UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

AMNET MORTGAGE, INC.

(Exact name of registrant as specified in its charter)

(858) 909-1200

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

ý  YES   o  NO

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

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

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

2

PART I.  FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

AmNet Mortgage, Inc. and Subsidiaries

Consolidated Balance Sheets, unaudited

(in thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

3

AmNet Mortgage, Inc. and Subsidiaries

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

(in thousands, except per share data)

See accompanying notes to consolidated financial statements.

4

AmNet Mortgage, Inc. and Subsidiaries

Consolidated Statements of Cash Flows, unaudited

(in thousands)

See accompanying notes to consolidated financial statements.

5

AMNET MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Sale of AmNet Mortgage, Inc. to Wachovia Bank

The Company has entered into an Amended and Restated Agreement and Plan of Merger dated as of September 13, 2005, with Wachovia Bank, National Association, a national banking association organized under the laws of the United States of America, and PTI, Inc., a Delaware corporation and wholly owned subsidiary of Wachovia, pursuant to which PTI will merge with and into the Company, with the Company being the surviving corporation (the “merger”) and becoming a wholly owned subsidiary of Wachovia.  Any references to the “merger” or the “pending merger” in this report refer to the transaction contemplated by the merger agreement.  In the merger, each issued and outstanding share of the Company’s common stock, par value $0.01 per share, is to be canceled and converted automatically into the right to receive $10.30 per share in cash.  The aggregate merger consideration (on a fully diluted basis) is approximately $83 million.  The merger remains subject to customary closing conditions, including approval of the merger by the Company’s stockholders.  Upon the unanimous recommendation of a special committee comprised of non-employee directors, the board of directors has unanimously approved the merger and recommended that the Company’s stockholders approve it.  The Company expects to hold a special meeting of stockholders to vote on the merger and the merger agreement in December 2005.  In connection with the meeting, we issued a definitive proxy statement dated November 7, 2005 that has been filed with the Securities and Exchange Commission.

Note 2.  Summary of Significant Accounting Policies and Practices

Basis of Financial Statement Presentation

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

In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim period presented. These adjustments are of a normal recurring nature. The interim financial data as of September 30, 2005 and September 30, 2004 is unaudited; however, in the opinion of the Company, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods.

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

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

Accounting For Changes and Error Corrections

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

6

Stock Options and Restricted Stock

The Company elected to apply APB Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for its stock-based compensation plans: the 2004 Equity Incentive Plan and 1997 Employee Stock Purchase Plan. Accordingly, no compensation cost has been recognized in the financial statements for stock options. Compensation in the form of restricted stock is recognized through amortization of deferred compensation. SFAS No. 123 “Accounting for Stock Based Compensation” requires pro forma disclosures of expense computed as if the fair value-based method had been applied in the financial statements of companies that continue to account for such arrangements under Opinion No. 25.

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

The FASB amended SFAS No. 123, “Accounting for Stock-Based Compensation,” which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” in December, 2004. The amendment requires the Company to record compensation expense for all share-based compensation beginning January 1, 2006. When adopted, this standard will have a negative impact on earnings of approximately $47 thousand per month in future periods since stock options already issued will vest in future periods and be expensed.

During the nine month period ending September 30, 2005 the Company authorized the issuance of 92,684 shares of restricted stock to executives within the Company which will vest over a three year period beginning in February of 2005. The Company also authorized the issuance of 18,400 shares of restricted stock to outside board members of the Company which vested August 12, 2005. An additional 18,400 shares of restricted stock were authorized to be issued to outside board members of the Company which will vest August 10, 2006.  The value of these restricted shares is being expensed over the vesting period.  On March 31, 2005 the Company authorized 47,900 restricted stock units to eleven senior executives of the Company with 50% vesting on December 31, 2008 and 2009 respectively.

