 |                    |  |  |  | $ | 3,444,094 |  |
| ARM loanscollateralizing debt obligations,net       |  |  |                       |   | 4,923,027 |                    |  |  |  |   | 4,837,575 |  |
| Mortgage-backedsecurities – available forsale |  |  |                       |   | 22,178    |                    |  |  |  |   | 22,178    |  |
| Hedginginstruments                                  |  |  |                       |   | 84,390    |                    |  |  |  |   | 84,390    |  |
| Liabilities:                                        |  |  |                       |   |      |                    |  |  |  |   |      |  |
| Warehouselinespayable                               |  |  |                       | $ | 3,227,072 |                    |  |  |  | $ | 3,227,072 |  |
| Collateralizeddebtobligations                       |  |  |                       |   | 4,713,147 |                    |  |  |  |   | 4,722,829 |  |
| Repurchaseagreements                                |  |  |                       |   | 100,300   |                    |  |  |  |   | 100,300   |  |
| Juniorsubordinateddebentures                        |  |  |                       |   | 128,871   |                    |  |  |  |   | 128,871   |  |
| Hedginginstruments                                  |  |  |                       |   | 187       |                    |  |  |  |   | 187       |  |
|                                                     |

|                                                     |  |  |                       |   |           |                    |  |  |  |   |           |  |
|-----------------------------------------------------|--|--|-----------------------|---|-----------|--------------------|--|--|--|---|-----------|--|
|                                                |  |  | December31,2005       |
|                                                |  |  | CarryingAmount        |   |           | EstimatedFairValue |
|                                                |  |  | (Dollars inthousands) |
| Assets:                                             |  |  |                       |   |      |                    |  |  |  |   |      |  |
| Mortgageloans held forsale                          |  |  |                       | $ | 3,378,197 |                    |  |  |  | $ | 3,383,752 |  |
| ARM loansheld for securitization,net                |  |  |                       |   | 282       |                    |  |  |  |   | 277       |  |
| ARM loanscollateralizing debt obligations,net       |  |  |                       |   | 4,681,554 |                    |  |  |  |   | 4,624,237 |  |
| Mortgage-backedsecurities – available forsale |  |  |                       |   | 23,357    |                    |  |  |  |   | 23,357    |  |
| Hedginginstruments                                  |  |  |                       |   | 54,472    |                    |  |  |  |   | 54,472    |  |
| Liabilities:                                        |  |  |                       |   |      |                    |  |  |  |   |      |  |
| Warehouselinespayable                               |  |  |                       | $ | 3,177,990 |                    |  |  |  | $ | 3,177,990 |  |
| Collateralizeddebtobligations                       |  |  |                       |   | 4,485,197 |                    |  |  |  |   | 4,485,197 |  |
| Repurchaseagreements                                |  |  |                       |   | 87,058    |                    |  |  |  |   | 87,058    |  |
| Juniorsubordinateddebentures                        |  |  |                       |   | 77,324    |                    |  |  |  |   | 77,324    |  |
| Hedginginstruments                                  |  |  |                       |   | 8,801     |                    |  |  |  |   | 8,801     |  |
|                                                     |

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RECENTLY ISSUED ACCOUNTINGSTANDARDS

In February  2006, FASB issued SFAS No.155, ‘‘Accounting for Certain Hybrid FinancialInstruments’’, which addresses issues on the evaluationof beneficial interests issued in securitization transactions underSFAS No. 133. The statement also amends SFAS No. 140 to eliminate theprohibition on a qualifying special purpose entity from holding aderivative financial instrument that pertains to a beneficial interestother than another derivative financial instrument. This statementshall be effective for all financial instruments acquired, issued, orsubject to a remeasurement event occurring after December31,  2006. The Company will adopt this statement when effectiveand is currently evaluating its impact.

In March2006, the FASB issued SFAS No. 156, ‘‘Accounting forServicing of Financial Assets’’, an amendment of SFAS No.140 (‘‘SFAS 156’’). This statement requiresthat an entity separately recognize a servicing asset or a servicingliability when it undertakes an obligation to service a financial assetunder a servicing contract in certain situations. Such servicing assetsor servicing liabilities are required to be initially measured at fairvalue, if practicable. SFAS 156 also allows an entity to choose one oftwo methods when subsequently measuring its servicing assets andservicing liabilities: (1) the amortization method or (2) thefair value measurement method. The amortization method existedunder SFAS 140 and remains unchanged in (1) allowing entities toamortize their servicing assets or servicing liabilities in proportionto and over the period of estimated net servicing income or netservicing loss and (2) requiring the assessment of those servicingassets or servicing liabilities for impairment or increased obligationbased on fair value at each reporting date. The fair value measurementmethod allows entities to measure their servicing assets or servicingliabilities at fair value each reporting date and report changes infair value in earnings in the period the change occurs. SFAS 156introduces the notion of classes and allows companies to make aseparate subsequent measurement election for each class of itsservicing rights. In addition, SFAS 156 requires certain comprehensiveroll−forward disclosures that must be presented for each class.The Statement is effective as of the beginning of an entity’sfirst fiscal year that begins after September  15,  2006.Earlier adoption is permitted as of the beginning of an entity’sfiscal year, so long as the entity has not yet issued financialstatements, including financial statements for any interim period, forthat fiscal year. The Company will adopt this statement when effectiveand is currently evaluating its impact.

NOTE 2 — PORTFOLIOARM LOANS

The following table presents theCompany's Portfolio ARM Loans as of June  30,  2006and December  31,  2005 (Dollars inthousands):

|                                           |  |  |                                         |   |           |                               |  |  |       |   |         |  |  |  |  |   |           |   |
|-------------------------------------------|--|--|-----------------------------------------|---|-----------|-------------------------------|--|--|-------|---|---------|--|--|--|--|---|-----------|---|
| June30, 2006 (unaudited)                  |  |  | ARMloanscollateralizingdebt obligations |   |           | ARMloansheldforsecuritization |  |  | Total |
| Principalbalanceoutstanding               |  |  |                                         | $ | 4,876,854 |                               |  |  |       | $ | — |  |  |  |  | $ | 4,876,854 |   |
| Unamortizedloan origination costs andfees |  |  |                                         |   | 50,447    |                               |  |  |       |   | — |  |  |  |  |   | 50,447    |   |
| Loanlossreserves                          |  |  |                                         |   | (4,274    | )                             |  |  |       |   | — |  |  |  |  |   | (4,274    | ) |
| Amortizedcost,net                         |  |  |                                         |   | 4,923,027 |                               |  |  |       |   | — |  |  |  |  |   | 4,923,027 |   |
| Grossunrealizedloss                       |  |  |                                         |   | (85,452   | )                             |  |  |       |   | — |  |  |  |  |   | (85,452   | ) |
| Estimatedfairvalue                        |  |  |                                         | $ | 4,837,575 |                               |  |  |       | $ | — |  |  |  |  | $ | 4,837,575 |   |
| Carryingvalue                             |  |  |                                         | $ | 4,923,027 |                               |  |  |       | $ | — |  |  |  |  | $ | 4,923,027 |   |
|                                           |

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|                                           |  |  |                                         |   |           |                               |  |  |       |   |         |   |  |  |  |   |           |   |
|-------------------------------------------|--|--|-----------------------------------------|---|-----------|-------------------------------|--|--|-------|---|---------|---|--|--|--|---|-----------|---|
| December31, 2005                          |  |  | ARMloanscollateralizingdebt obligations |   |           | ARMloansheldforsecuritization |  |  | Total |
| Principalbalanceoutstanding               |  |  |                                         | $ | 4,641,588 |                               |  |  |       | $ | 278     |   |  |  |  | $ | 4,641,866 |   |
| Unamortizedloan origination costs andfees |  |  |                                         |   | 44,089    |                               |  |  |       |   | 4       |   |  |  |  |   | 44,093    |   |
| Loanlossreserves                          |  |  |                                         |   | (4,123    | )                             |  |  |       |   | — |   |  |  |  |   | (4,123    | ) |
| Amortizedcost,net                         |  |  |                                         |   | 4,681,554 |                               |  |  |       |   | 282     |   |  |  |  |   | 4,681,836 |   |
| Grossunrealizedloss                       |  |  |                                         |   | (57,317   | )                             |  |  |       |   | (5      | ) |  |  |  |   | (57,322   | ) |
| Estimatedfairvalue                        |  |  |                                         | $ | 4,624,237 |                               |  |  |       | $ | 277     |   |  |  |  | $ | 4,624,514 |   |
| Carryingvalue                             |  |  |                                         | $ | 4,681,554 |                               |  |  |       | $ | 282     |   |  |  |  | $ | 4,681,836 |   |
|                                           |

Theloans that the Company retains in its portfolio are serviced through asubservicing arrangement. The TRS sells all of its fixed rate loanproduction to third parties, as well as any ARM loans that the Companydoes not retain in its portfolio.

The Company does notaccount for mortgage-backed securities created in connection with thesecuritization of Portfolio ARM Loans and placed with third partyinvestors as sales and, therefore, does not record any gain or loss inconnection with these securitization transactions. Instead, the Companyaccounts for the securities it issues as a long-term collateralizedfinancing. As of June  30,  2006, the Company heldapproximately $4.9  billion of ARM loans that collateralize thesecurities resulting from its securitization activities, and areclassified on its balance sheet as ARM loans collateralizing debtobligations, net.

The Company has credit exposure on itsARM Loan investment portfolio. During the six months ended June30,  2006, the Company recorded loan loss provisions totaling$513,000 to reserve for estimated future credit losses on Portfolio ARMLoans, and charged $362,000 against the allowance for losses during theperiod.

The following table summarizes Portfolio ARM Loandelinquency information as of June  30,  2006 andDecember  31,  2005 (Dollars inthousands):

June  30,  2006(unaudited)

|                             |  |  |            |  |     |             |  |  |                              |   |        |                      |  |  |  |  |      |   |  |  |  |  |      |   |
|-----------------------------|--|--|------------|--|-----|-------------|--|--|------------------------------|---|--------|----------------------|--|--|--|--|------|---|--|--|--|--|------|---|
| DelinquencyStatus           |  |  | Loan Count |  |     | LoanBalance |  |  | Percent ofPortfolio ARMLoans |   |        | PercentofTotalAssets |
| 60 to 89days                |  |  |            |  | 43  |             |  |  |                              | $ | 11,479 |                      |  |  |  |  | 0.23 | % |  |  |  |  | 0.13 | % |
| 90days ormore               |  |  |            |  | 14  |             |  |  |                              |   | 3,180  |                      |  |  |  |  | 0.07 |   |  |  |  |  | 0.04 |   |
| Inbankruptcy andforeclosure |  |  |            |  | 57  |             |  |  |                              |   | 15,858 |                      |  |  |  |  | 0.32 |   |  |  |  |  | 0.18 |   |
|                        |  |  |            |  | 114 |             |  |  |                              | $ | 30,517 |                      |  |  |  |  | 0.62 | % |  |  |  |  | 0.35 | % |
|                             |

December31,2005

|                             |  |  |            |  |    |             |  |  |                              |   |        |                      |  |  |  |  |      |   |  |  |  |  |      |   |
|-----------------------------|--|--|------------|--|----|-------------|--|--|------------------------------|---|--------|----------------------|--|--|--|--|------|---|--|--|--|--|------|---|
| DelinquencyStatus           |  |  | Loan Count |  |    | LoanBalance |  |  | Percent ofPortfolio ARMLoans |   |        | PercentofTotalAssets |
| 60 to 89days                |  |  |            |  | 48 |             |  |  |                              | $ | 12,189 |                      |  |  |  |  | 0.26 | % |  |  |  |  | 0.15 | % |
| 90days ormore               |  |  |            |  | 19 |             |  |  |                              |   | 5,627  |                      |  |  |  |  | 0.12 |   |  |  |  |  | 0.07 |   |
| Inbankruptcy andforeclosure |  |  |            |  | 18 |             |  |  |                              |   | 4,461  |                      |  |  |  |  | 0.10 |   |  |  |  |  | 0.05 |   |
|                        |  |  |            |  | 85 |             |  |  |                              | $ | 22,277 |                      |  |  |  |  | 0.48 | % |  |  |  |  | 0.27 | % |
|                             |

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NOTE 3 — MORTGAGE LOANS HELD FORSALE

Mortgage loans held for sale consist of thefollowing components (Dollars inthousands):

|                                               |  |  |             |   |           |                 |  |  |  |   |           |  |
|-----------------------------------------------|--|--|-------------|---|-----------|-----------------|--|--|--|---|-----------|--|
|                                          |  |  | June30,2006 |   |           | December31,2005 |
|                                          |  |  | (unaudited) |   |           |            |
| Mortgageloans held forsale                    |  |  |             | $ | 3,383,774 |                 |  |  |  | $ | 3,331,966 |  |
| Deferredorigination costs andfees             |  |  |             |   | 43,112    |                 |  |  |  |   | 46,231    |  |
| Carryingamount of mortgage loans held forsale |  |  |             | $ | 3,426,886 |                 |  |  |  | $ | 3,378,197 |  |
|                                               |

Mortgageloans are residential mortgages on properties located throughout theUnited States having maturities of up to 40 years, and include ARMloans that are not Portfolio ARM Loans. Pursuant to the terms of themortgage loans, the borrowers have pledged the underlying real estateas collateral for the loans. It is the Company's practice to sellto third party investors any loans that do not constitute Portfolio ARMLoans shortly after they are funded, generally within 30 to 60days.

The Company had loan purchase commitments from thirdparty investors for approximately $2.3  billion, as of bothJune  30,  2006 and December  31,  2005.Substantially all loans held for sale at June  30,  2006and December  31,  2005 were subsequently sold to thirdparty investors. Substantially all mortgage loans held for sale arepledged as collateral for warehouse lines payable (See Note6).

As of June  30,  2006 and December31,  2005, the Company had aggregate locked pipeline commitmentsto fund mortgage loans held for sale of $2.4  billion and$2.3  billion, respectively.

NOTE 4 — DERIVATIVESAND HEDGING ACTIVITIES

The Company is exposed to interestrate risk in conjunction with the origination, funding, sale andinvestment in mortgage loan assets. The Company manages the risk ofinterest rate changes primarily through the use of derivativeinstruments as follows:

|              |                                                                                                                                        |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------|
| •  | Fair value hedges,which are intended to manage the risks associated with potentialchanges in the fair value of loans held for sale;and |

|              |                                                                                                                            |
|--------------|----------------------------------------------------------------------------------------------------------------------------|
| •  | Cash flow hedges, which are intendedto manage the risks associated with potential changes in theCompany's financing costs. |

In connection with itsmortgage loan origination activities, MortgageIT issues IRLCs to loanapplicants and financial intermediaries. The IRLCs guarantee the loanterms, subject to credit approval, for a specified period while theapplication is in process, typically between 15 and 60 days.MortgageIT's risk management objective is to protect earningsfrom an unexpected change in the fair value of IRLCs by economicallyhedging the estimated closed loan volume from the IRLC pipeline.MortgageIT's pipeline hedging strategy primarily utilizes TBASecurities to protect the value of its IRLCs. The TBA Securities,options on TBA Securities, forward sales commitments and IRLCs relatingto mortgage loans held for sale, are derivative instruments and havebeen classified as such by the Company. Accordingly, these derivativeshave been recorded at fair value with changes in fair value reflectedin gain on sale of loans.

At June  30,  2006and December  31,  2005, the notional amount of theCompany's IRLCs relating to mortgage loans held for sale, wasapproximately $1.57  billion and $1.59  billion,respectively. The fair value of the IRLCs at June  30,2006 and December  31,  2005 reflected a gain ofapproximately $6.0  million and $5.8  million,respectively.

At June  30,  2006 andDecember  31,  2005, the notional amount of TBA Securitiesand options on TBA Securities outstanding was approximately$1.04  billion and $1.03  billion, respectively, with afair value gain of approximately $3.9  million and a fair valueloss of approximately $2.9  million,respectively.

At June  30,  2006 andDecember  31,  2005, the notional amount of theCompany's forward sales commitments with third party investorswas approximately $3.3  billion and $1.8  billion,respectively, with a fair value gain of approximately $3.6million and a fair value loss of approximately $4.6  million,respectively.

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Fair Value Hedges

TheCompany is exposed to interest rate risk in conjunction with the saleof mortgage loans. The Company manages the risk of interest ratechanges associated with its loans held for sale through use of TBASecurities, options on TBA Securities, forward sale commitments andEurodollar futures contracts. These derivative instruments are designedto hedge potential changes in the fair value of loans held forsale.

The fair value adjustments for IRLCs, TBASecurities, options, forward sales commitments and Eurodollar futurescontracts are included in gain on sale of mortgage loans.

CashFlow Hedges

The Company primarily utilizes Eurodollarfutures contracts, interest rate cap agreements (‘‘CapAgreements’’) and interest rate swap agreements(‘‘Swap Agreements’’) in order to managepotential changes in future LIBOR-based financing costs. The Companygenerally borrows funds based on short-term LIBOR-based interest ratesto finance its Portfolio ARM Loans. However, its Portfolio ARM Loanshave an initial fixed interest rate period up to five years. As aresult, the Company's existing and forecasted borrowings repriceto a new rate more frequently than its Portfolio ARM Loans. Therefore,the purpose of these hedges is to better match the average repricing ofthe variable rate debt with the average repricing of the Portfolio ARMLoans.

All changes in the fair value of derivativesdesignated as cash flow hedges, (Cap Agreements, Swap Agreements andthe effective portion of the Eurodollar futures contracts), arerecorded in OCI on the consolidated balance sheets and will berecognized as net interest income when the forecasted financingtransactions occur. If it becomes probable that the forecastedtransaction, which is the future interest payments on theCompany's collateralized debt obligations, will not occur asspecified at the inception of the hedging relationship, then therelated gain or loss in OCI would be reclassified out of OCI andrecognized in interest expense. The carrying value of these derivativeinstruments is included in hedging instruments on the accompanyingconsolidated balance sheets.

The Company purchases CapAgreements by incurring a one-time fee or premium. Pursuant to theterms of the Cap Agreements, the Company will receive cash payments ifthe interest rate index specified in the Cap Agreements increases abovecontractually specified levels. Therefore, such Cap Agreements have theeffect of capping the interest rate on a portion of the Company'sborrowings at a level specified by the Cap Agreement. The notionalbalances of the caps generally decline over the life of theseinstruments approximating the declining balance of the Company'scollateralized debt obligations.

Under the Company'sexisting Cap Agreements, the Company will receive cash payments shouldone-month LIBOR increase above the contract rates of the caps, whichrange from 3.00% to 6.02%. The Cap Agreements had anaverage maturity of 4.87 years as of June  30,  2006 andwill expire between August  2007 and June2014.

The Company enters into Swap Agreements to fix theinterest rate on a portion of the Company's borrowings asspecified in the Swap Agreement. When the Company enters into a SwapAgreement, it agrees to pay a fixed interest rate as specified in theagreement, typically based on LIBOR. Swap Agreements have the effect ofconverting the Company's variable-rate debt into fixed-rate debtover the life of the Swap Agreements.

Both Cap and SwapAgreements represent a means to lengthen the average repricing periodof the Company's variable-rate collateralized debt obligationssuch that the average repricing duration of the borrowings more closelymatches the average repricing duration of the Company's PortfolioARM Loans.

The Company uses Eurodollar futures contractsto hedge both forecasted and recognized LIBOR-based borrowings. WhenLIBOR-based interest rates change, the change in the value ofEurodollar futures contracts can be expected to approximately offsetthe change in LIBOR-based funding costs.

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The following table presentsnotional amount, carrying amount and realized and unrealized gains and(losses) recorded in OCI for the Company's cash flow hedges atJune  30,  2006 and December  31,  2005. Thecarrying amount of the cash flow derivative instruments is included inhedging instruments in the accompanying balancesheets.

|                             |  |  |                         |   |           |                |  |  |                |   |        |  |  |  |  |   |        |  |
|-----------------------------|--|--|-------------------------|---|-----------|----------------|--|--|----------------|---|--------|--|--|--|--|---|--------|--|
|                        |  |  | June30, 2006(unaudited) |
|                        |  |  | NotionalAmount          |   |           | CarryingAmount |  |  | NetGain (Loss) |
|                        |  |  | (Dollars inthousands)   |
| Eurodollar futurescontracts |  |  |                         | $ | 1,606,000 |                |  |  |                | $ | 978    |  |  |  |  | $ | 2,381  |  |
| Capagreements               |  |  |                         |   | 4,449,291 |                |  |  |                |   | 56,919 |  |  |  |  |   | 24,876 |  |
| Swapagreements              |  |  |                         |   | 538,044   |                |  |  |                |   | 13,420 |  |  |  |  |   | 13,249 |  |
| Totalcash flowhedges        |  |  |                         | $ | 6,593,335 |                |  |  |                | $ | 71,317 |  |  |  |  | $ | 40,506 |  |
|                             |

|                             |  |  |                       |   |           |                |  |  |               |   |        |  |  |  |  |   |        |   |
|-----------------------------|--|--|-----------------------|---|-----------|----------------|--|--|---------------|---|--------|--|--|--|--|---|--------|---|
|                        |  |  | December31,2005       |
|                        |  |  | NotionalAmount        |   |           | CarryingAmount |  |  | NetGain(Loss) |
|                        |  |  | (Dollarsin thousands) |
| Eurodollar futurescontracts |  |  |                       | $ | 4,141,000 |                |  |  |               | $ | 469    |  |  |  |  | $ | (3,627 | ) |
| Capagreements               |  |  |                       |   | 3,971,027 |                |  |  |               |   | 31,524 |  |  |  |  |   | 6,801  |   |
| Swapagreements              |  |  |                       |   | 596,463   |                |  |  |               |   | 11,264 |  |  |  |  |   | 10,999 |   |
| Totalcash flowhedges        |  |  |                       | $ | 8,708,490 |                |  |  |               | $ | 43,257 |  |  |  |  | $ | 14,173 |   |
|                             |

Asof June  30,  2006, the net gain in OCI was approximately$40.5  million. The Company estimates that, over the next twelvemonths, approximately $4.2  million of this net gain will bereclassified from OCI to net interest income.

NOTE 5 —REMIC SECURITIZATION

In November  2005, MortgageITcompleted its first REMIC securitization, whereby a pool of ARM loanstotaling approximately $388  million was securitized and sold tothe public. The Company retained the mortgage servicing rights andretained approximately $24.3  million in mortgage-backedsecurities created in the transaction.

The available forsale mortgage-backed securities consist of the Company’sinvestment in the interest-only, prepayment penalty and othersubordinated securities that the trust issued. The unrealized lossesand estimated fair value of the available for sale mortgage-backedsecurities as of June  30,  2006 and December31,  2005, are approximately $264,000 and $22.2  million,and $948,000 and $23.4  million,respectively.

MortgageIT records mortgage servicing rightsarising from the sale of loans in the REMIC securitization. Thecarrying value of mortgage servicing rights and the estimated fairvalue of the servicing rights as of June  30,  2006 andDecember  31,  2005, are approximately $2.9  millionand $3.2  million, and $2.5  million and $2.6million, respectively.

In February  2006, MortgageITcompleted its second REMIC transaction, which was structured to qualifyas a financing and, as such, is included in collateralized debtobligations, discussed below.

NOTE 6 —BORROWINGS

Collateralized Debt Obligations

In theFebruary  2006 REMIC securitization, the Company issued, througha trust, AAA and AA-rated floating-rate pass-through certificatestotaling $723.0  million and A-rated subordinated floating-ratesecurities totaling $10.1  million to third party investors, andretained $33.3  million of subordinated certificates, whichprovide credit support to the higher-ratedcertificates.

In addition, through December31,  2005, the Company had issued AAA/AA-rated floating-ratepass-through certificates totaling $5.25  billion and A+/BBB+subordinated floating-rate securities 

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totaling $55.1  million to third partyinvestors and retained $112.2  million of subordinatedcertificates, which provide credit support to the higher-ratedcertificates that were placed with third party investors. The interestrates on the floating-rate pass-through certificates reset monthly andare indexed to one-month LIBOR.

In connection with theissuance of these mortgage-backed securities, which are also referredto as collateralized debt obligations, the Company incurred costs of$17.7  million through June  30,  2006. These costsare being amortized over the expected life of the securities using thelevel yield method. These transactions were accounted for as financingsof loans and represent permanent financing that is not subject tomargin calls. The Company's collateralized debt obligations areissued by trusts and are secured by ARM loans deposited into the trust.For financial reporting and tax purposes, the trusts' ARM loansheld as collateral are recorded as assets of the Company and the issuedmortgage-backed securities are recorded as collateralized debtobligations.

As of June  30,  2006 andDecember  31,  2005, the mortgage-backed securities werecollateralized by ARM loans with a principal balance of $4.9billion and $4.6  billion, respectively. The debt matures between2033 and 2036 and is callable by the Company at par anytime after thetotal balance of the loans collateralizing the debt is amortized downto 20%, or 10% for the February  2006 REMICsecuritization, of the original unpaid balance. The balance of thisdebt is reduced as the underlying loan collateral is paid down byborrowers and is expected to have an average life of approximately 2.5years.

