10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
	For the quarterly period ended: June 30, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
	Commission File Number:  1-13485

AMNET MORTGAGE, INC.

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý  YES    o  NO

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock ($0.01) 7,389,133 as of July 30, 2004

INDEX

2

PART I.  FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

AmNet Mortgage, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data) (unaudited)

	June 30, 2004			December 31, 2003
ASSETS
Cash and cash equivalents	$	50,944		$	44,400
Cash and cash equivalents—restricted	2,290			2,100
Mortgage loans held for sale, net, pledged (lower of cost or market)	466,281			276,781
Mortgage loans held of sale (formerly bond collateral), net (lower of cost or market)	1,707			—
Bond collateral, mortgage loans, net	18,457			157,872
Bond collateral, real estate owned, net	800			3,380
Accounts receivable—mortgage loans sold/funded	5,558			3,856
Accrued interest receivable	1,013			2,593
Deferred taxes	7,497			5,694
Other assets	6,200			5,520
	$	560,747		$	502,196
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Short-term debt	$	453,808		$	268,619
Long-term debt, net	18,043			130,295
Derivative financial instruments	2,101			1,224
Accrued interest payable	591			494
Accrued expenses and other liabilities	7,494			12,950
Total liabilities	482,037			413,582
Commitments and contingencies (Note 12)
Minority Interest	155			129
Stockholders’ Equity:
Preferred stock, par value $.01 per share; 100,000 shares authorized; no shares issued and outstanding	—			—
Common stock, par value $.01 per share; 24,900,000 shares authorized; 7,389,133 shares issued and outstanding in 2004, and 7,873,714 shares issued and outstanding in 2003	74			79
Additional paid-in-capital	104,258			108,719
Accumulated deficit	(25,777		)	(20,313		)
Total stockholders’ equity	78,555			88,485
	$	560,747		$	502,196

See accompanying notes to consolidated financial statements.

3

AmNet Mortgage, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income (Loss), unaudited

(in thousands, except per share data)

	For theThree Months EndedJune 30, 2004			For theThree Months Ended June 30, 2003			For theSix Months Ended June 30, 2004			For TheSix Months EndedJune 30, 2003
Revenues
Gain on sales of loans	$	2,323		$	32,971		$	17,839		$	53,180
Derivative financial instruments and market adjustments
Derivative financial instruments—forward sales of mortgage backed securities and options to sell mortgage-backed securities	10,857			(3,027		)	5,370			(3,080		)
Market adjustment on interest rate lock commitments	4,390			(6,257		)	3,233			(8,415		)
Total derivative financial instruments and market adjustments	15,247			(9,284		)	8,603			(11,495		)
Interest on mortgage assets	9,569			10,393			16,211			19,639
Other income	434			247			729			462
Total revenue, net of derivative financial instruments and adjustments	27,573			34,327			43,382			61,786
Expenses
Employee compensation and benefits	14,399			12,586			26,242			22,070
Interest expense	4,754			4,598			7,994			8,811
Office and occupancy expense	959			621			1,795			1,188
Provision for loan losses	128			794			128			1,713
Gain on sale of real estate owned, net	(61		)	(330		)	(320		)	(515		)
Loss on bond collateral held for sale	880			—			5,309			—
Professional fees	1,369			1,338			2,404			2,742
Other operating expenses	4,687			4,025			8,940			7,779
Total expenses	27,115			23,632			52,492			43,788
Income (loss) before income taxes	458			10,695			(9,110		)	17,998
Income tax (benefit)	250			1,190			(3,646		)	(3,663		)
Net income (loss)	$	208		$	9,505		$	(5,464	)	$	21,661
Basic weighted average shares outstanding	7,838,504			7,863,437			7,856,426			7,863,154
Diluted weighted average shares outstanding	8,582,572			8,470,633			7,856,426			8,470,350
Net income (loss) per share basic	$	0.03		$	1.21		$	(0.70	)	$	2.75
Net income (loss) per share diluted	$	0.02		$	1.12		$	(0.70	)	$	2.56

See accompanying notes to consolidated financial statements.

4

AmNet Mortgage, Inc. and Subsidiaries

Consolidated Statements of Cash Flows, unaudited

(in thousands)

	For the Six Months Ended June 30, 2004			For the Six Months Ended June 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(5,464	)	$	21,661
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Loss on bond collateral held for sale	5,309			—
Amortization of mortgage assets premiums	980			1,838
Amortization of CMO capitalized costs	474			189
Changes in provision for loan losses	128			1,713
Change in real estate owned provision	401			1,216
Gain on sale of real estate owned, net	(320		)	(515		)
Proceeds from sale of mortgage loans held for sale	4,250,085			5,115,960
Mortgage loan originations	(4,439,585		)	(5,302,132		)
Increase in restricted cash	(190		)	(968		)
Increase in loans held for sale, not pledged (formerly bond collateral)	(7,016		)	—
Increase in accounts receivable—mortgage loans sold/funded	(1,702		)	(4,934		)
Decrease in accrued interest receivable	1,580			1,170
Increase in deferred taxes	(1,803		)	(9,141		)
Increase in other assets	(678		)	(1,819		)
Decrease/(increase) in derivative financial instruments	877			(1,380		)
Increase in accrued interest payable	97			13
(Decrease)/increase in accrued expenses and other liabilities	(5,456		)	14,263
Increase in minority interest	26			4
Net cash used in operating activities	(202,257		)	(162,862		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments on bond collateral, mortgage loans, net	23,195			49,203
Proceeds from sale of bond collateral	116,022			—
Proceeds from sale of real estate owned	1,589			6,125
Net cash provided by investing activities	140,806			55,328
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt	(112,727		)	(60,668		)
Increase in net borrowings from short-term debt	185,189			181,799
Stock options exercised	33			3
Purchase of treasury stock	(4,500		)	—
Net cash provided by financing activities	67,995			121,134
Net increase in cash and cash equivalents	6,544			13,600
Cash and cash equivalents at beginning of year	44,400			13,640
Cash and cash equivalents at end of period	$	50,944		$	27,240
Supplemental information
Interest paid	$	7,898		$	8,795
Taxes paid	$	2,784		—
Transfers from bond collateral, mortgage loans, net to real estate owned	$	1,087		$	(3,441	)

See accompanying notes to consolidated financial statements.

5

AMNET MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies and Practices

Basis of Financial Statement Presentation

In May 2004, American Residential Investment Trust, Inc. changed its name to AmNet Mortgage, Inc.

The consolidated financial statements include the accounts of AmNet Mortgage, Inc., a Maryland corporation, American Mortgage Network, Inc., a Delaware corporation and wholly-owned subsidiary of AmNet Mortgage Inc., American Residential Eagle, Inc., a Delaware special purpose corporation and wholly-owned subsidiary of AmNet and American Residential Eagle 2, Inc., a Delaware limited purpose corporation and wholly-owned subsidiary of American Residential Eagle, Inc. Substantially all of the assets American Residential Eagle, Inc. are pledged or subordinated to support short or long-term debt in the form of collateralized mortgage bonds and are not available for the satisfaction of general claims of AmNet Mortgage, Inc. American Residential Holdings, Inc. is an affiliate of AmNet Mortgage, Inc. that is consolidated in accordance with FASB Interpretation No. 46R “Consolidation of Variable Interest Entities.” All entities are together referred to as the “Company” or “AmNet.” The Company’s exposure to loss on the assets pledged as collateral is limited to its net investment, as the collateralized mortgage bonds are non-recourse to the Company. All significant intercompany balances and transactions have been eliminated in the consolidation of AmNet. Certain reclassifications may have been made to prior internal period amounts to conform to the current presentation.

In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented. These adjustments are of a normal recurring nature. The interim financial data as of June 30, 2004 and for the six months ended June 30, 2004 and June 30, 2003 is unaudited; however, in the opinion of the Company, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods.

Sales of mortgage loans are accounted for under Statement of Financial Accounting Standards (SFAS) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Mortgage loans are sold with the mortgage servicing rights released. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling prices and the carrying value of the related mortgage loans sold. Deferred origination fees and expenses are recognized at the time of sale.

In March 2004, the SEC released Staff Accounting Bulletin (SAB) No. 105, “Application of Accounting Principles to Loan Commitments.” The Company accounts for its commitments to extend credit as derivatives and records changes in fair value of the commitments in the statement of operations. The adoption of SAB No. 105 in the second quarter of 2004 did not have a significant effect on the Company’s financial statements.

Please refer to the Company’s Form 10-K for the year ending December 31, 2003, for a detailed discussion of all significant accounting policies.

6

Stock Options

The Company elected to apply APB Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for its stock-based compensation plans: the 1997 Stock Incentive Plan, 1997 Stock Option Plan, 1997 Employee Stock Purchase Plan and 1997 Outside Directors Stock Option Plan. Accordingly, no compensation cost has been recognized in the financial statements. SFAS 123 “Accounting for Stock Based Compensation” requires pro forma disclosures of expense computed as if the fair value based method had been applied in the financial statements of companies that continue to account for such arrangements under Opinion No. 25.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS 148, “Accounting For Stock Based Compensation Transition and Disclosure,” which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation, which the Company elected to early adopt for the twelve-month period ending December 31, 2002. The Company will continue to account for its stock based compensation according to the provisions of APB Opinion No. 25.

The FASB is currently considering amending SFAS 123, “Accounting for Stock-Based Compensation,” and APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The proposed standard will require the Company to record compensation expense for all share-based compensation plans. If adopted, this proposed standard would have a negative impact on our earnings in future periods since stock options are issued periodically to qualified employees.

Had compensation cost for the Company’s stock options been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123, as amended by SFAS No. 148, the Company’s net income (loss) and income per share would have been as follows (in thousands except income per share) (unaudited):

	Three Months Ended						Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Net income (loss) as reported	$	208		$	9,505		$	(5,464	)	$	21,661
Deduct: Total stock-based compensation expense determined under fair value-based method, net of tax effects (See Note 9)	(136		)	(505		)	(419		)	(1,023		)
Pro forma net income (loss)	$	72		$	9,000		$	(5,883	)	$	20,638
Income (loss) per share:
Basic as reported	$	0.03		$	1.21		$	(0.70	)	$	2.75
Basic pro forma	$	0.01		$	1.14		$	(0.75	)	$	2.62
Diluted as reported	$	0.02		$	1.12		$	(0.70	)	$	2.56
Diluted pro forma	$	0.01		$	1.06		$	(0.75	)	$	2.44

The assumptions used to calculate the fair value of options granted are evaluated and revised as necessary to reflect market conditions and the Company’s experience. These assumptions have not changed from prior periods.

Note 2.  Concentration of Mortgage Loan Sales

For the six months ending June 30, 2004, the Company sold a majority of the mortgage loans it originated to two of its competitors, Countrywide Home Loans, Inc. (62%) and Wells Fargo Funding, Inc. (16%). The Company’s considerations in deciding where to sell loans are price and operational efficiency.  The Company also considers speed of execution and loan product guidelines.  The Company believes that all of the loans it sells currently could be sold to a number of other investors. A Countrywide Home Loans, Inc. entity, Countrywide Warehouse Lending, is also a warehouse lender to the Company (see Note 7 Short-Term Debt).

7

Note 3.  Income Per Share

The following table illustrates the computation of basic and diluted income per share (in thousands, except share and per share data) (unaudited):

	For the Three Months Ended June 30, 2004		For the Three Months Ended June 30, 2003		For the Six Months Ended June 30, 2004			For the Six Months Ended June 30, 2003
Numerator:
Numerator for basic income (loss) per share	$	208	$	9,505	$	(5,464	)	$	21,661
Denominator:
Denominator for basic income (loss) per share - weighted average number of common shares outstanding during the period	7,838,504		7,863,437		7,856,426			7,863,154
Denominator for diluted income (loss) per share	8,582,572		8,470,633		7,856,426			8,470,350
Income (loss) per share - basic	$	0.03	$	1.21	$	(0.70	)	$	2.75
Income (loss) per share - diluted	$	0.02	$	1.12	$	(0.70	)	$	2.56

For the six months ended June 30, 2004 and 2003 there were 1,083,149 and 1,131,904 options, respectively, that were antidilutive and, therefore, not included in the calculations above.

Note 4.  Mortgage Loans Held for Sale, net, pledged

AmNet has pledged loans held for sale totaling approximately $466.3 million to secure credit lines (warehouse facilities) from four financial institutions. See Note 7, “Short-Term Debt.” Mortgage loans held for sale at June 30, 2004 consist of loans which have been committed for sale of approximately $162.2 million and loans available for sale at approximately $304.1 million, all of which are carried at the lower of cost or market value.

Note 5.  Bond Collateral, Mortgage Loans, net

AmNet has pledged collateral in order to secure the long-term debt issued in the form of CMOs. Bond Collateral Mortgage Loans consist primarily of subprime credit 30-year mortgage loans secured by first liens on one-to-four family residential properties. As of June 30, 2004 and 2003, 0% and 17.76%, respectively, of the bond collateral mortgage loans were fixed rate loans. The balance of the bond collateral mortgage loans are adjustable-rate mortgages. All Bond Collateral Mortgage Loans are pledged to secure repayment of the related long-term debt obligation. All principal and interest (less servicing and related fees) on the bond collateral is remitted to a trustee and is available for payment of the long-term debt obligation. The obligations under the long-term debt are payable solely from the bond collateral and are otherwise non-recourse to AmNet.

In March of 2004, approximately $113.9 million in mortgage loans bond collateral and approximately $2.3 million in REO bond collateral were reclassified as held for sale.  By June 30, 2004 all but 60 mortgage loans totaling approximately $1.7 million, had been sold.  These remaining assets are classified as Mortgage loans held for sale (formerly bond collateral), net.  There is no debt associated with these assets.  One remaining portfolio (CMO/FASIT 1998-1) was not sold.  Bond collateral for this structure is shown as Bond Collateral, Mortgage Loans, net and bond collateral, real estate owned, net.

8

Shown below are the components of bond collateral held for investment (after sale of the majority of bond collateral assets) at June 30, 2004; compared to the same components at December 31, 2003 (dollars in thousands) (unaudited):

	CMO/REMIC 2000-2 Securitization			CMO/REMIC 1999-A Securitization			CMO 1999-2 Securitization			CMO 1999-1 Securitization			CMO/FASIT 1998-1 Securitization			TOTAL Bond Collateral
At June 30, 2004
Mortgage loans	$	0		$	0		$	0		$	0		$	18,600		$	18,600
Unamortized premium	0			0			0			0			56			56
Allowance for loan losses	0			0			0			0			(199		)	(199		)
	$	0		$	0		$	0		$	0		$	18,457		$	18,457
Weighted average net coupon	0		%	0		%	0		%	0		%	9.45		%	9.45		%
Unamortized premiums as a percent of mortgage loans	0		%	0		%	0		%	0		%	0.30		%	0.30		%
At December 31, 2003
Mortgage loans	$	7,068		$	40,435		$	58,922		$	27,021		$	22,668		$	156,114
Unamortized premium	362			809			1,747			749			102			3,769
Allowance for loan losses	(141		)	(486		)	(517		)	(311		)	(556		)	(2,011		)
	$	7,289		$	40,758		$	60,152		$	27,459		$	22,214		$	157,872
Weighted average net coupon	9.15		%	9.49		%	9.00		%	8.88		%	9.40		%	9.17		%
Unamortized premiums as a percent of mortgage loans	5.12		%	2.00		%	2.96		%	2.77		%	0.45		%	2.41		%

Note 6.  Derivative Financial Instruments

AmNet makes commitments to fund mortgages at set interest rates, which are referred to individually as rate lock commitments. Additionally the Company’s loans are not yet committed for sale at the time of funding. Collectively, rate lock commitments and funded loans not yet committed for sale are the Company’s pipeline.  The value of the rate lock commitments and uncommitted loans will vary depending on changes in market interest rates between the time that a rate lock commitment is made and the time that the loan funds and is committed for sale to an investor.

AmNet attempts to estimate the number of rate lock commitments in the pipeline that will not close in order to calculate its interest rate exposure on a daily basis. AmNet then purchases hedging instruments in order to try to protect profit margins on the pipeline. The hedging instruments used are forward sales of mortgage-backed securities (“TBA”) and options on forward sales of mortgage-backed securities. Historically, changes in the price of these instruments closely relate to changes in the value (price) of loans in the pipeline.

At June 30, 2004 and June 30, 2003 AmNet had the following commitments to originate loans and loans not yet committed for sale to investors, and offsetting hedge coverage as follows (dollars in thousands) (unaudited):

	6/30/2004		6/30/2003
Interest rate exposure:
Commitments to originate loans at set interest rates (after applying fallout)	$	473,449	$	1,163,221
Closed loans not yet committed for sale to investors	304,126		355,492
Hedge coverage:
Forward sales of mortgage-backed securities (TBA)(notional amount)	670,500		1,346,500
Options on forward sales of mortgage-backed securities (notional amount)	145,000		280,000

9

Interest rate exposure does not directly correlate to hedge coverage without applying an option adjusted spread and fallout factor (for rate locks).

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

The following is a summary of the carrying value of AmNet’s derivative instruments as of June 30, 2004 and December 31, 2003 (dollars in thousands) (unaudited):

June 30, 2004	Range of Coupon Rate	Range of Notional Amount		Fair Value			Range of Expiration Dates
Forward sales of mortgage-backed securities (TBAs):
Fifteen year Fannie Mae	5.0-6.0 MBS	$	2,000-30,000	$	(2,988	)	Jul 20-Sept 20, 2004
Thirty year Fannie Mae	5.5-6.5 MBS	4000-25,000		(3,021		)	Jul 15-Sept 15, 2004
Thirty year Ginnie Mae	5.0-6.0 MBS	1,000-10,000		(480		)	Jul 22-Sept 22, 2004
Options on TBAs:
Thirty year Fannie Mae	6.0 Puts	20,000-40,000		292			Jul 15-Sept 15, 2004
Rate Lock Commitments				4,096
Total derivative financial instruments				$	(2,101	)
December 31, 2003	Coupon Rate	Range of Notional Amount		Fair Value			Range of Expiration Dates
TBA
Fifteen year Fannie Mae	4.5-5.5 MBS	$	3,000-25,000	$	(803	)	Jan 20-Mar 18, 2004
Twenty year Fannie Mae	4.5 MBS	2,000		56			Feb 12, 2004
Thirty year Fannie Mae	5.0-6.0 MBS	4,500-20,000		(1,388		)	Jan 14-Mar 15, 2004
Thirty year Ginnie Mae	5.0-6.0 MBS	1,000-8,000		(122		)	Jan 22-Feb 19, 2004
Options on TBAs:
Thirty year Fannie Mae	5.5 Puts	50,000		172			Mar 15, 2004
Rate Lock Commitments				861
Total derivative financial instruments				$	(1,224	)

The following is a summary of the components within total derivative financial instruments and market adjustments income (expense):(000’s)

	For the Three Months Ended June 30, 2004			For the Three Months Ended June 30, 2003			For the Six Months Ended June 30, 2004			For the Six Months Ended June 30, 2003
Derivative financial instruments-income (expense):
TBA gain/(loss) -closed positions	$	14,406		$	(7,293	)	$	8,411		$	(9,570	)
Options gain/(loss) - closed positions	4,287			—			4,287			—
Change in value of TBAs - open positions	(5,698		)	5,691			(4,231		)	8,366
Change in value of Options - open positions	(2,138		)	(1,425		)	(3,097		)	(1,876		)
Change in market adjustment on interest rate lock commitments	4,390			(6,257		)	3,233			(8,415		)
Total derivative financial instruments and market adjustments income (expense):	$	15,247		$	(9,284	)	$	8,603		$	(11,495	)

10

Note 7.  Short-Term Debt

As of June 30, 2004, mortgage loans held for sale totaling $466.3 million were pledged as collateral for warehouse facility borrowings of $453.8 million with four financial institutions. At June 30, 2004, the Company’s maximum borrowing capacity combined from these four financial institutions was $1.4 billion.  The table below shows the age of pledged mortgage loans as of June 30, 2004. (unaudited):

Aging Range	Number of Loans	Warehouse line usage		% of Total
	(in thousands)
Less than 30 days	2,523	$	398,588	87.8	%
30 to 60 days	250	46,709		10.3	%
61 days to 90 days	39	8,511		1.9	%
TOTAL	2,812	$	453,808	100.0	%

Of the $453.8 million of warehouse line usage at June 30, 2004, $122.4 million was funded through uncommitted warehouse facilities.

Warehouse facilities mature on various dates within one year, generally bearing interest at one-month LIBOR plus spread. The weighted average borrowing rates were 2.63% and 2.69% for the three month period ending June 30, 2004 and June 30, 2003 respectively. The weighted-average borrowing rate was 2.56% for the six months ending June 30, 2004 and 2.71% for the six months ending June 30, 2003. The weighted-average facility fee was .24% for the six months ending June 30, 2004 and .25% for the six months ending June 30, 2003 on the aggregate committed amount of the warehouse facilities. The warehouse facilities are repaid as principal payments on mortgage loans are received, or as the mortgage loans are sold. The agreements governing these facilities contain a number of covenants, including covenants based on tangible net worth, net income, and liquidity of the Company. As of June 30, 2004, the Company was in compliance with all of its warehouse lending agreements.

In 2001, the Company also entered into a $5 million senior subordinated secured revolving loan agreement (“Subordinated Loan Agreement”). The Subordinated Loan Agreement bore an interest rate of 12%. The $3 million loan balance was paid off in full in April 2004.

In April of 2004, the Company entered into agreements to sell approximately 85% of its mortgage portfolio assets. As a result, approximately $90 million in long-term debt was reclassified to short-term debt pending sale. During the second quarter of 2004 the Company extinguished all of the reclassified short-term debt, using proceeds from the sale of the mortgage loans and real estate owned bond collateral.

Note 8.  Long-Term Debt Related to Securitizations, net

The components of the long-term debt at June 30, 2004 and December 31, 2003, along with selected other information are summarized below (dollars in thousands) (unaudited):

	CMO/REMIC 2000-2 Securitization			CMO/REMIC 1999-A Securitization			CMO 1999-2 Securitization			CMO 1999-1 Securitization			CMO/FASIT 1998-1 Securitization			TOTAL Long-Term Debt
At June 30, 2004
Long-term debt	$	0		$	0		$	0		$	0		$	18,043		$	18,043
Capitalized costs on long-term debt	0			0			0			0			—			—
Total long-term debt	$	0		$	0		$	0		$	0		$	18,043		$	18,043
Weighted average financing rates	0		%	0		%	0		%	0		%	2.19		%	2.19		%
At December 31, 2003
Long-term debt	$	7,182		$	33,012		$	51,594		$	16,753		$	22,229		$	130,770
Capitalized costs on long-term debt	(30		)	(1		)	(267		)	(177		)	—			(475		)
Total long-term debt	$	7,152		$	33,011		$	51,327		$	16,576		$	22,229		$	130,295
Weighted average financing rates	2.24		%	1.29		%	3.33		%	1.82		%	2.14		%	2.37		%

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Note 9.  Stock Plans

As of June 30, 2004, shares of common stock were reserved for issuance under the Company’s stock plans as follows (unaudited):

	1997 Stock Incentive Plan	1997 Stock Option Plan	1997 Employee Stock Purchase Plan	1997 Outside Director Stock Option Plan	Total
Total Options Authorized at 1/1/2004	315,200	1,474,800	20,000	210,000	2,020,000
Total Options Issued	284,800	1,421,050	—	179,500	1,885,350
Options Reserved for Issuance	30,400	53,750	20,000	30,500	134,650

Stock option activity during the six months ending June 30, 2004 was as follows (unaudited):

	Number of Options		Weighted-Average Exercise Price
Balance at December 31, 2003	1,768,100		$	7.96
Granted	175,750		8.38
Forfeited	(89,724	)	6.60
Exercised	(26,909	)	5.52
Balance at June 30, 2004	1,827,217		$	8.09

At June 30, 2004, the range of exercise prices for outstanding options was $1.75 to $15.00 and the weighted-average remaining contractual life of outstanding options was 6.20 years. The weighted average exercise price of exercisable outstanding options was $8.01.  The table below shows options and prices for all outstanding options at June 30, 2004 (unaudited):

Option Exercise Price Range	Vested	Unvested	Number of Options
$1.75 to $3.00	101,282	73,032	174,314
$3.01 to $5.00	206,725	266,578	473,303
$5.01 to $7.50	307,740	47,710	355,450
$7.51 to $10.00	128,321	150,429	278,750
$10.01 to $12.50	286,675	2,625	289,300
$12.51 to $15.00	256,100	—	256,100
	1,286,843	540,374	1,827,217

The per share weighted-average fair value of stock options granted between January 1, 2004 and June 30, 2004 is computed quarterly.  For the first quarter ending March 31, 2004 the value was $2.48.  For the second quarter ending June 30, 2004 the value was $3.47 (See Note 1).  These values were calculated using the Black-Scholes option-pricing model, using the following weighted-average assumptions (unaudited):

	Three Months Ending March 31, 2004		Three Months Ending June 30, 2004
Expected dividend yield	0.00	%		0.00	%
Risk-free interest rate	2.80	%		3.81	%
Expected volatility	27.78	%		39.59	%
Expected life (years)	5			5

Note 10.  Business Segments

The Company reports its financial results in two segments: the Mortgage Banking Business and the Mortgage Asset Portfolio Business. The Mortgage Banking Business originates home mortgage loans through a network of mortgage loan brokers. These mortgage loans are subsequently sold to financial institutions. The Mortgage Asset Portfolio Business segment manages a portfolio of mortgage loans pledged as collateral for CMO debt.

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The accounting policies of the segments are the same as described in Note 1, “Summary of Significant Accounting Policies and Practices.” The Company evaluates the performance of its business segments based on revenue and expenses under the direct control of each business segment. The expense of premises and equipment incurred to support business operations are allocated accordingly, by segment.

