UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended March 31, 2008

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from       to

LUMINENT MORTGAGE CAPITAL, INC.

(Exact name of registrant as specified in its charter)

Maryland		06-1694835
(State or other jurisdiction of incorporation or		(I.R.S. Employer
organization)		Identification No.)
2005 Market Street, 21st Floor, Philadelphia, PA		19103
(Address of principal executive offices)		(Zip Code)

(215) 564-5900
(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 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. Yes þ      No o.

     Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer. See definition of “accelerated filer and large accelerated filer” as defined in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o.     No þ.

     The number of shares of common stock outstanding on April 30, 2008 was 43,283,339.

 

 

INDEX

		PAGE
PREFACE			2
CAUTIONARY NOTE			3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS			5
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			58
ITEM 4. CONTROLS AND PROCEDURES			63
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			64
ITEM 1A. RISK FACTORS			65
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			65
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			65
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			65
ITEM 5. OTHER INFORMATION			65
ITEM 6. EXHIBITS			65
SIGNATURES			66
EXHIBIT INDEX			67

PREFACE

     Effective May 9, 2008, S. Trezevant Moore, Jr. resigned as our President and Chief Executive Officer and as a member of our board of directors and we entered into a separation agreement with him on that date. On May 9, 2008, our board of directors appointed Zachary H. Pashel as our President and Chief Executive Officer effective May 15, 2008 and we intend to enter into an employment agreement with him when he commences employment. Mr. Pashel has served as a member of our board of directors since September 2007.

     For further information, reference is made to the Form 8-K Report we filed with the Securities and Exchange Commission on May 15, 2008 which is hereby incorporated herein by reference.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Form 10-Q contains certain forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements convey our current expectations or forecasts of future events. All statements contained in this Form 10-Q other than statements of historical fact are forward-looking statements. Forward-looking statements include statements regarding our financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words “may continue,” “estimate,” “intend,” “project,” “believe,” “expect,” “plan,” “anticipate” and similar terms may identify forward-looking statements, but the absence of such words does not necessarily mean that a statement is not forward-looking. These forward-looking statements include, among other things, statements about:

	•		our ability to obtain the financing we need to support our liquidity position and to remain in business;
	•		our inability to meet real estate investment trust, or REIT, dividend and distribution requirements;
	•		continued creditworthiness of the holders of mortgages underlying our mortgage-related assets;
	•		the effect of the flattening of, or other changes in, the yield curve on our investment strategies;
	•		changes in interest rates and mortgage prepayment rates;
	•		our ability to develop new fee-based asset management businesses successfully;
	•		the possible effect of negative amortization of mortgages on our financial condition;
	•		the possible impact of our failure to maintain exemptions under the Investment Company Act of 1940, or the 1940 Act;
	•		the possible impact of our disqualification as a REIT;
	•		the ability to trade our common stock due to the delisting of the stock from the New York Stock Exchange, or NYSE;
	•		potential impacts of our leveraging policies on our results of operations and cash available for distribution;
	•		the power of our board of directors to change our operating policies and strategies without stockholder approval;
	•		whether our board of directors will declare periodic distributions to our stockholders;
	•		effects of interest rate caps on the adjustable-rate and hybrid adjustable-rate loans and mortgage-backed securities we own;
	•		the degree to which our hedging strategies may or may not protect us from interest rate volatility;
	•		volatility in the timing and amount of our cash distributions; and
	•		the other important factors described in this Form 10-Q including those under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk” and the risk factors incorporated by reference under “Risk Factors.”

     Any or all of our forward-looking statements in this Form 10-Q may turn out to be inaccurate and actual results could differ materially from those anticipated or implied by our forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and future trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They may be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties.

     You should not rely unduly on those forward-looking statements, which speak only as of the date of this Form 10-Q. Unless required by the federal securities laws, we undertake no obligation to update publicly or revise any forward-looking statements to reflect new information or future events.

     This Form 10-Q contains market data, industry statistics and other data that we have obtained or compiled from information made available by third parties. We have not independently verified any third party data.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

INDEX TO FINANCIAL STATEMENTS

Condensed Consolidated Financial Statements of Luminent Mortgage Capital, Inc.:
Condensed Consolidated Balance Sheets at March 31, 2008 (unaudited) and December 31, 2007			6
Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2008 and March 31, 2007			7
Condensed Consolidated Statement of Stockholders’ Deficit (unaudited) for the three months ended March 31, 2008			8
Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2008 and March 31, 2007			9
Notes to the Condensed Consolidated Financial Statements (unaudited)			11

LUMINENT MORTGAGE CAPITAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2008				2007
(in thousands, except share and per share amounts)		(Unaudited)
Assets:
Cash and cash equivalents		$	1,344			$	3,522
Restricted cash			6,210				7,550
Residential mortgage loans, at fair value at March 31, 2008 and at amortized cost, net of allowance for loan losses of $38,145, at December 31, 2007			3,443,660				4,191,343
Mortgage-backed securities pledged as collateral, at fair value			220,574				435,885
Equity securities, at fair value			—				373
Interest receivable			8,179				16,129
Principal receivable			165				96
Derivatives, at fair value			69				101
Other assets			77,004				66,919
Total assets		$	3,757,205			$	4,721,918
Liabilities:
Mortgage-backed notes, at fair value at March 31, 2008		$	3,376,270			$	3,914,643
Repurchase agreements, at fair value at March 31, 2008			348,616				526,634
Collateralized debt obligations, at fair value at March 31, 2008			53,759				294,416
Junior subordinated notes, at fair value at March 31, 2008			24,591				92,788
Convertible senior notes, at fair value at March 31, 2008			36,000				90,000
Derivatives, at fair value			21,807				10,605
Revolving line of credit, at fair value at March 31, 2008			15,833				15,833
Cash distributions payable			13,857				13,857
Accrued interest expense			13,739				10,511
Warrant liability, at fair value			13,653				22,868
Accounts payable and accrued expenses			62,144				39,788
Total liabilities			3,980,269				5,031,943
Minority interest			148				—
Stockholders’ Deficit:
Preferred stock, par value $0.001:
10,000,000 shares authorized; no shares issued and outstanding at March 31, 2008 and December 31, 2007			—				—
Common stock, par value $0.001:
100,000,000 shares authorized; 43,283,339 and 43,172,839 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively			43				43
Additional paid-in capital			548,494				548,474
Accumulated other comprehensive income			2,007				6,556
Accumulated distributions in excess of accumulated earnings			(773,756	)			(865,098	)
Total stockholders’ deficit			(223,212	)			(310,025	)
Total liabilities and stockholders’ deficit		$	3,757,205			$	4,721,918

The accompanying notes are an integral part of these statements

LUMINENT MORTGAGE CAPITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		For the Three Months Ended
		March 31,
(in thousands, except share and per share amounts)		2008				2007
Net interest income:
Interest income:
Mortgage loan and securitization portfolio		$	66,338			$	98,690
Spread portfolio			1,316				30,376
Credit sensitive bond portfolio			9,112				16,500
Total interest income			76,766				145,566
Interest expense			68,972				115,204
Net interest income			7,794				30,362
Other income (expenses):
Unrealized gains on instruments carried at fair value, net			141,215				14,427
Realized Losses on loans and mortgage-backed securities, net			(6,024	)			(15,453	)
Interest income (expense) on derivative instruments			(2,337	)			837
Impairment losses on mortgage-backed securities			—				(4	)
Other expense			—				(80	)
Total other income (expenses)			132,854				(273	)
Operating Expenses:
Servicing expense			4,827				5,986
Provision for loan losses			—				3,543
Salaries and benefits			1,524				3,084
Professional services			2,225				844
Other general and administrative expenses			1,527				1,785
Total operating expenses			10,103				15,242
Income before income taxes			130,545				14,847
Income taxes			2,352				460
Net income		$	128,193			$	14,387
Net income per share — basic		$	2.97			$	0.30
Net income per share — diluted		$	1.59			$	0.30
Weighted-average number of shares outstanding — basic			43,108,841				47,316,058
Weighted-average number of shares outstanding — diluted			80,644,547				47,427,502
Dividends per share		$	—			$	0.30

The accompanying notes are an integral part of these statements

LUMINENT MORTGAGE CAPITAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited)