Had compensation cost for the Company’s stock options been recognized based upon the estimated fair value on the grant date under the fair value methodology, the Company’s net income and net loss would have been as follows (in thousands except income per share) (unaudited):

The assumptions used to calculate the fair value of options granted are evaluated and revised as necessary to reflect market conditions and the Company’s experience. The volatility component of the calculation to establish stock option value has been revised and is reflected in stock based compensation expense for the three months and nine months ended September 30, 2005 and 2004.

7

Note 3.  Income Per Share

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

For the nine months ended September 30, 2005 and 2004 there were 1,064,869 and 1,132,729 options, respectively, that were antidilutive and, therefore, not included in the calculations above.

Note 4.  Concentrations

For the nine months ending September 30, 2005, the Company sold the majority of its loans (by volume) to three correspondent investors, Countrywide Home Loans, Inc. (44.7%), Morgan Stanley Mortgage Capital Inc. (18.5%) and Wells Fargo Funding, Inc. (12.5%). The Company’s considerations in deciding where to sell loans are price and operational efficiency.  The Company also considers speed of execution and loan product guidelines.  The Company believes that all of the loans it sells currently could be sold to a number of other investors.

In addition, approximately 33% of the dollar value of loans generated were derived from loans originated in California.  While the Company generates loans on a nationwide basis, it is anticipated that the Company will continue to have a significant concentration of loans originated from California.

Note 5.  Mortgage Loans Held for Sale, net, pledged

AmNet has pledged loans held for sale totaling approximately $736.8 million to secure credit lines (warehouse facilities) from four financial institutions. (See Note 8. “Short-Term Debt.”). Mortgage loans held for sale at September 30, 2005 consist of loans which have been committed for sale of approximately $507.3 million and loans available for sale of approximately $229.5 million, all of which are carried at the lower of cost or market value.

Note 6.  Bond Collateral, Mortgage Loans, net

AmNet has pledged collateral in order to secure the long-term debt issued in the form of CMOs. Bond Collateral Mortgage Loans consist primarily of subprime credit, 30-year mortgage loans secured by first liens on one-to-four family residential properties. As of September 30, 2005 and 2004, 100% of the bond collateral mortgage loans are adjustable-rate mortgages. All Bond Collateral Mortgage Loans are pledged to secure repayment of the related long-term debt obligation. All principal and interest (less servicing and related fees) on the bond collateral is remitted to a trustee and is available for payment of the long-term debt obligation. The obligations under the long-term debt are payable solely from the bond collateral and are otherwise non-recourse to AmNet.

In March of 2004, approximately $113.9 million in Bond Collateral Mortgage Loans and approximately $2.3 million in REO bond collateral were reclassified as held for sale.  By September 30, 2004 all of these mortgage loans including real estate owned, had been sold.  One remaining portfolio (CMO/FASIT 1998-1) was not sold.  Bond collateral for this structure is shown in the Consolidated Balance Sheets as Bond collateral, mortgage loans, net and Bond collateral, real estate owned, net.

8

Note 7.  Derivative Financial Instruments

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

AmNet estimates the number of rate locked loan commitments in the pipeline that will not close in order to calculate its interest rate exposure on a daily basis. AmNet then purchases hedging instruments in order to try to protect profit margins on the pipeline. The hedging instruments typically used are forward sales of mortgage-backed securities (“TBA”) and options on forward sales of mortgage-backed securities. Historically, changes in the price of these instruments closely relate to changes in the value (price) of loans in the pipeline. The Company has elected not to apply hedge accounting for the derivative financial instruments.

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

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

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

9

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

Note 8.  Short-Term Debt

As of September 30, 2005, mortgage loans held for sale totaling $736.8 million were pledged as collateral for warehouse facility borrowings of $711.0 million under four warehouse facilities. At September 30, 2005, the Company’s maximum borrowing capacity combined from these four financial institutions was $1.9 billion.  The table below shows the age of pledged mortgage loans as of September 30, 2005 (in thousands) (unaudited):

Of the $711.0 million of warehouse line usage at September 30, 2005, $234.9 million was funded through uncommitted warehouse facilities.