The table below reflects the total assets at June 30, 2004 and 2003, and the capital expenditures for six-month periods ending June 30, 2004 and 2003 (in thousands) (unaudited):

	Mortgage Banking		Mortgage Asset Portfolio		Combined Segments
Total assets as of June 30, 2004	$	502,435	$	58,312	$	560,747
Total capital expenditures for the six months ending June 30, 2004	$	1,084	$	—	$	1,084
Total assets as of June 30, 2003	$	595,952	$	244,312	$	840,264
Total capital expenditures for the six months ending June 30, 2003	$	1,588	$	—	$	1,588

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The tables below reflect the year-to-date income statement activity by segment for the three-month and six-month periods ending June 30, 2004 and June 30, 2003:

AmNet Mortgage, Inc. and Subsidiaries
Consolidated Statements of Operations by Business Segment, unaudited

(in thousands)

	For the Three Months Ended June 30, 2004		For the Three Months Ended June 30, 2004			For the Three Months Ended June 30, 2004			For the Six Months Ended June 30, 2004			For the Six Months Ended June 30, 2004			For the Six Months Ended June 30, 2004
	Mortgage Banking		Mortgage Asset Portfolio			Combined Segments			Mortgage Banking			Mortgage Asset Portfolio			Combined Segments
Revenues
Gain on sales of loans	$	2,323	$	—		$	2,323		$	17,839		$	—		$	17,839
Derivative financial instruments and market adjustments
Derivative financial instruments—forward commitments and options	10,857		—			10,857			5,370			—			5,370
Market adjustment on interest rate lock commitments	4,390		—			4,390			3,233			—			3,233
Total derivative financial instruments and market adjustments	15,247		—			15,247			8,603			—			8,603
Interest on mortgage assets, net of premium amortization	8,994		575			9,569			14,008			2,203			16,211
Other income	66		368			434			145			584			729
Total revenue, net of derivative financial instruments and market adjustments	26,630		943			27,573			40,595			2,787			43,382
Expenses
Employee compensation and benefits	14,263		136			14,399			25,963			279			26,242
Interest expense	4,422		332			4,754			6,767			1,227			7,994
Office and occupancy expense	959		—			959			1,795			—			1,795
Provision for loan losses	—		128			128			—			128			128
Gain on sale of real estate owned, net	—		(61		)	(61		)	—			(320		)	(320		)
Loss on bond collateral held for sale	—		880			880			—			5,309			5,309
Professional fees	1,088		281			1,369			2,001			403			2,404
Other operating expenses	4,460		227			4,687			8,548			392			8,940
Total expenses	25,192		1,923			27,115			45,074			7,418			52,492
Income (loss) before income taxes	1,438		(980		)	458			(4,479		)	(4,631		)	(9,110		)
Income tax (benefit)	650		(400		)	250			(1,728		)	(1,918		)	(3,646		)
Net income (loss)	$	788	$	(580	)	$	208		$	(2,751	)	$	(2,713	)	$	(5,464	)

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	For the Three Months Ended June 30, 2003			For the Three Months Ended June 30, 2003			For the Three Months Ended June 30, 2003			For the Six Months Ended June 30, 2003			For the Six Months Ended June 30, 2003			For the Six Months Ended June 30, 2003
	Mortgage Banking			Mortgage Asset Portfolio			Combined Segments			Mortgage Banking			Mortgage Asset Portfolio			Combined Segments
Revenues
Gain on sales of loans	$	32,971		$	—		$	32,971		$	53,180		$	—		$	53,180
Derivative financial instruments and market adjustments
Derivative financial instruments—forward commitments and options	(3,027		)	—			(3,027		)	(3,080		)	—			(3,080		)
Market adjustment on interest rate lock commitments	(6,257		)	—			(6,257		)	(8,415		)	—			(8,415		)
Total derivative financial instruments and market adjustments	(9,284		)	—			(9,284		)	(11,495		)	—			(11,495		)
Interest on mortgage assets, net of premium amortization	7,561			2,832			10,393			13,462			6,177			19,639
Other income	34			213			247			51			411			462
Total revenue	31,282			3,045			34,327			55,198			6,588			61,786
Expenses
Employee compensation and benefits	12,449			137			12,586			21,594			476			22,070
Interest expense	3,447			1,151			4,598			6,122			2,689			8,811
Office and occupancy expense	621			—			621			1,188			—			1,188
Provision for loan losses	—			794			794			—			1,713			1,713
Loss on sale of real estate owned, net	—			(330		)	(330		)	—			(515		)	(515		)
Professional fees	1,183			155			1,338			2,272			470			2,742
Other operating expenses	3,826			199			4,025			7,321			458			7,779
Total expenses	21,526			2,106			23,632			38,497			5,291			43,788
Income before income taxes	9,756			939			10,695			16,701			1,297			17,998
Income tax	3,224			428			3,652			5,050			428			5,478
Income tax benefit from utilization of REIT net operating losses	—			(2,462		)	(2,462		)	—			(9,141		)	(9,141		)
Net income	$	6,532		$	2,973		$	9,505		$	11,651		$	10,010		$	21,661

Note 11.  Income Taxes

During 1997, the Company elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended. As a result of this election, the Company was not, with certain exceptions, taxed at the corporate level on the net income distributed to the Company’s shareholders. On July 19, 2002, the shareholders of the Company approved two proposals that allowed for the conversion of the Company from a REIT to a fully taxable entity. On February 7, 2003, the Company filed a notice with the Internal Revenue Service of its decision to de-REIT, effective beginning January 1, 2003.

As a result of the conversion to fully taxable status, an income tax benefit and related deferred tax asset of $6.7 million, after valuation allowance, was recorded in March of 2003.  As a result of deferred tax asset realization in 2003 the balance as of December 31, 2003 was $5.7 million. An additional tax benefit of $2.0 million was recorded in the first quarter of 2004. The deferred tax asset has been and will continue to be reduced by realization of income tax provisions over time. For the six month period ending June 30, 2004 the Company recorded an assumed income tax benefit for the six months ended June 30, 2004 of $3.7 million as a result of a pretax loss of $9.1 million.  This benefit was calculated based on an assumed income tax rate of 41% for 2004.

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Note 12.  Commitments and Contingencies

Lease Commitments

The Company rents certain premises and equipment under non-cancelable operating leases expiring at various dates through the year 2009. Rental expense under such leases is included in office and occupancy expense, and other operating expenses. Lease costs totaled $1.9 million in the six months ending June 30, 2004 and $1.3 million in the six months ending June 30, 2003. Future minimum lease payments under these leases as of June 30, 2004, are as follows (dollars in thousands) (unaudited):

Year ending June 30:
2005	$	4,352
2006	3,127
2007	1,838
2008	1,249
2009	687
	$	11,253

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

The statements contained in this Form 10-Q that are not purely historical are forward looking statements, including statements regarding our expectations, hopes, beliefs, intentions, or strategies regarding the future. Such statements use the words “expect,” “will,” “may,” “anticipate,” “goal,” “intend,” “seek,” “believe,” “plan,” “strategy” and derivatives of such words. Forward looking statements in this report include those statements regarding:

•the percentage of interest rate lock commitments that will likely result in mortgage loan fundings;

•our expectation of being able to renew, increase and syndicate our warehouse borrowing facilities;

•the expectation that AmNet’s primary source of revenues will be interest income and gains on sales of loans, net of gains or losses on derivative financial instruments;

•our belief that the quality of our loan products and services will permit us to gain market share even if demand for mortgages declines;

•our expectations surrounding the total size of the loan origination market, our ability to expand our sales force and customer base to originate loans, expand market share and be profitable in a potentially declining market, our loan origination volume and our expectations regarding higher loan costs and our target profit margins on each loan;

•our expectations surrounding our cash requirements, expenses (including our ability to control our fixed expenses), cash flow from operations, the sufficiency of our capital base, the sufficiency of our cash reserves and our sources of liquidity, including our ability to maintain our warehouse lending facilities and the factors we expect to affect our ability to do so;

•the expected adequacy of our various reserves;

•our intention to expand certain areas of our operations and the expected costs of doing so;

•our intention to continue to try and hedge against market fluctuations in interest rates and protect profit margins on our loan pipeline and loans, the instruments we intend to use and the expected inverse relationship of gains on hedging to margins on loan sales;

•the expected correlation of our profitability to loan origination volume;

•our belief that we will continue to qualify for correspondent lending programs and our ability to find alternative buyers for loans we originate;

•the expected concentration of our loans in California;

•the sub-prime loans we offer and plan to offer and the operations and risks related to such originations;

•our expectation that interest rates will rise and refinance demand will fall and the anticipated effect on various aspects of our business from changes in interest rates, including increased loan generation cost per loan and changes in the value of our loans and our derivatives;

•our expectations regarding the sale of the sixty mortgage loans remaining from sale the of portfolio assets and the proceeds we expect to receive;

•our expectations regarding the factors necessary to remain profitable;

•our expectation that revenues and expenses from our Mortgage Asset Portfolio Business will continue to decline;

•our expected effective tax rates, the impact of our deferred tax assets, the reduction of those assets over time and the possible need to establish a valuation account related to tax benefits;

•who we anticipate will be our competitors;

•the anticipated impact of changes in laws;

•our expectation that the purchase loan business will become a greater portion of our originations and the

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related impact of seasonality;

•our expected increasing reliance on information technology systems and the necessity of developing and upgrading such systems;

•our expectations regarding the impact of an amendment to FASB statement 123;

•our expectations regarding the future mixture of loans we will originate and the related impact on our reserves; and

•the correlation between our cost of funds and market interest rates.

These forward looking statements are based on information available to us on the date hereof, and we assume no obligation to update any such forward looking statements. It is important to note that our actual results and timing of certain events could differ materially from those in such forward looking statements.  Some of the most significant risks that we face that could harm our future operating results or prevent us from meeting our goals and objectives are the following:

•We are utilizing as much of our existing infrastructure as we can while managing our staffing levels and growing our sales presence in existing and new markets.  Our strategy requires us to capture an increasing percentage of the market in a highly competitive environment, which will put pressure on our gross margins.  If we are not able to do this, we would likely experience losses (due to our increased level of expenses).

•We have expanded our branch system and fixed expenses over the past year in a contracting market.  Additionally, our market share increases are dependent on retaining and expanding our sales force and broker customer base, which is more challenging in a highly competitive market environment.

•We sell a substantial portion of our loans to two of our competitors.  If our competitors stop purchasing our loans on favorable terms, we could be required to find alternate purchasers and/or accept unfavorable terms.  In either case, this could reduce our revenues and earnings.

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

•A large portion of the loans we fund are concentrated in California and therefore our results are subject to adverse economic conditions in California.

•Our hedging strategies may not be successful in mitigating our risks associated with interest rate changes.  In particular, for new loan products with shorter terms and loan products with adjustable rates, hedging strategies may not be effective at certain times.

•We have mortgage loans remaining for sale from the sale of mortgage portfolio assets. There can be no assurance that these loans will be sold in a timely manner and therefore our cash would remain invested in these loans.

•We have created reserves for trailing losses from the sale of portfolio assets. This estimate may prove to be inadequate thereby reducing cash and our earnings for additional costs incurred.

Other factors that may impact our results, include but are not limited to, general economic conditions, the world political climate, unexpected expense increases, overall interest rates, volatility in interest rates, the shape of the yield curve,  changes in accounting rules or their application, changes in the margins for gains on sale of originated loans, changes in the demand of mortgage brokers for our loan products and services or of loan purchasers for originated loans, increases in prepayment rates and default rates, changes in the requirements of correspondent loan programs or our ability to meet such requirements and changes in our anticipated cash requirements. These and other risk factors that could cause actual results to differ materially are set forth in more detail in this item under the heading “Business Risk Factors.”

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Introduction

Our Company was founded in 1997 as an externally managed Real Estate Investment Trust. Until 2001, substantially all of our operations consisted of the acquisition of residential mortgages for investment purposes. In mid-2001, our Board of Directors and management determined that it was in the best interest of the stockholders to fundamentally shift our strategic direction to mortgage banking. We started the transition in 2001 by forming AmNet to engage in mortgage banking activities. In order to more closely align our name with our activities, we changed our name from American Residential Investment Trust, Inc. to AmNet Mortgage, Inc., as of May 5, 2004. Effective January 1, 2002 we began reporting our financial results in two segments: the Mortgage Banking Business and the Mortgage Asset Portfolio Business.

Our Mortgage Banking segment originates mortgage loans predominately to prime quality borrowers secured by first trust deeds through a network of independent mortgage brokers. A concentration of our business is in California (26.2% of loans originated in the first six months of 2004); however, we do business on a nationwide basis. We sell the loans that we originate to institutional purchasers on a servicing-released basis.

We use a dedicated sales force to offer our loan products to approved wholesale mortgage brokers, who refer their clients’ loans to us for underwriting and funding. Loans meeting our underwriting criteria are generally approved and funded at our regional underwriting loan centers. Our headquarters office performs various functions through multiple departments including establishment of policy, risk management, secondary marketing, and loan delivery to investors, finance, accounting, administration, marketing, human resources, and information technology.

Our mortgage banking operations represented 93.6% of our revenue for the six months ended June 30, 2004. During the first six months of 2004, two branch offices and three regional offices were opened for a total of twenty-seven offices. The number of employees company-wide increased from 648 to 702 employees during the first six months of 2004.

We borrow funds under our warehouse credit facilities to fund and accumulate loans prior to sale to correspondent investors on a servicing-released basis. Currently we have four warehouse facilities that enable us to borrow up to an aggregate of $1.4 billion. We are generally allowed to borrow from 96% to 99% of the lesser of par or market value of the loans, and must comply with various lender covenants restricting, among other things, the absolute level of leverage, requiring minimum levels of cash reserves and requiring certain levels of profitability.

We generate revenue in our Mortgage Banking Business segment three principal ways:

•Gain on loan sales. Loan rates, fees and discount points are set based on our targeted gain on sale. This is referred to as our pricing margin. We currently sell the loans that we originate to institutional purchasers, on a servicing-released basis, for cash. We record the difference between the sale price of loans that we have sold and our cost to originate the loans sold as gain on loan sales. We recognize revenue at the time that we complete the loan sale, which is generally when we receive loan sale proceeds from the purchaser.  Gain on loan sales also includes fees we charge for loan origination such as underwriting fees, loan document preparation fees and wiring fees.

•Hedging. Hedging instruments are used to help mitigate exposure to interest rate fluctuations. The gains or losses from this activity will correspond to revenue derived from loan sales. Typically higher than expected gains from the sale of loans will be offset by hedging losses, while lower than expected gains from the sale of loans will be offset by hedging gains. Hedging gains or losses are included in the consolidated statements of operation and comprehensive income as derivative financial instruments and market adjustments.

•Interest income. From the time we fund a loan until the time we sell the loan, we earn interest on the loan, which is paid by the borrower. The interest that we earn is partially offset by the interest we pay under our warehouse credit facilities used to finance our mortgage originations.

The expenses in our Mortgage Banking segment include variable costs such as commissions, loan expenses and contract labor, as well as fixed overhead expenses such as personnel, rent, supplies and utilities.

We have continued to generate revenues and expenses from our Mortgage Asset Portfolio Business. Revenues and expenses from this segment of our business have declined in the second quarter of 2004 due to the sale of the majority of the portfolio assets in May 2004. We put up for sale approximately 85% of our portfolio and completed the majority of sales prior to June 30, 2004. Net proceeds totaled approximately $24.9 million.

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Our 2^nd Quarter 2004 Highlights (Executive Overview)

Our operating results for the second quarter of 2004 were dominated by the following:

•Based on a decision to liquidate the majority of our remaining mortgage asset portfolio, we entered into purchase and sale contracts to sell bond collateral mortgage assets, and we used a portion of the proceeds to redeem all of the related collateralized long-term debt. Sixty mortgage loans remain to be sold as of June 30, 2004 with a market value of $2.5 million and a book value of $1.7 million.

We determined that the market value of the bond collateral assets (sold and unsold) was lower than the carrying value which necessitated a valuation adjustment in March 2004 when the decision was made to sell the portfolio. The valuation adjustment for the period ended June 30, 2004 was approximately $5.3 million which includes among other things: sale expenses, write off of capitalized costs and premiums, net realizable sale adjustments and $750 thousand of reserves for trailing expenses and losses. The valuation adjustment (loss on bond collateral held for sale) for the second quarter of 2004 was approximately $880 thousand.

As of June 30, 2004 net proceeds from the portfolio sales totaled approximately $24.9 million which was received in the three month period ending June 30, 2004.  An additional $1.7 million is expected to be received upon sale of the sixty unsold mortgage loans. As of July 31, 2004, forty-three mortgage loans remain unsold.

•Our Mortgage Banking segment funded approximately $2.6 billion in loan volume for the period while funding for the same period in 2003 was $3.2 billion.  This represents a decline of approximately 19% from the second quarter of 2003 production. Rates for thirty-year fixed rate mortgages increased during the second quarter of 2004 from 5.52% at March 31, 2004 to 6.25% at June 30, 2004 according to Freddie Mac rates for thirty-year fixed-rate mortgages. Generally, demand for loans decreased beginning in late April of 2004 due to both higher interest rates and decreased refinance activity and accordingly our funding volume declined month over month during the second quarter of 2004. In the second quarter of 2003 a large portion of loans were refinances. The graph below shows monthly loan production comparisons between the second quarters of 2004 and 2003.

	(in millions)
	2004		2003
April	$	1,147	$	1,030
May	751		876
June	666		1,301

•We expect the trend of reduced loan refinance activity from 2003 levels to continue for the remainder of 2004.  According to the Mortgage Bankers Association (“MBA”) the overall loan production market is contracting from $3.8 trillion in 2003 to $2.5 trillion in 2004.

•Revenues totaled $27.6 million. This revenue was sufficient to cover variable and fixed expenses totaling $25.2 million for the mortgage banking segment.

•Cash and cash equivalents increased by $23.3 million during the second quarter of 2004 from $27.6 million at March 31, 2004 to $50.9 million at June 30, 2004. The key factors in this increase were the portfolio sales which netted approximately $24.9 million and cash generated by the mortgage banking segment offset by cash used to repurchase outstanding stock.

•We repurchased 511,490 shares of our outstanding common stock during the second quarter of 2004. Included in this total was the purchase of 500,000 shares through a privately negotiated transaction with a

20

single entity. The purchase price of this transaction was $8.80 per share resulting in a total cash outlay of $4.5 million.

•Mortgage loans held for sale are subject to timing differences related to recognition of income or expense. At June 30, 2004 loans held for sale or committed for sale contained approximately $5.1 million in gains (as compared to approximately $4.1 million at March 31, 2004) which would only be recognized at the time of loan sale while offsetting hedging losses were recognized at June 30, 2004 and March 31, 2004.

Critical Accounting Policies

The following analysis of financial condition and results of operations are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable in the circumstances; however, actual results may differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.

We believe that estimates and assumptions are important factors in the portrayal of our financial condition and results of operations. Our critical accounting policies that require management’s most subjective judgments include the following:

• Derivative hedging activities/determination of fair values

• Income taxes and benefits

• Allowance for loan losses – bond collateral mortgage loans

• Amortization of premiums on bond collateral loans

• Loan loss reserves – mortgage loans held for sale

Please refer to the Company’s Form 10-K for the year ending December 31, 2003, for a detailed discussion of these policies.

Management’s Financial Analysis

We represent non-GAAP financial measures in this report. We believe that these measures are helpful in understanding our business and operating results. You should not consider our non-GAAP financial measures as a replacement for any GAAP financial measures. The non-GAAP financial measures that we present are as follows:

Gross Margins - The Mortgage Banking segment generates gain on the sale of loans.  These gains are a function of the volume of loans sold in the period, and the value of the loans at the time these loans are committed for sale to an investor.  We also generate gains and losses on the derivative financial instruments that we acquire to hedge our targeted gain on sale of the loans.  We consider our gross margin to be the sum of our (i) gain on sale of loans and (ii) total derivative financial instruments and market adjustments.  This sum expressed as a percentage of our loan sales volume is our gross margin percentage.

When we develop the pricing of our loans, we incorporate a target gross margin percentage that we expect to obtain.  We then provide rate lock commitments to borrowers based on that pricing and the related target gross margin percentage.  However, if interest rates increase between the time we make a rate lock commitment and commit a loan for sale, then the market value of the loan would be reduced and we would not achieve our target margin percentage.  Accordingly, we acquire derivative financial instruments to hedge, or protect, our target margins from interest rate movements.  We hedge our loans from the time of a rate lock commitment to the time the loan is committed for sale to an investor.

If our hedging is effective, as the value of our pipeline decreases and we record a lower gain on sale, our hedge instruments increase in value to offset the reduced gain.  Alternatively, as the value of our pipeline increases, we record a larger gain on sale but the larger gain is offset by a loss on our hedges.  Accordingly, if we successfully hedge our pipeline, the gross margin percentage that we ultimately earn will be close to our target gross margin percentage and we will not be significantly impacted by interest rate changes.  In order to evaluate the effectiveness of our hedging program, management believes that it is important to evaluate our gross margins and then compare our actual gross margin percentage against our target gross margin percentage.

Net Interest Income - We earn interest income and incur interest expense in both segments of our operations. In the Mortgage Banking Business, we earn interest on a loan from the date the loan is funded until sale of the loan to an investor. Accordingly, interest income is a function of the volume of loans funded, the interest rate on the loans and the length of time the loans are held. To the extent we fund loans with borrowings under our warehouse facilities, we record interest expense based on the same factors. Similarly, in the Mortgage Asset Portfolio Business, we generate revenue from the interest we

21

receive on the mortgage loans we hold for investment and we incur interest expense on the borrowings used to finance our loan portfolio.

Because the interest income and interest expense in each segment of our business are closely related and dependant on many of the same factors, in particular the volume of loans we originate or hold for investment, management believes that it is helpful in understanding our operations to analyze the impact of interest income and expense together within each segment of our operations. For this reason, the discussion below provides information regarding the net interest income (interest income less interest expense) generated by each segment. Management believes that this is consistent with how financial analysts typically consider interest in analyzing mortgage banking operations.

Fixed and Variable Operating Expenses –  For the same reasons described above, the explanation of expenses includes a discussion of our operating expenses, which excludes interest expense. Because certain other expenses we incur in the Mortgage Banking Business, such as commissions and contract labor, also vary with the volume of our loan originations, management believes that it is important in understanding this business to consider the variable and the fixed expenses separately. Accordingly, we have included an estimated breakdown between variable and fixed amounts for each category of our operating expenses. Management believes that this will enable a better understanding of our results and the likely impact of future changes in our origination volumes.

Results of Operations

Three Month Results

Mortgage Banking Business

Our Mortgage Banking Business recorded net income of $788.1 thousand for the three-month period ending June 30, 2004 as compared to net income of $6.5 million in 2003 for the same period. These results were due in large part to (i) a 17% decrease in loan sales volume and revenues reflecting a contracted overall mortgage loan origination marketplace from 2003; (ii) decreased gross margins on loan sales; and (iii) increased expenses reflecting the expansion of regional and branch offices over the past year.

($ amounts in 000’s) (unaudited)

	Three Months Ended June 30, 2004					Three Months Ended June 30, 2003					2004 Increase (Decrease)
	Amount Income (Expense)			Basis Points		Amount Income (Expense)			Basis Points		Amount			Basis Points
Loans sold, net	$	2,608,531		—		$	3,133,407		—		$	(524,876	)	—
Revenues:
Premiums	33,200			127.27		73,433			234.35		(40,233		)	(107.08	)
Broker fees	5,986			22.95		10,580			33.76		(4,594		)	(10.81	)
Mortgage broker premiums	(31,786		)	(121.86	)	(46,258		)	(147.63	)	14,472			25.77
Premium recapture and loan loss provisions	(1,871		)	(7.17	)	(1,679		)	(5.36	)	(192		)	(1.81	)
Deferred origination costs	(3,206		)	(12.29	)	(3,104		)	(9.91	)	(102		)	(2.38	)
Gain on sales of loans	$	2,323		8.91		$	32,972		105.22		$	(30,649	)	(96.31	)
Derivative financial instruments and market adjustments	15,247			58.45		(9,284		)	(29.63	)	24,531			88.08
Gain on sale of loans, after derivative financial instruments and market adjustments (“gross margins”)	$	17,570		67.36		$	23,688		75.59		$	(6,118	)	(8.23	)
Interest on mortgage assets	8,994			34.48		7,561			24.13		1,433			10.35
Other income	66			0.25		35			0.11		31			0.14
Total revenue (Mortgage Banking Segment)	$	26,630		102.09		$	31,284		99.83		$	(4,654	)	2.26

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We expect the trend of reduced loan production from 2003 levels to continue for the remainder of 2004. The overall loan production market is contracting from $3.8 trillion in 2003 to $2.5 trillion in 2004 according to the MBA. The market is projected to be $1.0 trillion in the second half of 2004.

Gain on the sales of loans decreased for the quarter ended June 30, 2004, primarily due to our decrease in volume of loan sales and narrower gross margins. Our gain on the sale of loans was made up of a combination of various account categories which are summarized in the chart above, and quantified in basis points to loan sales volume. Premiums represent the price at which we sell the loans to investors in excess of the principal balance of loans sold. Broker fees represent various charges to brokers for services rendered which are deferred and recognized as part of the gain on the sales of the loans. Premiums and broker fees are offset by capitalized (deferred) loan origination costs. The largest deferred cost associated with loan production is broker premiums, or yield spread premiums. Other offsets to gain on sale include (i) loan premiums repaid to investors (“premium recapture”) and loan loss provisions and (ii) deferred origination costs, which are recognized at the time of loan sale. Premium recapture expenses represent repayment of a portion of certain loan sale premiums to investors on previously sold loans which subsequently payoff within six months of loan sale. We sell a substantial portion of our loans to two of our competitors.  If our competitors stop purchasing our loans on favorable terms, we could be required to find alternate purchasers and/or accept unfavorable terms.  In either case, this could reduce our revenues and earnings.

The use of derivative financial instruments is key to protecting our profit margins between the time of the interest rate lock to when the loan is sold to an investor. We use forward sales of mortgage backed securities (TBA) and options on forward sales of mortgage-backed securities as our primary hedging instruments. Due to increases in mortgage interest rates during most of the second quarter of 2004 and decreases in interest rates in the second quarter of 2003, we recorded net gains on derivative financial instruments of $15.2 million and net losses of $9.3 million, respectively.  During the second quarter of 2004, we continued with the same strategy of using forward sales of mortgage-backed securities and options on mortgage-backed securities.

