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, 2005
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 Exchange 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) 7,433,407 as of July 29, 2005

INDEX
PART I. FINANCIAL INFORMATION	3
Item 1. Consolidated Financial Statements	3
Consolidated Balance Sheets at June 30, 2005 and December 31, 2004	3
Consolidated Statements of Operations and Comprehensive (Loss) Income for the three months ended June 30, 2005 and June 30, 2004 and for the six months ended June 30, 2005 and June 30, 2004.	4
Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and June 30, 2004.	5
Notes to Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosures about Market Risk	39
Item 4. Controls and Procedures	40
PART II. OTHER INFORMATION	41
Item 1. Legal Proceedings	41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3. Defaults Upon Senior Securities	41
Item 4. Submission of Matters to a Vote of Security Holders	41
Item 5. Other Information	41
Item 6. Exhibits	41

2

PART I.  FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

AmNet Mortgage, Inc. and Subsidiaries

Consolidated Balance Sheets, unaudited

(in thousands, except share and per share data)

	June 30, 2005			December 31, 2004
ASSETS
Cash and cash equivalents	$	28,636		$	50,600
Cash and cash equivalents—restricted	2,850			2,100
Mortgage loans held for sale, net, pledged (lower of cost or market)	512,394			238,440
Bond collateral, mortgage loans, net	11,381			14,509
Bond collateral, real estate owned, net	254			479
Accounts receivable—mortgage loans sold/funded	36,092			16,167
Derivative financial instruments	—			616
Accrued interest receivable	1,018			819
Deferred taxes	11,535			10,694
Other assets	6,410			6,055
	$	610,570		$	340,479
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Short-term debt	$	500,786		$	232,236
Long-term debt, net	10,057			13,500
Derivative financial instruments	568			—
Accounts payable—derivative financial instruments	2,262			37
Accrued interest payable	1,374			515
Accrued commissions and payroll	7,955			5,218
Recourse liabilities associated with loan sales	5,724			5,480
Accrued expenses and other liabilities	5,285			6,212
Total liabilities	534,011			263,198
Commitments and contingencies (Note 12)
Minority interest	97			100
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; 7,433,407 shares issued and outstanding in 2005, and 7,389,133 shares issued and outstanding in 2004	73			73
Additional paid-in-capital	105,253			103,718
Deferred compensation	(1,190		)	—
Accumulated deficit	(27,674		)	(26,610		)
Total stockholders’ equity	76,462			77,181
	$	610,570		$	340,479

See accompanying notes to consolidated financial statements.

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AmNet Mortgage, Inc. and Subsidiaries

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

(in thousands, except per share data)

	For the Three Months Ended June 30, 2005			For the Three Months Ended June 30, 2004			For the Six Months Ended June 30, 2005			For the Six Months Ended June 30, 2004
Revenues
Gain on sales of loans	$	32,635		$	2,323		$	50,908		$	17,839
Derivative financial instruments and market adjustments
Derivative financial instruments—forward sales of mortgage-backed securities and options to sell mortgage-backed securities	(11,421		)	10,857			(8,366		)	5,370
Market adjustment on interest rate lock commitments	1,635			4,390			1,639			3,233
Total derivative financial instruments and market adjustments	(9,786		)	15,247			(6,727		)	8,603
Interest on mortgage assets	15,321			9,569			25,440			16,211
Other income	182			434			384			729
Total revenue, net of derivative financial instruments and adjustments	38,352			27,573			70,005			43,382
Expenses
Employee compensation and benefits	21,266			14,399			38,531			26,242
Interest expense	11,886			4,754			18,747			7,994
Office and occupancy expense	947			959			2,050			1,795
Provision for loan losses (bond collateral)	170			128			232			128
Loss/(gain) on sale of real estate owned, net	12			(61		)	9			(320		)
(Gain)/loss on bond collateral sold	(38		)	880			(38		)	5,309
Professional fees	1,893			1,369			3,034			2,404
Other operating expenses	5,095			4,687			9,415			8,940
Total expenses	41,231			27,115			71,980			52,492
(Loss) income before income taxes	(2,879		)	458			(1,975		)	(9,110		)
Income tax (benefit) provision	(1,307		)	250			(910		)	(3,646		)
Net (loss) income	$	(1,572	)	$	208		$	(1,065	)	$	(5,464	)
Basic weighted average shares outstanding	7,431,581			7,838,504			7,396,661			7,856,426
Diluted weighted average shares outstanding	7,431,581			8,582,572			7,396,661			7,856,426
Net (loss) income per share-basic	$	(0.21	)	$	0.03		$	(0.14	)	$	(0.70	)
Net (loss) income per share-diluted	$	(0.21	)	$	0.02		$	(0.14	)	$	(0.70	)

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, 2005			For the Six Months Ended June 30, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,065	)	$	(5,464	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on bond collateral sold	—			5,309
Amortization of mortgage assets premiums	7			980
Amortization of capitalized costs	—			474
Amortization of deferred compensation	242			—
Provision for loan losses (bond collateral)	232			128
Change in real estate owned provision (bond collateral)	23			401
Loss/(gain) on sale of real estate owned, net	9			(320		)
Proceeds from sale of mortgage loans held for sale	6,133,187			4,250,085
Mortgage loan originations	(6,407,140		)	(4,439,585		)
Increase in restricted cash	(750		)	(190		)
Increase in loans held for sale, not pledged (formerly bond collateral)	—			(7,016		)
Increase in accounts receivable—mortgage loans sold/funded	(19,925		)	(1,702		)
Decrease in derivative financial instruments, net	1,184			877
(Increase)/decrease in accrued interest receivable	(199		)	1,580
Increase in deferred taxes	(841		)	(1,803		)
Increase in other assets	(355		)	(678		)
Increase in accrued interest payable	859			97
Increase/(decrease) in accounts payable—derivative financial instruments	2,225			(1,139		)
Increase in loss reserve, mortgage loans sold	243			1,016
Increase/(decrease) in accrued commissions and payroll	2,737			(478		)
Decrease in accrued expenses and other liabilities	(927		)	(4,855		)
(Decrease)/increase in minority interest	(3		)	26
Net cash used in operating activities	(290,257		)	(202,257		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments on bond collateral, mortgage loans held or pending sale (June 30, 2004)	2,907			26,761
Proceeds from sale of bond collateral	—			112,456
Proceeds from sale of real estate owned	175			1,589
Net cash provided by investing activities	3,082			140,806
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt related to bond collateral held or pending sale (June 30, 2004)	(3,443		)	(26,849		)
Payments on long-term debt from sale of bond collateral	—			(85,878		)
Increase in net borrowings from short-term debt	268,550			185,189
Stock options exercised	104			33
Purchase of treasury stock	—			(4,500		)
Net cash provided by financing activities	265,211			67,995
Net (decrease) increase in cash and cash equivalents	(21,964		)	6,544
Cash and cash equivalents at beginning of year	50,600			44,400
Cash and cash equivalents at end of period	$	28,636		$	50,944
Supplemental information:
Interest paid	$	17,888		$	7,898
Taxes paid	$	820		$	2,784

See accompanying notes to consolidated financial statements.

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AMNET MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies and Practices

Basis of Financial Statement Presentation

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 Mortgage, Inc. 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 of American Residential Eagle, Inc. are pledged to support long-term debt in the form of a collateralized mortgage bond and is 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 bond is non-recourse to the Company. All significant intercompany balances and transactions have been eliminated in the consolidation of AmNet. Certain reclassifications have been made to prior period amounts to conform to the current presentation.

In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim period presented. These adjustments are of a normal recurring nature. The interim financial data as of June 30, 2005 and June 30, 2004 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.

Please refer to the Company’s Form 10-K for the year ending December 31, 2004, for a detailed discussion of all significant accounting policies.

Accounting For Changes and Error Corrections

During the quarter ending June 30, 2005, the FASB issued “FAS No. 154, Accounting Changes and Error Corrections – a replacement of APB No. 20 and FAS No. 3”.  This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. In the future, if changes or corrections are necessary, the Company will be guided by FAS No. 154.

Stock Options and Restricted Stock

The Company elected to apply APB Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for its stock-based compensation plans: the 2004 Equity Incentive Plan and 1997 Employee Stock Purchase Plan. Accordingly, no compensation cost has been recognized in the financial statements for stock options. Compensation in the form of restricted stock is recognized through amortization of deferred compensation. SFAS No. 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 No. 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. The Company continues to account for its stock based compensation according to the provisions of APB Opinion No. 25.

The FASB amended SFAS No. 123, “Accounting for Stock-Based Compensation,” which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” in December, 2004. The amendment requires the Company to record compensation expense

6

for all share-based compensation beginning January 1, 2006. When adopted, this standard will have a negative impact on earnings of approximately $66 thousand per month in future periods since stock options already issued will vest in future periods and be expensed.

During the six month period ending June 30, 2005 the Company authorized the issuance of  92,684 shares of restricted stock to executives within the Company which will vest over a three year period beginning in February of 2005. The Company also authorized the issuance of 18,400 shares of restricted stock to outside board members of the Company which will vest August 12, 2005. The value of these shares is being expensed over the vesting period.  On March 31, 2005 the Company authorized 47,900 restricted stock units to eleven senior executives of the Company with 50% vesting on December 31, 2008 and 2009 respectively.

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, the Company’s net loss would have been as follows (in thousands except income per share) (unaudited):

	Three Months Ended						Six Months Ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
Net (loss) income as reported	$	(1,572	)	$	208		$	(1,065	)	$	(5,464	)
Deduct: Total stock-based compensation expense determined under fair value-based method, net of tax effects (See Note 10)	(129		)	(193		)	(1,293		)	(814		)
Pro forma net (loss) income	$	(1,701	)	$	15		$	(2,358	)	$	(6,278	)
(Loss) income per share:
Basic as reported	$	(0.21	)	$	0.03		$	(0.14	)	$	(0.70	)
Basic pro forma	$	(0.23	)	$	0.00		$	(0.32	)	$	(0.80	)
Diluted as reported	$	(0.21	)	$	0.02		$	(0.14	)	$	(0.70	)
Diluted pro forma	$	(0.23	)	$	0.00		$	(0.32	)	$	(0.80	)

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. The volatility component of the calculation to establish stock option value has been revised and is reflected in stock based compensation expense for the three months and six months ended June 30, 2005 and 2004.

Note 2.  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, 2005			For the Three Months Ended June 30, 2004		For the Six Months Ended June 30, 2005			For the Six Months Ended June 30, 2004
Numerator:
Numerator for basic (loss) income per share	$	(1,572	)	$	208	$	(1,065	)	$	(5,464	)
Denominator:
Denominator for basic (loss) income per share - weighted average number of common shares outstanding during the period	7,431,581			7,838,504		7,396,661			7,856,426
Denominator for diluted (loss) income per share	7,431,581			8,582,572		7,396,661			7,856,426
(Loss) income per share - basic	$	(0.21	)	$	0.03	$	(0.14	)	$	(0.70	)
(Loss) income per share - diluted	$	(0.21	)	$	0.02	$	(0.14	)	$	(0.70	)

For the six months ended June 30, 2005 and 2004 there were 1,150,263 and 1,083,149 options, respectively, that were antidilutive and, therefore, not included in the calculations above.

Note 3.  Concentrations

For the six months ending June 30, 2005, the Company sold the majority of its loans (by volume) to three correspondent investors, Countrywide Home Loans, Inc. (45.2%), Morgan Stanley Mortgage Capital Inc. (18.2%) and Wells Fargo Funding, Inc. (12.9%). 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.

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In addition, approximately 32% of the dollar value of loans generated were derived from loans originated in California.  While the Company generates loans on a nationwide basis, it is anticipated that the Company will continue to have a significant concentration of loans originated from California.

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

AmNet has pledged loans held for sale totaling approximately $512.4 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, 2005 consist of loans which have been committed for sale of approximately $337.2 million and loans available for sale of approximately $175.2 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, 2005 and 2004, 100% 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 Bond Collateral Mortgage Loans and approximately $2.3 million in REO bond collateral were reclassified as held for sale.  By September 30, 2004 all of these mortgage loans including real estate owned, had been sold.  One remaining portfolio (CMO/FASIT 1998-1) was not sold.  Bond collateral for this structure is shown in the Consolidated Balance Sheets as Bond collateral, mortgage loans, net and Bond collateral, real estate owned, net.

Note 6.  Derivative Financial Instruments

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

AmNet estimates the number of rate locked loan 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 typically 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. The Company has elected not to apply hedge accounting for the derivative financial instruments.

At June 30, 2005 and December 31, 2004 AmNet had the following commitments to originate loans and loans not yet committed for sale to investors, and offsetting hedge coverage; (dollars in thousands) (unaudited).  (Note that interest rate exposure does not directly correspond to the notional amounts of hedge coverage without applying an option adjusted spread factor to the pipeline and hedges):

	June 30, 2005		December 31, 2004
Interest rate exposure:
Commitments to originate loans at set interest rates (after applying estimated fallout)	$	1,003,410	$	471,884
Funded loans not yet committed for sale to investors (closed loans)	175,199		138,250
	1,178,609		610,134
Hedge coverage:
Forward sales of To Be Announced mortgage-backed securities (“TBA”)(notional amount)	1,055,500		511,000
Options on forward sales of mortgage-backed securities (notional amount)	190,000		100,000
	1,245,500		611,000

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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 locked loan 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 loan characteristics.

The following is a summary of the carrying value of AmNet’s derivative instruments as of June 30, 2005 and December 31, 2004 (dollars in thousands) (unaudited):

June 30, 2005	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	4.5-5.5 MBS	$	500 -20,000	$	(401	)	Jul 19-Sept 19, 2005
Thirty year Fannie Mae	4.5-6.0 MBS	1,000 -30,000		(1,759		)	Aug 11-Sept 14, 2005
Thirty year Ginnie Mae	5.0-6.0 MBS	500 - 8,000		(101		)	Jul 21-Sept 21, 2005
Forward commitments by investor	5.125-5.5	1,200 - 10,000		(429		)	Jul 22-Aug 31, 2005
Options on TBAs:
Thirty year Fannie Mae	5.0 - 5.5 Puts	10,000 - 40,000		45			Jul 7 - Aug 5, 2005
Rate locked loan commitments				2,077
Total derivative financial instruments				$	(568	)

December  31, 2004	Range of Coupon Rate	Range of Notional Amount		Fair Value			Range of Expiration Date
Forward sales of mortgage-backed securities (TBAs):
Fifteen year Fannie Mae	4.5-5.5 MBS	$	1,000 - 20,000	$	(101	)	Jan 19-Mar 17, 2005
Thirty year Fannie Mae	5.0-6.0 MBS	500 - 20,000		(224		)	Jan 3-Mar 14, 2005
Thirty year Ginnie Mae	5.0-5.5 MBS	500 - 6,000		(82		)	Jan 20-Mar 22, 2005
Forward commitments by an investor	4.625-5.75	2,000 - 20,000		584			Jan 14-Feb 15, 2005
Options on TBAs:
Thirty year Fannie Mae	5.0-5.5 Puts	20,000 - 30,000		2			Jan 13, 2005
Rate locked loan commitments				437
Total derivative financial instruments				$	616

The following is a summary of the components within Total derivative financial instruments and market adjustments (expense) income (dollars in thousands) (unaudited):

	For the Three Months Ended June 30, 2005			For the Three Months Ended June 30, 2004			For the Six Months Ended June 30, 2005			For the Six Months Ended June 30, 2004
Derivative financial instruments - (expense) income:
Change in value of Options - open positions	$	(1,854	)	$	(2,138	)	$	(1,694	)	$	(3,097	)
Options (loss)/gain - closed positions	228			4,287			259			4,287
Change in value of TBAs - open positions	(1,762		)	(5,698		)	(2,866		)	(4,231		)
Change in market adjustment on interest rate locked loan commitments	1,635			4,390			1,639			3,233
TBA gain - closed positions	(8,033		)	14,406			(4,065		)	8,411
Total derivative financial instruments and market adjustments (expense) income:	$	(9,786	)	$	15,247		$	(6,727	)	$	8,603

Note 7.  Short-Term Debt

As of June 30, 2005, mortgage loans held for sale totaling $512.4 million were pledged as collateral for warehouse facility borrowings of $500.8 million with four financial institutions. At June 30, 2005, the Company’s maximum borrowing capacity

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combined from these four financial institutions was $2.1 billion (including $500 million through temporary facilities).  The table below shows the age of pledged mortgage loans as of June 30, 2005 (in thousands) (unaudited):

Aging Range	Number of Loans	Warehouse Line Usage		% of Total
Less than 30 days	2,255	$	456,580	91.2	%
30 to 60 days	19	4,396		0.9	%
61 to 90 days	244	39,102		7.8	%
91 to 120 days	10	708		0.1	%
Total	2,528	$	500,786	100.0	%

Of the $500.8 million of warehouse line usage at June 30, 2005, $212.7 million was funded through uncommitted warehouse facilities.

The warehouse facilities mature on various dates in 2005 and 2006, and generally bear interest at one-month LIBOR plus spread. The weighted average borrowing rates were 4.49% and 2.63% for the three months ending June 30, 2005 and June 30, 2004 respectively. The weighted-average borrowing rate was 4.27% for the six months ending June 30, 2005 and 2.56% for the six months ending June 30, 2004. The weighted-average facility fee was .23% for the six months ending June 30, 2005 and June 30, 2004 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. 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, minimum levels of cash reserves, profitability and stockholders’ equity. We are also, in a certain instance, required to maintain a restricted cash account with one of our warehouse lenders. During the six months ending June 30, 2005 we were required to add $425 thousand to our cash account due to general business conditions and $325 thousand due to a $100 million credit increase.  There were no changes in the restricted cash account during the quarter ending June 30, 2005.  As of June 30, 2005 the Company was out of compliance with certain warehouse line facility covenants. Waivers were obtained from three of our four warehouse providers and we believe we are in good standing with all of our warehouse lenders. The Company is in the process of obtaining the final waiver and is expected to be received by August 22, 2005.

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

The components of the long-term debt at June 30, 2005 and December 31, 2004, along with selected other information are summarized below (dollars in thousands) (unaudited):

CMO/ FASIT 1998-1 Securitization	June 30, 2005			December 31, 2004
Long-term debt	$	10,057		$	13,500
Weighted average financing rates	4.71		%	3.46		%

The table below shows the Company’s expected future payments for future obligations under the long-term debt agreement (000’s):

	Payments Due by Period
Contractual Obligations as of June 30, 2005	Total		Less than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Long-Term Debt	$	10,057	$	3,477	$	4,882	$	1,698	$	—

Note 9.  Recourse Liabilities Associated With Loan Sales

We sell loans to private investors and other financial institutions. Each loan sale is subject to certain terms and conditions, which generally require us to repurchase loans or indemnify and hold the investor harmless against any loss arising from early payment default activity and errors and omissions in the origination, processing and/or underwriting of the loans. We are subject to this risk for loans that we originate as well as loans we acquire from brokers and correspondents. At June 30, 2005 and December 31, 2004, we had approximately $4.6 million at both dates, recorded as an estimate for losses that may occur as a result of the guarantees described above based on trends in repurchase and indemnification requests, actual loss experience, known and inherent risks in the loans, and current economic conditions. The length of the indemnification period, which varies by investor and the nature of the potential defect, may extend to the life of the loan.

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Under most of our loan sale agreements, we are also obligated to refund premiums to investors if loans pay off within a certain number of days after the settlement of our loan sale. These refunds are referred to as early prepayment premiums or (“EPPs”). The EPP exposure period generally ranges up to 180 days after the settlement date. At June 30, 2005 and December 31, 2004, we had approximately $980 and $894 thousand, respectively, recorded as an estimated reserve for premium refunds that may occur as a result of loans sales which were still subject to EPP liability.

Reserve activity for the periods presented is as follows (dollars in thousands):

	Reserve For Repurchase Obligations			Premium Prepayment Reserve			Total
Balance at December 31, 2003	$	2,841		$	298		$	3,139
Payments	(1,784		)	(2,519		)	(4,303		)
Provisions	3,529			3,115			6,644
Balance at December 31, 2004	4,586			894			5,480
Payments	(632		)	(1,388		)	(2,020		)
Provisions	790			1,474			2,264
Balance at June 30, 2005	$	4,744		$	980		$	5,724

The balances for the Reserve For Repurchase Obligations and Premium Prepayment Reserve are included in the Consolidated Balance Sheets in the Recourse liabilities associated with loan sales line item. The payments and provisions represent the yearly change of the balance sheet accounts. The related expense for the three months ending June 30, 2005 and June 30, 2004 is included in the Consolidated Statements of Operations and Comprehensive (Loss) Income in the revenue section, gain on sales of loans line item.

Note 10.  Stock Plans

As of June 30, 2005, shares of common stock were reserved for issuance under the Company’s stock  plans as follows (unaudited):

	1997 Employee Stock Purchase Plan	2004 Equity Incentive Plan	1997 Stock Option Plans (New issuances terminated in 2004*)	Total
Total Stock Authorized at 1/1/2005	20,000	600,504	1,899,496	2,520,000
Total Options, Restricted Stock, Restricted Stock Units Issued or to be issued	—	345,108	1,899,496	2,244,604
Shares Reserved For Issuance at 6/30/05	20,000	255,396	—	275,396

* The 1997 Stock Plan continues until all options outstanding under it are terminated or exercised. No new options will be granted.

Stock option activity during the six months ending June 30, 2005 was as follows (unaudited):

	Number of Options		Weighted-Average Exercise Price
Balance at December 31, 2004	1,829,271		$	8.12
Granted	238,900		10.33
Forfeited	(50,526	)	7.61
Exercised	(18,498	)	3.67
Balance at June 30, 2005	1,999,147		$	8.43

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At June 30, 2005, 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 5.92 years. The weighted average exercise price of exercisable outstanding options was $8.94.  The table below shows options and prices for all outstanding options at June 30, 2005 (unaudited):

Option Exercise Price Range	Vested	Unvested	Number of Options
$1.75 to $3.00	131,334	29,146	160,480
$3.01 to $5.00	289,583	151,334	440,917
$5.01 to $7.50	313,447	35,753	349,200
$7.51 to $10.00	151,520	146,630	298,150
$10.01 to $12.50	488,727	5,573	494,300
$12.51 to $15.00	256,100	—	256,100
	1,630,711	368,436	1,999,147

The per share weighted-average fair value of stock options granted between January 1, 2005 and June 30, 2005 is computed quarterly.  For the first quarter ending March 31, 2005 the per share weighted-average fair value of stock options granted was $5.82. For the second quarter ending June 30, 2005 the value was $4.90. These values were calculated using the Black-Scholes option-pricing model, using the following weighted-average assumptions (unaudited):

	Three Months Ending June 30, 2005		Three Months Ending March 31, 2005
Expected dividend yield	0.00	%	0.00	%
Risk-free interest rate	3.72	%	4.18	%
Expected volatility	60.20	%	60.87	%
Expected life (years)	5		5

On February 7, 2005 the Company’s Compensation Committee authorized payments under the Long-Term Incentive Cash Plan. However, the Committee determined that it is in the best interests of the Company to pay half of each award value in cash and half in restricted stock of the Company. Consequently, 92,684 restricted shares of the Company’s stock were authorized to be issued to the executives of the Company with a three year vesting period. Issuance of the restricted stock was authorized in April 2005 and is to be issued. The cost to the Company will be approximately $278 thousand per year for three years beginning in 2005. On March 31, 2005 the Committee authorized 47,900 restricted stock units to eleven senior executives of the Company with 50% vesting on December 31, 2008 and 2009, respectively. On April 4, the Committee granted 18,400 restricted shares to the outside members of the Board of Directors vesting August 12, 2005. The result of these awards was $1.4 million of deferred compensation which was reduced during the six months ending June 30, 2005 to $1.2 million by monthly amortization and is included in the equity section of the Consolidated Balance Sheets.

