**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended June 30, 2006 or**

** ̈**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from                    to                    .**

**CommissionFile Number: 1-14100**

**IMPAC MORTGAGE HOLDINGS, INC.**

**(Exactname of registrant as specified in its charter)**

| **Maryland**                     |   | **33-0675505**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**1401Dove Street, Newport Beach, California 92660**(Address of principalexecutive offices)

**(949)475-3600**(Registrant’s telephonenumber, including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes x  No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large acceleratedfiler x  Accelerated filer o  Non-accelerated filer o

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)  Yes o  No x

Therewere 76,188,165 shares of common stock outstanding as of August 7, 2006.

 

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**IMPAC MORTGAGEHOLDINGS, INC.**

**FORM 10-QQUARTERLY REPORT**

**TABLE OF CONTENTS**
|          | ** ** | ** **                                                                                                                   | ** ** | ** ** |
|----------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|     | ** ** | **PART  I. FINANCIAL INFORMATION**                                                                                           |       |       |
|     |       |                                                                                                                         |       |       |
| ITEM 1.  | ** ** | **CONSOLIDATED FINANCIAL STATEMENTS**                                                                                        |       |       |
|     |       | Consolidated Balance Sheets as of June 30, 2006 and  December 31, 2005                                                       |       |       |
|     |       | Consolidated Statements of Operations and  Comprehensive Earnings for the Three and Six Months Ended June 30, 2006 and  2005 |       |       |
|     |       | Consolidated Statements of Cash Flows for the Six  Months Ended June 30, 2006 and 2005                                       |       |       |
|     |       | Notes to Consolidated Financial Statements                                                                                   |       |       |
|     |       |                                                                                                                         |       |       |
| ITEM 2.  | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS**                              |       |       |
|     |       | Forward-Looking  Statements                                                                                                  |       |       |
|     |       | General Overview                                                                                                             |       |       |
|     |       | Critical  Accounting Policies                                                                                                |       |       |
|     |       | Financial Highlights for the Second Quarter of 2006                                                                          |       |       |
|     |       | Financial Highlights for the First Six Months of 2006                                                                        |       |       |
|     |       | Second Quarter and Year-to-date 2006 Taxable Income                                                                          |       |       |
|     |       | Financial Condition and Results of Operations                                                                                |       |       |
|     |       | Liquidity and Capital Resources                                                                                              |       |       |
|     |       |                                                                                                                         |       |       |
| ITEM 3.  | ** ** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK**                                                              |       |       |
|     | ** ** | ** **                                                                                                                   |       |       |
| ITEM  4. | ** ** | **CONTROLS  AND PROCEDURES**                                                                                                 |       |       |
|     | ** ** | ** **                                                                                                                   |       |       |
|     | ** ** | **PART  II. OTHER INFORMATION**                                                                                              |       |       |
|     | ** ** | ** **                                                                                                                   |       |       |
| ITEM 1.  | ** ** | **LEGAL  PROCEEDINGS**                                                                                                       |       |       |
|     | ** ** | ** **                                                                                                                   |       |       |
| ITEM 1A. | ** ** | **RISK FACTORS**                                                                                                             |       |       |
|     | ** ** | ** **                                                                                                                   |       |       |
| ITEM 2.  | ** ** | **UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF  PROCEEDS**                                                             |       |       |
|     | ** ** | ** **                                                                                                                   |       |       |
| ITEM 3.  | ** ** | **DEFAULTS UPON SENIOR SECURITIES**                                                                                          |       |       |
|     | ** ** | ** **                                                                                                                   |       |       |
| ITEM 4.  | ** ** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                                      |       |       |
|     | ** ** | ** **                                                                                                                   |       |       |
| ITEM 5.  | ** ** | **OTHER  INFORMATION**                                                                                                       |       |       |
|     | ** ** | ** **                                                                                                                   |       |       |
| ITEM 6.  | ** ** | **EXHIBITS**                                                                                                                 |       |       |
|     | ** ** | ** **                                                                                                                   |       |       |
|     | ** ** | **SIGNATURES**                                                                                                               |       |       |
|     | ** ** | ** **                                                                                                                   |       |       |
|     | ** ** | **CERTIFICATIONS**                                                                                                           |       |       |
|     | ** ** | ** **                                                                                                                   |       |       |

 

 

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**PART I. FINANCIAL INFORMATION**

**ITEM 1.**                    CONSOLIDATEDFINANCIAL STATEMENTS

**IMPAC MORTGAGEHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS(dollar amounts in thousands, except share data)**
| ** **                                                                                                                                                                                                                                                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                     | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                                                                                     | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                     |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                     |       | $                 | 180,644    |                  | $          | 146,621 |   |
| Restricted cash                                                                                                                                                                                                                                                |       | 661               |       | 698                   |       |
| Securitized  mortgage collateral                                                                                                                                                                                                                               |       | 20,508,825        |       | 24,494,290            |       |
| Finance  receivables                                                                                                                                                                                                                                           |       | 292,286           |       | 350,217               |       |
| Mortgages  held-for-investment                                                                                                                                                                                                                                 |       | 8,390             |       | 160,070               |       |
| Allowance for loan  losses                                                                                                                                                                                                                                     |       | (68,072           | )          | (78,514               | )          |
| Mortgages  held-for-sale                                                                                                                                                                                                                                       |       | 1,203,223         |       | 2,052,694             |       |
| Accrued interest  receivable                                                                                                                                                                                                                                   |       | 102,994           |       | 123,565               |       |
| Derivatives                                                                                                                                                                                                                                                    |       | 312,877           |       | 250,368               |       |
| Other assets                                                                                                                                                                                                                                                   |       | 205,720           |       | 220,370               |       |
| Total assets                                                                                                                                                                                                                                                   |       | $                 | 22,747,548 |                  | $          | 27,720,379 |   |
|                                                                                                                                                                                                                                                           |       |              |       |                  |       |
| **LIABILITIES**                                                                                                                                                                                                                                                | ** ** | ** **        | ** ** | ** **            | ** ** |
| Securitized  mortgage borrowings                                                                                                                                                                                                                               |       | $                 | 20,094,718 |                  | $          | 23,990,430 |   |
| Reverse  repurchase agreements                                                                                                                                                                                                                                 |       | 1,278,485         |       | 2,430,075             |       |
| Trust preferred  securities                                                                                                                                                                                                                                    |       | 97,225            |       | 96,750                |       |
| Other  liabilities                                                                                                                                                                                                                                             |       | 58,934            |       | 36,177                |       |
| Total liabilities                                                                                                                                                                                                                                              |       | 21,529,362        |       | 26,553,432            |       |
|                                                                                                                                                                                                                                                           |       |              |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                                                                                 |       |              |       |                  |       |
|                                                                                                                                                                                                                                                           |       |              |       |                  |       |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                                                 | ** ** | ** **        | ** ** | ** **            | ** ** |
| Series-A junior  participating preferred stock, $0.01 par value; 2,500,000 shares authorized;  none issued and outstanding as of June 30, 2006 and December 31,  2005, respectively                                                                  |       | —            |       | —                |       |
| Series-B 9.375%  cumulative redeemable preferred stock, $0.01 par value; liquidation value  $50,000; 2,000,000 shares authorized, 2,000,000 shares issued and outstanding  as of June 30, 2006 and December 31, 2005, respectively                   |       | 20                |       | 20                    |       |
| Series-C 9.125%  cumulative redeemable preferred stock, $0.01 par value; liquidation value  $109,280; 5,500,000 shares authorized; 4,383,900 shares and 4,371,200 shares  issued and outstanding as of June 30, 2006 and December 31, 2005,  respectively |       | 44                |       | 44                    |       |
| Common stock,  $0.01 par value; 200,000,000 shares authorized; 76,112,963 shares issued and  outstanding as of June 30, 2006 and December 31, 2005, respectively                                                                                     |       | 761               |       | 761                   |       |
| Additional  paid-in capital                                                                                                                                                                                                                                    |       | 1,168,634         |       | 1,167,059             |       |
| Accumulated  other comprehensive (loss) income                                                                                                                                                                                                                 |       | (330              | )          | 1,305                 |       |
| Net accumulated  deficit:                                                                                                                                                                                                                                      |       |              |       |                  |       |
| Cumulative dividends declared                                                                                                                                                                                                                                  |       | (735,996          | )          | (675,373              | )          |
| Retained earnings                                                                                                                                                                                                                                              |       | 785,053           |       | 673,131               |       |
| Net accumulated earnings (deficit)                                                                                                                                                                                                                             |       | 49,057            |       | (2,242                | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                |       | 1,218,186         |       | 1,166,947             |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                               |       | $                 | 22,747,548 |                  | $          | 27,720,379 |   |

 

See accompanying notes toconsolidated financial statements.