Our gross margins were $17.6 million for the three months ended June 30, 2004 or 67 basis points on $2.6 billion in loan sales volume a decline of $6.1 million from $23.7 million or 76 basis points on $3.1 billion in loan sales volume for the comparable period in 2003. Loan sales volume declined $525 million. This decline was a major contributor in our reduction in the dollar amount of gross margins. The remaining decline was due to the lower overall gross margins that resulted from lower pricing reflecting competitive pressures. In total, premium recapture and loss provisions are comparable between quarters. However, loan loss provision increased by $1.2 million for the second quarter of 2004 versus the same period in 2003, while premium recapture expense declined by $972.8 thousand. The increase in loan loss provision in the second quarter of 2004 was the result timing differences related the amount of loans subject to losses. Going forward we generally expect premium recapture expense to decline due to the overall decline in refinance loans. Conversely while we believe that our underwriting process is sound and effective, loan loss provisions may increase in the future due to a higher mix of Alt-A loans which have more complex

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underwriting and are more likely to be rejected by investors if we sell loans which do not meet the investors’ underwriting criteria.

Mortgage loans are carried at the lower of cost or market value. As such, our loan sale gains are recognized at the time loan sale proceeds are received from investors. Consequently, any increase in the value of loans due to interest rate movements will not yet be recorded in our gross margin, while corresponding losses caused by the same interest rate movements will be recorded in our gross margins. This situation occurred at both March 31, 2004 and June 30, 2004. Our actual gross margin percentages in each quarter, after considering the above mentioned timing differences, were close to our target margin percentages and accordingly, we believe that our hedging program was successful in protecting profit margins on our loan originations in both quarters.  However, our hedging strategies may not be successful in mitigating our risks associated with interest rate changes in future periods. In particular, for new loan products with large loan balances, short terms, and loan products with adjustable rates, our hedging process may not be effective at certain times.

We recorded interest income of $9.0 million for the three months ended June 30, 2004. We earn interest on a loan from the date the loan is funded until final disposition. Accordingly, interest income is a function of the volume of loans funded, the interest rate on the loans and the length of time the loans are held prior to sale. To the extent we fund loans with borrowings under our warehouse facilities, we record interest expense based on the same factors. Interest expense for the period was $4.4 million. The resulting net interest income earned on loan inventories was $4.6 million, representing 18 basis points on second quarter 2004 loan production of $2.6 billion. For the comparable period ended June 30, 2003 interest income was $7.6 million and interest expense was $3.4 million. This resulted in net interest earned of $4.2 million, representing 13 basis points on second quarter 2003 loan production of $3.2 billion. Net interest income increased in a rising interest rate environment because our cost of funds does not necessarily rise in conjunction with market interest rates.

Total expenses incurred in the Mortgage Banking Business for the three months ended June 30, 2004 were approximately $25.2 million. Operating expenses, which included all expenses except interest expense (employee compensation and benefits, office and occupancy expense and other operating expenses), were approximately $20.8 million for the three months ended June 30, 2004. For the comparable period ended June 30, 2003, there were approximately $21.5 million of total expenses of which approximately $18.1 million were operating expenses. The increase in operating expenses in 2004 was due to the ongoing expansion of our mortgage banking operations, which are comprised of regional and branch loan production offices and headquarters operations. For the three months ended June 30, 2004, expenses included approximately $4.9 million in sales commissions, which vary in direct proportion with the volume of funded loans, or approximately 19 basis points (.19%) on $2.6 billion in funded loans. Operating expenses totaled $20.8 million, or approximately 80 basis points (.80%), on $2.6 billion in funded loans in the second quarter of 2004. Total variable and fixed basis point operating expenses (which is a measurement of the cost per loan) increased for the three months ended June 30, 2004 and June 30, 2003 (from 56 basis points in 2003 to 81 basis points in 2004). The operating cost per loan increased from $1,013 in 2003 to $1,421 per loan in the second quarter of 2004. The increased cost per loan in 2004 compared to the cost in the second quarter of 2003 shows that the reduced loan production in the second quarter of 2004 also reduced efficiency due to a larger branch system (over capacity in some branches) and higher headquarters overhead.

The table below provides the relationship between estimated fixed, variable and total expenses for the three months ended June 30, 2004 and 2003 (dollars in thousands) (unaudited):

2004 Mortgage Banking Expenses	Estimated Variable Expenses		Estimated Fixed Expenses		Total Expenses
Employee compensation and benefits	$	6,067	$	8,196	$	14,263
Office and occupancy expense	—		959		959
Professional fees	170		918		1,088
Other operating expense	1,222		3,238		4,460
Total operating expenses	7,459		13,311		20,770
Interest expense	4,422		—		4,422
Total expenses	$	11,881	$	13,311	$	25,192

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2003 Mortgage Banking Expenses	Estimated Variable Expenses		Estimated Fixed Expenses		Total Expenses
Employee compensation and benefits	$	7,069	$	5,380	$	12,449
Office and occupancy expense	—		621		621
Professional fees	293		890		1,183
Other operating expense	1,468		2,358		3,826
Total operating expenses	8,830		9,249		18,079
Interest expense	3,447		—		3,447
Total expenses	$	12,277	$	9,249	$	21,526

The effective federal and state tax rate for this segment was estimated to be 41%.  In 2003, we had a combined federal and state effective tax rate of approximately 30% primarily due to the realization of our operating loss carry forwards associated with our start-up operating losses.

Interest rate movements are difficult to predict, but it is recognized that interest rates on residential mortgages were historically low, and refinance demand was very strong during the latter part of the first quarter of 2004 and April of the second quarter. Revised projections by the MBA (April 2004) for mortgage loan originations for the remainder of 2004 indicate an increase in interest rates and a reduction of refinance demand over the next 3 quarters. Our financial projections for the second half of 2004 assume an increase in loan production over first quarter 2004 levels, principally due to an expectation of a larger sales force and continued market share penetration and growth.  Increased loan production levels and management of overhead expenses are the keys to achieving profitability for the remainder of 2004. Wherever possible we are managing staffing levels and utilizing as much of our existing infrastructure to process our loan production (adjust staffing size to an optimal level of efficiency) while growing our sales presence in existing and new markets. In summary, we have been and will continue to expand our business operations, primarily in sales areas, and control our fixed expenses in a contracting market.  Our strategy requires us to capture an increasing percentage of the market in a highly competitive environment, which will put pressure on our gross margins.  If we are not able to do this, we would likely experience losses due to our increased level of expenses.

Mortgage Asset Portfolio Business

Our Mortgage Asset Portfolio Business recorded a net loss of $580.3 thousand for the three month period ending June 30, 2004 as compared to an after tax gain of $3.0 million in 2003 for the same period. This decline was due in large part to the expenses recorded upon the sale of approximately 85% of our portfolio assets.

We held mortgage assets of approximately $137.4 million as of March 31, 2004. As of June 30, 2004 mortgage assets were approximately $21.0 million.  This reduction was based on a decision to liquidate the majority of our remaining portfolio.

The majority of our mortgage asset portfolio was sold in May 2004. As of June 30, 2004, we have received approximately $24.9 million in cash from the sales of portfolio assets, net of repayment of long-term debt (bonds). We recorded approximately $880 thousand to the loss on bond collateral held for sale in the second quarter of 2004 which is included in the total valuation adjustment expense of $5.3 million for the six months ended June 30, 2004. We expect to receive approximately $1.7 million in cash (net of reserves) from sale of the remaining loans to be sold subsequent to June 30, 2004. There is no debt associated with the remaining mortgage loans to be sold subsequent to June 30, 2004.

As a result of the portfolio sale, the Mortgage Asset Portfolio Business will become a minor part of both revenue and expense on a consolidated basis. For the second quarter of 2004, total revenue was approximately $943 thousand while in the second quarter of 2003, total revenue was $3.0 million. Expenses for the second quarter of 2004 were approximately $1.9 million, while expenses for the second quarter of 2003 were $2.1 million.

Six Month Results

Mortgage Banking Business

Our Mortgage Banking Business recorded net income of $2.8 million for the six-month period ending June 30, 2004 as compared to net income of $11.7 million in 2003 for the same period. These results were due in large part to (i) a 17% decrease in loan sales volume and revenues reflecting a contracted overall mortgage loan origination marketplace from 2003; (ii) a decreased gross margin on loan sales; and (iii) increased expenses reflecting the expansion of regional and branch offices over the past year.

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	Six Months Ended June 30, 2004					Six Months Ended June 30, 2003					2004 Increase (Decrease)
	Amount Income (Expense)			Basis Points		Amount Income (Expense)			Basis Points		Amount			Basis Points
	($ amounts in 000’s) (unaudited):
Loans sold, net	$	4,250,085		—		$	5,115,817		—		$	(865,732	)	—
Revenues:
Premiums	71,942			169.27		116,832			228.37		(44,890		)	(59.10	)
Broker fees	10,168			23.92		16,283			31.83		(6,115		)	(7.90	)
Mortgage broker premiums	(55,440		)	(130.44	)	(71,216		)	(139.21	)	15,776			8.76
Premium recapture and loan loss provisions	(3,195		)	(7.52	)	(3,147		)	(6.15	)	(48		)	(1.37	)
Deferred origination costs	(5,636		)	(13.26	)	(5,572		)	(10.89	)	(64		)	(2.37	)
Gain on sales of loans	$	17,839		41.97		$	53,180		103.95		$	(35,341	)	(61.98	)
Derivative financial instruments and market adjustments	8,603			20.24		(11,495		)	(22.47	)	20,098			42.71
Gain on sale of loans, after derivative financial instruments and market adjustments (“gross margins”)	$	26,442		62.21		$	41,685		81.48		$	(15,243	)	(19.27	)
Interest on mortgage assets	14,008			32.96		13,462			26.31		546			6.65
Other income	145			0.34		51			0.10		94			0.24
Total revenue (Mortgage Banking Segment)	$	40,595		95.52		$	55,198		107.90		$	(14,603	)	(12.38	)

Gain on the sales of loans decreased for the six months ended June 30, 2004, primarily due to our decrease in volume of loan sales and narrower margins particularly in the first three months of 2004. Our gain on the sale of loans was made up of a combination of various account categories which are summarized in the chart above, and quantified in basis points to loan sales volume.

The use of derivative financial instruments is a key to protecting our profit margins between the time of the interest rate lock to when the loan is sold to an investor. Due to increases in mortgage interest rates during the last half of the six month period ending June 30, 2004 and decreases in interest rates for the same period of 2003, we recorded net gains on derivative financial instruments of $8.6 million and net losses of $11.5 million, respectively.

Our gross margins were $26.4 million for the six months ended June 30, 2004 or 62 basis points on $4.3 billion in loan sales volume a decline of $15.2 million from $41.7 million or 81 basis points on $5.1 billion in loan sales volume for the comparable period in 2003.  Loan sales volume declined $866 million. This decline was a major contributor in our reduction in the dollar amout of gross margins. The remaining decline was due to the lower overall gross margins that resulted from lower pricing reflecting competitive pressures. In total, premium recapture and loss provisions are comparable between quarters. However, loan loss provision increased by $1.4 million for the second quarter of 2004 versus the same period in 2003, while premium recapture expense declined by $1.3 million. Going forward we generally expect premium recapture expense to decline due to the overall decline in refinance loans. Conversely, while we believe that our underwriting process is sound and effective, loan loss provisions may increase in the future due to a higher mix of Alt-A loans which have more complex underwriting and are more likely to be rejected by investors if we sell loans which do not meet the investors’ underwriting criteria.

Comparison between the first six months of 2003 and 2004 shows a decline in our gross margin rate from 81 basis points to 62 basis points.  Market conditions remain extremely competitive as interest rates increased during most of the six month period ending June 30, 2004.  Competitive pricing pressures remained a key factor in our reduced margins. Our actual gross margin percentages in each six month period were close to our target margin percentages and accordingly, we believe that our hedging program was successful in protecting profit margins on our loan originations in both periods.

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We recorded interest income of $14.0 million for the six months ended June 30, 2004 and interest expense for the period was $6.8 million. The resulting net interest income earned on loan inventories was $7.2 million, representing 16 basis points on the first six months of 2004 loan production of $4.4 billion. For the comparable period ended June 30, 2003 interest income was $13.5 million and interest expense was $6.1 million. This resulted in net interest earned of $7.4 million, representing 14 basis points for six months ending June 30, 2003 loan production of $5.3 billion.

Total expenses incurred in the Mortgage Banking Business for the six months ended June 30, 2004 were approximately $45.1 million. Operating expenses, which included all expenses except interest expense (employee compensation and benefits, office and occupancy expense and other operating expenses), were approximately $38.3 million for the six months ended June 30, 2004. For the comparable period ended June 30, 2003, there were approximately $38.5 million of total expenses of which approximately $32.4 million were operating expenses. The increase in operating expenses in 2004 was due to the ongoing expansion of our mortgage banking operations, which are comprised of regional and branch loan production offices and headquarters operations. For the six months ended June 30, 2004, expenses included approximately $8.2 million in sales commissions, which vary in direct proportion with the volume of funded loans, or approximately 19 basis points (.19%) on $4.4 billion in funded loans. Operating expenses totaled $38.3 million, or approximately 87 basis points (.87%), on $4.4 billion in funded loans. Total variable and fixed basis point operating expenses (which is a measurement of the cost per loan) increased for the six months ended June 30, 2004 and June 30, 2003 (from 61 basis points in 2003 to 86 basis points in 2004). The operating cost per loan increased from $1,096 in 2003 to $1,518 per loan for the six months ended June 30, 2004. The increased cost per loan in 2004 compared to the cost in  2003 shows that the reduced loan production in the second quarter of 2004 also reduced efficiency due to a larger branch system (over capacity in some branches) and higher headquarters overhead.

The table below provides the relationship between estimated fixed, variable and total expenses for the six months ended June 30, 2004 and 2003 (dollars in thousands) (unaudited):

2004 Mortgage Banking Expenses	Estimated Variable Expenses		Estimated Fixed Expenses		Total Expenses
Employee compensation and benefits	$	9,868	$	16,095	$	25,963
Office and occupancy expense	—		1,795		1,795
Professional fees	321		1,680		2,001
Other operating expense	2,597		5,951		8,548
Total operating expenses	12,786		25,521		38,307
Interest expense	6,767		—		6,767
Total expenses	$	19,553	$	25,521	$	45,074
2003 Mortgage Banking Expenses	Estimated Variable Expenses		Estimated Fixed Expenses		Total Expenses
Employee compensation and benefits	$	11,341	$	10,253	$	21,594
Office and occupancy expense	—		1,188		1,188
Professional fees	547		1,725		2,272
Other operating expense	2,801		4,520		7,321
Total operating expenses	14,689		17,686		32,375
Interest expense	6,122		—		6,122
Total expenses	$	20,811	$	17,686	$	38,497

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The table below provides a six month comparative view of loan production for 2004 and 2003 (unaudited):

	(in millions)
	2004		2003
January	$	435	$	598
February	558		618
March	877		862
April	1,147		1,030
May	751		876
June	666		1,301

Mortgage Asset Portfolio Business

Our Mortgage Asset Portfolio Business recorded a net loss of $2.7 million for the six month period ending June 30, 2004 as compared to net income gain of $10 million in 2003 for the same period. This decline was due in large part to the expenses recorded upon the sale of approximately 85% of our portfolio assts.

We held mortgage assets of approximately $161.3 million as of December 31, 2003.  As of June 30, 2004 mortgage assets were approximately $21.0 million. This reduction was based on a decision to liquidate the majority of our portfolio previously explained in section titled “Three Month Results”.

For the six months ended June 30, 2004, total revenue was approximately $2.8 million while for the same period in 2003 total revenue was $6.6 million. Expenses for the first six months of 2004 were approximately $7.4 million, while expenses for the same period of 2003 were $5.3 million. Approximately $5.3 million of expense the six month period ending June 30, 2004 expenses are related to portfolio sales. Included in the total Mortgage Asset Portfolio Business expense of approximately $7.4 million for the six months ended June 30, 2004, are $5.3 million of valuation adjustment expense related to the sale of bond collateral.

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Liquidity and Capital Resources

General

Our sources of liquidity during the six months ended June 30, 2004 primarily consisted of the following:

•borrowings under our warehouse and other credit facilities;

•revenues generated by our mortgage banking operating activities including interest income, broker fees, loan sale proceeds and hedge proceeds;

•sale of the majority of our Mortgage Asset Portfolio;

•excess interest spread in the Mortgage Asset Portfolio Business, net of repayments to servicers for past principal and interest advances on completed real estate owned dispositions.

Our primary cash requirements included:

•funding our mortgage loan originations;

•hedging losses;

•interest expense under our warehouse facilities;

•operating expenses, including commissions;

•repayment of our borrowings;

•repurchase of stock; and

•maintaining a “restricted cash” account, which includes amounts required to be held by certain warehouse line providers that may not be used in our operations or as equity for other warehouse lines of credit.

As our mortgage banking operations have grown and our mortgage asset portfolio has declined through portfolio sales and borrower payoffs, our cash flow from investment activities has continued to decline in amounts and materiality.

Cash Generated By and Used In Our Operations

During the six months ended June 30, 2004, on a consolidated basis we had net positive cash flow of $6.5 million. The principal factors impacting our positive cash flow are:

•Net increases in our cash investment in loan inventories totaled approximately $4.4 million.  Our warehouse line lending agreements allow us to borrow from 96% to 99% of the lesser of par or market value for each mortgage loan. We pay an additional 1% to 2% of the loan principal amount in fees or yield spread premium to the mortgage brokers. Lastly, a small portion of our loan inventory is funded with equity capital. We typically have cash invested totaling between 2% to 4% of the principal amount of loans held for sale, which is recouped when the loans are purchased by investors. Mortgage loans held for sale increased from approximately $276.8 million at December 31, 2003 to approximately $466.3 million at June 30, 2004. An increase in the amount of loan inventory, either by holding loans for longer periods, or due to increased loan funding volume, will cause cash reserves necessary to carry loan inventories to increase in direct proportion to the inventory held.

•Sale of portfolio assets provided net cash of $24.9 million.

•Stock repurchase of 511,490 shares for $4.5 million.

•Paid short term debt facility of $3.0 million.

•Consolidated cash revenues collected exceeded payments of consolidated cash expenses by approximately $1.3 million.

•We prepaid warehouse line facility fees and workers compensation premiums totaling $1.1 million, paid state taxes totaling $2.7 million (approximately  $2.5 million will be applied against future California corporate income taxes), had capital expenditures that totaled approximately $1.1 million, and paid 2003 accrued bonuses and incentives that totaled approximately $2.8 million.

We anticipate that our future liquidity will be predominantly impacted by our mortgage banking activities. For the remainder of 2004, wherever possible, we are managing staffing levels and utilizing as much of our existing infrastructure to balance our loan production while growing our sales presence in existing and new markets. Our market share growth strategy is designed to generate loan volumes from new customers and increased business with existing customers in order to sustain,

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and potentially increase loan production, despite a continued contraction in the overall loan origination market. We will attempt to increase the proportion of variable costs while controlling fixed costs to minimize total expenses and maximize capacity utilization as we execute our market share growth strategy. For the remainder of 2004, we expect to originate $650 million to $750 million per month of new mortgage loans and fund these originations with equity capital and warehouse facility borrowings. We expect our loan inventories to generally grow in proportion to growth in funding volume, and consequently expect to make additional cash investments in loan inventories.  We also expect to continue to engage in hedging transactions that may require cash investment to maintain or adjust hedged positions. If our funding volumes do not generate sufficient revenues, we may utilize cash to fund operating losses. We intend to use cash reserves, borrowings under the warehouse facilities as well as cash flow generated from the origination and sale of mortgage loans, to fund our operations. We are therefore dependent on significant levels of warehouse financing to help execute our mortgage banking strategy. Furthermore, we must originate minimum levels of loans ($650 million to $750 million) to be profitable. See Business Risk Factors in Item 1. Management believes that our company has sufficient sources of liquidity at June 30, 2004 to meet anticipated business requirements for the foreseeable future.

Short-Term Debt

As of June 30, 2004, short-term debt consists of $454 million of revolving credit lines (warehouse facilities) used to fund our lending activities. As of June 30, 2004, mortgage loans held for sale totaling $466 million were pledged as collateral for the warehouse facilities. We are dependent on our warehouse lending facilities to operate our business.  We must maintain, renew or replace our warehouse lines of credit in order to continue to fund loans.  Our warehouse facilities consist of borrowings of $454 million with four financial institutions. At June 30, 2004, our maximum available borrowings combined, from these four financial institutions is $1.4 billion. These facilities typically advance 96% to 99% of the lesser of par or market value of the loans pledged as collateral. Such financing is currently provided primarily under (i) a 364-day secured mortgage warehousing revolving credit agreement, dated as of November 26, 2001, (the “Bank Credit Agreement”) with JPMorgan/Chase Bank; (ii) secured mortgage warehousing revolving credit agreement, originally dated March 28, 2002, (the “UBS Warburg Agreement”) with UBS Warburg Real Estate Securities Inc.; (iii) secured mortgage warehousing revolving credit agreement, originally dated October 11, 2002, (the “Countrywide Agreement”) with Countrywide Warehouse Lending, Inc.; and (iv) a 364-day secured mortgage warehousing revolving credit agreement, dated as of September 15, 2003, (the “RFC Agreement”) with Residential Funding Corporation. These warehouse facilities are repaid as principal payments on mortgage loans are received, or as the mortgage loans are sold. The agreements governing these facilities contain a number of covenants, including covenants based on tangible net worth, cash flows, net income, and liquidity of our Company. During the second quarter of 2004 certain loan agreement covenants were modified to delay quarterly profitability threshold review until September 30, 2004. As of June 30, 2004, we were in compliance with our warehouse lending agreements. We believe we are in good standing with our warehouse providers and is in the process of renegotiating warehouse lending covenants and increasing warehouse loan limits. Any future reductions or restrictions in our warehouse capacity could reduce the volume of loans that we are able to fund and could therefore reduce our revenues and earnings.

In 2001, we also entered into a $5 million senior subordinated secured revolving loan agreement (Subordinated Loan Agreement). The Subordinated Loan Agreement bore interest at 12% and as of March 31, 2004, there was $3 million in borrowings outstanding. The loan was paid off in April 2004 and the Subordinated Loan Agreement was cancelled. We therefore will have no further access to this borrowing facility.

In April of 2004, we entered into agreements to sell 85% of our mortgage portfolio assets. As a result, at March 31, 2004, we reclassified approximately $90 million of our long-term debt to short-term debt. Net proceeds from the portfolio sales totaled approximately $24.9 million in the second quarter of 2004. We expect to receive an additional $1.7 million prior to December 31, 2004 from the remaining sixty loans held as of June 30, 2004. As of July 31, 2004 forty-three mortgage loans remain unsold.

Long-Term Debt—Non Recourse Mortgage- Backed Notes

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

Rate Lock Commitments to Borrowers and Commitments to Sell Loans

In the ordinary course of business, we make rate lock commitments to borrowers which obligate us to fund mortgages at set interest rates. The values of the underlying loans, and thus our expected gain on the subsequent funding and sale of these loans, may be impacted by subsequent changes in market interest rates. Accordingly, we attempt to protect (or hedge) our pricing margins by utilizing forward sales of TBAs and options on TBAs. The hedges typically increase or decrease in value in correlation to offsetting decreases or increases in the value of the loans. As loans fund, we typically sell or assign our hedges and enter into mandatory loan sale commitments with our correspondent investors.

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The following table summarizes our rate lock commitments and our commitments to sell mortgage-backed securities and mortgage loans (dollars in thousands) (unaudited):

	6/30/04		6/30/03
Commitments to originate loans at set interest rates	$	799,974	$	1,811,795
Forward sales of mortgage-backed securities (TBA and options on TBAs)	815,500		1,626,500
Mandatory commitments to sell mortgage loans held for sale	162,155		220,805

For the purposes of hedging our interest rate exposure on our pipeline, we make various assumptions in order to estimate the rate lock commitments which will not close (fallout ratio). The fallout ratio is applied to the total pipeline to arrive at the net exposure to interest rate changes in the market. The pipeline, after applying the fallout ratio, amounted to $473.4 million and $1,163.2 million at June 30, 2004 and 2003, respectively. Included in our pipeline are uncommitted loans held for sale of $304.1 million and $355.5 million at June 30, 2004 and June 30, 2003 respectively. The rate lock commitments on our pipeline are hedged utilizing forward sales of mortgage-backed securities and options. Some of these commitments may ultimately be denied by our Company or declined by the borrower, and therefore, the commitment amounts do not necessarily represent future cash requirements.

Lease and Long-Term Debt Commitments

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

	Payments Due by Period (dollars in thousands) (unaudited)
Contractual Obligations as of June 30, 2004	Total		Less than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Long-Term Debt	$	18,043	$	9,078	$	6,576	$	2,389	$	0
Operating Leases	11,253		4,352		4,965		1,936		—
Total	$	29,296	$	13,430	$	11,541	$	4,325	$	0

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

Business Risk Factors

Risks Associated with Our Mortgage Banking Business

We Have a Limited Operating History in the Mortgage Origination Industry, Which Makes it Difficult to Evaluate Our Current Business Performance and Future Prospects

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

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

Our Mortgage Banking Business had a net loss of approximately $2.8 million (after income tax benefits) for the six month period ended June 30, 2004. These losses were primarily attributable to a decline in loan funding volumes and revenues and higher overhead expenses as compared to the same period in 2003. We expect to incur additional costs and expenses related to the expansion of our sales force and regional underwriting centers. If this expansion does not result in adequate revenues, our financial performance will suffer. We must generate approximately $650 million to $750 million in sales volume per month, depending on pricing margins achieved, to meet our expense obligations. We are expanding our business operations and increasing our fixed expenses in a contracting market.  Our strategy requires us to capture an increasing percentage of the market in a highly competitive environment which will put pressure on our gross margins.  If we are not able to do this, we would likely experience losses due to our increased level of expenses. In addition, we expect to realize income tax benefits against future profits and taxes, some of the tax benefits may have to be reversed (valuation account established) in the future if significant operating losses occur, or if we determine at a future date that forecasted operating profits may not be sufficient to fully utilize deferred tax assets. See “Overhead Expenses May Not Be Covered by Sufficient Revenues to Sustain Profitable Operations.”

