1236309--3/9/2006--LUMINENT_MORTGAGE_CAPITAL

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Our stockholders equity or book value is volatile and is subject to changes in interest rates. Our mortgage loans and mortgage-backed securities are subject to defaults, which could adversely impact our results of operations or financial condition. The representations and warranties that we will make in our securitizations may subject us to liability, which could adversely impact our results of operations or financial condition. Our mortgage loans and mortgage-backed securities are subject to interest rate caps and resets that could adversely impact our results of operations or financial condition. The use of securitizations with over-collateralization requirements could restrict our cash flow and adversely impact our results of operations or financial condition. We purchase subordinated mortgage-backed securities that are structured to absorb a disproportionate amount of any losses on the underlying mortgage loans. These purchases could adversely impact our results of operations or financial condition. Our mortgage loans and mortgage-backed securities are subject to potential illiquidity, which might prevent us from selling them at reasonable prices when we find it necessary to sell them. This factor could adversely impact our results of operations or financial condition. Our mortgage loans and mortgage-backed securities are subject to the overall health of the U.S. economy, and a national or regional economic slowdown could adversely impact our results of operations or financial condition. We might not be able to obtain financing for our mortgage loans or mortgage-backed securities, which would adversely impact our results of operations or financial condition. Our investment strategies employ a significant amount of leverage, and are subject to daily fluctuations in market pricing and margin calls, which could adversely impact our results of operations or financial condition. Interest rate mismatches between our mortgage loans and mortgage-backed securities and our borrowings could adversely impact our results of operations or financial condition. Our use of certain types of financing may give our lenders greater rights in the event that either we or any of our lenders file for bankruptcy. Our hedging activities might be unsuccessful and adversely impact our results of operations and book value. Our mortgage loans may not be serviced effectively, which might adversely impact our results of operations or financial condition. If we are unable to securitize our mortgage loans successfully, we may be unable to grow or fully execute our business strategies and our earnings may decrease. Seneca might fail to comply with the terms of the Amended Agreement, manage our Spread portfolio poorly or lose key personnel that are important to our Spread portfolio, which could adversely impact our results of operations or financial condition. Because Seneca is entitled to a fee that may be significant if we terminate the Amended Agreement without cause, economic considerations might preclude us from terminating the Amended Agreement in the event that Seneca s performance fails to meet our expectations but does not constitute cause. Seneca s liability is limited under the Amended Agreement and we have agreed to indemnify Seneca against certain liabilities. If we are disqualified as a REIT, we will be subject to tax as a regular corporation and face substantial tax liability. Complying with REIT requirements might cause us to forego otherwise attractive opportunities. Complying with REIT requirements may limit our ability to hedge effectively. Complying with the REIT requirements may force us to borrow to make distributions to our stockholders. Recognition of excess inclusion income by us could have adverse tax consequences to us or our stockholders. Complying with the REIT requirements may force us to liquidate otherwise attractive investments. Failure to maintain an exemption from the Investment Company Act would harm our results of operations. Misplaced reliance on legal opinions or statements by issuers of mortgage-backed securities could result in a failure to comply with REIT income or assets tests. One-action rules may harm the value of the underlying property. We may be harmed by changes in various laws and regulations. Risks Related to Investing in Our Securities The timing and amount of our cash distributions may be volatile over time. Our declared cash distributions may force us to liquidate mortgage loans or mortgage-backed securities or borrow additional funds. Future offerings of debt securities by us, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may harm the value of our common stock. Changes in yields may harm the market price of our common stock. The market price and trading volume of our common stock may be volatile; broad market fluctuations could harm the market price of our common stock. The market price of our common stock may be adversely affected by future sales of a substantial number of shares of our common stock in the public market or the availability of such shares for sale. Issuance of large amounts of our stock could cause our price to decline. Restrictions on ownership of a controlling percentage of our capital stock might limit your opportunity to receive a premium on our stock. Certain provisions of Maryland law and our charter and bylaws could hinder, delay or prevent a change in control of our company.

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1236309--3/9/2006--LUMINENT_MORTGAGE_CAPITAL_INC