1

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**IMPAC MORTGAGEHOLDINGS, INC. AND SUBSIDIARIES**CONSOLIDATEDSTATEMENTS OF OPERATIONSAND COMPREHENSIVE EARNINGS(in thousands, except per share data)(unaudited)

 
| ** **                                                                                           | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                           | ** ** | **Ended June 30,**            | ** ** | **Ended June 30,**          | ** ** |
| ** **                                                                                           | ** ** | **2006**                                | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| **INTEREST INCOME:**                                                                                 |       |                                    |       |                                  |       |   |   |   |   |
| Mortgage assets                                                                                      |       | $                                       | 311,263    |                                  | $          | 308,339 |   | $ | 644,639 |   | $ | 584,360 |   |
| Other                                                                                                |       | 2,496                                   |       | 1,446                                 |       | 4,325 |   | 2,804 |   |
| Total interest income                                                                                |       | 313,759                                 |       | 309,785                               |       | 648,964 |   | 587,164 |   |
|                                                                                                 |       |                                    |       |                                  |       |   |   |   |   |
| **INTEREST EXPENSE:**                                                                                |       |                                    |       |                                  |       |   |   |   |   |
| Securitized mortgage borrowings                                                                      |       | 302,744                                 |       | 216,255                               |       | 598,219 |   | 395,722 |   |
| Reverse repurchase agreements                                                                        |       | 23,456                                  |       | 25,982                                |       | 49,329 |   | 42,744 |   |
| Other borrowings                                                                                     |       | 2,306                                   |       | 1,395                                 |       | 4,688 |   | 1,439 |   |
| Total interest expense                                                                               |       | 328,506                                 |       | 243,632                               |       | 652,236 |   | 439,905 |   |
|                                                                                                 |       |                                    |       |                                  |       |   |   |   |   |
| Net interest (expense) income                                                                        |       | (14,747                                 | )          | 66,153                                |       | (3,272 | ) | 147,259 |   |
| Provision for (recovery of) loan losses                                                              |       | (45                                     | )          | 5,711                                 |       | 105 |   | 11,785 |   |
| Net interest (expense) income after provision for  (recovery of) loan losses     |       | (14,702                                 | )          | 60,442                                |       | (3,377 | ) | 135,474 |   |
|                                                                                                 |       |                                    |       |                                  |       |   |   |   |   |
| **NON-INTEREST INCOME:**                                                                             |       |                                    |       |                                  |       |   |   |   |   |
| Realized gain (loss) from derivative instruments                                                     |       | 55,868                                  |       | (1,456                                | )          | 96,004 |   | (15,183 | ) |
| Change in fair value of derivative instruments                                                       |       | 11,504                                  |       | (97,679                               | )          | 62,933 |   | 33,639 |   |
| Gain on sale of loans                                                                                |       | 16,548                                  |       | 19,094                                |       | 30,741 |   | 31,945 |   |
| Provision for repurchases                                                                            |       | (12,773                                 | )          | (1,650                                | )          | (23,110 | ) | (5,364 | ) |
| Loss on lower of cost or market writedown                                                            |       | (18,780                                 | )          | —                                |       | (15,283 | ) | — |   |
| Other income                                                                                         |       | 9,581                                   |       | 2,307                                 |       | 18,403 |   | 7,384 |   |
| Total non-interest income (loss)                                                                     |       | 61,948                                  |       | (79,384                               | )          | 169,688 |   | 52,421 |   |
|                                                                                                 |       |                                    |       |                                  |       |   |   |   |   |
| **NON-INTEREST EXPENSE:**                                                                            |       |                                    |       |                                  |       |   |   |   |   |
| Personnel expense                                                                                    |       | 16,710                                  |       | 20,810                                |       | 35,331 |   | 39,690 |   |
| General and administrative and other expense                                                         |       | 4,524                                   |       | 6,560                                 |       | 9,600 |   | 11,473 |   |
| Amortization of deferred charge                                                                      |       | 5,915                                   |       | 6,792                                 |       | 11,011 |   | 12,595 |   |
| Professional services                                                                                |       | 2,192                                   |       | 2,021                                 |       | 4,509 |   | 5,440 |   |
| Equipment expense                                                                                    |       | 1,809                                   |       | 1,236                                 |       | 3,319 |   | 2,383 |   |
| Occupancy expense                                                                                    |       | 1,244                                   |       | 1,171                                 |       | 2,612 |   | 2,315 |   |
| Data processing expense                                                                              |       | 744                                     |       | 836                                   |       | 2,110 |   | 1,779 |   |
| Amortization and impairment of mortgage servicing  rights                                            |       | 381                                     |       | 736                                   |       | 732 |   | 1,026 |   |
| (Gain) loss on sale of other real estate owned                                                       |       | (621                                    | )          | 20                                    |       | (976 | ) | (829 | ) |
| Total non-interest expense                                                                           |       | 32,898                                  |       | 40,182                                |       | 68,248 |   | 75,872 |   |
| Net earnings (loss) before income taxes                                                              |       | 14,348                                  |       | (59,124                               | )          | 98,063 |   | 112,023 |   |
| Income tax benefit                                                                                   |       | (12,008                                 | )          | (4,124                                | )          | (13,859 | ) | (6,587 | ) |
| Net earnings (loss)                                                                                  |       | 26,356                                  |       | (55,000                               | )          | 111,922 |   | 118,610 |   |
| Cash dividends on cumulative redeemable preferred  stock                                             |       | (3,672                                  | )          | (3,624                                | )          | (7,344 | ) | (7,248 | ) |
| Net earnings  (loss) available to common stockholders                                                |       | $                                       | 22,684     |                                  | $          | (58,624 | ) | $ | 104,578 |   | $ | 111,362 |   |

 

See accompanying notes toconsolidated financial statements.