Repurchase Agreements

The Company had$100.3  million and $87.1  million outstanding underrepurchase agreements with a weighted average borrowing rate ofapproximately 5.3% and 3.5% and a weighted averageremaining maturity of 26 days as of June  30,  2006 andDecember  31,  2005, respectively.

JuniorSubordinated Debentures

During March  2006,MortgageIT issued approximately $51.5  million of juniorsubordinated debentures (the ‘‘2006Debentures’’). The 2006 Debentures were issued to a trustsubsidiary of MortgageIT in order to fund such trust'sobligations with respect to an aggregate of $50  million of trustpreferred securities which were issued by such trust subsidiary. The2006 Debentures are floating-rate and bear a variable interest rate of360 basis points above 3-month LIBOR, paid quarterly, and mature in2036. They are redeemable, by MortgageIT, at par, after five years andat a premium to par in certain limited circumstances over the firstfive years. In connection with the issuance of the 2006 Debentures, theCompany incurred costs of $1.5  million. These costs are beingamortized over the expected life of the 2006 Debentures using theinterest method.

During April and May  2005,MortgageIT issued an aggregate of approximately $77.3  million ofjunior subordinated debentures (the ‘‘2005Debentures’’). The 2005 Debentures were issued to trustsubsidiaries of MortgageIT in order to fund such trust'sobligations with respect to an aggregate of $75  million of trustpreferred securities which were issued by such trust subsidiary. The2005 Debentures are floating-rate and bear a variable interest rate of375 basis points above 3-month LIBOR, paid quarterly, and mature in2035. They are redeemable, by MortgageIT, at par, after five years andat a premium to par in certain limited circumstances over the firstfive years. In connection with the issuance of the 2005 Debentures, theCompany incurred costs of $2.5  million. These costs are beingamortized over the expected life of the 2005 Debentures using theinterest method.

As of June  30,  2006, theCompany did not include in its consolidated financial statements theassets, liabilities and operations of the trust subsidiaries pursuantto FASB Interpretation No. 46 (revised December  2003),‘‘Consolidation of Variable InterestEntities’’ (‘‘FIN 46R’’). Asof June  30,  2006, the Company recorded its investment inthe trust subsidiaries, of approximately $3.8  million, inprepaids and other assets in the accompanying consolidated balancesheets.

Warehouse Lines Payable

The Company haseight warehouse credit facilities with major lenders that it uses tofund mortgage loans.

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In May  2006, the Companyentered into a warehouse credit facility with Bank of America, N.A.,for a noncommitted credit limit of $1.0  billion. Under the line,outstanding advances are secured by the specific mortgage loans funded,and bear interest at LIBOR plus a spread based on the types of loansbeing funded. As of June  30,  2006, the Company hadapproximately $473.3  million outstanding on this facility. Thiscredit facility expires in May  2007.

In July2006, the Company entered into a warehouse credit facility with DBStructured Products, Inc., an indirect subsidiary of Deutsche Bank AG,(‘‘DB Structured Products’’) for acommitted credit limit of $5.0  billion. Under the line,outstanding advances are secured by the specific mortgage loans funded,and bear interest at LIBOR plus a spread based on the types of loansbeing funded. This credit facility expires in July  2007. OnJuly  11,  2006, the Company entered into a definitiveagreement to be acquired by DB Structured Products, which is describedmore fully in Note 13.

The Company maintains a warehousecredit facility with JPMorgan Chase Bank, National Association for anoncommitted credit limit of $500  million. Under the line,outstanding advances are secured by the specific mortgage loans funded,and bear interest at LIBOR plus a spread based on the types of loansbeing funded. As of June  30,  2006 and December31,  2005, the Company had outstanding approximately$363.1  million and $153.4  million, respectively, on thisfacility. This credit facility expires in October2006.

The Company maintains a warehouse credit facilitywith Credit Suisse First Boston Mortgage Capital LLC for an uncommittedcredit limit of $750  million. Under the line, outstandingadvances are secured by the specific mortgage loans funded, and bearinterest at LIBOR plus a spread based on the types of loans beingfunded. As of June  30,  2006 and December31,  2005, the Company had outstanding approximately$716.4  million and $384.1  million, respectively, on thisfacility. This credit facility expires in December2006.

The Company maintains a warehouse credit facilitywith Greenwich Capital Financial Products Inc. for an uncommittedcredit limit of $750  million. Under the line, outstandingadvances are secured by the specific mortgage loans funded, and bearinterest at LIBOR plus a spread based on the types of loans beingfunded. As of June  30,  2006 and December31,  2005, the Company had outstanding approximately$590.8  million and $485.6  million, respectively, on thisfacility. This credit facility expires in October2006.

The Company maintains a credit facility (the‘‘UBS Warehouse Facility’’) with UBS RealEstate Securities, Inc. (‘‘UBS’’), whichhas an uncommitted credit limit of $2.0  billion, which includesa mortgage loan sale conduit facility. This credit facility may beterminated at the discretion of the lender. The facility provides fortemporary increases in the line amount on an as-requested basis. Underthe UBS Warehouse Facility, outstanding advances are secured by thespecific mortgage loans funded and bear interest at LIBOR plus a spreadbased on the types of loans being funded. Interest is payable at thetime the outstanding principal amount of the advance is due, generallywithin 30 to 60 days. As of June  30,  2006, there were nooutstanding borrowings on the line. As of December  31,2005, the Company had outstanding approximately $589.0  million,on this facility. Under the conduit facility, the Company sellsmortgage loans to UBS at a price equal to the committed purchase pricefrom a third party investor, and records the transaction as a sale inaccordance with SFAS No. 140. UBS, in turn, sells the loan to a thirdparty investor. The Company facilitates the sale to the third partyinvestor on behalf of UBS and receives a performance fee that variesdepending on the time required by UBS to complete the transfer of theloans to the third party investor. The performance fee of $697,000,$2.3  million, $919,000 and $2.0  million for the three andsix months ended June  30,  2006 and 2005, respectively, isincluded in brokerage revenue on the statement of operations. Loans onthe conduit line, which totaled approximately $59.9  million and$1.1  billion at June  30,  2006 and December31,  2005, respectively, reduce availability under the facilityuntil they are transferred to the third party investor by UBS. Themortgage loans sold to UBS are subject to repurchase under certainlimited conditions, primarily if UBS determines that a mortgage loanwas not properly underwritten. This credit facility expires inAugust  2007.

The Company maintains a warehousecredit facility with Merrill Lynch Bank USA, which has a partiallycommitted credit limit of $1.25  billion. Under the line theoutstanding advances are secured 

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by the specific mortgage loans funded, andbear interest at LIBOR plus a spread based on the types of loans beingfunded. As of June  30,  2006 and December31,  2005, the Company had outstanding approximately$534.8  million and $1.1  billion, respectively, on thisfacility. This credit facility expires in December2006.

The Company maintains a credit facility withResidential Funding Corporation, which has a committed credit limit of$650  million, collateralized by the specific mortgage loansfunded, and bears interest at LIBOR plus a spread based on the types ofloans being funded. As of June  30,  2006 andDecember  31,  2005, the Company had outstandingapproximately $548.6  million and $510.1  million,respectively, on this facility. This credit facility expires inSeptember  2006.

The weighted average effective rateof interest for borrowings under all warehouse lines of credit wasapproximately 6.0% and 4.3% for the six months endedJune  30,  2006 and the year ended December31,  2005, respectively.

Substantially all mortgageloans held for sale have been pledged as collateral under the warehousecredit facilities described above. In addition, the facilities containvarious financial covenants and restrictions, including a requirementthat the Company maintain specified leverage ratios and net worthamounts. The Company was not in compliance with covenants contained inthree of its warehouse credit facilities as of April  30,2006, covenants contained in two of its warehouse credit facilities asof May  31,  2006, and covenants contained in two of itswarehouse credit facilities as of June  30,  2006, forwhich waivers have been obtained. No assurance can be made that theCompany's lenders will waive future covenant violations, ifviolations occur.

Maturities of borrowings are as followsat June  30,  2006 (Dollars inthousands):

|                                   |  |  |                      |   |           |                |  |  |           |   |           |           |  |  |                 |   |           |  |  |  |  |   |           |  |  |  |  |   |         |  |
|-----------------------------------|--|--|----------------------|---|-----------|----------------|--|--|-----------|---|-----------|-----------|--|--|-----------------|---|-----------|--|--|--|--|---|-----------|--|--|--|--|---|---------|--|
|                              |  |  | Paymentsdue byPeriod |
|                              |  |  | (unaudited)          |
|                              |  |  | Total                |   |           | Lessthan 1year |  |  | 1-3 years |   |           | 3-5 years |  |  | More than5years |
| Collateralized debtobligations(1) |  |  |                      | $ | 4,713,147 |                |  |  |           | $ | 1,046,567 |           |  |  |                 | $ | 1,825,770 |  |  |  |  | $ | 1,390,952 |  |  |  |  | $ | 449,858 |  |
| Warehouselinespayable             |  |  |                      |   | 3,227,072 |                |  |  |           |   | 3,227,072 |           |  |  |                 |   | —   |  |  |  |  |   | —   |  |  |  |  |   | — |  |
| Repurchaseagreements              |  |  |                      |   | 100,300   |                |  |  |           |   | 100,300   |           |  |  |                 |   | —   |  |  |  |  |   | —   |  |  |  |  |   | — |  |
| Juniorsubordinateddebentures      |  |  |                      |   | 128,871   |                |  |  |           |   | —   |           |  |  |                 |   | —   |  |  |  |  |   | —   |  |  |  |  |   | 128,871 |  |
|                                   |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                   |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Paymentson the Company's collateralized debt obligations are dependentupon cash flows received from underlying loans receivable. TheCompany's estimate of its repayment is based on scheduledprincipal payments on the underlying loans receivable, adjusted forestimated pre-payments. This estimate will differ from actualpre-payment amounts. |

Special-Purpose Warehouse FinanceSubsidiary

The Company's UBS Warehouse Facility,described above under ‘‘— Warehouse LinesPayable,’’ is administered by an agent on behalf of aninstitutionally managed medium term note conduit. Under the fundingagreements governing the UBS Warehouse Facility, the Company transfersfinance receivables to MortgageIT SPV I, a Delaware statutory trust(the ‘‘Trust’’) that has been establishedby the Company as a special purpose warehouse finance subsidiary of theCompany. The Trust, in turn, issues notes (the‘‘Notes’’) to the agent, collateralized bysuch finance receivables and cash. Through consolidation of the Trust,these transactions are treated as secured financing arrangements forfinancial reporting purposes. The agent provides funding under theNotes to the Trust pursuant to an advance formula, and the Trustforwards the funds to the Company in consideration for the transfer offinance receivables. Advances under the funding agreements bearinterest at LIBOR plus specified fees depending upon the source offunds provided by the agent. The Company is required to hold certainfunds in restricted cash accounts to provide additional collateral forborrowings under the facility. Additionally, the funding agreementscontain various covenants requiring certain minimum financial ratios,asset quality, and portfolio performance ratios (cumulative net loss,delinquency and repossession ratios) as well as deferment levels.Failure to meet any of these covenants, financial ratios or financialtests could result in an event of default under these agreements. If anevent of default occurs under these agreements, the lenders could electto declare all amounts outstanding under these 

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agreements to be immediately due andpayable, enforce their interests against collateral pledged under theseagreements or restrict the Company's ability to obtain additionalborrowings under these agreements.

In addition, under theagreements that document the issuance and sale of theNotes:

|              |                                                                                                                |
|--------------|----------------------------------------------------------------------------------------------------------------|
| •  | all assets which are from time totime owned by the Trust are legally owned by the Trust and not by theCompany; |

|              |                                                                                                           |
|--------------|-----------------------------------------------------------------------------------------------------------|
| •  | the Trust is a legal entityseparate and distinct from the Company and all other affiliates of theCompany; |

|              |                                                                                                                                                                                                                                                          |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the assets of the Trust arelegally assets only of the Trust, and are not legally available to theCompany and all other affiliates of the Company or their respectivecreditors, for pledge to other creditors or to satisfy the claims ofother creditors; |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | none of the Company orany other affiliate of the Company is legally liable on the debts ofthe Trust, except for an amount limited to 10% of the greater of(i) the total principal amount of Notes then outstanding under therelated note purchase agreement plus the aggregate outstandingprincipal of all mortgage loans sold under the loan repurchaseagreement and the loan sale agreement and (ii) the facility limit;and |

|              |                                                                               |
|--------------|-------------------------------------------------------------------------------|
| •  | assets of the Company which resultfrom the issuance and sale of the Notesare: |

|  |          |                                                                                                                                                   |
|--|----------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 1)  | any cash portion of the purchase pricepaid from time to time by the Trust in consideration of mortgage loanssold to the Trust by the Company; and |

|  |          |                                                              |
|--|----------|--------------------------------------------------------------|
|  | 2)  | thevalue of the Company's net equity investment in theTrust. |

As of June  30,  2006, the Trust hadthe following assets (in thousands):

|  |          |                                   |
|--|----------|-----------------------------------|
|  | a)  | cash andcash equivalents: $37,581 |

As of June  30,2006, the Trust had the following equity (inthousands):

|  |          |                                       |
|--|----------|---------------------------------------|
|  | a)  | $37,581 in members' equityinvestment. |

As of June  30,  2006, the Companyincluded in its consolidated financial statements the assets,liabilities and operations of the Trust pursuant to FIN46R.

NOTE 7 — NOTES PAYABLE

MortgageITissued senior secured notes due 2007, with an aggregate principalamount of $15  million, in March  2004. The notes aresecured by a first priority security interest in all ofMortgageIT's assets, with the exception of its mortgage loansheld for sale and ARM loans held for securitization. The note purchaseagreement governing the notes contains various restrictions andcovenants. As of June  30,  2006, MortgageIT was incompliance with all of the restrictions and covenants contained in therelated note purchase agreement. If covenant violations occur in thefuture, there can be no assurance that the investor will waivethem.

In November  2004, MortgageIT entered into anamendment of the note purchase agreement, which reduced the interestrate on the outstanding principal balance thereunder from 10%per annum to 71⁄2% per annum for the periodbeginning October  1,  2004 and ending March31,  2005. In addition, the amendment prohibited MortgageIT fromprepaying the notes prior to April  14,  2005. InAugust  2005, MortgageIT entered into an amendment andrestatement of the note purchase agreement, which reduced the interestrate on the outstanding principal balance thereunder from 10%per annum to 5.5% for the period as of August  23,2005 and ending at maturity. In addition, this amendment requiredMortgageIT to pay a premium on any optional prepayment of the notes onor prior to July  31,  2006.

InFebruary  2006, MortgageIT sold an additional aggregate principalamount of $15  million of senior secured notes to the investor,and amended the interest rate to 6.5% for all notes outstandingas of February  21,  2006 and ending atmaturity.

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NOTE 8 — STOCKHOLDERSEQUITY

Stock Repurchase Plan

In October2005, the Company announced that its board of directors authorized aprogram to repurchase up to $30  million of the Company'soutstanding common stock. The repurchase program allows for shares tobe purchased from time to time at management's discretion basedupon ongoing assessments of the capital needs of the Company and themarket valuation of its stock. Through December  31,  2005,the Company repurchased 90,400 shares of common stock at an averageprice of $13.03 per share. There were no repurchases during the sixmonths ended June  30,  2006.

2004 and AmendedLong-Term Incentive Plans

In August  2004, theCompany adopted the MortgageIT Holdings, Inc. 2004 Long-Term IncentivePlan (the ‘‘2004 Plan’’). A total of1,725,000 shares of common stock have been reserved for issuance underthe 2004 Plan, which terminates in 2014.

In April2005, the board of directors adopted the MortgageIT Holdings, Inc.Amended Long-Term Incentive Plan (the ‘‘AmendedPlan’’), which was subsequently approved by theCompany's stockholders. Under the Amended Plan, an additional1,000,000 shares of the Company's common stock were reserved forissuance; this addition of shares is the only material differencebetween the 2004 Plan and the Amended Plan. The Amended Plan willterminate in 2015.

Both the 2004 Plan and the Amended Planprovide for the grant of incentive stock options, non-qualified stockoptions, stock appreciation rights and restricted stock. During the sixmonths ended June  30,  2006, options to purchase 45,297shares of common stock, at an average exercise price of $12.03 pershare, and 17,761 shares of restricted stock were forfeited, and theCompany granted 317,345 shares of restricted stock. The stock optionsand restricted stock will vest over a three-year period. There havebeen no stock option grants made under the AmendedPlan.

During the six months ended June  30,2006, 59,277 shares of restricted stock vested.

There wereapproximately 838,000 shares available for future grant at June30,  2006, under both the 2004 Plan and the AmendedPlan.

NOTE 9 — EARNINGS PER SHARE

Basic anddiluted income per share are calculated in accordance with SFAS No.128, ‘‘Earnings Per Share.’’ The basic anddiluted income per common share for all periods presented were computedbased on the weighted-average number of common shares outstanding, asfollows (Dollars and shares in thousands, except per share data)(Unaudited):

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|                                                                        |  |  |                           |   |        |                          |  |  |      |   |        |      |  |  |  |   |        |  |  |  |  |   |        |  |
|------------------------------------------------------------------------|--|--|---------------------------|---|--------|--------------------------|--|--|------|---|--------|------|--|--|--|---|--------|--|--|--|--|---|--------|--|
|                                                                   |  |  | Three monthsendedJune 30, |   |        | Six months ended June30, |
|                                                                   |  |  | 2006                      |   |        | 2005                     |  |  | 2006 |   |        | 2005 |
| Netincome                                                              |  |  |                           | $ | 5,843  |                          |  |  |      | $ | 8,420  |      |  |  |  | $ | 1,116  |  |  |  |  | $ | 24,148 |  |
| Basicearnings pershare:                                                |  |  |                           |   |   |                          |  |  |      |   |   |      |  |  |  |   |   |  |  |  |  |   |   |  |
| Weightedaverage common stock outstanding for basic earnings pershare   |  |  |                           |   | 28,375 |                          |  |  |      |   | 19,486 |      |  |  |  |   | 28,364 |  |  |  |  |   | 19,446 |  |
| Basicearnings pershare                                                 |  |  |                           | $ | 0.21   |                          |  |  |      | $ | 0.43   |      |  |  |  | $ | 0.04   |  |  |  |  | $ | 1.24   |  |
| Dilutedearnings pershare:                                              |  |  |                           |   |   |                          |  |  |      |   |   |      |  |  |  |   |   |  |  |  |  |   |   |  |
| Netincome for diluted earnings pershare                                |  |  |                           | $ | 5,843  |                          |  |  |      | $ | 8,420  |      |  |  |  | $ | 1,116  |  |  |  |  | $ | 24,148 |  |
| Commonstock outstanding for basic earnings per sharecomputation        |  |  |                           |   | 28,375 |                          |  |  |      |   | 19,486 |      |  |  |  |   | 28,364 |  |  |  |  |   | 19,446 |  |
| Assumedconversion ofdilutive:                                          |  |  |                           |   |   |                          |  |  |      |   |   |      |  |  |  |   |   |  |  |  |  |   |   |  |
| Stockoptions and unvested restrictedstock                              |  |  |                           |   | 157    |                          |  |  |      |   | 419    |      |  |  |  |   | 158    |  |  |  |  |   | 454    |  |
| Weightedaverage common stock outstanding for diluted earnings pershare |  |  |                           |   | 28,532 |                          |  |  |      |   | 19,905 |      |  |  |  |   | 28,522 |  |  |  |  |   | 19,900 |  |
| Dilutedearnings pershare                                               |  |  |                           | $ | 0.20   |                          |  |  |      | $ | 0.42   |      |  |  |  | $ | 0.04   |  |  |  |  | $ | 1.21   |  |
|                                                                        |

NOTE10 — STATEMENT OF CASH FLOWS

Supplementaldisclosure of cash flow information (Dollars inthousands)

|                              |  |  |                                     |   |         |      |  |  |  |   |        |  |
|------------------------------|--|--|-------------------------------------|---|---------|------|--|--|--|---|--------|--|
|                         |  |  | (Unaudited)Six months ended June30, |
|                         |  |  | 2006                                |   |         | 2005 |
| Cashpaid during the yearfor: |  |  |                                     |   |    |      |  |  |  |   |   |  |
| Interest                     |  |  |                                     | $ | 222,469 |      |  |  |  | $ | 76,656 |  |
| Incometaxes                  |  |  |                                     |   | 4,993   |      |  |  |  |   | 8,246  |  |
|                              |

NOTE 11 —SEGMENT REPORTING

The Company operates its business intwo primary segments, mortgage investment operations conducted in theREIT and mortgage banking operations conducted in the TRS. Mortgageinvestment operations are driven by the balance of Portfolio ARM Loansand the net interest income generated on those balances. Mortgagebanking operations includes loan origination, underwriting, funding,secondary marketing and loan brokerage, title and insurance activities.Following is a summary of the Company's segment operating resultsfor the three and six months ended June  30,  2006 and 2005(Dollars in thousands).

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Three months ended June30,  2006(unaudited)

|                                                   |  |  |                              |   |           |                           |  |  |              |   |           |       |  |  |  |   |          |   |  |  |  |   |           |   |
|---------------------------------------------------|--|--|------------------------------|---|-----------|---------------------------|--|--|--------------|---|-----------|-------|--|--|--|---|----------|---|--|--|--|---|-----------|---|
|                                              |  |  | MortgageInvestmentOperations |   |           | MortgageBankingOperations |  |  | Eliminations |   |           | Total |
| Gainon sale of mortgageloans                      |  |  |                              | $ | —   |                           |  |  |              | $ | 68,839    |       |  |  |  | $ | 34       |   |  |  |  | $ | 68,873    |   |
| Brokeragerevenues                                 |  |  |                              |   | —   |                           |  |  |              |   | 5,810     |       |  |  |  |   | —  |   |  |  |  |   | 5,810     |   |
| Interestincome                                    |  |  |                              |   | 68,266    |                           |  |  |              |   | 59,958    |       |  |  |  |   | (11,589  | ) |  |  |  |   | 116,635   |   |
| Interestexpense                                   |  |  |                              |   | (61,882   | )                         |  |  |              |   | (68,199   | )     |  |  |  |   | 13,739   |   |  |  |  |   | (116,342  | ) |
| Netinterest income(expense)                       |  |  |                              |   | 6,384     |                           |  |  |              |   | (8,241    | )     |  |  |  |   | 2,150    |   |  |  |  |   | 293       |   |
| Realizedand unrealized gain on hedginginstruments |  |  |                              |   | 3,013     |                           |  |  |              |   | —   |       |  |  |  |   | —  |   |  |  |  |   | 3,013     |   |
| Other                                             |  |  |                              |   | —   |                           |  |  |              |   | 619       |       |  |  |  |   | —  |   |  |  |  |   | 619       |   |
| Totalrevenues                                     |  |  |                              |   | 9,397     |                           |  |  |              |   | 67,027    |       |  |  |  |   | 2,184    |   |  |  |  |   | 78,608    |   |
| Operatingexpenses                                 |  |  |                              |   | 1,302     |                           |  |  |              |   | 75,313    |       |  |  |  |   | 68       |   |  |  |  |   | 76,683    |   |
| Income(loss) before incometax                     |  |  |                              |   | 8,095     |                           |  |  |              |   | (8,286    | )     |  |  |  |   | 2,116    |   |  |  |  |   | 1,925     |   |
| Incometax (benefit)expense                        |  |  |                              |   | —   |                           |  |  |              |   | (3,918    | )     |  |  |  |   | —  |   |  |  |  |   | (3,918    | ) |
| Netincome(loss)                                   |  |  |                              | $ | 8,095     |                           |  |  |              | $ | (4,368    | )     |  |  |  | $ | 2,116    |   |  |  |  |   | 5,843     |   |
| Segmentassets                                     |  |  |                              | $ | 5,183,476 |                           |  |  |              | $ | 4,382,364 |       |  |  |  | $ | (860,929 | ) |  |  |  | $ | 8,704,911 |   |
|                                                   |

Allocationofeliminations:

|                                      |  |  |                              |   |        |                            |  |  |       |   |        |   |  |  |  |   |       |  |
|--------------------------------------|--|--|------------------------------|---|--------|----------------------------|--|--|-------|---|--------|---|--|--|--|---|-------|--|
|                                 |  |  | MortgageInvestmentOperations |   |        | Mortgage BankingOperations |  |  | Total |
| Net income (loss) beforeeliminations |  |  |                              | $ | 8,095  |                            |  |  |       | $ | (4,368 | ) |  |  |  | $ | 3,727 |  |
| Eliminations                         |  |  |                              |   | 1,949  |                            |  |  |       |   | 167    |   |  |  |  |   | 2,116 |  |
| Netincome(loss)                      |  |  |                              | $ | 10,044 |                            |  |  |       | $ | (4,201 | ) |  |  |  | $ | 5,843 |  |
|                                      |