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We May Not Be Able to Effectively Manage the Growth of Our Business

Over the past three years, we have experienced rapid growth. In the beginning of 2001, we had approximately 20 employees. As of June 30, 2004, we had approximately 702 employees. Many of these employees have very limited experience with us and a limited understanding of our systems. Many of our financial, operational and managerial systems were designed for a small business and have only recently been upgraded or replaced to support larger scale operations. If we fail to manage our growth effectively, our expenses could increase, negatively affecting our financial results.

Expanding Our Market Presence and Market Share in the Face of a Contracting Market May Not Be Successful

The origination market was an estimated $3.8 trillion in 2003 due to low interest rates which spurred both strong home sales and refinance demand. In 2004, the origination market is expected to contract to $2.5 trillion. Competitiveness will increase in this shrinking mortgage market, putting pressure on the market competitors to reduce revenues to sustain origination volumes and market share. Wherever possible we are managing staffing levels and utilizing  our existing infrastructure to load balance our loan production while growing our sales presence in existing and new markets. Our expansion is based on increasing variable costs while controlling fixed costs to minimize operating losses and maximizing capacity utilization. There can be no assurance that this strategy will be successful in the face of stiffening competition amid a contracting marketplace.

Competition in the Mortgage Banking Industry and Demand for Mortgages May Hinder Our Ability to Achieve or Sustain Profitable Origination Levels

Our success in the Mortgage Banking Business depends, in large part, on our ability to originate loans in sufficient quantity such that the gain on sales of loans net of hedge costs are in excess of both fixed and variable overhead costs. There can be no assurance that we will be able to originate sufficient levels of mortgages to achieve and sustain profitability. In originating and selling loans, we compete with investment banking firms, savings and loan associations, banks, mortgage bankers and other entities originating residential 1-4 unit mortgages, many of which have greater financial resources than us. We also face competition from companies already established in these markets. In addition to the level of home purchase activity, the origination market is directly tied to the general level of interest rates and refinance activity. The origination market was an estimated $3.8 trillion in 2003, due to strong home sales, low interest rates and strong refinance demand. In 2004 the origination market is expected to contract to $2.5 trillion. Competitiveness will increase in this shrinking mortgage market, putting pressure on the market competitors to reduce revenues to sustain origination volumes and market share. We believe that the variety and the price competitiveness of our loan products and customer service levels will allow us to gain market share over the next several years, even as the overall market for mortgages declines; however, there can be no assurance that we will be able to successfully and profitably compete.

Overhead Expenses May Not Be Covered By Sufficient Revenues To Sustain Profitable Operations

We have made a number of fixed overhead commitments to establish the operational and administrative infrastructure necessary to support our loan origination business. At June 30, 2004, lease commitments for headquarter and regional offices totaled approximately 169,800 square feet. There were 702 employees which include 121 which are paid solely by commissions. The balance of employees are salaried or hourly employees. In order to achieve profitability at this staffing level, our monthly loan sales volume must be approximately $700 to $900 million. By the end of the third quarter of 2004 we will have reduced our staffing level and other fixed expenses to enable profitable levels at the $650 to $750 million monthly sales volume level, but there can be no assurance this can be accomplished. Since our revenues are tied directly to the level of loan production and subsequent sale, it is imperative that we achieve a profitable level of originations, and the level of future profitability from mortgage banking will be in direct correlation to the level of loan origination volume. During the first six months of 2004, interest rates increased, and loan originations decreased to the point of unprofitability for the entire period. Interest rate movements are not easily projected and may adversely affect financial results in the future. There can be no assurances that we will be able to maintain loan origination volumes sufficient to cover our fixed overhead costs, and should we incur significant operating losses, our capital base and cash reserves could be materially adversely impacted.

Mortgage Banking Revenues Can Fluctuate From Period to Period Based on a Number of Factors

Our operating results have and may in the future fluctuate significantly from period to period as a result of a number of factors, including the volume of loan origination, interest rates and the level of unrealized gains/losses in unsold loans, pipeline loans or positions in derivative securities. Accordingly, the consolidated net income of our Company may fluctuate from period to period.

Our Financial Results Fluctuate As a Result of Seasonality and Other Timing Factors, Which Makes It Difficult To Predict Our Future Performance and May Affect the Price of Our Common Stock

Although the refinance portion of our Mortgage Banking Business is not seasonal, our purchase business is generally subject to seasonal trends. During 2003, our refinance business grew to 90% of our activity. In 2004, as we return to more normal markets and purchase and refinance activity become more equal, seasonality will again become a significant factor in our business. Seasonality trends reflect the general pattern of housing sales, which typically peak during the spring

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and summer seasons. Our quarterly operating results have fluctuated in the past and are expected to fluctuate in the future, reflecting the seasonality of the industry.

Further, if the closing of a sale of loans is postponed, the recognition of gain from the sale is also postponed. If such a delay causes us to recognize income in the next quarter, our results of operations for the previous quarter could be significantly depressed. If our results of operations do not meet the expectations of our stockholders and potential stockholders, the price of our common stock may decrease.

Contracting Mortgage Origination Market May Adversely Impact Our Business

According to the Mortgage Bankers Association, 2003 was a record year with $3.8 trillion in mortgage loan originations; however, 2004 is currently projected to be $2.5 trillion. This expected contraction is due to generally higher mortgage interest rates and a decline in the level of loan refinancing. We anticipate higher costs per loan and lower per loan revenue as a direct consequence of the expected market contraction and increased competition. Increased market share in existing markets and planned expansion into new markets may be insufficient to prevent an overall decline in results of operations. The growth of our business may also be adversely impacted due to general market contractions. We are expanding our business operations and increasing expenses in a contracting market.  Our strategy requires us to capture an increasing percentage of the market in a highly competitive environment, which will put pressure on our gross margins.  If we are not able to accomplish this strategy, we would likely experience losses due to our increased level of expenses.

Our Hedging Strategies May Not Be Successful in Mitigating Our Risks Associated With Interest Rate Changes

We use forward sales of mortgage-backed loan securities (TBA) and options on mortgage-backed securities (MBS) which are classified as derivative financial instruments, to provide a level of protection against interest rate risks. When rates change we expect to record a gain or loss on derivatives which would be offset by an inverse change in the value of our rate lock commitments and loans not yet committed for sale. We cannot assure you, however, that our use of derivatives will offset all of our risk related to changes in interest rates. There have been periods, and it is possible that there will be periods in the future, during which we will incur losses after accounting for our derivative financial instruments. The derivative financial instruments we select may not have the desired effect of reducing our interest rate risk. In addition, the nature and timing of hedging transactions may influence the effectiveness of these strategies. If we poorly design strategies or improperly execute transactions we could actually increase our exposure to interest rate risk and potential losses. In addition, hedging strategies involve transaction and other costs. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses.

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

Volatility in Interest Rates May Adversely Affect Our Results of Operations and Our Financial Position

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

The value of the mortgage loans that we originate is at risk due to fluctuations in interest rates during two time periods: (1) the period beginning when we have committed to funding the loan (rate lock commitments) and ending when the loan closes, or funds; and (2) the time period beginning when the loan closes and ending when we commit to sell, or sell the loans to third-party purchasers (uncommitted loans). These rate lock commitments and uncommitted loans held for sale are collectively referred to as our pipeline. To manage the interest rate risk of our pipeline, we continuously project the percentage of the pipeline loans we expect to close. Because projecting a percentage of pipeline loans that will close is especially difficult during periods of volatile interest rates, we cannot assure that our projections will be accurate. On the basis of such projections, we use forward sales of mortgage-backed securities (TBA) and options on MBS, which are classified as derivative instruments. These “hedges” are designed to mitigate the adverse impact interest rate fluctuations may have on the value of the pipeline. Our use of hedges is based in part on our estimates as to the percentage of loans that will close, and therefore we cannot assure you that our use of derivative securities will offset the risk of changes in interest rates.

If interest rates change, the actual percentage of pipeline loans that close may differ from the projected percentage. A sudden significant increase in interest rates can cause a higher percentage of pipeline loans to close than projected. We may not have made forward sales commitments to sell these additional loans and consequently may incur significant losses upon their sale at current market prices, which may not be offset by gains in the value of derivative securities, adversely affecting results of operations. Likewise, if a lower percentage of pipeline loans closes than was projected, due to a sudden decrease in interest rates or otherwise, we have and may in the future adjust our hedge positions or mandatory sales commitments at a significant cost, adversely affecting our results of operations. This risk is greater during times of interest rate volatility.

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We Are Subject to Counterparty Risks on Loan Sale Commitments and Hedging Transactions

In connection with our mortgage loan sales, which involve the sale of mortgage loans and mortgage-backed securities on a forward or other deferred delivery and payment basis, we may enter into forward sales of mortgage-backed securities (TBA) and options on MBS in connection with our hedging activities. We have credit risk exposure to the extent purchasers/sellers are unable to meet the terms of their forward purchase/sale contracts. As is customary in the marketplace, none of the forward payment obligations of any of our counterparties is currently secured or subject to margin requirements. We attempt to limit our credit exposure on forward sales arrangements on mortgage loans and mortgage-backed securities by entering into forward contracts only with institutions that we believe are acceptable credit risks, and which have substantial capital and an established track record in correspondent lending. We further attempt to limit our credit exposure on hedging transactions by dealing with a wide variety of firms. If counterparties do not perform, our results of operations may be adversely affected.

Failure to Renew and Obtain Adequate Financing May Adversely Affect Results Of Operations

We currently have revolving warehouse borrowing facilities in place totaling $1.4 billion. These facilities enable AmNet to fund up to approximately $1.6 billion on a monthly basis. In order to continue our operations, we must maintain, renew or replace warehouse lines of credit. There are a number of financial institutions which specialize in lending to mortgage banking companies and these types of secured borrowings. We expect to renew our current warehouse facilities with JP Morgan/Chase Bank, UBS Warburg Real Estate Securities, Countrywide Warehouse Lending, Inc. and Residential Funding Corporation. Failure to renew facilities would limit our potential to fund loans and may adversely affect our financial results. Among the factors that will affect our ability to renew and expand our warehouse line borrowings are financial market conditions and the value and performance of our Company prior to the time of such financing. There can be no assurance that any such financing can be successfully completed at advantageous rates or at all. Our warehouse credit facilities contain extensive restrictions and covenants that, among other things, require us to satisfy specified financial, asset quality and loan performance tests. If we fail to meet or satisfy any of these covenants, we would be in default under these agreements and our lenders could elect to declare all amounts outstanding under the agreements to be immediately due and payable, enforce their interests against collateral pledged under such agreements and restrict our ability to make additional borrowings. During the second quarter of 2004 certain loan agreement covenants were modified to delay quarterly profitability threshold review until September 30, 2004. There can be no assurance that we will be able to comply with these delayed threshold reviews. These agreements also contain cross-default provisions, so that if a default occurs, under one agreement, the lenders under our other agreements could also declare a default. Any default under our credit facilities could have an adverse effect on our financial results. As of June 30, 2004, we were in compliance with our warehouse lending agreements.

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

•incur additional debt by virtue of having warehouse loan covenants;

•make certain investments or acquisitions;

•repurchase or redeem capital stock;

•engage in mergers or consolidations;

•finance loans with certain attributes;

•reduce liquidity below certain levels; and

•hold loans for longer than established time periods.

These restrictions may interfere with our ability to obtain financing or to engage in other business activities, which may significantly harm our business financial condition, liquidity and results of operations.

We Sell a Substantial Portion of Loans We Originate to Competitors

We have warehouse line facilities with Countrywide. We also sell a portion of our loans to two of our competitors, Countrywide Home Loans, Inc., 62% in the first six months of 2004, and 16% were sold to Wells Fargo for the same time period. If either Countrywide or Wells Fargo changes its correspondent lending strategy or procedures, or stops purchasing our loans on favorable terms, we could be required to find alternate purchasers and/or accept unfavorable terms. We could also be forced to find other sources of warehouse line lending. Any of these results may have an adverse effect on our results of operations.

Dependency on Correspondent Investors, Secondary Markets

Our ability to generate gains on the sale of mortgages is largely dependent upon the continuation of correspondent lending programs offered by large correspondent lenders, as well as our continued eligibility to participate in such programs. Although we are in good standing with a number of large correspondent lenders and are not aware of any proposed discontinuation of, or significant reduction in, the operation of such programs, any such changes could have a material

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adverse effect on our operations. We anticipate that we will continue to remain eligible to participate in such programs, but any significant impairment of such eligibility would materially adversely affect our operations.

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

A large proportion of loans we fund are concentrated in California (26.2% of all loans closed for the six month period ended June 30, 2004). Although we have expanded our operations on the East Coast of the United States, a significant portion of our loan origination volume is likely to be based in California for the foreseeable future. Consequently, our results of operations and financial condition are dependent upon general trends in the California economy and its residential real estate market. Residential real estate market declines may adversely affect the levels of new mortgages in California or the value paid by correspondent lenders for loans in California, potentially adversely affecting our results of operations and financial condition.

Non-saleable or Repurchased Loans May Adversely Impact Results of Operations and Our Financial Position

In connection with the sale of loans to correspondent investors, we make a variety of representations and warranties regarding the loans, including those that are customary in the industry relating to, among other things, compliance with laws, regulations and investor program standards and the accuracy of information on the loan documents and in the loan file. In the event that an investor finds that a loan or group of loans violates our representations, the investor may require us to repurchase the loan or loan group and bear any potential related loss on the disposition of the loans, or provide an indemnification for any losses sustained by the investor on the loans. Additionally, we may originate a loan that does not meet investor underwriting criteria or has some other defect, requiring us to sell the loans at a significant discount. We have hired experienced personnel at all levels and have established significant controls to ensure that all loans are originated to our underwriting standards, and are maintained in compliance with all of the representations made by us in connection with our loan sale agreements. However, there can be no assurances that mistakes will not be made or that certain employees will not deliberately violate our lending policies and, accordingly, we are subject to repurchase risk and losses on unsaleable loans. Typically, with respect to any loan that might be repurchased or unsaleable, we would correct the flaws if possible and re-sell the loan in the market. We have created repurchase reserves to provide for this contingency on our financial statements, but there can be no assurances that loan losses associated with repurchased or unsaleable loans will not adversely impact results of operations or the financial condition of our Company.

The Company is Beginning to Lend to Sub-prime Borrowers which May Adversely Affect Earnings

Beginning in March of 2004, the Company began lending to sub-prime borrowers. Credit risks associated with sub-prime mortgage loans will be greater than those associated with mortgage loans that conform to FNMA and FHLMC guidelines. The principal difference between sub-prime mortgage loans and conforming mortgage loans is that sub-prime mortgage loans typically include one or more of the following: worse credit and income histories of the mortgagors, higher loan-to-value ratios, reduced or alternative documentation required for approval of the mortgagors, different types of properties securing the mortgage loans, higher loan sizes and the mortgagor’s non-owner occupancy status with respect to the mortgaged property. We have added personnel in a centralized sub-prime underwriting and funding center to help mitigate the risks associated with these loans, however there can be no assurance that all sub-prime loans will be able to be sold to investors at a profit. If we are not successful, higher overhead incurred to produce these loans may not be covered by the income derived from sub-prime lending.

Our of Recourse Reserve is Difficult to Estimate Given Our Limited History in the Mortgage Banking Business

We began our Mortgage Banking segment in November of 2001. Mortgage loans we sell to investors provide for repurchase of loans which become delinquent within varying timeframes. Our limited history makes it difficult to assess the amount of recourse reserves which should be provided given these recourse arrangements. Therefore there is no assurance that our recourse reserves are adequate.

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

We originate mortgage loans in many states. We must comply with the laws and regulations, as well as judicial and administrative decisions, of all of these jurisdictions, as well as an extensive body of federal laws and regulations. The volume of new or modified laws and regulations has increased in recent years, and, in addition, individual cities and counties have begun to enact laws that restrict loan origination activities in those cities and counties. The laws and regulations of each of these jurisdictions are different, complex and, in some cases, in direct conflict with each other. As our operations continue to grow, it may be more difficult to comprehensively identify, to accurately interpret and to properly program our technology systems and effectively train our personnel with respect to all of these laws and regulations, thereby potentially increasing our exposure to the risks of noncompliance with these laws and regulations.

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

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•civil and criminal liability;

•loss of approved status;

•demands for indemnification or loan repurchases from purchasers of our loans;

•class action lawsuits;

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

•administrative enforcement actions.

The Increasing Number of State and Local “Anti-predatory Lending” Laws May Restrict Our Ability to Originate or Increase Our Risk of Liability With Respect To Certain Mortgage Loans and Could Increase Our Costs of Doing Business

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

It is against our policy to engage in predatory lending practices, and we have generally avoided originating loans that exceed the APR or “points and fees” thresholds of these laws, rules and regulations, because the companies that buy our loans and/or provide financing for our loans origination operations generally do not want to buy or finance such loans. The continued enactment of these laws, rules and regulations may prevent us from making certain loans and may cause us to reduce the APR or the points and fees on loans that we do make. In addition, the difficulty of managing the risks presented by these laws, rules and regulations may decrease the availability of warehouse financing and the overall demand for loans, making it difficult to fund, sell or securitize any of our loans. If we relax our restrictions on loans subject to these laws, rules and regulations because the companies which buy our loans and/or provide financing for our loan origination operations relax their restrictions, we will be subject to greater risks for actual or perceived non-compliance with such laws, rules and regulations, including demands for indemnification or loan repurchases from our lenders and loan purchasers, class action lawsuits, increased defenses to foreclosure of individual loans in default, individual claims for significant monetary damages and administrative enforcement actions. The growing number of these laws, rules and regulations will likely increase our cost of doing business as we are required to develop systems and procedures to ensure that we do not violate any aspect of these new requirements. Any of the foregoing could materially and adversely affect our business, financial condition, liquidity and results of operations.

An Interruption In or Breach of Our Information Systems May Result In Lost Business

We rely heavily upon communications and information systems to conduct our business. As we implement our growth strategy and increase our volume of loan production, that reliance will increase. Any failure or interruption or breach in security of our information systems or the third-party information systems on which we rely could cause underwriting or other delays and could result in fewer loan applications being received, slower processing of applications and reduced efficiency in loan servicing. We utilize proprietary software for our main loan origination system. This software is not fully documented and we have a limited number of employees who are knowledgeable about this program. We cannot assure you that systems failure or interruptions will not occur, or if they do occur that they will be adequately addressed by us or the third parties on which we rely. The occurrence of any failures or interruptions could significantly harm our business.

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

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

We Must Attract and Retain Qualified Account Executives and Qualified Personnel to Produce Our Desired Level of Revenues

The Company relies on commissioned account executives to generate loan referrals from professional mortgage brokers. These account executives typically have established relationships with broker clients. The Company’s overall loan fundings are in direct proportion to the number of account executives, and as such, sustained loan production and market share growth are dependent on the successful retention and recruitment of the sales force. Similarly, the Company relies on

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the expertise of its employees in other facets of operations, including underwriting, capital markets, risk management, and finance and accounting. Given the dependency on the job market for qualified employees, to continue our growth poses the potential risk that the Company will not be able to attract and retain qualified employees.

Capital Shortages Could Impede the Ability to Execute Our Mortgage Banking Strategy

Our mortgage banking activities require a significant level of cash reserves and capital to support loan inventories and overhead exposure. Additionally, while we utilize warehouse credit facilities to fund our loan origination activity, we must invest cash equity in our loan inventories approximating 1% to 4% of the cost basis of these loans. While we believe our capital base, cash reserves and cash flow from the sale of a majority of our Mortgage Asset Portfolio Business and mortgage banking revenues will be sufficient to enable us to execute our mortgage banking strategy, there can be no assurances that capital shortages will not occur, requiring us to raise additional debt or equity capital or decrease or cease our origination activities.

We Are Subject To Losses Due To Fraudulent Acts On The Part Of Loan Applicants, Employees or Mortgage Brokers

Mortgage brokers who assist loan applicants in obtaining mortgage loans refer all of the mortgage loans originated by us. As such, the loan application, property appraisal, credit report and other supporting documentation are furnished by the mortgage broker and used by our underwriters to make approval or denial decisions. There could also be the potential of collusion between the broker and an employee to produce a fraudulent loan. Our employees usually have little contact with applicants, and rely on the mortgage broker to obtain and furnish all of the documentation supporting the mortgage loan application. Mortgage brokers may make mistakes in completing the documentation for a loan leading to an increased risk of our holding a non-saleable loan or of indemnifying or repurchasing loans from investors.

Further, in rare cases, the mortgage broker may knowingly or unknowingly submit an application wherein multiple parties to the transaction (borrower, appraiser, seller, or title insurer) work in collusion to inflate the property value and/or falsify other documentation in order to obtain a mortgage loan. These types of fraudulent mortgage loans will have a high risk of default, and will likely not be fully recoverable through disposition of the underlying property securing the mortgage loans.

Should material fraud be detected on a mortgage loan prior to sale to an investor, the mortgage loan may have to be sold at a significant discount or may not be saleable. Should material fraud or mistakes in loan documentation be detected after a mortgage loan is sold to a correspondent investor, we may be required to repurchase the loan or indemnify the investor. While the investor and/or we can initiate foreclosure proceedings on any loan deemed to be fraudulently obtained, we could incur significant losses on these fraudulent mortgage loans if principal or interest is not fully recovered through the foreclosure and disposition of the underlying property securing the mortgage loan.

We have established risk management and quality control committees to set policy and manage exposure to credit losses due to fraud, compliance errors or non-compliance with our underwriting standards. Regular quality control audits are done on representative samples of mortgage loans and all mortgage loans submitted by brokers who come under suspicion in the normal course business. Additionally, we have numerous controls and processes to ensure that all of the mortgage loans applications submitted through mortgage brokers are not based on fraudulent or intentionally misrepresented documentation. However, there can be no assurances that the broker and/or borrowers do not submit fraudulent or inaccurate documentation that is not detected by our personnel or by electronic fraud checks utilized by us. Should we originate significant numbers of fraudulent loan or loans based on inaccurate documentation, our results of operations and financial condition could be materially adversely affected.

If We Are Unable to Maintain and Expand Our Network of Independent Brokers, Our Loans Origination Business Will Decrease

All of our mortgage loan originations come from independent brokers. Our brokers are not contractually obligated to do business with us. Many of our brokers have not been in business more than a few years. Further, our competitors also have relationships with our brokers and actively compete with us in our efforts to expand our broker networks. Accordingly, we cannot assure you that we will be successful in maintaining our existing relationships or expanding our broker networks, the failure of which would significantly harm our business, financial condition, liquidity and results of operations.

We May be Subject to Fines or Other Penalties Based Upon the Conduct of Our Independent Brokers

The mortgage brokers from which we obtain loans have legal obligations to which they are subject. While these laws may not explicitly hold the originating lenders responsible for the legal violations of mortgage brokers, increasingly federal and state agencies have sought to impose such assignee liability. Recently, for example, the United States Federal Trade Commission (“FTC”) entered into a settlement agreement with a mortgage lender in which the FTC characterized a broker that had placed all of its loan production with a single lender as the “agent” of the lender, and the FTC imposed a fine on the lender in part because, as “principal,” the lender was legally responsible for the mortgage broker’s unfair and deceptive acts and practices. The United States Justice Department in the past has sought to hold a mortgage lender responsible for the pricing practices of its mortgage brokers, alleging that the mortgage lender was directly responsible for

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the total fees and charges paid by the borrower under the Fair Housing Act even if the lender neither dictated what the mortgage broker could charge nor kept the money for its own account. Accordingly, we may be subject to fines or other penalties based upon the conduct of our independent mortgage brokers.

A Housing and Urban Development Department (“HUD”) Proposed Rule to Reform Real Estate Settlement Procedures (“RESPA”) May Adversely Affect the Way We Conduct Business with Mortgage Brokers

HUD is proposing to improve the manner in which mortgage broker fees are disclosed by requiring that yield spread premiums (“YSP”) (and other mortgage broker compensation) be reported as payments from the lender. The purpose of this would be to have the mortgage broker only receive direct compensation from borrowers and attempt to eliminate disputes regarding improper broker payments. This proposed rule may adversely affect our business by requiring changes in systems and procedures which may cause delays and re-work to meet regulatory requirements.

Risks Associated with Our Mortgage Asset Portfolio Business

In May 2004, we sold the majority of our bond collateral mortgage loans and bond collateral real estate owned. Proceeds from the sale were used to retire $116.0 million of bond debt, leaving $18.0 million of bond debt at June 30, 2004. As such, the Mortgage Asset Portfolio Business is not expected to have a material impact on the Company’s financial statements going forward. The risks associated with our remaining Mortgage Asset Portfolio Business are outlined in our 2003 form 10-K filed with the SEC on March 30, 2004.

The Purchasers of the Portfolios Failed to Purchase all of the Bond Collateral and We Are Now Trying  to Sell the Remainder of  the Assets to Another Purchaser or Attempt to Enforce Remedies under Representations and Warranties Obtained from the Original Seller/Servicers Which May No Longer be Enforceable

In connection with their due diligence, the firms purchasing the majority of the remaining bond collateral rejected approximately $4.5 million of certain loans due to non-compliance with regulatory requirements in place at the time the loans were originated.  We have protections under the representation and warranties provided by the original seller/servicers from which we purchased the loans, and we expect to successfully exercise those remedies. Some of the rejected loans were subsequently sold to other buyers and closed prior to June 30, 2004. Remaining rejected loans are being put out to bid and are expected to be sold prior to December 31, 2004. The cost and losses expected to be incurred from the final disposition of the rejected mortgage loans has been accrued in our financial statements, however there can be no assurances that these provisions will be sufficient.  As of June 30, 2004 we had approximately $1.7 million of these loans which are carried at their estimated realizable value.

However, the protections afforded by the representations and warranties obtained from the original seller/servicer may no longer be enforceable. Certain sellers/servicers may no longer be in existence or the passage of time may have rendered the claim for a breach uncertain. In this event, we would need to re-sell or refinance the collateral and potentially incur cost or losses in the disposition of these assets and potentially utilize cash recourses to carry these assets in the meantime.  Accordingly, while we have received approximately $24.9 million in loan sale proceeds and expect to receive an additional $1.7 million in loan sale proceeds before December 31, 2004; there can be no assurance all of the $1.7 million will be received or significant delays in loan sales will not occur.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A primary market risk facing our Company is interest rate risk, which is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. We attempt to manage this risk in our Mortgage Banking and Mortgage Asset Portfolio Businesses.