2

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**IMPAC MORTGAGEHOLDINGS, INC. AND SUBSIDIARIES**CONSOLIDATEDSTATEMENTS OF OPERATIONSAND COMPREHENSIVE EARNINGS - (continued)(in thousands, except per share data)(unaudited)
| ** **                                                   | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **Ended June 30,**            | ** ** | **Ended June 30,**          | ** ** |
| ** **                                                   | ** ** | **2006**                                | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net earnings (loss)                                          |       | $                                       | 26,356     |                                  | $          | (55,000 | ) | $ | 111,922 |   | $ | 118,610 |   |
| Net unrealized  (losses) gains on securities :               |       |                                    |       |                                  |       |   |   |   |   |
| Unrealized holding (losses) gains arising during  year       |       | (991                                    | )          | 177                                   |       | (1,778 | ) | 441 |   |
| Reclassification of (losses) gains included in net  earnings |       | (55                                     | )          | —                                |       | 143 |   | — |   |
| Net unrealized (losses) gains                                |       | (1,046                                  | )          | 177                                   |       | (1,635 | ) | 441 |   |
| Comprehensive  earnings (loss)                               |       | $                                       | 25,310     |                                  | $          | (54,823 | ) | $ | 110,287 |   | $ | 119,051 |   |
|                                                         |       |                                    |       |                                  |       |   |   |   |   |
| Net earnings (loss) per  share:                              |       |                                    |       |                                  |       |   |   |   |   |
| Basic                                                        |       | $                                       | 0.30       |                                  | $          | (0.78 | ) | $ | 1.37 |   | $ | 1.48 |   |
| Diluted                                                      |       | $                                       | 0.30       |                                  | $          | (0.78 | ) | $ | 1.37 |   | $ | 1.46 |   |
| Dividends declared per  common share                         |       | $                                       | 0.25       |                                  | $          | 0.75 |   | $ | 0.50 |   | $ | 1.50 |   |

 

See accompanying notes to consolidated financialstatements.

3

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**IMPAC MORTGAGEHOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)**
| ** **                                                                                      | ** ** | **For the Six Months** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                      | ** ** | **Ended June 30,**          | ** ** |
| ** **                                                                                      | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                      |       |                                  |       |   |   |
| Net earnings                                                                                    |       | $                                     | 111,922    |   | $ | 118,610 |   |
| Adjustments to  reconcile net earnings to net cash provided by (used in) operating  activities: |       |                                  |       |   |   |
| Provision for loan losses                                                                       |       | 105                                   |       | 11,785 |   |
| Amortization of deferred charge, net                                                            |       | 11,011                                |       | 12,595 |   |
| Amortization of premiums, securitization costs and  debt issuance costs                         |       | 126,952                               |       | 138,600 |   |
| Gain on sale of other real estate owned                                                         |       | (976                                  | )          | (829 | ) |
| Loss (gain) on sale of loans                                                                    |       | (30,741                               | )          | (31,945 | ) |
| Provision for repurchases                                                                       |       | 23,110                                |       | 5,364 |   |
| Lower of cost or market writedown                                                               |       | 15,283                                |       | — |   |
| Change in fair value of derivative instruments                                                  |       | (62,933                               | )          | (33,639 | ) |
| Purchase of mortgages held-for-sale                                                             |       | (4,434,373                            | )          | (10,135,266 | ) |
| Sale and principal reductions on mortgages  held-for-sale                                       |       | 5,274,041                             |       | 9,464,660 |   |
| Net change in deferred taxes                                                                    |       | 83                                    |       | (1,990 | ) |
| Share based compensation                                                                        |       | 1,332                                 |       | — |   |
| Depreciation and amortization                                                                   |       | 3,018                                 |       | 2,205 |   |
| Amortization and impairment of mortgage servicing  rights                                       |       | 732                                   |       | 1,026 |   |
| Net change in accrued interest receivable                                                       |       | 20,571                                |       | (11,518 | ) |
| Net change in restricted cash                                                                   |       | 37                                    |       | 252,957 |   |
| Net change in other assets and liabilities                                                      |       | 35,120                                |       | (15,848 | ) |
| Net cash provided by (used in) operating activities                                             |       | 1,094,294                             |       | (223,233 | ) |
|                                                                                            |       |                                  | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                      |       |                                  | ** ** | ** ** | ** ** |
| Net change in securitized mortgage collateral                                                   |       | 3,801,928                             |       | (2,814,965 | ) |
| Net change in finance receivables                                                               |       | 57,931                                |       | 88,920 |   |
| Purchase of premises and equipment                                                              |       | (3,932                                | )          | (3,892 | ) |
| Net change in mortgages held-for-investment                                                     |       | 149,507                               |       | 344,288 |   |
| Purchase of investment securities available-for-sale                                            |       | 36,781                                |       | (28,269 | ) |
| Net change in mortgage servicing rights                                                         |       | (495                                  | )          | (711 | ) |
| Purchase of investments for deferred compensation  plan                                         |       | —                                |       | (2,485 | ) |
| Net principal reductions on investment securities  available-for-sale                           |       | (30,422                               | )          | 1,173 |   |
| Proceeds from the sale of other real estate owned                                               |       | 39,402                                |       | 25,107 |   |
| Net cash provided by (used in) investing activities                                             |       | 4,050,700                             |       | (2,390,834 | ) |
|                                                                                            |       |                                  |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                      |       |                                  |       |   |   |
| Net change in reverse repurchase agreements                                                     |       | (1,151,590                            | )          | 204,708 |   |
| Proceeds from securitized mortgage borrowings                                                   |       | 905,779                               |       | 7,109,346 |   |
| Repayment of securitized mortgage borrowings                                                    |       | (4,823,835                            | )          | (4,796,916 | ) |
| Issuance of trust preferred                                                                     |       | —                                |       | 76,202 |   |
| Common stock dividends paid                                                                     |       | (34,253                               | )          | (56,748 | ) |
| Preferred stock dividends paid                                                                  |       | (7,344                                | )          | (7,248 | ) |
| Proceeds from sale of cumulative redeemable  preferred stock                                    |       | 272                                   |       | — |   |
| Proceeds from exercise of stock options                                                         |       | —                                |       | 5,626 |   |
| Net cash (used in) provided by financing activities                                             |       | (5,110,971                            | )          | 2,534,970 |   |
|                                                                                            |       |                                  |       |   |   |
| Net change in cash and cash equivalents                                                         |       | 34,023                                |       | (79,097 | ) |
| Cash and cash equivalents at beginning of period                                                |       | 146,621                               |       | 324,351 |   |
| Cash and cash  equivalents at end of period                                                     |       | $                                     | 180,644    |   | $ | 245,254 |   |

 

4

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**IMPAC MORTGAGEHOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)**
| ** **                                        | ** ** | **For the Six Months** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **Ended June 30,**          | ** ** |
| ** **                                        | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| **SUPPLEMENTARY  INFORMATION:**                   |       |                                  |       |   |   |
| Interest paid                                     |       | $                                     | 517,438    |   | $ | 378,362 |   |
| Taxes paid                                        |       | 45                                    |       | 17,759 |   |
|                                              |       |                                  |       |   |   |
| **NON-CASH  TRANSACTIONS:**                       |       |                                  |       |   |   |
| Accumulated  other comprehensive (loss) gain      |       | $                                     | (1,635     | ) | $ | 441 |   |
| Transfer of  mortgages to other real estate owned |       | 72,143                                |       | 35,478 |   |
| Dividend  declared but unpaid                     |       | 19,028                                |       | 56,747 |   |

 

See accompanying notes to consolidated financialstatements.

5

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**Note A—Summary ofBusiness and Significant Accounting Policies**

**1. BusinessSummary and Financial Statement Presentation**

***Business Summary***

Unless the context otherwise requires, the terms “Company,”“we,” “us,” and “our” refer to Impac Mortgage Holdings, Inc. (IMH), a Marylandcorporation incorporated in August 1995, and its subsidiaries, IMH Assets Corp.(IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), and Impac FundingCorporation (IFC), together with its wholly-owned subsidiaries Impac Secured AssetsCorp. (ISAC) and Impac Commercial Capital Corporation (ICCC).

We are a mortgage real estate investment trust, or “REIT,”that is a nationwide acquirer, originator, seller and investor ofnon-conforming Alt-A residential mortgages or “Alt-A mortgages” and to a lesserextent, small-balance commercial mortgages or “commercial mortgages” andsub-prime residential mortgages. We also provide warehouse financing tooriginators of mortgages.