Threemonths ended June  30,  2005(unaudited)

|                                                   |  |  |                              |   |           |                           |  |  |              |   |           |       |  |  |  |   |          |   |  |  |  |   |           |   |
|---------------------------------------------------|--|--|------------------------------|---|-----------|---------------------------|--|--|--------------|---|-----------|-------|--|--|--|---|----------|---|--|--|--|---|-----------|---|
|                                              |  |  | MortgageInvestmentOperations |   |           | MortgageBankingOperations |  |  | Eliminations |   |           | Total |
| Gainon sale of mortgageloans                      |  |  |                              | $ | —   |                           |  |  |              | $ | 53,237    |       |  |  |  | $ | (6,252   | ) |  |  |  | $ | 46,985    |   |
| Brokeragerevenues                                 |  |  |                              |   | —   |                           |  |  |              |   | 6,275     |       |  |  |  |   | —  |   |  |  |  |   | 6,275     |   |
| Interestincome                                    |  |  |                              |   | 40,430    |                           |  |  |              |   | 26,118    |       |  |  |  |   | 1,352    |   |  |  |  |   | 67,900    |   |
| Interestexpense                                   |  |  |                              |   | (32,409   | )                         |  |  |              |   | (16,752   | )     |  |  |  |   | (94      | ) |  |  |  |   | (49,255   | ) |
| Netinterestincome                                 |  |  |                              |   | 8,021     |                           |  |  |              |   | 9,366     |       |  |  |  |   | 1,258    |   |  |  |  |   | 18,645    |   |
| Realizedand unrealized gain on hedginginstruments |  |  |                              |   | 820       |                           |  |  |              |   | —   |       |  |  |  |   | —  |   |  |  |  |   | 820       |   |
| Other                                             |  |  |                              |   | —   |                           |  |  |              |   | 243       |       |  |  |  |   | —  |   |  |  |  |   | 243       |   |
| Totalrevenues                                     |  |  |                              |   | 8,841     |                           |  |  |              |   | 69,121    |       |  |  |  |   | (4,994   | ) |  |  |  |   | 72,968    |   |
| Operatingexpenses                                 |  |  |                              |   | 3,728     |                           |  |  |              |   | 55,670    |       |  |  |  |   | (634     | ) |  |  |  |   | 58,764    |   |
| Incomebefore incometax                            |  |  |                              |   | 5,113     |                           |  |  |              |   | 13,451    |       |  |  |  |   | (4,360   | ) |  |  |  |   | 14,204    |   |
| Incometaxes                                       |  |  |                              |   | —   |                           |  |  |              |   | 5,784     |       |  |  |  |   | —  |   |  |  |  |   | 5,784     |   |
| Netincome                                         |  |  |                              | $ | 5,113     |                           |  |  |              | $ | 7,667     |       |  |  |  | $ | (4,360   | ) |  |  |  | $ | 8,420     |   |
| December31,2005                                   |  |  |                              |   |      |                           |  |  |              |   |      |       |  |  |  |   |     |   |  |  |  |   |      |   |
| Segmentassets                                     |  |  |                              | $ | 4,926,820 |                           |  |  |              | $ | 3,584,137 |       |  |  |  | $ | (129,066 | ) |  |  |  | $ | 8,381,891 |   |
|                                                   |

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Allocation ofeliminations:

|                               |  |  |                              |   |       |                            |  |  |       |   |        |   |  |  |  |   |        |   |
|-------------------------------|--|--|------------------------------|---|-------|----------------------------|--|--|-------|---|--------|---|--|--|--|---|--------|---|
|                          |  |  | MortgageInvestmentOperations |   |       | Mortgage BankingOperations |  |  | Total |
| Net income beforeeliminations |  |  |                              | $ | 5,113 |                            |  |  |       | $ | 7,667  |   |  |  |  | $ | 12,780 |   |
| Eliminations                  |  |  |                              |   | 1,352 |                            |  |  |       |   | (5,712 | ) |  |  |  |   | (4,360 | ) |
| Netincome                     |  |  |                              | $ | 6,465 |                            |  |  |       | $ | 1,955  |   |  |  |  | $ | 8,420  |   |
|                               |

Sixmonths ended June  30,  2006(unaudited)

|                                                   |  |  |                              |   |           |                           |  |  |              |   |           |       |  |  |  |   |          |   |  |  |  |   |           |   |
|---------------------------------------------------|--|--|------------------------------|---|-----------|---------------------------|--|--|--------------|---|-----------|-------|--|--|--|---|----------|---|--|--|--|---|-----------|---|
|                                              |  |  | MortgageInvestmentOperations |   |           | MortgageBankingOperations |  |  | Eliminations |   |           | Total |
| Gainon sale of mortgageloans                      |  |  |                              | $ | —   |                           |  |  |              | $ | 114,535   |       |  |  |  | $ | 90       |   |  |  |  | $ | 114,625   |   |
| Brokeragerevenues                                 |  |  |                              |   | —   |                           |  |  |              |   | 12,248    |       |  |  |  |   | —  |   |  |  |  |   | 12,248    |   |
| Interestincome                                    |  |  |                              |   | 134,504   |                           |  |  |              |   | 112,948   |       |  |  |  |   | (16,909  | ) |  |  |  |   | 230,543   |   |
| Interestexpense                                   |  |  |                              |   | (118,047  | )                         |  |  |              |   | (123,817  | )     |  |  |  |   | 20,541   |   |  |  |  |   | (221,323  | ) |
| Netinterest income(expense)                       |  |  |                              |   | 16,457    |                           |  |  |              |   | (10,869   | )     |  |  |  |   | 3,632    |   |  |  |  |   | 9,220     |   |
| Realizedand unrealized gain on hedginginstruments |  |  |                              |   | 3,433     |                           |  |  |              |   | —   |       |  |  |  |   | —  |   |  |  |  |   | 3,433     |   |
| Other                                             |  |  |                              |   | (95       | )                         |  |  |              |   | 952       |       |  |  |  |   | —  |   |  |  |  |   | 857       |   |
| Totalrevenues                                     |  |  |                              |   | 19,795    |                           |  |  |              |   | 116,866   |       |  |  |  |   | 3,722    |   |  |  |  |   | 140,383   |   |
| Operatingexpenses                                 |  |  |                              |   | 2,798     |                           |  |  |              |   | 151,478   |       |  |  |  |   | 249      |   |  |  |  |   | 154,525   |   |
| Income(loss) before incometax                     |  |  |                              |   | 16,997    |                           |  |  |              |   | (34,612   | )     |  |  |  |   | 3,473    |   |  |  |  |   | (14,142   | ) |
| Incometax (benefit)expense                        |  |  |                              |   | —   |                           |  |  |              |   | (15,258   | )     |  |  |  |   | —  |   |  |  |  |   | (15,258   | ) |
| Netincome(loss)                                   |  |  |                              | $ | 16,997    |                           |  |  |              | $ | (19,354   | )     |  |  |  | $ | 3,473    |   |  |  |  | $ | 1,116     |   |
| Segmentassets                                     |  |  |                              | $ | 5,183,476 |                           |  |  |              | $ | 4,382,364 |       |  |  |  | $ | (860,929 | ) |  |  |  | $ | 8,704,911 |   |
|                                                   |

Allocationofeliminations:

|                                      |  |  |                              |   |        |                            |  |  |       |   |         |   |  |  |  |   |        |   |
|--------------------------------------|--|--|------------------------------|---|--------|----------------------------|--|--|-------|---|---------|---|--|--|--|---|--------|---|
|                                 |  |  | MortgageInvestmentOperations |   |        | Mortgage BankingOperations |  |  | Total |
| Net income (loss) beforeeliminations |  |  |                              | $ | 16,997 |                            |  |  |       | $ | (19,354 | ) |  |  |  | $ | (2,357 | ) |
| Eliminations                         |  |  |                              |   | 3,286  |                            |  |  |       |   | 187     |   |  |  |  |   | 3,473  |   |
| Netincome(loss)                      |  |  |                              | $ | 20,283 |                            |  |  |       | $ | (19,167 | ) |  |  |  | $ | 1,116  |   |
|                                      |

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Six months ended June  30,2005(unaudited)

|                                                   |  |  |                              |   |           |                           |  |  |              |   |           |       |  |  |  |   |          |   |  |  |  |   |           |   |
|---------------------------------------------------|--|--|------------------------------|---|-----------|---------------------------|--|--|--------------|---|-----------|-------|--|--|--|---|----------|---|--|--|--|---|-----------|---|
|                                              |  |  | MortgageInvestmentOperations |   |           | MortgageBankingOperations |  |  | Eliminations |   |           | Total |
| Gainon sale of mortgageloans                      |  |  |                              | $ | —   |                           |  |  |              | $ | 92,403    |       |  |  |  | $ | (13,311  | ) |  |  |  | $ | 79,092    |   |
| Brokeragerevenues                                 |  |  |                              |   | —   |                           |  |  |              |   | 12,673    |       |  |  |  |   | —  |   |  |  |  |   | 12,673    |   |
| Interestincome                                    |  |  |                              |   | 73,701    |                           |  |  |              |   | 45,673    |       |  |  |  |   | 2,278    |   |  |  |  |   | 121,652   |   |
| Interestexpense                                   |  |  |                              |   | (54,244   | )                         |  |  |              |   | (26,403   | )     |  |  |  |   | (94      | ) |  |  |  |   | (80,741   | ) |
| Netinterestincome                                 |  |  |                              |   | 19,457    |                           |  |  |              |   | 19,270    |       |  |  |  |   | 2,184    |   |  |  |  |   | 40,911    |   |
| Realizedand unrealized gain on hedginginstruments |  |  |                              |   | 8,128     |                           |  |  |              |   | —   |       |  |  |  |   | 1,614    |   |  |  |  |   | 9,742     |   |
| Other                                             |  |  |                              |   | —   |                           |  |  |              |   | 506       |       |  |  |  |   | —  |   |  |  |  |   | 506       |   |
| Totalrevenues                                     |  |  |                              |   | 27,585    |                           |  |  |              |   | 124,852   |       |  |  |  |   | (9,513   | ) |  |  |  |   | 142,924   |   |
| Operatingexpenses                                 |  |  |                              |   | 6,742     |                           |  |  |              |   | 104,471   |       |  |  |  |   | (1,203   | ) |  |  |  |   | 110,010   |   |
| Incomebefore incometax                            |  |  |                              |   | 20,843    |                           |  |  |              |   | 20,381    |       |  |  |  |   | (8,310   | ) |  |  |  |   | 32,914    |   |
| Incometaxes                                       |  |  |                              |   | 2         |                           |  |  |              |   | 8,764     |       |  |  |  |   | —  |   |  |  |  |   | 8,766     |   |
| Netincome                                         |  |  |                              | $ | 20,841    |                           |  |  |              | $ | 11,617    |       |  |  |  | $ | (8,310   | ) |  |  |  | $ | 24,148    |   |
| December31,2005                                   |  |  |                              |   |      |                           |  |  |              |   |      |       |  |  |  |   |     |   |  |  |  |   |      |   |
| Segmentassets                                     |  |  |                              | $ | 4,926,820 |                           |  |  |              | $ | 3,584,137 |       |  |  |  | $ | (129,066 | ) |  |  |  | $ | 8,381,891 |   |
|                                                   |

Allocationofeliminations:

|                               |  |  |                              |   |        |                            |  |  |       |   |         |   |  |  |  |   |        |   |
|-------------------------------|--|--|------------------------------|---|--------|----------------------------|--|--|-------|---|---------|---|--|--|--|---|--------|---|
|                          |  |  | MortgageInvestmentOperations |   |        | Mortgage BankingOperations |  |  | Total |
| Net income beforeeliminations |  |  |                              | $ | 20,841 |                            |  |  |       | $ | 11,617  |   |  |  |  | $ | 32,458 |   |
| Eliminations                  |  |  |                              |   | 2,278  |                            |  |  |       |   | (10,588 | ) |  |  |  |   | (8,310 | ) |
| Netincome                     |  |  |                              | $ | 23,119 |                            |  |  |       | $ | 1,029   |   |  |  |  | $ | 24,148 |   |
|                               |

NOTE12 — COMMITMENTS AND CONTINGENCIES

On July13,  2006, a purported stockholder of the Company filed acomplaint seeking class action status in the Supreme Court of the Stateof New York against the Company and several of its directors. Thecomplaint alleges, among other things, that the Company’sdirectors breached their fiduciary duties by failing to maximizestockholder value with regard to the proposed acquisition of theCompany by DB Structured Products (see Note 13). Among other things,the complaint seeks class action status, a court order enjoining theCompany and its directors from proceeding with or consummating themerger, compensation for the plaintiff and members of the class for alllosses and damages suffered and the payment of attorneys’,accountants’ and experts’ fees. The Company intends todefend this lawsuit vigorously.

On February16,  2006, EMC Mortgage Corp.(‘‘EMC’’) filed suit against MortgageIT inthe 95th Judicial District Court of Dallas County, Texas. This suitalleges, among other things, that MortgageIT is obligated to repurchasefrom EMC approximately $70.5  million in sub-prime mortgage loanssold to EMC pursuant to a Mortgage Loan Purchase and Interim ServicingAgreement dated January  1,  2003, as amended, due toalleged breaches of representations and warranties as well as allegedearly payment default repurchase obligations with respect to suchloans. The case was subsequently removed to the U.S. District Court forthe Northern District of Texas, Dallas Division. MortgageIT has movedto dismiss EMC’s third amended complaint and intends tovigorously defend the suit. At this stage of the proceedings, it is notpossible to predict the outcome of this litigation.

OnSeptember  29,  2004, as amended on October12,  2004, an action was filed in the U.S. District Court for theSouthern District of New York against our subsidiary, MortgageIT, andIPI Skyscraper Mortgage, which was, at the time, a subsidiary of, andhas now been merged with and into, 

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MortgageIT. The case was filed by fourformer loan officers of a MortgageIT branch in Newburgh, New York, andseeks to recover allegedly unpaid minimum wage and overtime under bothfederal and New York labor laws for themselves and others similarlysituated. The parties entered into a settlement agreement. On August 4,2006, at a hearing, the Court opined that the settlement reached by theparties was fair and it would enter an order approving the settlement.Including a charge of approximately $600,000 for the three months endedJune 30, 2006, the Company has fully reserved for thissettlement.

In addition to these cases, in the ordinarycourse of business, the Company is a defendant in or party to a numberof pending and threatened legal actions and proceedings, and is alsoinvolved from time to time in investigations and administrativeproceedings by governmental agencies. Certain of such actions andproceedings involve alleged violations of consumer protection laws,including claims relating to the Company’s loan origination andcollection efforts, and other federal and state banking laws. Certainof such actions and proceedings include claims for breach of contract,restitution, compensatory damages, punitive damages and other forms ofrelief. Due to the difficulty of predicting the outcome of suchmatters, the Company can give no assurance that it will prevail on allclaims made against it; however, management believes, based on currentknowledge and after consultation with counsel, that these legal mattersand administrative proceedings and the losses, if any, resulting fromthe final outcome thereof, will not have a material adverse effect onthe Company’s financial position, results of operations orliquidity, but can give no assurance that they will not have such aneffect.

Although it is difficult to predict the outcome ofany litigation, the Company has established litigation reserves wherenecessary in accordance with generally accepted accountingprinciples.

NOTE 13 — SUBSEQUENT EVENT

OnJuly  11,  2006, the Company entered into a definitiveagreement to be acquired by DB Structured Products, Inc., for$14.75 in cash per share of Company common stock, or approximately$429  million in the aggregate. The transaction is expected toclose in the fourth quarter of 2006, pending regulatory approvals,approval by the Company’s stockholders and the satisfaction ofother customary closing conditions.

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|              |                                                                                      |
|--------------|--------------------------------------------------------------------------------------|
| ITEM2.  | MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS |

Unless thecontext suggests otherwise, the terms‘‘Company,’’‘‘Holdings,’’‘‘we,’’ ‘‘us,’’and ‘‘our’’ refer to MortgageIT Holdings,Inc., a Maryland corporation incorporated in March  2004, and itssubsidiaries. ‘‘MortgageIT’’ or‘‘TRS’’ refers to our wholly ownedsubsidiary, MortgageIT, Inc., a New Yorkcorporation.

GENERAL

Formed in March  2004,Holdings is organized and conducts its operations to qualify as REITfor federal income tax purposes, and is focused on earning net interestincome from mortgage loans originated by MortgageIT, its taxable REITsubsidiary. MortgageIT was incorporated in New York in February1999, and began marketing mortgage loan services in May  1999.MortgageIT is a full-service residential mortgage banking company thatis licensed to originate mortgage loans throughout the United States.MortgageIT originates single-family mortgage loans of all types, with aparticular focus on prime ARM and fixed-rate, first lien residentialmortgage loans. Prior to August  4,  2004, MortgageIT soldall of the loans it originated through both its retail and wholesaleoperations to third party investors. Home Closer LLC(‘‘Home Closer’’), a subsidiary ofMortgageIT, Inc., provides settlement, title and relatedservices.

Our Company's business strategy is toself-originate prime ARM loans that are used to collateralize debtobligations, and generate earnings by holding these loans or investmentsecurities in our portfolio and receiving the spread between the yieldon our assets and the cost of borrowings. Our investment strategy isdesigned to mitigate credit risk and interest rate risk. Our mortgageloan investment portfolio consists primarily of self-originated primeARM Loans that collateralize multi-class pass-through securities thatwe issue in securitization transactions, and prime ARM Loans that weintend to securitize. A small portion of the portfolio consists ofmortgage-backed securities (‘‘MBS’’) issuedby the TRS through a real estate mortgage investment conduit(‘‘REMIC’’). Mortgage-backed securities aredebt obligations that represent claims to the cash flows from pools ofmortgage loans. A REMIC is an entity through which an issuer can sellmultiple-class securities to investors. The entity invests in a pool ofmortgages, and sells interests in those mortgages through securitieswith one or more senior classes as well as subordinated classes thatassume the credit risk of defaults and delinquencies.

AREMIC securitization may be structured to qualify as either a sale or afinancing for accounting purposes. The REMIC securitization executed bythe TRS in November  2005 is structured to qualify as a sale, andas such, the loans are removed from our balance sheet, but the Companyretains excess interest, prepayment penalty and subordinated securitiesfor its investment portfolio. In such transactions the TRS generatesgain on sale revenue through the sale of loans to the REMIC, and mayalso retain mortgage servicing rights(‘‘MSR’’) on the underlying loans, therebygenerating a stream of revenue over the life of the loans. Thesecurities purchased by the Company for its investment portfolio arefunded with a combination of repurchase line financing and equitycapital. The REMIC securitization executed by the TRS inFebruary  2006 is structured to qualify as a financing. The loanstherefore remain on our balance sheet, and the Company generatesearnings by receiving the spread between the yield on these loan assetsand the cost of borrowings. The Company used a combination ofmulti-class pass-through securities, repurchase line financing andequity capital for this REMIC securitization.

The loansthat we retain in portfolio are serviced through a subservicingarrangement. Generally, we expect to continue to sell the fixed rateloans originated by MortgageIT to third parties as well as any ARM orhybrid ARM loans that we do not retain in portfolio.

OnAugust  4,  2004, we closed our initial public offering andsold 14.6  million shares of common stock at a price to thepublic of $12.00 per share, for net proceeds of approximately$163.4  million, after deducting the underwriters' discountand other offering-related expenses. Since the completion of ourinitial public offering, the primary focus of our business has been tobuild a leveraged portfolio of single-family residential mortgage loanscomprised largely of traditional ARM and hybrid ARM loans,

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the majority of which have an initialfixed-rate period followed by an adjustable-rate period. Our portfolioof mortgage loans consists exclusively of loans originated by the TRS.As of June  30,  2006, we had transferred to our investmentportfolio approximately $6.3  billion of residential traditionalARM and hybrid ARM loans originated by MortgageIT, as well as$24.3  million of investment securities collateralized byself-originated ARM loans.

In June  2005, theCompany conducted a secondary public offering of its common stock andsold 7,289,428 shares at a price to the public of $18.25 per share. InJuly  2005, the underwriters of the secondary public offeringexercised, in full, their option to purchase an additional 1,422,646shares of common stock from the Company at the public offering price of$18.25 to cover over-allotments. Net proceeds to the Company, afterdeducting the underwriting discount and estimated offering expenses,were approximately $150  million. In addition, certainstockholders sold 2,194,878 shares in the secondary public offering.The Company did not receive any proceeds from the sale of shares by theselling stockholders.

In April and May  2005, theCompany issued, in two private placements, an aggregate of $75million of trust preferred securities(‘‘TPS’’) through trust subsidiaries andsold them to collateralized debt obligation pool vehicles under Rule144A of the Securities Act of 1933. The floating-rate TPS bear avariable interest rate of 375 basis points above 3-month LIBOR, paidquarterly, and will mature in 2035. They are redeemable at par afterfive years and, in certain limited circumstances, at a premium to parin less than five years. Proceeds from the TPS sale were used to growthe Company’s self-originated loan portfolio as well as tosupport the continued expansion of the Company’s taxable REITsubsidiary.

In March  2006, the Company issued$50  million of TPS through a trust subsidiary and sold them tocollateralized debt obligation pool vehicles under Rule 144A of theSecurities Act of 1933. The floating-rate TPS bear a variable interestrate of 360 basis points above 3-month LIBOR, paid quarterly, and willmature in 2036. They are redeemable at par after five years and, incertain limited circumstances, at a premium to par in less than fiveyears. Proceeds from the TPS sale were used to support the continuedexpansion of the Company’s taxable REITsubsidiary.

In October  2005, the Company announceda program to repurchase up to $30  million of its outstandingcommon stock, depending upon management’s discretion based uponongoing assessments of the capital needs of the Company and the marketvaluation of its stock. During the fourth quarter of 2005, the Companyrepurchased approximately $1.2  million of its stock. There wereno repurchases during the six months ended June  30,2006.

Also, in October  2005, Holdings established acaptive mortgage reinsurance company, which generates earnings frommortgage insurance premiums paid on a portion of the loans originatedby MortgageIT. Approximately 4.4% of the loans originated byMortgageIT during the first six months of 2006 required mortgageinsurance.

In December  2005, the TRS declared a$10  million dividend to Holdings, substantially all of which wasincluded in the 2005 dividend payments paid to shareholders of theCompany.

During the fourth quarter of 2005, gain on salemargins for sub-prime loans narrowed significantly industry-wide. Inresponse to these adverse industry conditions, the Company reduced itspresence in the sub-prime origination market by decreasing the numberof its sub-prime branches and implementing related work forcereductions. In the first quarter of 2006, the Company exited thenational wholesale sub-prime market, and by June  30,2006, the Company had eliminated its national wholesale sub-primebranches and staff. Funded sub-prime volume during the first six monthsof 2006 was reduced to $168  million, or 1% ofMortgageIT’s total originations during the period. As ofJune  30,  2006, all but $23.0  million of sub-primeinventory had been allocated to trades. The Company continues tooriginate sub-prime loans through a division that is primarily focusedon handling loan applications coming through our traditional primeretail origination channel that do not conform to prime lendingguidelines. However, the Company expects future sub-prime loan volumenot to be a material component of its total originations. All of thesub-prime loan production is sold to third party investors and we donot hold sub-prime loans in our investment portfolio.

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On July  11,  2006, theCompany entered into a definitive agreement to be acquired by DBStructured Products, Inc., for $14.75 in cash per share ofCompany common stock, or approximately $429  million in theaggregate. The transaction is expected to close in the fourth quarterof 2006, pending regulatory approvals, approval by the Company’sstockholders and the satisfaction of other customary closingconditions.

DESCRIPTION OF BUSINESS

The Companyoperates its business in two primary segments, mortgage investmentoperations and mortgage banking operations. Mortgage investmentoperations are driven by the net interest income generated on ourleveraged prime mortgage loan investment portfolio. Mortgage bankingoperations are driven by income generated from our mortgage loanorigination business and include sales, loan processing, underwriting,funding, secondary marketing and brokerageactivities.

Financial information regarding theCompany's business segments can be found in Note 11 to theconsolidated financial statements included elsewhere in this quarterlyreport on Form 10-Q.

Mortgage InvestmentOperations

Our mortgage investment operationsinvolve the acquisition and retention, in a leveraged portfolio, oftraditional ARM loans, hybrid ARM loans, pay option ARMs andmortgage-backed securities (collectively, ‘‘PortfolioAssets’’). Traditional ARM loans are mortgage loans thathave interest rates that reprice in one year or less(‘‘Traditional ARMs’’ or‘‘Traditional ARM loans’’), and hybrid ARMloans are mortgage loans that have a fixed interest rate for an initialperiod of not more than five years and then convert to Traditional ARMsfor their remaining terms to maturity (‘‘HybridARMs’’ or ‘‘Hybrid ARMloans’’, and together with the Traditional ARM loans andpay option ARMs, collectively referred to as (‘‘PortfolioARM Loans’’). Pay optionARMs (‘‘POAs’’) are mortgage loansthat carry a low introductory or ‘‘teaser’’rate for the first 30-90 days, and thereafter reprice monthly on thebasis of an index such as the 12-month Treasury Average. POAs offerthree monthly payment options each month: permitting the borrower topay a fully amortizing amount, including principal and interest;interest only; or an amount that is less than the accrued interest.This last option results in an increase in the loan balance due, whichis commonly referred to as ‘‘negativeamortization.’’ Approximately one-third of the loancollateral in the REMIC securitization completed by the TRS inFebruary  2006 consisted of POAs. Although the loans from thisREMIC remain on the balance sheet of the TRS for reportingpurposes, we consider them to be part of the Company’sinvestment portfolio.