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 stockholders. On July 19, 2002, the stockholders 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 relinquish its REIT status, effective January 1, 2003.

As a result of the conversion to a fully taxable status, an income tax benefit and related deferred tax asset of $5.7 million was recorded in 2003. As of June 30, 2005, our deferred tax asset amounts to $11.5 million which reflects a change in the tax provision from December 31, 2004. The tax provision was calculated based on an assumed income tax rate of 44% for 2005.

At June 30, 2005, in determining the possible future realization of deferred tax assets, management considers future taxable income from the following sources: (a) reversal of taxable temporary differences, (b) future operations exclusive of reversing temporary differences, and (c) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into years in which net operating losses might otherwise expire.

As the Company’s net income and its projections of net income vary over time, the expected realizability of its deferred tax assets may change. If the Company determines that its ability to realize all of its deferred taxes is unlikely, the Company will set up certain valuation allowances against those assets, which would negatively affect its net income. However, currently, we expect to fully utilize our deferred tax assets.

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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 2010. Rental expense under such leases is included in office and occupancy expense, and other operating expenses. Lease costs totaled $2.1 million in the six months ending June 30, 2005 and $1.9 million in the six months ending June 30, 2004. Future minimum lease payments under these leases as of June 30, 2005, are as follows (dollars in thousands) (unaudited):

Year ending June 30:
2006	$	3,530
2007	2,562
2008	1,868
2009	1,226
2010	370
After June 30, 2010	—
	$	9,556

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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 words such as “expect,” “will,” “may,” “anticipate,” “goal,” “intend,” “seek,” “believe, “target”, “ “plan,” “strategy” and derivatives of such words. Forward looking statements in this report include those statements regarding:

•Our future results of operations and the factors that could impact our results;

•The factors that may impact our future liquidity;

•Our strategies;

•Changes in the mortgage market and competitive factors;

•The estimates we use in preparing our financial statements and the impact of accounting standards;

•The risks that may impact our business.

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 maximizing the utilization of our existing infrastructure 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 or lower gross margins).

•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. In particular we must remain competitive relative to our pricing of loans, which could cause us to lower our gross margins.

•We sell a substantial portion of our loans to two of our competitors.  If these 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.

•In 2004 we made the strategic decision to create a correspondent lending operating platform and in 2005 we began purchasing closed loans from small mortgage bankers and other financial institutions.  Some of the risks associated with this channel are different from our wholesale lending business, and our Company has no experience competing in this highly competitive segment of the mortgage market.  We have committed overhead to this new channel, and expect to make additional investments in the remainder of 2005 to try to build this new source of revenue.  However it is difficult to evaluate our competitive posture and growth prospects for this channel, and we may not be able to compete effectively against larger, well established correspondent lenders.

•In 2004 we began offering subprime loans to wholesale brokers, and we intend to increase our proportion of subrpime loans significantly in 2005 as we hire dedicated account executives to call on mortgage brokers who specialize in subprime loans. While we have a centralized underwriting and funding center to process these loans and have hired experienced personnel, subprime loans are more complex and any errors we make in underwriting or funding these loans could cause loans to be un-saleable or to be sold at a significant loss.  Additionally subprime lending is extremely competitive making it difficult to evaluate the potential growth prospects and profit margins for this product line.

•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 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.

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, undetected fraud on the part of borrowers, brokers, appraisers or our employees, changes in the mortgage industry regulatory environment, increases in prepayment

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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 a subsidiary, American Mortgage Network, Inc., to engage in the wholesale lending segment of the mortgage banking industry. In January of 2003 we elected to relinquish our REIT status with the Internal Revenue Service (previously approved by our stockholders). In order to more closely align our name with our mortgage banking focus, we changed our name from American Residential Investment Trust, Inc. to AmNet Mortgage, Inc., as of May 5, 2004. On September 29, 2004 our Company’s stock began trading on the NASDAQ National Market System under the trading symbol AMNT. Previously we were listed on the American Stock Exchange under the trading symbol INV and prior to that we were listed on the NYSE.

In March of 2004, we began providing loan programs tailored to subprime borrowers with credit that does not meet conventional guidelines or who require non-conventional loan terms with respect to loan-to-value, debt ratio, cash-out or documentation. We offer subprime loans through several different loan programs. However, our Company policy is not to provide high cost loans which are defined as mortgage loans that feature either an interest rate or points and fees charged in connection with loans that exceed certain thresholds prescribed by federal or state law or local ordinances. Subprime lending provides loan solutions for borrowers with credit problems who would not qualify for other lending products we offer. The unit cost to originate these loans is higher due to more labor intensive underwriting and funding processes, higher sales commission rates and a higher percentage of loan applications that are not approved or funded. As a result of higher credit risk and cost, we must charge higher interest rates for assuming this risk. To help mitigate the additional risks while our systems and processes are being refined, underwriting for these loans is performed at our centralized subprime operations center located in our San Diego headquarters office as opposed to the regional underwriting and funding we utilize for all other wholesale loan products we offer. Our long-term strategy is to grow this segment of our business to up to 20 percent of our loan funding volume. Our subprime volume was 1.7 percent of total loan volume funded in the first six months of 2005 and is expected to reach four percent of total loan volume by the end of 2005. We have hired seasoned staff to augment our expertise in this area of lending. We also have negotiated with investors to buy the loans we generate and amended our agreements with existing warehouse lenders to finance these loans.

In the second half of 2004 we made a strategic decision to create a correspondent lending channel. Incremental revenues from this channel will help us to more fully leverage our wholesale lending infrastructure, particularly our headquarters administrative costs. Correspondents are larger brokers, mortgage bankers or other financial institutions who originate and fund loans and sell closed loans on a servicing-released basis. We have hired an experienced sales team and established an operations center in Columbia, Maryland to process these loan purchases. We began originating loans through this channel in the first quarter of 2005 and in the second quarter funded loan volume was less than 1.5% of total funded volume for the Company.

We originate mortgage loans predominately to prime quality borrowers (except our subprime division) secured by first trust deeds through a network of independent mortgage brokers. A concentration of our business is in California (32% of loans originated in the six months ending June 30, 2005); 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, loan delivery to investors, finance, accounting, administration, marketing, human resources, and information technology.

At June 30, 2005, we are operational in thirty-one office locations which represents a net reduction of one office from December 31, 2004. We had a total of 885 employees at June 30, 2005 which is an increase of 126 employees from December 31, 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. As of June 30, 2005 we had four warehouse facilities that enabled us to borrow up to an aggregate of $2.1 billion (including $500 million through temporary facilities). 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 requiring, among other things, minimum levels of cash reserves, certain levels of profitability and restricted leverage ratios.

We generate revenue, net of hedging and market adjustments in our mortgage banking business in 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

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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, net of premiums we pay to brokers.

Hedging and market adjustments. Hedging instruments are used to help mitigate exposure to interest rate fluctuations and protect our pricing margins. The gains or losses from this activity will be highly negatively correlated to revenue derived from loan sales. Typically higher than expected gains from the sale of loans will be offset by hedging losses and market adjustments, while lower than expected gains from the sale of loans will be offset by hedging gains. The value of our rate lock loan commitments are measured at the end of each accounting period. The change from the prior period is recorded as a market adjustment. Hedging gains or losses and market adjustments are included in the consolidated statements of operations and comprehensive income as derivative financial instruments and market adjustments.

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

Relative to our Mortgage Asset Portfolio, we made a strategic decision to sell the vast majority of our mortgage portfolio assets in the first quarter of 2004 and we completed the sales in the third quarter of 2004. The remaining mortgage assets of approximately $11.6 million are pledged to secure long term debt totaling approximately $10.1 million. These assets are referred to as our CMO/FASIT 1998-1 Securitization and are referred to on the balance sheet as bond collateral. Our Company over-collateralized the bonds at the time of issuance by pledging assets in excess of new liabilities.  These bond collateral assets are carried at the lower of cost or net realizable value.  At June 30, 2005, our bond collateral assets were carried on our balance sheet at approximately $1.5 million more than our remaining long term debt.

On a cash basis, we continue to receive principal and interest payments on the bond collateral assets and these proceeds are used by the bond trustee to service and pay down the long term debt. Any excess cash flow is remitted to us on a monthly basis. The long term debt is non-recourse to our Company, meaning that only the principal and interest received from the bond collateral assets, combined with any proceeds from the sale of REO loans, can be used to service the bond liabilities.  As such, while we do generally receive some net cash flow from the bond collateral assets each month, we will never be required to have any cash outlay associated with these assets and the related long term liability.

The expenses of our business include variable costs such as commissions, loan expenses and contract labor, as well as fixed overhead expenses such as personnel, rent, supplies and utilities.

Due to the immateriality of our mortgage asset portfolio business, we discontinued business segment reporting as of January 1, 2005.  As such, we began presenting management’s discussion and analysis of financial condition and our results of operations on a consolidated basis beginning, the three months ended March 31, 2005.

Our 2nd Quarter 2005 Highlights (Executive Overview)

Our consolidated operating results for the second quarter of 2005 were dominated by the following:

•We funded approximately $3.7 billion in loan volume for the period while fundings for the same period in 2004 were $2.6 billion.  This represents an increase of approximately 44.1% while the overall mortgage market declined from approximately $802 billion for the quarter ending June 30, 2004 to approximately $779 billion for the quarter ending June 30, 2005, according to the Mortgage Bankers Association (“MBA”) Mortgage Finance Forecast dated July 12, 2005.  Also, according to the MBA, loan volume is projected to increase from $2.6 trillion for all of 2004 to $2.7 trillion for all of 2005. Key reasons for our loan production increase are: a sales force increase (204 at June 30, 2005 compared to 121 account executives at June 30, 2004), a maturing of our branch network resulting in better market penetration and a broader range of loan products offered by the Company. The graph below shows monthly loan production comparisons between the second quarters of 2005 and 2004.

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2005 & 2004 Loan Fundings by Month - Second Quarter

	(in millions)
	2005		2004
April	$	986	$	1,147
May	1,224		751
June	1,488		668
Totals – Quarters ending June 30	$	3,698	$	2,566

•Total revenues, net of derivative financial instruments and market adjustments, were $38.4 million which represented a 39% increase from the quarter ending June 30, 2004. Net revenue from interest income of $9.6 million and $15.3 million less interest expense of $4.8 million and $11.9 million decreased from $4.8 million to $3.4 million (quarters ending June 30, 2004 and June 30, 2005 respectively) as a result of interest spread compression.

•Total revenue was insufficient to cover variable and fixed expenses totaling $41.2 million resulting in a pretax loss of $2.9 million.  We had adverse impacts from timing differences, as more fully described below in the section entitled “Interest Rate Risk Management and the Relationship Between our Hedging Instruments and the market adjustments and gain on Sale That we may Record for a Period”.

•Unrestricted cash and cash equivalents decreased by $8.7 million during the second quarter of 2005 from $37.3 million at March 31, 2005, to $28.6 million at June 30, 2005. The key factors in the decrease were (i) additional cash invested in higher loan  inventories including our warehouse haircuts (1% to 4% of loans held for sale) was approximately $5.1 million and premiums paid to mortgage brokers which are not recouped until we sell our loans to investors was approximately $6.8, and (ii) increased accounts receivable from loans was approximately $18.2 million. These decreases were partially offset by decreases in certain receivables and increases in various accrued expenses.

•Our mortgage asset portfolio received approximately $2.1 million in principal and REO sale proceeds. The Company reduced related long term debt by approximately $2.1 million.

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

•Fair value of mortgage loans held for sale

•Income taxes and benefits

•Recourse liabilities associated with loan sales

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Please refer to the Company’s Form 10-K for the year ending December 31, 2004, for a detailed discussion of these policies.

Management’s Financial Analysis

We present 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 - Gains from the sale of loans 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 sales 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 (or basis point gross margin).

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 market 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.  If interest rates decrease, then the opposite would be true. Accordingly, we acquire derivative financial instruments to hedge, or protect our target margins from interest rate increases.  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 our operations. We earn interest on a loan from the date the loan is funded until its sale 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 prior to sale. To the extent we fund loans with borrowings under our warehouse facilities, we record interest expense based on the same factors. We also generate revenue from the interest we receive on the bond collateral mortgage loans we hold for investment and we incur interest expense on the borrowings used to finance our loan fundings and bond collateral.

Because the interest income and interest expense of our business are closely related and dependant on many of the same factors, in particular the volume of loans we originate, management believes that it is helpful in understanding our operations to analyze the impact of interest income on mortgage loans held for sale and related short term debt expense together. For this reason, the discussion below provides information regarding the net interest income (interest income less interest expense). 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 in “Net Interest Income” above, the explanation of expenses includes a discussion of our operating expenses, excluding 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 our business to consider the variable and 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.

Interest Rate Risk Management And The Relationship Between Our Hedging Instruments And The Market Adjustments And Gain On Sale That We May Record For A Period

Our mortgage banking business is subject to the risk of changing interest rates between the time we commit to extend credit at a set interest rate (rate lock) and the time we commit the mortgage loans for sale. Our pipeline consists of loans for which we have provided a rate lock but which we have not yet closed (rate locked loan commitments) and closed loans that have not yet been committed for sale (closed loans). Generally, as market interest rates rise, our pipeline, which then has lower interest rates than the prevailing market, is not as attractive to investors and therefore we lose value in the pipeline. Conversely, as market interest rates fall, our pipeline is more attractive to investors and we gain value in the pipeline. However, some of this gain in value may be offset by an increase in the fallout of our rate locked loans as borrowers choose not to fund their loan with us and seek alternative loans with the new, lower interest rates.

To mitigate the risk of rising interest rates and protect our pricing margins, we purchase hedge instruments.  The gains or losses from this activity will generally correlate to losses or gains derived from market adjustments on our rate locked loan commitments and losses or gains that we record on sales of our closed loans. Typically, higher than expected market adjustments and

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gains from the sale of loans will be offset by hedging losses, while lower than expected market adjustments and gains from the sale of loans will be offset by hedging gains. However, the correlated gains and losses are not always recorded in the same accounting period because of timing differences.

Utilizing past loan fallout history, we estimate the percentage of our rate lock loan commitments that will close, but these projections are difficult, especially during periods of volatile interest rates. We hedge (or protect) our loan sale margin in the pipeline using forward sales of mortgage-backed securities (“TBA’s”), options on mortgage-backed securities (“MBS”) and similar agreements.

We generally adjust our hedge coverage on a daily basis based upon changes in the size and composition of the pipeline and resultant changes to our estimated pipeline exposure, seeking to protect our loan sale margin targets. Since August of 2002, we have used an outside company, Mortgage Capital Management, Inc. (“MCM”), to help us manage our interest rate risks. MCM is a quantitative software and advisory service firm that currently serves a number of clients in the mortgage banking industry. MCM performs pipeline exposure analysis and provides hedging recommendations on a daily basis. Our loan pipeline at June 30, 2005 was approximately $1.9 billion, at December 31, 2004 and June 30, 2004 our pipeline was approximately $0.8 billion. We believe our hedges have correlated to both increases and decreases in the value of our loan rate locked loans and uncommitted closed loans. In the future, as our loan products change and our subprime and correspondent channels increase production, our hedging strategies, fallout assumptions and hedging instruments may change to better mitigate the risk of interest rate changes.

The aggregate gains or losses that we ultimately recognize on our rate locked loans, closed loans and hedge instruments, is our gross margin. We record gains or losses on the three components of our gross margin as follows:

•Rate locked loan commitments.  Any change in the value of our rate locked loan commitments, from the expected value of the loan at the time the rate lock commitment was made to the end of the period is measured at the end of each accounting period, and is recorded as a market adjustment. Both increases and decreases in value are recorded at the end of a period. These changes are recorded as a “market adjustment on interest rate lock commitments” in our Statement of Operations.

•Closed loans.  We do not recognize any increase in the fair value in our closed loan inventory until a true sale has taken place, nor do we recognize a decline in the fair value of our loans if that decline is not more that our expected gain on sale profit margin on the loan.   However, if the cost basis of the loan is more than could be obtained by sale in the marketplace, a market adjustment is recorded (referred to as the lower of cost or market, or “LOCOM”). Accordingly, decreases in the fair value as of the end of the period are not recorded in the current period unless the fair value of our closed loans fall below our cost basis.  Any  such declines in value are recorded in our Statement of Operations as an adjustment to our “gain on sale of loans” revenue at the time they are recognized.

•Hedge instruments.  Our hedging instruments (forward sales of mortgage backed securities and options on forward sales of mortgage backed securities) are marked to market at the end of each period and both increases and decreases in value are recorded. These changes in value are recorded as “derivative financial instruments” in our Statement of Operations.

All increases or decreases in the value of our hedges and rate lock commitments are recorded in the current period. However because the Company has chosen to not apply hedge accounting under the provisions of FAS 133 as it relates to its hedges of the pipeline and loans committed for sale, the Company does not recognize changes in the fair value of its closed loans (unless lower than cost) at the end of the quarter.  Accordingly there may be a timing difference between the recognition of the gain on the loans and the gain/loss associated with the hedging instruments which are carried at fair value.  In two circumstances we may have timing differences that impact our operating results:

•A decrease in market interest rates will generate a hedge loss recorded in the current period, with an offsetting  increase in the fair value of our closed loans. But this increase is not recognized in our operating income until the loan sales have settled.  As a result of revenue recognition differences between our hedges and our closed loans, we may recognize a hedge loss in one quarter and not recognize the corresponding increase in the fair value of loans until the next quarter.

•An increase in market interest rates will cause the fair value of our uncommitted loans to decline, with such declines offset by increases in the value of our hedges.  Since we recognize hedging gains in the current period, we accelerate all or a portion of the expected pricing margin we have in our loans. When the decline in the fair  value of our loans  is not below our carrying value, we will  realize the reduced profit margin on our loans in the subsequesnt period when the loans are sold.

Depending on the movement in interest rates and the hedge ratios in place, this timing difference may have a positive or negative impact on the Company’s reported results of operations with a positive impact at quarter end resulting in a negative impact in the subsequent quarter [and vice versa]. The net impact of these timing differences is shown in the table below (positive numbers indicate an increase in fair value loans held for sale while negative numbers represent the opposite):

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Period	Estimated Net Change In Fair Value
1st Quarter 2004	$	(709,276	)
2nd Quarter 2004	1,219,784
3rd Quarter 2004	27,015
4th Quarter 2004	(1,958,987		)
1st Quarter 2005	(2,112,175		)
2nd Quarter 2005	4,086,076

Note that the third quarter of 2005 has been positively impacted by approximately $2.3 million fair value not recognized in the second quarter of 2005 however this could be offset or enhanced by any unrecognized changes in fair value that occur at the end of the third quarter.

We have provided a more detailed description of the methods and estimates we use to calculate the value of our derivative instruments and gain on sale in our Annual Report on form 10-K under the heading “Derivative and Hedging Activities / Determination of Fair Values”.

Results of Operations

Three Month Results

We recorded a net loss of $1.6 million for the three-month period ending June 30, 2005 as compared to net income of $208 thousand in 2004 for the same period.   Our loan production increased 44.1% for the quarter ending June 30, 2005 over the quarter ending June 30, 2004.  Consequently, total revenues increased 39% from $27.6 million to $38.4 million for the quarter ended June 30, 2005 as compared to the same period in 2004.  Our expenses increase 52% from $27.1 million  for the three months ended June 30, 2004 to $41.2 million for the sale period in 2005, due to a larger branching system and associated fixed expenses as well as higher variable costs associated with higher loan production levels.  Additionally, we incurred costs in 2005 for the continued startup operations in our subprime and correspondent divisions.  Interest expenses increased by virtue of higher levels of warehouse borrowings to support higher prodiction levels and a higher borrowing rate due to increases in the short term interest rates.

Timing differences described above adversely impacted our revenues in both the second quarter of 2005 and 2004, however the impact on the 2^nd quarter 2005 was significantly larger ($4.1 million for the quarter ended June 30, 2005 and $1.2 million for the quarter ended June 30, 2004).

	($ amounts in 000’s) (unaudited)
	Three Months Ended June 30, 2005		Three Months Ended June 30, 2004		2005 Increase (Decrease)
Loans sold, net	$	3,605,854	$	2,610,669	$	995,185

	Amount Income (Expense)			Basis Points (Loans Sold)		Amount Income (Expense)			Basis Points (Loans Sold)		Amount			Basis Points (Loans Sold)
Revenues:
Premiums	$	69,144		191.75		$	33,200		127.17		$	35,944		64.58
Broker fees	9,665			26.80		5,986			22.93		3,679			3.87
Mortgage broker premiums	(41,821		)	(115.98	)	(31,786		)	(121.76	)	(10,035		)	5.78
Premium recapture and loan loss provisions	(1,142		)	(3.17	)	(1,871		)	(7.17	)	729			4.00
Deferred origination costs	(3,211		)	(8.90	)	(3,206		)	(12.28	)	(5		)	3.38
Gain on sales of loans	$	32,635		90.50		$	2,323		8.89		$	30,312		81.61
Derivative financial instruments and market adjustments	(9,786		)	(27.14	)	15,247			58.40		(25,033		)	(85.54	)
Gain on sales of loans, after derivative financial instruments and market adjustments (“gross margin”)	$	22,849		63.36		$	17,570		67.29		$	5,279		(3.93	)
Interest on mortgage loans held for sale	15,175			42.08		8,994			34.45		6,181			7.63
Interest on bond collateral	146			0.41		575			2.21		(429		)	(1.80	)
Total interest income	15,321			42.49		9,569			36.66		5,752			5.83
Other income	182			0.51		434			1.66		(252		)	(1.15	)
Total revenue	$	38,352		106.36		$	27,573		105.61		$	10,779		0.75

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The overall mortgage loan market in 2005 is expected to increase from $2.6 trillion in 2004, to $2.7 trillion in 2005 according to the MBA forecast dated July 12, 2005. While the overall market is anticipated to slightly expand, we are continuing to concentrate on gaining market share over our competitors.  Our strategy is to capture an increasing percentage of the market through sales force expansion. In the second quarter of 2005, we increased loan production 44.1%, from $2.6 billion in the quarter ending March 31, 2005, to $3.7 billion for the quarter ending June 30, 2005.

Gain on sales of loans recognized on a GAAP basis, after derivative financial instruments and market adjustments, increased (in dollar terms) for the quarter ended June 30, 2005 over the quarter ended June 30, 2004 due to a higher volume of loans sold and origination of more profitable loans.  Note that decreasing interest rates for the quarter ended June 30, 2005 decreased the gain on derivative financial instruments and market adjustments and increased the gain on sale margins. For the quarter ended June 30, 2004 increasing interest rates during the quarter conversely increased the value of derivative financial instruments but decreased our gain on sale margins.

Our gain on the sale of loans consisted of a combination of various account categories which are summarized in the chart above, and quantified in basis points of 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 by us which are deferred at loan origination 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 mortgage 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 these competitors stop purchasing our loans on favorable terms, we could be required to find alternate purchasers and/or accept  less favorable terms.  In either case, this could reduce our revenues and earnings.