We operate four core businesses:

·     thelong-term investment operations that is conducted by IMH and IMH Assets;

·     themortgage operations that is conducted by IFC and ISAC;

·     thewarehouse lending operations that is conducted by IWLG; and

·     thecommercial operations that is conducted by ICCC.

The long-term investment operations generate earningsprimarily from net interest income earned on mortgages held as securitizedmortgage collateral and mortgages held-for-investment (long-term mortgageportfolio). The long-term mortgage portfolio as reported on our consolidatedbalance sheets consists of mortgages held as securitized mortgage collateraland mortgages held-for-investment. Investments in Alt-A mortgages andcommercial mortgages are initially financed with short-term borrowings underreverse repurchase agreements, which are subsequently converted to long-termfinancing in the form of securitized mortgage borrowings. Cash flows from thelong-term mortgage portfolio and proceeds from the sale of capital stock alsofinance the acquisition of new Alt-A and commercial mortgages.

The mortgage operations acquire, originate, sell andsecuritize primarily Alt-A adjustable rate mortgages (ARMs) and fixed ratemortgages (FRMs) and, to a lesser extent, sub-prime residential mortgages fromcorrespondents, mortgage brokers and retail customers. Correspondents originateand close mortgages under their mortgage programs and then sell the closedloans to the mortgage operations on a flow (loan-by-loan) basis or through bulksale commitments. Correspondents include savings and loan associations,commercial banks and mortgage bankers. The mortgage operations generate incomeby securitizing and selling mortgages to permanent investors, including thelong-term investment operations. This business also earns revenue from feesassociated with mortgage servicing rights, master servicing agreements andinterest income earned on mortgages held-for-sale. The mortgage operations usefacilities provided by the warehouse lending operations to finance theacquisition and origination of mortgages.

The warehouse lending operations provide repurchasefinancing to mortgage loan originators, including the mortgage and commercialoperations, by funding mortgages from their closing date until sale topre-approved investors. This business earns fees from each transaction as wellas net interest income from the difference between its cost of borrowings andthe interest earned on repurchase advances.

The commercial operations originate commercialmortgages, that are primarily adjustable rate mortgages with initial fixedinterest rate periods of two-, three-, five-, seven- and ten-yearsthat subsequently adjust to adjustable rate mortgages, or “hybrid ARMs,” withbalances that generally range from $500,000 to $5.0 million. Commercialmortgages have interest rate floors, which is the initial start rate, in somecircumstances have lock out periods, and prepayment penalty periods of three-,five-, seven- and ten-years. These mortgages provide greater assetdiversification on our balance sheet as commercial

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mortgage borrowerstypically have higher credit scores and typically have lower loan-to-valueratios, or “LTV ratios,” and the mortgages have longer average lives thanresidential mortgages.

The Company securitizes mortgages in the form ofcollateralized mortgage obligations (CMOs) and real estate mortgage investmentconduits (REMICs). The typical CMO securitization is designed so that thetransferee (securitization trust) is not a qualifying special purpose entity(QSPE) and thus as the sole residual interest holder, the Company consolidatessuch variable interest entity. Amounts consolidated are classified assecuritized mortgage collateral and securitized mortgage borrowings in theconsolidated balance sheets. Generally, the typical REMIC securitizationqualifies for sale accounting treatment and the securitization trust is a QSPEand thus not consolidated by the Company. In the event that a REMICsecuritization trust does not meet sale accounting and QSPE criteria, thesecuritization is treated as a secured borrowing and consolidation is assessedpursuant to FIN 46R.

In 2005 and 2006, we completed ISAC REMIC 2005-2 andISAC REMIC 2006-1 securitizations which were treated as a sale for tax purposesbut treated as secured borrowings for generally accepted accounting principles(GAAP) purposes and consolidated in the financial statements. The associatedcollateral and borrowings have been combined with CMO’s and included insecuritized mortgage collateral and borrowings, respectively, for reportingpurposes. Hence, reference to “securitized mortgage collateral” or “securitizedmortgage borrowings” includes the REMIC 2005-2 and 2006-1 securitizedcollateral and borrowings, respectively.

In the second quarter of 2006, we completed ISAC REMIC2006-2 securitization in the amount of $834.0 million which was treated asa sale for both tax and GAAP purposes. Residual interest of approximately $29.8 million,calculated as present value of estimated future cash flows retained as a resultof the ISAC REMIC 2006-2 securitization, was recorded in other assets on thebalance sheet. As of June 30, 2006, the tax basis value of our residualinterests from securitization transactions was $116.4 million. Investmentsin residual interest and subordinated securities represent higher risk thaninvestments in senior mortgage-backed securities because these subordinatedsecurities bear all credit losses prior to the related senior securities. Therisk associated with holding residual interest and subordinated securities isgreater than holding the underlying mortgage loans directly due to theconcentration of losses attributed to the subordinated securities. The value ofresidual interests represents the present value of future cash flows expectedto be received by us from excess cash flows created in the securitizationtransaction. In general, future cash flows are estimated by taking the couponrate of the loans underlying the transaction less the interest rate paid to theinvestors, less contractually specified servicing and trustee fees, and after givingeffect to estimated prepayments and credit losses. We estimate future cashflows from these securities and value them utilizing assumptions based in parton projected discount rates, delinquency, mortgage loan prepayment speeds andcredit losses.

In January 2006, we combined our Alt-A wholesaleand sub-prime residential mortgage product offerings under one platform. Oursub-prime residential mortgage products previously marketed under NovelleFinancial Services, Inc., are now offered by our Alt-A wholesaleoperations, Impac Lending Group (ILG), a division of IFC.

On January 1, 2006, we elected to convert ImpacCommercial Capital Corporation “ICCC” from a qualified REIT subsidiary to ataxable REIT subsidiary. On June 30, 2006, IMH approved the transfer of ICCC tobe a wholly-owned subsidiary of IFC effective January 1, 2006.

***Financial Statement Presentation***

The accompanying unaudited consolidated financialstatements of IMH and our subsidiaries (as defined above) have been prepared inaccordance with GAAP for interim financial information and with theinstructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,they do not include all of the information and footnotes required by GAAP forcomplete financial statements. In the opinion of management, all adjustments,consisting of normal recurring adjustments considered necessary for a fairpresentation, have been included. Operating results for the three-month andsix-month period ended June 30, 2006 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2006.

All significant inter-company balances andtransactions have been eliminated in consolidation. In addition, certainamounts in the prior periods’ consolidated financial statements have beenreclassified to conform to the current year presentation.

Management has made a number of estimates andassumptions relating to the reporting of assets and liabilities, the disclosureof contingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period toprepare these financial statements in conformity with GAAP. The items effectedby

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management’s estimatesand assumptions include allowance for loan losses, valuation of derivativefinancial instruments, repurchase liabilities related to sold loans, theamortization of various loan premiums and discounts due to prepaymentestimates, and lower of cost or market “LOCOM”. Actual results could differfrom those estimates.

Premiums, discounts and securitization costsassociated with the securitized mortgage collateral and securitized mortgageborrowing are amortized or accreted into interest income/expense over theprojected lives of the securitized mortgage collateral and securitized mortgageborrowings using the interest method. Our policy for estimating prepaymentspeeds for calculating the effective yield is to evaluate historicalperformance, market prepayment speeds, and current conditions. If our estimateof prepayments is incorrect, we may be required to make an adjustment to theamortization or accretion of premiums and discounts that would have an impacton future income.