																		Accumulated
														Accumulated				Distributions
		Common Stock								Additional				Other				in Excess of
						Par				Paid-in				Comprehensive				Accumulated				Comprehensive
(in thousands)		Shares				Value				Capital				Income				Earnings				Income				Total
Balance, January 1, 2008			43,173			$	43			$	548,474			$	6,556			$	(865,098	)						$	(310,025	)
Cumulative effect of adoption of new accounting principle															(4,296	)			(36,847	)		$	(4,296	)			(41,143	)
Net income																			128,193				128,193				128,193
Amortization of derivative gains															(253	)							(253	)			(253	)
Comprehensive income																						$	123,644
Issuance and amortization of restricted common stock			111				—				20								(4	)							16
Balance, March 31, 2008			43,284			$	43			$	548,494			$	2,007			$	(773,756	)						$	(223,212	)

The accompanying notes are an integral part of these statements

LUMINENT MORTGAGE CAPITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		For the Three Months Ended March 31,
(in thousands)		2008				2007
Cash flows from operating activities:
Net income		$	128,193			$	14,387
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Change in fair value of financial instruments			(135,191	)			(4,550	)
Amortization of premium/(discount) on residential mortgage loans and mortgage-backed securities and depreciation and amortization			(164	)			4,442
Impairment losses on securities			—				4
Provision for loan losses			—				3,543
Realized loss on real estate owned			(4,465	)			—
Negative amortization of residential mortgage loans			(8,323	)			(35,466	)
Share-based compensation			17				712
Net losses on sales of mortgage-backed-securities available-for-sale			—				15,453
Changes in operating assets and liabilities:
(Increase) decrease in interest receivable, net of purchased interest			5,181				(1,250	)
(Increase) decrease in other assets			10,511				(18,491	)
Increase in accounts payable and other liabilities			16,661				7,485
Increase (decrease) in accrued interest expense			3,225				(2,754	)
Net cash provided by (used in) operating activities			15,645				(16,485	)
Cash flows from investing activities:
Purchases of mortgage-backed securities			—				(461,640	)
Proceeds from sales of mortgage-backed securities			129,363				14,887
Principal payments of mortgage-backed securities			6,182				115,838
Purchases of residential mortgage loans, net			—				(414,262	)
Principal payments of residential mortgage loans			100,398				460,433
Purchases of derivative instruments			—				(8,880	)
Proceeds from derivative instruments			—				6,701
Net change in restricted cash			1,340				(49,947	)
Proceeds from sale of equity securities			373				—
Other			—				(136	)
Net cash provided by (used in) investing activities			237,656				(337,006	)
Cash flows from financing activities:
Capitalized financing costs			—				(4,414	)
Borrowings under repurchase agreements			1,633,530				11,312,497
Principal payments on repurchase agreements			(1,823,334	)			(11,139,734	)
Repayments of warehouse lending facilities, net			—				(349,362	)
Repayments of commercial paper facility, net			—				(18,655	)
Distributions to stockholders			—				(14,343	)
Proceeds from issuance of mortgage-backed notes			—				718,451
Principal payments on mortgage-backed notes			(92,829	)			(362,535	)
Proceeds from issuance of collateralized debt obligations			27,825				266,027
Principal payments on collateralized debt obligations			(823	)			—
Proceeds from minority interest investment			152				—
Net cash provided by (used in) financing activities			(255,479	)			407,932
Net increase (decrease) in cash and cash equivalents			(2,178	)			54,441
Cash and cash equivalents, beginning of the period			3,522				5,902
Cash and cash equivalents, end of the period		$	1,344			$	60,343

LUMINENT MORTGAGE CAPITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

		For the Three Months Ended March 31,
(in thousands)		2008				2007
Supplemental disclosure of cash flow information:
Interest paid		$	65,743			$	122,217
Taxes paid (refund received)			(3,600	)			56
Non-cash investing and financing activities:
Transfer of residential mortgage loans to real estate owned			37,830				2,879
Proceeds from the sale of mortgage-backed securities			(2,315	)			—
Repayments of repurchase agreements			2,315				—
Acquisition of mortgage-backed securities available-for-sale through collateralized debt obligations			—				(3,986	)
(Increase) decrease in principal receivable			(69	)			(433	)
Increase (decrease) in cash distributions payable to stockholders			—				75
Principal payments of mortgage-backed securities available-for-sale			—				183
Repayments of warehouse lending facilities			—				(183	)
Increase in unsettled security purchases			—				2,271

The accompanying notes are an integral part of these statements

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—OVERVIEW

     Luminent Mortgage Capital Inc., or the Company, was organized as a Maryland corporation on April 25, 2003. The Company commenced operations on June 11, 2003. The Company’s common stock began trading on the New York Stock Exchange, or NYSE, under the trading symbol LUM on December 19, 2003. The NYSE suspended the listing of the Company’s stock effective May 2, 2008. Subsequently, the Company’s stock began to be quoted on the Over-the-Counter, or OTC, Bulletin Board under the trading symbol “LUMC”.

     The Company is a real estate investment trust, or REIT, which, together with its subsidiaries, has historically invested in two core mortgage investment strategies. Under its Residential Mortgage Credit strategy, the Company invests in mortgage loans purchased from selected high-quality providers within certain established criteria as well as subordinated mortgage-backed securities and other asset-backed securities that have credit ratings below AAA. Under its Spread strategy, the Company invests primarily in U.S. agency and other highly-rated single-family, adjustable-rate and hybrid adjustable-rate mortgage-backed securities. On March 28, 2008, the Company announced its intention, subject to stockholder approval, to convert from a Maryland corporation qualified as a REIT to a publicly-traded partnership, or PTP, taxed as a partnership in order to provide more flexibility to offer services managing real estate debt and provide fee-based management services to third-parties. In anticipation of this conversion, the Company formed a new REIT subsidiary to hold certain retained interests of securitization trusts that are required to be held by a REIT in accordance with the trust documents. Third-party investors hold the common stock of this subsidiary, and the Company therefore recognized a minority interest of $0.1 million on the consolidated balance sheet at March 31, 2008 representing the subsidiary common stock held by third parties.

     The information furnished in these unaudited condensed consolidated interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations for the interim periods do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2007.

Business Conditions and Going Concern

     The Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. As the Company announced on August 6, 2007, the mortgage industry and the financing methods the industry has historically relied upon deteriorated significantly and in an unprecedented fashion. Effectively, the secondary market for many fixed income securities especially mortgage-backed securities closed, and, as a result, the Company simultaneously experienced a significant increase in margin calls from its repurchase agreement counterparties, or repurchase agreement lenders, and a decrease in the amount of financing its lenders would provide on a given amount of collateral. Prices for even the highest quality AAA-rated bonds dropped precipitously. These events resulted in a rapid and significant loss of liquidity forcing the Company to sell investment assets at significant losses and write down investments held in its portfolio to reflect reductions in the fair value of the investments. As of March 31, 2008, the Company had a deficit to stockholder’s equity of $223.2 million because of these losses, and these events caused substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

          Beginning in August 2007, the Company has entered into a number of financing transactions with Arco Capital Corporation, Ltd., or Arco, and issued a warrant to Arco enabling it to acquire a 51% economic interest in the Company. Currently, the Company is continuing to shift financing from short-term arrangements that are subject to margin calls to long-term financing and financing provided by related parties. As of March 31, 2008, the Company had $182.3 million of short-term financing remaining with non-related parties.

          The Company’s main source of liquidity is monthly principal and interest payments on loans and mortgage-backed securities investments. These monthly cash receipts are used to pay contractual principal and interest payments on debt as well as to pay expenses required to support the Company’s operations.

          On March 28, 2008, the Company announced its intention, subject to shareholder approval, to restructure the Company from a corporation qualified as a REIT to a PTP. The PTP structure will permit the Company to offer fee-based services including credit-risk management services, asset management advisory services and sub-manager services without the restrictive asset and income rules to which companies qualified as a REIT must adhere. An additional advantage of this structure is the flexibility it would provide related to income distribution in that management would have more discretion to conserve capital or distribute capital to stockholders than is allowed under REIT requirements. In anticipation of the conversion to this structure, the Company is actively marketing its services, including the formation of a joint venture to perform credit risk management services. The Company believes that over time fee income will provide a more significant source of income for the Company.