The warehouse facilities mature on various dates in 2005 and 2006, and generally bear interest at one-month LIBOR plus spread. The weighted average borrowing rates were 5.02% and 3.08% for the three months ending September 30, 2005 and September 30, 2004 respectively. The weighted-average borrowing rate was 4.60% for the nine months ending September 30, 2005 and 2.74% for the nine months ending September 30, 2004. The weighted-average facility fee was .24% for the nine months ending September 30, 2005 and .23% for the nine months ending September 30, 2004 on the aggregate committed amount of the warehouse facilities. The warehouse facilities are repaid as principal payments on mortgage loans are received, or as the mortgage loans are sold. We are generally allowed to borrow from 96% to 99% of the lesser of par or market value of the loans, and must comply with various lender covenants restricting, among other things, the absolute level of leverage, minimum levels of cash reserves, profitability and stockholders’ equity. We are also, in a certain instance, required to maintain a restricted cash account with one of our warehouse lenders. During the nine months ending September 30, 2005 we were required to add $675 thousand to our cash account as a result of rising interest rates causing reduced values of warehouse line loans and $325 thousand due to a $100 million credit increase.  As of September 30, 2005 the Company was in compliance with warehouse line facility covenants. We believe we are in good standing with all of our warehouse lenders.

10

Note 9.  Long-Term Debt Related to Securitizations, net

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

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

Note 10.  Recourse Liabilities Associated With Loan Sales

We sell loans to private investors and other financial institutions. Each loan sale is subject to certain terms and conditions, which generally require us to repurchase loans or indemnify and hold the investor harmless against any loss arising from early payment default activity and errors and omissions in the origination, processing and/or underwriting of the loans. We are subject to this risk for loans that we originate as well as loans we acquire from brokers. At September 30, 2005 we had approximately $5.9 million and approximately $4.6 million at December 31, 2004  recorded as estimates for losses that may occur as a result of the guarantees described above based on trends in repurchase and indemnification requests, actual loss experience, known and inherent risks in the loans, and current economic conditions. The length of the indemnification period, which varies by investor and the nature of the potential defect, may extend to the life of the loan.

Under most of our loan sale agreements, we are also obligated to refund premiums to investors if loans pay off within a certain number of days after the settlement of our loan sale. These refunds are referred to as early prepayment premiums or (“EPPs”). The EPP exposure period generally ranges up to 180 days after the settlement date. At September 30, 2005 and December 31, 2004, we had approximately $771 and $894 thousand, respectively, recorded as an estimated reserve for premium refunds that may occur as a result of loan sales which were still subject to EPP liability.

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

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

As a result of the hurricanes (Rita and Katrina) affected area properties were re-inspected prior to loan closing. These storms had no financial affect on the Company.

11

Note 11.  Stock Plans

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

* The 1997 stock option plans continue until all options outstanding under it are terminated or exercised. No new options will be granted.

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

In the event that the merger is completed, the Company's stock plans will be cancelled. The approximate cost to Wachovia to purchase outstanding options will be $5.0 million. This amount is included in the approximate total purchase price of $83 million.

At September 30, 2005, the range of exercise prices for outstanding options was $1.75 to $15.00 and the weighted-average remaining contractual life of outstanding options was 5.71 years. The weighted average exercise price of exercisable outstanding options was $8.90.  The table below shows options and prices for all outstanding options at September 30, 2005 (unaudited):

The per share weighted-average fair value of stock options granted between January 1, 2005 and September 30, 2005 is computed quarterly.  For the first quarter ending March 31, 2005 the per share weighted-average fair value of stock options granted was $5.82. For the second quarter ending June 30, 2005 the value was $4.90. For the third quarter ending September 30, 2005 the value was $5.48. These values were calculated using the Black-Scholes option-pricing model, using the following weighted-average assumptions (unaudited):