All of the Portfolio ARM Loans weacquire are originated by our mortgage banking operations and must meetthe underwriting criteria and guidelines set forth in our investmentand risk management policy. For purposes of maintaining liquidity forborrowings or as collateral, we may also invest in U.S. Treasurysecurities or debentures and discount notes guaranteed by either of twogovernment-sponsored corporations, Federal National MortgageAssociation (‘‘FNMA’’ or‘‘Fannie Mae’’) and Federal Home LoanMortgage Corporation (‘‘FHLMC’’ or‘‘Freddie Mac’’).

The fundingof our mortgage loan portfolio primarily consists of borrowings fromour warehouse lines of credit for loans awaiting securitization, theissuance of collateralized debt obligations(‘‘CDOs’’) and repurchase agreements. Weoriginate ARM loans for our investment portfolio and either securitizethem from the TRS with subsequent purchase of a portion of thesecurities by Holdings, or transfer the loans to Holdings with theintention of securitizing them by transferring them to independenttrusts. In order to facilitate the securitization of our loans, wegenerally create subordinate certificates, which provide a specifiedamount of credit enhancement to the higher rated certificates. Uponsecuritization, we finance the loans through the issuance of CDOs inthe capital markets and occasionally retain certain subordinatecertificates. We service Portfolio ARM Loans through asubservicer.

When a securitization is accomplished throughHoldings, we do not account for CDOs placed with third party investorsas sales and, therefore, do not record any gain or loss in connectionwith 

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securitization transactions. Thesecuritizations are accounted for as long-term collateralizedfinancings. Consequently, the Portfolio ARM Loans transferred to theindependent trust are shown as assets on our balance sheet. On ourbalance sheet, our Portfolio ARM Loans consist of ARM loanscollateralizing debt obligations and ARM loans held for securitization.We, therefore, generate revenue in our mortgage investment operationsfrom the spread between the interest income on our Portfolio ARM Loansand our cost of borrowings (i.e., the interest expense on ourCDOs, warehouse lines of credit, and repurchaseagreements).

The loan securitization process benefits usby creating highly liquid securitized assets that can be readilyfinanced in the capital markets.

When a securitization isaccomplished through the TRS and the securitization is structured toqualify as a sale, we account for MBS placed with third party investorsas sales and consequently record a gain or loss in connection with thesecuritization transaction. The TRS may also retain the MSR associatedwith the securitized loans. The securities purchased by Holdings areshown as assets on our balance sheet. These securities are classifiedas available for sale and, therefore, are carried at fair value on thebalance sheet.

When a securitization is accomplishedthrough the TRS and the securitization is structured to qualify as afinancing, we do not record a gain or loss in connection with thesecuritization transaction. The loans used as collateral in thesecuritization are shown as assets on the balance sheet of the TRS.Although the loans from such securitizations remain on the balancesheet of the TRS for reporting purposes, we consider them to bepart of the Company’s investment portfolio.

PortfolioStrategy

It is our general policy to originate100% of the ARM Loans we hold in our investment portfolio.However, we retain the right to purchase mortgage-backed securitiesguaranteed by Fannie Mae or Freddie Mac or the Government NationalMortgage Association (‘‘GNMA’’ or‘‘Ginnie Mae’’).

We selectloans for inclusion in our investment portfolio based on a variety ofcredit risk factors. Our Corporate Risk Committee has establishedspecific loan investment guidelines, including minimum FICO scores,maximum loan-to-value ratios, maximum loan size and other applicablecredit quality criteria.

According to our investmentguidelines, we invest at least 85% of assets in high qualityARMs and Hybrid ARMs, and short-term investments,including:

|              |                                                                                                                                         |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| •  | Traditional ARM and Hybrid ARMmortgage loans that have been deposited into trusts that issue MBScollateralized by the transferredloans; |

|              |                                    |
|--------------|------------------------------------|
| •  | FNMA and FHLMC mortgagesecurities; |

|              |                                                                                                                                                                                                                                                                                                                                                                               |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | ARM securities rated withinone of the two highest rating categories by at least one of thenationally recognized statistical ratings agencies (Moody'sInvestors Service (‘‘Moody's’’);Standard & Poor's, a division of The McGraw-Hill Companies,Inc. (‘‘S&P’’); or Fitch Ratings(‘‘Fitch’’)); |

|              |                                                                                                                                                |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | securitiesand loans that are unrated but that we determine to be of comparablequality to comparable high-quality rated mortgage securities;and |

|              |                                                                                                                |
|--------------|----------------------------------------------------------------------------------------------------------------|
| •  | cash and cash equivalents, includingshort-term investments in U.S. Treasury and agency non-mortgagesecurities. |

The portfolio also may retain certain classesof our MBS that are below investment grade (below BBB). Interests innon-investment grade assets will comprise no more than 25% ofstockholders' equity on an historical cost basis.

AtJune  30,  2006, our investment operations held totalassets of $5.2  billion, of which $4.9  billion consistedof securitized loans, and securities available for sale. That comparesto $4.9  billion in total assets at December  31,2005, of which $4.7  billion consisted of securitized loans,loans awaiting securitization and securities available forsale.

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Mortgage BankingOperations

Our mortgage banking operations areconducted through MortgageIT and its subsidiaries. The TRS is afull-service residential mortgage banking company that is licensed tooriginate loans throughout the United States.

The TRSgenerates revenue through the origination, sale and brokering ofmortgage loans sourced through its loan production channels. Thisrevenue primarily consists of gain on sale of mortgage loans, loanbrokerage revenues and net interest income. Gain on sale of mortgageloans is typically generated from the sale of mortgage loans toinvestors, on a servicing released basis, generally within 30 to 60days of funding. Accordingly, we do not generally capitalize the valueof MSR. Gain is recognized based on the difference between the netsales proceeds and the carrying value of the mortgage loans sold and isrecognized in earnings at the time of sale. The carrying value of themortgage loans sold includes direct loan-related origination costs andfees. When the TRS securitizes loans through a REMIC transaction,structured to qualify as a sale, it generates gain on sale revenue whenthe loans are sold to the REMIC, and it also may capitalize the valueof MSR and amortize it in proportion to, and over the period of,estimated net servicing income (the excess of servicing revenues overservicing costs). Brokerage revenue consists of fees and commissionsearned by brokering mortgage loans ultimately funded by third partylenders. Interest on mortgage loans held for sale accrues on loans fromthe date of funding through the date of sale.

The firstREMIC securitization completed by the TRS in November  2005 wascollateralized by POAs. In this transaction, a pool of POA loanstotaling approximately $388  million was securitized and sold tothe public. We retained the mortgage servicing rights and retainedapproximately $24  million in MBS created in the transaction.

In February  2006, MortgageIT completed its secondREMIC transaction, which was structured to qualify as a financing. Inthe February  2006 REMIC transaction, we issued, through a trust,AAA and AA-rated floating-rate pass-through certificates totaling$723.0  million and A-rated subordinated floating-rate securitiestotaling $10.1  million to third party investors, and retained$33.3  million of subordinated certificates, which provide creditsupport to the higher-ratedcertificates.

MortgageIT's mortgage bankingoperations expenses consist primarilyof:

|              |                                                              |
|--------------|--------------------------------------------------------------|
| •  | loan origination commissions, salariesand employee benefits; |

|              |                                   |
|--------------|-----------------------------------|
| •  | mortgage loanprocessing expenses; |

|              |                                     |
|--------------|-------------------------------------|
| •  | general andadministrative expenses; |

|              |                                                                  |
|--------------|------------------------------------------------------------------|
| •  | marketing, loanacquisition and business development expenses;and |

|              |                                                           |
|--------------|-----------------------------------------------------------|
| •  | rent expense, professional fees, anddepreciation expense. |

A substantial portion ofMortgageIT's expenses are variable in nature. Loan originationcommissions are paid to loan production officers only upon theorigination of the mortgage loan, making such commission expenses100% variable. Salaries, benefits and other related payrollcosts may fluctuate based upon management's assessment of currentand predicted future levels of mortgage loan originationvolume.

Loan Underwriting

We follow a specificunderwriting methodology based on the following philosophy —first, evaluate the borrower's ability to repay the loan and,then, evaluate the value of the property securing the loan. We havedeveloped underwriting guidelines and practices that establish clearparameters for our loan underwriters and credit officers to make loanapproval decisions. For mortgage loans retained in our investmentportfolio, we seek those loans that we believe have low risk of defaultand resulting loss. Although our loan underwriting procedures arestructured to predict future borrower payment patterns and financialcapability, based on the borrower's past history and currentfinancial information, as well as our ability to collect the remainingloan balance through foreclosure in the event of a default, noassurance can be made that every loan originated will perform asanticipated.

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In evaluating the borrower'sability and willingness to repay a loan, we review and analyze thefollowing aspects of the borrower: credit score, income and its source,employment history, debt levels in revolving, installment and othermortgage loans, credit history and use of credit in the past, and theability and/or willingness to provide verification for the above.Credit scores, credit history, use of credit in the past andinformation as to debt levels typically can be obtained from a thirdparty credit report through a credit repository. Those sources are usedin all instances, as available. Sometimes, borrowers have little or nocredit history that can be tracked by one of the primary creditrepositories. In these instances, the reason for the lack of history isconsidered and taken into account. In our experience, most prospectiveborrowers have accessible credit histories.

In evaluatinga potential property to be used as collateral for a mortgage loan, weconsider all of the following aspects of the property: the loan balanceversus the property value, e.g., the loan-to-value ratio, theproperty type, how the property will be occupied (a primary residence,second home or investment property), if the property's apparentvalue is supported by recent sales of similar properties in the same ora nearby area, any unique characteristics of the property and ourconfidence in the data and their sources.

Otherconsiderations that may effect our decision regarding aborrower's loan application are the borrower's purpose inrequesting the loan (e.g., purchase of a home as opposed tocashing equity out of the home through a refinancing), the loan type(e.g., adjustable-rate, including adjustment periods and loanlife rate caps, or fixed-rate), and any items unique to a loan that webelieve could affect credit performance.

BusinessStrategy

All of the loans originated at the TRS aretransferred to our investment loan portfolio, sold or brokered to thirdparty investors, or used in REMIC transactions to collateralize MBSthat are sold to third party investors as well as to the REIT. Ourmortgage banking operations consist primarily of the followingactivities:

|              |                                                                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | wholesale prime productionoperations, including loans originated through retail loan brokers andcorrespondents that are not MortgageIT employees and funded byMortgageIT; |

|              |                                                                                                                                                                                  |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | correspondent lendingoperations, including loans originated through banks, credit unions andmortgage bankers and funded by MortgageIT through its correspondentlending division; |

|              |                                                                                                                                                                                          |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | retail prime productionoperations, including both brokered loans and funded loans that areoriginated through retail branch offices and through MortgageIT'sinternet origination channel; |

|              |                                         |
|--------------|-----------------------------------------|
| •  | secondaryloan marketing operations; and |

|              |                                                                                        |
|--------------|----------------------------------------------------------------------------------------|
| •  | mortgageloan title, settlement and other mortgage related services through HomeCloser. |

Sale of Loans

We generally sell ourmortgage loans on a whole loan, non-recourse basis. However, we do havepotential liability under the representations and warranties we make topurchasers and insurers of the loans. In the event of a breach of suchrepresentations and warranties, we may be required to either repurchasethe subject mortgage loans or indemnify the investor or insurer. Insuch cases, any subsequent credit loss on the mortgage loans isrecognized by MortgageIT. When we execute a REMIC transactionstructured to qualify as a sale from the TRS, we use our loans tocollateralize MBS that are sold to third party investors as well as tothe REIT.

All of our sub-prime loan production is sold tothird party investors.

Loan Products

MortgageIToriginates both mortgage loans to finance home purchases, referred toas purchase mortgage loans, and loans to refinance existing mortgageloans. For the six months ended June  30,  2006,MortgageIT's purchase loan originations represented approximately46% of its total residential mortgage loan originations measuredby principal balance.

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MortgageIT originates prime firstlien conventional and non-conventional, conforming single-familyresidential mortgage loans. In addition, MortgageIT also originates alesser amount of non-conforming first lien single-family residentialmortgage loans such as jumbo loans, sub-prime loans and‘‘Alt A’’ loans, as well as home equity andsecond lien mortgage loans.

HedgingActivities

We generally do not seek to anticipatethe direction of interest rates as a part of our business strategy. Weseek to maintain hedge positions that avoid the effects of severeinterest rate movements, which might otherwise impair our ability toearn net interest income and gain on sale revenues. Accordingly, wegenerally seek to mitigate interest rate risk by matching the repricingdurations of our Portfolio ARM Loans with the repricing durations ofour liabilities. We also seek to mitigate the interest rate riskassociated with our mortgage loans held for sale and interest rate lockcommitments issued to borrowers.

For our mortgageinvestment operations, subject to the limitations imposed by the REITqualification tests, some or all of the following financial instrumentsare used for hedging financing cost interest rate risk: Eurodollarfutures contracts; interest rate swaps; interest rate caps, collars andfloors; and other instruments that may be determined to be advantageousand are permitted under the investment and risk management policyadopted by our board of directors.

For our mortgagebanking operations, some or all of the following financial instrumentsare used for hedging the fair value of loans held for sale: forwardsale loan commitments and forward sales and purchases of MBS andoptions on such securities in the forward delivery TBA market;Eurodollar futures contracts; and other instruments that may bedetermined to be advantageous and are permitted under the investmentand risk management policy adopted by our board ofdirectors.

For further information on our interest raterisk management, see Item 3 Quantitative and Qualitative DisclosuresAbout Market Risk — Interest Rate Risk Management of thisquarterly report on Form 10-Q and Note 4 — Derivatives andHedging Activities to the consolidated financialstatements.

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RESULTS OF OPERATIONS

Thefollowing table sets forth certain financial data as a percentage oftotal revenues for the three and six months ended June30,  2006 and2005.

|                                                    |  |  |                           |  |        |                         |  |  |      |  |        |      |  |  |  |  |        |    |  |  |  |  |        |   |
|----------------------------------------------------|--|--|---------------------------|--|--------|-------------------------|--|--|------|--|--------|------|--|--|--|--|--------|----|--|--|--|--|--------|---|
|                                               |  |  | Threemonths endedJune 30, |  |        | Six months endedJune30, |
|                                               |  |  | 2006                      |  |        | 2005                    |  |  | 2006 |  |        | 2005 |
| Revenues:                                          |  |  |                           |  |   |                         |  |  |      |  |   |      |  |  |  |  |   |    |  |  |  |  |   |   |
| Gainon sale of mortgageloans                       |  |  |                           |  | 87.6   | %                       |  |  |      |  | 64.4   | %    |  |  |  |  | 81.7   | %  |  |  |  |  | 55.3   | % |
| Brokeragerevenues                                  |  |  |                           |  | 7.4    | %                       |  |  |      |  | 8.6    | %    |  |  |  |  | 8.7    | %  |  |  |  |  | 8.9    | % |
| Netinterestincome                                  |  |  |                           |  | 0.4    | %                       |  |  |      |  | 25.6   | %    |  |  |  |  | 6.6    | %  |  |  |  |  | 28.6   | % |
| Realizedand unrealized gain on hedginginstruments  |  |  |                           |  | 3.8    | %                       |  |  |      |  | 1.1    | %    |  |  |  |  | 2.4    | %  |  |  |  |  | 6.8    | % |
| Other                                              |  |  |                           |  | 0.8    | %                       |  |  |      |  | 0.3    | %    |  |  |  |  | 0.6    | %  |  |  |  |  | 0.4    | % |
| Totalrevenues                                      |  |  |                           |  | 100.0  | %                       |  |  |      |  | 100.0  | %    |  |  |  |  | 100.0  | %  |  |  |  |  | 100.0  | % |
| Operatingexpenses:                                 |  |  |                           |  |   |                         |  |  |      |  |   |      |  |  |  |  |   |    |  |  |  |  |   |   |
| Compensationand employeebenefits                   |  |  |                           |  | 45.0   | %                       |  |  |      |  | 44.1   | %    |  |  |  |  | 51.8   | %  |  |  |  |  | 42.1   | % |
| Processingexpenses                                 |  |  |                           |  | 29.1   | %                       |  |  |      |  | 18.8   | %    |  |  |  |  | 33.3   | %  |  |  |  |  | 16.8   | % |
| Generaland administrativeexpenses                  |  |  |                           |  | 10.4   | %                       |  |  |      |  | 8.5    | %    |  |  |  |  | 11.2   | %  |  |  |  |  | 9.1    | % |
| Rent                                               |  |  |                           |  | 4.5    | %                       |  |  |      |  | 3.1    | %    |  |  |  |  | 5.1    | %  |  |  |  |  | 3.2    | % |
| Marketing,loan acquisition and businessdevelopment |  |  |                           |  | 1.6    | %                       |  |  |      |  | 1.4    | %    |  |  |  |  | 1.8    | %  |  |  |  |  | 1.3    | % |
| Professionalfees                                   |  |  |                           |  | 4.9    | %                       |  |  |      |  | 3.4    | %    |  |  |  |  | 4.6    | %  |  |  |  |  | 3.4    | % |
| Depreciationandamortization                        |  |  |                           |  | 2.1    | %                       |  |  |      |  | 1.2    | %    |  |  |  |  | 2.3    | %  |  |  |  |  | 1.1    | % |
| Totaloperatingexpenses                             |  |  |                           |  | 97.6   | %                       |  |  |      |  | 80.5   | %    |  |  |  |  | 110.1  | %  |  |  |  |  | 77.0   | % |
| Income(loss) before incometaxes                    |  |  |                           |  | 2.4    | %                       |  |  |      |  | 19.5   | %    |  |  |  |  | (10.1  | )% |  |  |  |  | 23.0   | % |
| Incometaxes                                        |  |  |                           |  | (5.0   | )%                      |  |  |      |  | 7.9    | %    |  |  |  |  | (10.9  | )% |  |  |  |  | 6.1    | % |
| Netincome                                          |  |  |                           |  | 7.4    | %                       |  |  |      |  | 11.6   | %    |  |  |  |  | 0.8    | %  |  |  |  |  | 16.9   | % |
|                                                    |

Threemonths ended June  30,  2006 compared to three months endedJune  30,  2005

Net (loss)income

On a consolidated basis, our net incomedecreased from approximately $8.4  million in the second quarterof 2005 to approximately $5.8  million in the second quarter of2006. The decrease is primarily attributable to lower net interestincome from mortgage banking and in the investment portfolio andadditional losses incurred during the second quarter of 2006 for thewind-down of our national wholesale sub-prime operations. Totalrevenues increased quarter over quarter by approximately 8% from$73.0  million to approximately $78.6  million, while totalexpenses increased approximately 30% quarter over quarter fromapproximately $58.8  million to approximately $76.7million driven by a 19% increase in funded loans fromapproximately $6.4  billion to approximately $7.6  billion.Gain on sale of mortgage loans increased by approximately 47% to$68.9  million in the second quarter of 2006 compared toapproximately $47.0  million in the second quarter of 2005, whilenet interest income decreased by approximately 98% from$18.6  million to approximately $293,000. The gain on derivativesused in our investment portfolio hedging program increased by275% from $0.8  million in the second quarter of 2005 to$3.0  million in the second quarter of 2006. Brokerage revenuedecreased by approximately 8% to $5.8  million in thesecond quarter of 2006 compared to approximately $6.3  million inthe second quarter of 2005. The following table presents the averagebalance for each category of our interest-earning assets andinterest-bearing liabilities, with the corresponding annualizedeffective rate of interest and the related interest income or expensefor the same period:

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Average Balance, Rate and InterestIncome/Expense Table (Dollars inthousands)

|                                      |  |  |                                   |   |           |                     |  |  |                          |  |        |                |  |  |                     |   |         |                          |  |  |  |   |           |  |  |  |  |  |        |   |  |  |  |   |        |  |
|--------------------------------------|--|--|-----------------------------------|---|-----------|---------------------|--|--|--------------------------|--|--------|----------------|--|--|---------------------|---|---------|--------------------------|--|--|--|---|-----------|--|--|--|--|--|--------|---|--|--|--|---|--------|--|
|                                 |  |  | Forthe three months ended June30, |
|                                 |  |  | 2006                              |   |           | 2005                |
|                                 |  |  | AverageBalance                    |   |           | EffectiveRate/Yield |  |  | InterestIncomeandExpense |  |        | AverageBalance |  |  | EffectiveRate/Yield |   |         | InterestIncomeandExpense |
| Interest-earningassets:              |  |  |                                   |   |      |                     |  |  |                          |  |   |                |  |  |                     |   |    |                          |  |  |  |   |      |  |  |  |  |  |   |   |  |  |  |   |   |  |
| PortfolioAssets                      |  |  |                                   | $ | 5,115,382 |                     |  |  |                          |  | 5.32   | %              |  |  |                     | $ | 67,980  |                          |  |  |  | $ | 3,403,563 |  |  |  |  |  | 4.92   | % |  |  |  | $ | 41,726 |  |
| Mortgageloans held forsale           |  |  |                                   |   | 3,318,517 |                     |  |  |                          |  | 5.81   |                |  |  |                     |   | 48,176  |                          |  |  |  |   | 1,852,818 |  |  |  |  |  | 5.59   |   |  |  |  |   | 25,811 |  |
| Cashand cashequivalents              |  |  |                                   |   | 57,540    |                     |  |  |                          |  | 3.33   |                |  |  |                     |   | 479     |                          |  |  |  |   | 72,152    |  |  |  |  |  | 2.02   |   |  |  |  |   | 363    |  |
|                                 |  |  |                                   |   | 8,491,439 |                     |  |  |                          |  | 5.49   |                |  |  |                     |   | 116,635 |                          |  |  |  |   | 5,328,533 |  |  |  |  |  | 5.11   |   |  |  |  |   | 67,900 |  |
| Interest-bearingliabilities:         |  |  |                                   |   |      |                     |  |  |                          |  |   |                |  |  |                     |   |    |                          |  |  |  |   |      |  |  |  |  |  |   |   |  |  |  |   |   |  |
| Collateralizeddebtobligations        |  |  |                                   |   | 4,875,205 |                     |  |  |                          |  | 4.97   |                |  |  |                     |   | 60,512  |                          |  |  |  |   | 2,658,664 |  |  |  |  |  | 4.01   |   |  |  |  |   | 26,560 |  |
| Warehouselinespayable                |  |  |                                   |   | 3,223,333 |                     |  |  |                          |  | 6.26   |                |  |  |                     |   | 50,986  |                          |  |  |  |   | 2,340,124 |  |  |  |  |  | 3.54   |   |  |  |  |   | 20,631 |  |
| Otherdebt                            |  |  |                                   |   | 252,351   |                     |  |  |                          |  | 7.59   |                |  |  |                     |   | 4,844   |                          |  |  |  |   | 170,474   |  |  |  |  |  | 4.86   |   |  |  |  |   | 2,064  |  |
|                                 |  |  |                                   |   | 8,350,889 |                     |  |  |                          |  | 5.51   |                |  |  |                     |   | 116,342 |                          |  |  |  |   | 5,169,262 |  |  |  |  |  | 3.82   |   |  |  |  |   | 49,255 |  |
| Netinterest-earning assets andspread |  |  |                                   | $ | 140,550   |                     |  |  |                          |  | (0.02  | )%             |  |  |                     | $ | 293     |                          |  |  |  | $ | 159,271   |  |  |  |  |  | 1.29   | % |  |  |  | $ | 18,645 |  |
| Netinterestmargin(1)                 |  |  |                                   |   |      |                     |  |  |                          |  | 0.01   | %              |  |  |                     |   |    |                          |  |  |  |   |      |  |  |  |  |  | 1.40   | % |  |  |  |   |   |  |
|                                      |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Netinterest margin is computed by dividing annualized net interest incomeby the average daily balance of interest-earningassets. |

Mortgage InvestmentOperations

Revenues

Net interestincome.    REIT net interest income decreased approximately20% to $6.4  million for the three months endedJune  30,  2006 from approximately $8.0  million forthe comparable period ended June  30,  2005. The decreasewas due to a lower net interest margin, driven by the flattening yieldcurve, partly offset by higher average interest-earning assets ofapproximately $5.2  billion for the three months endedJune  30,  2006 compared with average interest-earningassets of approximately $3.4  billion for the comparable periodended June  30,  2005. Net interest margin at the REITdeclined to .49% for the three months ended June30,  2006 from .94% for the comparable period endedJune  30,  2005 due to continued flattening of the yieldcurve as average one-month LIBOR rose to 5.08% in the secondquarter of 2006 from 3.10% in the second quarter of 2005. Thefollowing table presents the average balance for each category of ourinterest-earning assets and interest-bearing liabilities, with thecorresponding annualized effective rate of interest and the relatedinterest income or expense for the same period:

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Average Balance, Rate and InterestIncome/Expense Table(Dollars inthousands)

|                                          |  |  |                                   |   |           |               |  |  |                          |  |         |                |  |  |               |   |         |                          |  |  |  |   |           |  |  |  |  |  |        |   |  |  |  |   |        |  |
|------------------------------------------|--|--|-----------------------------------|---|-----------|---------------|--|--|--------------------------|--|---------|----------------|--|--|---------------|---|---------|--------------------------|--|--|--|---|-----------|--|--|--|--|--|--------|---|--|--|--|---|--------|--|
|                                     |  |  | Forthe three months ended June30, |
|                                     |  |  | 2006                              |   |           | 2005          |
|                                     |  |  | AverageBalance                    |   |           | EffectiveRate |  |  | InterestIncomeandExpense |  |         | AverageBalance |  |  | EffectiveRate |   |         | InterestIncomeandExpense |
| Interest-earningassets:                  |  |  |                                   |   |      |               |  |  |                          |  |    |                |  |  |               |   |    |                          |  |  |  |   |      |  |  |  |  |  |   |   |  |  |  |   |   |  |
| PortfolioAssets                          |  |  |                                   | $ | 5,112,418 |               |  |  |                          |  | 5.19    | %              |  |  |               | $ | 66,316  |                          |  |  |  | $ | 3,403,563 |  |  |  |  |  | 4.76   | % |  |  |  | $ | 40,374 |  |
| Cashand cash equivalents and otherassets |  |  |                                   |   | 92,931    |               |  |  |                          |  | 8.40    |                |  |  |               |   | 1,950   |                          |  |  |  |   | 22,935    |  |  |  |  |  | 0.99   |   |  |  |  |   | 56     |  |
|                                     |  |  |                                   |   | 5,205,349 |               |  |  |                          |  | 5.25    |                |  |  |               |   | 68,266  |                          |  |  |  |   | 3,426,498 |  |  |  |  |  | 4.73   |   |  |  |  |   | 40,430 |  |
| Interest-bearingliabilities:             |  |  |                                   |   |      |               |  |  |                          |  |    |                |  |  |               |   |    |                          |  |  |  |   |      |  |  |  |  |  |   |   |  |  |  |   |   |  |
| Collateralizeddebtobligations            |  |  |                                   |   | 4,875,205 |               |  |  |                          |  | 4.96    |                |  |  |               |   | 60,478  |                          |  |  |  |   | 2,658,664 |  |  |  |  |  | 3.99   |   |  |  |  |   | 26,466 |  |
| Warehouselinespayable                    |  |  |                                   |   | —   |               |  |  |                          |  | — |                |  |  |               |   | — |                          |  |  |  |   | 555,301   |  |  |  |  |  | 3.80   |   |  |  |  |   | 5,257  |  |
| Repurchaseagreements                     |  |  |                                   |   | 99,923    |               |  |  |                          |  | 5.56    |                |  |  |               |   | 1,404   |                          |  |  |  |   | 89,332    |  |  |  |  |  | 3.08   |   |  |  |  |   | 686    |  |
|                                     |  |  |                                   |   | 4,975,128 |               |  |  |                          |  | 4.92    |                |  |  |               |   | 61,882  |                          |  |  |  |   | 3,303,297 |  |  |  |  |  | 3.93   |   |  |  |  |   | 32,409 |  |
| Netinterest-earning assets andspread     |  |  |                                   | $ | 230,221   |               |  |  |                          |  | 0.33    | %              |  |  |               | $ | 6,384   |                          |  |  |  | $ | 123,201   |  |  |  |  |  | 0.80   | % |  |  |  | $ | 8,021  |  |
| Netinterestmargin(1)                     |  |  |                                   |   |      |               |  |  |                          |  | 0.49    | %              |  |  |               |   |    |                          |  |  |  |   |      |  |  |  |  |  | 0.94   | % |  |  |  |   |   |  |
|                                          |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Netinterest margin is computed by dividing annualized net interest incomeby the average daily balance of interest-earningassets. |

Expenses

Compensation andemployee benefits.    Compensation and employee benefitsexpenses decreased approximately 59% to $312,000 for the threemonths ended June  30,  2006 from $756,000 for thecomparable period ended June  30,  2005. The decrease wasprimarily due to a decrease in the number of employees dedicated to theinvestment operations as the business achieved economies ofscale.