NOTE 2 —SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Note 2 to the consolidated financial statements to the Company’s Form 10-K for the year ended December 31, 2007 describes the Company’s significant accounting policies. There have been no significant changes to these policies during 2008 with the exception of the required adoption of the Statement of Financial Accounting Standards, or SFAS, No. 157, Fair Value Measurements, and the adoption of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, that the Company adopted for investment assets and financing liabilities. See the description of recent accounting pronouncements below.

     Changes in Accounting Policies

     In February 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 159 that allows entities to make an election to record financial assets and liabilities, with limited exceptions, at fair value on the balance sheet, with changes in fair value recorded in earnings. The Company adopted the Statement as of January 1, 2008 and elected the fair value option for all of its investment assets, which include residential mortgage loans and mortgage-backed securities, and for financing liabilities, which include repurchase agreements, mortgage-backed notes, collateralized debt obligations, senior convertible notes, junior subordinated notes and lines of credit. These assets and liabilities were selected for fair value accounting in order to provide better matching of accounting methods for related assets and liabilities and may reduce, or at times may increase volatility in the income statement that occurred previously due to the use of different accounting methods for related assets and liabilities. By adopting this Statement, the Company’s investment assets and related financing liabilities will be carried on the balance sheet at fair value with gains and losses due to changes in the fair value of the assets and liabilities recorded in the statement of operations. At January 1, 2008, all differences between the carrying basis of these assets and liabilities as well as the effect of the write-off of certain related assets and liabilities such as premiums and discounts, deferred financing costs and valuation accounts were recorded in stockholders’ equity as the cumulative effect of adoption of a new accounting principle.

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

     The effect on the financial assets and liabilities selected for the fair value option as of January 1, 2008 was as follows (in thousands):

		Carrying Value				Net Gain
		Prior to				(Loss) due to				Carrying Value
		Adoption				Adoption				After Adoption
Residential mortgage loans		$	4,191,343			$	(522,586	)		$	3,668,757
Mortgage-backed securities			435,885				—				435,885
Debt issuance costs, a component of other assets			17,144				(17,144	)			—
Mortgage-backed notes			3,914,643				280,007				3,634,636
Repurchase agreements			526,634				(19,795	)			546,429
Collateralized debt obligations			294,416				171,283				123,133
Junior subordinated notes			92,788				43,242				49,546
Convertible senior notes			90,000				23,850				66,150
Pre-tax cumulative effect of adoption							(41,143	)
Effect on deferred tax asset							—
Cumulative effect on stockholders’ equity							(41,143	)
Reclassification from accumulated other comprehensive income							4,296
Cumulative effect on retained earnings						$	(36,847	)

     The net loss due to the adoption of SFAS No. 159 above included the reclassification to stockholder equity of a $38.1 million allowance for loan losses, $95.7 million of loan premiums, $23.7 million of net discounts on mortgage-backed securities, $19.8 million of discounts on repurchase agreements, $3.9 million of net premiums on debt obligations and $17.2 million of debt issuance costs.

     The adoption of SFAS No. 159 resulted in new fair value measurement policies for some of the Company’s assets and liabilities. The following discussion describes new accounting policies adopted in conjunction with the adoption of SFAS No. 159 as of January 1, 2008. Historical balances are carried in accordance with the policies in place prior to the adoption of SFAS No. 159, which are detailed in the Company’s Form 10-K for the year ended December 31, 2007.

Residential Mortgage Loans

     The Company estimates the fair value of its residential mortgage loans using internally generated cash flow analysis, available market information and other appropriate valuation methodologies. The Company believes the estimates used reflect the fair values it may be able to receive should it choose to sell the loans. These estimates involve matters of uncertainty, judgment in interpreting relevant market data and are inherently subjective in nature. Many factors are necessary to estimate fair values, including, but not limited to, interest rates, prepayment rates, amount and timing of credit losses, supply and demand, liquidity, cash flows and other market factors. The Company applies these factors to its portfolio as appropriate in order to determine fair values. Gains and losses in the fair value of residential mortgage loans are recorded in other income (expense) in the statement of operations.

     Interest income on mortgage loans is accrued and credited to income based on the contractual amounts due under the loan agreements. The accrual of interest on impaired loans is discontinued when, in the Company’s opinion, the borrower may be unable to meet payments as they become due. Also, loans 90 days or more past due are placed on non-accrual status. When an interest accrual is discontinued, all associated unpaid accrued interest income is reversed against current period operating results. Interest income is subsequently recognized only to the extent cash payments are received.

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Investment Securities

     The Company’s Spread portfolio consists of AAA-rated mortgage-backed securities. The fair values of these securities are based on estimates provided by independent pricing services and dealers in mortgage-backed securities. Because the price estimates may vary between sources, the Company makes certain judgments and assumptions about the appropriate price to use. Different judgments and assumptions could result in different presentations of value.

     The Company’s Residential Mortgage Credit portfolio consists of mortgage-backed securities rated below AAA. The fair value of the Residential Mortgage Credit portfolio is estimated using internally generated cash flow analysis, available market information and other appropriate valuation methodologies. The Company believes the estimates used reflect the fair values it may be able to receive should it choose to sell the mortgage-backed securities. These estimates involve matters of uncertainty, judgment in interpreting relevant market data and are inherently subjective in nature. Many factors are necessary to estimate fair values, including, but not limited to, interest rates, prepayment rates, amount and timing of credit losses, supply and demand, liquidity, cash flows and other market factors. The Company applies these factors to its portfolio as appropriate in order to determine fair values. Gains and losses in the fair value of mortgage-backed securities are recorded in other income (expense) in the statement of operations.

     Security transactions are recorded on the trade date.

     Interest income on investment securities is accrued and credited to income based upon the contractual amounts due under the security terms.

Mortgage-Backed Notes

     The Company has issued non-recourse mortgage-backed notes to provide permanent financing for its residential mortgage loans. The mortgage-backed notes are issued through securitization trusts which are comprised of various classes of securities that bear interest at various spreads to the one-month London Interbank Offered Rate, or LIBOR. The Company estimates the fair value of its mortgage-backed notes using internally generated cash flow analysis, available market information and other appropriate valuation methodologies. The Company believes the estimates used reflect the fair values that the Company would pay to transfer the liability. These estimates involve matters of uncertainty, judgment in interpreting relevant market data and are inherently subjective in nature. Many factors are necessary to estimate fair values, including, but not limited to, interest rates, prepayment rates, amount and timing of credit losses, supply and demand, liquidity, cash flows and other market factors. The Company applies these factors to its portfolio as appropriate in order to determine fair values. Gains and losses in the fair value of mortgage-backed notes are recorded in other income (expense) in the statement of operations.

     Interest expense on mortgage-backed notes is accrued as interest expense based upon the contractual amounts due under the note terms.

Collateralized Debt Obligations

     The Company has issued non-recourse collateralized debt obligations, or CDOs, to provide permanent financing for some of its mortgage-backed securities. The CDOs are issued through a securitization trust which is comprised of various classes of securities that bear interest at various spreads to the three-month LIBOR. The Company estimates the fair value of its CDOs using internally generated cash flow analysis, available market information and other appropriate valuation methodologies. The Company believes the estimates used reflect the fair values that the Company would pay to transfer the liability. These estimates involve matters of uncertainty, judgment in interpreting relevant market data and are inherently subjective in nature. Many factors are necessary to

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

estimate fair values, including, but not limited to, interest rates, prepayment rates, amount and timing of credit losses, supply and demand, liquidity, cash flows and other market factors. The Company applies these factors to its portfolio as appropriate in order to determine fair values. Gains and losses in the fair value of CDOs are recorded in other income (expense) in the statement of operations.

     Interest expense on CDOs is accrued as interest expense based upon the contractual amounts due under the note terms.

Repurchase Agreements

     The Company’s repurchase agreements are borrowings secured by mortgage-backed securities. All of the Company’s repurchase agreements at March 31, 2008 are short-term, and, therefore, the contractual obligation approximates their fair value.