12

On February 7, 2005 the Company’s Compensation Committee authorized payments under the Long-Term Incentive Cash Plan. However, the Committee determined that it is in the best interests of the Company to pay half of each award value in cash and half in restricted stock of the Company. Consequently, 92,684 restricted shares of the Company’s stock were authorized to be issued to the executives of the Company with a three year vesting period. Issuance of the restricted stock was authorized in April 2005. The cost to the Company is approximately $278 thousand per year for three years beginning in 2005. On March 31, 2005 the Committee authorized 47,900 restricted stock units to eleven senior executives of the Company with 50% vesting on December 31, 2008 and 2009, respectively. On April 4, the Committee granted 18,400 restricted shares to the outside members of the Board of Directors vested August 12, 2005. On August 10, 2005 the Committee granted 18,400 restricted shares to the outside members of the Board of Directors vesting August 10, 2006. The result of these awards was $1.6 million of deferred compensation which was reduced during the nine months ending September 30, 2005 to $1.2 million by monthly amortization and is included in the equity section of the Consolidated Balance Sheets.

Note 12.  Income Taxes

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

As a result of the conversion to a fully taxable status, an income tax benefit and related deferred tax asset of $5.7 million was recorded in 2003. As of September 30, 2005, our deferred tax asset is approximately $10.1 million which reflects a change in the tax provision from December 31, 2004. The tax provision was calculated based on an assumed income tax rate of 44% for 2005.

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

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

Note 13.  Commitments and Contingencies

Lease Commitments

The Company rents certain premises and equipment under non-cancelable operating leases expiring at various dates through the year 2011. Rental expense under such leases is included in office and occupancy expense, and other operating expenses. Lease costs totaled $3.1 million in the nine months ending September 30, 2005 and $3.0 million in the nine months ending September 30, 2004. Future minimum lease payments under these leases as of September 30, 2005, are as follows (dollars in thousands) (unaudited):

Wachovia Merger – Termination Fee

The pending merger agreement discussed in Note 1 provides that if the merger agreement is terminated under certain specific circumstances as set forth in the merger agreement, the Company will be liable to pay Wachovia an aggregate termination fee of up to $3.5 million.

13

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

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

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

•      The factors that may impact our future liquidity;

•      Our strategies;

•      Changes in the mortgage market and competitive factors;

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

•      The risks that may impact our business.

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

•      We have entered into an Amended and Restated Agreement and Plan of Merger with Wachovia Bank, National Association and a wholly owned merger subsidiary of Wachovia, pursuant to which the merger subsidiary will merge with and into AmNet and AmNet will be the surviving corporation and become a wholly owned subsidiary of Wachovia.  Completion of the merger is expected to occur no later than the first quarter of 2006; however, there can be no assurance that the merger will be completed.

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

•      Our market share increases are dependent on retaining and expanding our sales force and broker customer base, which is more challenging in a highly competitive market environment. In particular we must remain competitive relative to our pricing of loans, which could cause us to lower our gross margins.

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

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

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

•      A significant source of revenue is derived from the net interest spread we earn on loans held for sale and financed with short term warehouse lending facilities. Continued flattening of the interest rate yield curve (decreased difference between long term interest rates and short term interest rates)  has reduced net interest rate spread significantly over the

14

past year.  Further flattening and potential inversion of the yield curve could significantly impact this revenue source and jeopardize our ability to sustain profitability.

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

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

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

Introduction

Our Company was founded in 1997 as an externally managed Real Estate Investment Trust. Until 2001, substantially all of our operations consisted of the acquisition of residential mortgages for investment purposes. In mid-2001, our Board of Directors and management determined that it was in the best interest of the stockholders to fundamentally shift our strategic direction to mortgage banking. We started the transition in 2001 by forming a subsidiary, American Mortgage Network, Inc., to engage in the wholesale lending segment of the mortgage banking industry. In January of 2003 we elected to relinquish our REIT status with the Internal Revenue Service (previously approved by our stockholders). In order to more closely align our name with our mortgage banking focus, we changed our name from American Residential Investment Trust, Inc. to AmNet Mortgage, Inc., as of May 5, 2004. On September 29, 2004 our Company’s stock began trading on the NASDAQ National Market System under the trading symbol AMNT. Previously we were listed on the American Stock Exchange under the trading symbol INV and prior to that we were listed on the NYSE.