Mortgage Banking Business

Interest Rate Risk

Rate lock commitments and mortgage loans held for sale are subject to market price fluctuation until committed for sale. These fluctuations are primarily tied to changes in market interest rates and the relationship of short-term rates to long-term rates. In order to mitigate this risk, a variety of financial derivative instruments (including forward mandatory mortgage security sales (TBA) and options on TBA sales) are utilized to hedge or mitigate market price fluctuations. These instruments are classified as derivative financial instruments on our financial statements. Our hedge positions are continually adjusted based on routine and ongoing quantification of our risk, but hedges may or may not be fully successful in complete risk mitigation. In particular, our capital markets personnel must make estimates of the percentage of rate lock commitments expected to close under different interest rate changes. Losses on the sale of mortgage loans not offset by corresponding gains on hedge positions, or hedging activity not offset by corresponding gains on the sale of mortgages, could adversely impact

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results of operations and our financial position.

Mortgage Asset Portfolio Business

Interest Rate Risk

Our operating results for this business segment will depend in large part on differences between the income earned from our assets (net of credit losses) and our borrowing costs. All but $1.7 million of this business segment’s bond collateral and real estate owned are pledged as collateral for long-term debt (securitizations). In most cases, the income from assets will respond more slowly to interest rate fluctuations than the cost of borrowings, which creates a mismatch between asset yields and borrowing rates.  Consequently, changes in interest rates, particularly short-term interest rates, may influence the Mortgage Asset Portfolio Business net income. Long-term debt interest rates are tied to LIBOR.  Increases in these rates will tend to decrease net income from the Mortgage Asset Portfolio Business.

Other Risks

We have sold approximately 85% of our portfolio and retired related debt. As of June 30, 2004 approximately $1.7 million of mortgage loans were not accepted by buyers of our portfolio sale.  We are currently seeking other buyers for these loans.   If new buyers cannot be located we may have to arrange alternative short-term financing and our costs of carrying these assets could increase significantly. Our estimates of net proceeds and expenses could also be affected by these changes.

Sensitivity Analysis

The methods we have used in our sensitivity analysis have not changed significantly since December 31, 2003. Our mortgage asset portfolio (although diminished in size as a result of asset sales) is subject to interest rate risk.

We have performed various sensitivity analyses that quantify the net financial impact of changes in interest rates on our interest rate-sensitive assets, liabilities and commitments. These analyses presume an instantaneous parallel shift of the yield curve. Various techniques are employed to value the underlying financial instruments, and these techniques rely upon a number of critical assumptions. The scenarios presented in the table below are illustrative. Actual experience may differ materially from the estimated amounts presented for each scenario. To the extent that yield curve shifts are non-parallel, and to the extent that actual variations in significant assumptions differ from those applied for purposes of the valuations, the resultant valuations can also be expected to vary. Such variances may prove material.

					If Interest Rates Were To
	June 30, 2004				Increase			Decrease		Increase			Decrease
	Carrying Amount		Estimated Fair Value		50 Basis Points Estimated Fair Value					100 Basis Points Estimated Fair Value
Interest-earning assets:
Cash and cash equivalents	$	50,944	$	50,944	$	50,944		$	50,944	$	50,944		$	50,944
Mortgage loans held for sale, net, pledged, (lower of cost or market)	466,281		471,347		465,618			475,867		459,672			480,102
Bond collateral and real estate owned, net	19,257		19,641		19,637			19,647		19,635			19,653
Total interest-earning assets	$	536,482	$	541,932	$	536,199		$	546,458	$	530,251		$	550,699
Interest-bearing liabilities:
Short-term debt	$	453,808	$	453,808	$	453,808		$	453,808	$	453,808		$	453,808
Long-term debt, net	18,043		18,043		18,043			18,043		18,043			18,043
Derivative financial instruments	2,101		2,101		(7,367		)	2,687		(12,524		)	8,212
Total interest-bearing liabilities	$	473,952	$	473,952	$	464,484		$	474,538	$	459,327		$	480,063

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

Cash and Cash Equivalents

The carrying amount for cash and cash equivalents approximates fair value because these instruments are demand

39

deposits and money market accounts and do not present unanticipated interest rate or credit concerns.

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

The fair value is estimated based on quoted market prices from institutional investors for similar types of mortgage loans. A portion of mortgage loans held for sale are committed for sale under mandatory sale arrangements and as such are not re-valued for subsequent changes in interest rates.

Bond Collateral, Mortgage Loans and Real Estate Owned, Net

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

Derivatives

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

Short-Term Debt

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

Long-Term Debt

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

ITEM 4.  CONTROLS AND PROCEDURES

(a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

(b) There has been no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS
	The Company filed a lawsuit in 2003 for breach of contract, unfair competition and misappropriation of trade secrets against LoanCity.com and other individuals. On March 10, 2004, the Company was awarded $3.4 million in compensatory and punitive damages. LoanCity.com and other defendants posted a surety bond for approximately $5 million.  If an appeal of the verdict is made by LoanCity.com and the other defendants, the court would require the process to begin by the end of 2004.
ITEM 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS
	Our Purchase of Equity Securities
	Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number of Shares that May Yet Be Purchased Under the Plan or Program
	Month #1 (April 1, 2004 to April 30, 2004)	—	—		—	400,000
	Month #2 (May 1, 2004 to May 31, 2004)	—	—		—	400,000
	Month #3 (June 1, 2004 to June 30, 2004)	511,490 (purchased from 6/4/04 to 6/24/04) (Note 1)	$	8.81	11,490	388,510
	Total	511,490	$	8.81	11,490	388,510
	Note 1) The Company purchased 500,000 shares through a privately negotiated transaction with a single entity.
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES
	Not applicable.
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company distributed its Definitive Proxy Statement, Proxy and Annual Report to Stockholders on or about

July 1, 2004 for its Annual Meeting of Stockholders held August 12, 2004.  At the Company’s Annual Meeting, the stockholders were asked to consider two proposals.

The first proposal considered by the stockholders of the Annual Meeting involved the election of three Class I directors.  The existing Board of Directors selected three nominees, all of whom ran unopposed and each of whom was then serving as a Class I director.  The nominees of the Board, and the voting results with respect thereto, were:

Name	Votes For	Withheld
H. James Brown	6,445,376	826,245
David Nierenberg	7,236,526	35,095
Herbert Tasker	7,104,136	167,485

The following directors’ terms of office continued after the Annual Meeting: Robert A. Gunst, Keith Johnson, Richard T. Pratt, John M. Robbins, Robert T. Barnum, and Mark J. Riedy.

The second proposal considered by the stockholders of the annual meeting involved the approval of the 2004 Equity Incentive Plan (the “2004 Plan”).  The 2004 Plan is intended to replace our 1997 Stock Incentive Plan, 1997 Stock Option Plan and 1997 Outside Directors Plan (collectively the “Prior Plans”) which terminate upon approval of the 2004 Plan by the

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stockholders.

Approval of the 2004 Plan by the stockholders combines previously authorized but unissued stock options of One Hundred Nine Thousand Six Hundred Fifty (109,650) shares with a new authorization of Five Hundred Thousand (500,000) shares.  The voting results as to the second proposal were as follows:

	For	Against	Abstentions	Broker Non-Votes
2004 Plan	3,900,953	408,110	10,007	2,953,151

ITEM 5.  OTHER INFORMATION

None

ITEM 6.  EXHIBITS AND REPORTS ON 8-K

(a)		Exhibits
	*	3.1	Second Articles of Amendment and Restatement of the Registrant
	****	3.1 A	Articles of Amendment (regarding name change)
	**	3.2	Fourth Amended and Restated Bylaws of the Registrant
	***	4.1	Registration Rights Agreement dated February 11, 1997
	**	4.3	First Amended and Restated Rights Agreement between the Company and American Stock Transfer and Trust Company dated as of February 2, 1999 and amended as of March 4, 2004
		10.27	2004 Equity Incentive Plan
		10.28	Stock Repurchase Agreement
		10.29	Supplemental Executive Retirement Plan
		31.1	Section 302 CEO Certification
		31.2	Section 302 CFO Certification
		32.1	Section 906 CEO Certification
		32.2	Section 906 CFO Certification

*	Incorporated by reference to our annual report on Form 10-K for the fiscal year ended December 31, 2002 filed March 31, 2003
**	Incorporated by reference to our annual report on Form 10-K for the fiscal year ended December 31, 2003 filed on March 30, 2004
***	Incorporated by reference to our registration statement on Form S-11 filed September 25, 1997
****	Incorporated by reference to our quarterly report form 10-Q for the fiscal quarter ended March 31, 2004 filed May 17, 2004.

(b)		Reports on Form 8-K – The Company filed or furnished the following reports on form 8-K during the quarter
	Date	Items
	5/13/2004	Item 7 Exhibits (press release furnished)
		Item 12 results of operations and financial condition

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMNET MORTGAGE, INC.
Dated:  August 16, 2004	By:	/s/ Judith A. Berry
			Judith A. Berry,
			Executive Vice President
			Chief Financial Officer

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EX-10.27

Exhibit 10.27

AMNET MORTGAGE, INC.

2004 EQUITY INCENTIVE PLAN

TABLE OF CONTENTS

1.	Establishment, Purpose and Term of Plan
	1.1	Establishment
	1.2	Purpose
	1.3	Term of Plan
2.	Definitions and Construction
	2.1	Definitions
	2.2	Construction
3.	Administration
	3.1	Administration by the Committee
	3.2	Authority of Officers
	3.3	Administration with Respect to Insiders
	3.4	Committee Complying with Section 162(m)
	3.5	Powers of the Committee
	3.6	No Repricing
	3.7	Indemnification
4.	Shares Subject to Plan
	4.1	Maximum Number of Shares Issuable
	4.2	Adjustments for Changes in Capital Structure
5.	Eligibility and Award Limitations
	5.1	Persons Eligible for Awards
	5.2	Participation
	5.3	Incentive Stock Option Limitations
	5.4	Award Limits
6.	Terms and Conditions of Options
	6.1	Exercise Price
	6.2	Exercisability and Term of Options
	6.3	Payment of Exercise Price
	6.4	Effect of Termination of Service
	6.5	Transferability of Options
7.	Terms and Conditions of Stock Appreciation Rights
	7.1	Types of SARs Authorized
	7.2	Exercise Price
	7.3	Exercisability and Term of SARs
	7.4	Exercise of SARs
	7.5	Deemed Exercise of SARs
	7.6	Effect of Termination of Service
	7.7	Nontransferability of SARs
8.	Terms and Conditions of Restricted Stock Awards
	8.1	Types of Restricted Stock Awards Authorized
	8.2	Purchase Price
	8.3	Purchase Period
	8.4	Payment of Purchase Price
	8.5	Vesting and Restrictions on Transfer
	8.6	Voting Rights; Dividends and Distributions

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	8.7	Effect of Termination of Service
	8.8	Nontransferability of Restricted Stock Award Rights
9.	Terms and Conditions of Performance Awards
	9.1	Types of Performance Awards Authorized
	9.2	Initial Value of Performance Shares and Performance Units
	9.3	Establishment of Performance Period, Performance Goals and Performance Award Formula
	9.4	Measurement of Performance Goals
	9.5	Settlement of Performance Awards
	9.6	Voting Rights; Dividend Equivalent Rights and Distributions
	9.7	Effect of Termination of Service
	9.8	Nontransferability of Performance Awards
10.	Terms and Conditions of Restricted Stock Unit Awards
	10.1	Grant of Restricted Stock Unit Awards
	10.2	Purchase Price
	10.3	Vesting
	10.4	Voting Rights, Dividend Equivalent Rights and Distributions
	10.5	Effect of Termination of Service
	10.6	Settlement of Restricted Stock Unit Awards
	10.7	Nontransferability of Restricted Stock Unit Awards
11.	Deferred Stock Units
	11.1	Establishment of Deferred Stock Unit Program
	11.2	Terms and Conditions of Deferred Stock Units
12.	Standard Forms of Award Agreement
	12.1	Award Agreements
	12.2	Authority to Vary Terms
13.	Change in Control
	13.1	Definitions
	13.2	Effect of Change in Control on Options and SARs
	13.3	Effect of Change in Control on Restricted Stock Awards
	13.4	Effect of Change in Control on Performance Awards
	13.5	Effect of Change in Control on Restricted Stock Unit Awards
	13.6	Effect of Change in Control on Deferred Stock Units
14.	Compliance with Securities Law
15.	Tax Withholding
	15.1	Tax Withholding in General
	15.2	Withholding in Shares
16.	Amendment or Termination of Plan
17.	Miscellaneous Provisions
	17.1	Repurchase Rights
	17.2	Provision of Information
	17.3	Rights as Employee, Consultant or Director
	17.4	Rights as a Stockholder
	17.5	Fractional Shares
	17.6	Severability
	17.7	Beneficiary Designation
	17.8	Unfunded Obligation

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AMNET MORTGAGE, INC.

2004 EQUITY INCENTIVE PLAN

1.Establishment, Purpose and Term of Plan.

1.1Establishment.  The AmNet Mortgage, Inc. 2004 Equity Incentive Plan (the “Plan”) is hereby established effective as of                    , 2004, the date of its approval by the stockholders of the Company (the “Effective Date”).

1.2Purpose.  The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. The Plan seeks to achieve this purpose by providing for Awards in the form of Options, Indexed Options, Stock Appreciation Rights, Restricted Stock Purchase Rights, Restricted Stock Bonuses, Performance Shares, Performance Units, Restricted Stock Units and Deferred Stock Units. After the Effective Date, the Company shall terminate, and no longer issue any awards from under, the Company’s 1997 Stock Incentive Plan, 1997 Stock Option Plan and 1997 Outside Director Stock Option Plan.

1.3Term of Plan.  The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Awards granted under the Plan have lapsed. However, all Incentive Stock Options shall be granted, if at all, within ten (10) years from the Effective Date.

2.Definitions and Construction.

2.1Definitions.  Whenever used herein, the following terms shall have their respective meanings set forth below:

(a)“Affiliate” means (i) an entity, other than a Parent Corporation, that directly, or indirectly through one or more intermediary entities, controls the Company or (ii) an entity, other than a Subsidiary Corporation, that is controlled by the Company directly, or indirectly through one or more intermediary entities. For this purpose, the term “control” (including the term “controlled by”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the relevant entity, whether through the ownership of voting securities, by contract or otherwise; or shall have such other meaning assigned such term for the purposes of registration on Form S-8 under the Securities Act.

(b)“Award” means any Option, Indexed Option, SAR, Restricted Stock Purchase Right, Restricted Stock Bonus, Performance Share, Performance Unit, Restricted Stock Unit or Deferred Stock Unit granted under the Plan.

(c)“Award Agreement” means a written agreement between the Company and a Participant setting forth the terms, conditions and restrictions of the Award granted to the Participant. An Award Agreement may be an “Option Agreement,” an “Indexed Option Agreement,” a “SAR Agreement,” a “Restricted Stock Purchase Agreement,” a “Restricted Stock Bonus Agreement,” a “Performance Share Agreement,” a “Performance Unit Agreement,” a “Restricted Stock Unit Agreement,” or a “Deferred Stock Unit Agreement.”

(d)“Board” means the Board of Directors of the Company.

(e)“Code” means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.

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(f)“Committee” means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. If no committee of the Board has been appointed to administer the Plan, the Board shall exercise all of the powers of the Committee granted herein, and, in any event, the Board may in its discretion exercise any or all of such powers.

(g)“Company” means AmNet Mortgage, Inc., a Maryland corporation, or any successor corporation thereto.

(h)“Consultant” means a person engaged to provide consulting or advisory services (other than as an Employee or a member of the Board) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on a Form S-8 Registration Statement under the Securities Act.

(i)“Deferred Stock Unit” means a bookkeeping entry representing a right granted to a Participant pursuant to Section 11 of the Plan to receive a share of Stock on a date determined in accordance with the provisions of Section 11 and the Participant’s Award Agreement.

(j)“Director” means a member of the Board.

(k)“Disability” means the permanent and total disability of the Participant, within the meaning of Section 22(e)(3) of the Code.

(l)“Dividend Equivalent” means a credit, made at the discretion of the Committee or as otherwise provided by the Plan, to the account of a Participant in an amount equal to the cash dividends paid on one share of Stock for each share of Stock represented by an Award held by such Participant.

(m)“Employee” means any person treated as an employee (including an Officer or a Director who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a Director’s fee shall be sufficient to constitute employment for purposes of the Plan. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the effective date of such individual’s employment or termination of employment, as the case may be. For purposes of an individual’s rights, if any, under the Plan as of the time of the Company’s determination, all such determinations by the Company shall be final, binding and conclusive, notwithstanding that the Company or any court of law or governmental agency subsequently makes a contrary determination.

(n)“Exchange Act” means the Securities Exchange Act of 1934, as amended.

(o)“Fair Market Value” means, as of any date, the value of a share of Stock or other property as determined by the Committee, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following:

(i)If, on such date, the Stock is listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, The Nasdaq SmallCap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the

B-2

relevant date, or such other appropriate day as shall be determined by the Committee, in its discretion.

(ii)If, on such date, the Stock is not listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be as determined by the Committee in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse.

(p)“Incentive Stock Option” means an Option intended to be (as set forth in the Award Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code.

(q)“Indexed Option” means an Option with an exercise price which either increases by a fixed percentage over time or changes by reference to a published index, as determined by the Committee and set forth in the Option Agreement.

(r)“Insider” means an Officer, a Director or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act.

(s)“Nonstatutory Stock Option” means an Option not intended to be (as set forth in the Award Agreement) an incentive stock option within the meaning of Section 422(b) of the Code.

(t)“Officer” means any person designated by the Board as an officer of the Company.

(u)“Option” means the right to purchase Stock at a stated price for a specified period of time granted to a Participant pursuant to Section 6 of the Plan. An Option may be either an Incentive Stock Option, a Nonstatutory Stock Option or an Indexed Option.

(v)“Parent Corporation” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

(w)“Participant” means any eligible person who has been granted one or more Awards.

(x)“Participating Company” means the Company or any Parent Corporation, Subsidiary Corporation or Affiliate.

(y)“Participating Company Group” means, at any point in time, all entities collectively which are then Participating Companies.

(z)“Performance Award” means an Award of Performance Shares or Performance Units.

(aa)“Performance Award Formula” means, for any Performance Award, a formula or table established by the Committee pursuant to Section 9.3 of the Plan which provides the basis for computing the value of a Performance Award at one or more threshold levels of attainment of the applicable Performance Goal(s) measured as of the end of the applicable Performance Period.

(bb)“Performance Goal” means a performance goal established by the Committee pursuant to Section 9.3 of the Plan.

(cc)“Performance Period” means a period established by the Committee pursuant to Section 9.3 of the Plan at the end of which one or more Performance Goals are to be measured.

(dd)“Performance Share” means a bookkeeping entry representing a right granted to a Participant pursuant to Section 9 of the Plan to receive a payment equal to the value of a Performance Share, as determined by the Committee, based on performance.

(ee)“Performance Unit” means a bookkeeping entry representing a right granted to a Participant pursuant to Section 9 of the Plan to receive a payment equal to the value of a Performance Unit, as determined by the Committee, based upon performance.

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(ff)“Prior Plan Options” means any option or other award granted by the Company which is subject to vesting or repurchase by the Company, including specifically, all such options and awards granted pursuant to the Company’s 1997 Stock Incentive Plan, 1997 Stock Option Plan and 1997 Outside Director Stock Option Plan which is outstanding on or after the Effective Date.

(gg)“Restricted Stock Award” means an Award of a Restricted Stock Bonus or a Restricted Stock Purchase Right.

(hh)“Restricted Stock Bonus” means Stock granted to a Participant pursuant to Section 8 of the Plan.

(ii)“Restricted Stock Purchase Right” means a right to purchase Stock granted to a Participant pursuant to Section 8 of the Plan.

(jj)“Restricted Stock Unit” or “Stock Unit” means a bookkeeping entry representing a right granted to a Participant pursuant to Section 10 of the Plan to receive a share of Stock on a date determined in accordance with the provisions of Section 10 and the Participant’s Award Agreement.

(kk)“Restriction Period” means the period established in accordance with Section 8.5 of the Plan during which shares subject to a Restricted Stock Award are subject to Vesting Conditions.

(ll)“Rule 16b-3” means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation.

(mm)“SAR” or “Stock Appreciation Right” means a bookkeeping entry representing, for each share of Stock subject to such SAR, a right granted to a Participant pursuant to Section 7 of the Plan to receive payment of an amount equal to the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the SAR over the exercise price.

(nn)“Section 162(m)” means Section 162(m) of the Code.

(oo)“Securities Act” means the Securities Act of 1933, as amended.

(pp)“Service” means a Participant’s employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. A Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders such Service or a change in the Participating Company for which the Participant renders such Service, provided that there is no interruption or termination of the Participant’s Service. Furthermore, a Participant’s Service shall not be deemed to have terminated if the Participant takes any military leave, sick leave, or other bona fide leave of absence approved by the Company. However, if any such leave taken by a Participant exceeds ninety (90) days, then on the one hundred eighty-first (181st) day following the commencement of such leave any Incentive Stock Option held by the Participant shall cease to be treated as an Incentive Stock Option and instead shall be treated thereafter as a Nonstatutory Stock Option, unless the Participant’s right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Participant’s Award Agreement. A Participant’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the entity for which the Participant performs Service ceasing to be a Participating Company. In addition, a Participant’s Service shall be deemed to have terminated if, in the Committee’s sole discretion, the Participant’s employment relationship is transferred to an Affiliate or Subsidiary Corporation and the Participant is offered a replacement equity award from the Affiliate or Subsidiary Corporation. Subject to the foregoing, the Company, in its discretion, shall determine whether the Participant’s Service has terminated and the effective date of such termination.

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(qq)“Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2 of the Plan.

(rr)“Subsidiary Corporation” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

(ss)“Ten Percent Owner” means a Participant who, at the time an Incentive Stock Option is granted to the Participant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company (other than an Affiliate) within the meaning of Section 422(b)(6) of the Code.

(tt)“Vesting Conditions” mean those conditions established in accordance with Section 8.5 or Section 10.3 of the Plan prior to the satisfaction of which shares subject to a Restricted Stock Award or Restricted Stock Unit Award, respectively, remain subject to forfeiture or a repurchase option in favor of the Company upon the Participant’s termination of Service.

2.2Construction.  Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

3.Administration.

3.1Administration by the Committee.  The Plan shall be administered by the Committee. All questions of interpretation of the Plan or of any Award shall be determined by the Committee, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Award.

3.2Authority of Officers.  Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the Officer has apparent authority with respect to such matter, right, obligation, determination or election. The Board may, in its discretion, delegate to a committee comprised of one or more Officers the authority to grant one or more Awards, without further approval of the Board or the Committee, to any Employee, other than a person who, at the time of such grant, is an Insider; provided, however, that (a) such Awards shall not be granted for shares in excess of the maximum aggregate number of shares of Stock authorized for issuance pursuant to Section 4.1, (b) the exercise price per share of each Option shall be not less than the Fair Market Value per share of the Stock on the effective date of grant (or, if the Stock has not traded on such date, on the last day preceding the effective date of grant on which the Stock was traded), and (iii) each such Award shall be subject to the terms and conditions of the appropriate standard form of Award Agreement approved by the Board or the Committee and shall conform to the provisions of the Plan and such other guidelines as shall be established from time to time by the Board or the Committee.

3.3Administration with Respect to Insiders.  With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3.

3.4Committee Complying with Section 162(m).  If the Company is a “publicly held corporation” within the meaning of Section 162(m), the Board may establish a Committee of “outside directors” within the meaning of Section 162(m) to approve the grant of any Award which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m).

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3.5Powers of the Committee.  In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Committee shall have the full and final power and authority, in its discretion:

(a)to determine the persons to whom, and the time or times at which, Awards shall be granted and the number of shares of Stock or units to be subject to each Award;

(b)to determine the type of Award granted and to designate Options as Incentive Stock Options, Nonstatutory Stock Options or Indexed Options;

(c)to determine the Fair Market Value of shares of Stock or other property;

(d)to determine the terms, conditions and restrictions applicable to each Award (which need not be identical) and any shares acquired pursuant thereto, including, without limitation, (i) the exercise or purchase price of shares purchased pursuant to any Award, (ii) the method of payment for shares purchased pursuant to any Award, (iii) the method for satisfaction of any tax withholding obligation arising in connection with Award, including by the withholding or delivery of shares of Stock, (iv) the timing, terms and conditions of the exercisability or vesting of any Award or any shares acquired pursuant thereto, (v) the Performance Award Formula and Performance Goals applicable to any Award and the extent to which such Performance Goals have been attained, (vi) the time of the expiration of any Award, (vii) the effect of the Participant’s termination of Service on any of the foregoing, and (viii) all other terms, conditions and restrictions applicable to any Award or shares acquired pursuant thereto not inconsistent with the terms of the Plan;

(e)to determine whether an Award of Restricted Stock Units, SARs, Performance Shares or Performance Units will be settled in shares of Stock, cash, or in any combination thereof;

(f)to approve one or more forms of Award Agreement;

(g)to amend, modify, extend, cancel or renew any Award or to waive any restrictions or conditions applicable to any Award or any shares acquired pursuant thereto;

(h)to accelerate, continue, extend or defer the exercisability or vesting of any Award or any shares acquired pursuant thereto, including with respect to the period following a Participant’s termination of Service;

(i)to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt sub-plans or supplements to, or alternative versions of, the Plan, including, without limitation, as the Committee deems necessary or desirable to comply with the laws or regulations of or to accommodate the tax policy, accounting principles or custom of, foreign jurisdictions whose citizens may be granted Awards;

(j)to authorize, in conjunction with any applicable Company deferred compensation plan, that the receipt of cash or Stock subject to any Award under this Plan, may be deferred under the terms and conditions of such Company deferred compensation plan; and

(k)to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award Agreement and to make all other determinations and take such other actions with respect to the Plan or any Award as the Committee may deem advisable to the extent not inconsistent with the provisions of the Plan or applicable law.