**2. Stock Options**

Effective January 1, 2006, we adopted the Statement ofFinancial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,”using the modified prospective method, which requires us to record compensationexpense for all awards granted after the date of adoption, and for the unvestedportion of previously granted awards that remain outstanding at the date ofadoption. Accordingly, prior period amounts presented herein have not beenrestated to reflect the adoption of SFAS 123R. As required, the pro formaimpact from recognition of the estimated fair value of stock options granted toemployees has been disclosed for previous periods.

As a result of adopting SFAS 123R on January 1, 2006,the Company’s net earnings before income taxes and net earnings for the sixmonths ended June 30, 2006 are $1.3 million and $931 thousand lower,respectively, than if it had continued to account for share-based compensationunder Accounting Principles Board Opinion No. 25 “Accounting for StockIssued to Employees,” (“APB 25”). Basic and diluted earnings per share forthe six months ended June 30, 2006 are $0.01 and $0.01 lower, respectively,than if the company had continued to account for share-based compensation underAPB 25.

The fair value concepts were not changed significantlyin SFAS 123R; however, in adopting SFAS 123R, companies must choose amongalternative valuation models and amortization assumptions. After assessingalternative valuation models and amortization assumptions, we will continueusing both the Black-Scholes-Merton option-pricing formula and straight-lineamortization of compensation expense over the requisite service period of thegrant. We will reconsider use of the Black-Scholes-Merton model if additionalinformation becomes available in the future that indicates another model wouldbe more appropriate for the Company, or if grants issued in future periods havecharacteristics that cannot be reasonably estimated using this model.

The following table illustrates the impact as if theCompany had elected to use the fair value approach to account for its employeestock-based compensation plan at June 30, 2005:

|                                                                                    | ** ** | **For the Three Months** | ** ** | **For the Six Months**  | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **Ended June 30, 2005**  | ** ** | **Ended June 30, 2005** | ** ** |
| Net (loss)  earnings available to common stockholders                              |       | $                                       | (58,624    | )                                      | $          | 111,362 |   |
| Less: Total stock-based employee compensation expense  using the fair value method |       | (532                                    | )          | (1,078                                 | )          |
| Pro forma net  (loss) earnings                                                     |       | $                                       | (59,156    | )                                      | $          | 110,284 |   |
|                                                                               |       |                                    |       |                                   |       |
| Net (loss)  earnings per share as reported:                                        |       |                                    |       |                                   |       |
| Basic                                                                              |       | $                                       | (0.78      | )                                      | $          | 1.48 |   |
| Diluted                                                                            |       | $                                       | (0.78      | )                                      | $          | 1.46 |   |
|                                                                               |       |                                    |       |                                   |       |
| Pro forma net  (loss) earnings per share:                                          |       |                                    |       |                                   |       |
| Basic                                                                              |       | $                                       | (0.78      | )                                      | $          | 1.46 |   |
| Diluted                                                                            |       | $                                       | (0.78      | )                                      | $          | 1.44 |   |

 

The fair value of options granted, which is amortizedto expense over the option vesting period, is estimated on the date of grantusing the Black-Scholes-Merton option pricing model with the followingweighted average assumptions:

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|                                         | ** ** | **For the Six Months** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **Ended June 30,**          | ** ** |
| ** **                              | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Risk-free  interest rate                |       | 3.90%-4.26                            | %          | 2.16%-4.50 | % |
| Expected lives  (in years)              |       | 3                                     |       | 3 - 4 |   |
| Expected  volatility (1)                |       | 34.75                                 | %          | 42.26 | % |
| Expected  dividend yield                |       | 10.00                                 | %          | 10.00 | % |
| Grant date fair value  of share options |       | $                                     | 1.79       |   | $ | 3.71 |   |
|                                         |            |                                       |            |  |  |  |  |

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(1)             Expected volatilitiesare based on the historical volatility of the Company’s stock over the expectedoption life.

The following table summarizes activity, pricing andother information for the Company’s stock options for the six-month periodended June 30, 2006:

|                                           | ** ** | ** **         | ** ** | **Weighted-**    | ** ** | **Weighted-**           | ** ** | **Aggregate**           | ** ** |
|-------------------------------------------|------------|--------------------|------------|------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | ** **         | ** ** | **Average**      | ** ** | **Average**             | ** ** | **Intrinsic**           | ** ** |
| ** **                                | ** ** | **Number of** | ** ** | **Exercise**     | ** ** | **Remaining Life** | ** ** | **Value (1)**      | ** ** |
| ** **                                | ** ** | **Shares**         | ** ** | **Price $** | ** ** | **(Years)**             | ** ** | **(in thousands)** | ** ** |
| Options  outstanding at beginning of year |       | 5,266,544          |       | $                | 14.55      |                    |       |                    |       |   |
| Options granted                           |       | —             |       | —           |       |                    |       |                    |       |
| Options  exercised                        |       | —             |       | —           |       |                    |       |                    |       |
| Options  forfeited / cancelled            |       | (426,668           | )          | 16.22            |       |                    |       |                    |       |
| Options  outstanding at end of period     |       | 4,839,876          |       | $                | 14.41      |                    | 2.49       |                    | $          | 5,285.8 |   |
| Options exercisable at  end of period     |       | 2,248,851          |       | $                | 11.90      |                    | 2.52       |                    | $          | 5,285.8 |   |

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(1)             Theintrinsic value of a stock option is the amount by which the fair value of theunderlying stock exceeds the exercise price of the option.

The aggregate intrinsic value in the preceding tablerepresents the total pretax intrinsic value, based on the Company’s closingstock price of $11.18 as of June 30, 2006, which would have been receivedby the option holders had all option holders exercised their options as of thatdate.

A summary of the option activity of the Company’snonvested shares and changes during the six month period ended June 30,2006, is presented below:

|                                               | ** ** | ** ** | ** ** | **Weighted-**       | ** ** |
|-----------------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                                    | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                                    | ** ** | ** ** | ** ** | **Grant-Date**      | ** ** |
| ** **                                    | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Nonvested  outstanding at beginning of period |       | 2,872,694  |       | $                   | 2.25       |   |
| Granted                                       |       | —     |       | —              |       |
| Vested                                        |       | —     |       | —              |       |
| Forfeited                                     |       | (281,669   | )          | 2.24                |       |
| Nonvested outstanding  at end of period       |       | 2,591,025  |       | $                   | 2.25       |   |

 

As of June 30, 2006, there was approximately $3.2 million of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements granted under the plan. That cost isexpected to be recognized over a weighted average period of 1.8 years.

Additional information regarding stock optionsoutstanding as of June 30, 2006, is as follows:

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| ** **         | ** ** | **Stock Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------|------------|-----------------------------------------|------------|------------------------------|------------|
| ** **         | ** ** | ** **                              | ** ** | **Weighted-**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **         | ** ** | ** **                              | ** ** | **Average**                  | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| **Exercise**       | ** ** | ** **                              | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Price**          | ** ** | **Number**                              | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Range ($)** | ** ** | **Outstanding**                         | ** ** | **Life in Years**  | ** ** | **Price ($)** | ** ** | **Exercisable** | ** ** | **Price ($)** | ** ** |
| 3.85               |       | 22,500                                  |       | 4.59                         |       | 3.85 |   | 22,500 |   | 3.85 |   |
| 4.18               |       | 652,500                                 |       | 4.74                         |       | 4.18 |   | 652,500 |   | 4.18 |   |
| 4.44 - 9.40        |       | 110,000                                 |       | 5.11                         |       | 7.16 |   | 110,000 |   | 7.16 |   |
| 9.42               |       | 11,250                                  |       | 5.74                         |       | 9.42 |   | 11,250 |   | 9.42 |   |
| 10.95              |       | 398,621                                 |       | 0.08                         |       | 10.95 |   | 398,621 |   | 10.95 |   |
| 13.76              |       | 1,388,500                               |       | 3.12                         |       | 13.76 |   | — |   | — |   |
| 14.27              |       | 1,058,505                               |       | 1.08                         |       | 14.27 |   | 627,325 |   | 14.27 |   |
| 21.77              |       | 40,000                                  |       | 7.98                         |       | 21.77 |   | 40,000 |   | 21.77 |   |
| 22.83              |       | 653,000                                 |       | 2.08                         |       | 22.83 |   | 218,327 |   | 22.83 |   |
| 23.10              |       | 505,000                                 |       | 2.09                         |       | 23.10 |   | 168,328 |   | 23.10 |   |
| 3.85 - 23.10       |       | 4,839,876                               |       | 2.49                         |       | 14.41 |   | 2,248,851 |   | 11.90 |   |