In March of 2004, we began providing loan programs tailored to subprime borrowers with credit that does not meet conventional guidelines or who require non-conventional loan terms with respect to loan-to-value, debt ratio, cash-out or documentation. We offer subprime loans through several different loan programs. However, our Company policy is not to provide high cost loans which are defined as mortgage loans that feature either an interest rate or points and fees charged in connection with loans that exceed certain thresholds prescribed by federal or state law or local ordinances. Subprime lending provides loan solutions for borrowers with credit problems who would not qualify for other lending products we offer. The unit cost to originate these loans is higher due to more labor intensive underwriting and funding processes, higher sales commission rates and a higher percentage of loan applications that are not approved or funded. As a result of higher credit risk and cost, we must charge higher interest rates for assuming this risk. To help mitigate the additional risks while our systems and processes are being refined, underwriting for these loans is performed at our centralized subprime operations center located in our San Diego headquarters office as opposed to the regional underwriting and funding we utilize for all other wholesale loan products we offer. Our long-term strategy is to grow this segment of our business to up to 20 percent of our total loan funding volume. Our subprime volume was 2.3 percent of total loan volume funded in the first nine months of 2005 and is expected to reach four percent of total loan volume by the end of 2005. We have hired seasoned staff to augment our expertise in this area of lending. We also have negotiated with investors to buy the loans we generate and amended our agreements with existing warehouse lenders to finance these loans.

In the second half of 2004 we made a strategic decision to create a correspondent lending channel. We began originating loans through this channel in the first quarter of 2005. Progress in building loan volume was slower than projected with a resulting increased investment required to attain profitability. Profit margins being very thin in this type of lending, the lack of volume increase meant a protracted time of unprofitability. During the third quarter of 2005 the decision was made to close our Correspondent lending channel.

We originate mortgage loans predominately to prime quality borrowers (except our subprime division) secured by first trust deeds through a network of independent mortgage brokers. A concentration of our business is in California (33% of loans [by volume] originated in the nine months ending September 30, 2005); however, we do business on a nationwide basis. We sell the loans that we originate to institutional purchasers on a servicing-released basis.

We use a dedicated sales force to offer our loan products to approved wholesale mortgage brokers, who refer their clients’ loans to us for underwriting and funding. Loans meeting our underwriting criteria are generally approved and funded at our regional underwriting loan centers. Our headquarters office performs various functions through multiple departments including establishment

15

of policy, risk management, secondary marketing, loan delivery to investors, finance, accounting, administration, marketing, human resources, and information technology.

The Company has entered into an Amended and Restated Agreement and Plan of Merger dated as of September 13, 2005, with Wachovia Bank, National Association, a national banking association organized under the laws of the United States of America, and PTI, Inc., a Delaware corporation and wholly owned subsidiary of Wachovia, pursuant to which PTI will merge with and into the Company, with the Company being the surviving corporation (the “merger”) and becoming a wholly owned subsidiary of Wachovia.  Any references to the “merger” or the “pending merger” in this report refer to the transaction contemplated by the merger agreement.  In the merger, each issued and outstanding share of the Company’s common stock, par value $0.01 per share, is to be canceled and converted automatically into the right to receive $10.30 per share in cash.  The aggregate merger consideration (on a fully diluted basis) is approximately $83 million.  The merger remains subject to customary closing conditions, including approval of the merger by the Company’s stockholders.  Upon the unanimous recommendation of a special committee comprised of non-employee directors, the board of directors has unanimously approved the merger and recommended that the Company’s stockholders approve it.  The Company expects to hold a special meeting of stockholders to vote on the merger and the merger agreement in December 2005.  In connection with the meeting, we issued a definitive proxy statement dated November 7, 2005 that has been filed with the Securities and Exchange Commission.