3.6No Repricing.  Without the affirmative vote of holders of a majority of the shares of Stock cast in person or by proxy at a meeting of the stockholders of the Company at which a quorum representing a majority of all outstanding shares of Stock is present or represented by proxy, the Board shall not approve a program providing for the amendment of outstanding Options and/or SARs to reduce the exercise price thereof. This paragraph shall not be construed to apply to “issuing or

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assuming a stock option in a transaction to which section 424(a) applies,” within the meaning of Section 424 of the Code.

3.7Indemnification.  In addition to such other rights of indemnification as they may have as members of the Board or the Committee or as officers or employees of the Participating Company Group, members of the Board or the Committee and any officers or employees of the Participating Company Group to whom authority to act for the Board, the Committee or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same.

4.Shares Subject to Plan.

4.1Maximum Number of Shares Issuable.  Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be granted under the Plan shall be 2,441,867, reduced at any time by the number of shares subject to the Prior Plan Options (which as of the Effective Date equaled approximately 1,827,217). Such shares shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. If any outstanding Award, including any Prior Plan Options, for any reason expires or is terminated or canceled without having been exercised or settled in full, or if shares of Stock acquired pursuant to an Award subject to forfeiture or repurchase, including any Prior Plan Options, are forfeited or repurchased by the Company, the shares of Stock allocable to the terminated portion of such Award, including any Prior Plan Options, or such forfeited or repurchased shares of Stock shall again be available for grant under the Plan. Shares of Stock shall not be deemed to have been granted pursuant to the Plan (a) with respect to any portion of an Award that is settled in cash or (b) to the extent such shares are withheld in satisfaction of tax withholding obligations pursuant to Section 15.2. Upon payment in shares of Stock pursuant to the exercise of a SAR, the number of shares available for grant under the Plan shall be reduced only by the number of shares actually issued in such payment. If the exercise price of an Option is paid by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Participant, the number of shares available for grant under the Plan shall be reduced by the net number of shares for which the Option is exercised.

4.2Adjustments for Changes in Capital Structure.  Subject to any required action by the stockholders of the Company, in the event of any change in the Stock effected without receipt of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the stockholders of the Company in a form other than Stock (excepting normal cash dividends) that has a material effect on the Fair Market Value of shares of Stock, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Awards, and in the exercise or purchase price per share under any outstanding Award in order to prevent dilution or enlargement of Participants’ rights under the Plan. For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as “effected without receipt of consideration by the Company.” Any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded down to the nearest whole number, and in no event may the exercise or purchase price under any Award be decreased to an amount less than the par value, if any, of the stock subject to such Award. The adjustments determined by the Committee pursuant to this Section 4.2 shall be final, binding and conclusive.

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5.Eligibility and Award Limitations.

5.1Persons Eligible for Awards.  Awards may be granted only to Employees, Consultants and Directors. For purposes of the foregoing sentence, “Employees,” “Consultants” and “Directors” shall include prospective Employees, prospective Consultants and prospective Directors to whom Awards are granted in connection with written offers of an employment or other service relationship with the Participating Company Group; provided, however, that no Stock subject to any such Award shall vest, become exercisable or be issued prior to the date on which such person commences Service.

5.2Participation.  Awards are granted solely at the discretion of the Committee. Eligible persons may be granted more than one (1) Award. However, eligibility in accordance with this Section shall not entitle any person to be granted an Award, or, having been granted an Award, to be granted an additional Award.

5.3Incentive Stock Option Limitations.

(a)Persons Eligible.  An Incentive Stock Option may be granted only to a person who, on the effective date of grant, is an Employee of the Company, a Parent Corporation or a Subsidiary Corporation (each being an “ISO-Qualifying Corporation”). Any person who is not an Employee of an ISO-Qualifying Corporation on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee of an ISO-Qualifying Corporation shall be deemed granted effective on the date such person commences Service with an ISO-Qualifying Corporation, with an exercise price determined as of such date in accordance with Section 6.1.

(b)Fair Market Value Limitation.  To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by a Participant for the first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand dollars ($100,000), the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section, the Participant may designate which portion of such Option the Participant is exercising. In the absence of such designation, the Participant shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Upon exercise, shares issued pursuant to each such portion shall be separately identified.

5.4Award Limits.

(i)Options and SARs.  Subject to adjustment as provided in Section 4.2, no Employee shall be granted within any fiscal year of the Company one or more Options or Freestanding SARs which in the aggregate are for more than Three Hundred Thousand (300,000) shares of Stock, provided, however, that the Company may make an additional one-time grant to any newly-hired Employee of an Option and/or SAR for the purchase of up to an additional One Hundred and Fifty Thousand (150,000) shares of Stock. An Option which is canceled (or a Freestanding SAR as to which the exercise price is reduced to reflect a reduction in the Fair Market Value of the Stock) in the same fiscal year of the Company in which it was granted shall continue to be counted against such limit for such fiscal year.

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(ii)Restricted Stock Awards and Restricted Stock Units.  Subject to adjustment as provided in Section 4.2, no Employee shall be granted within any fiscal year of the Company one or more Restricted Stock Awards or Restricted Stock Units, subject to Vesting Conditions based on the attainment of Performance Goals, for more than One Hundred and Fifty Thousand (150,000) shares of Stock, provided, however, that the Company may make an additional one-time grant to any newly-hired Employee of a Restricted Stock Award or Restricted Stock Units of up to an additional Seventy-Five Thousand (75,000) shares of Stock.

(iii)Performance Awards.  Subject to adjustment as provided in Section 4.2, no Employee shall be granted (A) Performance Shares which could result in such Employee receiving more than One Hundred and Fifty Thousand (150,000) shares of Stock for each full fiscal year of the Company contained in the Performance Period for such Award, or (B) Performance Units which could result in such Employee receiving more than Two Million Five Hundred Thousand ($2,500,000) for each full fiscal year of the Company contained in the Performance Period for such Award. No Participant may be granted more than one Performance Award for the same Performance Period.

6.Terms and Conditions of Options.

Options shall be evidenced by Award Agreements specifying the number of shares of Stock covered thereby, in such form as the Committee shall from time to time establish. No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement. Award Agreements evidencing Options may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

6.1Exercise Price.  The exercise price for each Option shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) no Incentive Stock Option granted to a Ten Percent Owner shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (c) notwithstanding anything to the contrary in this Section 6.1, in the case of an Indexed Option, the Committee shall determine the exercise price of such Indexed Option and the terms and conditions that affect, if any, any adjustments to the exercise price of such Indexed Option. Notwithstanding the foregoing, an Option may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code.

6.2Exercisability and Term of Options.  Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Award Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service. Subject to the foregoing, unless otherwise specified by the Committee in the grant of an Option, any Option granted hereunder shall terminate ten (10) years after the effective date of grant of the Option, unless earlier terminated in accordance with its provisions.

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6.3Payment of Exercise Price.

(a)Forms of Consideration Authorized.  Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check or in cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Participant having a Fair Market Value not less than the exercise price, (iii) by delivery of a properly executed notice of exercise together with irrevocable instructions to a broker providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a “Cashless Exercise”), (iv) by such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (v) by any combination thereof. The Committee may at any time or from time to time grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration.

(b)Limitations on Forms of Consideration.

(i)Tender of Stock.  Notwithstanding the foregoing, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock to the extent such tender or attestation would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. Unless otherwise provided by the Committee, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Participant for more than six (6) months (and not used for another Option exercise by attestation during such period) or were not acquired, directly or indirectly, from the Company.

(ii)Cashless Exercise.  The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise, including with respect to one or more Participants specified by the Company notwithstanding that such program or procedures may be available to other Participants.

6.4Effect of Termination of Service.  An Option shall be exercisable after a Participant’s termination of Service to such extent and during such period as determined by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Option.

6.5Transferability of Options.  During the lifetime of the Participant, an Option shall be exercisable only by the Participant or the Participant’s guardian or legal representative. Prior to the issuance of shares of Stock upon the exercise of an Option, the Option shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Option, a Nonstatutory Stock Option shall be assignable or transferable subject to the applicable limitations, if any, described in the General Instructions to Form S-8 Registration Statement under the Securities Act. Notwithstanding any of the foregoing, the Board may permit further transferability of any Option, on a general or specific basis, and may impose conditions and limitations on any permitted transferability.

7.Terms and Conditions of Stock Appreciation Rights.

Stock Appreciation Rights shall be evidenced by Award Agreements specifying the number of shares of Stock subject to the Award, in such form as the Committee shall from time to time establish. No SAR or purported SAR shall be a valid and binding obligation of the Company unless evidenced by

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a fully executed Award Agreement. Award Agreements evidencing SARs may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

7.1Types of SARs Authorized.  SARs may be granted in tandem with all or any portion of a related Option (a “Tandem SAR”) or may be granted independently of any Option (a “Freestanding SAR”). A Tandem SAR may be granted either concurrently with the grant of the related Option or at any time thereafter prior to the complete exercise, termination, expiration or cancellation of such related Option.

7.2Exercise Price.  The exercise price for each SAR shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share subject to a Tandem SAR shall be the exercise price per share under the related Option and (b) the exercise price per share subject to a Freestanding SAR shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the SAR.

7.3Exercisability and Term of SARs.

(a)Tandem SARs.  Tandem SARs shall be exercisable only at the time and to the extent, and only to the extent, that the related Option is exercisable, subject to such provisions as the Committee may specify where the Tandem SAR is granted with respect to less than the full number of shares of Stock subject to the related Option. The Committee may, in its discretion, provide in any Award Agreement evidencing a Tandem SAR that such SAR may not be exercised without the advance approval of the Company and, if such approval is not given, then the Option shall nevertheless remain exercisable in accordance with its terms. A Tandem SAR shall terminate and cease to be exercisable no later than the date on which the related Option expires or is terminated or canceled. Upon the exercise of a Tandem SAR with respect to some or all of the shares subject to such SAR, the related Option shall be canceled automatically as to the number of shares with respect to which the Tandem SAR was exercised. Upon the exercise of an Option related to a Tandem SAR as to some or all of the shares subject to such Option, the related Tandem SAR shall be canceled automatically as to the number of shares with respect to which the related Option was exercised.

(b)Freestanding SARs.  Freestanding SARs shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Award Agreement evidencing such SAR; provided, however, that no Freestanding SAR shall be exercisable after the expiration of ten (10) years after the effective date of grant of such SAR.

7.4Exercise of SARs.  Upon the exercise (or deemed exercise pursuant to Section 7.5) of a SAR, the Participant (or the Participant’s legal representative or other person who acquired the right to exercise the SAR by reason of the Participant’s death) shall be entitled to receive payment of an amount for each share with respect to which the SAR is exercised equal to the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the SAR over the exercise price. Payment of such amount shall be made in cash, shares of Stock, or any combination thereof as determined by the Committee. Unless otherwise provided in the Award Agreement evidencing such SAR, payment shall be made in a lump sum as soon as practicable following the date of exercise of the SAR. The Award Agreement evidencing any SAR may provide for deferred payment in a lump sum or in installments. When payment is to be made in shares of Stock, the number of shares to be issued shall be determined on the basis of the Fair Market Value of a share of Stock on the date of exercise of the SAR. For purposes of Section 7, a SAR shall be deemed exercised on the date on which the Company receives notice of exercise from the Participant.

7.5Deemed Exercise of SARs.  If, on the date on which a SAR would otherwise terminate or expire, the SAR by its terms remains exercisable immediately prior to such termination or expiration

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and, if so exercised, would result in a payment to the holder of such SAR, then any portion of such SAR which has not previously been exercised shall automatically be deemed to be exercised as of such date with respect to such portion.

7.6Effect of Termination of Service.  Subject to earlier termination of the SAR as otherwise provided herein a SAR shall be exercisable after a Participant’s termination of Service to such extent and during such period as determined by the Committee, in its discretion, and set forth in the Award Agreement evidencing such SAR and thereafter shall terminate.

7.7Nontransferability of SARs.  During the lifetime of the Participant, a SAR shall be exercisable only by the Participant or the Participant’s guardian or legal representative. Prior to the exercise of a SAR, the SAR shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. Notwithstanding any of the foregoing, the Board may permit further transferability of any SAR, on a general or specific basis, and may impose conditions and limitations on any permitted transferability.

8.Terms and Conditions of Restricted Stock Awards.

Restricted Stock Awards shall be evidenced by Award Agreements specifying whether the Award is a Restricted Stock Bonus or a Restricted Stock Purchase Right and the number of shares of Stock subject to the Award, in such form as the Committee shall from time to time establish. No Restricted Stock Award or purported Restricted Stock Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement. Award Agreements evidencing Restricted Stock Awards may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

8.1Types of Restricted Stock Awards Authorized.  Restricted Stock Awards may be in the form of either a Restricted Stock Bonus or a Restricted Stock Purchase Right. Restricted Stock Awards may be granted upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of one or more Performance Goals described in Section 9.4. If either the grant of a Restricted Stock Award or the lapsing of the Restriction Period is to be contingent upon the attainment of one or more Performance Goals, the Committee shall follow procedures substantially equivalent to those set forth in Sections 9.3 through 9.5(a).

8.2Purchase Price.  The purchase price for shares of Stock issuable under each Restricted Stock Purchase Right shall be established by the Committee in its discretion. No monetary payment (other than applicable tax withholding) shall be required as a condition of receiving shares of Stock pursuant to a Restricted Stock Bonus, the consideration for which shall be services actually rendered to a Participating Company or for its benefit. Notwithstanding the foregoing, the Participant shall furnish consideration in the form of cash or past services rendered to a Participating Company or for its benefit having a value not less than the par value of the shares of Stock subject to such Restricted Stock Award.

8.3Purchase Period.  A Restricted Stock Purchase Right shall be exercisable within a period established by the Committee, which shall in no event exceed thirty (30) days from the effective date of the grant of the Restricted Stock Purchase Right; provided, however, that no Restricted Stock Purchase Right granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service.

8.4Payment of Purchase Price.  Except as otherwise provided below, payment of the purchase price for the number of shares of Stock being purchased pursuant to any Restricted Stock Purchase Right shall be made (a) in cash, by check, or in cash equivalent, (b) by such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (iii) by

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any combination thereof. The Committee may at any time or from time to time grant Restricted Stock Purchase Rights which do not permit all of the foregoing forms of consideration to be used in payment of the purchase price or which otherwise restrict one or more forms of consideration. Restricted Stock Bonuses shall be issued in consideration for past services actually rendered to a Participating Company or for its benefit.

8.5Vesting and Restrictions on Transfer.  Shares issued pursuant to any Restricted Stock Award may or may not be made subject to Vesting Conditions based upon the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 9.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award. During any Restriction Period in which shares acquired pursuant to a Restricted Stock Award remain subject to Vesting Conditions, such shares may not be sold, exchanged, transferred, pledged, assigned or otherwise disposed of other than pursuant to an Ownership Change Event, as defined in Section 13.1, or as provided in Section 8.8. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.

8.6Voting Rights; Dividends and Distributions.  Except as provided in this Section, Section 8.5 and any Award Agreement, during the Restriction Period applicable to shares subject to a Restricted Stock Award, the Participant shall have all of the rights of a stockholder of the Company holding shares of Stock, including the right to vote such shares and to receive all dividends and other distributions paid with respect to such shares. However, in the event of a dividend or distribution paid in shares of Stock or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, then any and all new, substituted or additional securities or other property (other than normal cash dividends) to which the Participant is entitled by reason of the Participant’s Restricted Stock Award shall be immediately subject to the same Vesting Conditions as the shares subject to the Restricted Stock Award with respect to which such dividends or distributions were paid or adjustments were made.

8.7Effect of Termination of Service.  Unless otherwise provided by the Committee in the grant of a Restricted Stock Award and set forth in the Award Agreement, if a Participant’s Service terminates for any reason, whether voluntary or involuntary (including the Participant’s death or Disability), then (a) the Company shall have the option to repurchase for the purchase price paid by the Participant any shares acquired by the Participant pursuant to a Restricted Stock Purchase Right which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service and (b) the Participant shall forfeit to the Company any shares acquired by the Participant pursuant to a Restricted Stock Bonus which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company.

8.8Nontransferability of Restricted Stock Award Rights.  Prior to the issuance of shares of Stock pursuant to a Restricted Stock Award, rights to acquire such shares shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or the laws of descent and distribution. All rights with respect to a Restricted Stock Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

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9.Terms and Conditions of Performance Awards.

Performance Awards shall be evidenced by Award Agreements in such form as the Committee shall from time to time establish. No Performance Award or purported Performance Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement. Award Agreements evidencing Performance Awards may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

9.1Types of Performance Awards Authorized.  Performance Awards may be in the form of either Performance Shares or Performance Units. Each Award Agreement evidencing a Performance Award shall specify the number of Performance Shares or Performance Units subject thereto, the Performance Award Formula, the Performance Goal(s) and Performance Period applicable to the Award, and the other terms, conditions and restrictions of the Award.

9.2Initial Value of Performance Shares and Performance Units.  Unless otherwise provided by the Committee in granting a Performance Award, each Performance Share shall have an initial value equal to the Fair Market Value of one (1) share of Stock, subject to adjustment as provided in Section 4.2, on the effective date of grant of the Performance Share, and each Performance Unit shall have an initial value of one hundred dollars ($100). The final value payable to the Participant in settlement of a Performance Award determined on the basis of the applicable Performance Award Formula will depend on the extent to which Performance Goals established by the Committee are attained within the applicable Performance Period established by the Committee.

9.3Establishment of Performance Period, Performance Goals and Performance Award Formula.  In granting each Performance Award, the Committee shall establish in writing the applicable Performance Period, Performance Award Formula and one or more Performance Goals which, when measured at the end of the Performance Period, shall determine on the basis of the Performance Award Formula the final value of the Performance Award to be paid to the Participant. Unless otherwise permitted in compliance with the requirements under Section 162(m) with respect to “performance-based compensation,” the Committee shall establish the Performance Goal(s) and Performance Award Formula applicable to each Performance Award no later than the earlier of (a) the date ninety (90) days after the commencement of the applicable Performance Period or (b) the date on which 25% of the Performance Period has elapsed, and, in any event, at a time when the outcome of the Performance Goals remains substantially uncertain. Once established, the Performance Goals and Performance Award Formula shall not be changed during the Performance Period. The Company shall notify each Participant granted a Performance Award of the terms of such Award, including the Performance Period, Performance Goal(s) and Performance Award Formula.

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9.4Measurement of Performance Goals.  Performance Goals shall be established by the Committee on the basis of targets to be attained (“Performance Targets”) with respect to one or more measures of business or financial performance (each, a “Performance Measure”), subject to the following:

(a)Performance Measures.  Performance Measures shall have the same meanings as used in the Company’s financial statements, or, if such terms are not used in the Company’s financial statements, they shall have the meaning applied pursuant to generally accepted accounting principles, or as used generally in the Company’s industry. Performance Measures shall be calculated with respect to the Company and each Subsidiary Corporation consolidated therewith for financial reporting purposes or such division or other business unit as may be selected by the Committee. For purposes of the Plan, the Performance Measures applicable to a Performance Award shall be calculated in accordance with generally accepted accounting principles, but prior to the accrual or payment of any Performance Award for the same Performance Period and excluding the effect (whether positive or negative) of any change in accounting standards or any extraordinary, unusual or nonrecurring item, as determined by the Committee, occurring after the establishment of the Performance Goals applicable to the Performance Award. Performance Measures may be one or more of the following, or a combination of the any of the following, as determined by the Committee:

(i)revenue;

(ii)gross margin;

(iii)operating margin;

(iv)operating income;

(v)pre-tax profit;

(vi)earnings before interest, taxes and depreciation;

(vii)net income;

(viii)cash flow;

(ix)expenses;

(x)the market price of the Stock;

(xi)earnings per share;

(xii)return on stockholder equity;

(xiii)return on capital;

(xiv)return on net assets;

(xv)economic value added;

(xvi)number of customers;

(xvii)market share;

(xviii)return on investment

(xix)profit after tax

(xx)product approval

(xxi)volume and/or origination;

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(xxii)strategic benchmarks; and

(xxiii)customer satisfaction.

(b)Performance Targets.  Performance Targets may include a minimum, maximum, target level and intermediate levels of performance, with the final value of a Performance Award determined under the applicable Performance Award Formula by the level attained during the applicable Performance Period. A Performance Target may be stated as an absolute value or as a value determined relative to a standard selected by the Committee.

9.5Settlement of Performance Awards.

(a)Determination of Final Value.  As soon as practicable following the completion of the Performance Period applicable to a Performance Award, the Committee shall certify in writing the extent to which the applicable Performance Goals have been attained and the resulting final value of the Award earned by the Participant and to be paid upon its settlement in accordance with the applicable Performance Award Formula.

(b)Discretionary Adjustment of Award Formula.  In its discretion, the Committee may, either at the time it grants a Performance Award or at any time thereafter, provide for the positive or negative adjustment of the Performance Award Formula applicable to a Performance Award granted to any Participant who is not a “covered employee” within the meaning of Section 162(m) (a “Covered Employee”) to reflect such Participant’s individual performance in his or her position with the Company or such other factors as the Committee may determine. If permitted under a Covered Employee’s Award Agreement, the Committee shall have the discretion, on the basis of such criteria as may be established by the Committee, to reduce some or all of the value of the Performance Award that would otherwise be paid to the Covered Employee upon its settlement notwithstanding the attainment of any Performance Goal and the resulting value of the Performance Award determined in accordance with the Performance Award Formula. No such reduction may result in an increase in the amount payable upon settlement of another Participant’s Performance Award.

(c)Effect of Leaves of Absence.  Unless otherwise required by law, payment of the final value, if any, of a Performance Award held by a Participant who has taken in excess of thirty (30) days in leaves of absence during a Performance Period shall be prorated on the basis of the number of days of the Participant’s Service during the Performance Period during which the Participant was not on a leave of absence.

(d)Notice to Participants.  As soon as practicable following the Committee’s determination and certification in accordance with Sections 9.5(a) and (b), the Company shall notify each Participant of the determination of the Committee.

(e)Payment in Settlement of Performance Awards.  As soon as practicable following the Committee’s determination and certification in accordance with Sections 9.5(a) and (b), payment shall be made to each eligible Participant (or such Participant’s legal representative or other person who acquired the right to receive such payment by reason of the Participant’s death) of the final value of the Participant’s Performance Award. Payment of such amount shall be made in cash, shares of Stock, or a combination thereof as determined by the Committee. Unless otherwise provided in the Award Agreement evidencing a Performance Award, payment shall be made in a lump sum. An Award Agreement may provide for deferred payment in a lump sum or in installments. If any payment is to be made on a deferred basis, the Committee may, but shall not be obligated to, provide for the payment during the deferral period of Dividend Equivalents or interest.

(f)Provisions Applicable to Payment in Shares.  If payment is to be made in shares of Stock, the number of such shares shall be determined by dividing the final value of the Performance

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Award by the value of a share of Stock determined by the method specified in the Award Agreement. Such methods may include, without limitation, the closing market price on a specified date (such as the settlement date) or an average of market prices over a series of trading days. Shares of Stock issued in payment of any Performance Award may be fully vested and freely transferable shares or may be shares of Stock subject to Vesting Conditions as provided in Section 8.5. Any shares subject to Vesting Conditions shall be evidenced by an appropriate Award Agreement and shall be subject to the provisions of Sections 8.5 through 8.8 above.

9.6Voting Rights; Dividend Equivalent Rights and Distributions.  Participants shall have no voting rights with respect to shares of Stock represented by Performance Share Awards until the date of the issuance of such shares, if any (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Performance Share Award that the Participant shall be entitled to receive Dividend Equivalents with respect to the payment of cash dividends on Stock having a record date prior to the date on which the Performance Shares are settled or forfeited. Such Dividend Equivalents, if any, shall be credited to the Participant in the form of additional whole Performance Shares as of the date of payment of such cash dividends on Stock. The number of additional Performance Shares (rounded to the nearest whole number) to be so credited shall be determined by dividing (a) the amount of cash dividends paid on such date with respect to the number of shares of Stock represented by the Performance Shares previously credited to the Participant by (b) the Fair Market Value per share of Stock on such date. Dividend Equivalents may be paid currently or may be accumulated and paid to the extent that Performance Shares become nonforfeitable, as determined by the Committee. Settlement of Dividend Equivalents may be made in cash, shares of Stock, or a combination thereof as determined by the Committee, and may be paid on the same basis as settlement of the related Performance Share as provided in Section 9.5. Dividend Equivalents shall not be paid with respect to Performance Units. In the event of a dividend or distribution paid in shares of Stock or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, appropriate adjustments shall be made in the Participant’s Performance Share Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than normal cash dividends) to which the Participant would entitled by reason of the shares of Stock issuable upon settlement of the Performance Share Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Performance Goals as are applicable to the Award.

9.7Effect of Termination of Service.  The effect of a Participant’s termination of Service on the Performance Award shall be determined by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Performance Award.

9.8Nontransferability of Performance Awards.  Prior to settlement in accordance with the provisions of the Plan, no Performance Award shall be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to a Performance Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

10.Terms and Conditions of Restricted Stock Unit Awards.

Restricted Stock Unit Awards shall be evidenced by Award Agreements specifying the number of Restricted Stock Units subject to the Award, in such form as the Committee shall from time to time establish. No Restricted Stock Unit Award or purported Restricted Stock Unit Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement. Award

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Agreements evidencing Restricted Stock Units may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

10.1Grant of Restricted Stock Unit Awards.  Restricted Stock Unit Awards may be granted upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of one or more Performance Goals described in Section 9.4. If either the grant of a Restricted Stock Unit Award or the Vesting Conditions with respect to such Award is to be contingent upon the attainment of one or more Performance Goals, the Committee shall follow procedures substantially equivalent to those set forth in Sections 9.3 through 9.5(a).

10.2Purchase Price.  No monetary payment (other than applicable tax withholding, if any) shall be required as a condition of receiving a Restricted Stock Unit Award, the consideration for which shall be services actually rendered to a Participating Company or for its benefit.

10.3Vesting.  Restricted Stock Units may or may not be made subject to Vesting Conditions based upon the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 9.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award.