Revolving Line of Credit and Unsecured Borrowings

     The Company has a revolving line of credit and unsecured borrowings in the form of junior subordinated notes and convertible senior notes. The fair value of these borrowings is estimated based upon the contractual principal and interest payment terms, contractual interest rates in relation to current interest rates and the Company’s own credit standing and in the case of the convertible notes, estimates obtained from third parties. The Company believes the estimates used reflect the fair value that it would pay to transfer the liability. Gains and losses in the fair value of revolving lines of credit and unsecured borrowings are recorded in other income (expense) in the statement of operations.

     Interest expense on the revolving line of credit and unsecured borrowings is accrued as interest expense based upon the contractual amounts due under the debt terms.

     In September 2006, the FASB issued SFAS No. 157 that defines fair value in generally accepted accounting principles in the United States of America, or GAAP, and expands requirements for disclosure about fair value estimates. SFAS No. 157 does not require any new fair value measurements. The Company adopted SFAS No. 157 as of January 1, 2008. The statement did not have a material impact on the Company’s consolidated financial statements other than the requirement to include the expanded disclosure included in Note 8.

Recent Accounting Pronouncements

     In February 2008, the FASB issued FASB Staff Position, or FSP 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions, to resolve questions about the accounting for repurchase financings. Under the FSP, if a repurchase agreement is entered into contemporaneously, or in the contemplation of the initial transfer of an asset and is with the same counterparty as the asset transfer, then under most circumstances neither the asset nor the repurchase agreement liability will be recorded in the financial statements and the arrangement will be treated as a forward contract under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The FSP is effective for repurchase financings in which the initial transfer is entered into in fiscal years beginning after November 15, 2008. The initial adoption of this Statement will not have a material effect on the Company’s balance sheet or results of operations, but if the Company enters into significant transactions described in the Statement the accounting would be significantly different from current practice where both the asset and liability are recorded on the Company’s balance sheet and interest income and expense is recorded in the Company’s results of operations.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

     In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction, whether the assets are acquired from a full or partial acquisition; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies to all transactions or other events in which the Company obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an Amendment of Accounting Research Bulletin No. 51. SFAS No. 160 requires reporting entities to present noncontrolling or minority interests as equity as opposed to as a liability or mezzanine equity, and provides guidance on the accounting for transactions between an entity and noncontrolling interests. SFAS No. 160 applies for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.

NOTE 3—SECURITIES

     As of January 1, 2008, due to the adoption of SFAS No. 159, all of the Company’s securities are carried at fair value with all realized and unrealized gains and losses recognized in the consolidated statement of operations.

     As of December 31, 2007, the Company held $6.9 million hybrid securities that were classified as trading. For the three months ended March 31, 2007, the Company recognized an increase in fair value of these securities of $59 thousand in its consolidated statement of operations.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

     The following table summarizes the Company’s unrealized gains and losses on securities classified as available-for-sale, which were carried at fair value as of December 31, 2007.

Unrealized Gains and Losses on Available-for-Sale Securities
(in thousands)

						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
December 31, 2007
Mortgage-backed securities, available-for-sale		$	424,838			$	4,188			$	—			$	429,026
Equity securities			373				—				—				373
Total		$	425,211			$	4,188			$	—			$	429,399

     Prior to the adoption of SFAS No. 159, the Company evaluated available-for-sale securities for other-than-temporary impairment on a quarterly basis, and more frequently when conditions warranted such evaluation. As of December 31, 2007, due to business conditions at that date, the Company could not say with certainty that it had the ability to hold these securities until recovery of the impairment loss, and, therefore, all impairment losses were recognized through its consolidated statement of operations.

     During the three months ended March 31, 2008 the Company had realized losses of $2.0 million on the sales of securities in its Residential Mortgage Portfolio. The securities were sold as part of our continuing strategy to reduce leverage. During the three months ended March 31, 2007, the Company had realized losses of $15.5 million on the sale of securities in its Residential Mortgage Credit portfolio. These securities were selected for sale due to the rising level of delinquencies in the underlying loan collateral which was noted in the first quarter of 2007, as well as to reduce the Company’s exposure to certain mortgage-backed assets issuers.

     The weighted-average lives of the mortgage-backed securities as of March 31, 2008 in the table below are based upon data provided through subscription-based financial information services, assuming constant prepayment rates to the balloon or reset date for each security. The prepayment model considers current yield, forward yield, steepness of the yield curve, current mortgage rates, mortgage rates of the outstanding loans, loan age, margin and volatility. Actual maturities of the Company’s mortgage-backed securities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal, and are generally shorter than their stated maturities.

Weighted-Average Life of Mortgage-Backed Securities
(dollars in thousands)

										Weighted-
										Average
Weighted-Average Life		Fair Value				Amortized Cost				Coupon
Less than one year		$	6,034			$	14,951				4.78	%
Greater than one year and less than five years			166,900				209,877				3.86
Greater than five years			47,640				85,066				4.26
Total		$	220,574			$	309,894				4.08	%

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

     At December 31, 2007, mortgage-backed securities had a weighted-average amortized cost, excluding residual interests, of 51.1% of face amount.

NOTE 4—RESIDENTIAL MORTGAGE LOANS

     As of January 1, 2008, due to the adoption of SFAS No. 159, all of the Company’s residential mortgage loans are carried at fair value with all realized and unrealized gains and losses recognized in the consolidated statement of operations. Prior to January 1, 2008, the Company’s residential mortgage loans were carried at amortized cost, net of allowance for loan losses.

Components of Residential Mortgage Loans
(in thousands)

		March 31,				December 31,
		2008				2007
Principal		$	3,999,843			$	4,133,820
Unamortized premium			—				95,668
			3,999,843				4,229,488
Allowance for loan losses			—				(38,145	)
Fair value adjustment			(556,183	)			—
Total residential mortgage loans, at fair value at March 31, 2008 and at amortized cost, net of allowance for loan losses at December 31, 2007		$	3,443,660			$	4,191,343

     At December 31, 2007, residential mortgage loans had a weighted-average amortized cost of 102.3% of face amount.

Geographic Concentrations of Residential Mortgage Loans

		March 31, 2008				December 31, 2007
Top five geographic concentrations (% exposure):
California			56.6	%			56.5	%
Florida			9.9	%			9.7	%
Arizona			4.2	%			4.3	%
Virginia			3.8	%			3.9	%
Nevada			3.7	%			3.7	%

     Residential mortgage loans are now carried at fair value, and, therefore, no allowance for loan losses is recorded because estimated losses are now included in the calculation of fair value. The Company’s activity in the allowance for loan losses for the three months ended March 31, 2007 is as follows:

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Allowance for Loan Losses
(in thousands)

		Three Months
		Ended March 31,
		2007
Balance, beginning of period		$	5,020
Provision for loan losses			3,543
Charge-offs			(301	)
Balance, end of period		$	8,262

     At March 31, 2008 and December 31, 2007, the Company estimated that $513.3 million and $352.8 million, respectively, of loans were impaired. At December 31, 2007, residential mortgage loans in the amount of $11.8 million were individually evaluated and it was determined that no allowance for loan losses was required because those loans were eligible for putback to the seller or the value of the collateral, including any available mortgage insurance, was sufficient, and no loss was expected on the loan. At March 31, 2008 and December 31, 2007, $702.8 million and $254.0 million, respectively, of residential mortgage loans were 90 days or more past due all of which were on non-accrual status. Interest reversed for loans in non-accrual status at March 31, 2008 and December 31, 2007 was $17.0 million and $10.5 million, respectively.

     At March 31, 2008 and December 31, 2007, the Company had $63.5 million and $34.7 million, respectively, of real estate owned that is included in other assets on its consolidated balance sheet.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 5—BORROWINGS

     The Company leverages its portfolio of mortgage-backed securities and residential mortgage loans through the use of various financing arrangements. As of January 1, 2008, due to the adoption of SFAS No. 159, all of the Company’s borrowings are carried at fair value with all realized and unrealized gains and losses recognized in the consolidated statement of operations. Prior to January 1, 2008, the Company’s borrowings were carried at amortized cost, net of unamortized discounts or premiums. The following table presents summarized information with respect to the Company’s borrowings.