Premium recapture and loan loss provisions decreased by $729 thousand in the second quarter of 2005 compared to the same period in 2004. The decrease was mainly due to a reduction in loan loss reserves in the second quarter of 2005 which was the result of  a change in estimate (as a result of new information showing a reduced exposure to loss) for loan reserves on loans guaranteed by the Federal Housing Administration of approximately $436 thousand. Premium recapture expense increased in the second quarter of 2005 compared to the same period in 2004 due to loan volume increases, however this expense is expected to decline (as a percentage of loans sold) as interest rates rise and refinance activity declines. 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 and subprime loans which have more complex underwriting criteria and are more likely to be rejected by investors if unintentionally we sell them loans which do not meet their underwriting guidelines.

The use of hedges (recorded as derivative financial instruments) is key to protecting our profit margins between the time of the interest rate lock and when the loan is committed for sale to an investor. Generally when mortgage interest rates rise, the value of loans we have in our pipeline declines, and when interest rates decline the opposite is true.  We utilize hedge instruments to help protect the value of loans in our pipeline from increases in interest rates.  Consequently, basis point loan premiums, and gain on sales of loans, are best analyzed in conjunction with the basis point gain or loss from our derivative financial instruments and market adjustments on our pipeline. We continued to use forward sales of mortgage-backed securities (TBA) and options on forward sales of mortgage-backed securities as our primary hedging instruments. Due to decreases in mortgage interest rates during the second quarter of 2005 we recorded losses on derivative financial instruments of $9.8 million. For the second quarter of 2004 we recorded net gains of $15.2 million due to increasing mortgage interest rates during the quarter.

Our gross margins, before considering the impacts of timing differences, were $22.8 million for the three months ended June 30, 2005 or 63 basis points (.63%) on $3.6 billion in loan sales volume, representing an increase of $5.3 million from $17.6 million on $2.6 billion in loan sales volume for the comparable period in 2004. Loan sales volume increased $1.0 billion. Overall competitive pressure remains intense although not at levels seen in 2004. There can be no assurances that margins will remain at current levels and accordingly our gross margins would be affected if competitive pressures increase or decrease.

Our overall actual gross margin percentages, after considering timing differences, in the quarter ending June 30, 2005 approximated our target gross margin percentages, indicating that our hedging strategies were effective in protecting our pricing margins.  We believe that our hedging program was generally successful in protecting profit margins on our loan originations. 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 be less effective at certain times.

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We recorded interest income on mortgage loans held for sale of $15.2 million for the three months ended June 30, 2005. For our mortgage loans held for sale we earn interest on a loan from the date the loan is funded until sale. Accordingly, interest income related to our mortgage loans held for sale is a function of the volume of loan production, 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 on our warehouse borrowings for the period was $11.8 million. Interest income of $15.2 million less interest expense of $11.8 million results in net interest income of $3.4 million 9 basis points (.9%) on second quarter 2005 loan production of $3.7 billion. For the comparable period ended June 30, 2004 interest income was $9.0 million and interest expense was $4.4 million. This resulted in net interest earned of $4.6 million, representing 18 basis points on second quarter 2004 loan production of $2.6 billion. The reason for the basis point decline in net interest spread for 2005 was a flattening of the yield curve and a higher proportion of adjustable rate loans in our loan inventories. Interest income on bond collateral decreased in the three month period ending June 30, 2005 to approximately $0.15 million from $0.58 million in the three month period ending June 30, 2004. This reduction was a direct result of the sale of a majority of bond collateral in 2004.

The table below provides the relationship between estimated fixed, variable and total consolidated expenses to loan production for the three months ended June 30, 2005 and 2004 (dollars in thousands) (unaudited):

	Three months ending June 30, 2005
Loan production		$	3,696,807

	Estimated Variable Expenses		Estimated Variable Expenses Bpts.	Estimated Fixed Expenses			Estimated Fixed Expenses Bpts.		Total Expenses			Total Expenses Bpts.
Employee compensation and benefits	$	10,224	27.66	$	11,042		29.87		$	21,266		57.53
Office and occupancy expense	—		—	947			2.56		947			2.56
Professional fees and contract labor	366		0.99	1,527			4.13		1,893			5.12
Other operating expense	1,647		4.46	3,448			9.33		5,095			13.79
Total operating expenses	12,237		33.11	16,964			45.89		29,201			79.00
Interest expense – short term debt	11,769		31.83	—			—		11,769			31.83
Interest expense – long term debt	117		0.32	—			—		117			0.32
Total interest expense	11,886		32.15	—			—		11,886			32.15
Provision for loan losses	—		—	170			0.46		170			0.46
Gain on REO, net	—		—	12			0.03		12			0.03
Valuation adjustment – Bond Collateral	—		—	(38		)	(0.10	)	(38		)	(0.10	)
Total consolidated expenses	$	24,123	65.26	$	17,108		46.28		$	41,231		111.54

	Three months ending June 30, 2004
Loan production		$	2,566,360

	Estimated Variable Expenses		Estimated Variable Expenses Bpts.	Estimated Fixed Expenses			Estimated Fixed Expenses Bpts.		Total Expenses			Total Expenses Bpts.
Employee compensation and benefits	$	6,067	23.64	$	8,332		32.47		$	14,399		56.11
Office and occupancy expense	—		—	959			3.74		959			3.74
Professional fees and contract labor	197		0.77	1,172			4.57		1,369			5.34
Other operating expense	1,236		4.81	3,451			13.45		4,687			18.26
Total operating expenses	7,500		29.22	13,914			54.23		21,414			83.45
Interest expense – short term debt	4,422		17.23	—			—		4,422			17.23
Interest expense – long term debt	332		1.29	—			—		332			1.29
Total interest expense	4,754		18.52	—			—		4,754			18.52
Provision for loan losses	—		—	128			0.50		128			0.50
Gain on REO, net	—		—	(61		)	(0.24	)	(61		)	(0.24	)
Valuation adjustment – Bond Collateral	—		—	880			3.43		880			3.43
Total consolidated expenses	$	12,254	47.74	$	14,861		57.92		$	27,115		105.66

Total expenses incurred for the three months ended June 30, 2005 were approximately $41.2 million. Operating expenses, which included all expenses except interest expense (employee compensation and benefits, office and occupancy expense, professional fees and contract labor and other operating expenses), were approximately $29.2 million or approximately 79 basis points (.79%) for the three months ended June 30, 2005. For the comparable period ended June 30, 2004, there were approximately $27.1 million of total expenses, of which approximately $21.4 million or approximately 83 basis points (.83%) were operating

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expenses (which excludes interest expense, provision for loan losses, gain on REO and valuation adjustment). The increase in operating expenses in the second quarter of 2005 was primarily due to the increase in loan production and loan production-related expenses and increases in the number of branch and corporate headquarters personnel. Although operating expenses increased for the three months ended June 30, 2005 the basis points declined because fixed costs did not rise in relation to increased loan volume. For the three months ended June 30, 2005, expenses included approximately $9.2 million in sales commissions, which vary in proportion to the volume of loan production, or approximately 25 basis points (.25%) on $3.7 billion in funded loans. The basis point commissions expense increase in 2005 was due to a higher proportion of new account executives receiving guaranteed commissions during their first three months with our Company and higher commissioned product type volume.

Operating expenses totaled $29.2 million or approximately 79 basis points (.79%), on $3.7 billion in loan production in the second quarter of 2005 which is an increase from the same period in 2004 but a decrease in basis points. The operating cost per loan produced increased from $1,466 in the second quarter of 2004 to $1,515 per loan in the second quarter of 2005. Although greater production efficiency may have been expected with a 44.9% increase in loan production, our branch system is larger and our employee counts are higher. Also, a change in our product mix and a higher proportion of purchase loan transactions have required more staffing. New branches being less efficient offset volume efficiency gains by mature branches.  Our commission rates are higher due to a change in the mix of loan product (with offsetting revenue benefit) and a higher proportion of commission guarantees (which are temporary) due to higher recruiting levels. Also, our new Correspondent and Subprime lending channels continue to incur losses while ramping up infrastructure and loan production volume.

The effective combined federal and state tax rates are estimated to be 44%.  In 2004, losses increased our deferred income tax benefit to approximately $10.7 million at December 31, 2004. At June 30, 2005 our deferred income tax benefit balance was increased to $11.6 million.  This benefit is expected to be realized in future periods through the utilization of net operating loss carryforwards; however should the Company not generate sufficient operating profits, our deferred tax benefits may have to be reversed.  There can be no assurances that all of the Company’s deferred tax assets, totaling $11.5 million, will be realized in future periods.

Interest rate movements are difficult to predict, but mortgage interest rates generally declined during the second quarter of 2005. Projections by the MBA (July 2005) for the remainder of 2005 indicate an increase in interest rates and slight increase in loan volume ($2.6 trillion for 2004 and $2.7 trillion for 2005). 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. We have been investing in growth and expanding and will continue to expand our business operations, primarily in sales areas, while we focus on controlling our fixed expenses. 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 current level of operating expenses.

We continue to hold a small portfolio of bond collateral mortgage loans ($11.6 million) and related debt ($10.1 million).

Six Month Results

We recorded a net loss of $1.1 million for the six-month period ending June 30, 2005 as compared to a net loss of $5.5 million in 2004 for the same period. These results were due in large part to (i) the same reasons described in the “Three Month Results” and (ii) for the six month period ending June 30, 2004 we recorded a $5.3 million loss on the sale of portfolio assets.

Timing differences described above adversely impacted our revenues in the both the six month period ending June 30, 2005 and 2004, For the six months ending June 30, 2005 the adverse impact was estimated to be $2.0 million and the adverse impact was approximately $0.5 million for the same six month period in 2004.

	2005			2004
	6 months			6 months
	(millions)			(millions)
12/31/04	$	(0.3	) reverse prior	$	(1.7	) reverse prior
6/30/05	2.3		at quarter end	2.2		at quarter end
Net	$	2.0		$	0.5

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The table below provides a six month comparative view of loan production for 2005 and 2004 (unaudited):

2005 & 2004 YTD Loan Fundings by Month

	(in millions)
	2005		2004
January	$	727	$	436
February	816		558
March	1,164		877
April	986		1,147
May	1,223		751
June	1,488		668
Year to date totals	$	6,404	$	4,437

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The chart below compares our revenue categories to basis points of loans sold for the six month periods ending June 30, 2005 and June 30, 2004.

($ amounts in 000’s) (unaudited)

	Six Months Ended June 30, 2005		Six Months Ended June 30, 2004		2005 Increase (Decrease)
Loans sold, net	$	6,133,187	$	4,251,688	$	1,881,499

	Amount Income (Expense)			Basis Points (Loans Sold)		Amount Income (Expense)			Basis Points (Loans Sold)		Amount				Basis Points (Loans Sold)
Revenues:
Premiums	$	114,782		187.15		$	71,942		169.21		$	42,840			17.94
Broker fees	16,374			26.70		10,168			23.92		6,206				2.78
Mortgage broker premiums	(72,013		)	(117.42	)	(55,440		)	(130.39	)	(16,573			)	12.97
Premium recapture and loan loss provisions	(2,152		)	(3.51	)	(3,195		)	(7.51	)	1,043				4.00
Deferred origination costs	(6,083		)	(9.92	)	(5,636		)	(13.26	)	(447			)	3.34
Gain on sales of loans	$	50,908		83.00		$	17,839		41.97		$		33,069		41.03
Derivative financial instruments and market adjustments	(6,727		)	(10.97	)	8,603			20.23		(15,330			)	(31.02	)
Gain on sales of loans, after derivative financial instruments and market adjustments (“gross margin”)	$	44,181		72.04		$	26,442		62.20		$	17,739			9.83
Interest on mortgage loans held for sale	25,007			40.77		14,008			32.95		10,999				7.82
Interest on bond collateral	433			0.71		2,203			5.18		(1,770			)	(4.47	)
Total interest income	25,440			41.48		16,211			38.13		9,229				3.35
Other income	384			0.63		729			1.72		(345			)	(1.09	)
Total revenue	$	70.005		114.14		$	43,382		102.05		$	26,623			12.09

Gain on sales of loans after derivative financial instruments and market adjustments, increased for the six months ended June 30, 2005 over the same period ended June 30, 2004 due to a higher level of loans sold and better gross margins due to changes in our product mix. Decreasing interest rates for the six months ended June 30, 2005 increased the gain on sales of loans and decreased the value of derivative financial instruments and market adjustments. For the six months ended June 30, 2004 increasing interest rates increased the value of derivative financial instruments but decreased our gain on sale margins.

Premium recapture and loan loss provisions decreased by $1.0 million in the six months ended June 30, 2005 compared to the same period in 2004. The decrease was mainly due to a reduction in loan loss reserves in the first six months of 2005 which was the result of a change in estimate for FHA loan reserves (as a result of new information showing a reduced exposure to loss). Premium recapture expense decreased in the first six months of 2005 compared to the same period in 2004 which overcame second quarter increases due to second quarter loan production volume increases. If interest rates rise and refinancing activity decreases, premium recapture expense will decline as a percentage of loans sold.

Due to decreases in mortgage interest rates during the first six months of 2005 we recorded losses on derivative financial instruments of $6.7 million. For the same period in 2004 we recorded net gains of $8.6 million due to increasing mortgage interest rates.

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Our gross margins were $44.1 million for the six months ended June 30, 2005 or 72 basis points (.72%) on $6.1 billion in loan sales volume, representing an increase of $17.7 million from $26.4 million on $4.3 billion in loan sales volume for the comparable period in 2004. Loan sales volume increased $1.9 billion.

We recorded interest income on mortgage loans held for sale of $25.0 million for the six months ended June 30, 2005. Interest expense on our warehouse borrowings for the period was $18.5 million. The resulting net interest income earned on loan inventories was $6.5 million (interest income of $25.0 million less $18.5 million of interest expense), representing 10 basis points (.10%) on first six months of 2005 loan production of $6.4 billion. For the comparable period ended June 30, 2004 interest income was $14.0 million and interest expense was $6.8 million. This resulted in net interest earned of $7.2 million, representing 17 basis points (.17%) on the first six months 2004 loan production of $4.4 billion. The reason for the net interest decrease for 2005 was a flattening of the yield curve. Interest income on bond collateral decreased in the six month period ending June 30, 2005 to approximately $0.43 million from $2.2 million in the six month period ending June 30, 2004. This reduction was a direct result of the sale of a majority of bond collateral in 2004.

The table below provides the relationship between estimated fixed, variable and total consolidated expenses to loan production for the six months ended June 30, 2005 and 2004 (dollars in thousands) (unaudited):

	Six months ending June 30, 2005
Loan production		$	6,404,459

	Estimated Variable Expenses		Estimated Variable Expenses Bpts.	Estimated Fixed Expenses			Estimated Fixed Expenses Bpts.		Total Expenses			Total Expenses Bpts.
Employee compensation and benefits	$	17,413	27.19	$	21,118		32.97		$	38,531		60.16
Office and occupancy expense	—		—	2,050			3.20		2,050			3.20
Professional fees and contract labor	633		0.99	2,401			3.75		3,034			4.74
Other operating expense	3,035		4.74	6,380			9.96		9,415			14.70
Total operating expenses	21,081		32.92	31,949			49.88		53,030			82.80
Interest expense – short term debt	18,518		28.91	—			—		18,518			28.91
Interest expense – long term debt	229		0.36	—			—		229			0.36
Total interest expense	18,747		29.27	—			—		18,747			29.27
Provision for loan losses	—		—	232			0.36		232			0.36
Gain on REO, net	—		—	9			0.01		9			0.01
Valuation adjustment – Bond Collateral	—		—	(38		)	(0.06	)	(38		)	(0.06	)
Total consolidated expenses	$	39,828	62.19	$	32,152		50.19		$	71,980		112.38

	Six months ending June 30, 2004
Loan production		$	4,435,807

	Estimated Variable Expenses		Estimated Variable Expenses Bpts.	Estimated Fixed Expenses			Estimated Fixed Expenses Bpts.		Total Expenses			Total Expenses Bpts.
Employee compensation and benefits	$	9,868	22.25	$	16,374		36.91		$	26,242		59.16
Office and occupancy expense	—		—	1,795			4.05		1,795			4.05
Professional fees and contract labor	358		0.81	2,046			4.61		2,404			5.42
Other operating expense	2,618		5.90	6,322			14.25		8,940			20.15
Total operating expenses	12,844		28.96	26,537			59.82		39,381			88.78
Interest expense – short term debt	6,767		15.25	—			—		6,767			15.25
Interest expense – long term debt	1,227		2.77	—			—		1,227			2.77
Total interest expense	7,994		18.02	—			—		7,994			18.02
Provision for loan losses	—		—	128			0.29		128			0.29
Gain on REO, net	—		—	(320		)	(0.72	)	(320		)	(0.72	)
Valuation adjustment – Bond Collateral	—		—	5,309			11.97		5,309			11.97
Total consolidated expenses	$	20,838	46.98	$	31,654		71.36		$	52,492		118.34

Total expenses incurred for the six months ended June 30, 2005 were approximately $72.0 million. Operating expenses, which included all expenses except interest expense (employee compensation and benefits, office and occupancy expense,

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professional fees and contract labor and other operating expenses), were approximately $53.0 million for the six months ended June 30, 2005. For the comparable period ended June 30, 2004, there were approximately $52.5 million of total expenses, of which approximately $39.4 million were operating expenses. The increase in operating expenses in 2005 was primarily due to the increase in loan production and loan production-related expenses and increases in the number of branch and corporate headquarters personnel. For the six months ended June 30, 2005, expenses included approximately $15.2 million in sales commissions, which vary in proportion to the volume of loan production, or approximately 24 basis points (.24%) on $6.4 billion in funded loans. The basis point commissions expense increased in 2005 due to a higher proportion of new account executives receiving guaranteed commissions during their first three months with our Company and higher commissioned product type volume.

Operating expenses totaled $53.0 million or approximately 83 basis points (.83%), on $6.4 billion in loan production in the first six months of 2005. Total operating expenses in basis points of loan production (which is a measurement of the cost per loan) decreased for the six months ended June 30, 2005 compared to the same period in 2004 (from 89 basis points (.89%) in 2004 to 83 basis points (.83%) in 2005). The operating cost per loan produced increased from $1,561 in the first six months of 2004 to $1,571 per loan in the first six months of 2005. Although greater production efficiency may have been expected with a 44.4% increase in loan production, our branch system is still maturing. New branches being less efficient offset volume efficiency gains by mature branches.  Also, our new Correspondent and Subprime lending channels continue to incur losses while building loan production volume.

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Liquidity and Capital Resources

General

Our sources of liquidity during the six months ended June 30, 2005 primarily consisted of the following:

•              borrowings under our warehouse facilities;

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

•              hedging gains;

•              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;

•              interest expense under our warehouse facilities;

•              operating expenses, including commissions;

•              repayment of our warehouse borrowings;

•              increasing 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 and;

•              funding certain mortgage originations without the use of warehouse financing.

Cash Generated By and Used In Our Operations

During the six months ended June 30, 2005, on a consolidated basis we had net negative cash flow of $22.0 million. The principal factors impacting our negative cash flow are:

•Net increases in our cash investment in loan inventories and loan sale receivables totaled approximately $25.0 million.  Our warehouse line lending agreements typically 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 entirely with equity capital. We typically have cash invested totaling between 1% 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 $238.4 million at December 31, 2004 to approximately $512.4 million at June 30, 2005. 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 utilization to carry loan inventories to increase in direct proportion to the inventory held.

•      Cash usage for capital expenditures totaled approximately $0.8 million.

•      Transfers of cash to restricted cash accounts totaled $0.8 million.  Restricted cash increased to $2.85 million representing Company cash accounts required to be maintained under certain warehouse lending agreements.

•      Other consolidated operating cash flow totaled $4.5 million during the six months ended June 30, 2005.

For the remainder of 2005, wherever possible, we are attempting to utilize our current support staffing levels (except for increases in the number of account executives) and 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 increase loan production, despite minimal growth in the overall loan origination market from calendar year 2004 to 2005 and to react more quickly to volume changes. We will attempt to increase the proportion of variable costs while controlling fixed costs to maintain flexibility in the cost structure which will react more quickly to volume changes. For the remainder of 2005, we expect to average greater than one billion dollars per month of new mortgage loans and fund these originations with equity capital and warehouse facility borrowings. We expect our loan inventory balances to generally increase during the remainder of 2005.  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 or should gain on sale margins or interest spreads on our warehouse loans decline, 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 which will include continued support for Subprime and Correspondent Lending activities which are not expected to be profitable until the fourth quarter of 2005. We are therefore dependent on significant levels of warehouse financing to help execute our mortgage banking strategy. Considering investments in Correspondent and Subprime lending activities, timing differences for revenue and expense recognition,  and given margin stability (without extraordinary charges) we must generate approximately $1.1 billion to $1.2 billion in loan sales per month to avoid negative operating cash flow.

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During the three months ending June 30, 2005 we averaged $1.2 billion per month in loan production and during the six months ending June 30, 2005 we averaged $1.0 billion per month in loan production.  See Business Risk Factors in Item 2 below. Management believes that our Company has sufficient sources of liquidity at June 30, 2005 to meet anticipated business requirements for the foreseeable future.

Short-Term Debt

As of June 30, 2005, short-term debt consists of $500.8 million of revolving credit lines (warehouse facilities) used to fund our lending activities. As of June 30, 2005, mortgage loans held for sale totaling $512.4 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 $500.8 million with four financial institutions. At June 30, 2005, our maximum permanent combined borrowings from these four financial institutions are $1.6 billion. As of June 30, 2005 we also had access to an additional $500 million in temporary borrowing capacity, of which $300 million subsequently became permanent and $200 million expired in early July 2005. 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, originally dated as of November 26, 2001 (current expiration date is May 22, 2006), (the “Bank Credit Agreement”) with JPMorgan Chase Bank; (ii) a secured mortgage warehousing revolving credit agreement, originally dated as of March 28, 2002 (there is no expiration date as this is an uncommitted facility) (the “UBS Agreement”) with UBS Real Estate Securities Inc.; (iii) a secured mortgage warehousing revolving credit agreement, originally dated as of October 11, 2002 (current expiration date of December 31, 2005), (the “Countrywide Agreement”) with Countrywide Warehouse Lending; and (iv) a 729-day secured mortgage warehousing revolving credit agreement, originally dated as of September 15, 2003 (current expiration date of July 31, 2006), (the “Agreement”) with Residential Funding Corporation. Each warehouse facility is entered into by our subsidiary American Mortgage Network, Inc. and guaranteed by AmNet Mortgage, Inc. or entered into by both corporations. 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 but not limited to covenants based on tangible net worth, cash flows, net income, and liquidity of our Company. As of June 30, 2005 the Company was not in compliance with certain warehouse line facility covenants due to GAAP losses in the second quarter of 2005. Waivers were obtained from three of our four warehouse providers and we believe we are in good standing with all of our warehouse lenders. The Company is in the process of obtaining the final waiver and is expected to be received by August 22, 2005.

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 Loan Commitments to Borrowers and Commitments to Sell Loans and Mortgage Backed Securities

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. 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 total rate lock commitments to arrive at the net exposure to interest rate changes in the market. As loans fund, we typically sell or assign our hedges and enter into mandatory loan sale commitments with our correspondent investors. The following is a summary of our commitments to fund and commitments to sell loans and mortgage backed securities at June 30, 2005 and December 31, 2004 (dollars in thousands):

	June 30, 2005		December 31, 2004
Commitments to Fund Loans:
Commitments to originate loans at set interest rates (before applying estimated fallout)	$	1,874,289	$	813,081
Commitments to originate loans at set interest rates (after applying estimated fallout)	1,003,410		471,884
Commitment to Sell Loans or Mortgage Backed Securities:
Mandatory commitments to sell mortgage loans held for sale	337,195		100,798
Forward sales of mortgage backed securities (TBA) and options on forward sales	1,245,500		611,000

The above table merely lists the commitments we have to fund loans and sell loans or mortgage backed securities and is not referencing any of our closed loan inventory. In Note 6 to our audited financial statements we have quantified the interest rate exposure we have on our pipeline and compare this exposure to our hedge coverage.