Processing expenses.    Mortgage loanprocessing expenses decreased approximately 53% to $564,000 forthe three months ended June  30,  2006 from approximately$1.2  million for the comparable period ended June30,  2005. The decrease was primarily due to a lower provisionfor loan losses.

General and administrativeexpenses.    General and administrative expenses decreasedapproximately 79% to $250,000 for the three months endedJune  30,  2006 from approximately $1.2  million forthe comparable period ended June  30,  2005. This decreasewas primarily due to lower insurance and other administrativeexpenses.

Professional fees.    Professionalfees decreased approximately 71% to $176,000 for the threemonths ended June  30,  2006 from $603,000 for thecomparable period ended June  30,  2005. This decrease wasprimarily due to lower legal and other professionalexpenses.

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Mortgage BankingOperations

Revenues

Gain on sale ofmortgage loans.    Gain on sale of mortgage loans increased byapproximately 29% to $68.8  million for the three monthsended June  30,  2006 from $53.2  million for thethree months ended June  30,  2005. Mortgage whole loansales to third parties increased by approximately 59% to$6.5  billion for the three months ended June  30,2006 from $4.1  billion for the three months ended June30,  2005. Sub-prime gain on sale decreased to a loss ofapproximately $783,000 for the three months ended June30,  2006 from a gain of approximately $14.9  million forthe three months ended June  30,2005.

Brokerage revenue.    Brokerage revenuedecreased by approximately 8% to $5.8  million for thethree months ended June  30,  2006 from approximately$6.3  million for the three months ended June  30,2005 due to a 15% decline in brokered loan volume.

Net interest income.    Net interest incomedecreased to negative $8.2  million for the three months endedJune  30,  2006 from $9.4  million for the threemonths ended June  30,  2005. The decrease is attributableto higher borrowing costs on warehouse lines payable in the secondquarter of 2006 in line with an increase in average one-month LIBOR to5.08% from 3.10% in the second quarter of 2005, a loweraverage coupon on mortgage loans held for sale driven by a higherpercentage of POAs carrying low teaser rates, and higher warehousefunding costs for aged loans. The following table presents the averagebalance for each category of our interest-earning assets andinterest-bearing liabilities, with the corresponding annualizedeffective rate of interest and the related interest income orexpense.

Average Balance, Rate and Interest Income/ExpenseTable (Dollars inthousands)

|                                              |  |  |                                   |   |           |               |  |  |                          |  |        |                |  |  |               |   |        |                          |  |  |  |   |           |  |  |  |  |  |         |   |  |  |  |   |         |  |
|----------------------------------------------|--|--|-----------------------------------|---|-----------|---------------|--|--|--------------------------|--|--------|----------------|--|--|---------------|---|--------|--------------------------|--|--|--|---|-----------|--|--|--|--|--|---------|---|--|--|--|---|---------|--|
|                                         |  |  | Forthe three months ended June30, |
|                                         |  |  | 2006                              |   |           | 2005          |
|                                         |  |  | AverageBalance                    |   |           | EffectiveRate |  |  | InterestIncomeandExpense |  |        | AverageBalance |  |  | EffectiveRate |   |        | InterestIncomeandExpense |
| Interest-earningassets:                      |  |  |                                   |   |      |               |  |  |                          |  |   |                |  |  |               |   |   |                          |  |  |  |   |      |  |  |  |  |  |    |   |  |  |  |   |    |  |
| Mortgageloans held forsale                   |  |  |                                   | $ | 3,318,517 |               |  |  |                          |  | 5.81   | %              |  |  |               | $ | 48,176 |                          |  |  |  | $ | 1,852,818 |  |  |  |  |  | 5.59    | % |  |  |  | $ | 25,811  |  |
| PortfolioAssets                              |  |  |                                   |   | 748,915   |               |  |  |                          |  | 6.07   |                |  |  |               |   | 11,360 |                          |  |  |  |   | —   |  |  |  |  |  | — |   |  |  |  |   | — |  |
| Cashand cashequivalents                      |  |  |                                   |   | 51,403    |               |  |  |                          |  | 3.28   |                |  |  |               |   | 422    |                          |  |  |  |   | 49,217    |  |  |  |  |  | 2.50    |   |  |  |  |   | 307     |  |
|                                         |  |  |                                   |   | 4,118,835 |               |  |  |                          |  | 5.82   |                |  |  |               |   | 59,958 |                          |  |  |  |   | 1,902,035 |  |  |  |  |  | 5.51    |   |  |  |  |   | 26,118  |  |
| Interest-bearingliabilities:                 |  |  |                                   |   |      |               |  |  |                          |  |   |                |  |  |               |   |   |                          |  |  |  |   |      |  |  |  |  |  |    |   |  |  |  |   |    |  |
| Warehouselinespayable                        |  |  |                                   |   | 3,223,333 |               |  |  |                          |  | 6.26   |                |  |  |               |   | 50,986 |                          |  |  |  |   | 1,784,823 |  |  |  |  |  | 3.46    |   |  |  |  |   | 15,374  |  |
| Juniorsubordinated debentures and other debt |  |  |                                   |   | 995,057   |               |  |  |                          |  | 6.84   |                |  |  |               |   | 17,213 |                          |  |  |  |   | 81,142    |  |  |  |  |  | 6.81    |   |  |  |  |   | 1,378   |  |
|                                         |  |  |                                   |   | 4,218,390 |               |  |  |                          |  | 6.40   |                |  |  |               |   | 68,199 |                          |  |  |  |   | 1,865,965 |  |  |  |  |  | 3.60    |   |  |  |  |   | 16,752  |  |
| Netinterest-earning assets andspread         |  |  |                                   | $ | (99,555   | )             |  |  |                          |  | (0.58  | )%             |  |  |               | $ | (8,241 | )                        |  |  |  | $ | 36,070    |  |  |  |  |  | 1.91    | % |  |  |  | $ | 9,366   |  |
| Netinterestmargin(1)                         |  |  |                                   |   |      |               |  |  |                          |  | (0.80  | )%             |  |  |               |   |   |                          |  |  |  |   |      |  |  |  |  |  | 1.98    | % |  |  |  |   |    |  |
|                                              |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Netinterest margin is computed by dividing annualized net interest incomeby the average daily balance of interest-earningassets. |

Expenses

Compensation andemployee benefits.    Compensation and employee benefitsexpenses increased approximately 11% to $35.1  million forthe three months ended June  30,  2006 from approximately$31.5  million for the three months ended June  30,2005. The increase was primarily due to higher 

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staffing resulting from a 19%increase in origination volume to approximately $7.6  billion inthe second quarter of 2006 from approximately $6.4  billion inthe second quarter of 2005.

Processingexpenses.    Mortgage loan processing expenses increasedapproximately 72% to $22.5  million for the three monthsended June  30,  2006 from approximately $13.1million for the three months ended June  30,  2005. Theincrease was primarily due to higher sub-prime loan repurchase expensesin the second quarter of 2006 relative to the second quarter of 2005,as well as higher processing expenses on increased prime originationvolume.

General and administrativeexpenses.    General and administrative expenses increased byapproximately 54% to $7.7  million for the three monthsended June  30,  2006 from approximately $5.0million for the three months ended June  30,  2005. Thisincrease was primarily due to continuing branch expansions and staffinggrowth resulting from higher quarter over quarter origination volumes,as well as higher expenses related to the settlement of a pending legalproceeding.

Marketing, loan acquisition and businessdevelopment expenses.    Marketing, loan acquisition andbusiness development expenses increased approximately 30% to$1.3  million for the three months ended June  30,2006 from approximately $1.0  million for the three months endedJune  30,  2005. The increase was primarily due to higherbusiness development expenses associated with the expansion of branchesin new geographic areas and higher quarter over quarteroriginations.

Rent expense.    Rent expenseincreased approximately 52.0% to $3.5  million for thethree months ended June  30,  2006 from approximately$2.3  million for the three months ended June  30,2005. This increase was primarily due to expansion of existingbranches, including the New York headquarters, as well as feesassociated with the wind-down of branches within our wholesalesub-prime and retail divisions during the second quarter of2006.

Professional fees.    Professional feesincreased approximately 95% to $3.7  million for the threemonths ended June  30,  2006 from approximately $1.9million for the three months ended June  30,  2005. Thisincrease was primarily due to higher litigation defense costs andincreased regulatory examination and compliancecosts.

Depreciation and amortizationexpenses.    Depreciation and amortization expenses increasedapproximately 90% to $1.6  million for the three monthsended June  30,  2006 from $841,000 for the three monthsended June  30,  2005. The increase was primarily due toleasehold improvements for branch expansions as well as investments incomputer system hardware.

Income taxexpense.    MortgageIT made the election to be treated as ataxable REIT subsidiary and, therefore, is subject to federal and statecorporate income taxes. Accordingly, the Company records a taxprovision on the taxable income of the TRS, which includes intercompanyincome that is eliminated in our consolidated statements ofoperations.

Six months ended June  30,  2006compared to six months ended June  30,2005

Net (loss) income

On aconsolidated basis, our net income decreased from approximately$24.1  million for the six months ended June  30,2005 to approximately $1.1  million for the six months endedJune  30,  2006. The decrease is primarily attributable tolosses incurred for the wind-down of our national wholesale sub-primeoperations during 2006, lower net interest income in mortgage bankingand in the investment portfolio, and lower realized gains onderivatives used in our investment portfolio hedging program. Totalrevenues decreased by approximately 2% to $140.4  millionfor the six months ended June  30,  2006, fromapproximately $142.9  million for the comparable period in 2005,while total expenses increased approximately 40% to$154.5  million from approximately $110.0  million drivenby higher sub-prime loan repurchase expenses and a 38% increasein funded loans from approximately $10.7  billion toapproximately $14.8  billion. Gain on sale of mortgage loansincreased by approximately 45% to $114.6  million in thefirst six months of 2006 compared to approximately $79.1  millionin the comparable period in 2005, while net interest income decreasedby approximately 

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78% from $40.9  million toapproximately $9.2  million. In addition, the gain on derivativesused in our investment portfolio hedging program decreased byapproximately 65% from $9.7  million in the first sixmonths of 2005 to $3.4  million in the first six months of 2006.Brokerage revenue decreased by approximately 4% to $12.2million for the six months ended June  30,  2006, fromapproximately $12.7  million for the comparable period in 2005.The following table presents the average balance for each category ofour interest-earning assets and interest-bearing liabilities, with thecorresponding annualized effective rate of interest and the relatedinterest income or expense for the same period:

Average Balance,Rate and Interest Income/Expense Table (Dollars inthousands)

|                                      |  |  |                                 |   |           |                     |  |  |                          |  |        |                |  |  |                     |   |         |                          |  |  |  |   |           |  |  |  |  |  |        |   |  |  |  |   |         |  |
|--------------------------------------|--|--|---------------------------------|---|-----------|---------------------|--|--|--------------------------|--|--------|----------------|--|--|---------------------|---|---------|--------------------------|--|--|--|---|-----------|--|--|--|--|--|--------|---|--|--|--|---|---------|--|
|                                 |  |  | Forthe six months ended June30, |
|                                 |  |  | 2006                            |   |           | 2005                |
|                                 |  |  | AverageBalance                  |   |           | EffectiveRate/Yield |  |  | InterestIncomeandExpense |  |        | AverageBalance |  |  | EffectiveRate/Yield |   |         | InterestIncomeandExpense |
| Interest-earningassets:              |  |  |                                 |   |      |                     |  |  |                          |  |   |                |  |  |                     |   |    |                          |  |  |  |   |      |  |  |  |  |  |   |   |  |  |  |   |    |  |
| PortfolioAssets                      |  |  |                                 | $ | 5,027,797 |                     |  |  |                          |  | 5.31   | %              |  |  |                     | $ | 133,479 |                          |  |  |  | $ | 3,066,999 |  |  |  |  |  | 4.96   | % |  |  |  | $ | 75,904  |  |
| Mortgageloans held forsale           |  |  |                                 |   | 3,332,071 |                     |  |  |                          |  | 5.78   |                |  |  |                     |   | 96,315  |                          |  |  |  |   | 1,547,735 |  |  |  |  |  | 5.87   |   |  |  |  |   | 45,307  |  |
| Cashand cashequivalents              |  |  |                                 |   | 46,391    |                     |  |  |                          |  | 3.23   |                |  |  |                     |   | 749     |                          |  |  |  |   | 64,689    |  |  |  |  |  | 1.37   |   |  |  |  |   | 441     |  |
|                                 |  |  |                                 |   | 8,406,259 |                     |  |  |                          |  | 5.49   |                |  |  |                     |   | 230,543 |                          |  |  |  |   | 4,679,423 |  |  |  |  |  | 5.22   |   |  |  |  |   | 121,652 |  |
| Interest-bearingliabilities:         |  |  |                                 |   |      |                     |  |  |                          |  |   |                |  |  |                     |   |    |                          |  |  |  |   |      |  |  |  |  |  |   |   |  |  |  |   |    |  |
| Collateralizeddebtobligations        |  |  |                                 |   | 4,779,766 |                     |  |  |                          |  | 4.83   |                |  |  |                     |   | 115,524 |                          |  |  |  |   | 2,370,904 |  |  |  |  |  | 3.68   |   |  |  |  |   | 43,533  |  |
| Warehouselinespayable                |  |  |                                 |   | 3,254,015 |                     |  |  |                          |  | 5.97   |                |  |  |                     |   | 97,694  |                          |  |  |  |   | 1,989,996 |  |  |  |  |  | 3.45   |   |  |  |  |   | 34,243  |  |
| Otherdebt                            |  |  |                                 |   | 229,770   |                     |  |  |                          |  | 7.02   |                |  |  |                     |   | 8,105   |                          |  |  |  |   | 137,206   |  |  |  |  |  | 4.33   |   |  |  |  |   | 2,965   |  |
|                                 |  |  |                                 |   | 8,263,551 |                     |  |  |                          |  | 5.33   |                |  |  |                     |   | 221,323 |                          |  |  |  |   | 4,498,106 |  |  |  |  |  | 3.60   |   |  |  |  |   | 80,741  |  |
| Netinterest-earning assets andspread |  |  |                                 | $ | 142,708   |                     |  |  |                          |  | 0.16   | %              |  |  |                     | $ | 9,220   |                          |  |  |  | $ | 181,317   |  |  |  |  |  | 1.62   | % |  |  |  | $ | 40,911  |  |
| Netinterestmargin(1)                 |  |  |                                 |   |      |                     |  |  |                          |  | 0.22   | %              |  |  |                     |   |    |                          |  |  |  |   |      |  |  |  |  |  | 1.75   | % |  |  |  |   |    |  |
|                                      |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Netinterest margin is computed by dividing annualized net interest incomeby the average daily balance of interest-earningassets. |

Mortgage InvestmentOperations

Revenues

Net interestincome.    REIT net interest income decreased approximately15% to $16.5  million for the six months ended June30,  2006 from approximately $19.5  million for thecomparable period ended June  30,  2005. The decrease wasdue to a lower net interest margin, driven by the flattening yieldcurve, partly offset by higher average interest-earning assets of$5.1  billion for the six months ended June  30,2006 compared with average interest-earning assets of $3.1billion for the comparable period ended June  30,  2005.Net interest margin at the REIT declined to .64% for the sixmonths ended June  30,  2006 from 1.26% for thecomparable period ended June  30,  2005 due to continuedflattening of the yield curve as average one-month LIBOR rose to4.85% in the first six months of 2006 from 2.87% in thefirst six months of 2005. The following table presents the averagebalance for each category of our interest-earning assets andinterest-bearing liabilities, with the corresponding annualizedeffective rate of interest and the related interest income or expensefor the same period:

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Average Balance, Rate and InterestIncome/Expense Table(Dollars inthousands)

|                                          |  |  |                                 |   |           |               |  |  |                          |  |        |                |  |  |               |   |         |                          |  |  |  |   |           |  |  |  |  |  |        |   |  |  |  |   |        |  |
|------------------------------------------|--|--|---------------------------------|---|-----------|---------------|--|--|--------------------------|--|--------|----------------|--|--|---------------|---|---------|--------------------------|--|--|--|---|-----------|--|--|--|--|--|--------|---|--|--|--|---|--------|--|
|                                     |  |  | Forthe six months ended June30, |
|                                     |  |  | 2006                            |   |           | 2005          |
|                                     |  |  | AverageBalance                  |   |           | EffectiveRate |  |  | InterestIncomeandExpense |  |        | AverageBalance |  |  | EffectiveRate |   |         | InterestIncomeandExpense |
| Interest-earningassets:                  |  |  |                                 |   |      |               |  |  |                          |  |   |                |  |  |               |   |    |                          |  |  |  |   |      |  |  |  |  |  |   |   |  |  |  |   |   |  |
| PortfolioAssets                          |  |  |                                 | $ | 5,025,497 |               |  |  |                          |  | 5.20   | %              |  |  |               | $ | 130,530 |                          |  |  |  | $ | 3,066,999 |  |  |  |  |  | 4.81   | % |  |  |  | $ | 73,626 |  |
| Cashand cash equivalents and otherassets |  |  |                                 |   | 98,927    |               |  |  |                          |  | 8.03   |                |  |  |               |   | 3,974   |                          |  |  |  |   | 34,115    |  |  |  |  |  | 0.44   |   |  |  |  |   | 75     |  |
|                                     |  |  |                                 |   | 5,124,424 |               |  |  |                          |  | 5.25   |                |  |  |               |   | 134,504 |                          |  |  |  |   | 3,101,114 |  |  |  |  |  | 4.77   |   |  |  |  |   | 73,701 |  |
| Interest-bearingliabilities:             |  |  |                                 |   |      |               |  |  |                          |  |   |                |  |  |               |   |    |                          |  |  |  |   |      |  |  |  |  |  |   |   |  |  |  |   |   |  |
| Collateralizeddebtobligations            |  |  |                                 |   | 4,779,766 |               |  |  |                          |  | 4.83   |                |  |  |               |   | 115,396 |                          |  |  |  |   | 2,370,904 |  |  |  |  |  | 3.67   |   |  |  |  |   | 43,439 |  |
| Warehouselinespayable                    |  |  |                                 |   | 3,432     |               |  |  |                          |  | 4.74   |                |  |  |               |   | 82      |                          |  |  |  |   | 537,193   |  |  |  |  |  | 3.55   |   |  |  |  |   | 9,499  |  |
| Repurchaseagreements                     |  |  |                                 |   | 96,237    |               |  |  |                          |  | 5.31   |                |  |  |               |   | 2,569   |                          |  |  |  |   | 89,135    |  |  |  |  |  | 2.94   |   |  |  |  |   | 1,306  |  |
|                                     |  |  |                                 |   | 4,879,435 |               |  |  |                          |  | 4.81   |                |  |  |               |   | 118,047 |                          |  |  |  |   | 2,997,232 |  |  |  |  |  | 3.63   |   |  |  |  |   | 54,244 |  |
| Netinterest-earning assets andspread     |  |  |                                 | $ | 244,989   |               |  |  |                          |  | 0.44   | %              |  |  |               | $ | 16,457  |                          |  |  |  | $ | 103,882   |  |  |  |  |  | 1.14   | % |  |  |  | $ | 19,457 |  |
| Netinterestmargin(1)                     |  |  |                                 |   |      |               |  |  |                          |  | 0.64   | %              |  |  |               |   |    |                          |  |  |  |   |      |  |  |  |  |  | 1.26   | % |  |  |  |   |   |  |
|                                          |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Netinterest margin is computed by dividing annualized net interest incomeby the average daily balance of interest-earningassets. |

Expenses

Compensation andemployee benefits.    Compensation and employee benefitsexpenses decreased approximately 59% to $651,000 for the sixmonths ended June  30,  2006 from approximately $1.6million for the comparable period ended June  30,  2005.The decrease was primarily due to a decrease in the number of employeesdedicated to the investment operations as the business achievedeconomies of scale.

Processingexpenses.    Mortgage loan processing expenses decreasedapproximately 43% to $1.3  million for the six monthsended June  30,  2006 from approximately $2.3million for the comparable period ended June  30,  2005.The decrease was primarily due to a lower provision for loanlosses.

General and administrativeexpenses.    General and administrative expenses decreasedapproximately 74% to $461,000 for the six months endedJune  30,  2006 from approximately $1.8  million forthe comparable period ended June  30,  2005. This decreasewas primarily due to lower insurance and other administrativeexpenses.

Professional fees.    Professionalfees decreased approximately 68% to $351,000 for the six monthsended June  30,  2006 from approximately $1.1million for the comparable period ended June  30,  2005.This decrease was primarily due to lower legal and other professionalexpenses.

Mortgage BankingOperations

Revenues

Gain on sale ofmortgage loans.    Gain on sale of mortgage loans increasedapproximately 24% to $114.5  million for the six monthsended June  30,  2006 from approximately $92.4million for the six months ended June  30,  2005. Mortgagewhole loan sales to third parties increased by approximately 88%to $13.0  billion for the six months ended June  30,2006 from approximately $6.9  billion for the six months endedJune  30,  2005. Sub-prime gain on sale decreased to a lossof approximately $10.1  million for the six months endedJune  30,  2006 from a gain of approximately $19.8million for the six months ended June  30,2005.

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Brokeragerevenue.    Brokerage revenue decreased by approximately4% to $12.2  million for the six months ended June30,  2006, from approximately $12.7  million for thecomparable period in 2005, due to a 12% decline in brokered loanvolume from the comparable period.