Borrowings
(dollars in thousands)

										Weighted-
						Contractual				Average				Fair Value of				Final Stated
		Fair Value				Balance				Interest Rate				Collateral(4)				Maturities (5)
March 31, 2008
Mortgage-backed notes		$	3,376,270			$	3,797,843				2.99	%		$	3,442,707				2046
Repurchase agreements			348,616				348,616				6.39				165,830				2008
Collateralized debt obligations			53,759				358,109				3.64				92,814				2047
Junior subordinated notes			24,591				92,788				7.44			none					2035
Convertible senior notes			36,000				90,000				8.63			none					2027
Revolving line of credit			15,833				15,833				7.14			none					2012
Total		$	3,855,069			$	4,703,189				3.50	%		$	3,701,351
December 31, 2007
Mortgage-backed notes (1)		$	3,634,636			$	3,890,224				3.95	%		$	3,711,875				2046
Repurchase agreements (2)			546,429				546,429				7.23				396,657				2008
Collateralized debt obligations (3)			123,133				295,122				5.55				117,789				2047
Junior subordinated notes			49,546				92,788				8.42			none					2035
Convertible senior notes			66,150				90,000				8.63			none					2027
Revolving line of credit			15,833				15,833				9.10			none					2012
Total		$	4,435,727			$	4,930,396				4.57	%		$	4,226,321

     At December 31, 2007, the Company had unamortized capitalized financing costs of $17.2 million related to its borrowings, which were deferred at the issuance date of the related borrowing and were being amortized using the effective yield method over the estimated life of the borrowing. All capitalized financing costs were reclassified to stockholders’ equity as part of the cumulative effect of the adoption of SFAS No. 159 on January 1, 2008.

     Mortgage-Backed Notes

     The Company has issued non-recourse mortgage-backed notes to provide permanent financing for its residential mortgage loans. The mortgage-backed notes are issued through securitization trusts which are comprised

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

of various classes of securities that bear interest at various spreads to the one-month LIBOR. The borrowing rates of the mortgage-backed notes reset monthly except for $0.2 billion of the notes which, like the underlying loan collateral, are fixed for a period of three to five years and then become variable based on the average rates of the underlying loans which will adjust based on LIBOR. Residential mortgage loans collateralize the mortgage-backed notes. On a consolidated basis, the securitizations are accounted for as financings in accordance with SFAS No. 140 and qualify for consolidation with the Company’s balance sheet in accordance with FIN 46(R); therefore, the assets and liabilities of the securitization entities are consolidated on the Company’s consolidated balance sheet. See Note 12 for information on the deconsolidation of securitization trusts.

     Repurchase Agreements

     The Company has entered into repurchase agreements with four third-party financial institutions to finance the purchase of certain of its mortgage-backed securities. The repurchase agreements are short-term borrowings that bear interest rates based on one-month LIBOR plus a spread.

Repurchase Agreement Maturities
(in thousands)

		March 31, 2008				December 31, 2007
Overnight 1 day or less		$	75,523			$	4,199
Between 2 and 30 days			273,093				542,230
Total		$	348,616			$	546,429

Collateralized Debt Obligations

     The Company has issued non-recourse collateralized debt obligations or CDOs to provide permanent financing for some of its mortgage-backed securities. The CDOs are issued through a securitization trust, which is comprised of various classes of securities that bear interest at various spreads to the three-month LIBOR. The borrowing rates of the CDOs reset monthly. Mortgage-backed securities collateralize the CDOs. On a consolidated basis, the securitization is accounted for as a financing in accordance with SFAS No. 140 and qualified for consolidation with the Company’s balance sheet in accordance with FIN 46(R); therefore, the assets and liabilities of the securitization entity is consolidated on the Company’s consolidated balance sheet.

     As of March 31, 2008, 39 securities with a fair value of $8.1 million that collateralize the CDOs were deemed to be in default by way of ratings downgrades. These securities have, to date, continued to make principal and interest payments as required by their individual structures. Because these securities are deemed to be in default, the principal payment structure of the CDOs has converted from a pro-rata principal payment structure to a sequential principal payment structure where principal payments are paid to the highest rated bonds first and then will be made sequentially to each class of bonds from highest to lowest. In addition, all interest payments collected by the trust on the securities that are deemed to be in default are made as principal payments on a sequential pay basis.

Junior Subordinated Notes

     Junior subordinated notes consist of 30-year notes issued in March and December of 2005 to Diana Statutory Trust I, or DST I, and Diana Statutory Trust II, or DST II, respectively. These trusts are unconsolidated affiliates of the Company formed to issue $2.8 million of the trusts’ common securities to the Company and to place

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

$90.0 million of preferred securities privately with unrelated third-party investors. The Company pays interest to the trusts quarterly. The trusts remit dividends pro rata to the holders of the common and preferred trust securities based on the same terms as the junior subordinated notes.

     The DST I notes in the amount of $51.6 million bear interest at a fixed rate of 8.16% per annum through March 30, 2010 and, thereafter, at a variable rate equal to three-month LIBOR plus 3.75% per annum through maturity. The DST I notes and trust securities mature in March 2035 and are redeemable on any interest payment date at the option of the Company in whole, but not in part, on or after March 30, 2010 at the redemption rate of 100% plus accrued and unpaid interest. Prior to March 30, 2010, upon the occurrence of a special event relating to certain U.S. federal income tax or investment company events, the Company may redeem the DST I notes in whole, but not in part, at the redemption rate of 107.5% plus accrued and unpaid interest.

     The DST II notes in the amount of $41.2 million bear interest at a variable rate equal to three-month LIBOR plus 3.75% per annum through maturity. The DST II notes and trust securities mature in December 2035, the Company may redeem the DST II notes at any interest payment date in whole, but not in part, at the redemption rate of 100% plus accrued and unpaid interest.

Convertible Senior Notes

     In June 2007, the Company completed a private offering of $90.0 million of convertible senior notes, or the Notes, that are due in 2027 with a coupon of 8.125%.

     Prior to June 1, 2026, upon the occurrence of specified events, as defined in the Note agreement, primarily related to the price of the Company’s stock or change of control transactions, the Notes are convertible at the option of the holder at an initial conversion rate of 89.4114 shares of the Company’s common stock per $1,000 principal amount of Notes. The initial conversion price of $11.18 represented a 22.5% premium to the closing price of $9.13 per share of the Company’s common stock on May 30, 2007. On or after June 1, 2026, the Notes are convertible at any time prior to maturity at the option of the holder. Upon conversion of the Notes by a holder, the holder will receive cash up to the principal amount of such Notes and, with respect to the remainder, if any, of the conversion value in excess of such principal amount, at the option of the Company in cash or in shares of the Company’s common stock. The initial conversion rate is subject to adjustment in certain circumstances, which primarily relate to the issuance of new shares of common stock, as defined in the Note agreement.

     Prior to June 5, 2012, the Notes are not redeemable at the Company’s option, except to preserve the Company’s qualification as a REIT. On or after June 5, 2012, the Company may redeem all or a portion of the Notes at a redemption price equal to the principal amount plus accrued and unpaid interest, including additional interest, if any.

     Note holders may require the Company to repurchase all or a portion of the Notes at a purchase price equal to the principal amount plus accrued and unpaid interest (including additional interest), if any, on the Notes on June 1, 2012, June 1, 2017, June 1, 2022 or upon the occurrence of certain change in control transactions prior to June 5, 2012.

     As of March 31, 2008, the Company is paying an additional interest rate penalty of 0.50% per annum on the Notes because the Company has not filed a registration statement with the Securities and Exchange Commission to register the securities associated with the convertible debt as required by the agreement. In accordance with GAAP, the penalty rate is accrued until the time the Company estimates it will be in compliance with the terms of the agreement. As of March 31, 2008, $0.2 million was accrued for this penalty.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Revolving Line of Credit

     In September 2007, the Company entered into a definitive credit agreement with a related party that was amended in December 2007 that provides for a revolving credit facility in the amount of the lesser of $16.0 million or 85% of eligible asset values as defined in the definitive credit agreement. The line of credit matures on September 26, 2012 and undrawn portions of the facility can be cancelled at the Company’s option. The line of credit bears interest at LIBOR plus 4.00%. A commitment fee of 0.50% is payable quarterly on the daily average amount of the unused line of credit. The facility will be repaid from net proceeds in excess of $250,000 from the sale, transfer or disposition of any property or asset of the Company or from 75% of the Company’s annual excess cash amount as defined in the agreement. The line of credit is secured by all of the assets of the Company that are not subject to a previous security interest. As of March 31, 2008, the Company was not in compliance with certain covenants required by this agreement; however, Arco has provided the Company with a waiver and has continued to allow the Company to maintain the lines of credit.