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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, 2005	Total		Less than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Long-Term Debt	$	10,057	$	3,477	$	4,882	$	1,698	$	—
Operating Leases	9,556		3,530		4,430		1,596		—
Total	$	19,613	$	7,007	$	9,312	$	3,294	$	—

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

Business Risk Factors

Failure to Achieve and Maintain Effective Internal Controls In Accordance With Section 404 of the Sarbanes-Oxley Act Could Have a Material Adverse Effect on Our Business, Operating Results and Stock Price

We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act. Under Section 404 our management will be required to assess the effectiveness of our internal controls over financial reporting and our independent auditors will be required to issue an attestation report on management’s assessment. Our loan origination software consists of proprietary programs which are not completely documented, and we are currently implementing additional control measures in order to strengthen various aspects of our technology infrastructure. During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to maintain adequate internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business, operating results and the trading price of our stock.

We Have a Limited Operating History in Correspondent Lending, Which Makes it Difficult to Predict our Future Prospects for this Lending Channel

In 2001 we began our mortgage banking operations and operated exclusively as a wholesale lender. As such we have worked with our approved broker clients, who refer loans to the Company for underwriting and funding. In 2004 we made a strategic decision to create a correspondent lending channel. Incremental revenues from this channel will help us to more fully leverage our wholesale lending infrastructure, particularly our headquarters administrative costs. Correspondents are larger brokers, mortgage bankers or other financial institutions who originate and fund loans and sell closed loans on a service released basis. We have hired an experienced sales team and established an operations center in Columbia, Maryland to process these loan purchases. We began operations in the first quarter of 2005. The correspondent segment of the mortgage banking market is highly competitive, particularly relative to the pricing of loans, and is dominated by large financial institutions that have large and well established correspondent lending sales and operating platforms. Additionally, many of these competitors retain the servicing on the loans they purchase, and may offer their clients more operational flexibility than we intend to offer since we sell all of the loans we fund or purchase on a servicing released basis. As a result of our Company’s limited experience in correspondent lending and formidable competitors in this segment of the industry, it is difficult to evaluate our growth prospects for this new channel. Overhead expenses directly attributable to the correspondent channel are currently in the range of $39,000 to $122,000 per month. While we continue to dedicate overhead expense to create additional capabilities and build our market presence in this new channel, we may not be able to achieve the level of anticipated loan fundings to cover our direct overhead, or it may take longer than we have anticipated.

We Have a Limited Operating History in Subprime Lending, Which Makes it Difficult to Predict our Future Prospects for this Lending Channel

In 2004 we made a strategic decision to build the infrastructure and hire executives to enable our Company to build our subprime volume to 20% of total volume by the end of 2007. We created a subprime loan underwriting center and began to hire dedicated subprime wholesale account executives. Incremental revenues from this channel will help us to more fully leverage our existing lending infrastructure, particularly our headquarters administrative costs. The subprime segment of the mortgage banking market is highly competitive, and is dominated by large, well-established firms who specialize in this segment of the market. Additionally, many of these subprime lenders have portfolio capabilities and may offer their clients more operational flexibility that we intend to offer since we sell all of the loans we fund or purchase on a servicing released basis. As a result of the increasingly competitive nature of this market segment and our Company’s limited experience in subprime lending, it is difficult to evaluate our growth prospects for this product line. Overhead expense directly attributable to the subprime business is currently in the range of $250,000 month. While we will continue to dedicate overhead expense and intend to increase our overhead expenses in 2005 to recruit sales professionals and build our market

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presence in this new channel, we may not be able to achieve the level of anticipated fundings to cover our direct overhead, or it may take longer than we have anticipated.

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 was 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. 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

 We expect to incur additional costs and expenses related to the expansion of our sales force, development of our correspondent and subprime lending channels, and investment in our information technology capabilities. If this expansion does not result in adequate revenues, our financial performance will suffer. We must generate approximately $1.1 billion to $1.2 billion in sales volume per month in 2005, absent further declines in revenue margins due to competitive pressures or spread compression, to meet our expense obligations. We are expanding our business operations and increasing our fixed expenses.  Our strategy requires us to capture an increasing percentage of the market in wholesale lending, correspondent lending and subprime lending, 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 utilize 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.”

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, 2005, we had approximately 885 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.

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

Our success depends, in large part, on our ability to originate loans in sufficient quantity such that the gain on sales of loans net of hedges and other revenue 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 mortgage loan origination market is directly tied to, the general level of interest rates, and refinance activity. Competitiveness has increased, 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 Generate 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, 2005, lease commitments for headquarter and regional offices totaled approximately 209,400 square feet. There were 885 employees including 204 employees who are paid solely by commissions. The balance of employees are salaried or hourly employees. In order to achieve profitability at this staffing level plus expected staffing levels in 2005, our monthly loan sales volume must be approximately $1.1 to $1.2 billion, absent further deterioration in pricing margins due to competitive pressures, 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. Furthermore, should competitive pressures require us to reduce targeted gains on the sale of loans, the volume required to sustain profitability would increase. There can be no assurances that we will be able to

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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.

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, the value of funded loans not yet committed for sale or positions in derivative securities. Accordingly, the consolidated net income of our Company may fluctuate from period to period.

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 subsequent quarter, our results of operations for the previous quarter could be significantly depressed.

Our Financial Results Fluctuate As a Result of Seasonality

Although the refinance portion of our business is not seasonal, our purchase business is generally subject to seasonal trends. During 2003, our refinance business grew to a high of 90% of our activity. In 2004 and the first six months of 2005, as we returned to more normal markets and purchase and refinance activity became more equal, seasonality became a significant factor in our business. Seasonality trends reflect the general pattern of housing sales, which typically peak during the spring 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.

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

We use forward sales of mortgage-backed 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 risk. 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 locked loan commitments and closed loans. However, our use of derivatives may not offset all of our risk related to changes in interest rates. In the past we have incurred, and in the future we may 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 be less 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 locked loan 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 of closed loans. These rate locked loan commitments and closed loans are collectively referred to as our pipeline. To manage the interest rate risk of our pipeline, we continuously project the percentage of rate locked loan commitments on loans we expect to close. Because projecting a percentage of rate lock commitment 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. 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 instruments will offset the risk of changes in interest rates.

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If interest rates change, the actual percentage of rate lock commitment loans that close may differ from the projected percentage. A sudden significant increase in interest rates can cause a higher percentage of rate lock commitment 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 instruments, adversely affecting results of operations. Likewise, if a lower percentage of rate lock commitment loans close 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. Also, as our loan product list changes over time, our assumptions concerning rate locked loan closings may change. Incorrect assumptions will adversely affect results of operations.

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

As of June 30, 2005 we had four revolving warehouse borrowing facilities in place totaling $2.1 billion (including $500 million through temporary facilities). These facilities enable AmNet to fund in excess of $2.1 billion per month depending on how quickly we are able to process loan fundings and subsequently sell funded loans within the month.  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 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. While the Company expects to be able to meet their covenants (and if not, obtain waivers), if we fail to meet or satisfy any of these covenants and/or not obtain waivers, 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. 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 uncured default under our credit facilities could have a materially adverse effect on our financial results. As of June 30, 2005 the Company was not in compliance with certain warehouse line facility covenants. Waivers were obtained and we believe we are in good standing with all of our warehouse lenders.

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.

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We Sell a Substantial Portion of Loans We Originate to Competitors

We have warehouse line facilities with Countrywide Home Loans, Inc. (“Countrywide”). We also sell a substantial portion of our loans to Countrywide as well as other competitors. For the six months ending June 30, 2005 we sold (by loan volume) to Countrywide 45.2%, Morgan Stanley Mortgage Capital Inc. (“Morgan Stanley”) 18.2% and Wells Fargo Funding Inc. (“Wells Fargo”) 12.9% of all loan sales. If Countrywide, Wells Fargo or Morgan Stanley 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 borrowing. Any of these events may have an adverse effect on our results of operations.

Dependency on Correspondent Investors, Secondary Markets

Our ability to generate gains on the sales 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 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 (32% by loan volume) of all loans closed for the six month period ended June 30, 2005. 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 investors for loans in California, potentially adversely affecting our results of operations and financial condition.

Repurchased or Non-saleable 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 inadvertently 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 these reserves are adequate, or that loan losses associated with repurchased or unsaleable loans will not adversely impact results of operations or the financial condition of our Company. Additionally, should an investor or group of investors experience an adverse trend of non-compliant loans from our Company, we could lose the privilege of selling loans to the investor(s), which could have a material adverse impact on our ability to sell our loans and thus adversely impact the results of operations or the financial condition of the Company.

The Company Provides Loans to Subprime Borrowers which May Adversely Affect Earnings

Credit risks associated with subprime mortgage loans will be greater than those associated with mortgage loans that conform to FNMA and FHLMC guidelines. The principle difference between subprime mortgage loans and conforming mortgage loans is that subprime 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 subprime underwriting and funding center to help mitigate the risks associated with these loans, however there can be no assurance that all subprime 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 subprime lending.

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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:

•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 /or high cost loans which are defined as mortgage loans that feature either an interest rate or points and fees charged in connection with loans that exceed certain thresholds prescribed by federal or state law or local ordinances. We have generally avoided originating loans that exceed the APR or “points and fees” thresholds of these laws, rules and regulations. The companies that buy our loans and/or provide financing for our loan 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. 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 application. We cannot assure you that systems failure or interruptions will not occur, or if they do occur that

36

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 could 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 brokers. The Company’s overall loan fundings are dependent upon 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 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 1.0% to 4.0% of the cost basis of these loans. While we believe our capital base, cash reserves and cash flow from 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 Errors or 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 or purchased 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 loan 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. Additionally, in the case of Alternative A loans, which in some cases permit the borrower to “state” their income but not have to provide income documentation, the mortgage broker may intentionally coach a borrower to make material misrepresentations in order to qualify for a loan.

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. We have representations and warranties agreed upon by our correspondent lending customers to repurchase loans which do not meet certain 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 of 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

37

fraud checks utilized by us. Should we originate a significant number of fraudulent loans or loans based on inaccurate documentation, and incur costs or losses that cannot be recovered through contractual remedies we have with our brokers, correspondents or other vendors, 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 Loan 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 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.

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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 on a daily basis.

Mortgage Origination – 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 results of operations and our financial position.

Other Risks

Our ability to generate gains on the sales of mortgages is largely dependent upon the continuation of correspondent investor programs offered by large institutions. Typically these institutions have mortgage banking operations with which we compete. At any point in time an investor could discontinue our business relationship and therefore narrow the scope of investors available to buy our loans.

Sensitivity Analysis

The methods we have used in our sensitivity analysis have not changed significantly since December 31, 2004.  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.

	(dollars in thousands)
							If Interest Rates Were To
	June 30, 2005						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	$	28,636		$	28,636		$	28,636	$	28,636		$	28,636	$	28,636
Mortgage loans held for sale, net, pledged, (lower of cost or market)	512,394			517,013			514,822		518,367			512,565		519,659
Derivative financial instruments	(568		)	(568		)	1,017		(2,690		)	1,483		(6,537		)
Bond collateral and real estate owned, net	11,635			12,372			12,370		12,374			12,375		12,361
Total interest-earning assets	$	552,097		$	557,453		$	556,845	$	556,687		$	555,059	$	554,119
Interest-bearing liabilities:
Short-term debt	$	500,786		$	500,786		$	500,786	$	500,786		$	500,786	$	500,786
Long-term debt, net	10,057			10,057			10,057		10,057			10,057		10,057
Total interest-bearing liabilities	$	510,843		$	510,843		$	510,843	$	510,843		$	510,843	$	510,843

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

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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.

Derivative financial instruments

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.

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.

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
	None.
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
	The Company did not repurchase any of its shares in the six months ended June 30, 2005.  The Company’s repurchase program announced May 13, 2004 authorized the repurchase of 400,000 shares of which 294,610 remain available to be repurchased with no expiration date on this program.

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES
	Not applicable.
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	None
ITEM 5.	OTHER INFORMATION
	(a)   On May 10, 2005 American Mortgage Network, Inc., a subsidiary of the Company, entered in to a Master Agreement with Fidelity Information Services, Inc. and Addendum 1 and Addendum 2 thereto.  Pursuant to the agreement, Fidelity will service the company’s loans from the time they are closed until the time the company sells the loans.  The Company has agreed to pay Fidelity for equipment use, software and processing fees based on usage along with certain minimum monthly fees. The term of the Agreement is five years. Termination of the agreement requires six months notice. Fidelity retains ownership rights to all software used by the Company   A copy of the agreement is filed with this Form 10-Q.
	(b)   None
ITEM 6.	EXHIBITS

(a)		Exhibits
	(1)	3.1	Second Articles of Amendment and Restatement of the Registrant
	(2)	3.1A	Articles of Amendment (regarding name change)
	(3)	3.2	Fourth Amended and Restated Bylaws of the Registrant
	(4)	4.1	Registration Rights Agreement dated February 11, 1997
	(3)	4.3	First Amended and Restated Rights Agreement by and between the Company and American Stock Transfer and Trust Company dated as of February 2, 1999 and amended as of March 4, 2004.
	(4)	10.6	1997 Stock Incentive Plan
	(4)	10.7	Form of 1997 Stock Option Plan, as amended
	(4)	10.8	Form of 1997 Outside Directors Stock Option Plan
	(4)	10.9	Form of Employee Stock Purchase Plan
	(4)	10.14	Form of Indemnity Agreement
	(5)	10.17	The Termination and Release Agreement, dated as of December 20, 2001
	(5)	10.18	Amendment No. 1 to the Securities Purchase Agreement, dated as of December 20, 2001
	(5)	10.19	Amendment No. 1 to the Registration Rights Agreement, dated as of December 20, 2001
	(6)	10.20	Lease between American Residential Investment Trust, Inc. and Sorrento Wateridge Partners, L.P. dated November 30, 2001
	(7)	10.21	Executive Employment Agreement between AmNet Mortgage, Inc. and John  Robbins dated September 30, 2004.
	(7)	10.22	Executive Employment Agreement between AmNet Mortgage, Inc. and Jay Fuller dated September 30, 2004.
	(7)	10.23	Executive Employment Agreement between AmNet Mortgage, Inc. and Judith A. Berry dated September 30, 2004.
	(7)	10.24	Executive Employment Agreement between AmNet Mortgage, Inc. and Lisa Faulk dated September 30, 2004.
	(8)	10.25	Long Term Incentive Cash Plan for Executive Officers
	(11)	10.25A	Amendment to the Long Term Incentive Cash Plan

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(8)	10.26	2004 Executive Bonus Plan Description
(9)	10.27	2004 Equity Incentive Plan
(9)	10.28	Stock Repurchase Agreement dated June 24, 2004 with Home Asset  Management Corp.
(9)	10.28.1	Supplemental Executive Retirement Plan
(10)	10.29	Form of Restricted Stock Agreement
(10)	10.30	Form of Long Term Incentive Plan Restricted Stock Agreement
(10)	10.31	Form of Standard Restricted Stock Unit Agreement
(10)	10.32	Form of Executive Restricted Stock Unit Agreement
(10)	10.33	Form of Stock Option Agreement
(10)	10.34	Executive Officer Annual Cash Bonus Program — 2005
(10)	10.35	Cash Long Term Incentive Program (2005-2006)
(10)	10.36	Cash Long Term Incentive Program (2005-2007)
(10)	10.37	Form of Director Stock Option Agreement
(10)	10.38	Form of Director Restricted Stock Agreement
(10)	10.39	Schedule of Director Compensation
(12)	10.40	Fidelity Information Services Inc.  Master Agreement, addendum 1 & 2 dated  May 10, 2005
	31.1	Certification of Chief Executive Officer
	31.2	Certification of Chief Financial Officer
	32.1	Certification of Chief Executive Officer
	32.2	Certification of Chief Financial Officer

(1)	Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 filed March 31, 2003.
(2)	Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 filed May 17, 2004.
(3)	Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 filed March 30, 2004.
(4)	Incorporated by reference to Registration Statement on Form S-11 filed September 25, 1997 (File No. 333-33679).
(5)	Incorporated by reference to the Company’s current Report on Form 8-K filed January 9, 2002 (File No. 001-13485).
(6)	Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 filed May 15, 2003.
(7)	Incorporated by reference to the Company’s Current Report on Form 8-K filed October 6, 2004.
(8)	Incorporated by reference to the Company’s Amendment to Annual Report on Form 10-K/A for fiscal year ended December 31, 2003 filed April 29, 2004.
(9)	Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 filed August 16, 2004.
(10)	Incorporated by reference to the Company’s Current Report on Form 8-K filed April 7, 2005.
(11)	Incorporated by reference to the Company’s Current Report on Form 8-K filed February 11, 2005.
(12)	Confidential treatment has been requested for a portion of this contract.

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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 15, 2005	By:	/s/ Judith A. Berry
		Judith A. Berry,
		Executive Vice President Chief Financial Officer

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EX-10.40

Exhibit 10.40

CONFIDENTIAL TREATMENT REQUESTED—REDACTED COPY

CONFIDENTIAL TREATMENT REQUESTED:  INFORMATION FOR WHICH CONFIDENTIAL TREATMENT

HAS BEEN REQUESTED IS OMITTED AND NOTED WITH “***.”  AN UNREDACTED VERSION OF THIS

DOCUMENT HAS BEEN SUBMITTED SEPARATELY TO THE SECURITIES AND EXCHANGE COMMISSION.

MASTER AGREEMENT

BETWEEN

FIDELITY INFORMATION SERVICES, INC.

AND

AMERICAN MORTGAGE NETWORK, INC.

Agreement No.: 264-05M

GENERAL TERMS AND CONDITIONS

This Agreement is entered into as of May 10, 2005 (“Effective Date”), by and between Fidelity Information Services, Inc., located at 601 Riverside Avenue, Jacksonville, Florida 32204 (“Fidelity”) and American Mortgage Network, Inc., located at 10421 Wateridge Circle, Suite 250, San Diego, California 92121 (“Client”).

In consideration of the mutual benefits and obligations set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Fidelity and Client hereby agree as follows:

1.       DEFINITIONS

For purposes of this Agreement, the following terms shall have the definitions set forth below:

1.1“AAA” means the American Arbitration Association.

1.2“Addendum” means an attachment to this Agreement identified as an addendum and containing terms and conditions which are unique to a particular Product or Service.

1.3“Affiliate” means an entity which controls, is controlled by, or is under common control with, a party to this Agreement, as represented by ownership of a majority-in-interest of the voting stock (or other similar ownership interest if not represented by stock) of another entity.

1.4“Authorized Location(s)” means the physical location(s), as identified in the applicable Addenda or Schedules, at which licenses and Access Rights to Products and Services are granted pursuant to the terms of this Agreement.

*** Confidential material redacted and submitted separately to the Commission

1

1.5“Basic Professional Services” means initial environmental set up, rule configuration and basic Installation, implementation, consultation and training in connection with the Products and Services.

1.6“Client’s Customer” means a third party which has a contractual relationship with Client whereby Client performs Subservicing for such third party.

1.7“Client Confidential Information” means all information of a non-public nature disclosed by Client to Fidelity during the term of this Agreement.

1.8“Competitor” means any person, firm or corporation engaged in the business of developing, marketing or licensing software products or services which are in competition with the software Products and Services provided by Fidelity, or Fidelity’s parent, Affiliates or Subsidiaries.

1.9“CPI-U Index” means theU.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Index, U.S. City Average, Non-Seasonally Adjusted, for all Urban Consumers, All Items (‘82-’84 = 100).

1.10“Defect Related” means a deficiency or a problem directly related to a deficiency in the following programs or equipment, whereby such program or equipment does not perform as designed, tested, and documented in the required environment: (a) Passport, Director software programs (Fidelity generated code); (b) Passport or Director server hardware at Fidelity’s facilities; (c) Fidelity owned network components (lines, routers, modems); or (d) Fidelity defined configuration settings or parameters.

1.11“Dependent Addendum” means an Addendum which has, as a prerequisite for and/or condition of, the continuation of its force and effect, any other Addendum hereunder for Fidelity Products and Services as specifically required in the applicable Dependent Addendum.

1.12“Derivative Work(s)” means a copyrightable creation borne of and based on any pre-existing computer code, programs, system, report, Documentation, or any other existing item owned or developed by a party.

1.13“Director” means a browser-enabled, thin client product consisting of a series of computer workstation and server based programs delivered through the Portal that has been developed or licensed by Fidelity to create a graphical extension to the MSP System and provide a common platform for distributed systems integration and directed workflow.

1.14“Dispute Notice” shall have the meaning set forth in Section 18.3 (Binding Arbitration) hereof.

*** Confidential material redacted and submitted separately to the Commission

2

1.15“Disputing Party” shall have the meaning set forth in Section 18.3 (Binding Arbitration) hereof.

1.16“Documentation” means user guides and manuals, handbooks, training materials and all other printed or electronic materials relating to or describing the use of the Products and Services.

1.17“Extended Term” shall have the meaning set forth in Section 3.2 (Extended Term) hereof.

1.18“FDIC” means the Federal Deposit Insurance Corporation.

1.19“Fidelity Confidential Information” means any and all Products and Services including the Documentation, the Software, any nonpublic information which pertains to Fidelity’s processes or business operations, and any other information which Fidelity identifies to Client as confidential or proprietary, which are the sole and exclusive property of Fidelity or are licensed by Fidelity from third parties and constitute the valuable, proprietary products and trade secrets of Fidelity or such third parties, as applicable, embodying substantial creative efforts, ideas and expressions and are copyrighted under United States law and treaty provision.

1.20“Fidelity Optional Processing and Support Services Rates Schedule” means that certain Schedule attached hereto as Exhibit A.

1.21“FM Cycle” means a nightly batch cycle within the MSP System resulting from end of day and go book transactions, as defined in the Documentation.  The FM Cycle serves as a driver module that calls other programs to perform various functions, which may include but are not limited to, processing data, performing calculations, and printing reports.

1.22“GLB Act” means the Gramm-Leach-Bliley Act (15 U.S.C. Section 6801, et seq.) and the implementing regulations thereunder.

1.23“Host” means any computer(s) utilized by Fidelity as a host provider of system functionality for Products and Services.

1.24“Installation” means Fidelity’s activities or processes necessary to make the applicable Products and Services available for access or use by Client.  Installation may include but is not limited to, setting up Fidelity’s requisite hardware, software, and communications.  Installation does not include activities or processes that are the responsibility of Client which may be necessary for access or use of the Products and Services.

1.25“Internet Service(s)” means Internet and intranet based programs developed by Fidelity as well as the development, hosting, maintenance of and/or customization of web sites on the Internet by Fidelity.

*** Confidential material redacted and submitted separately to the Commission

3

1.26“MSP” means Fidelity’s mortgage servicing package.

1.27“MSP System” means Fidelity’s mortgage servicing package system consisting of the Software, Navigator™ and Fidelity RLS Training Fundamentals.

1.28“Original Term” shall have the meaning set forth in Section 3.1 (Original Term) hereof.

1.29“OTS” means the Office of Thrift Supervision.