Net interestincome.    Net interest income decreased by approximately156% to negative $10.9  million for the six months endedJune  30,  2006 from approximately $19.3  million forthe six months ended June  30,  2005. The decrease isattributable to higher borrowing costs on warehouse lines payable inthe first six months of 2006 in line with an increase in averageone-month LIBOR to 4.85% from 2.87% in the first sixmonths of 2005, as well as a lower average coupon on mortgage loansheld for sale driven by a higher percentage of POAs carrying low teaserrates. The following table presents the average balance for eachcategory of our interest-earning assets and interest-bearingliabilities, with the corresponding annualized effective rate ofinterest and the related interest income or expense.

AverageBalance, Rate and Interest Income/Expense Table (Dollars inthousands)

|                                              |  |  |                                 |   |           |               |  |  |                          |  |        |                |  |  |               |   |         |                          |  |  |  |   |           |  |  |  |  |  |         |   |  |  |  |   |         |  |
|----------------------------------------------|--|--|---------------------------------|---|-----------|---------------|--|--|--------------------------|--|--------|----------------|--|--|---------------|---|---------|--------------------------|--|--|--|---|-----------|--|--|--|--|--|---------|---|--|--|--|---|---------|--|
|                                         |  |  | Forthe six months ended June30, |
|                                         |  |  | 2006                            |   |           | 2005          |
|                                         |  |  | AverageBalance                  |   |           | EffectiveRate |  |  | InterestIncomeandExpense |  |        | AverageBalance |  |  | EffectiveRate |   |         | InterestIncomeandExpense |
| Interest-earningassets:                      |  |  |                                 |   |      |               |  |  |                          |  |   |                |  |  |               |   |    |                          |  |  |  |   |      |  |  |  |  |  |    |   |  |  |  |   |    |  |
| Mortgageloans held forsale                   |  |  |                                 | $ | 3,332,071 |               |  |  |                          |  | 5.78   | %              |  |  |               | $ | 96,315  |                          |  |  |  | $ | 1,547,735 |  |  |  |  |  | 5.87    | % |  |  |  | $ | 45,307  |  |
| PortfolioAssets                              |  |  |                                 |   | 565,724   |               |  |  |                          |  | 5.65   |                |  |  |               |   | 15,983  |                          |  |  |  |   | —   |  |  |  |  |  | — |   |  |  |  |   | — |  |
| Cashand cashequivalents                      |  |  |                                 |   | 39,358    |               |  |  |                          |  | 3.30   |                |  |  |               |   | 650     |                          |  |  |  |   | 30,574    |  |  |  |  |  | 2.40    |   |  |  |  |   | 366     |  |
|                                         |  |  |                                 |   | 3,937,153 |               |  |  |                          |  | 5.74   |                |  |  |               |   | 112,948 |                          |  |  |  |   | 1,578,309 |  |  |  |  |  | 5.80    |   |  |  |  |   | 45,673  |  |
| Interest-bearingliabilities:                 |  |  |                                 |   |      |               |  |  |                          |  |   |                |  |  |               |   |    |                          |  |  |  |   |      |  |  |  |  |  |    |   |  |  |  |   |    |  |
| Warehouselinespayable                        |  |  |                                 |   | 3,250,583 |               |  |  |                          |  | 5.97   |                |  |  |               |   | 97,612  |                          |  |  |  |   | 1,452,803 |  |  |  |  |  | 3.42    |   |  |  |  |   | 24,744  |  |
| Juniorsubordinated debentures and other debt |  |  |                                 |   | 791,312   |               |  |  |                          |  | 6.59   |                |  |  |               |   | 26,205  |                          |  |  |  |   | 48,071    |  |  |  |  |  | 6.92    |   |  |  |  |   | 1,659   |  |
|                                         |  |  |                                 |   | 4,041,895 |               |  |  |                          |  | 6.09   |                |  |  |               |   | 123,817 |                          |  |  |  |   | 1,500,874 |  |  |  |  |  | 3.52    |   |  |  |  |   | 26,403  |  |
| Netinterest-earning assets andspread         |  |  |                                 | $ | (104,742  | )             |  |  |                          |  | (0.35  | )%             |  |  |               | $ | (10,869 | )                        |  |  |  | $ | 77,435    |  |  |  |  |  | 2.28    | % |  |  |  | $ | 19,270  |  |
| Netinterestmargin(1)                         |  |  |                                 |   |      |               |  |  |                          |  | (0.55  | )%             |  |  |               |   |    |                          |  |  |  |   |      |  |  |  |  |  | 2.45    | % |  |  |  |   |    |  |
|                                              |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Netinterest margin is computed by dividing annualized net interest incomeby the average daily balance of interest-earningassets. |

Expenses

Compensation andemployee benefits.    Compensation and employee benefitsexpenses increased approximately 23% to $72  million forthe six months ended June  30,  2006 from approximately$58.4  million for the six months ended June  30,2005. The increase was primarily due to higher staffing resulting froma 38% increase in origination volume to approximately$14.8  billion in the first six months of 2006 from approximately$10.7  billion in the first six months ended June30,  2005.

Processingexpenses.    Mortgage loan processing expenses increasedapproximately 99% to $45.7  million for the six monthsended June  30,  2006 from approximately $23.0million for the six months ended June  30,  2005. Theincrease was primarily due to higher sub-prime loan repurchase expensesin the first six months of 2006 relative to the first six months of2005, as well as higher processing expenses on increased primeorigination volume.

General and administrativeexpenses.    General and administrative expenses increased byapproximately 32% to $14.8  million for the six monthsended June  30,  2006 from approximately $11.2million for the six months ended June  30,  2005. Thisincrease was primarily due to branch expansions, as well as staffinggrowth resulting from higher quarter over quarter originationvolumes.

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Marketing, loan acquisition andbusiness development expenses.    Marketing, loan acquisitionand business development expenses increased approximately 32% to$2.5  million for the six months ended June  30,2006 from approximately $1.9  million for the six months endedJune  30,  2005. The increase was primarily due to higherbusiness development expenses associated with the expansion of branchesin new geographic areas and higher period over periodoriginations.

Rent expense.    Rent expenseincreased approximately 57% to $7.2  million for the sixmonths ended June  30,  2006 from approximately $4.6million for the six months ended June  30,  2005. Thisincrease was primarily due to expansion of existing branches, as wellas fees associated with the wind-down of branches within our wholesalesub-prime and retail divisions during the first six months of2006.

Professional fees.    Professional feesincreased approximately 65% to $6.1  million for the sixmonths ended June  30,  2006 from approximately $3.7million for the six months ended June  30,  2005. Thisincrease was primarily due to higher litigation defense costs andincreased regulatory examination and compliance costs, as well ashigher technology consulting expenses.

Depreciation andamortization expenses.    Depreciation and amortizationexpenses increased approximately 100% to $3.2  million forthe six months ended June  30,  2006 from approximately$1.6  million for the six months ended June  30,2005. The increase was primarily due to leasehold improvements forbranch expansions as well as investments in computer systemhardware.

Income tax expense.    MortgageITmade the election to be treated as a taxable REIT subsidiary and,therefore, is subject to federal and state corporate income taxes.Accordingly, the Company records a tax provision on the taxable incomeof the TRS, which includes intercompany income that is eliminated inour consolidated statements of operations.

FINANCIALCONDITION

At June  30,  2006 andDecember  31,  2005, our assets consisted of both PortfolioARM Loans and mortgage loans held for sale, representing 57% and39%, respectively, of total assets at June  30,2006, and 56% and 40%, respectively, of total assets atDecember  31,  2005.

Total assets increased by$323.0  million from December  31,  2005 toJune  30,  2006. The increase primarily reflects anincrease in Portfolio Arm Loans in the amount of $241.5  millionand an increase in mortgage loans held for sale in the amount of$48.7  million.

The following table presentsvarious characteristics of our Portfolio ARM Loans as of June30,  2006. The aggregate unpaid principal balance of the loansincluded in this table is approximately $4.9billion.

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|                                       |  |  |         |   |         |        |  |  |     |   |           |   |  |  |  |   |        |   |
|---------------------------------------|--|--|---------|---|---------|--------|--|--|-----|---|-----------|---|--|--|--|---|--------|---|
|                                  |  |  | Average |   |         | High   |  |  | Low |
| Originalloanbalance                   |  |  |         | $ | 286,402 |        |  |  |     | $ | 1,500,000 |   |  |  |  | $ | 21,207 |   |
| Couponrate onloans                    |  |  |         |   | 5.67    | %      |  |  |     |   | 8.38      | % |  |  |  |   | 3.50   | % |
| %Grossmargin                          |  |  |         |   | 2.20    | %      |  |  |     |   | 3.00      | % |  |  |  |   | 1.75   | % |
| Lifetimecap                           |  |  |         |   | 5.99    | %      |  |  |     |   | 9.95      | % |  |  |  |   | 5.00   | % |
| Originalterm(months)                  |  |  |         |   | 360     |        |  |  |     |   | 360       |   |  |  |  |   | 360    |   |
| Remainingterm(months)                 |  |  |         |   | 346     |        |  |  |     |   | 356       |   |  |  |  |   | 329    |   |
| Geographicdistribution (top 5states): |  |  |         |   |    |        |  |  |     |   |      |   |  |  |  |   |   |   |
| California                            |  |  |    |   |         |   |  |  |     |   | 53.5      | % |
| Arizona                               |  |  |    |   |         |   |  |  |     |   | 7.5       |   |
| Washington                            |  |  |    |   |         |   |  |  |     |   | 6.6       |   |
| Florida                               |  |  |    |   |         |   |  |  |     |   | 5.2       |   |
| Nevada                                |  |  |    |   |         |   |  |  |     |   | 3.1       |   |
| Other                                 |  |  |    |   |         |   |  |  |     |   | 24.1      |   |
| Occupancystatus:                      |  |  |    |   |         |   |  |  |     |   |      |   |
| Owneroccupied                         |  |  |    |   |         |   |  |  |     |   | 89.1      | % |
| Investor                              |  |  |    |   |         |   |  |  |     |   | 8.3       |   |
| Secondhome                            |  |  |    |   |         |   |  |  |     |   | 2.6       |   |
| Documentationtype:                    |  |  |    |   |         |   |  |  |     |   |      |   |
| FullDocumentation                     |  |  |    |   |         |   |  |  |     |   | 40.3      | % |
| StatedIncome/VerifiedAssets           |  |  |    |   |         |   |  |  |     |   | 48.0      |   |
| StatedIncome/Stated Assets            |  |  |    |   |         |   |  |  |     |   | 4.2       |   |
| VerifiedAssets                        |  |  |    |   |         |   |  |  |     |   | 2.6       |   |
| NoDocumentation                       |  |  |    |   |         |   |  |  |     |   | 4.9       |   |
| Loanpurpose:                          |  |  |    |   |         |   |  |  |     |   |      |   |
| Purchase                              |  |  |    |   |         |   |  |  |     |   | 55.5      | % |
| Cash-outrefinance                     |  |  |    |   |         |   |  |  |     |   | 28.1      |   |
| Rate& termrefinance               |  |  |    |   |         |   |  |  |     |   | 16.4      |   |
| Originalloan-to-value:                |  |  |    |   |         |   |  |  |     |   |      |   |
| 80.01%andover                         |  |  |    |   |         |   |  |  |     |   | 2.1       | % |
| 70.01%-80.00%                         |  |  |    |   |         |   |  |  |     |   | 71.3      |   |
| 60.01%-70.00%                         |  |  |    |   |         |   |  |  |     |   | 15.8      |   |
| 50.01%-60.00%                         |  |  |    |   |         |   |  |  |     |   | 6.2       |   |
| 50.00%or less                         |  |  |    |   |         |   |  |  |     |   | 4.6       |   |
| Weightedaverage originalloan-to-value |  |  |    |   |         |   |  |  |     |   | 74.0      | % |
| Propertytype:                         |  |  |    |   |         |   |  |  |     |   |      |   |
| Singlefamily                          |  |  |    |   |         |   |  |  |     |   | 60.4      | % |
| PUD                                   |  |  |    |   |         |   |  |  |     |   | 23.6      |   |
| Condominium                           |  |  |    |   |         |   |  |  |     |   | 11.8      |   |
| Otherresidential                      |  |  |    |   |         |   |  |  |     |   | 4.2       |   |
| ARMloan type:                         |  |  |    |   |         |   |  |  |     |   |      |   |
| 3-yearhybrid                          |  |  |    |   |         |   |  |  |     |   | 19.1      | % |
| 5-yearhybrid                          |  |  |    |   |         |   |  |  |     |   | 75.3      |   |
| PayOption                             |  |  |    |   |         |   |  |  |     |   | 5.1       |   |
| Other                                 |  |  |    |   |         |   |  |  |     |   | 0.5       |   |
| ARMinterest ratecaps:                 |  |  |    |   |         |   |  |  |     |   |      |   |
| Initialcap:                           |  |  |    |   |         |   |  |  |     |   |      |   |
| Under3.00                             |  |  |    |   |         |   |  |  |     |   | 5.4       | % |
| 3.01-4.00                             |  |  |    |   |         |   |  |  |     |   | 0.0       |   |
| 4.01-5.00                             |  |  |    |   |         |   |  |  |     |   | 21.5      |   |
| 5.01-6.00                             |  |  |    |   |         |   |  |  |     |   | 73.1      |   |
| Periodiccap:                          |  |  |    |   |         |   |  |  |     |   |      |   |
| None                                  |  |  |    |   |         |   |  |  |     |   | 0.2       | % |
| Under1.00%                            |  |  |    |   |         |   |  |  |     |   | 0.1       |   |
| Over1.00%                             |  |  |    |   |         |   |  |  |     |   | 99.7      |   |
| Percentof interest-only loanbalances  |  |  |    |   |         |   |  |  |     |   | 78.8      | % |
| FICOscore atorigination:              |  |  |    |   |         |   |  |  |     |   |      |   |
| 801andover                            |  |  |    |   |         |   |  |  |     |   | 2.7       | % |
| 751to 800                             |  |  |    |   |         |   |  |  |     |   | 31.5      |   |
| 701 to750                             |  |  |    |   |         |   |  |  |     |   | 43.4      |   |
| 651 to700                             |  |  |    |   |         |   |  |  |     |   | 21.7      |   |
| 650 orless                            |  |  |    |   |         |   |  |  |     |   | 0.7       |   |
| Weighted averageFICO(1)score:         |  |  |    |   |         |   |  |  |     |   | 732       |   |
|                                       |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                     |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | FICOis a credit score, ranging from 300 to 850, with 850 being the bestscore, based upon the credit evaluation methodology developed by Fair,Isaac and Company, a consulting firm specializing in creating creditevaluation models. |

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CRITICAL ACCOUNTING POLICIES ANDESTIMATES

Management's discussion and analysis offinancial condition and results of operations is based on the amountsreported in our consolidated financial statements. These consolidatedfinancial statements have been prepared in conformity with accountingprinciples generally accepted in the United States of America(‘‘GAAP’’), many of which require the useof estimates, judgments and assumptions that affect reported amounts.Changes in the estimates and assumptions could have a material effecton these consolidated financial statements. In accordance with recentSEC guidance, those material accounting policies that we believe arethe most critical to an investor's understanding of our financialresults and condition, and require complex management judgment aredescribed below. Additional information regarding our accountingpolicies is contained in Note 1 to the consolidated financialstatements included elsewhere in this quarterly report on Form10-Q.

Derivatives and Hedging Activities

Weutilize derivatives to manage interest rate risk exposure. Inaccordance with SFAS No. 133, ‘‘Accounting for DerivativeInvestments and Hedging Activities,’’ all derivativeinstruments are recorded at fair value. We designate every derivativeinstrument as either (1) a hedge of the fair value of a recognizedasset or liability or of an unrecognized firm commitment, (2) a hedgeof the variability of cash flows to be paid related to either aforecasted or recognized liability, or (3) a free-standing derivativeinstrument.

To qualify for hedge accounting under SFAS No.133, we must demonstrate, on an ongoing basis, that our interest raterisk management activity is highly effective. We determine theeffectiveness of our interest rate risk management activities usingstandard statistical measures. If we are unable to qualify certain ofour interest rate risk management activities for hedge accounting, thenthe gain or loss on the associated derivative financial instrumentswould be reflected in current period earnings. See Note 4 of ourconsolidated financial statements included elsewhere in this quarterlyreport on Form 10-Q for further information pertaining to ouraccounting for derivatives and hedging activities.

Changesin the fair value of a derivative that is highly effective and that isdesignated and qualifies as a fair value hedge, along with the changein the fair value of the hedged asset or liability, are recorded inearnings. Our fair value hedges are used primarily for mortgage loansheld for sale.

Gains and losses on a derivative that ishighly effective and that is designated and qualifies as a cash flowhedge are recorded in accumulated other comprehensive income (loss) tothe extent that the derivative is effective as a hedge, until earningsare affected by the variability in cash flows of the designated hedgeditem. Our cash flow hedges are used primarily to hedge the financingcost for forecasted or recognized mortgage-backed collateralized debtobligations.

We obtain the fair value of Eurodollarfutures, forward delivery contracts on MBS (‘‘TBASecurities’’), options on TBA Securities and interestrate swaps and caps from quoted market prices.

The fairvalue of forward sale commitments to deliver mortgages is estimatedusing current quoted market prices for dealer or investor commitmentsas applies to our existing positions.

The fair value of aninterest rate lock commitment (‘‘IRLC’’) isbased on an estimate of the fair value of the underlying mortgage loan,and given the probability that the loan will fund within the terms ofthe IRLC. After issuance, the value of an IRLC can change and be eitherpositive or negative, depending on the change in value of theunderlying mortgage loan. The probability that the underlying loan willfund is driven by a number of factors, in particular, the change, ifany, in mortgage rates after the lock date. In general, the probabilityof funding increases if mortgage rates rise and decreases if mortgagerates fall. The probability that a loan will fund within the terms ofthe IRLC also is influenced by the source of the applicant, purpose forthe loan (purchase or refinance) and the application approvalrate.

Fair value estimates are made as of a specific pointin time based on estimates using present value or other valuationtechniques. These techniques may involve uncertainties and aresignificantly affected by the assumptions used and the judgments maderegarding risk characteristics of various financial 

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instruments, discount rates, estimates offuture cash flows, future expected loss experience and other factors.Changes in assumptions could significantly affect these estimates andthe resulting fair values.

Interest Income on Portfolio ARMLoans

Interest income is accrued based on the outstandingprincipal amount and contractual terms of our loans. Direct loanorigination fees and costs are deferred and amortized as an interestincome yield adjustment over the life of the related loans using theeffective yield method. Estimating prepayments and estimating theremaining lives of the loans requires management judgment, whichinvolves consideration of possible future interest rate environments.The actual lives could be more or less than the amount estimated bymanagement. See Item 3 — Quantitative and QualitativeDisclosures About Market Risk — Interest Rate Risk Management inthis quarterly report on Form 10-Q for further details.

LoanLoss Reserves

MortgageIT's historical operationshad an insignificant amount of loan losses due to default ornon-performance on the loans primarily because mortgage loans were soldsoon after being originated. Because we now hold loans for investment,we record an allowance for loan losses reflecting our estimate offuture loan default losses. Our Portfolio ARM Loans are collectivelyevaluated for impairment, as the loans are homogeneous in nature. Theallowance is based upon management's assessment of the variousrisk factors affecting our investment loan portfolio, including currenteconomic conditions, the makeup of the portfolio based on credit grade,loan-to-value ratios, delinquency status, historical credit losses,purchased mortgage insurance and other factors deemed to warrantconsideration. The allowance is maintained through ongoing lossprovisions charged to operating income and is reduced by loans that arecharged off. Determining the allowance for loan losses is subjective innature due to the estimates required and the potential for imprecision.Two critical assumptions used in estimating the loan loss reserves arean assumed rate of default, which is the expected rate at which loansgo into foreclosure over the life of the loans, and an assumed rate ofloss severity, which represents the expected rate of realized loss upondisposition of the properties that have gone intoforeclosure.

REMIC Securitization

MortgageITstructured its November  2005, REMIC securitization so thatcontrol over the collateral was transferred and the transfer wasaccounted for as a sale. In accordance with SFAS No. 140, a gainor loss on the sale is recognized based on the carrying amount of thefinancial assets involved in the transfer, allocated between the assetstransferred and the retained interests based on their relative fairvalue at the date of transfer. In the REMIC securitization, MortgageITretained the right to service the underlying mortgage loans andHoldings also purchased certain mortgage securities issued by the trust(see Note 5 to the consolidated financial statements included elsewherein this quarterly report on Form 10-Q). The gain recognized uponsecuritization depends on, among other things, the estimated fair valueof the components of the REMIC securitization — the loanstransferred, the mortgage securities purchased and the mortgageservicing rights. We obtain the estimated fair value of the MBS fromdifferent sources, including broker dealers. The initial value of theMBS we purchase in a REMIC securitization is derived from the allocatedcost, based upon the relative fair value of the entire REMICsecuritization.

An implied yield (discount rate) iscalculated based on the initial value derived above and using projectedcash flows generated using assumptions for prepayments, expected creditlosses and interest rates. Additionally, this yield serves as theinitial accretable yield used to recognize income on thesecurities.

Mortgage Servicing Rights

MortgageITrecorded MSR arising from the sale of mortgages in the November2005, REMIC securitization at the allocated cost, utilizing therelative fair value allocation method based upon an 

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estimate of what a third party would pay forthe MSR. The MSR are amortized in proportion to and over the estimatedperiod of net servicing income. MortgageIT subsequently evaluates andmeasures the MSR for impairment by comparing the unamortized balanceagainst the fair value obtained from a broker dealer. An impairmentloss is recognized for MSR that have an unamortized balance in excessof the estimated fair value.

LIQUIDITY AND CAPITALRESOURCES

Liquidity is a measure of our ability to meetpotential cash requirements, including ongoing commitments to repayborrowings, fund and maintain investments, pay dividends to ourstockholders and other general business needs. It is our policy to haveadequate liquidity available at all times. We manage liquidity toensure that we have the continuing ability to maintain cash flows thatare adequate to fund operations and meet commitments on a timely andcost-effective basis.

Liquidity from Mortgage InvestmentOperations

The principal sources of liquidity from ourmortgage investment operations are the issuance of MBS, repurchaseagreements, and principal payments and net interest earned from ourPortfolio ARM Loans. The net interest income earned from our PortfolioARM Loans is the primary source of income and liquidity for the paymentof dividends to our stockholders. We believe that our liquidity levelis in excess of that necessary to pay dividends to our stockholders andto satisfy our operating requirements.

Loansecuritizations are the primary funding source for our Portfolio ARMLoans.

We securitize mortgage loans by transferring themto independent trusts that issue securities collateralized by thetransferred mortgage loans. The loan securitization process benefits usby creating highly liquid securitized assets that can be readilyfinanced in the capital markets. We believe there is a reliable andstable market for term financing of investment grade MBS that we issue.Through June  30,  2006, we completed seven securitizationtransactions, in which we securitized ARM loans into a series of prorata pay, floating-rate securities, and the February  2006 REMICsecuritization.

In these transactions, we issued AAA andAA− rated floating-rate pass-through certificates totaling$5.97  billion and A+/BBB+ subordinated floating-rate securitiestotaling $65.2  million to third party investors, and retained$145.5  million of subordinated certificates, which providecredit support to the higher-rated certificates. The interest rates onthe floating-rate pass-through certificates reset monthly and areindexed to the one-month LIBOR rate. In connection with the issuance ofthese MBS, we incurred securitization costs of $15.5  million,including investment banking fees, legal fees and other related costs.The securitization costs are amortized over the expected life ofMBS.

As of June  30,  2006 and December31,  2005, outstanding MBS were collateralized by ARM loans witha remaining principal balance of approximately $4.9  billion and$4.6  billion, respectively. These MBS mature between 2033 and2036 and are callable at par by us after the total remaining balance ofthe loans collateralizing the debt is paid down to 20%, or10% for the February  2006 REMIC securitization, of itsoriginal balance. The balance of our debt is also reduced as theunderlying loan collateral is paid down, and is expected to have anaverage life of approximately 2.5 years.

We also utilizerepurchase agreements as a source of financing for our mortgageinvestment operations. These arrangements vary in size and othercharacteristics among multiple providers. In particular, repurchaseagreements have terms that will vary with respect to advance rates,interest spreads, size, duration and other characteristics depending onthe nature of the underlying collateral in theprogram.

Under these agreements, we sell some or all ofthe retained interest in our MBS to a counterparty and we agree torepurchase those assets at a future date. At maturity, we repurchasethe assets from the counterparty at an amount equal to the originalsales price plus interest. During the term of a repurchase agreement,we continue to earn principal and interest on the underlying mortgageassets. As of June  30,  2006 and December31,  2005, we had $100.3  million and $87.1  millionof securities outstanding under the repurchase agreements,respectively.

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These financing arrangements areshort-duration facilities, generally 30 days, secured by the retainedinterest in our MBS, the value of which may move inversely with changesin interest rates. A decline in the market value of our investments maylimit our ability to borrow or result in lenders requiring additionalcollateral. As a result, we could be required to sell some of ourinvestments under adverse market conditions in order to maintainliquidity. If such sales are made at prices lower than the amortizedcosts of such investments, we will incur losses.