NOTE 6—CAPITAL STOCK AND EARNINGS PER SHARE

     Beginning on August 14, 2007, the Company entered into a series of agreements with Arco that provided it with repurchase agreement financing and a liquidity line of credit. In exchange for the repurchase agreement financing Arco received a warrant to purchase up to 51,000,000 shares of the Company’s common stock representing 49% of the voting interest in the Company and preferred stock to, together with the common stock, represent a total of 51% of the economic interest in the Company on a fully diluted basis. The warrant holder has the right to elect to receive non-voting shares upon exercise of the warrant. The warrant is exercisable until September 30, 2012 at an exercise price of $0.18 per share subject to anti-dilution adjustments to maintain the economic ownership percentage of the Company attributable to the warrant at 51% on a fully-diluted basis

     The Company recorded the initial value of the warrant of $22.3 million as a liability with an offsetting amount recorded as debt discount on the related repurchase agreement financing. At January 1, 2008, due to the adoption of SFAS No. 159, the Company reclassified to stockholder’s equity unamortized debt discount related to the warrants in the amount of $19.8 million as a component of the cumulative effect of adoption of a new accounting principle. Subsequent changes in the fair value of the warrants are recorded as a liability with the gain or loss recognized in other income (expense) in the consolidated statement of operations.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

     The Company estimates the fair value of the warrant using the Black-Scholes Pricing Model. Values ascribed to the warrant are as follows:

Warrant Pricing Assumptions

		March 31,				December 31,
		2008				2007
Risk-free interest rate			2.46	%			3.45	%
Expected life in years			4.42				4.67
Expected volatility (1)			30.0	%			30.0	%
Dividend yield (2)			0.0	%			0.0	%

     From November 2005 to May 2007, the Company’s board of directors authorized a series of common stock repurchase programs. As of March 31, 2008, the Company had the authority to acquire up to 2,370,785 common shares, however; due to the Company’s liquidity concerns; the Company has no plans to repurchase shares of its common stock.

     The Company calculates basic net income or loss per share by dividing net income or loss for the period by the weighted-average shares of its common stock outstanding for that period. Diluted net income per share takes into account the effect of dilutive instruments, such as warrants, stock options and unvested restricted common stock and convertible notes, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding.

Reconciliation of Basic and Diluted Earnings Per Share

		For the Three Months Ended
		March 31, 2008								March 31, 2007
		Basic				Diluted(1)				Basic				Diluted
Net income		$	128,193			$	128,193			$	14,387			$	14,387
Weighted-average number of common shares outstanding			43,108,841				43,108,841				47,316,058				47,316,058
Additional shares due to:
Assumed conversion of dilutive warrant, common stock options and vesting of unvested restricted common stock			—				37,535,706				—				111,444
Adjusted weighted-average number of common shares outstanding			43,108,841				80,644,547				47,316,058				47,427,502
Net income per share		$	2.97			$	1.59			$	0.30			$	0.30

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 7—2003 STOCK INCENTIVE PLANS

     Effective June 4, 2003, the Company adopted a 2003 Stock Incentive Plan and a 2003 Outside Advisors Stock Incentive Plan. The plans provide for the grant of a variety of long-term incentive awards to employees and officers of the Company or individual consultants or advisors who render or have rendered bona fide services as an additional means to attract, motivate, retain and reward eligible persons. These plans as amended authorize the award of up to 2,000,000 shares of the Company’s common stock at the discretion of the compensation committee of the board of directors of which 1,850,000 shares comprise the 2003 Stock Incentive Plan and 150,000 shares comprise the 2003 Outside Advisors Stock Incentive Plan. The compensation committee determines the exercise price and the vesting requirement of each grant as well as the maximum term of each grant. The Company uses historical data to estimate stock option exercises and employee termination in its calculations of stock-based employee compensation expense and expected terms.

Common Stock Available for Grant

						2003 Outside
		2003 Stock				Advisors Stock
		Incentive Plan				Incentive Plan				Total
March 31, 2008
Shares reserved for issuance			1,850,000				150,000				2,000,000
Granted			(1,140,000	)			(20,760	)			(1,160,760	)
Forfeited			—				—				—
Expired			50,000				—				50,000
Total available for grant			760,000				129,240				889,240

Outstanding Stock Options

March 31, 2008
Stock options outstanding (shares)			5,000
Weighted-average exercise price		$	13.00
Weighted-average remaining life (years)			5.58

     At March 31, 2008, all outstanding stock options were fully vested and had no aggregate intrinsic value. No stock options were granted, exercised or forfeited during the three months ended March 31, 2008. Stock options for 50,000 shares of common stock with and exercise price of $15.00 per share expired unexercised during the three months ended March 31, 2008.

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Common Stock Awards

		Number of Common				Weighted-Average
		Shares				Issue Price
Outstanding, January 1, 2008			990,423			$	9.18
Issued			110,500				0.65
Forfeited			—				—
Outstanding, March 31, 2008			1,100,923			$	8.32

Non-Vested Common Stock Awards

		Number of Common				Weighted-Average
		Shares				Grant-Date Fair Value
Nonvested, January 1, 2008			20,760			$	9.20
Granted			110,500				0.65
Vested			—				—
Forfeited			—				—
Nonvested, March 31, 2008			131,260			$	1.92

     The fair value of common stock awards is determined on the grant date using the closing stock price on the NYSE that day.

     Total stock-based compensation expense related to common stock awards for the three months ended March 31, 2008 and 2007 were $20 thousand and $0.7 million, respectively. At March 31, 2008, stock-based employee compensation expense of $0.2 million related to non-vested common stock awards is expected to be recognized over a weighted-average period of 1.7 years.

NOTE 8—FAIR VALUE OF FINANCIAL INSTRUMENTS

     SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, interest receivable, principal receivable, accrued interest expense and accounts payable approximate their carrying value on the consolidated balance sheet.

     Effective January 1, 2008, the Company adopted SFAS No. 159 and elected to account for all of its investments and financing liabilities at fair value. The fair values of the Company’s financial instruments that were not reported at fair value on the consolidated balance sheet as of December 31, 2007 prior to the adoption of SFAS No. 159 are reported below.

Fair Value of Financial Instruments
(in thousands)

		December 31, 2007
		Carrying
		Value				Fair Value
Residential mortgage loans		$	4,191,343			$	3,668,755
Mortgage-backed notes			3,914,643				3,634,636
Repurchase agreements			526,634				546,429
CDOs			294,416				123,133
Convertible senior notes			90,000				66,150
Junior subordinated notes			92,788				49,546

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

     Effective January 1, 2008, the Company adopted SFAS No. 157. The statement established a fair value hierarchy that distinguished between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). Determining where an asset or liability falls within that hierarchy depends on the lowest level of input that is significant to the fair value measurement as a whole. An adjustment to the pricing method used within either level 1 or level 2 inputs could generate a fair value measurement that effectively falls into a lower level in the hierarchy. The hierarchy consists of three broad levels as follows:

Level 1 — quoted market prices in an active market for identical assets or liabilities

Level 2 — inputs other than level 1 inputs that are either directly or indirectly observable

Level 3 — unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use

     The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter, and, based on various factors; it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between different levels will be rare.

     See Note 2 for a description of the valuation methodologies used for assets and liabilities for which the Company adopted fair value accounting as of January 1, 2008. Valuation methodologies used for assets and liabilities that were accounted for at fair value prior to January 1, 2008 are described in Note 2 to the December 31, 2007 consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2007.