1.30“Passport” means a browser-enabled, thin client product consisting of a series of computer workstation and server based programs delivered through the Portal that have been developed or licensed by Fidelity to serve as a repository of data designed to enhance Fidelity’s client’s business analysis and decision productivity.

1.31“Paternal Addendum” means an Addendum which is a prerequisite for the existence and continuation of any other Addendum hereof.

1.32“Portal” means Fidelity’s browser-enabled technology to support the accessibility and delivery of various Products and Services.

1.33“PowerCell” means Fidelity’s customer service support group that provides operational, application and technical support for Fidelity’s clients.

1.34“Principal Balance Loan(s)” means i) any loan on the MSP System which has an outstanding balance showing with an active loan status; ii) any equity line of credit loan which has a principal balance; iii) any equity line of credit loan which has a zero balance at the end of a billing cycle due to advances and payments being received which result in a zero balance; or iv) any equity line of credit loan which has a zero balance because no drafts have been made against such loan, but it is shown as an active loan on the MSP System.

1.35“Process” or “Processing” means performance of loan servicing activities including, but not limited to, escrow, customer service, investor accounting, and default functions utilizing the MSP System to input, update, and track loan data by executing a minimum of nineteen (19) FM Cycles per month.

1.36“Products and Services” means individually or collectively, the hardware, software, communications, systems, and services provided by Fidelity and made available to Client hereunder.

1.37“Releases” means maintenance releases of the software components of particular Products and Services, other than MSP, which do not contain additional functionality.

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1.38“Schedule” means a supplemental statement of details appended to an Addendum issued pursuant to this Agreement.  Schedules may include but are not limited to, information concerning the number of authorized User Access Rights for Products and Services, costs and/or fees associated with Products and Services, Authorized Locations, effective dates, and anniversary dates.

1.39“Seat License(s)” means an individual workstation version of a specified Product license accessible through a single user sign on ID at an Authorized Location pursuant to the terms of this Agreement.

1.40“Service Bureau Processing” means the process by which Client provides data processing services to a third party and grants to such third party and its employees use or access (beyond inquiry only access) to all or any part of the MSP System or any or all of the Products and Services provided hereunder for the purpose of performing loan servicing functions and related mortgage loan activities.

1.41“SLA” shall mean the service level agreement attached hereto as Exhibit B.

1.42“Software” means the series of computer programs developed by Fidelity and currently employed to perform electronic data processing services for its clients.

1.43“SOW” means statements of work entered into by and between Fidelity and Client in connection with SOW Services.

1.44“SOW Services” means services which may include but are not limited to, consulting, custom programming, data conversion, IP installation, project management, product implementation, program modifications, and training, that are listed in one or more SOW(s) executed by Client and Fidelity, which SOW(s) are incorporated into and form a part of this Agreement.

1.45“Subservicing” means the process by which Client and its employees perform loan servicing functions or mortgage loan activities for or on behalf of a third party who owns the servicing rights to the loans or the loan portfolio, and such third party has either inquiry-only access or no access to any part of the MSP System or the Products and Services provided hereunder.

1.46“Subsidiary” means an entity which is controlled by a party to this Agreement, as represented by ownership of a majority-in-interest of the voting stock (or other similar ownership interest if not represented by stock) by such party.

1.47“Support” means Fidelity provided standard support consisting of telephone or email support for issues pertaining to the functionality of the Products and Services as they relate to the intended design including all Defect Related issues.

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1.48“Third Party Product(s)” means all hardware, software, and communications devices and services designated and/or required for support of the Products and Services.

1.49“Third Party Review” means the annual Statement on Auditing Standards No. 70 review of Fidelity’s internal procedures and report prepared by its Certified Public Accountants.

1.50“Transferred Third Party Software” means any third party software for which Fidelity has transferred to Client the applicable licenses and support.

1.51“User Access Right” means a limited right to access and use Products and Services through a single user sign on ID at an Authorized Location pursuant to the terms of this Agreement.

1.52“Versions” means updates to the software components of particular Products and Services, other than MSP containing additional functionality.

2.TERMS AND CONDITIONS FOR PRODUCTS AND SERVICES

2.1General Terms and Conditions for Products and Services.  This Agreement sets forth the terms and conditions for the provisions by Fidelity to Client and Client Affiliates of the Products and Services during the Term, as more fully described in the Addenda attached hereto.  Fidelity will provide the Products and Services on its own and/or through one or more Fidelity Affiliates and/or subcontractors.

2.2Addenda.  Each Addendum hereto is incorporated into and forms a part of this Agreement.  All applicable terms, conditions, responsibilities and delivery schedules which are unique to particular Products or Services (as opposed to those which apply generally to all Products and Services and which are set forth elsewhere in this Agreement and in the other exhibits attached hereto) are identified in the Addenda.  The applicable Products and Services specific terms, conditions, responsibilities and delivery schedules shall govern the provision of such Products and Services.  Any new terms, conditions, responsibilities or delivery schedules which may be specifically applicable to particular Products and Services, as they are negotiated through the course of business, shall be set forth in writing and executed by the parties and added to this Agreement as an amendment.  Such action shall not constitute a modification or change of any provision of the Agreement or of any other provision of any other Addendum, unless expressly stated in such written agreement.  Unless otherwise agreed to in writing by the parties hereunder, the Products and Services to be rendered by Fidelity to Client are limited to those Products and Services which are described in the Agreement and the Addenda. 

3.TERM OF AGREEMENT

3.1Original Term.  This Agreement shall be effective on the Effective Date and continue in full force and effect for sixty (60) full calendar months from the commencement of the Processing of Client’s loans on Fidelity’s MSP System (the “Original Term”).  Fidelity and

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Client agree to promptly confirm to each other in writing the date on which conversion was completed and production commenced on the MSP System to clarify the Original Term.

3.2Extended Term.  In the event Client and Fidelity fail to execute a renewal of this Agreement at least sixty (60) days prior to the expiration of the Original Term, this Agreement shall automatically renew for an additional one (1) year extended term (the “Extended Term”) on the same terms and conditions as the Original Term; provided, however, fees for such Extended Term shall be increased by an amount not to exceed the percent increase in the CPI-U Index between the annual averages of the most recently published twelve (12) month period and the immediately preceding twelve (12) month period, provided, however, in no event shall the percentage increase be less than three percent (3%) or greater than seven percent (7%).  Unless agreed by Client and Fidelity to the contrary, this Agreement shall terminate at the end of such Extended Term.

4.PRICING, INVOICING AND PAYMENT

4.1Pricing.  All pricing for Products and Services for which Client has executed an Addendum shall be set forth in the applicable Addendum or a Schedule attached thereto.  Client shall pay Fidelity for SOW Services according to a schedule contained in the applicable SOW or, if no schedule is provided, monthly as SOW Services are performed and invoiced by Fidelity.  In addition, from time to time, Client may elect to use miscellaneous products and services such as, but not limited to, data entry, printing, microfiche, special computer usage for Easytrieve, consulting, etc.  These and other optional or usage based services will be billed to Client in accordance with Fidelity’ Optional Processing and Support Services Billing Rates Schedule, a copy of which has been provided to Client.  Fidelity’s Optional Processing and Support Services Billing Rates Schedule may be modified upon thirty (30) days written notice to Client.

4.2Invoicing and Payment.  All fees due hereunder shall be paid in U.S. Dollars and shall be due to Fidelity within thirty (30) days of the date of the invoice.  Client shall pay an interest charge equal to the lesser of the prime rate (as published in the Wall Street Journal) plus two percent (2%) per annum or the highest rate allowed by law payable per month, or portion thereof, on the unpaid balance of any amounts which are not paid in full when due (including any amount under dispute as discussed below); provided however, that in no event shall such interest charges exceed the maximum interest rate allowed by law.  All payments due to Fidelity hereunder shall, unless otherwise indicated, be mailed to Fidelity at its address listed in the preamble of this Agreement.  In the event Client disputes any amounts due, Client shall provide written notice of the amount of, and the reason for the dispute.  Such disputed amounts shall then be subject to the Informal Dispute Resolution provisions of Section 18.1.  All non-disputed items within the same invoice remain due and payable as stated above.

4.3Taxes.  All charges and fees to be paid by Client under this Agreement are exclusive of any applicable withholding, sales, use, value added, excise, services or other tax which may be assessed on the provision of the Products and Services, excluding taxes based on Fidelity’ income which shall be paid by Fidelity.  In the event that a sales, use, value added, excise,

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services or other tax is assessed on the provision of any Products and Services provided to Client under this Agreement, Client will pay directly, reimburse or indemnify Fidelity for such taxes as well as any applicable interest, penalties and other Fidelity fees and expenses.  Client shall, upon request by Fidelity, pay the same either to Fidelity or to the appropriate taxing authority at any time during or after the termination of this Agreement.  The parties will cooperate with each other in determining the extent to which any tax is due and owing under the circumstances, and shall provide and make available to each other any withholding tax certificates, and other exemption certificates or information reasonably requested by either party.

5.OWNERSHIP, CONFIDENTIALITY AND NON-DISCLOSURE

5.1Fidelity Confidential Information.  Client acknowledges that the Fidelity Confidential Information is the sole and exclusive property of Fidelity.  Any writing or work of authorship, regardless of medium, created or developed by Fidelity, Client or any third party in connection with the Products and Services under this Agreement and any contribution by Client or its employees to the enhancement or modification of the Products and Services provided hereunder, including all copyright interests therein, shall be not be considered “worksfor hire”,but shall be owned solely and exclusively by Fidelity.  To the extent that any such works may be considered works for hire under applicable law, Client agrees to assign and, upon their creation, automatically assigns to Fidelity the ownership of all copyright interests therein including, but not limited to, all software, information, Internet Services, programs and documentation without the necessity of any further consideration to Client.

5.1.1  Limited Use and Access.  To the extent any of the Products and Services hereunder require rights to access and use, and the parties have executed the appropriate Addendum or SOW associated with such Products and Services, Client is hereby granted a nontransferable, non-assignable, nonexclusive right to access and use such Products and Services for a term as stated in the applicable Addendum, in object code format only, for its sole use and benefit and for the sole purpose as stated in the applicable Addendum.  A right to access and use Products and Services does not grant or assign to Client any legal or equitable title or other right in Products and Services or any modifications of such Products and Services.  Client will utilize Fidelity Confidential Information only for data owned by Client, or data to which servicing rights, as applicable, are owned by Client.  Client shall not provide, for profit or otherwise, access to the Fidelity Confidential Information or any component thereof to any Competitor.  Client will observe confidentiality regarding the Fidelity Confidential Information including, without limitation, agreeing not to disclose or otherwise permit any other person or entity access to, in any manner, the Fidelity Confidential Information, except that such disclosure or access shall, subject to the following provisions and the provisions of Section 5.1.2, be permitted to an employee of Client requiring such access in the course of employment, to a regulatory agency, or to Client’s Customer (provided Client’s Customer is not a Competitor of Fidelity) or as required by a court of competent jurisdiction. Client must ensure that all such employees and Client’s Customers comply with the confidentiality provisions of this Agreement contained herein.  Client may not make any copies, or similar versions of the Fidelity Confidential Information without the prior written consent of Fidelity.  Except as provided for in this Agreement, the Fidelity

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Confidential Information may not be subleased, sublicensed, franchised, sold, offered for sale, outsourced, used to operate as a service bureau, encumbered or otherwise disposed of by Client, either voluntarily or by operation of law, without the prior written consent of Fidelity.

5.1.2  Subservicing.  Client may perform Subservicing; provided, however: a) Client hereby represents and warrants that access by Client’s Customers to Fidelity’s Confidential Information, the MSP System, Software and/or the Products and Services will be limited to inquiry-only; b) Client agrees that Client remains responsible for and shall pay to Fidelity all fees and charges arising from, associated with or incurred as a result of Subservicing; (c) Client’s Customers may not utilize any support provided hereunder including, but not limited to, telephone assistance from PowerCell; (d) Client will include in any agreements with Client’s Customers for Subservicing limitation of liability, indemnity and confidentiality provisions substantially the same as those set forth herein; (e) Fidelity’s liability for actual direct damages incurred by Client for claims related to Subservicing shall be, in addition to the provisions of Section 12 below, further limited to the lesser of the amount of the actual direct monetary loss suffered by Client or the amount paid to Fidelity for such loans which are the subject of Subservicing based upon the lowest per loan price charged to Client over the six (6) months preceding the date of the claim; and (f) Client’s Customers shall not be third party beneficiaries of this Agreement.

5.1.3  Modifications and Derivative Works.  Client shall not change, alter or modify, create derivative works, outsource, use the Fidelity Confidential Information to operate as a service bureau, or translate, reverse assemble, reverse engineer, reverse compile, disassemble or analyze or otherwise examine for purposes of reverse engineering the Software or any other Fidelity Confidential Information provided hereunder. Client acknowledges that any modification, adaptation, translation, or derivative work by Fidelity (or by Client in violation of this provision) and based on the Fidelity Confidential Information shall be trade secrets and are the exclusive, confidential, and proprietary property of Fidelity, and Client hereby transfers and assigns any and all rights in and to any such modification, adaptation, translation, or derivative work to Fidelity, including any copyrights thereto.  Client acknowledges that Fidelity’s licensors shall be third party beneficiaries for the purpose of protecting their respective property provided under this Agreement.  Client shall provide prompt written notice to Fidelity if Client knows of, or suspects, any such unauthorized access to, or use of the Fidelity Confidential Information.  Client agrees not to remove any copyright, trademark or other intellectual property notices or property tags from the Fidelity Confidential Information.

5.1.4  Termination of Access.  Upon termination of this Agreement, and expiration of any post termination assistance period, or any Addendum or SOW hereto, Client’s access to the respective Fidelity Confidential Information shall end immediately and Client agrees to return such Fidelity Confidential Information in its possession, to destroy any and all copies made by Client, its employees and/or Client’s Customers, and to certify to Fidelity in writing that it has returned or destroyed the Fidelity Confidential Information.

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5.2Client Confidential Information.  All Client Confidential Information shall be used by Fidelity for the purposes of administering and otherwise implementing the terms of this Agreement and protected by Fidelity in accordance with the terms of this Section.  Client’s Confidential Information shall also include all “non-public personal information” as defined in Title V of the GLB Act, as the same may be amended from time to time, that Fidelity received from or at the direction of Client and that concerns any of Client’s “customers” and/or “consumers” (as defined in the GLB Act).  Fidelity acknowledges that any Client Confidential Information being stored or processed by Fidelity is and shall remain the property of Client and will take all such reasonable measures as may be necessary to protect the confidentiality of Client Confidential Information which comes into Fidelity’ possession, if any.  Fidelity further agrees to observe confidentiality regarding the Client Confidential Information, including without limitation agreeing not to disclose or otherwise permit any other person or entity access to, in any manner, Client Confidential Information or any part thereof without Client’s prior written consent, except that such disclosure or access shall be permitted to an employee of Fidelity requiring such access in the course of employment.  Fidelity shall not disclose or use Client Confidential Information for any purposes other than to carry out the purposes for which Client disclosed the data to Fidelity, or as permitted by this Agreement.  Notwithstanding the foregoing, Client consents to the use by Fidelity of statistical data generated by Client Confidential Information provided that such use shall not result in the disclosure of Client Confidential Information which will directly or indirectly identify Client or any specific individual.  At the request of Client, and upon payment to Fidelity of all monies due under the terms of this Agreement, Fidelity shall transfer any Client Confidential Information held by Fidelity to Client.

5.3Security Standards.  To the extent Fidelity is in possession of any Client Confidential Information in its provision of a Product or Service hereunder, Fidelity has implemented certain security measures with respect to such Product or Service designed to safeguard Client’s Confidential Information.  Fidelity will use commercially reasonable efforts to adhere to such additional security measures requested by Client with respect to Client’s Confidential Information as may be reasonably requested by Client.  Client will reimburse Fidelity if implementation of and/or adherence to such additional security measures increases Fidelity’s costs of operation.

5.4Confidentiality of this Agreement.  Client and Fidelity agree that the terms and conditions of this Agreement and the related negotiations between Client and Fidelity with respect to this Agreement shall be treated as confidential pursuant to this Section 5.  The parties also acknowledge that this Agreement contains confidential information and agree to limit distribution of this Agreement to those individuals with a need to know the contents of this Agreement.  In no event may this Agreement be reproduced or copies shown to any third parties (exclusive of contractors, subcontractors and agents who have a need for it) without the prior written consent of the other party, except as may be necessary by reason of legal, accounting, tax or regulatory requirements, in which event Client and Fidelity agree to exercise reasonable diligence in limiting such disclosure to the minimum necessary under the particular circumstances.  The parties further agree to seek commercial confidential status for this Agreement with any regulatory commission with which this Agreement must be filed, to the extent such a designation can be secured.

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In addition, each party agrees to give notice to the other party of any demands to disclose or provide the confidential information received from the other or any third party under lawful process prior to disclosing or furnishing confidential information, and agrees to cooperate in seeking reasonable protective arrangements requested by the other party.

5.5Exceptions to Confidentiality. The obligations of this Section 5 shall not apply to any information, whether Fidelity Confidential Information, Client Confidential Information or otherwise, which:

a)is in the public domain at the time of disclosure, or thereafter enters the public domain through no act or omission by the recipient hereunder or its agents, employees or subcontractors; or

b)is developed by the recipient hereunder independently of any confidential information of the disclosing party hereunder or was in the recipient’s lawful possession at the time of disclosure hereunder as shown by written records; or

c)is disclosed to the recipient without obligation of confidentiality by a third party with the right to do so; or

d)is disclosed: (i) pursuant to a requirement or official request of a governmental agency, a court or administrative subpoena or order, or any applicable legislative or regulatory requirement; (ii) in defense of any claim or cause of action asserted against such party or any of its Affiliates, Subsidiaries, officers, directors, employees or agents; (iii) as otherwise permitted by the GLB Act; (iv) as required by law or national stock exchange rule; or (v) as otherwise permitted under this Agreement.

5.6Intellectual Property Notices.  Client agrees not to remove any copyright, trademark or other intellectual property notices or property tags from Products and Services provided hereunder.  Copyright notices for Internet Services provided hereunder may contain a hyperlink to Fidelity’ web site.

6.HARDWARE, SOFTWARE, COMMUNICATIONS AND BASIC PROFESSIONAL SERVICES

6.1Client Hardware, Software and Communications.  Client shall be responsible, at its own expense, for providing all Third Party Products, including but not limited to, Third Party Products which are utilized as a part of Client’s operating and/or network environment, as identified by Fidelity in the specific Addenda as being required to access or effectively utilize the Products and Services provided thereunder.  Fidelity will make available to Client the specification requirements for Client’s Third Party Products to be compatible with the Products and Services and Client assumes total responsibility for ensuring such compatibility. Fidelity will provide Client with notice of any upgrades to Client’s hardware or software required to accommodate new Versions, Releases, or changes in any Products and Services.  Client shall comply with such upgrade requirements within ninety (90) days from such notice.  Client shall be

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responsible for providing maintenance and paying for any required upgrades on all Client owned, leased or licensed hardware and software. In addition, Client shall be responsible for continued maintenance, support and timely installation of enhancements and upgrades to the Transferred Third Party Software as deemed necessary by Fidelity to ensure compatibility with and provide optimum functionality of the Products and Services.  Client shall also be responsible for providing the communications and LAN interfaces to Client’s network required to support the use and functions of the Products and Services as specifically identified in any applicable SOW, as well as any hardware, software and communications upgrades necessary for increased performance based on additional user requirements.  Any problems or claims with these Third Party Products or Transferred Third Party Software shall be the responsibility of the manufacturer of such products, and Client shall seek recourse only against such manufacturer.

6.2Fidelity Hardware, Software and Communications.  In the event that Fidelity owned or licensed hardware, software, or communications, including application servers, are located at Client’s site, Client shall prepare, or have prepared, the necessary facilities to house the hardware, software, or communications devices and services, and take all reasonable steps necessary to provide for their physical security.  Client shall reasonably cooperate with Fidelity in the coordination and scheduling of installation, maintenance, and upon termination, deinstallation of hardware, software, or communications devices and services.  Fidelity reserves the right in its sole discretion to relocate or replace the hardware, software, or communication devices and services at any time upon reasonable notice to Client.  Client understands that Fidelity servers are for Fidelity use only and shall not install any Client owned or licensed software on the Fidelity server(s).  Fidelity reserves the right to remove any hardware, software, files or data on any Fidelity server.  Client further agrees not to use, access or attempt to perform maintenance on any Fidelity server(s), for any reason unless authorized in advance by Fidelity.

6.3Communication Devices.  Communication devices shall be specified and ordered by Fidelity.  Such devices will be leased in Fidelity’ name or owned by Fidelity.  Fidelity, in turn, will bill Client for such devices located in Client’s office(s). Should Client desire to terminate the communication devices, Client shall give Fidelity not less than ninety (90) days notice.  Fidelity shall charge Client and Client shall pay for the communication devices located at Client’s site upon receipt of termination notice by one party to the other, or upon immediate termination by Fidelity pursuant to the terms of this Agreement.  Upon termination, and satisfaction of all contractual obligations by Client under this Agreement, Fidelity will refund to Client the amount paid for the communication devices provided Client has returned the devices to Fidelity in good working condition, excepting normal wear and tear.

6.4Basic Professional Services.  In order for Client to obtain access to certain Products and Services, Client shall contract with Fidelity for Basic Professional Services.  Such Basic Professional Services relate to use of the applicable Product and Service in conjunction with the components of the MSP System which are certified for use with the applicable Product and Service as of the date such Basic Professional Services are required.  Basic Professional Services and the associated fees shall be set forth in and further identified in one or more SOW to be mutually developed by the parties.

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7.       PROGRAM MODIFICATIONS

Client may request modifications to the report contents or Software by submitting to Fidelity a program modification request form defining the desired change.  Upon receipt of a program modification request from Client, Fidelity will respond to Client with a feasibility study within thirty (30) days.  The feasibility study will contain a high level cost and resources estimate broken down by development methodology phases.  Upon Client’s approval of the feasibility estimates, Fidelity and Client shall work in good faith to mutually agree on a SOW fully describing the final product and the final fixed price.  The SOW will include the cost of the programming definition, programming, testing, installation and documentation.

8.ISSUANCE OF VERSIONS AND RELEASES

8.1Designation of Versions and Releases.  Updates to the software component of Products and Services, other than MSP, will be stated as Versions or Releases and will be identified by numeric designations.  Upon receiving access to the software components of particular Products and Services, the level of such software will be designated numerically where the first number identifies the Version level and the second number identifies the Release level of that Version.

Example:  Version 4.2 designates Version 4 with Release 2.

8.2Versions.  Fidelity may, from time to time and in its sole discretion (and by means or media determined solely by Fidelity) issue and install subsequent Versions.  Additional fees may be due in connection with subsequent Versions which embody substantial additional functionality.

8.3Releases.  Fidelity may, from time to time and in its sole discretion (and by means or media determined solely by Fidelity), issue and install Releases to the existing supported Version of a particular Product of Service as part of the right of access conveyed to Client.

8.4Support of Versions and Releases.  Client acknowledges that as new Versions and/or Releases are made available, Fidelity will grant access to and support only the most recent Version and Release.

9.SUPPORT

9.1Support.  In accordance with the specifications set forth in the Documentation, Fidelity will provide Support.  PowerCell will take support requests on a wide range of problem situations, capturing descriptive data, and offering resolution assistance for routine problems.  PowerCell, will also serve as the escalation point for problems relating to sublicensed third party software provided as part of a Product or Service.