 

**3. RecentAccounting Pronouncements**

In February 2006, the FASB issued SFAS No. 155, *“Accounting for Certain Hybrid Financial Instruments”, an amendment ofFASB Statements No. 133 and SFAS No. 140* (“SFAS 155”).This statement permits fair value re-measurement for any hybrid financialinstrument that contains an embedded derivative that otherwise would requirebifurcation. It also clarifies which interest-only strips and principal-only stripsare not subject to FASB Statement No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS 133”). The statement alsoestablishes a requirement to evaluate interests in securitized financial assetsto identify interests that are freestanding derivatives or hybrid financialinstruments that contain an embedded derivative requiring bifurcation. Thestatement also clarifies that concentration of credit risks in the form ofsubordination are not embedded derivatives, and it also amends SFAS 140 toeliminate the prohibition on a QSPE from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument. SFAS 155 is effective for all financial instrumentsacquired or issued after the beginning of an entity’s first fiscal year thatbegins after September 15, 2006. The adoption of this statement by theCompany will not have a significant effect on the financial results ofoperations.

In March 2006, the FASB issued SFAS No. 156, *“Accounting for Servicing of Financial Assets”- an amendment of FASBStatement No. 140* (“SFAS 156”). This statement requires anentity to recognize a servicing asset or servicing liability each time itundertakes an obligation to service a financial asset by entering into aservicing contract in any of the following situations; whenever a transfer ofthe servicer’s financial assets that meets the requirements for saleaccounting, a transfer of the servicer’s financial assets to a qualifyingspecial-purpose entity in a guaranteed mortgage securitization in which thetransferor retains all of the resulting securities and classifies them aseither available-for-sale securities or trading securities in accordance withFASB Statement No. 115, Accounting for Certain Investments in Debt andEquity Securities, an acquisition or assumption of an obligation to service afinancial asset that does not relate to financial assets of the servicer or itsconsolidated affiliates. This statement requires all separately recognizedservicing assets and servicing liabilities to be initially measured at fairvalue, if practicable. This statement permits an entity to choose either theamortization method or the fair value measurement method for each class ofseparately recognized servicing assets and servicing liabilities. Thisstatement at its initial adoption, permits a one-time reclassification ofavailable-for-sale securities to trading securities by entities with recognizedservicing rights, without calling into question the treatment of otheravailable-for-sale securities under Statement 115, provided that theavailable-for-sale securities are identified in some manner as offsetting theentity’s exposure to changes in fair value of servicing assets or servicingliabilities that a servicer elects to subsequently measure at fair value. Thisstatement also requires separate presentation of servicing assets and servicingliabilities subsequently measured at fair value in the statement of financialposition and additional disclosures for all separately recognized servicingassets and servicing liabilities. An entity should adopt this statement as ofthe beginning of its first fiscal year that begins after September 15, 2006.The adoption of this statement by the Company is not expected to have asignificant effect on the financial results of operations.

In June 2006, the FASB issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes, (“FIN 48”)*which expands on the accounting guidance of FASB Statement No. 109,*Accounting for Income Taxes*. Thisinterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a

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 tax position taken or expected to be taken ina tax return. This interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. FIN 48 is effective for fiscal years beginningafter December 15, 2006. The adoption of this interpretation by theCompany is not expected to have a significant effect on the financial resultsof operations.

**4. LegalProceedings**

The Company’s Form 10-K for the year ended December31, 2005 reported securities class actions filed against the Company and itssenior officers and directors. On May 1, 2006, the U.S. District Court, CentralDistrict of California approved the consolidation of the federal securitiesclass actions and appointed lead plaintiff and lead counsel. A consolidatedcomplaint was filed in this action on July 24, 2006. The Company and itsofficers and directors intend to move to dismiss the consolidated complaint.

The Company’s Form 10-K for the year ended December 31,2005 and Form 10-Q for the period ended March 31, 2006 reportedshareholder derivative actions filed against the Company and its seniorofficers and directors in the U.S. District Court, Central District ofCalifornia and Orange County Superior Court. On April 20, 2006, the OrangeCounty Superior Court approved the consolidation of the state shareholderderivative actions and appointed lead plaintiff and lead counsel. Aconsolidated amended complaint was filed in this action on May 12, 2006.The Company and its officers and directors have moved to stay the stateshareholder derivative action pending resolution of the federal securitiesclass actions and federal shareholder derivative actions. On June 7, 2006,the U.S. District Court, Central District of California approved theconsolidation of the federal shareholder derivative actions and appointed leadplaintiff and lead counsel.

We believe that we have meritorious defenses to theabove claims and intend to defend these claims vigorously. Nevertheless,litigation is uncertain and we may not prevail in the lawsuits and can expressno opinion as to their ultimate resolution. An adverse judgment in any of thesematters could have a material adverse effect on us.

**NoteB—Reconciliation of Earnings Per Share**

The following table presents the computation of basicand diluted net earnings per share including the dilutive effect of stockoptions and cumulative redeemable preferred stock outstanding for the periodsindicated:
| ** **                                                                      | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                      | ** ** | **Ended June 30,**            | ** ** | **Ended June 30,**          | ** ** |
| ** **                                                                      | ** ** | **2006**                                | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Numerator  for basic earnings per share:**                                    |       |                                    |       |                                  |       |   |   |   |   |
| Net earnings (loss)                                                             |       | $                                       | 26,356     |                                  | $          | (55,000 | ) | $ | 111,922 |   | $ | 118,610 |   |
| Less: Cash dividends on cumulative redeemable  preferred stock                  |       | (3,672                                  | )          | (3,624                                | )          | (7,344 | ) | (7,248 | ) |
| Net earnings (loss) available to common stockholders                            |       | $                                       | 22,684     |                                  | $          | (58,624 | ) | $ | 104,578 |   | $ | 111,362 |   |
| **Denominator  for basic earnings per share:**                                  |       |                                    |       |                                  |       |   |   |   |   |
| Basic weighted average number of common shares  outstanding during the period   |       | 76,113                                  |       | 75,387                                |       | 76,113 |   | 75,297 |   |
| **Denominator  for diluted earnings per share:**                                |       |                                    |       |                                  |       |   |   |   |   |
| Diluted weighted average number of common shares  outstanding during the period |       | 76,113                                  |       | 75,387                                |       | 76,113 |   | 75,297 |   |
| Net effect of dilutive stock options                                            |       | 307                                     |       | —                                |       | 288 |   | 938 |   |
| Diluted weighted  average common shares                                         |       | 76,420                                  |       | 75,387                                |       | 76,401 |   | 76,235 |   |
|                                                                            |       |                                    |       |                                  |       |   |   |   |   |
| Net earnings  (loss) per share:                                                 |       |                                    |       |                                  |       |   |   |   |   |
| Basic                                                                           |       | $                                       | 0.30       |                                  | $          | (0.78 | ) | $ | 1.37 |   | $ | 1.48 |   |
| Diluted                                                                         |       | $                                       | 0.30       |                                  | $          | (0.78 | ) | $ | 1.37 |   | $ | 1.46 |   |

 

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For the three and six month periods ended June 30,2006, stock options to purchase 4.1  million and 4.3  million shares,respectively, were outstanding but not included in the above weighted averagecalculations because they were anti-dilutive. For the six month period ended June 30,2005, stock options to purchase 1.4  million shares, were outstanding butnot included in the above weighted average calculations because they wereanti-dilutive.