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis in the statement of financial position at March 31, 2008:

Fair Value Hierarchy of Financial Assets and Liabilities
(in thousands)

		Quoted Prices in								Significant
		Active Markets for				Significant Other				Unobservable
		Identical Assets				Observable Inputs				Inputs				Total Fair
		(Level 1)				(Level 2)				(Level 3)				Value
Assets
Residential mortgage loans		$	—			$	—			$	3,443,660			$	3,443,660
Mortgage-backed securities			—				—				220,574				220,574
Derivatives			—			$	—				69				69
Total assets		$	—			$	—			$	3,664,303			$	3,664,303
Liabilities
Mortgage-backed notes		$	—			$	—			$	3,376,270			$	3,376,270
Repurchase agreements			—				348,616				—				348,616
CDOs			—				—				53,759				53,759
Junior subordinated notes			—				—				24,591				24,591
Convertible senior notes			—				—				36,000				36,000
Warrant liability			—				—				13,653				13,653
Revolving line of credit			—				—				15,833				15,833
Derivatives			—				—				21,807				21,807
Total liabilities		$	—			$	348,616			$	3,541,913			$	3,890,529

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
(in thousands)

										Purchases,
		Beginning				Total Realized				Sales, Issuances,
		Balance at				and Unrealized				Repayments or				Ending Balance at
		January 1, 2008				Gains (Losses)				Settlements, net				March 31, 2008
Assets
Residential mortgage loans (1)		$	3,668,757				(99,657	)			(125,440	)		$	3,443,660
Mortgage-backed securities			435,885				(80,151	)			(135,160	)			220,574
Derivatives			101				(32	)			—				69
Total assets		$	4,104,743			$	(179,840	)		$	(260,600	)		$	3,664,303
Liabilities
Mortgage-backed notes		$	3,634,636			$	165,537			$	(92,829	)		$	3,376,270
CDOs			123,133				96,376				27,002				53,759
Junior subordinated notes			49,546				24,955				—				24,591
Convertible senior notes			66,150				30,150				—				36,000
Warrant liability			22,868				9,215				—				13,653
Revolving line of credit			15,833				—				—				15,833
Derivatives			10,605				(11,202	)			—				21,807
Total liabilities		$	3,922,771			$	315,031			$	(65,827	)		$	3,541,913

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

     The following table presents the amounts of total gains (losses) for the three months ended March 31, 2008 are included in the statement of operations and are attributable to assets and liabilities held on the Company’s balance sheet as of March 31, 2008.

Changes in Fair Value of Assets and Liabilities Held on the Balance Sheet
(in thousands)

		Gains (Losses) in
		Fair Value
For the Three Months Ended March 31, 2008:
Unrealized gains (losses)
Assets
Residential mortgage loans		$	(95,585	)
Mortgage-backed securities			(78,199	)
Derivatives			(32	)
Total assets			(173,816	)
Liabilities
Mortgage-backed notes			165,537
Repurchase agreements			—
CDOs			96,376
Junior subordinated notes			24,955
Convertible senior notes			30,150
Warrant liability			9,215
Revolving line of credit			—
Derivatives			(11,202	)
Total liabilities			315,031
Unrealized gains, net			141,215
Realized losses, net			(6,024	)
Realized and unrealized gains, net		$	135,191

     The Company has no assets or liabilities that are required to be measured at fair value on a non-recurring basis.

NOTE 9—ACCUMULATED OTHER COMPREHENSIVE INCOME

Components of Accumulated Other Comprehensive Income
(in thousands)

		March 31, 2008				December 31, 2007
Unrealized holding losses on securities available-for-sale		$	—			$	(658,507	)
Reclassification adjustment for net losses (gains) on sales of securities available-for-sale included in net income			—				181,149
Impairment losses on securities included in net income			—				481,654
Net unrealized gain on securities available-for-sale			—				4,296
Net deferred realized and unrealized gains on cash flow hedges			2,007				2,260
Accumulated other comprehensive income		$	2,007			$	6,556

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 10—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     The Company seeks to manage its interest rate risk and credit exposure and protect its liabilities against the effects of major interest rate changes. Such interest rate risk may arise from: (1) the issuance and forecasted rollover and repricing of short-term liabilities with fixed rate cash flows or from liabilities with a contractual variable rate based on LIBOR; (2) the issuance of long-term fixed rate or floating rate debt through securitization activities or other borrowings or (3) the change in value of loan purchase commitments. The Company also seeks to manage its credit risk exposure which may arise from the creditworthiness of the holders of the mortgages underlying its mortgage-related assets. The Company may use various combinations of derivative instruments or other risk-sharing arrangements to attempt to manage these risks.

Derivative Contracts
(in thousands)

		Estimated Fair Value
		March 31,				December 31,
		2008				2007
Interest rate swap contracts		$	(22,420	)		$	(11,436	)
Interest rate cap contracts			682				932
Credit default swaps			—				—

Realized and Unrealized Gains and Losses on Derivative Contracts
(in thousands)

		For the Three Months Ended March 31,
		2008				2007
Free standing derivatives:
Realized gains (losses)		$	(2,337	)		$	10,976
Unrealized gains (losses)			(11,234	)			4,748
Purchase commitment derivatives:
Realized losses			—				(95	)
Unrealized losses			—				(547	)

     The Company’s derivative contracts have master netting arrangements allowing it to net gains and losses in individual contracts with the same counterparty.

Cash Flow Hedging Strategies

     Prior to January 1, 2006, the Company entered into derivative contracts that it accounted for under hedge accounting as prescribed by SFAS No. 133. Effective January 1, 2006, the Company discontinued the use of hedge accounting. Under hedge accounting, prior to the end of the specified hedge time period, the effective portion of all contract gains and losses, whether realized or unrealized, was recorded in other comprehensive income. Due to the discontinuance of hedge accounting prior to contract maturity, hedge effectiveness gains included in accumulated other comprehensive income at December 31, 2005 will be amortized during the specified hedge time period. During the three months ended March 31, 2008 and 2007, interest expense decreased by $0.3 million and $0.4 million, respectively, due to the amortization of hedge effectiveness gains and net realized gains.

NOTE 11—INCOME TAXES

     In addition to the $36.2 million of undistributed REIT taxable income as of March 31, 2008, the Company has declared but suspended dividends in the amount of $13.6 million, net of dividend equivalent rights. In order to

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

maintain its status as a REIT, the Company must pay the dividend through a cash distribution or distribution-in-kind prior to September 15, 2008.

     Although the Company has taken the position that it will be taxed as a REIT for the year ended December 31, 2007, the tax position described above is uncertain. Because such tax position fails to meet the “more likely than not” tax benefit recognition threshold as set forth in FIN 48, which was adopted on January 1, 2007, the Company provided for income taxes for the year ended December 31, 2007 and for the three months ended March 31, 2008 in accordance with the provisions of SFAS No. 109. The total amount of unrecognized tax benefits was $23.7 million as of March 31, 2008, all of which, if recognized, would affect the effective rate on continuing operations. If the Company meets the distribution requirement by September 15, 2008, then it will qualify as a REIT, and an unrecognized tax benefit of $23.7 million will be recognized in full.

     On March 17, 2008, the Company filed requests for extension of time to file its 2007 U.S. Federal Tax Return for Real Estate Investment Trusts, as well as U.S. federal, state, and local tax returns for Proserpine, LLC, a taxable REIT subsidiary. The Company did not include required payments totaling $1.6 million with these extension requests. As a result, the Company will incur penalties and interest at the IRS, state and local prescribed rates until such delinquent taxes are paid in full. Approximately $1.4 million of the total delinquent amount represents federal excise tax on estimated undistributed REIT taxable income for 2007. The Company is currently evaluating options to maintain its qualification as a REIT; however, if the Company fails to do so, then it would owe corporate income tax instead of the $1.4 million in excise tax as shown on its extension request.

NOTE 12—DECONSOLIDATION OF VARIABLE INTEREST ENTITIES

     The Company consolidates variable interest entities if it is the primary beneficiary of the entity. Beginning in the third quarter of 2007, the Company sold some of its interests in its securitization trusts that were established to permanently finance its residential mortgage loans. These sales triggered a reconsideration event in accordance with FIN 46(R). As a result, the Company’s Luminent Mortgage Trust 2007-2, or 2007-2, securitization no longer qualified for consolidation in the Company’s consolidated financial statements. Residential mortgage loans in the amount of $642.5 million were removed from the Company’s balance sheet along with the related debt of $620.8 million. The Company recorded $12.8 million in losses on the deconsolidation of this securitization. The Company continues to hold mortgage-backed securities with a fair value of $6.2 million at March 31, 2008 related to the 2007-2 trust. These assets are included in the Company’s mortgage-backed securities portfolio as of March 31, 2008. All other securitizations, other than the 2007-2 securitization, continue to qualify for consolidation as of March 31, 2008.

     At March 31, 2008, the 2007-2 trust had $604.6 million of residential mortgage loans that collateralized $604.6 million of mortgage-backed notes.