10.4Voting Rights, Dividend Equivalent Rights and Distributions.  Participants shall have no voting rights with respect to shares of Stock represented by Restricted Stock Units until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Restricted Stock Unit Award that the Participant shall be entitled to receive Dividend Equivalents with respect to the payment of cash dividends on Stock having a record date prior to date on which Restricted Stock Units held by such Participant are settled. Such Dividend Equivalents, if any, shall be paid by crediting the Participant with additional whole Restricted Stock Units as of the date of payment of such cash dividends on Stock. The number of additional Restricted Stock Units (rounded to the nearest whole number) to be so credited shall be determined by dividing (a) the amount of cash dividends paid on such date with respect to the number of shares of Stock represented by the Restricted Stock Units previously credited to the Participant by (b) the Fair Market Value per share of Stock on such date. Such additional Restricted Stock Units shall be subject to the same terms and conditions and shall be settled in the same manner and at the same time (or as soon thereafter as practicable) as the Restricted Stock Units originally subject to the Restricted Stock Unit Award. In the event of a dividend or distribution paid in shares of Stock or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, appropriate adjustments shall be made in the Participant’s Restricted Stock Unit Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than normal cash dividends) to which the Participant would entitled by reason of the shares of Stock issuable upon settlement of the Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Vesting Conditions as are applicable to the Award.

10.5Effect of Termination of Service.  Unless otherwise provided by the Committee in the grant of a Restricted Stock Unit Award and set forth in the Award Agreement, if a Participant’s Service terminates for any reason, whether voluntary or involuntary (including the Participant’s death or Disability), then the Participant shall forfeit to the Company any Restricted Stock Units pursuant to the Award which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service.

10.6Settlement of Restricted Stock Unit Awards.  The Company shall issue to a Participant on the date on which Restricted Stock Units subject to the Participant’s Restricted Stock Unit Award vest or on such other date determined by the Committee, in its discretion, and set forth in the Award Agreement one (1) share of Stock (and/or any other new, substituted or additional securities or other

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property pursuant to an adjustment described in Section 10.4) for each Restricted Stock Unit then becoming vested or otherwise to be settled on such date, subject to the withholding of applicable taxes. Notwithstanding the foregoing, if permitted by the Committee and set forth in the Award Agreement, the Participant may elect in accordance with terms specified in the Award Agreement to defer receipt of all or any portion of the shares of Stock or other property otherwise issuable to the Participant pursuant to this Section.

10.7Nontransferability of Restricted Stock Unit Awards.  Prior to the issuance of shares of Stock in settlement of a Restricted Stock Unit Award, the Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to a Restricted Stock Unit Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

11.Deferred Stock Units.

11.1Establishment of Deferred Stock Unit Program.  The Committee, in its discretion and upon such terms and conditions as it may determine, may establish one or more programs pursuant to the Plan under which:

(a)Participants designated by the Committee who are Insiders or otherwise among a select group of highly compensated Employees may irrevocably elect, prior to a date specified by the Committee, to reduce such Participant’s compensation otherwise payable in cash (subject to any minimum or maximum reductions imposed by the Committee) and to be granted automatically at such time or times as specified by the Committee one or more Awards of Deferred Stock Units with respect to such numbers of shares of Stock as determined in accordance with the rules of the program established by the Committee and having such other terms and conditions as established by the Committee.

(b)Participants designated by the Committee who are Insiders or otherwise among a select group of highly compensated Employees may irrevocably elect, prior to a date specified by the Committee, to be granted automatically an Award of Deferred Stock Units with respect to such number of shares of Stock and upon such other terms and conditions as established by the Committee in lieu of:

(i)shares of Stock otherwise issuable to such Participant upon the exercise of an Option;

(ii)cash or shares of Stock otherwise issuable to such Participant upon the exercise of a SAR; or

(iii)cash or shares of Stock otherwise issuable to such Participant upon the settlement of a Performance Award.

11.2Terms and Conditions of Deferred Stock Units.  Deferred Stock Units granted pursuant to this Section 11 shall be evidenced by Award Agreements in such form as the Committee shall from time to time establish. No such Deferred Stock Unit or purported Deferred Stock Unit shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement. Award Agreements evidencing Deferred Stock Units may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

(a)Vesting Conditions.  Deferred Stock Units shall not be subject to any vesting conditions.

(b)Terms and Conditions of Deferred Stock Units.

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(i)Voting Rights; Dividend Equivalent Rights and Distributions.  Participants shall have no voting rights with respect to shares of Stock represented by Deferred Stock Units until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, a Participant shall be entitled to receive Dividend Equivalents with respect to the payment of cash dividends on Stock having a record date prior to date on which Deferred Stock Units held by such Participant are settled. Such Dividend Equivalents shall be paid by crediting the Participant with additional whole and/or fractional Deferred Stock Units as of the date of payment of such cash dividends on Stock. The method of determining the number of additional Deferred Stock Units to be so credited shall be specified by the Committee and set forth in the Award Agreement. Such additional Deferred Stock Units shall be subject to the same terms and conditions and shall be settled in the same manner and at the same time (or as soon thereafter as practicable) as the Deferred Stock Units originally subject to the Deferred Stock Unit Award. In the event of a dividend or distribution paid in shares of Stock or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, appropriate adjustments shall be made in the Participant’s Deferred Stock Unit Award so that it represent the right to receive upon settlement any and all new, substituted or additional securities or other property (other than normal cash dividends) to which the Participant would entitled by reason of the shares of Stock issuable upon settlement of the Award.

(ii)Settlement of Deferred Stock Unit Awards.  A Participant electing to receive an Award of Deferred Stock Units pursuant to this Section 11, shall specify at the time of such election a settlement date with respect to such Award. The Company shall issue to the Participant as soon as practicable following the earlier of the settlement date elected by the Participant or the date of termination of the Participant’s Service, a number of whole shares of Stock equal to the number of whole Deferred Stock Units subject to the Deferred Stock Unit Award. Such shares of Stock shall be fully vested, and the Participant shall not be required to pay any additional consideration (other than applicable tax withholding) to acquire such shares. Any fractional Deferred Stock Unit subject to the Deferred Stock Unit Award shall be settled by the Company by payment in cash of an amount equal to the Fair Market Value as of the payment date of such fractional share.

(iii)Nontransferability of Deferred Stock Unit Awards.  Prior to their settlement in accordance with the provision of the Plan, no Deferred Stock Unit Award shall be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to a Deferred Stock Unit Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

12.Standard Forms of Award Agreement.

12.1Award Agreements.  Each Award shall comply with and be subject to the terms and conditions set forth in the appropriate form of Award Agreement approved by the Committee and as amended from time to time. Any Award Agreement may consist of an appropriate form of Notice of Grant and a form of Agreement incorporated therein by reference, or such other form or forms as the Committee may approve from time to time.

12.2Authority to Vary Terms.  The Committee shall have the authority from time to time to vary the terms of any standard form of Award Agreement either in connection with the grant or amendment of an individual Award or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Award Agreement are not inconsistent with the terms of the Plan.

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13.Change in Control.

13.1Definitions.

(a)An “Ownership Change Event” shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange or transfer to one or more subsidiaries of the Company); or (iv) a liquidation or dissolution of the Company.

(b)A “Change in Control” shall mean an Ownership Change Event or series of related Ownership Change Events (collectively, a “Transaction”) in which the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company’s voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting securities of the Company or, in the case of an Ownership Change Event described in Section 13.1(a)(iii), the entity to which the assets of the Company were transferred (the “Transferee”), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities which own the Company or the Transferee, as the case may be, either directly or through one or more subsidiary corporations or other business entities. The Committee shall have the right to determine whether multiple sales or exchanges of the voting securities of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive.

13.2Effect of Change in Control on Options and SARs.

(a)Accelerated Vesting.  Notwithstanding any other provision of the Plan to the contrary, the Committee, in its sole discretion, may provide in any Award Agreement or, in the event of a Change in Control, may take such actions as it deems appropriate to provide for the acceleration of the exercisability and vesting in connection with such Change in Control of any or all outstanding Options and SARs and shares acquired upon the exercise of such Options and SARs upon such conditions and to such extent as the Committee shall determine.

(b)Assumption or Substitution.  In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent corporation thereof, as the case may be (the “Acquiring Corporation”), may, without the consent of the Participant, either assume the Company’s rights and obligations under outstanding Options and SARs or substitute for outstanding Options and SARs substantially equivalent options and stock appreciation rights for the Acquiring Corporation’s stock. In the event that the Acquiring Corporation elects not to assume or substitute for outstanding Options and SARs in connection with a Change in Control, or if the Acquiring Corporation is not a “publicly held corporation” within the meaning of Section 162(m), the exercisability and vesting of each such outstanding Option, SAR and any shares acquired upon the exercise thereof held by a Participant whose Service has not terminated prior to such date shall be accelerated, effective as of the date ten (10) days prior to the date of the Change in Control. The exercise or vesting of any Option, SAR and any shares acquired upon the exercise thereof that was permissible solely by reason of this Section 13.2 and the provisions of such applicable Award Agreement shall be conditioned upon the consummation of the Change in Control. Any Options and SARs which are neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding

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effective as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired upon exercise of an Option or SAR prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all applicable provisions of the applicable Award Agreement evidencing such Option or SAR except as otherwise provided in such applicable Award Agreement. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the outstanding Options and SARs immediately prior to an Ownership Change Event described in Section 13.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the outstanding Options and SARs shall not terminate unless the Committee otherwise provides in its discretion.

(c)Cash-Out.  The Committee may, in its sole discretion and without the consent of any Participant, determine that, upon the occurrence of a Change in Control, each or any Option or SAR outstanding immediately prior to the Change in Control shall be canceled in exchange for a payment with respect to each vested share of Stock subject to such canceled Option or SAR in (i) cash, (ii) stock of the Company or of a corporation or other business entity a party to the Change in Control, or (iii) other property which, in any such case, shall be in an amount having a Fair Market Value equal to the excess of the Fair Market Value of the consideration to be paid per share of Stock in the Change in Control over the exercise price per share under such Option or SAR (the “Spread”). In the event such determination is made by the Committee, the Spread (reduced by applicable withholding taxes, if any) shall be paid to Participants in respect of their canceled Options and SARs as soon as practicable following the date of the Change in Control.

13.3Effect of Change in Control on Restricted Stock Awards.  The Committee may, in its discretion, provide in any Award Agreement evidencing a Restricted Stock Award that, in the event of a Change in Control, the lapsing of the Restriction Period applicable to the shares subject to the Restricted Stock Award held by a Participant whose Service has not terminated prior to the Change in Control shall be accelerated effective immediately prior to the consummation of the Change in Control to such extent as specified in such Award Agreement. Any acceleration of the lapsing of the Restriction Period that was permissible solely by reason of this Section 13.3 and the provisions of such Award Agreement shall be conditioned upon the consummation of the Change in Control.

13.4Effect of Change in Control on Performance Awards.  The Committee may, in its discretion, provide in any Award Agreement evidencing a Performance Award that, in the event of a Change in Control, the Performance Award held by a Participant whose Service has not terminated prior to the Change in Control shall become payable effective as of the date of the Change in Control to such extent as specified in such Award Agreement.

13.5Effect of Change in Control on Restricted Stock Unit Awards.  The Committee may, in its discretion, provide in any Award Agreement evidencing a Restricted Stock Unit Award that, in the event of a Change in Control, the Restricted Stock Unit Award held by a Participant whose Service has not terminated prior to such date shall be settled effective as of the date of the Change in Control to such extent as specified in such Award Agreement.

13.6Effect of Change in Control on Deferred Stock Units.  The Committee may, in its discretion, provide in any Award Agreement evidencing a Deferred Stock Unit Award that, in the event of a Change in Control, the Deferred Stock Units pursuant to such Award shall be settled effective as of the date of the Change in Control to such extent as specified in such Award Agreement.

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14.Compliance with Securities Law.

The grant of Awards and the issuance of shares of Stock pursuant to any Award shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities and the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Award may be exercised or shares issued pursuant to an Award unless (a) a registration statement under the Securities Act shall at the time of such exercise or issuance be in effect with respect to the shares issuable pursuant to the Award or (b) in the opinion of legal counsel to the Company, the shares issuable pursuant to the Award may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to issuance of any Stock, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

15.Tax Withholding.

15.1Tax Withholding in General.  The Company shall have the right to deduct from any and all payments made under the Plan, or to require the Participant, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise of an Option, to make adequate provision for, the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to an Award or the shares acquired pursuant thereto. The Company shall have no obligation to deliver shares of Stock, to release shares of Stock from an escrow established pursuant to an Award Agreement, or to make any payment in cash under the Plan until the Participating Company Group’s tax withholding obligations have been satisfied by the Participant.

15.2Withholding in Shares.  The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable to a Participant upon the exercise or settlement of an Award, or to accept from the Participant the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the tax withholding obligations of the Participating Company Group. The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates.

16.Amendment or Termination of Plan.

The Committee may amend, suspend or terminate the Plan at any time. However, without the approval of the Company’s stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, (c) no Option and/or SAR repricing as described in Section 3.6, (d) no amendment to permit the granting of Options (other than Indexed Options) with exercise prices less than Fair Market Value on the date of grant, and (e) no other amendment of the Plan that would require approval of the Company’s stockholders under any applicable law, regulation or rule. No amendment, suspension or termination of the Plan shall affect any then outstanding Award unless expressly provided by the Committee. In any event, no amendment, suspension or termination of the Plan may adversely affect any then outstanding Award without the consent of the Participant unless necessary to comply with any applicable law, regulation or rule.

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17.Miscellaneous Provisions.

17.1Repurchase Rights.  Shares issued under the Plan may be subject to one or more repurchase options, or other conditions and restrictions as determined by the Committee in its discretion at the time the Award is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.

17.2Provision of Information.  Each Participant shall be given access to information concerning the Company equivalent to that information generally made available to the Company’s common stockholders.

17.3Rights as Employee, Consultant or Director.  No person, even though eligible pursuant to Section 5, shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant. Nothing in the Plan or any Award granted under the Plan shall confer on any Participant a right to remain an Employee, Consultant or Director or interfere with or limit in any way any right of a Participating Company to terminate the Participant’s Service at any time. To the extent that an Employee of a Participating Company other than the Company receives an Award under the Plan, that Award shall in no event be understood or interpreted to mean that the Company is the Employee’s employer or that the Employee has an employment relationship with the Company.

17.4Rights as a Stockholder.  A Participant shall have no rights as a stockholder with respect to any shares covered by an Award until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such shares are issued, except as provided in Section 4.2 or another provision of the Plan.

17.5Fractional Shares.  The Company shall not be required to issue fractional shares upon the exercise or settlement of any Award.

17.6Severability.  If any one or more of the provisions (or any part thereof) of this Plan or of any Award Agreement issued hereunder, shall be held to be invalid, illegal or unenforceable in any respect, such provision shall be modified so as to make it valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions (or any part thereof) of the Plan or of any Award Agreement shall not in any way be affected or impaired thereby. The Company may, without the consent of any Participant, and in a manner determined necessary solely in the discretion of the Company, amend the Plan and any outstanding Award Agreement as the Company deems necessary to ensure the Plan and all Awards remain valid, legal or enforceable in all respects.

17.7Beneficiary Designation.  Subject to local laws and procedures, each Participant may file with the Company a written designation of a beneficiary who is to receive any benefit under the Plan to which the Participant is entitled in the event of such Participant’s death before he or she receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. If a married Participant designates a beneficiary other than the Participant’s spouse, the effectiveness of such designation may be subject to the consent of the Participant’s spouse. If a Participant dies without an effective designation of a beneficiary who is living at the time of the Participant’s death, the Company will pay any remaining unpaid benefits to the Participant’s legal representative.

B-24

17.8Unfunded Obligation.  Participants shall have the status of general unsecured creditors of the Company. Any amounts payable to Participants pursuant to the Plan shall be unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974. No Participating Company shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Participant account shall not create or constitute a trust or fiduciary relationship between the Committee or any Participating Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or the Participant’s creditors in any assets of any Participating Company. The Participants shall have no claim against any Participating Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to the Plan.

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EX-10.28

Exhibit 10.28

HOME ASSET MANAGEMENT CORP.
11100 Santa Monica Blvd., Suite 2000
Los Angeles, CA 90025

STOCK REPURCHASE AGREEMENT

June 24, 2004

Mr. John M. Robbins
Chief Executive Officer

AmNet Mortgage, Inc.

10421 Wateridge Circle, Suite 250

San Diego, CA 92121

Re:  Repurchase of 500,000 shares of AmNet common stock

Dear John:

This Stock Repurchase Agreement (“Agreement”) is made and entered into as of the 24th day of June, 2004, by and among AmNet Mortgage, Inc. (“Buyer” or the “Company”), a Maryland Corporation and Home Asset Management Corp., a Delaware Corporation (“Seller”).

WHEREAS, Seller desires to sell the Shares (as defined herein) on the terms and subject to the conditions contained in this Agreement; and

WHEREAS, Buyer has been authorized by its Board of Directors and desires to purchase the Shares (as defined herein) on the terms and subject to the conditions contained in this Agreement.

NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows:

1.  Seller shall sell, transfer, convey, assign and deliver to Buyer, and Buyer shall acquire from Seller, 500,000 shares of common stock, $0.01 par value per share, of the Company owned by Seller (the “Shares”).

2.  The purchase price to be paid by Buyer to Seller shall be Four Million Four Hundred Thousand Dollars ($4,400,000) by wire transfer of immediately available funds based upon the Company’s intra-day stock trading price of $8.80 per share on June 22, 2004.

3.  Ownership of the Shares. (i) Seller is and immediately prior to the Closing will be, the true, lawful owner and record holder of the Shares, and will have the right to sell and transfer to Buyer good and marketable title to such Shares, free and clear of any claim, liability, lien, pledge, mortgage, security interest, restriction or encumbrance (collectively, “Encumbrances”) of any kind; and (ii) the delivery to Buyer of the instruments of transfer of ownership contemplated by this Agreement will vest good and marketable title to the Shares in Buyer, free and clear of all Encumbrances of any kind or nature whatsoever.  Seller, or its affiliates, acquired the Shares from the Company in a non public offering more than three years before the date of this Agreement.

The wire instructions are as follows:

Bank of America

Private Bank - Los Angeles,#4957

555 South Flower Street, 49th Floor

Los Angeles, CA 90071

ABA #: 121000358

June 24, 2004

Stock Repurchase Agreement

Account Name: Home Asset Management Co.

Account #: 49575-00809

Please indicate your acknowledgement of and agreement to this Agreement by executing a copy of this Agreement in the space indicated below.

Sincerely,

Home Asset Management Corp.
By:	/s/ John C. Rocchio
	John C. Rocchio
	President

ACCEPTED AND AGREED TO ON                        , 2004.

Home Asset Management Corp.
By:	/s/ John C. Rocchio
	John C. Rocchio
	President

TCW/Crescent Mezzanine Partners, L.P.
TCW/Crescent Mezzanine Trust
TCW/Crescent Mezzanine Investment Partners, L.P.
By:	TCW/Crescent Mezzanine, L.L.C.
Its:	Investment Manager

By:	/s/ John C. Rocchio
	John C. Rocchio
	Managing Director

AmNet Mortgage, Inc.
By:	/s/ John Robbins
Name:		John Robbins
Its:		Chairman

EX-10.29

Exhibit 10.29

AMNET MORTGAGE, INC.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Effective January 1, 2003

TABLE OF CONTENTS

ARTICLE I  DEFINITIONS
	1.1	“Account(s)”
	1.2	“Benchmark Fund”
	1.3	“Beneficiary”
	1.4	“Benefit(s)”
	1.5	“Board of Directors” or “Board”
	1.6	“Change in Control”
	1.7	“Code”
	1.8	“Committee”
	1.9	“Company”
	1.10	“Compensation”
	1.11	“Disability”
	1.12	“Discretionary Company Credit”
	1.13	“Distribution Date”
	1.14	“Effective Date”
	1.15	“Election”
	1.16	“Eligible Individual”
	1.17	“Employer”
	1.18	“In-Service Distribution Date”
	1.19	“Interest”
	1.20	“Interest Rate”
	1.21	“Ownership Change Event”
	1.22	“Participant”
	1.23	“Plan”
	1.24	“Plan Year”
	1.25	“Service”
	1.26	“Trust”
	1.27	“Trust Agreement”
	1.28	“Trustee”
	1.29	“Year of Service”
ARTICLE II  ELIGIBILITY
	2.1	Eligibility.
	2.2	Commencement of Participation.
	2.3	Cessation of Participation.
	2.4	Cessation of Eligibility.
ARTICLE III  DEFERRALS AND CONTRIBUTIONS
	3.1	Discretionary Company Credits.
	3.2	Calculation of Discretionary Company Credits.
	3.3	No Withdrawal.

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ARTICLE IV  VESTING
	4.1	Vesting of Participants’ Accounts.
	4.2	Vesting Upon Plan Termination.
ARTICLE V  ACCOUNTS
	5.1	Accounts.
	5.2	Interest Credited to Accounts at Least Monthly.
	5.3	Determination of Interest Rate.
ARTICLE VI  BENEFIT DISTRIBUTIONS AND ACCOUNT WITHDRAWALS
	6.1	Benefit Amount.
	6.2	Timing of Distributions.
	6.3	Distribution Upon Participant Termination of Service.
	6.4	Method of Distribution.
		6.4.1	Distribution Methods.
		6.4.2	Installment Amounts.
		6.4.3	Minimum Account Balance Necessary for Installments.
	6.5	Election of In-Service Distribution Date.
		6.5.1	Initial Election.
		6.5.2	Revocation or Amendment of Election.
		6.5.3	Termination Before the Planned Distribution Date.
		6.5.4	Termination After Commencement of Installment In-Service Distributions.
		6.5.5	Absence of In-Service Distribution Election.
	6.6	Distribution Upon Death of Participant.
	6.7	Distribution Upon Disability of Participant.
	6.8	Distribution Following Plan Termination.
	6.9	Financial Hardship Withdrawal.
	6.10	Limitation on Distributions to Covered Employees.
	6.11	Tax Withholding.
ARTICLE VII  BENEFICIARIES
	7.1	Designation of Beneficiary.
	7.2	No Designated Beneficiary.
ARTICLE VIII  TRUST OBLIGATION TO PAY BENEFITS
	8.1	Deferrals Transferred to the Trust.
	8.2	Source of Benefit Payments.
	8.3	Investment Discretion.
	8.4	No Secured Interest.
ARTICLE IX  PLAN ADMINISTRATION, AMENDMENT AND TERMINATION
	9.1	Committee Powers and Responsibilities.

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	9.2	Decisions of the Committee.
	9.3	Indemnification.
	9.4	Claims Procedure.
	9.5	Plan Amendment.
	9.6	Plan Termination.
ARTICLE X  MISCELLANEOUS
	10.1	No Assignment.
	10.2	No Secured Interest.
	10.3	Successors.
	10.4	No Employment Agreement.
	10.5	Attorneys’ Fees.
	10.6	Governing Law.
	10.7	Entire Agreement.
	10.8	Severability

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AMNET MORTGAGE, INC.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Effective January 1, 2003

The AMNET MORTGAGE, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (the “Plan”) is adopted effective January 1, 2003, by AMNET MORTGAGE, INC., a Maryland corporation (the “Company”), primarily for the purpose of providing additional retirement income for a select group of management or highly compensated employees of the Company.  This Plan is intended to be an unfunded, nonqualified deferred compensation plan.  Plan participants shall have the status of unsecured creditors of the Company with respect to the payment of Plan benefits.

ARTICLE I

DEFINITIONS

Whenever used herein, the masculine pronoun shall be deemed to include the feminine, and the singular to include the plural, unless the context clearly indicates otherwise, and the following definitions shall govern the Plan:

1.1“Account(s)” means the book entry account(s) established under the Plan for each Participant to which are credited the Participant’s Discretionary Company Credits and the Interest with respect thereto.  Account balances shall be reduced by any distributions made to the Participant or the Participant’s Beneficiary(ies) therefrom and any charges that may be imposed on such Account(s) pursuant to the terms of the Plan.  Separate Subaccounts may be established to which shall be credited a Participant’s Discretionary Company Credits, which may be made for any Plan Year, if any, and the Interest with respect thereto.  Where Subaccounts have been established, Account shall refer to all of the Participants’ Subaccounts, collectively, as the context may require.

1.2“Benchmark Fund” shall mean one or more of the mutual funds or contracts selected by the Committee pursuant to Article V.

1.3“Beneficiary” means one, some, or all (as the context shall require) of those persons, trusts or other entities designated by a Participant to receive the undistributed value of his or her Account following the Participant’s death.

1.4“Benefit(s)” means the total vested amount credited to a Participant’s Account or Subaccount.

1.5“Board of Directors” or “Board” means the Board of Directors of the Company.

1.6“Change in Control” shall mean an Ownership Change Event or series of related Ownership Change Events (collectively, a “Transaction”) in which the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company’s voting stock

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immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting securities of the Company or, in the case of an Ownership Change Event described in Section 1.21(iii), the entity to which the assets of the Company were transferred (the “Transferee”), as the case may be.  For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities which own the Company or the Transferee, as the case may be, either directly or through one or more subsidiary corporations or other business entities.  The Board shall have the right to determine whether multiple sales or exchanges of the voting securities of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive.

1.7“Code” means the Internal Revenue Code of 1986, as amended.

1.8“Committee” means the Supplemental Executive Retirement Plan Committee composed of such individuals as may be appointed by the Board which shall function as the Plan Administrator.

1.9“Company” means AmNet Mortgage, Inc., a Maryland corporation, and any successor organization thereto.

1.10“Compensation” means a Participant’s base salary and annual bonus awarded under any Company annual bonus plan, and shall include amounts deferred under the Company’s 401(k) plan, Section 125 cafeteria plan, or any other voluntary deferred compensation plan.

1.11“Disability” means the inability of the Participant, in the opinion of a qualified physician acceptable to the Committee, to perform the major duties of the Participant’s position with the Company because of the illness or injury of the Participant.  If the Company adopts a long-term disability plan, then the definition of “Disability” will be redefined to be consistent with such long-term disability plan in effect at the time of the disability.

1.12“Discretionary Company Credit” means the amount, if any, of Company credits awarded to a Participant pursuant to Article III.

1.13“Distribution Date” means the date on which distribution of a Participant’s Benefits is made or commenced pursuant to Article VI.