Inaddition, we draw down on all but one of our warehouse creditfacilities to finance loans that are held for securitization by theREIT.

Liquidity from Mortgage BankingOperations

The principal sources of liquidity from ourmortgage banking operations are our warehouse credit facilities and ourprincipal use of liquidity is the origination of new mortgageloans.

To originate a mortgage loan, MortgageIT utilizesits eight short-term warehouse credit facilities that are available tofund mortgage loans held for sale. These facilities are secured by themortgage loans owned by MortgageIT and by certain other assets,including cash deposited in interest-bearing collateral accounts.Advances drawn under these facilities bear interest at rates that varydepending on the type of mortgage loans securing the advances. Thesefacilities are subject to sub-limits, advance rates and terms that varydepending on the type of mortgage loans securing these financings andthe ratio of MortgageIT's liabilities to its tangible net worth.Warehouse credit facilities generally have a term of one year and havebeen renewed annually. As of June  30,  2006, the aggregateamount of our warehouse facilities was $6.9  billion and theamount available for additional borrowings under these facilities wasapproximately $3.6  billion.

During May  2006and July  2006 the Company negotiated two new warehouse creditfacilities, bringing the total number of facilities it may draw upon toeight.

These facilities bear interest at LIBOR plus aspread based on the types of loans being funded. The weighted averageeffective rate of interest for borrowings under all warehouse creditfacilities was approximately 6.0% and 4.3% for the sixmonths ended June  30,  2006 and the year endedDecember  31,  2005, respectively.

Allmortgage loans held for sale have been pledged as collateral under theabove warehouse credit facilities. The documents governingMortgageIT's warehouse credit facilities contain a number ofcompensating balance requirements and restrictive financial and othercovenants that, among other things, require it to maintain minimumlevels of tangible net worth, liquidity and stockholders' equity,and maximum leverage ratios, as well as to comply with applicableregulatory and investor requirements.

The Company was notin compliance with covenants contained in three of its warehouse creditfacilities as of April  30,  2006, covenants contained intwo of its warehouse credit facilities as of May  31,2006, and covenants contained in two of its warehouse credit facilitiesas of June  30,  2006, for which waivers have beenobtained. No assurance can be made that the Company's lenderswill waive future covenant violations, if violations occur. Thesefacilities contain covenants limiting the Company's abilityto:

|              |                                                                    |
|--------------|--------------------------------------------------------------------|
| •  | consolidate, merge or enter intosimilar extraordinarytransactions; |

|              |                                                 |
|--------------|-------------------------------------------------|
| •  | transfer or sell asubstantial amount of assets; |

|              |                                             |
|--------------|---------------------------------------------|
| •  | createadditional liens on the collateral;or |

|              |                                                                                                                                      |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------|
| •  | change the nature of its business,without obtaining the prior consent of the lenders, which consent maynot be unreasonably withheld. |

These limits may in turnrestrict the Company's ability to pay cash or stock dividends onits common stock. In addition, under the facilities, the Company cannotcontinue to finance a mortgage loan that it holds through the facilityif:

|              |                                                                                                                                                                                       |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the loan is rejected as‘‘unsatisfactory for purchase’’ by theultimate investor and/or has exceeded its permissible warehouse period,which varies by facility; |

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|              |                                                                                                                                  |
|--------------|----------------------------------------------------------------------------------------------------------------------------------|
| •  | the Company failsto deliver the applicable note, mortgage or other documents evidencingthe loan within the requisite timeperiod; |

|              |                                                                                                                      |
|--------------|----------------------------------------------------------------------------------------------------------------------|
| •  | the underlying property thatsecures the loan has sustained a casualty loss in excess of 5%of its appraised value; or |

|              |                                                                                                           |
|--------------|-----------------------------------------------------------------------------------------------------------|
| •  | the loan ceasesto be an eligible loan (as determined pursuant to the warehouse creditfacility agreement). |

In addition to the warehouse creditfacilities, MortgageIT has entered into a mortgage loan purchaseagreement with one of its warehouse lenders, which the Company refersto as a conduit facility. Under this agreement, the lender purchases aloan from MortgageIT, which enables MortgageIT to record the sale andrecognize the gain on sale. Upon sale, MortgageIT removes both theloans and the corresponding warehouse liability from its balance sheet.A third party subsequently purchases the loan directly from the lender.MortgageIT facilitates the final settlement of the loan sale betweenthe lender and the third party, and receives a performance fee forservices provided to the lender. MortgageIT classifies the performancefee as brokerage revenue. The capacity available under the conduitfacility is included in the aggregate capacity under the warehousecredit facility with the lender. The overall facility capacity at anygiven time is reduced by the outstanding balance on the warehousecredit facility plus the outstanding balance of the conduit facility.The conduit facility is not a committed facility and may be terminatedat the discretion of the lender.

In addition to thewarehouse facilities and the conduit facility, MortgageIT issues juniorsubordinated debentures (the‘‘Debentures’’).

DuringMarch  2006, MortgageIT issued $51.5  million of theDebentures. The Debentures were issued to a trust subsidiary ofMortgageIT in order to fund the trust's obligations with respectto an aggregate of $50  million of trust preferred securitieswhich were issued by such trust subsidiary. The Debentures arefloating-rate and bear a variable interest rate of 360 basis pointsabove 3-month LIBOR, paid quarterly, and mature in 2036. They areredeemable, by MortgageIT, at par after five years and at a premium topar in certain limited circumstances over the first five years. Inconnection with the issuance of the Debentures, the Company incurredcosts of $1.5  million. These costs are being amortized over theexpected life of the securities.

During April andMay  2005, MortgageIT issued $77.3  million of theDebentures in two separate private placements. The Debentures wereissued to a trust subsidiary of MortgageIT in order to fund thetrust's obligations with respect to an aggregate of $75million of trust preferred securities which were issued by such trustsubsidiary. The Debentures are floating-rate securities and bear avariable interest rate of 375 basis points above 3-month LIBOR, paidquarterly, and mature in 2035. They are redeemable, by MortgageIT, atpar after five years and at a premium to par in certain limitedcircumstances over the first five years. In connection with theissuance of the Debentures, the Company incurred costs of $2.5million. These costs are being amortized over the expected life of thesecurities.

Also, MortgageIT entered into a note purchaseagreement in March  2004, whereby MortgageIT sold an aggregateprincipal amount of $15  million of senior secured notes (the‘‘Notes’’) to an investor; MortgageIT soldan additional aggregate principal amount of $15  million of Notesto the investor in February  2006. The proceeds from the sale ofthe Notes provide working capital for MortgageIT. Under the relatednote purchase agreement, as amended, the Notes bore interest at (i) arate of 10% per annum through September  30,  2004,(ii) a rate of 7.5% per annum from October  1,  2004through March  31,  2005, (iii) a rate of 10% perannum from April  1,  2005 to August  23,2005, (iv) a rate of 5.5% per annum from August24,  2005 to February  20,  2006 and (v) a rate of6.5% per annum from February  21,  2006 to maturity.Interest on the Notes is payable quarterly in arrears. The Notesprovide for a single payment of the entire amount of the unpaidprincipal and any unpaid accrued interest on the Notes on March29,  2007. As of June  30,  2006, MortgageIT was incompliance with all of the restrictions and covenants contained in thenote purchase agreement. If covenant violations occur in the future,there can be no assurance that the investor will waivethem.

MortgageIT makes certain representations andwarranties, and is subject to various affirmative and negativefinancial and other covenants, under the terms of both the warehousecredit facilities and 

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certain investor loan sale agreementsregarding, among other things, the loans' compliance with lawsand regulations, their conformity with the investors'underwriting standards and the accuracy of information. In the event ofa breach of these representations, warranties or covenants or in theevent of an early payment default, these loans may become ineligiblecollateral for the warehouse credit facilities or may become ineligiblefor sale to an investor, and MortgageIT may be required to repurchasethe loans from the warehouse lender or the investor. MortgageIT hasimplemented procedures to help ensure quality control and conformity tounderwriting standards and to minimize the risk of being required torepurchase loans. MortgageIT has been required to repurchase loans ithas sold from time to time; however, to date, these repurchases havenot had a material impact on the results of operations ofMortgageIT.

MortgageIT's ability to originate andfund loans has historically depended in large part on its ability tosell the mortgage loans it originates at a premium in the secondarymarket so that it may generate cash proceeds to repay borrowings underits warehouse facilities. The value of MortgageIT's loans isrelevant in determining the overall amount of borrowings that will beavailable to it under its financing facilities. The value of our loansdepends on a number of factors,including:

|              |                                                               |
|--------------|---------------------------------------------------------------|
| •  | interest rates on our loanscompared to market interest rates; |

|              |                                        |
|--------------|----------------------------------------|
| •  | theborrower credit riskclassification; |

|              |                                                                     |
|--------------|---------------------------------------------------------------------|
| •  | loan-to-value ratios, loanterms, underwriting and documentation;and |

|              |                             |
|--------------|-----------------------------|
| •  | general economicconditions. |

Cash and Cash Equivalents

TheCompany's cash and cash equivalents increased to $55.9million at June  30,  2006 from $36.8  million atDecember  31,  2005. The Company's primary sources ofcash and cash equivalents during the six months ended June30,  2006 were as follows:

|              |                                                              |
|--------------|--------------------------------------------------------------|
| •  | a$228.0  million increase in collateralized debtobligations; |

|              |                                                      |
|--------------|------------------------------------------------------|
| •  | a $49.1  millionincrease in warehouse lines payable; |

|              |                                                                                                |
|--------------|------------------------------------------------------------------------------------------------|
| •  | a$48.5  million increase from net proceeds from the issuance ofjunior subordinated debentures; |

|              |                                               |
|--------------|-----------------------------------------------|
| •  | a$15.0  million increase in notes payable;and |

|              |                                                                    |
|--------------|--------------------------------------------------------------------|
| •  | a $13.2  million increase inborrowings from repurchase agreements. |

The Company'sprimary uses of cash and cash equivalents during the six months endedJune  30,  2006 were asfollows:

|              |                                                   |
|--------------|---------------------------------------------------|
| •  | a $241.2  million increasein Portfolio ARM Loans; |

|              |                                                         |
|--------------|---------------------------------------------------------|
| •  | a $48.7million increase in mortgage loans held forsale; |

|              |                                                                                          |
|--------------|------------------------------------------------------------------------------------------|
| •  | a $34.7  million decrease inaccounts payable, accrued expenses and other liabilities;and |

|              |                                       |
|--------------|---------------------------------------|
| •  | a $20.7  million distributionpayment. |

Payment of Distributions

OnDecember  16,  2004, we declared our initial distributionon our common stock of $0.44 per share. The distribution was made inJanuary  2005 and, for financial reporting purposes, wasreflected as an increase in our accumulated deficit. The total cashdistribution of approximately $8.5  million exceeded the minimumtaxable income distribution requirements for the year.

OnMarch  16,  2005, we declared a cash dividend on our commonstock of $0.48 per share. The dividend was distributed in April2005 and, for financial reporting purposes, was reflected as anincrease in our accumulated deficit. The total cash dividend ofapproximately $9.3  million exceeded the minimum taxable incomedistribution requirements for the quarter.

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On May  17,  2005, wedeclared a cash dividend on our common stock of $0.48 per share. Thedividend was distributed in July  2005 and, for financialreporting purposes, was reflected as an increase in our accumulateddeficit. The total cash dividend of approximately $9.3  millionexceeded the minimum taxable income distribution requirements for thequarter.

On September  21,  2005, we declareda cash distribution on our common stock of $0.48 per share. Thedistribution was made in October  2005 and, for financialreporting purposes, was reflected as an increase in our accumulateddeficit. The total cash distribution of approximately $13.6million exceeded the minimum taxable income distribution requirementsfor the quarter.

On December  12,  2005, wedeclared a cash distribution on our common stock of $0.48 per share.The distribution was made in January  2006 and, for financialreporting purposes, was reflected as an increase in our accumulateddeficit. The total cash distribution of approximately $13.6million exceeded the minimum taxable income distribution requirementsfor the quarter.

On March  17,  2006, wedeclared a cash distribution on our common stock of $0.25 per share.The distribution was made in April  2006 and, for financialreporting purposes, was reflected as an increase in our accumulateddeficit. The total cash distribution of approximately $7.1million exceeded the minimum taxable income distribution requirementsfor the quarter.

On June  14,  2006, wedeclared a cash distribution on our common stock of $0.30 per share.The distribution was made in July  2006 and, for financialreporting purposes, was reflected as an increase in our accumulateddeficit. The total cash distribution of approximately $8.5million exceeded the minimum taxable income distribution requirementsfor the quarter.

We are required to make annualdistributions of our income to our stockholders in order to maintainour REIT status and to avoid corporate income tax and the nondeductibleexcise tax. However, differences in timing between the recognition ofREIT taxable income and the actual receipt of cash could require us tosell assets or to borrow funds on a short-term basis to meet the REITdistribution requirements and to avoid corporate income tax and thenondeductible excise tax. Further, certain of our assets may generatesubstantial mismatches between REIT taxable income and available cash.Such assets could, for example, include MBS we hold that have beenissued at a discount and require the accrual of taxable income inadvance of the receipt of cash. As a result, our taxable income mayexceed our cash available for distribution and the requirement todistribute a substantial portion of our net taxable income could causeus to: (1) sell assets under adverse market conditions; (2) borrow onunfavorable terms; or (3) distribute amounts that would otherwise beinvested in future acquisitions, capital expenditures or repayment ofdebt in order to comply with the REIT distributionrequirements.

INFLATION

For the periods presentedherein, inflation has been relatively low and we believe that inflationhas not had a material effect on our results of operations. To theextent inflation increases in the future at a rate that is faster thanthe market currently anticipates, interest rates are also likely torise, which would likely reduce the number of mortgage loans weoriginate. A reduction in the number of loans we originate resultingfrom increased inflation would adversely affect our future results ofoperations. Additionally, to the extent that the investment portfolioearnings are sensitive to rising interest rates, unanticipatedincreases in inflation may adversely affect our results ofoperations.

OFF-BALANCE SHEET ARRANGEMENTS

In ourREMIC securitization, we pooled the loans we originated and sold themto a trust where they serve as collateral for asset-backed securities,which the trust issues to the public and to the REIT.

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CONTRACTUAL OBLIGATIONS

Wehad the following commitments (excluding derivative financialinstruments) at June  30,2006:

|                                   |  |  |                       |   |           |                |  |  |           |   |           |           |  |  |                  |   |           |  |  |  |  |   |           |  |  |  |                                  |  |         |  |
|-----------------------------------|--|--|-----------------------|---|-----------|----------------|--|--|-----------|---|-----------|-----------|--|--|------------------|---|-----------|--|--|--|--|---|-----------|--|--|--|----------------------------------|--|---------|--|
|                              |  |  | Paymentsdue by Period |
|                              |  |  | (Dollars inthousands) |
|                              |  |  | (unaudited)           |
|                              |  |  | Total                 |   |           | Lessthan 1year |  |  | 1-3 years |   |           | 3-5 years |  |  | Morethan 5 years |
| Collateralized debtobligations(1) |  |  |                       | $ | 4,713,147 |                |  |  |           | $ | 1,046,567 |           |  |  |                  | $ | 1,825,770 |  |  |  |  | $ | 1,390,952 |  |  |  |     $449,858 |
| Warehouselinespayable             |  |  |                       |   | 3,227,072 |                |  |  |           |   | 3,227,072 |           |  |  |                  |   | —   |  |  |  |  |   | —   |  |  |  |                                  |  | — |  |
| Repurchaseagreements              |  |  |                       |   | 100,300   |                |  |  |           |   | 100,300   |           |  |  |                  |   | —   |  |  |  |  |   | —   |  |  |  |                                  |  | — |  |
| Juniorsubordinateddebentures      |  |  |                       |   | 128,871   |                |  |  |           |   | —   |           |  |  |                  |   | —   |  |  |  |  |   | —   |  |  |  |                                  |  | 128,871 |  |
| Operatingleases                   |  |  |                       |   | 46,334    |                |  |  |           |   | 13,472    |           |  |  |                  |   | 21,981    |  |  |  |  |   | 10,838    |  |  |  |                                  |  | 43      |  |
| Notespayable                      |  |  |                       |   | 30,000    |                |  |  |           |   | 30,000    |           |  |  |                  |   | —   |  |  |  |  |   | —   |  |  |  |                                  |  | — |  |
|                                   |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                       |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Paymentson our collateralized debt obligations are dependent upon cash flowsreceived from underlying loans receivable. Our estimate of theirrepayment is based on scheduled principal payments on the underlyingloans receivable, adjusted for pre-payments. This estimate will differfrom actual pre-paymentamounts. |

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|              |                                                           |
|--------------|-----------------------------------------------------------|
| ITEM3.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK |

Market risk is the exposure to lossesresulting from changes in interest rates, credit spreads, foreigncurrency exchange rates, commodity prices and equity prices. As we areinvested solely in U.S. dollar-denominated instruments, primarilysingle-family residential mortgage instruments, and our borrowings arealso domestic and U.S. dollar denominated, we are not subject toforeign currency exchange, or commodity and equity price risk. Theprimary market risk that we are exposed to is interest rate risk andits related ancillary risks. Interest rate risk is highly sensitive tomany factors, including governmental monetary and tax policies,domestic and international economic and political considerations, andother factors beyond our control. Our interest bearing assets,liabilities and related derivative instruments used for hedgingpurposes, are market risk sensitive and may change in value if interestrates fluctuate. The following table presents information as to thenotional amount, carrying amount and estimated fair value of certain ofour market risk sensitive assets, liabilities and hedging instrumentsat June  30,  2006 and December  31,2005:

|                                                     |  |  |                         |  |  |                |   |           |                    |  |  |  |   |           |  |
|-----------------------------------------------------|--|--|-------------------------|--|--|----------------|---|-----------|--------------------|--|--|--|---|-----------|--|
|                                                |  |  | June30, 2006(unaudited) |
|                                                |  |  | NotionalAmount          |  |  | CarryingAmount |   |           | EstimatedFairValue |
|                                                |  |  | (Dollars inthousands)   |
| Assets:                                             |  |  |                    |  |  |                |   |      |                    |  |  |  |   |      |  |
| Mortgageloans held forsale                          |  |  | $3,378,243              |  |  |                | $ | 3,426,886 |                    |  |  |  | $ | 3,444,094 |  |
| ARMloans collateralizing debt obligations,net       |  |  | 4,876,854               |  |  |                |   | 4,923,027 |                    |  |  |  |   | 4,837,575 |  |
| Mortgage-backedsecurities – available forsale |  |  |                    |  |  |                |   | 22,178    |                    |  |  |  |   | 22,178    |  |
| Hedginginstruments                                  |  |  | 15,373,330              |  |  |                |   | 84,390    |                    |  |  |  |   | 84,390    |  |
| Liabilities:                                        |  |  |                    |  |  |                |   |      |                    |  |  |  |   |      |  |
| Warehouselinespayable                               |  |  | $3,227,072              |  |  |                | $ | 3,227,072 |                    |  |  |  | $ | 3,227,072 |  |
| Collateralizeddebtobligations                       |  |  | 4,713,147               |  |  |                |   | 4,713,147 |                    |  |  |  |   | 4,722,829 |  |
| Repurchaseagreements                                |  |  | 100,300                 |  |  |                |   | 100,300   |                    |  |  |  |   | 100,300   |  |
| Juniorsubordinateddebentures                        |  |  | 128,871                 |  |  |                |   | 128,871   |                    |  |  |  |   | 128,871   |  |
| Hedginginstruments                                  |  |  | 723,475                 |  |  |                |   | 187       |                    |  |  |  |   | 187       |  |
|                                                     |

|                                                     |  |  |                       |  |  |                |   |           |                    |  |  |  |   |           |  |
|-----------------------------------------------------|--|--|-----------------------|--|--|----------------|---|-----------|--------------------|--|--|--|---|-----------|--|
|                                                |  |  | December31,2005       |
|                                                |  |  | NotionalAmount        |  |  | CarryingAmount |   |           | EstimatedFairValue |
|                                                |  |  | (Dollars inthousands) |
| Assets:                                             |  |  |                  |  |  |                |   |      |                    |  |  |  |   |      |  |
| Mortgageloans held forsale                          |  |  | $3,327,144            |  |  |                | $ | 3,378,197 |                    |  |  |  | $ | 3,383,752 |  |
| ARMloans held for securitization,net                |  |  | 278                   |  |  |                |   | 282       |                    |  |  |  |   | 277       |  |
| ARM loanscollateralizing debt obligations,net       |  |  | 4,641,588             |  |  |                |   | 4,681,554 |                    |  |  |  |   | 4,624,237 |  |
| Mortgage-backedsecurities – available forsale |  |  |                  |  |  |                |   | 23,357    |                    |  |  |  |   | 23,357    |  |
| Hedginginstruments                                  |  |  | 11,152,164            |  |  |                |   | 54,472    |                    |  |  |  |   | 54,472    |  |
| Liabilities:                                        |  |  |                  |  |  |                |   |      |                    |  |  |  |   |      |  |
| Warehouselinespayable                               |  |  | $3,177,990            |  |  |                | $ | 3,177,990 |                    |  |  |  | $ | 3,177,990 |  |
| Collateralizeddebtobligations                       |  |  | 4,485,197             |  |  |                |   | 4,485,197 |                    |  |  |  |   | 4,485,197 |  |
| Repurchaseagreements                                |  |  | 87,058                |  |  |                |   | 87,058    |                    |  |  |  |   | 87,058    |  |
| Juniorsubordinateddebentures                        |  |  | 77,324                |  |  |                |   | 77,324    |                    |  |  |  |   | 77,324    |  |
| Hedginginstruments                                  |  |  | 7,242,693             |  |  |                |   | 8,801     |                    |  |  |  |   | 8,801     |  |
|                                                     |

INTERESTRATE RISK MANAGEMENT

We utilize a variety of derivativeinstruments in order to hedge our interest rate risk. Our hedgingtransactions using derivative instruments involve certain risks such ascounterparty credit risk, the enforceability of hedging contracts andthe risk that unanticipated and significant changes in interest rateswill cause a significant loss of basis in the contract. Thecounterparties to our derivative arrangements are major financialinstitutions and securities dealers that are well capitalized with highcredit ratings and with which we may also have other financialrelationships. While we do not 

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anticipate nonperformance by anycounterparty, we are exposed to potential credit losses in the eventthe counterparty fails to perform. Our exposure to credit risk in theevent of default by a counterparty can be measured as the differencebetween the value of the contract and the current market price. Wemanage this risk by using multiple counterparties and limiting ourcounterparties to major financial institutions with good creditratings, and in some cases, establishing rights to collateral posted bythe derivative counterparty. In addition, we monitor the credit qualityof our derivative counterparties. Accordingly, we do not expect anymaterial losses as a result of default by such counterparties. However,there can be no assurance that we will be able to adequately manage theforegoing risks, or ultimately realize an economic benefit that exceedsthe costs related to these hedging strategies.

MortgageInvestment Operations

Our investment risk exposure islargely due to interest rate risk. Interest rate risk is defined as thesensitivity of our current and future earnings to interest ratevolatility, variability of spread relationships, the difference inrepricing intervals between our assets and liabilities, and the effectthat interest rates may have on our cash flows, especially PortfolioARM Loan prepayments. Interest rate risk may affect our interestincome, interest expense and the market value of our interest raterisk-sensitive assets and liabilities. Our policies to manage interestrate risk aim to produce earnings stability and preserve capital byminimizing the negative effects of changing market interest rates andthe impact of prepayment risk.

We are subject to interestrate exposure with respect to our financing costs relating to ourPortfolio ARM Loans. Changes in interest rates impact our earnings invarious ways. While we invest primarily in ARM Loans, rising short-terminterest rates may temporarily negatively affect our earnings and,conversely, falling short-term interest rates may temporarily increaseour earnings. This impact can occur for several reasons and is affectedby portfolio prepayment activity as discussed below. First, ourborrowings may react to changes in interest rates sooner than our ARMLoans because the weighted average next repricing dates of theborrowings are likely to be shorter time periods than those of the ARMLoans. Second, interest rates on ARM Loans may be capped per adjustmentperiod (commonly referred to as the periodic cap), and our borrowingsmay not have similar limitations. Third, changes in interest rates onARM Loans typically lag behind changes in applicable interest rateindices due to the required notice period provided to ARM Loanborrowers when the interest rates on their loans are scheduled tochange.

Interest rates can also affect our net return onHybrid ARM loans. During a declining interest rate environment, theprepayment of Hybrid ARM loans may accelerate, possibly resulting in adecline in our net return on Hybrid ARM loans, as replacement HybridARM loans may have a lower yield than the older ones paying off. Incontrast, during an increasing interest rate environment, Hybrid ARMloans may prepay slower than expected, requiring us to finance agreater amount of Hybrid ARM loans than originally anticipated at atime when interest rates may be higher, resulting in a decline in ournet return on Hybrid ARM loans.

The rate of prepayment onmortgage loans may increase if interest rates decline or if thedifference between long-term and short-term interest rates diminishes.Increased prepayments would cause us to amortize the deferredorigination costs and fees for our mortgage loans over a shorterperiod, resulting in a reduced yield on our mortgage loans.Additionally, to the extent proceeds of prepayments cannot bereinvested at a rate of interest at least equal to the rate previouslyearned on such mortgage loans, our portfolio yield could be adverselyaffected.