NOTE 13—LEGAL MATTERS

Class Action Lawsuits

     Following the Company’s August 6, 2007 announcement of certain actions the Company’s board of directors took, the Company and certain officers and directors were named as defendants in six purported class action lawsuits. A consolidated complaint has been filed, on behalf of a purported class of investors who purchased the Company’s securities between June 25, 2007 and August 6, 2007. The lawsuit alleges, generally, that the defendants violated federal securities laws by making material misrepresentations to the market concerning the Company’s operations and prospects, thereby artificially inflating the price of the Company’s common stock. The complaints seek unspecified damages.

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

     The case involves complex issues of law and fact and has not yet progressed to the point where the Company can:

	•		predict its outcome;
	•		estimate damages that might result from the case; or
	•		predict the effect that final resolution that the case might have on its business, financial condition or results of operations, although such effect could be materially adverse.

     The Company believes these allegations to be without merit. The Company intends to seek dismissal of the lawsuit for failure to state a valid legal claim, and if the case is not dismissed on motion, to vigorously defend itself against these allegations. The Company maintains directors and officers liability insurance which the Company believes should provide coverage to the Company and its officers and directors for most or all of any costs, settlements or judgments resulting from the lawsuit.

     In addition, a stockholder derivative action was filed on August 31, 2007 in the Superior Court of the State of California, County of San Francisco, in which an individual stockholder purports to assert claims on behalf of the Company against numerous directors and officers for alleged breach of fiduciary duty, abuse of control and other similar claims. The Company believes the allegations in the stockholder derivative complaint to be without merit and filed a motion to dismiss all claims. In response to the motion, the plaintiff voluntarily filed an amended derivative complaint. The Company filed a motion to dismiss the amended complaint on April 13, 2008. Furthermore, any recovery in the derivative lawsuit would be payable to the Company, and this lawsuit is, therefore, unlikely to have a material negative effect on its business, financial condition or results of operations.

Repurchase Agreement Litigation

     The Company has initiated legal proceedings against two repurchase agreement counterparties in the U.S. District Court for the Southern District of New York regarding those counterparties’ disposition of certain mortgage-backed securities that were posted with them pursuant to certain repurchase agreements. The lawsuits allege that during the summer of 2007 the counterparties, among other things, failed to act in good faith and in a commercially reasonable manner in purportedly attempting to liquidate the securities posted with them and/or in attempting to credit the Company for the value of those securities, after certain margin calls were not met.

     Both defendants dispute the lawsuits’ allegations claim that the liquidation of the posted collateral resulted in a deficit that is owed by the Company. One of the defendants has asserted counterclaims alleging that it is owed approximately $6.6 million for alleged deficit amount plus certain principal and interest amounts paid on the securities it had seized and demanding legal fees. The other counterparty has not yet asserted a counterclaim, but had previously claimed a deficit of approximately $7.7 million.

     On December 21, 2007, a repurchase agreement lender alleged that an event of default existed for an unspecified reason on the part of the Company and its affiliates under a master repurchase agreement. As a result, the repurchase agreement lender alleged that the repurchase date for reverse repurchase transactions by the Company and those affiliates having an aggregate repurchase price of approximately $8.0 million calculated as of December 21, 2007, would occur (to the extent that the repurchase date had not already occurred), and the repurchase agreement lender demanded payment by the Company of that aggregate repurchase price, together with interest thereon and expenses. In March 2008, the repurchase agreement lender informed the Company that it had sold the collateral for the repurchase agreement and the Company estimates the sales resulted in a deficit of approximately $7.3 million.

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

     The Company and its affiliates do not agree with the repurchase agreement lender that the above-described event of default existed. Furthermore, the Company and its affiliates believe that most of the securities subject to the related reverse repurchase transactions were sponsored, issued and underwritten by affiliates of the repurchase agreement lender and then sold to the Company by the underwriter, which is an agent of the repurchase agreement lender, in violation of federal and state securities laws. The Company and an affiliate are seeking to rescind the related sale. Approximately $7.0 million of the amount demanded by the repurchase agreement lender relates to the securities sponsored, issued, and underwritten by affiliates of the repurchase agreement lender.

     On December 24, 2007, the Company and an affiliate filed a lawsuit against affiliates of the repurchase agreement lender relating to the issuance and sale of the aforementioned securities. The lawsuit alleges that the defendants misrepresented and failed to disclose material information relating to the securities they offered and sold to the Company and an affiliate, entitling the Company and an affiliate to rescission and/or monetary damages. In April 2008, the defendant filed a motion to dismiss the case.

     These cases are in the early stages and the Company cannot predict the effect that final resolution of the cases might have on its business, financial condition or results of operations, although such effect could be materially adverse. The Company believes the counterparties’ claims are without merit and the Company intends to vigorously defend itself against them if and to the extent they are pursued in the lawsuits.

NOTE 14—RELATED PARTY TRANSACTIONS

     In the ordinary course of its business operations, the Company has ongoing relationships and has engaged in transactions with several related entities described below.

     Beginning on August 14, 2007, the Company entered into a series of financing agreements with Arco. As a result of these agreements, the Company issued Arco a warrant to purchase up to 51,000,000 shares of the Company’s common stock representing 49% of the voting interest in the Company and 51% of the economic interest in the Company on a fully diluted basis. In addition, as part of this series of agreements, four directors satisfactory to Arco were appointed to the Company’s board of directors. See Note 5 and Note 6 for additional information on the terms of these agreements.

     At March 31, 2008, the Company had a facility through Arco and its affiliate to provide repurchase agreement financing and a revolving line of credit in the maximum amount of $190.0 million. At March 31, 2008, $166.3 million in repurchase agreement financing was outstanding at an average interest rate of 9.08%. The repurchase agreements mature and are re-extended monthly. In addition, the Company had $15.8 million outstanding on a revolving line of credit provided by Arco at an average interest rate of 7.14%. The line of credit matures on September 26, 2012.

     In January 2008, the Company sold mortgage-backed securities with a cost basis of approximately $132.6 million for proceeds of $132.3 million to an affiliated company of a director. This sale was reported to the audit committee of the board of directors in accordance with the Company’s policy for such transactions and was deemed to be on terms that would have been obtained in an arms’ length transaction.

     As of March 31, 2008, Arco had also provided guarantees on $96.8 million of repurchase agreement financing with an unaffiliated third-party.

NOTE 15—SUBSEQUENT EVENTS

     The NYSE delisted the Company’s common stock effective May 2, 2008 due to the Company’s inability to meet the stock price and capitalization requirements for continued listing on the exchange. Subsequent to the

LUMINENT MORTGAGE CAPITAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

delisting by the NYSE, the Company’s stock began to be quoted on the Over-the-Counter, or OTC, Bulletin Board under the symbol “LUMC”.

     In April 2008, the Company entered into a lease for 6,556 square feet of office space in Philadelphia, PA that will replace its current office space. The lease commences on May 15, 2008 and expires on May 31, 2014. Base rental is $0.2 million per year, and the lease incorporates a provision for annual 2.5% increases in base rent.

     On May 9, 2008, the Company entered into a second amendment to the amended and restated credit agreement dated September 26, 2007 with Arco. The amended agreement no longer limits the aggregate amount outstanding under specified master repurchase agreements with an affiliate of Arco. In addition, the amendment

	•		reduces the fixed charge coverage ratio requirement, and allows non-cash adjustments thereto, through December 31, 2009;
	•		changes the payment of obligations covenant to allow for lender agreement to exclude certain items; and
	•		modifies events of default language to require notice and failure to remedy for cross-default and judgment default items

     On May 15, 2008 the Company entered into an agreement with a repurchase agreement lender to settle $75.5 million of repurchase agreement financing in exchange for mortgage-backed securities with a fair value of approximately $18.8 million, a cash payment of $5.0 million and a note for $13.0 million with a five year maturity.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included in Item 1 of this Form 10-Q. This discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. See “Cautionary Note Regarding Forward-Looking Statements.” As a result of many factors, such as those set forth under “Risk Factors” in Item 1A of this Form 10-Q, Item 1A of our Form 10-K for the year ended December 31, 2007, elsewhere in this Form 10-Q or incorporated by reference herein, our actual results may differ materially from those anticipated in such forward-looking statements.