At September  30, 2005, we are operational in thirty office locations which represents a net reduction of two offices from December 31, 2004. We had a total of 956 employees at September 30, 2005 which is an increase of 197 employees from December 31, 2004.

We borrow funds under our warehouse credit facilities to fund and accumulate loans prior to sale to correspondent investors on a servicing-released basis. As of September 30, 2005 we had four warehouse facilities that enabled us to borrow up to an aggregate of $2.2 billion. We are generally allowed to borrow from 96% to 99% of the lesser of par or market value of the loans, and must comply with various lender covenants requiring, among other things, minimum levels of cash reserves, certain levels of profitability and restricted leverage ratios.  See Part II Item 5(a), regarding a new warehouse facility.

We generate revenue, net of hedging and market adjustments in our mortgage banking business in three principal ways (gain on loan sales net of hedging and market adjustments, and interest income):

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

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

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

Relative to our Mortgage Asset Portfolio, we made a strategic decision to sell the vast majority of our mortgage portfolio assets in the first quarter of 2004 and we completed the sales in the third quarter of 2004. The remaining mortgage assets of approximately $11.1 million are pledged to secure long term debt totaling approximately $9.3 million. These assets are referred to as our CMO/FASIT 1998-1 Securitization and are referred to on the balance sheet as bond collateral. Our Company over-collateralized the bonds at the time of issuance by pledging assets in excess of new liabilities.  These bond collateral assets are carried at the lower of cost or net realizable value.  At September 30, 2005, our bond collateral assets were carried on our balance sheet at approximately

16

$1.8 million more than our remaining long term debt.

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

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

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

Our 3rd Quarter 2005 Highlights (Executive Overview)

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

•      We funded approximately $4.5 billion in loan volume for the period while fundings for the same period in 2004 were $2.1 billion.  This represents an increase of approximately 119% while the overall mortgage market increased from approximately $646 billion for the quarter ending September 30, 2004 to approximately $775 billion for the quarter ending September 30, 2005 (an increase of approximately 20%), according to the Mortgage Bankers Association (“MBA”) Mortgage Finance Forecast dated October 26, 2005. For all of 2005, the MBA is projecting $2.8 trillion in residential mortgage lending which approximately equals 2004. Key reasons for our loan production increase are: a sales force increase (267 account executives at September 30, 2005 compared to 145 account executives at September 30, 2004), a maturing of our branch network resulting in better market penetration and a broader range of loan products offered by the Company. The graph below shows monthly loan production comparisons between the third quarters of 2005 and 2004.

2005 & 2004 Loan Fundings by Month - Second Quarter

17

•              Total revenue was $56.0 million which represented a 165% increase from the quarter ending September 30, 2004. Net interest income (interest income less interest expense) decreased for the quarter ending September 30, 2005 versus the quarter ending for the same period in 2004. Net interest income in the third quarter of 2005 was $3.7 million (interest income of $22.4 million less interest expense of $18.7 million). Net interest income in third quarter of 2004 was $3.8 million (interest income of $8.2 million less interest expense of $4.4 million).

•              Total revenue inclusive of the benefits of revenue timing differences, was sufficient to cover variable and fixed expenses totaling $52.7 million resulting in pretax income of $3.3 million.  We had favorable impacts from timing differences, as more fully described below in the section entitled “Interest Rate Risk Management and the Relationship Between Our Hedging Instruments and the Market Adjustments and Gain on Sale that We May Record for a Period”.

•              Employee compensation and benefits increased by $11.6 million in the 3rd quarter of 2005 compared to the same period in 2004.  Approximately $5.5 million of this increase was directly the result of higher commissions on incremental loan funding volume.  Another $2.4 million is associated with an overall higher commission rate driven by higher commission guaranty payments and a change in the commission rates on some products.  The balance of the increase in compensation totaled $3.7 million and was associated with increases in staffing to handle larger loan funding levels and a higher proportion of loans requiring complex underwriting.  These higher overhead expenses have served to significantly reduce the positive impact of loan funding volume growth, and the company is attempting to implement technology enhancements which would improve efficiencies.  However these process improvements are not expected to benefit the Company's cost structure until late 2006.