1.14“Effective Date” means the date on which the Plan shall be first effective, which is January 1, 2003.

1.15“Election” means the form on which a Participant (i) elects a Distribution Date, and (ii) elects the method by which his or her Benefits will be distributed.  The Election shall be in such form as may be prescribed by the Committee.

1.16“Eligible Individual” means an employee of the Employer who is a member of the select group of management and highly compensated employees as more particularly described in Article II and who has been designated by theCommittee, in its sole discretion, as eligible to participate in the Plan.

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1.17“Employer” means the Company or a subsidiary thereof that has adopted this Plan.

1.18“In-Service Distribution Date”  means the date on which distribution of a Participant’s Account is made or commenced pursuant to Section 6.4.

1.19“Interest” means the investment return or loss determined in accordance with Article V which shall be credited to the Participants’ Accounts.

1.20“Interest Rate” shall have the meaning as set forth in Section 5.3.

1.21“Ownership Change Event” shall be deemed to have occurred if any of the following occurs with respect to the Company:  (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange or transfer to one or more subsidiaries of the Company); or (iv) a liquidation or dissolution of the Company.

1.22“Participant” means an Eligible Individual for whom Discretionary Company Credits are made, regardless of whether such Eligible Individual has executed and submitted an Election.

1.23“Plan” means the AmNet Mortgage, Inc. Supplemental Executive Retirement Plan, effective January 1, 2003, as it may be amended from time to time.

1.24“Plan Year” means the 12-month period beginning on each January 1 and ending on the following December 31.

1.25“Service” means the Participant’s employment or service with the Employer on a substantially full-time basis, whether in the capacity of an employee or a director.  A Participant’s Service shall include periods of employment or service with any Employer regardless of whether such Employer has adopted this Plan.  A Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity under which the Participant renders Service to the Company, provided there is no interruption or termination of Participant’s Service.  A Participant’s Service shall terminate upon an actual termination of Service, whether by death, Disability, or otherwise.  Subject to the foregoing, the Committee, in its discretion, shall determine whether Participant’s Service has terminated and the effect of such termination.

1.26“Trust” means the legal entity, if any, created by a Trust Agreement.  The Company is under no obligation to fund the obligation to provide Benefits under the Plan through the establishment of a Trust, and it is anticipated that the Company will not, at least initially, establish a Trust under the Plan.  However, the Company may, in its sole and absolute discretion, determine at any time that a Trust shall be established.

1.27“Trust Agreement” means the trust agreement, if any, entered into between the Company and any Trustee.

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1.28“Trustee” means the Trustee, if any, named in the Trust Agreement and any duly appointed successor or successors thereto.

1.29“Year of Service” means 12 consecutive months of Service.

ARTICLE II

ELIGIBILITY

2.1Eligibility.  Eligibility for participation in the Plan shall be limited to a select group of management or highly compensated employees of the Employer, who are designated by the Committee, in its sole discretion, as eligible to participate in the Plan.  Eligible Individuals shall be notified as to their eligibility to participate in the Plan.

2.2Commencement of Participation.  An Eligible Individual shall commence participation in the Plan when a Discretionary Company Credit is made to the Account of such Eligible Individual pursuant to the provisions of Section 3.

2.3Cessation of Participation.  Active participation in the Plan shall end when a Participant’s Service terminates for any reason or at such time as a Participant is notified by the Committee, pursuant to Section 2.4, below, that he or she is no longer eligible to participate in the Plan.  Upon termination of Service or eligibility, a Participant shall remain an inactive Participant in the Plan until all of the vested Benefits to which he or she is entitled under this Plan have been paid in full.

2.4Cessation of Eligibility.  The Committee may at any time, in its sole discretion, notify any Participant that he or she is not eligible to participate in the Plan, or is not eligible for Discretionary Company Credits in any Plan Year.

ARTICLE III

CONTRIBUTIONS

3.1Discretionary Company Credits.  A Participant’s Subaccount shall be credited with Discretionary Company Credits, in such amounts and at such times as the Company may, in its sole discretion, determine and communicate to the Participant.  The Company shall have the right, but not the obligation, to provide a prorated Discretionary Company Credit in the year of (i) a Change in Control or (ii) any Participant’s death or Disability, in such amount as the Board may deem appropriate to reflect the prorated year in which (i) the Change in Control occurs or (ii) the Participant’s death or Disability occurred.

3.2Calculation of Discretionary Company Credits.  The Company shall establish, in its sole and absolute discretion, the performance criteria and/or formula for determining any Participant’s Discretionary Company Credits.  Such contributions shall be based upon the profitability of the Company, the performance of the Participant, the Compensation paid to the Participant, the Company’s earnings per share, in tandem with any other Company annual incentive plan, or such other factors as the Company shall consider appropriate.  The Company

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shall be under no obligation to continue to make Discretionary Company Credits and may discontinue or change the amount or method of calculating the amount of such Discretionary Company Credits at any time.

3.3No Withdrawal.  Except as otherwise provided in Article XI, amounts credited to a Participant’s Account may not be withdrawn by a Participant and shall be paid only in accordance with the provisions of this Plan.

ARTICLE IV

VESTING

4.1Vesting of Participants’ Accounts.

4.1.1A Participant shall vest in Discretionary Company Credits, if any, and the Interest credited thereon in accordance with the schedule specified by the Company, in its sole discretion, at the time of any Discretionary Company Credits are awarded.  Unless otherwise determined by the Company at the time any Discretionary Company Credit is made, the amounts credited to a Participant’s Discretionary Company Credit Subaccount shall be 100% vested upon the earliest of:

4.1.1.1the Participant’s completion of five (5) Years of Service;

4.1.1.2the Participant’s death;

4.1.1.3the Participant’s Disability;

4.1.1.4as of the date ten (10) days prior to the date of the Change in Control; or

4.1.1.5the Participant’s involuntary termination by the Company for any reason other than Cause.

4.1.1.6any other date, as determined solely in the discretion of the Board.

4.2Vesting Upon Plan Termination.  Notwithstanding any other provision in the Plan to the contrary, a Participant’s Account shall be 100% vested upon the termination of the Plan.  However, the cessation of contributions under the Plan shall not be deemed a termination of the Plan unless otherwise determined by the Company in its sole and absolute discretion.

ARTICLE V

ACCOUNTS

5.1Accounts.  Separate Subaccounts shall be established and maintained for each Participant.  Each Participant’s applicable Subaccounts shall be credited with the Participant’s Discretionary Company Credits, if any, made for such Participant.  Participants’ Accounts shall

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be credited (debited) with the applicable Interest, as set forth in this Article V.  Participants’ Accounts shall be reduced by distributions therefrom and any charges which may be imposed on the Accounts pursuant to the terms of the Plan.

5.2Interest Credited to Accounts at Least Monthly.  Each Subaccount shall be credited (debited) monthly, or more frequently as the Committee may specify, in an amount equal to the Subaccount balance on the first day of the prior month multiplied by the Interest Rate applicable to such Subaccount.

5.3Determination of Interest Rate.

5.3.1The Committee shall designate the particular funds or contracts which shall constitute the Benchmark Funds, and may, in its sole discretion, change or add to the Benchmark Funds; provided, however, that (i) the initial Benchmark Funds offered under the Plan shall only be those investment funds offered by the Company under the Company’s 401(k) plan, and (ii) the Committee shall notify Participants of any such change prior to the effective date thereof.

5.3.2Each Participant may select among the Benchmark Funds and specify the manner in which each of his or her Subaccounts shall be deemed to be invested, solely for purposes of determining the Participant’s Interest Rate.  The Committee shall establish and communicate the rules, procedures and deadlines for making and changing Benchmark Fund selections.  The Company shall have no obligation to acquire investments corresponding to the Participant’s Benchmark Fund selections.

5.3.3The Interest Rate is based on the asset unit value, net of administrative fees and investment management fees and other applicable fees or charges, of the Benchmark Fund(s) designated by the Board and other applicable fees or charges.  The Interest Rate may be negative if the applicable Benchmark Fund(s) sustain a loss.

ARTICLE VI

BENEFIT DISTRIBUTIONS AND ACCOUNT WITHDRAWALS

6.1Benefit Amount.  The value of the Participant’s Benefit shall be equal to the vested value of the Participant’s Subaccount(s) on the last day of the calendar quarter prior to the Distribution Date, or such other date as the Committee may specify, adjusted for Discretionary Company Credits, and/or withdrawals which have been subsequently credited thereto or made therefrom prior to the Distribution Date.

6.2Timing of Distributions.  Benefits shall be paid (or, payments shall commence) as soon as practicable after the earlier of:

6.2.1The first day of the month following the end of the quarter in which a Participant’s employment with the Employer terminates; or

6.2.2The day prior to the closing of a Change in Control; or

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6.2.3The In-Service Distribution Date designated by the Participant; or

6.2.4The date Committee is notified that a Participant has died or after the Committee has determined that a Participant has incurred a Disability; or

6.2.5The first day of the month following the end of the quarter in which the Plan is terminated in accordance with Section 9.4.

6.3Distribution Upon Participant Termination of Service.  Notwithstanding any other Election the Participant may have made, once the Participant’s Service has terminated, the Company shall distribute, in the form of a single lump sum payment, the Participant’s vested Account balance.

6.4Method of In-Service Distribution. 

6.4.1Distribution Methods.  If a Participant elects an In-Service Distribution, such Participant’s Benefits shall be paid in one of the following methods, as specified in his or her most recent effective Election:

6.4.1.1A single lump sum payment;

6.4.1.2In quarterly installment payments of substantially equal amounts over a period not exceeding five (5) years.

6.4.1.3A Participant may amend his or her Election as to the method of distribution by filing an amended Election provided, however, no such amended Election shall be effective unless it is filed at least twelve (12) months prior to the date on which the distribution is made or commenced.

6.4.2Installment Amounts.  For purposes of this Section 6.4, installment distributions shall be paid in substantially equal quarterly payments under an installment methodology established by the Committee.

6.4.3Minimum Account Balance Necessary for Installments.  Notwithstanding anything to the contrary in Section 6.5, if a Participant’s Account balance is less than $25,000 at the time elected to begin installment distributions, the Participant’s Benefit will automatically be distributed in a single lump sum.

6.5Election of In-Service Distribution Date.

6.5.1Initial Election.  Upon receipt of notice of a Discretionary Company Credit, a Participant may specify an In-Service Distribution Date for the Subaccount to which such Discretionary Company Credit is credited, subject to the following:

6.5.1.1A Participant may elect an In-Service Distribution Date for all of the Benefits credited to such Subaccount.

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6.5.1.2The In-Service Distribution Date for any Subaccount must be at least two (2) years after the end of the Plan Year for which such Discretionary Company Credit to such Subaccount are made.

6.5.1.3The In-Service Distribution Date must be a date when the Discretionary Company Credit is 100% vested.

6.5.2Revocation or Amendment of Election.  A Participant who has elected an In-Service Distribution Date may revoke and/or amend the In-Service Distribution Date Election by filing a revocation or an amended Election at least twelve (12) months in advance of the In-Service Distribution Date specified in the Election being revoked or amended.  The amended In-Service Distribution Date must be in a Plan Year after the In-Service Distribution Date specified in the prior Election.  If a Participant revokes an In-Service Distribution Date Election and does not provide another In-Service Distribution Date, the Participant shall be deemed to have elected to have the Benefit distributed at termination of employment.  An In-Service Distribution Date Election for any Deferral Subaccount may be amended only twice.

6.5.3Termination Before the Planned Distribution Date.  Notwithstanding any prior Election, if the Participant terminates employment with the Employer before his In-Service Distribution Date, distribution of the Participant’s Account shall be made or commenced as soon as administratively feasible after the first day of the month following the end of the quarter in which the employment termination occurs and in the form elected for distributions at termination of employment.

6.5.4Termination After Commencement of Installment In-Service Distributions.  Notwithstanding any prior Election, if the Participant terminates employment with the Employer while receiving installment In-Service Distributions, the remaining installments shall be immediately distributed in a single lump sum as soon as administratively feasible after the first day of the month following the end of the quarter in which the employment termination occurs.

6.5.5Absence of In-Service Distribution Election.  If a Participant does not elect an In-Service Distribution Date in his or her Initial Election, or if the Participant revokes an In-Service Distribution Date Election, the Participant will be deemed to have elected to have the Benefits credited to the relevant Subaccount distributed upon his or her termination of employment, and such a deemed election shall be irrevocable.

6.6Distribution Upon Death of Participant. If a Participant dies before his or her Benefit payments have commenced, then such Participant’s Benefits shall be paid to his or her designated Beneficiary in a single lump sum cash distribution as soon as administratively feasible after the Committee is notified of the Participant’s death and receives evidence satisfactory to it thereof.  If a Participant dies after his or her Benefit distribution has commenced, his or her remaining Benefits shall be paid to the deceased Participant’s Beneficiary in a single lump sum cash distribution as soon as administratively feasible after the Committee is notified of the Participant’s death and receives evidence satisfactory to it thereof.

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6.7Distribution Upon Disability of Participant.  If a Participant suffers a Disability before his or her Benefit payments have commenced, then such Participant’s Benefits shall be paid in a single lump sum cash distribution as soon as administratively feasible after the Committee is notified of the Participant’s Disability and receives evidence satisfactory to it thereof.

6.8Distribution Following Plan Termination.  All Benefits (including installments remaining on Benefits for which payment has commenced) shall be paid in a single lump sum cash distribution as soon as administratively feasible following termination of the Plan.

6.9Financial Hardship Withdrawal. A Participant may withdraw up to one hundred percent (100%) of the vested Benefits credited to his or her Subaccount(s) as may be required to meet a sudden unforeseeable financial emergency of the Participant.  Such hardship distribution shall be subject to the following provisions:

6.9.1The hardship withdrawal must be necessary to satisfy the unforeseeable emergency and no more may be withdrawn than is required to relieve the financial need after taking into account other resources that are reasonably available to the Participant for this purpose.

6.9.2The Participant must certify that the financial need cannot be relieved:  (i) through reimbursement or compensation by insurance or otherwise; (ii) by reasonable liquidation of the Participant’s assets, to the extent such liquidation would not itself cause an immediate and heavy financial need; or (iii) by borrowing from commercial sources on reasonable commercial terms.

6.9.3An unforeseeable financial emergency is a severe financial hardship to Participant resulting from a sudden and unexpected illness or accident of Participant or of a dependent of Participant (as defined in section 152(a) of the Code), loss of Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of Participant.  Neither the need to pay tuition expenses on behalf of the Participant or the Participant’s spouse or children nor the desire to purchase a home shall be considered an unforeseeable emergency.

6.9.4The Committee, in its sole discretion, shall determine if there is an unforeseeable financial emergency, if the Participant has other resources to satisfy such emergency and the amount of the hardship withdrawal that is required to alleviate the Participant’s financial hardship.

6.9.5Upon receiving a financial hardship withdrawal, the Participant’s Deferrals will be discontinued for the remainder of the Plan Year in which a financial hardship withdrawal occurs.  Such Participants will, however, be eligible for any Discretionary Company Credits which may be made to the Plan on their behalf.

6.10Limitation on Distributions to Covered Employees. Notwithstanding any other provision of this Article VI, in the event that the Participant is a “covered employee” as that term is defined in section 162(m)(3) of the Code, or would be a covered employee if Benefits were

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distributed solely in accordance with his or her Election or early withdrawal request, the Committee may determine, in its sole and absolute discretion, that the maximum amount which may be distributed from the Participant’s Account in any Plan Year shall not exceed one million dollars ($1,000,000) less the amount of compensation paid to the Participant in such Plan Year which is not “performance-based” (as defined in Code section 162(m)(4)(C)), which amount shall be reasonably determined by the Committee at the time of the proposed distribution.  Any amount which is not distributed to the Participant in a Plan Year as a result of this limitation shall be distributed to the Participant in the next Plan Year, subject to compliance with the foregoing limitations set forth in this Section 6.10.  This Section 6.10 shall not apply and not restrict any distribution to any Participant if such distributions are made on account of either the termination of the Plan or a Change in Control.

6.11Tax Withholding. Distribution and withdrawal payments under this Article VI shall be subject to all applicable withholding requirements for state and federal income taxes and to any other federal, state or local taxes that may be applicable to such payments.

ARTICLE VII

BENEFICIARIES

7.1Designation of Beneficiary.  The Participant shall have the right to designate on such form as may be prescribed by the Committee, one or more Beneficiaries to receive any Benefits due under the Plan which may remain unpaid on the date of the Participant’s death.  The Participant shall have the right at any time to revoke such designation and to substitute one or more other Beneficiaries.

7.2No Designated Beneficiary.  If, upon the death of the Participant, there is no valid Beneficiary designation, the Beneficiary shall be the Participant’s surviving spouse.  In the event there is no surviving spouse, then the Participant’s Beneficiary shall be the Participant’s estate.

ARTICLE VIII

OBLIGATION TO PAY BENEFITS

8.1Contributions in Trust.  The Employer may, in its sole and absolute discretion, transfer Discretionary Company Credits, if any, made by or on behalf of a Participant to a Trustee to be held pursuant to the terms of a Trust Agreement.

8.2Source of Benefit Payments.  All benefits payable to a Participant hereunder shall be paid by the Employer to the extent no assets have been transferred to a Trust, and by the Trustee, to the extent any assets are held in a Trust by the Trustee.

8.3Investment Discretion.  The Benchmark Funds established pursuant to Section 5.3 shall be for the sole purpose of determining the Interest Rate to be used for determining the Interest credited to the Participant’s Account.  Neither a Trustee nor the Committee shall have any obligation to invest the Participants’ Account in accordance with his deemed investment directions or in any other investment.

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8.4No Secured Interest.  Except as otherwise provided by a Trust Agreement, the assets of any Trust or other account which may be established by the Company to reflect Plan Benefits, shall be subject to the claims of creditors of the Employer.  Except as provided in a Trust Agreement, the Participant (or the Participant’s Beneficiary) shall be a general unsecured creditor of the Employer with respect to the payment of Benefits under this Plan.

ARTICLE IX

PLAN ADMINISTRATION, AMENDMENT AND TERMINATION

9.1Committee Powers and Responsibilities.  The Committee shall have complete control of the administration of the Plan herein set forth with all powers necessary to enable it properly to carry out its duties in that respect.  Not in limitation, but in amplification of the foregoing, the Committee shall have the power and authority to:

9.1.1Construe the Plan and any Trust Agreement to determine all questions that shall arise as to interpretations of the Plan’s provisions including determination of which individuals are Eligible Individuals and the determination of the amounts credited to a Participant’s Account, and the appropriate timing and method of Benefit payments;

9.1.2Establish reasonable rules and procedures which shall be applied in a uniform and nondiscriminatory manner with respect to Elections, the establishment of Accounts and Subaccounts, and all other discretionary provisions of the Plan;

9.1.3Establish the rules and procedures by which the Plan will operate that are consistent with the terms of the Plan documents;

9.1.4Establish the rules and procedures by which the Plan shall determine and pay installment distributions and in-service distributions;

9.1.5Compile and maintain all records it determines to be necessary, appropriate or convenient in connection with the administration of the Plan;

9.1.6Adopt amendments to the Plan document which are deemed necessary or desirable to facilitate administration of the Plan and/or to bring these documents into compliance with all applicable laws and regulations, provided that the Committee shall not have the authority to adopt any Plan amendment that will result in substantially increased costs to the Company unless such amendment is contingent upon ratification by the Board before becoming effective;

9.1.7Employ such persons or organizations to render service or perform services with respect to the administrative responsibilities of the Committee under the Plan as the Committee determines to be necessary and appropriate, including but not limited to attorneys, accountants, and benefit, financial and administrative consultants;

9.1.8Select, review and retain or change the Benchmark Funds which are used for determining the Interest Rate under the Plan;

9.1.9Direct the investment of the assets of any Trust;

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9.1.10Review the performance of any Trustee with respect to such Trustee’s duties, responsibilities and obligations under the Plan and any Trust Agreement;

9.1.11Take such other action as may be necessary or appropriate to the management and investment of the Plan assets.

9.2Decisions of the Committee.  Decisions of the Committee made in good faith upon any matter within the scope of its authority shall be final, conclusive and binding upon all persons, including Participants and their legal representatives or Beneficiaries.  Any discretion granted to the Committee shall be exercised in accordance with rules and policies established by the Committee.

9.3Indemnification.  To the extent permitted by law, the Company shall indemnify each member of the Committee, and any other Employee or member of the Board with duties under the Plan, against losses and expenses (including any amount paid in settlement) reasonably incurred by such person in connection with any claims against such person by reason of such person’s conduct in the performance of duties under the Plan, except in relation to matters as to which such person has acted fraudulently or in bad faith in the performance of duties.  Notwithstanding the foregoing, the Company shall not indemnify any person for any expense incurred through any settlement or compromise of any action unless the Company consents in writing to the settlement or compromise.

9.4Claims Procedure.  Benefits shall be provided from this Plan through procedures initiated by the Committee, and the Participant need not file a claim.  However, if a Participant or Beneficiary believes he or she is entitled to a Benefit different from the one received, then the Participant or Beneficiary may file a claim for the Benefit by writing a letter to the Committee.

9.4.1If any claim for Benefits under the Plan is wholly or partially denied, the claimant shall be given notice in writing of such denial within 90 days of the date the letter claiming benefits is received by the Committee.  If special circumstances require an extension of time, written notice of the extension shall be furnished to the claimant within the initial 90-day period.

9.4.2Notice of the denial shall set forth the following information: (a) the specific reason or reasons for the denial; (b) specific reference to pertinent Plan provisions on which denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; (d) an explanation that a full review by the Committee of the decision denying the claim may be requested by the claimant or his or her authorized representative by filing with the company, within 60 days after such notice has been received, a written request for such review; and (e) if such request is so filed, the claimant or his or her authorized representative may review pertinent documents and submit issues and comments in writing within the same 60 day period specified in the preceding subparagraph.

9.4.3The decision of the Committee upon review shall be made promptly, and not later than 60 days after the Committee’s receipt of the request for review, unless special circumstances require an extension of time for processing, in which case the claimant shall be so

12

notified and a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review.  If the claim is denied, wholly or in part, the claimant shall be promptly given a copy of the decision.  The decision shall be in writing and shall include specific reasons for the denial, specific references to the pertinent Plan provisions on which the denial is based and shall be written in a manner calculated to be understood by the claimant.  No further legal action may be initiated claiming benefits under this Plan until the claims procedure set forth in this Article IX is completed.

9.5Plan Amendment.  This Plan may be amended by the Company at any time in its sole discretion.  Additionally, the Plan may be amended upon an action of the members of the Committee subject to the provisions in Section 9.1.  However, no amendment may be made that alters the nature of an Election or Benefit Distribution Election or which would reduce the amount credited to a Participant’s Account on the date of such amendment, unless such amendment is made pursuant to Section 10.8 of the Plan to comply with changes in applicable law.

9.6Plan Termination.  The Company reserves the right to terminate the Plan in its entirety by an action of the Board at any time upon fifteen (15) days notice to the Participants.  The termination of the Plan shall automatically revoke all outstanding Benefit Distribution Elections and all elections to have Benefits paid in installments.  If the Plan is terminated, all benefits shall be paid as set forth in Section 6.8.  Any amounts remaining in a Trust after all benefits have been paid shall revert to the Company.

ARTICLE X

MISCELLANEOUS

10.1No Assignment.  The right of any Participant, any Beneficiary or any other person to the payment of any benefits under this Plan shall not be assigned, transferred, pledged or encumbered.

10.2No Secured Interest.  The obligation of the Company to Participants under this Plan shall not be funded or otherwise secured, and shall be paid out of the general assets of the Company.  Participants are general unsecured creditors of the Company with respect to the obligations hereunder and shall have no legal or equitable interest in the assets of the Company, including any assets as the Company may set aside or reserve against its obligations under this Plan.

10.3Successors.  This Plan shall be binding upon and inure to the benefit of the Employee, its successors and assigns and the Participant and his or her heirs, executors, administrators and legal representatives.

10.4No Employment Agreement.  Nothing contained herein shall be construed as conferring upon any Participant the right to continue in the employ of the Employer as an employee.

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10.5Attorneys’ Fees.  If the Employer, the Participant, any Beneficiary, any beneficiary under an insurance policy purchased pursuant to Section 6.12, and/or a successor in interest to any of the foregoing, brings legal action to enforce any of the provisions of this Plan, the prevailing party in such legal action shall be reimbursed by the other party, the prevailing party’s costs of such legal action including, without limitation, reasonable fees of attorneys, accountants and similar advisors and expert witnesses.

10.6Governing Law.  This Plan shall be construed in accordance with and governed by the laws of the State of California.

10.7Entire Agreement.  This Plan constitutes the entire understanding and agreement with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations or warranties among any Participant and the Employer other than those as set forth or provided for herein.

10.8Severability.  If any provision of this Plan is held to be invalid, illegal or unenforceable, such invalidity, illegality, or unenforceability shall not affect any other provision of this Plan, and the Plan shall be construed and enforced as if such provision had not been included.  In addition, if such provision is invalid, illegal or unenforceable due to changes in applicable law, the Company may amend the Plan, without the consent and without providing any advance notice to any Participant, as may be necessary or desirable to comply with changes in the applicable law or financial accounting of deferred compensation plans.

IN WITNESS WHEREOF, this Plan has been adopted by the Company effective as of the Effective Date.

	AMNET MORTGAGE, INC.
Dated: August 10, 2004	By:

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EX-31.1

Exhibit 31.1

SECTION 302

CERTIFICATIONS

I, John M. Robbins, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AmNet Mortgage, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:

a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 16, 2004

/s/ John M. Robbins

John M. Robbins

Chief Executive Officer

EX-31.2

Exhibit 31.2

SECTION 302

CERTIFICATIONS

I, Judith A. Berry, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AmNet Mortgage, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:

a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 16, 2004

/s/ Judith A. Berry

Judith A. Berry

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of AmNet Mortgage, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John M. Robbins, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that, to the best of my knowledge:

(1)The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 16, 2004
	/s/ John M. Robbins
	John M. Robbins
	Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of AmNet Mortgage, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Judith A. Berry, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that, to the best of my knowledge:

(1)The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 16, 2004
	/s/ Judith A. Berry
	Judith A. Berry
	Chief Financial Officer