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9.2Issue Management.  Fidelity, via PowerCell, shall respond to Client within the following timeframes on reported issues:

9.2.1Severity Level 1 Issues.  Severity Level 1 issues are high impact problems reported by Client where a critical system or major component is down or unavailable with no workaround available.  Fidelity will acknowledge receipt of Severity Level 1 issues within four (4) hours after being reported to or detected by Fidelity, whichever is earlier.  Fidelity will provide updates to Client on Severity Level 1 issues, either by telephone or electronic mail, at mutually agreed upon times and, in any event, no less frequently than every four (4) hours.

9.2.2Severity Level 2 Issues.  Severity Level 2 issues are moderate to high impact problems that must be resolved; however a workaround is available until resolution is achieved.  Fidelity will acknowledge receipt of Severity Level 2 issues within eight (8) business hours after being reported to or detected by Fidelity, whichever is earlier.  Fidelity will provide updates to Client on Severity Level 2 issues, either by telephone or electronic mail, at mutually agreed upon times and, in any event, no less frequently than every eight (8) business hours.

10.DEFAULT

In the event either party: (a) defaults under the terms of this Agreement which causes a material and adverse effect on the non-defaulting party, and fails to cure the default within thirty (30) days after written notice of such default; or (b) files a voluntary petition under any bankruptcy law, becomes insolvent, makes an assignment for the benefit of its creditors, or has involuntary bankruptcy proceedings commenced against it or a receiver appointed for all or substantially all of its assets and such involuntary petition and receiver are not dismissed within ninety (90) days of the filing or appointment, the non-defaulting party may then immediately terminate the Addendum(s) relating to the default and pursue subject to Section 12 (Limitation of Liability), any and all other rights in law or equity that the non-defaulting party may have, including but not limited to, invoking the provisions of Section 18 (Conflict Resolution).

11.TERMINATION

11.1Termination for Convenience.  Client may terminate this Agreement, or any Addendum hereto, without cause by providing one-hundred eighty (180) days prior written notice to Fidelity. In the event such early termination by Client includes termination of the MSP Addendum, whether the required notice is provided or not, Client shall, in addition to all other monies due and payable to Fidelity, pay as liquidated damages a contract commitment amount which shall be calculated as follows: a) the Minimum Monthly Principal Balance Loan Billing Requirement as of the date of termination shall be multiplied by the then applicable monthly rate per loan to determine the monthly minimum Basic Processing Charges; and b) the monthly minimum Basic Processing Charges shall then be multiplied by the number of months remaining in the Original Term or then current Extended Term after the date of termination.  The contract commitment amount can be summarized as follows:

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(Minimum Monthly Principal Balance Loan Billing Volume Requirement on the date of termination * monthly rate per loan on the date of termination) * months remaining in Original or Extended Term after termination date.

The parties acknowledge and agree that damages resulting from a claim under this section are not readily ascertainable at this time, and the above amount of liquidated damages are reasonable under the circumstances.

11.2      Reconfiguration of Client’s Network.  Upon termination of this Agreement, or any Addendum or SOW hereunder, Client shall pay all costs, including but not necessarily limited to, charges resulting from required reconfiguration of Client’s network for any reason and at any time, any applicable data center charges, travel, living, and out of pocket expenses of Fidelity employees incurred with the deinstallation of any applicable Products and Services.  All monies owing under this Agreement shall be paid in full prior to any obligation by Fidelity to assist Client with the reconfiguration of Client’s network.

11.3      Effect of Termination on Addenda.  The termination of an Addendum pursuant to this Section shall have no effect on any other Addendum that may be in force and effect as part of this Agreement except to the extent that the terminated Addendum is a Paternal Addendum.  In the event that a Paternal Addendum is terminated pursuant to this Section, Fidelity may, at its sole discretion, terminate any applicable Dependent Addendum.  Termination of a Dependent Addendum by Fidelity will not relieve Client of any obligations, financial or otherwise with respect to the Dependent Addendum.  Obligations of confidentiality, indemnification, as well as any other provisions intended to survive termination of this Agreement or any Addendum hereto, shall upon termination of this Agreement or any Addendum hereto, continue in full force and effect and shall be binding upon Client and Fidelity following such termination.

12.LIMITATION OF LIABILITY

12.1DIRECT DAMAGES.  EACH PARTY’S LIABILITY ON ANY CLAIM OR LOSS ARISING OUT OF, OR CONNECTED WITH THIS AGREEMENT SHALL BE LIMITED TO THE ACTUAL DIRECT DAMAGES INCURRED BY THE NONDEFAULTING PARTY, PROVIDED THAT IN EACH SUCH INSTANCE, SUCH LIABILITY SHALL NOT EXCEED THE LESSER OF (1) THE AMOUNT OF THE ACTUAL DIRECT MONETARY LOSS SUFFERED BY THE NONDEFAULTING PARTY OR (2) THE AMOUNT PAID TO FIDELITY BY CLIENT OVER THE SIX (6) MONTHS PRECEDING THE DATE OF THE CLAIM.  NEITHER PARTY’S AGGREGATE LIABILITY UNDER THIS AGREEMENT SHALL, IN ANY EVENT, EXCEED THE TOTAL FEES PAID BY CLIENT TO FIDELITY FOR THE TWELVE (12) MONTHS PRECEDING THE DATE OF THE CLAIM.  THE LIMITATIONS OF LIABILITY SET FORTH IN THIS SECTION SHALL NOT APPLY TO:  (A) INDEMNITY OBLIGATIONS SET FORTH IN SECTION 13 OF THIS AGREEMENT; OR (B) CLAIMS FOR BREACH OF CONFIDENTIALITY AND NONDISCLOSURE SET FORTH IN SECTION 5 OF THIS AGREEMENT.

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12.2UNAUTHORIZED MODIFICATION OR USE OF SOFTWARE.  FIDELITY SHALL NOT BE RESPONSIBLE FOR ANY DAMAGES OR EXPENSES RESULTING FROM THE MODIFICATION OR ALTERATION OF THE SOFTWARE OR SYSTEMS BY CLIENT, OR THE UNAUTHORIZED USE OF THE SOFTWARE OR SYSTEMS, OR FROM THE UNINTENDED AND UNFORESEEN RESULTS OBTAINED BY CLIENT RESULTING FROM SUCH USE.

12.3INDIRECT, SPECIAL, CONSEQUENTIAL OR THIRD PARTY DAMAGES. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL OR THIRD PARTY DAMAGES OF ANY KIND INCLUDING, BUT NOT LIMITED TO LOST PROFITS, LOSS OF GOODWILL OR BUSINESS INTERRUPTION, ARISING OUT OF THIS AGREEMENT OR THE USE OF ANY EQUIPMENT, SOFTWARE, DOCUMENTATION OR SERVICE PROVIDED UNDER THIS AGREEMENT.

12.4SCREEN SCRAPING OR SIMILAR TECHNOLOGY. EXCEPT WHERE AUTHORIZED BY FIDELITY IN WRITING, FIDELITY SHALL NOT BE LIABLE TO CLIENT OR ANY THIRD PARTY FOR ANY DAMAGES OR EXPENSES ARISING FROM THE USE OF SCREEN SCRAPING OR SIMILAR TECHNOLOGY BY CLIENT OR ANY THIRD PARTY, INCLUDING DATA AGGREGATORS, IN CONNECTION WITH THE PRODUCTS AND SERVICES HEREUNDER, OR THE UNINTENDED AND UNFORESEEN RESULTS OBTAINED FROM THE USE OF SUCH TECHNOLOGY.

13.INDEMNIFICATION

13.1Personal Injury and Property Damage.  Each party agrees to indemnify, defend and hold harmless the other and its Affiliates and its and their officers, directors, employees, advisors, representatives and agents from and against any and all liabilities, losses, costs, damages and expenses (including, without limitation, reasonable attorney’s fees) arising from or in connection with the damage, loss (including, without limitation, theft) or destruction of any real property or tangible personal property of any person or injury or death to any persons resulting from the actions or inactions of any employee, agent or subcontractor of the indemnifying party insofar as such damage arises out of or in the course of fulfilling its obligations under this Agreement and to the extent such damage is due to any negligence, misconduct, breach of statutory duty, or failure of the indemnifying party, its employees, agents or subcontractors to exercise their duties hereunder.  The foregoing represents the sole and exclusive remedy of each party with regard to the matter described in this Section 13.1.

13.2Infringement of Fidelity Software.  Fidelity agrees to defend at its own expense, any claim or action brought by any third party against Client or its Affiliates or any of its or their officers, directors, employees, advisors, representatives or agent (each an “Indemnified Person”) for actual or alleged infringement of any patent, copyright or other intellectual property right (including, but not limited to, misappropriation of trade secrets) based upon the Software or the Products and Services furnished hereunder.  Fidelity further agrees to indemnify and hold each

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Indemnified Person harmless from and against any and all liabilities, losses, costs, direct damages, and expenses (including, without limitation, reasonable attorneys’ fees) associated with any such claim or action incurred by such Indemnified Person.  Fidelity shall have the sole right to conduct and control the defense of any such claim or action and all negotiations for its settlement or compromise, unless otherwise mutually agreed to in writing between the parties hereto; provided, however, that no settlement or compromise may include any acknowledgement or admission of liability by, or the entry of any judgment against, such Indemnified Person without such Indemnified Person’s consent, which consent shall not be unreasonably delayed, conditioned or withheld.  Fidelity agrees to give Client, and Client agrees to give Fidelity, as appropriate, prompt written notice of any written threat, warning or notice of any such claim or action against Fidelity or Client, as appropriate, or any other user or any supplier of components of the Software covered hereunder, which could have an adverse impact on Client’s use of same, provided Fidelity or Client, as appropriate, knows of such claim or action.  If in any such suit so defended, all or any part of the Software (or any component thereof) is held to constitute an infringement or violation of any other party’s intellectual property rights and is enjoined, or if in respect of any claim of infringement, Fidelity deems it advisable to do so, Fidelity shall at its sole option take one or more of the following actions at no additional cost to Client: (a) procure the right to continue the use of the same without material interruption for Client; (b) replace the same with non-infringing software that meets the same specifications as the infringing software; or (c) modify said Fidelity Software so as to be non-infringing, provided that the Software as modified meets the same specifications as the infringing software.  The foregoing represents the sole and exclusive remedy of Client with regard to any of the above infringements or alleged infringements.

13.3Subservicing.  Client agrees to indemnify, defend and hold Fidelity harmless from and against any and all liabilities, losses, costs, damages, and expenses (including, without limitation, reasonable attorney’s fees) arising from or in connection with:  (a) any breach of the confidentiality provisions of this Agreement by any of Client’s Customers; or (b) misuse or unauthorized use by any of Client’s Customers of the Software, Fidelity Confidential Information or any Product or Service provided in connection with this Agreement.

14.PERIODIC REPORTS

Fidelity, annually, will provide to Client (and to the District Director of the OTS or OCC, as applicable) at no charge one (1) copy, in such media as Fidelity shall determine it its sole discretion, of the Third Party Review.

As of the Effective Date, Fidelity is a wholly owned subsidiary of a public-traded company, Fidelity National Financial (“FNF”).  As a publicly-traded company, FNF discloses its financial information pursuant to United States securities laws and regulations.  That financial information includes the financial statement segment reporting of Fidelity.  A copy of FNF’s financial information is available at www.FNF.com or through the Securities and Exchange Commission’s EDGAR website.  If at any time in the future, Fidelity’s financial segment information is no longer publicly available, Fidelity agrees to provide Client with such information.

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15.TIME OF PERFORMANCE AND INCREASED COSTS

Fidelity’s time of performance with respect to Products and Services performed under this Agreement shall be extended, to the extent reasonably necessary, in the event that (a) Client fails to submit data or materials in the prescribed form or in accordance with the requirements of this Agreement; (b) Client fails to perform on a timely basis or provide adequate resources to perform the tasks, functions or other responsibilities of Client described in this Agreement, or any applicable Addendum or SOW hereunder; (c) there occurs a Force Majeure condition as contemplated in Section 23 which prevents timely performance; (d) Client or any governmental agency authorized to regulated or supervise Client makes any special request which affects Fidelity’ normal performance schedule; (e) Client changes its priorities in a manner that adversely impacts the performance of the Products and Services; or (f) any Client software does not perform in accordance with its specifications and, in each case, the same is necessary for Fidelity’ performance hereunder.  In addition, if any of the above events occur, and such event will result in an increased cost to Fidelity for providing the affected Products and Services, Fidelity shall so advise Client and Client may either pay any and all of such increased costs to Fidelity or relieve Fidelity of its responsibilities hereunder.

16.ASSIGNMENT

Neither this Agreement, nor any rights, duties, or obligations of Client hereunder may be assigned or delegated in whole or in part by Client, whether by operation of law or otherwise, without the prior written consent of Fidelity, which consent shall not be unreasonably withheld. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns.  Except where otherwise expressly agreed upon in writing by Client and Fidelity, no assignment or delegation, in whole or in part, shall release Client from any of its obligations pursuant to this Agreement.  Neither the terms of this Agreement nor any performance hereunder shall be construed to create any rights in any person other than the parties to this Agreement.

17.INSURANCE

Fidelity will maintain substantially the same insurance and insurance coverage as set forth below throughout the term of this Agreement:

Type of Coverage	Limit	Minimum Insurer Bests Rating
Commercial General Liability	$1,000,000 each occurrence $2,000,000 Annual Aggregate	A - VIII

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Property Insurance	$100,000,000 Direct Damage & Business Interruption $5mm Accounts Receivable $5mm Service Interruption $1mm Transit & Fine Arts Various Other Sublimits	A - VIII
Workers’ Compensation	Coverage A - statutory Coverage B - $1,000,000 each accident $1,000,000 each employee-disease $1,000,000 policy limit - disease	A - VIII
Data Processors Errors and Omissions	$10,000,000 Occurrence/Aggregate	A - VIII
Umbrella	$25,000,000	A - VIII

18.CONFLICT RESOLUTION

18.1Informal Dispute Resolution.

18.1.1 Notices. Fidelity and Client will notify each other within a commercially reasonable timeframe and as promptly as possible regarding any conflicts arising out of this Agreement or in the interpretation of the provisions of this Agreement, or any dispute as to whether or not an event of default has occurred.  Fidelity and Client will attempt to resolve all such conflicts as promptly as possible and in good faith before initiating any causes of action arising out of this Agreement.

18.1.2Escrow Account.If any dispute remains unresolved for any reason after thirty (30) days following the initial written request for informal dispute resolution, or such other period of time as mutually agreed to in writing, then following such period, with respect to monetary disputes submitted to informal dispute resolution, Client shall place such disputed payment amount into an independent third party interest bearing escrow account within two (2) business days and then the parties may continue informal dispute resolution efforts.  The prevailing party (at either informal dispute resolution efforts or binding arbitration) shall be entitled to the interest accrued on the monies placed in escrow pursuant to this Section, for each such disputed payment amount.

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18.2Escalation Procedures.

18.2.1Good Faith Efforts.Each of the parties agrees to negotiate, in good faith, any claim or dispute that has not been satisfactorily resolved following the notice and resolution process described in Section 18.1.  To this end, each party agrees to escalate any and all unresolved disputes or claims in accordance with Section 18.2 before taking further action.

18.2.2Escalation of Unresolved Disputes.If the negotiations conducted pursuant to Section 18.1 do not lead to resolution of the underlying dispute or claim to the satisfaction of a party involved in such negotiations, then either party may notify the other in writing that he/she desires to elevate the dispute or claim to the President of the mortgage division of Fidelity and the Chief Information Officer of Client for resolution.  Upon receipt by the other party of such written notice, the dispute or claim shall be so elevated and the President of Fidelity, Inc. and the Chief Information Officer of Client shall negotiate in good faith and each use its reasonable best efforts to resolve such dispute or claim.  The location, format, frequency, duration and conclusion of these elevated discussions shall be left to the discretion of the representatives involved.  Upon agreement, the representatives may utilize other alternative dispute resolution procedures to assist in the negotiations.  Discussions and correspondence among the representatives for purposes of these negotiations shall be treated as confidential information developed for purposes of settlement, exempt from discovery and production, which shall not be admissible in subsequent proceedings between the parties.  Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in evidence in such subsequent proceeding.

18.3Binding Arbitration.  Fidelity and Client stipulate and agree that if they are unable to resolve any controversy arising under this Agreement following diligent and good faith attempts to resolve such controversy under the informal dispute resolution process outlined in Sections 18.1 and 18.2, then such controversy, and any ancillary claims not so resolved and not so subject, shall be submitted to binding arbitration at the election of either party (the “Disputing Party”) pursuant to the following conditions:

18.3.1  Selection of Arbitrator.  The Disputing Party shall notify the AAA and the other party in writing describing in reasonable detail the nature of the dispute (the “Dispute Notice”), and shall request that AAA furnish to the parties a list of five (5) possible arbitrators who shall be licensed to practice law in the United States and shall have at least five (5) years of experience in data processing matters.  Each party shall have fifteen (15) days to reject two (2) of the proposed arbitrators.  If one (1) individual has not been so rejected, he or she shall serve as arbitrator; if two (2) or more individuals have not been so rejected, AAA shall select the arbitrator from those individuals.

18.3.2  Conduct of Arbitration.  Arbitration will be conducted by the arbitrator selected pursuant to Section 18.3.1 with respect to the dispute described in the Dispute Notice and any other disputes related to this Agreement between the parties to this Agreement (i)

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pending at the inception of such arbitration and not otherwise being arbitrated under this Section 18.3; or (ii) arising during the pendency of such arbitration in accordance with the rules of AAA, except as specifically provided otherwise in this Section 18.3.  The arbitrator will allow reasonable discovery in the forms permitted by the Federal Rules of Civil Procedure, to the extent consistent with the purpose of the arbitration.  The arbitrator will have no power or authority, under the rules of AAA or otherwise, to amend or disregard any provision of this Section 18.3.  The arbitration hearing shall be limited to not more than five (5) days, with each of Client and Fidelity being allocated one-half of the time for the presentation of its case.  Unless otherwise agreed to by the parties, an arbitration hearing shall be conducted on consecutive business days.

18.3.3  Replacement of Arbitrator.  Should the arbitrator refuse or be unable to proceed with arbitration proceedings as called for by this Section 18.3, such arbitrator shall be replaced by an arbitrator selected from the other four (4) arbitrators originally proposed by AAA and not rejected by the parties, if any, or if there are no remaining proposed arbitrators who have not been rejected, by repeating the process of selection described in Section 18.3.1 above.  If an arbitrator is replaced pursuant to this Section 18.3.3, then a rehearing shall take place in accordance with the provisions of this Section 18.3 and the rules of AAA.

18.3.4  Findings and Conclusions.  The arbitrator rendering judgment upon disputes between parties to this Agreement as provided in this Section 18 shall, after reaching judgment and award, prepare and distribute to the parties a writing describing the findings of fact and conclusions of law relevant to such judgment and award and containing an opinion setting forth the reasons for the giving or denial of any award.  The arbitrator, at its discretion, may include an award of reasonable attorney’s fees for the prevailing party in its final judgment and award.

18.3.5  Place of Arbitration Hearings.  Arbitration hearings contemplated by Section 18.3.2 shall be held in Jacksonville, Florida.  If Fidelity and Client agree, arbitration hearings may be held in another location.

18.3.6  Time is of the Essence.  The arbitrator is instructed that time is of the essence in the arbitration proceeding, and that the arbitrator shall have the right and authority to issue monetary sanctions against either of the parties if, upon a showing of good cause, the party is unreasonably delaying the proceeding.  The arbitrator shall render his or her judgment or award within fifteen (15) days following the conclusion of the arbitration proceeding.  Recognizing the express desire of the parties for an expeditious means of dispute resolution, the arbitrator shall limit or allow the parties to expand the scope of discovery as may be reasonable under the circumstances.

18.4Injunctive Relief.  Notwithstandingthe preceding dispute resolution procedures, if Fidelity or Client makes a good faith determination that a breach of the terms of this Agreement by the other party is such that the damages to such party resulting therefrom will be so immediate or severe and incapable of adequate redress after the fact, such party may seek a temporary restraining order and/or other immediate injunctive relief.  If a party making such a determination

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files a pleading with a court seeking such temporary restraining order or immediate injunctive relief and such pleading is successfully challenged by the other party to this Agreement, the party filing such pleading seeking a temporary restraining order or immediate injunctive relief shall pay all of the costs and attorneys’ fees of the party successfully challenging such pleading.

19.USE OF NAME OR LOGO

Neither party may use the name or logo of the other party for advertising, solicitation, promotion, or press releases without the prior written consent of the other, which consent will not be unreasonably withheld.  Notwithstanding the preceding sentence, the Client agrees that Fidelity may publish a press release announcing the initial relationship between the parties within fifteen (15) days of the Effective Date.  Fidelity shall give Client notice of any contents of such press release and Client will review and provide comments, if any, within two (2) business days.  In the absence of any comments or following incorporation of Client’s comments, Fidelity may publish such press release.  Nothing herein will prohibit either party from issuing or causing the publication of any public announcement to the extent that such action is required by applicable law or the rules of any generally recognized stock exchange applicable to such party or its Affiliates, in which case the party wishing to make such disclosure will, if practicable under the circumstances, notify the other party of the proposed time of issuance of such public announcement and consult with and allow the other party reasonable time to comment.

20.DISASTER RECOVERY

20.1Disaster Recovery Plan.  Fidelity will provide disaster recovery services for its batch and online processing obligations to Client at a dedicated facility which is equipped to handle Fidelity’s data center processing in the event disaster recovery is needed.  Provided that Client is utilizing the Fidelity telecommunication network, Fidelity agrees to provide data communication access to the disaster recovery facility, including the necessary communication devices (multiplexors, modems, channel extenders, etc.) to facilitate such communication; otherwise, Client shall be responsible for providing, and paying for, the necessary communication lines and devices.  Throughout the term of this Agreement, Fidelity will maintain in effect contracts and/or arrangements for disaster recovery, which are substantially equivalent to those, which are currently in effect.

20.2Recovery Time.  Client acknowledges that disaster recovery arrangements are designed to deal with circumstances, which are expected to cause a substantial portion of the capabilities at Fidelity’s data center to be unavailable for a period exceeding seventy-two (72) hours.  Should such an event or situation occur, Fidelity shall execute its disaster recovery plan in a timeframe and manner necessary to ensure the restoration of batch and on-line processing service to Client within seventy-two (72) hours of service interruption.

20.3Testing.  Fidelity will test its disaster recovery capabilities at least once per calendar year.  Client is allowed to participate in the disaster recovery test when deemed appropriate by Fidelity.

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20.4Storage Of Data Files.  Fidelity will provide off-site storage for Client’s data files so that they can be reconstructed in the event of loss or destruction of Client’s processing files at Fidelity’s data center.  Such off-site storage will be in accordance with the guidelines set forth in Fidelity’s Third Party Review.

21.REPRESENTATIONS AND WARRANTIES

21.1Client’s Representations and Warranties.  Client represents and warrants that:

(a) Client is a validly formed and existing entity and in good standing under the laws of the state of its formation;

(b) Client has all requisite power and authority to execute, deliver and perform its obligations under this Agreement and the same have been duly authorized by all necessary actions of Client; and

 (c) Client’s execution and performance of this Agreement will not constitute: (i) a violation of any judgment, order or decree; (ii) a default under any material contract by which it or they are bound; or (iii) an event that would, with notice and/or lapse of time, constitute such a default.