**Note C—SegmentReporting**

The following tables present reporting segments as ofand for the six and three month periods ended June 30, 2006 and 2005:
| ** **                                                         | ** ** | **Reporting Segments as of and for the Six Months** | ** ** | ** **     | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                         | ** ** | **Ended June 30, 2006**                                                      | ** ** | ** **     | ** ** |
| ** **                                                         | ** ** | **Long-Term**                                                                               | ** ** | **Warehouse**  | ** ** | **Mortgage** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Investment**                                                                              | ** ** | **Lending**    | ** ** | **Operations** | ** ** | **Commercial** | ** ** | **Inter-** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Operations**                                                                              | ** ** | **Operations** | ** ** | **(IFC)** | ** ** | **Operations** | ** ** | **Company (1)** | ** ** | **Consolidated** | ** ** |
| **Balance Sheet Items:**                                           |       |                                                                                        |       |           |       |   |   |   |   |   |   |   |   |
| Securitized  mortgage collateral and mortgages held-for-investment |       | $                                                                                           | 20,623,573 |           | $          | — |   | $ | — |   | $ | — |   | $ | (106,358 | ) | $ | 20,517,215 |   |
| Mortgages  held-for-sale                                           |       | —                                                                                      |       | —         |       | 1,076,090 |   | 127,133 |   | — |   | 1,203,223 |   |
| Finance  receivables                                               |       | —                                                                                      |       | 1,388,282      |       | — |   | — |   | (1,095,996 | ) | 292,286 |   |
| Total assets                                                       |       | 20,974,306                                                                                  |       | 1,484,173      |       | 1,123,951 |   | 126,699 |   | (961,581 | ) | 22,747,548 |   |
| Total  stockholders’ equity                                   |       | 1,034,678                                                                                   |       | 231,058        |       | 83,658 |   | 240 |   | (131,448 | ) | 1,218,186 |   |
|                                                               |       |                                                                                        |       |           |       |   |   |   |   |   |   |   |   |
| **Income Statement Items:**                                        |       |                                                                                        |       |           |       |   |   |   |   |   |   |   |   |
| Net interest  (loss) income                                        |       | $                                                                                           | (47,314    | )              | $          | 14,570 |   | $ | (1,386 | ) | $ | 190 |   | $ | 30,668 |   | $ | (3,272 | ) |
| Provision for  loan losses                                         |       | 105                                                                                         |       | —         |       | — |   | — |   | — |   | 105 |   |
| Realized gain  from derivatives                                    |       | 95,986                                                                                      |       | —         |       | 4 |   | 14 |   | — |   | 96,004 |   |
| Change in fair  value of derivatives                               |       | 54,866                                                                                      |       | —         |       | 4,254 |   | (217 | ) | 4,030 |   | 62,933 |   |
| Other  non-interest (loss) income                                  |       | (782                                                                                        | )          | 1,548          |       | 17,878 |   | 3,101 |   | (10,994 | ) | 10,751 |   |
| Non-interest  expense and income taxes                             |       | 7,718                                                                                       |       | 3,501          |       | 34,581 |   | 5,105 |   | 3,484 |   | 54,389 |   |
| Net earnings (loss)                                                |       | $                                                                                           | 94,933     |           | $          | 12,617 |   | $ | (13,831 | ) | $ | (2,017 | ) | $ | 20,220 |   | $ | 111,922 |   |

 
| ** **                             | ** ** | **Reporting Segments as of and for the Three Months** | ** ** | ** **     | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                             | ** ** | **Ended June 30, 2006**                                                        | ** ** | ** **     | ** ** |
| ** **                             | ** ** | **Long-Term**                                                                                 | ** ** | **Warehouse**  | ** ** | **Mortgage** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Investment**                                                                                | ** ** | **Lending**    | ** ** | **Operations** | ** ** | **Commercial** | ** ** | **Inter-** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Operations**                                                                                | ** ** | **Operations** | ** ** | **(IFC)** | ** ** | **Operations** | ** ** | **Company (1)** | ** ** | **Consolidated** | ** ** |
| **Income Statement Items:**            |       |                                                                                          |       |           |       |   |   |   |   |   |   |   |   |
| Net interest  (loss) income            |       | $                                                                                             | (35,226    | )              | $          | 6,879 |   | $ | (2,664 | ) | $ | 56 |   | $ | 16,208 |   | $ | (14,747 | ) |
| Recovery of loan  losses               |       | (45                                                                                           | )          | —         |       | — |   | — |   | — |   | (45 | ) |
| Realized gain  from derivatives        |       | 55,851                                                                                        |       | —         |       | 4 |   | 13 |   | — |   | 55,868 |   |
| Change in fair  value of derivatives   |       | 7,903                                                                                         |       | —         |       | 629 |   | (1,058 | ) | 4,030 |   | 11,504 |   |
| Other  non-interest (loss) income      |       | (518                                                                                          | )          | 751            |       | (3,286 | ) | 2,064 |   | (4,435 | ) | (5,424 | ) |
| Non-interest  expense and income taxes |       | 3,680                                                                                         |       | 1,627          |       | 10,766 |   | 2,696 |   | 2,121 |   | 20,890 |   |
| Net earnings (loss)                    |       | $                                                                                             | 24,375     |           | $          | 6,003 |   | $ | (16,083 | ) | $ | (1,621 | ) | $ | 13,682 |   | $ | 26,356 |   |

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(1)             Incomestatement items include inter-company loan sale transactions and theelimination of related gains. Corporate overhead expenses are generallyallocated to the segments based on percentage of time devoted to the segment.

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| ** **                                                         | ** ** | **Reporting Segments as of and for the Six Months** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Ended June 30, 2005**                                                      | ** ** |
| ** **                                                         | ** ** | **Long-Term**                                                                               | ** ** | **Warehouse** | ** ** | **Mortgage** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Investment**                                                                              | ** ** | **Lending** | ** ** | **Operations** | ** ** | **Inter-** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Operations**                                                                              | ** ** | **Operations** | ** ** | **(IFC)** | ** ** | **Company (1)** | ** ** | **Consolidated** | ** ** |
| **Balance Sheet Items:**                                           |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Securitized  mortgage collateral and mortgages held-for-investment |       | $                                                                                           | 24,338,258 |   | $ | — |   | $ | — |   | $ | (126,189 | ) | $ | 24,212,069 |   |
| Mortgages  held-for-sale                                           |       | —                                                                                      |       | 401 |   | 1,280,724 |   | - |   | 1,281,125 |   |
| Finance  receivables                                               |       | —                                                                                      |       | 1,809,901 |   | — |   | (1,427,001 | ) | 382,900 |   |
| Total assets                                                       |       | 24,670,806                                                                                  |       | 1,920,374 |   | 1,346,352 |   | (1,438,722 | ) | 26,498,810 |   |
| Total  stockholders’ equity                                   |       | 901,594                                                                                     |       | 187,551 |   | 24,955 |   | (66,091 | ) | 1,048,009 |   |
|                                                               |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| **Income Statement Items:**                                        |       |                                                                                        |       |   |   |   |   |   |   |   |   |
| Net interest  income                                               |       | $                                                                                           | 81,027     |   | $ | 24,980 |   | $ | 6,659 |   | $ | 34,593 |   | $ | 147,259 |   |
| Provision for  loan losses                                         |       | 11,785                                                                                      |       | — |   | — |   | — |   | 11,785 |   |
| Realized loss  from derivatives                                    |       | (15,183                                                                                     | )          | — |   | — |   | — |   | (15,183 | ) |
| Change in fair  value of derivatives                               |       | 38,007                                                                                      |       | — |   | (4,368 | ) | — |   | 33,639 |   |
| Other  non-interest income                                         |       | 981                                                                                         |       | 4,257 |   | 74,400 |   | (45,673 | ) | 33,965 |   |
| Non-interest  expense and income taxes                             |       | 7,000                                                                                       |       | 3,855 |   | 61,268 |   | (2,838 | ) | 69,285 |   |
| Net earnings (loss)                                                |       | $                                                                                           | 86,047     |   | $ | 25,382 |   | $ | 15,423 |   | $ | (8,242 | ) | $ | 118,610 |   |