Conversely, the rate of prepayment on mortgageloans may decrease if interest rates rise or if the difference betweenlong-term and short-term interest rates increases. Decreasedprepayments would cause us to amortize the deferred origination costsand fees for our mortgage loans over a longer period. Therefore, inrising interest rate environments where prepayments are declining, theyield on our ARM Loan portfolio could be expected to increase due tohigher interest rates and decreased amortization expense attributableto slower prepayments.

The positions we take to hedge ournet interest income recognize the effect of prepayments on the size andcomposition of the portfolio. We manage prepayment risk by regularlyrecalculating the 

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notional amount of the required hedgepositions through the application of a prepayment model and implementhedge adjustments, as required.

While we have notexperienced any significant credit losses to date, such losses arepossible. For example, a rising interest rate environment or economicdownturn could cause our mortgage loan default rate and credit lossesto increase, which would adversely affect our liquidity and operatingresults.

The following table summarizes the repricingcharacteristics of our Portfolio ARM Loans:

RepricingCharacteristics of Portfolio ARMLoans

|                                   |  |  |                         |   |           |              |  |  |  |  |        |   |
|-----------------------------------|--|--|-------------------------|---|-----------|--------------|--|--|--|--|--------|---|
|                              |  |  | June30, 2006            |
|                              |  |  | UnpaidPrincipal Balance |   |           | PortfolioMix |
|                              |  |  | (Dollars inthousands)   |
| Traditional ARMLoans:             |  |  |                         |   |      |              |  |  |  |  |   |   |
| Index:                            |  |  |                         |   |      |              |  |  |  |  |   |   |
| Six-monthLIBOR                    |  |  |                         | $ | 16,496    |              |  |  |  |  | 0.3    | % |
| One-yearconstant maturitytreasury |  |  |                         |   | 7,134     |              |  |  |  |  | 0.2    | % |
|                              |  |  |                         |   | 23,630    |              |  |  |  |  | 0.5    | % |
| HybridARMLoans:                   |  |  |                         |   |      |              |  |  |  |  |   |   |
| Index:                            |  |  |                         |   |      |              |  |  |  |  |   |   |
| 3years orless                     |  |  |                         |   | 929,657   |              |  |  |  |  | 19.1   | % |
| Over 3years to 5years             |  |  |                         |   | 3,674,427 |              |  |  |  |  | 75.3   | % |
|                              |  |  |                         |   | 4,604,084 |              |  |  |  |  | 94.4   | % |
| PayOption ARMLoans                |  |  |                         |   | 249,140   |              |  |  |  |  | 5.1    | % |
|                              |  |  |                         | $ | 4,876,854 |              |  |  |  |  | 100.0  | % |
|                                   |

Ourrisk management is focused on protecting against possible‘‘compression’’ in the net interest marginearned on our investment portfolio. The ‘‘yieldcurve’’ creates this risk because of different repricingdurations for instruments with different maturities. In substance, thehedging objective is to protect the net interest margin by matchingrepricing durations for the ARM and Hybrid ARM loan portfolio and thecorresponding funding sources. As discussed below, Hybrid ARM loans arethe primary loans requiring hedging of the corresponding fundingsources.

Traditional ARM loans have shorter repricingperiods (one year or less) than do Hybrid ARM loans. The interest rateon Traditional ARM loans will reset monthly, semi-annually or annuallyat a contractual margin over a U.S. Treasury index or a LIBOR index.The corresponding funding liabilities will similarly have shortercontractual repricing frequencies. Additionally, when Hybrid ARM loansreach the end of their fixed rate period and become‘‘rolled Hybrids,’’ they reprice based onsemi-annual or annual LIBOR or U.S. Treasury indices and behave muchlike Traditional ARMs. While there exists some ‘‘basisrisk’’ between the repricing of both the Traditional ARMsand rolled Hybrids versus the typical one month funding costs of theportfolio, management believes this basis risk is manageable. HybridARM loans initially have longer repricing periods than TraditionalARMs. We may not be able to obtain matched repricing features for thecorresponding funding sources since our borrowings generally haveshorter repricing contractual terms than most of our Hybrid ARM loanswhere the initial rate is fixed for up to five years.

Tomitigate the effect of interest rate fluctuations on our net interestincome, including the effect of prepayment rates, we hedge thefinancing costs of our issued mortgage-backed securities with interestrate swap agreements, Eurodollar futures contracts and interest ratecap agreements (collectively, ‘‘Portfolio HedgingInstruments’’) in order to better match the repricingdurations of our Portfolio ARM Loans and our issued mortgage-backedsecurities.

We may also use other instruments that may bedetermined to be advantageous and are permitted under the hedgingpolicy adopted by our board of directors.

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We use Eurodollar futures contractsto hedge for forecasted and recognized LIBOR-based borrowings.Eurodollar futures contracts have the effect of fixing the interestrate on LIBOR-based liabilities in the event that LIBOR-based fundingcosts change.

We enter into interest rate cap agreements(‘‘Cap Agreements’’) by incurring aone-time fee or premium. Pursuant to the terms of the Cap Agreements,we will receive cash payments if the LIBOR-based interest rate indexspecified in any such Cap Agreement increases above contractuallyspecified levels. Therefore, such Cap Agreements have the effect ofcapping the interest rate expense on a portion of our borrowings abovea level specified by the Cap Agreement. The purchase price of these CapAgreements is amortized over the life of the Cap Agreements, and theamortization expense generally increases as the Cap Agreements approachmaturity. Therefore, the cap premium amortization expense in futureperiods can be expected to increase from the current amortizationrate.

We enter into interest rate swap agreements(‘‘Swap Agreements’’) to fix the interestrate on a portion of our borrowings as specified in the Swap Agreement.When we enter into a Swap Agreement, we generally agree to pay a fixedinterest rate, generally based on LIBOR. These Swap Agreements have theeffect of converting our variable-rate debt into fixed-rate debt overthe life of the Swap Agreements.

Both Cap Agreements andSwap Agreements represent a way to lengthen the average repricingperiod of our variable-rate borrowings such that the average repricingof the borrowings more closely matches the average repricing of ourPortfolio ARM Loans.

Management relies on a variety oftools to assess the interest rate risk exposure of the investmentportfolio under various interest rate scenarios. Using financialmodeling, the fair value and interest rate sensitivity of financialinstruments, or groups of similar instruments, is estimated and thenaggregated to form a comprehensive picture of the risk characteristicsof the investment portfolio.

The table below presents thesensitivity of the market value of our portfolio using a discountedcash flow simulation model. Application of this method results in anestimation of the change in the market value of our assets and hedgedliabilities per 50 basis point (‘‘bp’’)incremental instantaneous parallel shifts in the LIBOR yield curve asof June  30,  2006 — a measure commonly referred toas sensitivity of equity. Positive sensitivity of equity indicates anincrease in the market value of our assets relative to the market valueof our hedged liabilities corresponding to the indicated shift in theyield curve.

As of June  30,2006

|                                                     |  |  |                                                |   |         |      |  |  |     |   |         |      |  |  |  |   |         |   |  |  |  |   |         |   |
|-----------------------------------------------------|--|--|------------------------------------------------|---|---------|------|--|--|-----|---|---------|------|--|--|--|---|---------|---|--|--|--|---|---------|---|
|                                                |  |  | BasisPoint Increase (Decrease) in InterestRate |
|                                                |  |  | (100)                                          |   |         | (50) |  |  | +50 |   |         | +100 |
|                                                |  |  | (Dollarsin thousands)                          |
| Change in market valuesof:                          |  |  |                                                |   |    |      |  |  |     |   |    |      |  |  |  |   |    |   |  |  |  |   |    |   |
| Assets                                              |  |  |                                                | $ | 66,000  |      |  |  |     | $ | 35,400  |      |  |  |  | $ | (41,400 | ) |  |  |  | $ | (85,100 | ) |
| Hedgedliabilities                                   |  |  |                                                |   | (62,500 | )    |  |  |     |   | (36,600 | )    |  |  |  |   | 44,100  |   |  |  |  |   | 91,500  |   |
| Netchange in market value of portfolioequity        |  |  |                                                | $ | 3,500   |      |  |  |     | $ | (1,200  | )    |  |  |  | $ | 2,700   |   |  |  |  | $ | 6,400   |   |
| Percentagechange in market value of portfolioequity |  |  |                                                |   | 1.50    | %    |  |  |     |   | (0.50   | )%   |  |  |  |   | 1.10    | % |  |  |  |   | 2.70    | % |
|                                                     |

Theuse of Portfolio Hedging Instruments is a critical part of our interestrate risk management strategies, and the effects of these PortfolioHedging Instruments on the market value of the investment portfolio arereflected in the model's output. This analysis also takes intoconsideration the value of options embedded in our mortgage assets,including constraints on the repricing of the interest rate of ARMassets resulting from periodic and lifetime cap features, as well asprepayment options. Assets and liabilities that are not interestrate-sensitive, such as cash, payment receivables, prepaid expenses,payables and accrued expenses are excluded. The sensitivity of equitycalculated from this model is a key measure of the effectiveness of ourinterest rate risk management strategies.

Changes inassumptions including, but not limited to, volatility, mortgage andfinancing spreads, prepayment behavior, defaults, as well as the timingand level of interest rate changes, will affect the results of themodel. Therefore, actual results are likely to vary from modeledresults.

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The table below presents theduration of our assets and liabilities as of June  30,2006, under the then prevailing yield curve, as well as withinstantaneous parallel 50 bp shifts in the curve. Positive portfolioduration indicates that the market value of the investment portfolio,net of borrowings and hedges, will decline if interest rates rise andincrease if interest rates decline. The closer duration is to zero, theless interest rate changes are expected to affect the market value ofportfolio equity.

As of June  30,2006

|                                 |  |  |                                                |  |      |      |  |  |      |  |      |     |  |  |      |  |       |   |  |  |  |  |       |   |  |  |  |  |       |   |
|---------------------------------|--|--|------------------------------------------------|--|------|------|--|--|------|--|------|-----|--|--|------|--|-------|---|--|--|--|--|-------|---|--|--|--|--|-------|---|
|                            |  |  | BasisPoint Increase (Decrease) in InterestRate |
|                            |  |  | (100)                                          |  |      | (50) |  |  | Base |  |      | +50 |  |  | +100 |
|                            |  |  | (Years)                                        |
| DurationofAssets                |  |  |                                                |  | 1.12 |      |  |  |      |  | 1.30 |     |  |  |      |  | 1.49  |   |  |  |  |  | 1.64  |   |  |  |  |  | 1.76  |   |
| Durationof Borrowings andHedges |  |  |                                                |  | 0.89 |      |  |  |      |  | 1.28 |     |  |  |      |  | 1.62  |   |  |  |  |  | 1.87  |   |  |  |  |  | 2.07  |   |
| NetPortfolioDuration            |  |  |                                                |  | 0.23 |      |  |  |      |  | 0.02 |     |  |  |      |  | (0.13 | ) |  |  |  |  | (0.23 | ) |  |  |  |  | (0.31 | ) |
|                                 |

Althoughmarket value sensitivity analysis is widely accepted in identifyinginterest rate risk, it does not take into consideration changes thatmay occur such as, but not limited to, changes in investment andfinancing strategies, changes in market spreads, changes in the shapeof the yield curve and changes in business volumes.

MortgageBanking Operations

Movements in interest rates can pose amajor risk to our mortgage banking operations in either a rising ordeclining interest rate environment. MortgageIT utilizes warehouselines of credit to fund its origination activity. The cost of theseborrowings is at variable interest rate terms that increase or decreaseas short term interest rates increase or decrease. In addition, we areexposed to price risk from the time an interest rate lock commitment ismade to a mortgage applicant (or financial intermediary) to the timethe related mortgage loan is sold. During this period, we are exposedto losses if mortgage rates rise, because the value of the IRLC ormortgage declines.

The committed pipeline consists of loanapplications in process where we have issued IRLCs to the applicants(or financial intermediaries). IRLCs guarantee the rate and points onthe underlying mortgage for a specified period, generally from seven tosixty days. Managing the price risk related to the committed pipelineis complicated by the fact that the ultimate percentage of applicationsthat close within the terms of the IRLC is variable. The primary factorthat drives the variability of the closing percentage is change inmortgage rates. In general, the percentage of applications in thecommitted pipeline that ultimately close within the terms of the IRLCincreases if mortgage rates rise and decreases if mortgage rates fall.This is due primarily to the relative attractiveness of currentmortgage rates compared to the applicants' committed rates. Theclosing percentage is also influenced by the source of theapplications, age of the applications, purpose for the loans (purchaseor refinance) and the application approval rate. We have developedclosing ratio estimates for the committed pipeline using empirical datataking into account all of these variables. To mitigate the effect ofthe interest rate risk inherent in issuing an IRLC from the lock-indate to the funding date of a loan, MortgageIT uses various derivativeinstruments, including forward sale loan commitments, Eurodollarfutures contracts and forward sales and purchases of mortgage-backedsecurities and options on such securities in the forward delivery TBAmarket to economically hedge the IRLCs.

If MortgageIT doesnot deliver into forward sale loan or TBA commitments, such instrumentscan be settled on a net basis. Net settlement entails paying orreceiving cash based upon the change in market value of the existinginstrument. All forward sale loan commitments and forward sales andpurchases of TBA commitments are typically settled within 90 days ofthe contract date.

MortgageIT also hedges the economicvalue of funded loans that are held for sale but not yet allocated toan investor sale commitment. Once a loan has been funded,MortgageIT's risk management objective for its mortgage loansheld for sale is to protect earnings from an unexpected decline invalue of its mortgage loans. Similar to IRLCs, MortgageIT'sstrategy is to use forward sale loan commitments, Eurodollar futurescontracts and TBAs to hedge its mortgage loans held for sale.

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The notional amount of the derivativecontracts, along with the underlying rate and terms of such contracts,are equivalent to the unpaid principal amount of the mortgage inventorybeing hedged; hence, the derivative contracts effectively fix theforward sales price and, thereby, substantially mitigate interest rateand price risk to MortgageIT.

The following furtherdescribes the derivative instruments we may use in our risk managementactivities related to the committed pipeline and mortgage loaninventory. The value of these derivative instruments generally moves inthe opposite direction to the value of the mortgage loan inventory. Wereview our committed pipeline and mortgage inventory risk profiles on adaily basis.

|              |                                                                                                                                                                                                |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Forward sales ofmortgage-backed securities: represents an obligation to sell amortgage-backed security at a specific price in the future; therefore,its value increases as mortgage ratesrise. |

|              |                                                                                                                                                                                                    |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Forward purchases of mortgage-backedsecurities: represents an obligation to buy a mortgage-backed securityat a specific price in the future; therefore, its value increases asmortgage rates fall. |

|              |                                                                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Long call options onmortgage-backed securities: represents a right to buy a mortgage-backedsecurity at a specific price in the future; therefore, its valueincreases as mortgage rates fall. |

|              |                                                                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Long putoptions on mortgage-backed securities: represents a right to sell amortgage-backed security at a specific price in the future; therefore,its value increases as mortgage ratesrise. |

|              |                                                                                                                                                                                                       |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Long call options on Treasuryfutures: represents a right to acquire a Treasury futures contract at aspecific price in the future; therefore, its value increases as thebenchmark Treasury rate falls. |

|              |                                                                                                                                                                                                  |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Long putoptions on Treasury futures: represents a right to sell a Treasuryfutures contract at a specific price in the future; therefore, itsvalue increases as the benchmark Treasury raterises. |

|              |                                                                                                                                                                                                                                |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Short Eurodollar futures contracts:represents a standardized exchange-traded contract, the value of whichis tied to spot Eurodollar rates at specified future dates; therefore,its value increases when Eurodollar rates rise. |

Finally,the mortgage banking industry is generally subject to seasonal trends.These seasonal trends reflect the pattern in the national housingmarket. Home sales typically rise during the spring and summer seasons,and decline during the fall and winter seasons. Seasonality has less ofan effect on mortgage refinancing activity, which is primarily drivenby prevailing mortgage rates.

ITEM 4.    CONTROLS ANDPROCEDURES

Evaluation of disclosure controls andprocedures

The Company carried out an evaluation, withthe participation of management, including its Chief Executive Officerand Chief Financial Officer, of the effectiveness of its disclosurecontrols and procedures (pursuant to Rule 13a-15(e) under theSecurities Exchange Act of 1934) as of the end of the period covered bythis quarterly report on Form 10-Q. Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that theCompany's disclosure controls and procedures are effective toensure that it is able to record, process, summarize and report theinformation the Company is required to disclose in the filings itsubmits to the SEC within the time periods required.

Changes ininternal control over financial reporting

During thequarter ended June  30,  2006, there has been no change inour internal control over financial reporting that has materiallyaffected, or is reasonably likely to materially affect, theCompany’s internal control over financialreporting.

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PART II.    OTHERINFORMATION

Item 1.    Legal Proceedings

OnJuly  13,  2006, a purported stockholder of the Companyfiled a complaint seeking class action status in the Supreme Court ofthe State of New York against the Company and several of its directors.The complaint alleges, among other things, that the Company’sdirectors breached their fiduciary duties by failing to maximizestockholder value with regard to the proposed acquisition of theCompany by DB Structured Products. Among other things, the complaintseeks class action status, a court order enjoining the Company and itsdirectors from proceeding with or consummating the merger, compensationfor the plaintiff and members of the class for all losses and damagessuffered and the payment of attorneys’, accountants’ andexperts’ fees. The Company intends to defend this lawsuitvigorously.

On February  16,  2006, EMCMortgage Corp. (‘‘EMC’’) filed suit againstMortgageIT in the 95th Judicial District Court of Dallas County, Texas.This suit alleges, among other things, that MortgageIT is obligated torepurchase from EMC approximately $70.5  million in sub-primemortgage loans sold to EMC pursuant to a Mortgage Loan Purchase andInterim Servicing Agreement dated January  1,  2003, asamended, due to alleged breaches of representations and warranties aswell as alleged early payment default repurchase obligations withrespect to such loans. The case was subsequently removed to the U.S.District Court for the Northern District of Texas, Dallas Division.MortgageIT has moved to dismiss EMC’s third amended complaintand intends to vigorously defend the suit. At this stage of theproceedings, it is not possible to predict the outcome of thislitigation.

On September  29,  2004, asamended on October  12,  2004, an action was filed in theU.S. District Court for the Southern District of New York against oursubsidiary, MortgageIT, and IPI Skyscraper Mortgage, which was, at thetime, a subsidiary of, and has now been merged with and into,MortgageIT. The case was filed by four former loan officers of aMortgageIT branch in Newburgh, New York, and seeks to recover allegedlyunpaid minimum wage and overtime under both federal and New York laborlaws for themselves and others similarly situated. The parties enteredinto a settlement agreement. On August 4, 2006, at a hearing, the Courtopined that the settlement reached by the parties was fair and it wouldenter an order approving the settlement. Including a charge ofapproximately $600,000 for the three months ended June 30, 2006, theCompany has fully reserved for this settlement.

Inaddition to these cases, in the ordinary course of business, theCompany is a defendant in or party to a number of pending andthreatened legal actions and proceedings, and is also involved fromtime to time in investigations and administrative proceedings bygovernmental agencies. Certain of such actions and proceedings involvealleged violations of consumer protection laws, including claimsrelating to the Company’s loan origination and collectionefforts, and other federal and state banking laws. Certain of suchactions and proceedings include claims for breach of contract,restitution, compensatory damages, punitive damages and other forms ofrelief. Due to the difficulty of predicting the outcome of suchmatters, the Company can give no assurance that it will prevail on allclaims made against it; however, management believes, based on currentknowledge and after consultation with counsel, that these legal mattersand administrative proceedings and the losses, if any, resulting fromthe final outcome thereof, will not have a material adverse effect onthe Company’s financial position, results of operations orliquidity, but can give no assurance that they will not have such aneffect.

Although it is difficult to predict the outcome ofany litigation, the Company has established litigation reserves wherenecessary in accordance with generally accepted accountingprinciples.

Item 1A.    Risk Factors

Except asset forth below, there have been no material changes in our riskfactors from those disclosed in our 2005 Annual Report on Form10-K.

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Risks Relating to the Company’sProposed Acquisition by Deutsche Bank.

On July11,  2006, the Company entered into a definitive agreement to beacquired by DB Structured Products, Inc., an indirect subsidiary ofDeutsche Bank AG, for $14.75 in cash per share of Company common stock,or approximately $429  million in the aggregate. The transactionis subject to the fulfillment or waiver of a number of conditions toclosing, including the receipt of Company stockholder approval and allrequisite regulatory approvals, and other customary closing conditions.If any of the closing conditions are not fulfilled or waived, or if therequisite stockholder votes in favor of the transaction are notobtained, the acquisition of the Company by DB Structured Products willnot close.

Item 2.    Unregistered Sales of EquitySecurities and Use of Proceeds

None.

Item3.    Defaults Upon SeniorSecurities

None.

Item 4.    Submission ofMatters to a Vote of Security Holders

At theCompany’s annual meeting of stockholders held on June13,  2006 (the ‘‘Annual Meeting’’),the following matters were voted upon with the results of the voting onsuch matters indicated:

Election of the following directorto a two-yearterm:

|               |  |  |     |  |            |          |  |  |  |  |        |  |
|---------------|--|--|-----|--|------------|----------|--|--|--|--|--------|--|
|          |  |  | For |  |            | Withheld |
| EdolphusTowns |  |  |     |  | 25,728,727 |          |  |  |  |  | 76,250 |  |
|               |

Electionof each of the following directors to a three-yearterm:

|                |  |  |     |  |            |          |  |  |  |  |           |  |
|----------------|--|--|-----|--|------------|----------|--|--|--|--|-----------|--|
|           |  |  | For |  |            | Withheld |
| JohnK. Darr    |  |  |     |  | 25,702,329 |          |  |  |  |  | 102,648   |  |
| MichaelN.Garin |  |  |     |  | 23,145,732 |          |  |  |  |  | 2,659,245 |  |
| TimothySchantz |  |  |     |  | 23,251,180 |          |  |  |  |  | 2,553,797 |  |
|                |

Thefollowing sets forth the names of the other directors whose terms ofoffice continued after the Annual Meeting:

Fred A.AssenheimerMichael J. MaroccoNancyMcKinstry

Doug W.Naidus

2.    Ratification ofthe appointment of BDO Seidman, LLP as the Company’s independentauditor for the year ending December  31,2006:

|            |  |  |         |  |           |         |  |  |  |  |        |  |
|------------|--|--|---------|--|-----------|---------|--|--|--|--|--------|--|
| For        |  |  | Against |  |           | Abstain |
| 23,240,881 |  |  |         |  | 2,546,989 |         |  |  |  |  | 17,107 |  |
|            |

Item5.    Other Information

None.

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ITEM 6.    EXHIBITS AND FINANCIALSTATEMENT SCHEDULES

Exhibits filed with this Form10-Q

|  |    |    |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--|----|----|--|--|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 31 | .1 |  |  |  | Certificationof Chief Executive Officer pursuant to Rule 13a – 14(a)/15d-14(a)of the Securities Exchange Act of 1934, as adopted pursuant to Section302 of the Sarbanes-Oxley Act of2002                                                                                                                                                                                                                                                                                                                                                   |
|  | 31 | .2 |  |  |  | Certification of Chief FinancialOfficer pursuant to Rule 13a – 14(a)/15d-14(a) of the SecuritiesExchange Act of 1934, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of2002                                                                                                                                                                                                                                                                                                                                                   |
|  | 32 | .1 |  |  |  | Certification of Chief ExecutiveOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002 (This exhibit shall notbe deemed ‘‘filed’’ for purposes of Section18 of the Securities Exchange Act of 1934, as amended, or otherwisesubject to the liability of that section. Further, this exhibit shallnot be deemed to be incorporated by reference into any filing under theSecurities Act of 1933, as amended, or the Securities Exchange Act of1934, as amended.) |
|  | 32 | .2 |  |  |  | Certification ofChief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibitshall not be deemed ‘‘filed’’ for purposesof Section 18 of the Securities Exchange Act of 1934, as amended, orotherwise subject to the liability of that section. Further, thisexhibit shall not be deemed to be incorporated by reference into anyfiling under the Securities Act of 1933, as amended, or the SecuritiesExchange Act of 1934, asamended.)  |
|  |

|  |
|--|
|  |  |
|  |

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Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned thereuntoduly authorized:

|  |        |                          |
|--|--------|--------------------------|
|  |   | MORTGAGEIT HOLDINGS,INC. |

|  | By:    /s/ DOUG W.NAIDUS                               |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  |        |                                                                                                           |
|--|--------|-----------------------------------------------------------------------------------------------------------|
|  |   |  Name:Doug W. Naidus Title: Chairman and Chief ExecutiveOfficer Date:  August  8,2006 |

|  | By:    /s/ GLENN J.MOURIDY                             |
|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  |        |                                                                                                                  |
|--|--------|------------------------------------------------------------------------------------------------------------------|
|  |   |  Name: GlennJ. Mouridy Title: President and Chief FinancialOfficer Date:  August 8,2006 |

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