21.2Fidelity’s Representations and Warranties.  Fidelity represents and warrants to Client that:

(a) Fidelity is a validly formed and existing entity and in good standing under the laws of the state of its formation;

(b) Fidelity has all requisite power and authority to execute, deliver and perform its obligations under this Agreement and the same have been duly authorized by all necessary actions of Fidelity;

 (c) Fidelity’s execution and performance of this Agreement will not constitute: (i) a violation of any judgment, order or decree; (ii) a default under any material contract by which it or they are bound; or (iii) an event that would, with notice and/or lapse of time, constitute such a default;

(d) Fidelity owns, is the authorized licensee of, or has the right to transfer to Client, the Software provided hereunder; Fidelity has the legal right to provide access to or license the Software to Client pursuant to this Agreement; and

(e) to the best of its knowledge, the Software substantially conforms, in all material respects, to the specifications set forth in the Documentation provided that the Software is used by Client in accordance with the provisions of this Agreement and any applicable Documentation.

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21.3DISCLAIMER OF WARRANTIES. EXCEPT AS EXPRESSLY PROVIDED ELSEWHERE HEREIN, FIDELITY AND ITS LICENSORS MAKE NO OTHER WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCTS AND SERVICES, SOFTWARE AND SYSTEMS, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, OWNERSHIP OR FITNESS FOR A PARTICULAR PURPOSE, AND SUCH IMPLIED WARRANTIES ARE HEREBY EXPRESSLY AND SPECIFICALLY DISCLAIMED.  CLIENT ASSUMES TOTAL RESPONSIBILITY FOR THE SELECTION OF THE SOFTWARE AND SYSTEMS TO ACHIEVE CLIENT’S INTENDED RESULTS, AND FOR THE USE AND RESULTS OBTAINED FROM THE SOFTWARE AND/OR SERVICES.  FIDELITY DOES NOT WARRANT THAT THE FUNCTIONS CONTAINED IN THE SOFTWARE AND SYSTEMS WILL MEET CLIENT’S REQUIREMENTS.

22.NON-SOLICITATION OF EMPLOYEES

Neither Client nor Fidelity will solicit the services of any employee of the other party for the duration of this Agreement Term without first obtaining the written consent of the other party.  Notwithstanding the foregoing, Client and Fidelity understand and agree that the following shall not constitute solicitation under this Section: (a) employment solicitations directed to the general public at large, including without limitation newspaper, radio, internet and television advertisements, and (b) an employment solicitation directed by a party to an employee of the other party, and any related communications, that occurs after a communication regarding employment that was initiated by the employee.

23.FORCE MAJEURE

Neither Fidelity nor Client shall be responsible to the other for delays and/or failures in performance resulting from acts beyond their control.  Such acts shall include but not be limited to acts of God, strikes, lockouts, riots, acts of war, acts of terrorism, epidemics, governmental regulations superimposed after the fact, fire, communication line failures, power failures, earthquakes, or other disasters.  Notwithstanding the foregoing, takeovers (hostile or otherwise), mergers, or acquisitions shall not be deemed force majeure events.  In the event the ability of either party to perform its obligations under this Agreement is prevented by a Force Majeure event, passage of any law or any other similar force beyond the control of that party for a period of more than thirty (30) days, then either party may terminate this Agreement or any portion of this Agreement upon written notice to the other party. In the event the affected party elects not to terminate this Agreement, Client and Fidelity will negotiate a proration of monthly charges based on the affected Products and Services and the period of time by which performance was prevented.

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24.MODIFICATION OF AGREEMENT

Neither this Agreement, nor any Addenda or SOWs hereunder may be modified or amended except by a written document signed by the party against whom enforcement is sought.

25.WAIVER

The waiver of a breach of, or a default under, any term or condition of this Agreement shall not be construed as a continuing waiver of any such term or condition, nor shall a waiver of a breach of, or a default under, any term or condition be construed as a waiver of any breach or default under any other term or condition, or in any manner affect any other term or condition hereof.

26.INDEPENDENT CONTRACTOR

Fidelity is an independent contractor, which has the sole right to supervise, manage, control and direct its performance of services. The performance of activities by either party under this Agreement shall not constitute either a joint venture or partnership of the parties. This Agreement shall not be construed to limit in any way the rights of the parties to pursue, independently and in accordance with their respective management policies, any aspects of their respective businesses and operations.

27.SEVERABILITY OF PROVISIONS

The provisions of this Agreement are severable, and if any provision is hereafter declared invalid or unenforceable by any court of competent jurisdiction, such determination shall not affect the validity of any other provision hereof.

28.SURVIVAL OF REPRESENTATIONS AND WARRANTIES

The terms, provisions, representations, warranties and covenants contained in Sections 5 (Ownership, Confidentiality and Non-Disclosure), 12 (Limitation of Liability) and 13 (Indemnification) of this Agreement shall survive the delivery and acceptance of those services to be delivered hereunder, the payment of any fees or other charges hereunder, and the termination of this Agreement for any reason.

29.NOTICES

Whenever the giving of a written notice by Fidelity or Client is required by this Agreement, such notice shall be given personally or sent by certified mail or overnight courier, postage prepaid, addressed to the other party in care of a designated officer and at the address listed in the preamble of this Agreement, or at such other address as may be specified by Fidelity or Client in advance in writing to the other, and shall be deemed to have been given on the date of receipt by the other.  Written notice may also be made by facsimile or electronic mail provided that within a reasonable amount of time subsequent to transmitting the facsimile or electronic mail

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notification, an original written notice is delivered personally or sent by certified mail or overnight courier, postage prepaid, addressed to the other party in care of a designated officer and at the address showing in the preamble of this Agreement, or at such other address as may be specified by Fidelity or Client in advance in writing to the other.

30.FURTHER ASSURANCES

The parties shall perform all acts and execute all supplementary instruments or documents which may be necessary to carry out the intent of this Agreement.

31.ORDER OF PRECEDENCE

The general terms and conditions set forth in this Agreement shall apply to all Addenda, Schedules, SOWs and any other documents attached hereto.  To the extent any of the provisions are found to be in conflict with other provisions in the Agreement, the order of precedence of the documents is as follows: the provisions of the Schedules shall take precedence respectively, followed by each Addendum, then this Agreement’s General Terms and Conditions, and then any applicable SOW respectively.

32.GOVERNING LAW

This Agreement shall be considered as entered into in the State of Florida and shall be governed by and construed in accordance with the laws of the State of Florida.

33.COUNTERPARTS

This Agreement may be executed in one or more counterparts, each of which is deemed an original, but all of which together constitute one agreement.

34.ENTIRE AGREEMENT

This Agreement constitutes the complete understanding of Fidelity and Client, supercedes any prior oral or written communications, supercedes any requests for proposals, terms sheets or letters of intent, and no representation other than is contained herein or in any agreement referred to herein shall be binding on either party.  No alteration, modification, or waiver of any provision hereof shall be valid unless in writing and signed by the parties hereto.

35.PERFORMANCE AUDITS

Fidelity will cooperate fully with Client or its auditors, internal or external, upon reasonable prior notice, for the purpose of inspecting, examining, and auditing the performance of the Services to be rendered by Fidelity to Client hereunder (with the exception of any records, information or procedures which are of a confidential nature with a third party or are addressed in Fidelity’s

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Third Party Review); provided, however, that any such inspection, examination and/or audit shall take place only during normal business hours and in a manner that will not disturb the ordinary transaction of Fidelity’s business.  Fidelity reserves the right to charge Client on a time and materials basis for any services reasonably required to be performed by Fidelity in connection therewith.  Performance audits shall not be scheduled to occur during the fourth quarter of any calendar year.  Client shall limit any performance audits to a reasonable duration and limit the number of performance audits performed to one (1) per calendar year.  Client and its representatives may be required to sign Fidelity’s nondisclosure and confidentiality agreement in advance of performing any audits.  Client will provide, and instruct its auditors, internal and external, to provide Fidelity with a copy of that portion of each written report containing comments concerning Fidelity or the Services performed by Fidelity pursuant to this Agreement.  In no event may any representative of client or auditor be a Competitor.

36.COVENANT OF GOOD FAITH

Each party, in its respective dealings with the other party under or in connection with this Agreement, shall act in good faith.

AMERICAN MORTGAGE NETWORK,	FIDELITY INFORMATION SERVICES,
INC.	INC.
By:	By:
Its	Its
Printed Name	Printed Name
Date	Date
“CLIENT”	“FIDELITY”

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CONFIDENTIAL TREATMENT REQUESTED—REDACTED COPY

CONFIDENTIAL TREATMENT REQUESTED:  INFORMATION FOR WHICH CONFIDENTIAL TREATMENT

HAS BEEN REQUESTED IS OMITTED AND NOTED WITH “***.”  AN UNREDACTED VERSION OF THIS

DOCUMENT HAS BEEN SUBMITTED SEPARATELY TO THE SECURITIES AND EXCHANGE COMMISSION.

ADDENDUM 1

TO

MASTER AGREEMENT NO. 264-05M

BETWEEN

FIDELITY INFORMATION SERVICES, INC.

AND

AMERICAN MORTGAGE NETWORK, INC.

FOR

MORTGAGE SERVICING PACKAGE WITH ONLINE SERVICES

This Addendum 1 (“Addendum”) to the above referenced Master Agreement (the “Agreement”) is entered into as of May 10, 2005 (“Addendum 1 Effective Date”), by and between Fidelity Information Services, Inc. (“Fidelity”) and American Mortgage Network, Inc. (“Client”).

1.DEFINITIONS

The definitions set forth in the Agreement, or any Addendum or Exhibit thereto, are incorporated herein by reference as if fully stated herein.  The following additional terms shall have the definitions set forth below:

1.1        “Daily Currency Information” shall mean Client’s loan information, which is available to Passport and current as of the previous processing cycle.

1.2        “Fidelity RLS Training Fundamentals” shall mean Fidelity’s overview, disk and computer based training products designed to support Client’s in-house training efforts with respect to the MSP System, including such updates, enhancements and modifications as Fidelity deems necessary.

1.3        “Month-end File” shall mean a file containing Time Series Information.

1.4        “Navigator™” shall mean Fidelity’s electronic reference and procedural library product.

1.5        “OEM” shall mean original equipment manufacturer.

1.6        “Online Services” or “Online System(s)” shall meanonline access from terminals located in Client’s office(s) through the CICS telecommunication facility to information contained in Client’s mortgage master, history, and certain utility files.

1.7        “Regular File” shall mean a file containing Daily Currency Information.

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1.8        “Time Series Information” shall mean a limited number of snapshots of Client’s loan information, each as of a specific month-end period.

2.TERM

The term of this Addendum shall run simultaneously with the Original Term and Extended Term, if applicable, of the Agreement.

3.MSP REMOTE PROCESSING CHARGES AND SERVICES

3.1        Basic Processing Charges.  In consideration for Processing data and Client’s use of the MSP System, Client shall be charged and shall pay to Fidelity Basic Processing Charges per month equal to the monthly rate per loan set forth in the following table times the number of loans processed on the MSP System for that month, but in no event less than the Minimum Monthly Principal Balance Loan Billing Volume Requirement set forth below:

2005 Monthly Basic Processing Charges Per Principal Balance Loan ***

The above charges cover regular daily (five (5) days per week), monthly and normal year-end Processing cycles.  In addition, in no event shall Client shall Process less than the Minimum Monthly Principal Balance Loan Processing Volume Requirement set forth in the table below:

Minimum Monthly Principal Balance Loan Billing Volume Requirement	***
Minimum Monthly Principal Balance Loan Processing Volume Requirement	***

Notwithstanding the foregoing, Fidelity understands and agrees that Client is entering into the Agreement to initially Process less than the Minimum Monthly Principal Balance Loan Processing Volume Requirement set forth above.  As a result, the Minimum Monthly Principal Balance Loan Processing Volume Requirement shall not apply to Client until Client actually Processes that minimum number of loans on the MSP System in one month.  Once Client Processes loans greater than or equal to the Minimum Monthly Principal Balance Loan Processing Volume Requirement in any month, the Minimum Monthly Principal Balance Loan Processing Volume Requirement shall apply and Client shall be obligated to Process at least that number of loans each month thereafter.

3.2        For the fees described above, in addition to Processing, Client shall be entitled to use the Products and Services listed below:

a)MSP telephone support, enhancement videos (if applicable), and all shared standard MSP enhancements added to the MSP System during the Original Term or any Extended Term of this Addendum;

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b)Director monthly per loan fee, subject to the allowances set forth in Section 7.1 (“Director User Access Rights”) hereof;

c)Passport monthly per loan fee, subject to the allowances set forth in Section 6.1 (“Passport Fees and Allowances”);

d)up to *** standard Online LetterWriter letters (“OLLW”), as measured utilizing industry standard measurement tools, per each *** Principal Balance Loans per month (the “Allowable OLLW”).  Additional standard OLLW letters produced above the Allowable OLLW and all ARM OLLW letters will be billable at the rate of *** each until Client’s portfolio reaches *** Principal Balance Loans.  Once Client’s portfolio exceeds *** Principal Balance Loans, all OLLW letters above the Allowable OLLW and all ARM OLLW letters will be billable at the non-plan rates as set forth in the Fidelity Optional Processing and Support Services Rates Schedule;

e)up to *** online transactions, as measured utilizing industry standard measurement tools, per principal balance loan per month (the “Allowable CICS”).  For example, if Client has a processing portfolio of 10,000 principal balance loans, the above fees cover up to *** online transactions per month.  Fidelity shall have the right to bill Client and Client agrees to pay a fee for the number of transactions over and above the Allowable CICS at the rate of *** each; provided, however, during the first six (6) months after Client processes its first loan on the MSP System, Client shall not be charged any fees for excess CICS transactions;

f)one (1) copy per month of Navigator™;

g)Fidelity RLS Training Fundamentals and access to Fidelity’s computer based training products (non-classroom) in pre-defined quantities based on Client’s loan count;

h)the functionality provided by the following enhancements (and any implementation or installation charges in connection with such enhancements) are included upon written request by Client:

Enhancement Title/Description	IP#(s)
Monthly Billing	778, 947, 1395 & 1639
Daily Interest Accrual	1443
Credit Risk	1410
Auto Process Stop for PIF Trans	1308
Additional User Fields USR2-4	1336, 1602 & 1700
Tax Bureau:
TransAmerica	0724, 0941, 1267, 1503, 1607, 1622, 1623, 1624 & 1819
Lereta	1231
CRM	1355
Fidelity	1407
First American	0935, 1050, 1061 & 1501
Prime First – Interest Only Loans ARM	1416
Interest Only on Fixed Rate Loans	1830
Salomon Brothers Portfolio Analysis Tape	1298
ELOCS	1423

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3

i)tape rental for in-house backup;

j)Dexport charges; and

k)extended system availability (bronze plan) with read only access to a limited number of screens and/or modules (currently ISA0, ISA1, ISA2, ISH5, LSCH, NC04, NC07, PAY1, PAY2, PAY3, PAY4, P190, P309, VRKB, VRU1, VRU4, and VRU5) for the times specified below, subject to the terms of the SLA:

i)Monday through Friday:  8:00 p.m. PT (11:00 p.m. ET) until 5:00 a.m. PT (8:00 a.m. ET) the following morning;

ii)   Saturday:  3:00 p.m. PT (6:00 p.m. ET) until 3:00 a.m. PT (6:00 a.m. ET) Sunday morning; and

iii)  Sunday:  9:00 a.m. PT (12:00 p.m. ET) until 5:00 a.m. PT (8:00 a.m. ET) Monday morning.

Extended access to any screens and/or modules and the available hours set forth above are subject to change from time to time at Fidelity’s sole discretion.

l)Loans which have been paid-in-full, foreclosed, or transferred to a non-affiliated company, and are therefore inactive zero balance loans up to the Minimum Monthly Principal Balance Loans Billing Volume Requirement set forth above.  Inactive zero balance loans above the number included in the Basic Processing Charges will be billed to Client at the rate of *** pre loan until Client’s portfolio reaches *** Principal Balance Loans.  Once Client’s

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portfolio exceeds *** Principal Balance Loans, all inactive zero balance loans above the number included in the Basic Processing Charges will be billed to Client in accordance with the rates set forth in the Fidelity Optional Processing and Support Service Rates Schedule.  This charge is to cover regular daily (five (5) days per week), monthly and normal year-end processing, but does not include the inactive loan fees for Passport.

m)If Client elects to use FTP protocol for daily output reports to be delivered through Fidelity’s InterChange product and executes a Fidelity InterChange agreement in form and substance acceptable to Fidelity, Client will receive up to *** files per month.  Electronic data interchange transmissions in excess of *** files per month will be billed in accordance with the Fidelity Optional Processing and Support Services Rates Schedule; provided, however, electronic data interchange translated transmissions to or from a government sponsored entity, regulatory agency or insurance carrier (to the extent such insurance carrier is a business partner with Fidelity) will be provided at no additional cost to Client.

n)When generally made available to Fidelity’s other clients, Client will be provided access to Fidelity’s new collection workstation, subject to payment by Client of any applicable implementation fees.

3.3        Adjustments of Basic Processing Charges and Minimum Billing and Processing Requirements. The Basic Processing Charges, Minimum Monthly Principal Balance Loan Billing Volume Requirement and Minimum Monthly Principal Balance Loan Processing Volume Requirement set forth in Section 3.1 above shall remain in effect for the first year of the Original Term.  In the event the Addendum 1 Effective Date is other than January 1, for price adjustment purposes only, the first year of the term shall be deemed to be the period from the commencement of the term through and including the immediately succeeding December 31.  During the second and subsequent years of the Original Term, Fidelity reserves the right upon thirty (30) days written notice to Client, to adjust the Basic Processing Charges, Minimum Monthly Principal Balance Loan Billing Volume Requirement and Minimum Monthly Principal Balance Loan Processing Volume Requirement.  Such adjustment to the Basic Processing Charges shall not exceed the percent increase in the CPI-U Index between the annual averages of the most recently published twelve (12) month period and the immediately preceding twelve (12) month period, provided, however, in no event shall the percentage increase be less than ***.  For purposes of forecasting, documentation preparation, and advance notification requirements, the “most recently published” period shall be deemed to be the latest available published period at the time Fidelity begins its price adjustment process for the upcoming year.  In no event shall the Minimum Monthly Principal Balance Loan Billing Volume Requirement or Minimum Monthly Principal Balance Loan Processing Volume Requirement be adjusted below the levels set forth above.

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4.INPUT/OUTPUT SERVICES

4.1        Input.  Client shall perform the data entry requirements from items of original entry (which items remain in the possession of Client). Client shall create the input data and Client and/or Client’s agent will transmit the input data required by each System, as defined in the Documentation, to Fidelity’s computer facilities in Jacksonville via a mutually agreed upon method of data transmission. Input data is to be received by Fidelity each business day, or other processing frequency as required, at 8:00 p.m. PT (11:00 p.m. ET).  Client shall be responsible for verification of the data transmitted and for the release of the data to Fidelity for processing.

4.2        Output.  Fidelity will process the data using the Software and will have the output available to allow the Client to begin to print the output data at Client’s location at a mutually agreed upon time. Fidelity will use its commercially reasonable efforts to complete the processing and transmission of Client’s data on schedule, provided Client has transmitted and released its input in accordance with Section 4.1 (“Input”) of this Addendum.

4.3        Rejected Transactions and System Balancing.  Client shall correct and resubmit all transactions rejected by the Software and Client shall be responsible for reconciling and adjusting differences in batch control totals which result from rejected transactions and/or erroneous control totals. Client is responsible for the system balancing on a daily basis.

4.4        Reasonable Care.  Client agrees to exercise reasonable care in the use of each service. “Reasonable care” includes, but is not limited to, scheduling certain reports and producing large volumes of output data only on selected days. Certain reports identified in the Documentation have been blocked in the Software from being produced during peak cycles.   For example, restrictions may be placed on certain reports and large volume output during month end, mid-month and year end processing cycles.

5.ONLINE SERVICES

For a complete description of the On-line Services provided by Fidelity, and their availability, reference is made to the SLA attached to the Master Agreement.

6.PASSPORT

6.1        Passport Fees and Allowances.  In exchange for the payment of the Basic Processing Charges, Client shall be entitled to access to Passport, a specific allowance of CPU usage time per principal balance loan as set forth in the table in Section 6.1.5 below, storage of a rolling thirteen (13) months of Time Series Information and access to Scorecard Phase II.

6.1.1 Inactive Loan Fee.  Client shall pay Fidelity a monthly inactive loan fee as set forth in the table below for each inactive or zero balance loan available to Passport.

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6.1.2 Available Files.  Fidelity shall make the Regular File and the Month-end File available in Passport.  CPU usage against the Regular File shall be tracked independently from the CPU usage against the Month-end File.

a)Client’s monthly CPU usage against the Month-end File shall be counted after Client’s monthly CPU usage allowance and Client shall pay a Regular File Excess Usage Fee at Fidelity’s then current rates for excess usage.

b)Client’s monthly CPU usage against the Month-end File shall be counted after Client’s monthly Regular File CPU usage in calculating Client’s total CPU usage against both files for purposes of determining if Client’s total monthly CPU usage has exceeded the allowable amount.  Client shall pay a Month-end File Excess Usage Fee at Fidelity’s then current rates for excess usage for any CPU usage against the Month-end File which, when combined with Client’s CPU usage against the Regular File, results in total CPU usage in excess of the allowable amount.

6.1.3 Excess Storage Fees.  Based upon Client’s principal balance loan volume, Client shall pay to Fidelity an excess storage fee as set forth in the table below for each month of retention of Time Series Information in excess of the allowable number of months.

6.1.4 CPU Usage.

a)Client’s monthly CPU usage against the Regular File shall be counted first towards Client’s monthly CPU usage allowance and Client shall pay a Regular File Excess Usage Fee as set forth in Section 6.1.5 for any CPU usage against the Regular File which results in CPU usage in excess of the allowable amount.

b)Client’s monthly CPU usage against the Month-end File shall be counted after Client’s monthly Regular File CPU usage in calculating Client’s total CPU usage against both files for purposes of determining if Client’s total monthly CPU usage has exceeded the allowable amount.  Client shall pay a Month-end File Excess Usage Fee as set forth in Section 6.1.5 for any CPU usage against the Month-end File which when combined with Client’s CPU usage against the Regular File, results in total CPU usage in excess of the allowable amount.

c)CPU usage allowances are subject to adjustment by Fidelity from time to time based upon improvements in CPU performance in order to maintain the same relative CPU usage allowance.  For example, if Fidelity upgrades the CPU or otherwise improves the CPU processing speed, then the CPU usage allowance described herein may be proportionately adjusted downward to reflect such

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improvement.  Fidelity will provide written notice to Client of any adjustments to the CPU usage allowance.

6.1.5  Additional Monthly Allowances and Fees. 

CPU Usage Allowance (allowable seconds per loan)	***
Excess Usage Fees – Regular (per CPU second)	***
Excess Storage Fees (per principal balance loan per additional month of Time Series data over 13 months)	***
Inactive Loans	***

7.  DIRECTOR

7.1        Director User Access Rights.  The Basic Processing Charges include the right of access to Director.  The Basic Processing Charges entitle Client to an initial allocation of twenty (20) Director User Access Rights and thereafter one (1) full usage standard Director User Access Right per five hundred (500) Principal Balance Loans.  In the event Client requires more User Access Rights than the allowance set forth above, Client may request such additional User Access Rights subject to the payment of the then current additional fees.  Client is authorized to utilize the Director User Access Rights only at the following location(s):                           .