•              Professional fees totaled approximately $2.8 million for the third quarter of 2005 while for the same period in 2004 professional fees totaled approximately $0.9 million. The majority of this increase relate directly to the cost of the merger.  The merger-related fees are comprised primarily of legal and accounting services, and other related transaction costs.  These expenses are expected to continue until the merger is completed.  The total amount of these merger-related fees are not determinable at this time.  We also had higher contract labor expenses due to higher loan production levels.

•              Correspondent lending activity was discontinued during the quarter. The financial impact was less than $50 thousand of expense for employee severance costs and subleasing office space.

•              Total expenses increased 6 basis points largely due to increased interest rates and the resulting increase in interest expense. Total expense dollars also increased as a result of increased commission costs related to loan volume increases and payment guarantees for new account executives.

•              Net interest income (interest income less interest expense) decreased largely as a result of the flattening of the yield curve (the difference between long term interest rates and short term interest rates has been decreasing).

•              Unrestricted cash and cash equivalents decreased by $6.9 million during the third quarter of 2005 from $28.6 million at June 30, 2005, to $21.7 million at September 30, 2005. The key factors in the cash decrease were additional cash invested in higher loan inventories and related loan sale receivables related to loan production increases.

•              Our mortgage asset portfolio received approximately $0.7 million in principal and REO sale proceeds. The Company reduced related long term debt by approximately $0.7 million.

Critical Accounting Policies

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

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

•      Derivative hedging activities / determination of fair values

•      Fair value of mortgage loans held for sale

•      Income taxes and benefits

•      Recourse liabilities associated with loan sales

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

18

Management’s Financial Analysis

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

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

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

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

Net Interest Income - We earn interest income and incur interest expense in our operations. We earn interest on a loan from the date the loan is funded until its sale to an investor. Accordingly, interest income is a function of the volume of loans funded, the interest rate on the loans and the length of time the loans are held prior to sale. To the extent we fund loans with borrowings under our warehouse facilities, we record interest expense based on the same factors. We also generate revenue from the interest we receive on the bond collateral mortgage loans we hold for investment and we incur interest expense on the borrowings used to finance our loan fundings and bond collateral.

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

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

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

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

To mitigate the risk of rising interest rates and protect our pricing margins, we purchase hedge instruments.  The gains or losses from this activity will generally correlate to losses or gains derived from market adjustments on our rate locked loan

19

commitments and losses or gains that we record on sales of our closed loans. Typically, higher than expected market adjustments and gains from the sale of loans will be offset by hedging losses, while lower than expected market adjustments and gains from the sale of loans will be offset by hedging gains. However, the correlated gains and losses are not always recorded in the same accounting period because of timing differences.

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

We generally adjust our hedge coverage on a daily basis based upon changes in the size and composition of the pipeline and resultant changes to our estimated pipeline exposure, seeking to protect our loan sale margin targets. Since August of 2002, we have used an outside company, Mortgage Capital Management, Inc. (“MCM”), to help us manage our interest rate risks. MCM is a quantitative software and advisory service firm that currently serves a number of clients in the mortgage banking industry. MCM performs pipeline exposure analysis and provides hedging recommendations on a daily basis. Our loan pipeline at September 30, 2005 was approximately $1.6 billion, at December 31, 2004 our pipeline was approximately $0.8 billion and at September 30, 2004 our pipeline was approximately $0.9 billion. We believe our hedges have correlated to both increases and decreases in the value of our rate locked loans and uncommitted closed loans. In the future, as our loan products change and our subprime channel increases production, our hedging strategies, fallout assumptions and hedging instruments may change to better mitigate the risk of interest rate changes.

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

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

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

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

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

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

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

20

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