7.2        Access Verification Rights.  Client agrees to permit representatives of Fidelity or its licensors to inspect, during Client’s normal business hours, any Authorized Location(s) or any other locations under the control of Client for which Fidelity or its licensors have reasonable cause to believe Director or any third party component of Director is being accessed or used.  Upon request, Client shall provide written certification to Fidelity of the number of User Access Rights at each Authorized Location or other location where Director is used or otherwise accessed or used by Client.  Client also acknowledges and agrees that Fidelity may be obligated under its agreements with third party software licensors, for software components which are part of or associated with the use of Director, to allow such licensors the right to audit Fidelity’s records for access and distribution verification.  Such records may include, but not be limited to, the names, addresses, contact names and phone numbers of the Fidelity’s clients who have User Access Rights to Director.  Client consents to Fidelity’s compliance with such obligations and agrees to cooperate with Fidelity or its licensors regarding such audit efforts.

7.3        Access Violations.  Client is authorized to access Director only in the manner of use for which User Access Rights have been authorized hereunder.  If it is determined that Client is accessing Director at locations other than Authorized Locations, Fidelity may, in accordance with the termination provisions of the Agreement, and at Fidelity’s sole option, terminate this Addendum, terminate any and all User Access Rights that have been authorized under this

*** Confidential material redacted and submitted separately to the Commission

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Addendum in addition to any unauthorized access, or require Client to execute a modification agreement for such additional User Access Rights.

8.TRANSMISSION SERVICE & TERMINAL EQUIPMENT

8.1        Transmission Service.  Client will pay all costs for installation/deinstallation and for the data transmission service between Client’s service center and Fidelity’s site. Fidelity shall specify and order the type of transmission service required and will bill Client for those transmission services in accordance with the fees set forth in the Fidelity Optional Processing and Support Service Rates schedule, a copy of which has been delivered to Client.  In the event Client relocates its service center, Client shall be responsible for the cost of deinstallation at Client’s old site and for reinstallation of such transmission service at Client’s new site. Should Client desire to terminate the data transmission service, Client shall give Fidelity not less than ninety (90) days prior written notice. Client shall be responsible for any deconversion costs of such transmission service at the time of termination of such service.

8.2        Communication Devices.  The communication devices (satellite, terrestrial, or frame relay) shall be specified and ordered by Fidelity. Such devices will be leased in Fidelity’s name or owned by Fidelity. Fidelity, in turn, will bill Client for such devices located in Client’s office(s). Should Client desire to terminate the communication devices, Client shall give Fidelity not less than ninety (90) days prior written notice.

8.3        Terminal and Printing Equipment.  Fidelity will specify the type of terminal and printing equipment to be used by Client. Client may use its most cost effective or efficient method for acquiring the equipment specified by Fidelity.  At Client’s option, Fidelity, as an OEM dealer, may sell or lease the terminal and printing equipment to Client. In such case, Fidelity and Client will execute the applicable agreement for either the purchase or lease of such equipment.

8.4        Hardware and Software Requirements for Navigator™.  Client’s ability to access Navigator™ is contingent upon the use of certain hardware and software.  Fidelity will specify the type of hardware and software required for Client’s use of Navigator™. Client may use its most cost effective or efficient method for acquiring the equipment specified by Fidelity.  Fidelity, as an OEM dealer, may sell or lease the hardware or software to Client. In such case, Fidelity and Client will execute the applicable agreement for either the purchase or lease of such hardware or software.  Client shall have the sole responsibility for adequate protection and back-up of its data used in connection with Navigator™, including but not limited to utilization of the appropriate virus detection software upon receipt of the initial release and each monthly update of Navigator™ prior to use.

8.5        Transmission Problems. Fidelity shall use commercially reasonable efforts in isolating data transmission problems and obtaining service from the terminal hardware vendors and/or communication carriers.   In situations where data transmission is rendered impossible by virtue

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of equipment failure at Fidelity’s site, Fidelity agrees to provide such data, via a medium to be agreed to between Fidelity and Client, at its expense.  In the event the inability to transmit is caused by a failure of the communication carrier, the cost to provide such data will be borne equally by Fidelity and Client.  In the event of equipment failure at Client’s site, Client shall pay all costs associated with such data transfer.

9.       STANDARD ENHANCEMENTS

Fidelity may, using commercially reasonable efforts and based on changes to government regulations, tax laws, mortgage industry and mortgage agencies’ needs, as well as other reasons which Fidelity may deem necessary, issue standard enhancements to the MSP System.  Unless otherwise specified in the applicable Addenda or SOW, such standard enhancements are included as part of the fees set forth herein.

10.    SECURITY

The MSP System provides Client with built-in security through initial access and through submenus. Client is responsible for the initial setup of security levels and security codes as well as for the ongoing maintenance of security codes and security levels within the MSP System. Client agrees at the time this Addendum is executed to identify in writing to Fidelity the person who is responsible for the initiation and maintenance of the security controls within the MSP System.

11.    PROCESSING REMEDIES

11.1      REPROCESSING DATA.  FIDELITY’S SOLE OBLIGATION IN THE EVENT OF NEGLIGENCE OR ERROR BY FIDELITY IN THE PERFORMANCE OR NON-PERFORMANCE OF ITS DUTIES HEREUNDER SHALL BE LIMITED TO REPROCESSING THE DATA FOR CLIENT. FIDELITY’S OBLIGATION HEREIN IS CONTINGENT UPON CLIENT NOTIFYING FIDELITY WITHIN TWO (2) BUSINESS DAYS OR TWO (2) PROCESSING CYCLES AFTER THE RECEIPT OF ERRONEOUS DATA.

11.2      NAVIGATOR^TM.  TO THE EXTENT CLIENT RECEIVES NAVIGATOR™ UNDER THIS AGREEMENT, FIDELITY’S SOLE OBLIGATION IN THE EVENT OF NEGLIGENCE OR ERROR BY FIDELITY IN THE PERFORMANCE OR NON-PERFORMANCE OF ITS DUTIES WITH RESPECT TO NAVIGATOR™ SHALL BE LIMITED TO REPLACING NAVIGATOR™ FOR THE REMAINING TERM OF THE MSP ADDENDUM.

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CONFIDENTIAL TREATMENT REQUESTED—REDACTED COPY

CONFIDENTIAL TREATMENT REQUESTED:  INFORMATION FOR WHICH CONFIDENTIAL TREATMENT

HAS BEEN REQUESTED IS OMITTED AND NOTED WITH “***.”  AN UNREDACTED VERSION OF THIS

DOCUMENT HAS BEEN SUBMITTED SEPARATELY TO THE SECURITIES AND EXCHANGE COMMISSION.

ADDENDUM 2

TO

MASTER AGREEMENT NO. 264-05M

BETWEEN

FIDELITY INFORMATION SERVICES, INC.

AND

AMERICAN MORTGAGE NETWORK, INC.

FOR

CPI LASERCHECK SYSTEM

This Addendum 2 (“Addendum”) is entered into as of May 10, 2005 (“Addendum 2 Effective Date”), by and between Fidelity Information Services, Inc. (“Fidelity”) and American Mortgage Network, Inc. (“Client”).

1.DEFINITIONS.

1.1        The definitions set forth in the Agreement or any addendum or exhibit thereto, are incorporated herein by this reference as if fully stated herein.

1.2        “CPI LaserCheck Software” means the Version of the software existing on the Effective Date of this Addendum which has been developed and is owned solely by Fidelity and has been incorporated into the CPI LaserCheck System

1.3        “CPI LaserCheck System” means the CPI LaserCheck Software, hardware unit(s) and any associated software described on any Schedule attached hereto.

1.4        “Target Shipping Date” means a date to be determined by Fidelity which will be within thirty (30) days after the later of the Addendum 2 Effective Date or the date this Addendum is fully executed.

2.PURCHASE.

2.1        Purchase Price.  Fidelity agrees to sell to Client, and Client agrees to purchase from Fidelity, the hardware components of the CPI LaserCheck System(s).  Fidelity hereby grants to Client and Client accepts a nontransferable and non exclusive right to access and use the CPI LaserCheck Software.  Pricing for the CPI LaserCheck System is set forth on Schedule 1 attached hereto.  Payments shall be made in accordance with the terms of the Agreement.

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2.2        Client’s Business Use.  Client represents and warrants that it is acquiring the CPI LaserCheck System for its own business use and purpose, without any intention to re-sell or transfer the CPI LaserCheck System to any third party.

2.3        Security Interest.  Fidelity reserves a security interest in the CPI LaserCheck System and all components, replacements, and proceeds thereof to secure payment of Client’s obligations to Fidelity.  Such security interest will be retained and title to the hardware components of the CPI LaserCheck System will not pass to Client until Client’s payment obligation for the purchase price is paid in full.  Client agrees that Fidelity will have the right to file financing statements pursuant to the Uniform Commercial Code or other applicable law to evidence or perfect such security interest, and Client agrees to join with Fidelity in executing such financing statements, if requested.

3.       TERM.

The term of this Addendum shall be from the Addendum 2 Effective Date through the later of: (a) receipt by Fidelity of the final payment due for the CPI LaserCheck System; or (b) the date of termination of the software support and printer maintenance described below; or (c) termination of the access rights granted herein.

4.SOFTWARE SUPPORT AND HARDWARE MAINTENANCE.

4.1        Software Support. Client shall pay to Fidelity a monthly support fee, as shown on Schedule 1 attached to this Addendum, for which Fidelity, either directly or through a subcontractor or agent, shall provide the following:  a) telephone technical support and problem reporting for CPI LaserCheck Software between the hours of 8:00 a.m. and 6:00 p.m. Eastern Time (ET) via PowerCell; b) software maintenance including new Releases of the CPI LaserCheck Software as they are made available by Fidelity at no additional charge, provided however, that Fidelity shall only support the most current Release and the immediately preceding Release.

4.2        Hardware Maintenance.  Client shall pay to Fidelity an annual hardware maintenance fee as shown on Schedule 1 attached to this Addendum, for which Fidelity, either directly or through a subcontractor or agent, shall provide printer maintenance.  The annual hardware maintenance fee specifically excludes replacement of any hardware which cannot be reasonably repaired, is obsolete where parts are no longer available from the hardware manufacturer or where the hardware manufacturer no longer provides maintenance support services for the hardware.  Fidelity or its agent shall make commercially reasonable efforts to diagnose a reported problem and, if necessary, dispatch a technician to the Client’s location to resolve such problem. Client shall be responsible for maintaining any third party hardware and software not provided by Fidelity, including but not limited to, maintaining licenses and supported versions of the software, and obtaining and installing the appropriate upgrades,

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modifications, enhancements, and releases made available by the third party software or hardware manufacturer to ensure compatibility with and the functionality of the CPI LaserCheck System.  Client acknowledges that magnetic ink character recognition (“MICR”) printers are required to operate the CPI LaserCheck System and that Fidelity has provided Client with a list of acceptable MICR printers, current as of the Effective Date of this Addendum.  Fidelity may update such list from time to time.  Client may request Fidelity to test other printers for compatibility with the CPI LaserCheck System, but such testing shall be performed, at Client’s expense, pursuant to a separate SOW and at Fidelity’s then current rates for time and materials.  Fidelity shall have no liability or obligation with respect to failure of the CPI LaserCheck System to function properly if such failure is caused by Client, Client’s environment or the consumables, such as toner, used by Client.

4.3        Termination of Support and Maintenance.  Client may terminate the software support and/or printer maintenance for the CPI LaserCheck System by providing thirty (30) days advance written notice to Fidelity.  Fidelity, in such event, shall not be obligated to refund any support or maintenance fees paid by Client.  Fidelity may terminate the software support and/or printer maintenance by providing sixty (60) days advance written notice to Client and Fidelity shall refund the prorata portion of any prepaid support and/or hardware maintenance fees.

4.4        New Versions.  New or subsequent Versions of the CPI LaserCheck Software, if any, will be made available only upon payment by Client of a new user access fee at the then current rates.

4.5        Price Adjustments.  Fidelity reserves the right, once annually (or more frequently if such adjustment relates to the pass through of increases by Fidelity’s third party vendors) and upon forty five (45) days prior written notice to Client, to adjust the monthly software support fee and annual printer maintenance fee.

5.DELIVERY AND RISK OF LOSS.

5.1        Delivery.  The CPI LaserCheck System shall be packed, prepared for shipment and shipped by Fidelity or its agent, F.O.B. Fidelity’s or agent’s site on the Target Shipping Date.

5.2        Risk of Loss.  Fidelity will bear the risk of loss until the commencement of loading of the CPI LaserCheck System on the transportation vehicle.  From that time, all risk of loss shall be borne by Client.  Fidelity or its agent will arrange for replacement value transit insurance coverage on the CPI LaserCheck System at Client’s expense from the time the CPI LaserCheck System is shipped from Fidelity’s or agent’s site until delivery at Client’s site.  All transportation, insurance and subsequent installation costs, if any, shall be paid by Client.

5.3        Rescheduling.  Client may request a delay or deferral of the Target Shipping Date of any CPI LaserCheck System, one time only, by providing thirty (30) days advance written notice to Fidelity of such request.  If such request is received by Fidelity sixty (60) days or more before the Target Shipping Date, Client shall pay a rescheduling charge equal to five percent

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3

(5%) of the purchase price of the CPI LaserCheck System so rescheduled. If such request is received by Fidelity less than sixty (60) days prior to the Target Shipping Date, Client shall pay a rescheduling charge equal to ten percent (10%) of the purchase price of the CPI LaserCheck System so rescheduled.

5.4        Cancellation.  If Client requests cancellation, in writing, of an order pursuant to any Schedule 1 to this Addendum prior to the Target Shipping Date for all or any part of the CPI LaserCheck System, Client will pay to Fidelity the cancellation charge set forth below for the CPI LaserCheck System(s) or component(s) so canceled:

Days Notice Prior to Target Shipping Date	% of Purchase Price Due
30 or more	7.5	%
7 to 29	15.0	%
0 to 6	30.0	%

6.INSTALLATION.

6.1        Installation.  The CPI LaserCheck System(s) will be deemed to be successfully installed when it is placed into an operational state in Client’s facility, but is not necessarily placed into production or “live” use by Client.  In the event the CPI LaserCheck System fails to function substantially in accordance with the system documentation following successful installation, Client will cooperate with Fidelity in determining the reasons for such failure and the remedial steps that are necessary.  Client will take such actions as may be reasonably necessary, and Fidelity will perform such warranty and maintenance obligations as it may have pursuant to this Agreement, to cause the CPI LaserCheck System to function properly.  In the event the CPI LaserCheck System cannot be successfully installed or fails to continue to function properly for twenty (20) consecutive days after successful installation, then either party hereto may terminate this Agreement with respect to the specific failed CPI LaserCheck System by providing at least ten (10) days prior written notice to the other party hereto.  In the event of such termination due to failure to install or function, provided that such failure is not a result of, or is not attributable to Client or Client’s equipment, environment or consumables, Fidelity shall be responsible for the deinstallation, packing and return freight of the CPI LaserCheck System to Fidelity’s designated facility.  Otherwise, Client shall be responsible for the deinstallation, packing and return freight of the applicable CPI LaserCheck System.

6.2        Additional Installation Services.  If Client desires on site installation assistance, Fidelity will make commercially reasonable efforts to provide a technician at Fidelity’s then published daily rate for such services, plus any travel and lodging expenses as incurred subject, however, to the availability of Fidelity personnel.  Installation services can also be performed by the maintenance vendor on a time and materials basis.

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7.       LIMITATION OF LIABILITY.

7.1        IN THE EVENT FIDELITY SHALL MATERIALLY FAIL TO PERFORM ITS OBLIGATIONS IN ACCORDANCE WITH THE TERMS OF THIS ADDENDUM AS RENDERED IN THE JUDGMENT AND AWARED BY A COURT OF COMPETENT JURISDICTION, FIDELITY’S LIABILITY ON ANY CLAIM OR LOSS ARISING OUT OF, OR CONNECTED WITH PRODUCTS OF SERVICES FURNISHED HEREUNDER, SHALL IN ALL CASES BE LIMITED SOLELY TO CORRECTION OF NONCONFORMITIES WHICH DO NOT SUBSTANTIALLY CONFORM WITH THE AGREED DESCRIPTION OF PRODUCTS OR SERVICES.  IF FOR ANY REASON FIDELITY IS UNABLE OR FAILS TO CORRECT NONCONFORMITIES, FIDELITY’S LIABILITY FOR DAMAGES FOR SUCH FAILURE, WHETHER IN CONTRACT OR TORT (INCLUDING FIDELITY’S OWN NEGLIGENCE), LAW OR EQUITY, SHALL NOT EXCEED THE AMOUNTS PAID BY CLIENT FOR THAT PORTION OF THE PRODUCTS OR SERVICES WHICH FAIL TO CONFORM.  NONWITHSTANDING THE FOREGOING, FOR PRODUCTS OR SERVICES OR OTHERWISE, FIDELITY’S LIABILITY SHALL BE LIMITED TO THE ACTUAL DIRECT DAMAGES INCURRED BY CLIENT, PROVIDED THAT IN EACH SUCH INSTANCE, FIDELITY’S LIABILITY SHALL NOT EXCEED THE LESSER OF I) THE AMOUNT OF THE ACTUAL DIRECT MONETARY LOSS SUFFERED BY CLIENT OR II) THE AMOUNT PAID TO FIDELITY BY CLIENT FOR THE PRODUCTS AND SERVICES FOR WHICH THE MATERIAL FAILURE OCCURRED.  FIDELITY’S AGGREGATE LIABILITY SHALL NOT, IN ANY EVENT, EXCEED THE TOTAL FEES PAID BY CLIENT TO FIDELITY UNDER THIS ADDENDUM.

7.2         FIDELITY SHALL NOT BE RESPONSIBLE FOR ANY DAMAGES OR EXPENSES RESULTING FROM THE MODIFICATION, ALTERATION OR THE UNAUTHORIZED USE BY CLIENT, OF THE CPI LASERCHECK SOFTWARE OR CPI LASERCHECK SYSTEMS, OR FROM THE UNINTENDED AND UNFORESEEN RESULTS OBTAINED BY CLIENT RESULTING FROM SUCH USE.

7.3         EVEN TO THE EXTENT CLIENT’S EXCLUSIVE REMEDIES FAIL OF THEIR ESSENTIAL PURPOSES, WHETHER OR NOT FIDELITY HAS BEEN ADVISED IN ADVANCE THAT SUCH DAMAGES MAY BE INCURRED, IN NO EVENT WILL FIDELITY BE LIABLE FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL OR THIRD PARTY DAMAGES OF ANY KIND INCLUDING, BUT NOT LIMITED TO LOST PROFITS, LOSS OF GOODWILL OR BUSINESS INTERRUPTION, ARISING OUT OF THIS ADDENDUM OR THE USE OF ANY EQUIPMENT, SOFTWARE, DOCUMENTATION OF SERVICES PROVIDED UNDER THIS ADDENDUM.

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CONFIDENTIAL TREATMENT REQUESTED-REDACTED COPY

CONFIDENTIAL TREATMENT REQUESTED:  INFORMATION FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED IS OMITTED AND NOTED WITH “***.” AN UNREDACTED VERSION OF THIS DOCUMENT HAS BEEN SUBMITTED SEPARATELY TO THE SECURITES AND EXCHANGE COMMISSION.

CPI LASERCHECK SYSTEM Schedule 1

SCHEDULE 1
TO
ADDENDUM 2
CPI LASERCHECK SYSTEM

To Agreement No.: 264-05M
Schedule No.: 01

ý Initial Issue o Subsequent Issue o Replacement Issue (amends Schedule No. :         )

Schedule Effective Date: May 10, 2005

PURPOSE OF ISSUANCE:  To document Client’s Order for the following CPI LaserCheck hardware and software.

For this Schedule 1, Client hereby elects to: o Lease Equipment ý Purchase Equipment

					Monthly	Annual
		Purchase	Extended		Maintenance	Hardware
Description	Qty	Price Each	Price		and Support	Maintenance
A. PC HARDWARE
CPI LaserCheck PC (See F.1 below for configuration)*	1
S5500 15inch 2T Monitor US	1
Zip 250Mb ATAPI Int Drive	1
Zip 250Mb single for PC	1
PC Anywhere v11.0	1
Intl USR Fax modem 56K PCI v92	1
6 socket SurgeMaster w / 4ft cord	1
Total PC Configuration	7		***		***	***
B. CPI LASERCHECK SYSTEM SOFTWARE
CPI LaserCheck Application Software Version 2.2 (CPS)	1				***
IP 795	1
IP 1347 Disbursement Check Voucher Option	1
Total CPI LaserCheck System Software	3		***		***	***
C. PRINTER HARDWARE
Kyocera MICR Laser Printer (FS-3718 - 18PPM)	1					***
500 Sheet Feeder with Path Adapter	1					***
Parallel Printer Cable	1
MICR toner cartridge	1
Total Printer Hardware	4		***		***	***
D. OPTIONAL EQUIPMENT & SERVICES
Cartridge for Signature/Logo (SC-2)	1
Digitizing fee for company logo	1
Digitizing fee for each signature	1
Total Optional Equipment & Services	3				***	***
TOTAL	17		***	**	***	***

*    A loaner PC will be provided to Client at no charge until version CPI LaserCheck 3.0 is released, at which time, the new version of CPI LaserCheck will be loaded on a PC of like size and configuration as detailed above and shipped to Client at no extra charge.  Client, at its expense,  will ship the loaner PC back to Fidelity once new PC is installed.

*** Confidential material redacted and submitted separately to the Commission

1

**  Hardware and Software Purchase Price is included in the Conversion Statement of Work.

E.  OTHER TERMS AND CONDITIONS

E.1    PC Configuration is as follows:  CPI LaserCheck Workstation EVO D530 CMT P4/2.6Ghz,  512Mb, 80Gb CDRW WXPP

E.2   Depending upon the configuration of Client’s CPI LaserCheck System, connectivity to Fidelity through Client’s EDI connection may result in additional charges.  Such charges are set forth in the then current Optional Processing and Support Services Rates schedule.  A copy of the current schedule is attached hereto for reference.

E.3   Purchase Price does not include installation, tax, insurance or shipping.

E.4   Installation is charged at an hourly rate of ***, with a 1.5 day minimum, plus travel, lodging and out-of-pocket expenses.

E.5    The required IP 795 and any optional IPs for the Fidelity LaserCheck System are governed by the terms and conditions of theMaster Agreement executed between Client and Fidelity.

E.6    An annual maintenance contract for the printer(s) set forth in Section C. above, shall be required following the initial one (1) year warranty period.  On-site maintenance and support shall be provided by Fidelity’s agent, which Client may request through Fidelity’s PowerCell.

E.7    Target Ship Date is estimated to be approximately thirty (30) days after Fidelity’s receipt of this executed Schedule 1.

E.8    Pricing included in this Schedule 1 are valid for sixty (60) days from the Schedule Effective Date.

This Schedule 1 is incorporated into and made a part of Addendum2 to Master Agreement #264-05M between Fidelity and Client.

IN WITNESS WHEREOF, the parties to the aforementioned Agreement hereby execute this Schedule 1.

AMERICAN MORTGAGE NETWORK, INC.		FIDELITY INFORMATION SERVICES, INC.
By.		By.
Signature	Date	Signature	Date
Printed or Typed Name		Printed or Typed Name
		As its
Title		Title
“Client”		“Fidelity”

*** Confidential material redacted and submitted separately to the Commission

2

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 15, 2005

/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 15, 2005

/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, 2005, 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 15, 2005
	/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, 2005, 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 15, 2005
	/s/ Judith A. Berry
	Judith A. Berry
	Chief Financial Officer