 
| ** **                             | ** ** | **Reporting Segments as of and for the Three Months** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Ended June 30, 2005**                                                        | ** ** |
| ** **                             | ** ** | **Long-Term**                                                                                 | ** ** | **Warehouse** | ** ** | **Mortgage** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Investment**                                                                                | ** ** | **Lending** | ** ** | **Operations** | ** ** | **Inter-** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Operations**                                                                                | ** ** | **Operations** | ** ** | **(IFC)** | ** ** | **Company (1)** | ** ** | **Consolidated** | ** ** |
| **Income Statement Items:**            |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Net interest  income                   |       | $                                                                                             | 28,908     |   | $ | 13,638 |   | $ | 4,685 |   | $ | 18,922 |   | $ | 66,153 |   |
| Provision for  loan losses             |       | 5,711                                                                                         |       | — |   | — |   | — |   | 5,711 |   |
| Realized loss  from derivatives        |       | (1,456                                                                                        | )          | — |   | — |   | — |   | (1,456 | ) |
| Change in fair  value of derivatives   |       | (90,872                                                                                       | )          | — |   | (6,807 | ) | — |   | (97,679 | ) |
| Other  non-interest income (loss)      |       | 1,140                                                                                         |       | 2,230 |   | 30,880 |   | (14,499 | ) | 19,751 |   |
| Non-interest expense  and income taxes |       | 4,307                                                                                         |       | 1,770 |   | 29,501 |   | 480 |   | 36,058 |   |
| Net (loss) earnings                    |       | $                                                                                             | (72,298    | ) | $ | 14,098 |   | $ | (743 | ) | $ | 3,943 |   | $ | (55,000 | ) |

----

(1)             Incomestatement items include inter-company loan sale transactions and theelimination of related gains. Corporate overhead expenses are generallyallocated to the segments based on percentage of time devoted to the segment.

**Note D—MortgagesHeld-for-Sale**

Mortgages held-for-sale for the periods indicatedconsisted of the following:

|                                                             | ** ** | **At June 30,** | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                                                  | ** ** | **2006**                  | ** ** | **2005**                      | ** ** |
| Mortgages  held-for-sale - residential                      |       | $                         | 1,078,763  |                          | $          | 2,027,194 |   |
| Mortgages  held-for-sale - commercial                       |       | 126,600                   |       | —                        |       |
| Change in fair  value of mortgages held-for-sale            |       | (19,749                   | )          | (4,465                        | )          |
| Net premiums on  mortgages held-for-sale — residential |       | 17,075                    |       | 29,965                        |       |
| Net premiums on  mortgages held-for-sale — commercial  |       | 534                       |       | —                        |       |
| Total mortgages  held-for-sale                              |       | $                         | 1,203,223  |                          | $          | 2,052,694 |   |

 

Gains and losses on repurchases are recorded againstthe gain on sale of loans in the financial statements. Included in otherliabilities as of June 30, 2006 and December 31, 2005, was a liability formortgage repurchases of $31.1 million and

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$10.4 million,respectively. The liability for mortgage repurchases is maintained for thepurpose of providing for estimated losses from repurchasing previously soldmortgages for various reasons, including early payment defaults or breach ofrepresentations or warranties, which mortgages may be subsequently sold at aloss. In determining the adequacy of the liability for mortgage repurchases,management considers such factors as specific requests for repurchase, knownproblem loans, underlying collateral values, recent sales activity of similarloans and other appropriate information.

During the three and six months ended June 30, 2006,the provision for loan repurchases was $12.8 million and $23.1 million,respectively. During the three and six months ended June 30, 2005, theprovision for loan repurchases was $1.7 million and $5.4 million,respectively. For the three month period ended June 30, 2006, there were nosales of repurchased and re-priced mortgages. The loss on sale of repurchasedand re-priced mortgages are recorded against gain on sale of loans in thefinancial statements.

**Note E—SecuritizedMortgage Collateral**

Securitized mortgage collateral consisted of thefollowing:

|                                                             | ** ** | **At June 30,** | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                                                  | ** ** | **2006**                  | ** ** | **2005**                      | ** ** |
| Mortgages  secured by single-family residential real estate |       | $                         | 18,879,688 |                          | $          | 22,986,632 |   |
| Mortgages secured  by commercial real estate                |       | 1,380,851                 |       | 1,195,541                     |       |
| Net unamortized  premiums on mortgages — residential   |       | 235,273                   |       | 301,709                       |       |
| Net unamortized  premiums on mortgages — commercial    |       | 13,013                    |       | 10,408                        |       |
| Total  securitized mortgage collateral                      |       | $                         | 20,508,825 |                          | $          | 24,494,290 |   |

 

**Note F—Allowancefor Loan Losses**

The allowance for loan loss is comprised of thefollowing:

|                                                                    | ** ** | **At June 30,** | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                                                         | ** ** | **2006**                  | ** ** | **2005**                      | ** ** |
| Securitized  mortgage collateral and mortgages held-for-investment |       | $                         | 49,250     |                          | $          | 55,007 |   |
| Specific reserve  for finance receivables                          |       | 10,683                    |       | 10,683                        |       |
| Specific reserve  for estimated hurricane losses                   |       | 8,139                     |       | 12,824                        |       |
| Total allowance  for loan losses                                   |       | $                         | 68,072     |                          | $          | 78,514 |   |

 

Activity for allowance for loan losses for the periodsindicated was as follows:

|                                          | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **Ended June 30,**            | ** ** | **Ended June 30,**          | ** ** |
| ** **                               | ** ** | **2006**                                | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Beginning  balance                       |       | $                                       | 74,258     |                                  | $          | 66,789 |   | $ | 78,514 |   | $ | 63,955 |   |
| (Recovery of)  provision for loan losses |       | (45                                     | )          | 5,711                                 |       | 105 |   | 11,785 |   |
| Charge-offs, net  of recoveries          |       | (6,141                                  | )          | (2,674                                | )          | (10,547 | ) | (5,914 | ) |
| Total allowance  for loan losses         |       | $                                       | 68,072     |                                  | $          | 69,826 |   | $ | 68,072 |   | $ | 69,826 |   |

 

**Note G—OtherAssets**

Other assets for the periods indicated consisted ofthe following:

14

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|                                             | ** ** | **At June 30,** | ** ** | **At December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **2006**                  | ** ** | **2005**                      | ** ** |
| Real estate  owned                          |       | $                         | 80,068     |                          | $          | 46,351 |   |
| Deferred charge                             |       | 41,035                    |       | 47,406                        |       |
| Investment  securities available-for-sale   |       | 32,213                    |       | 40,227                        |       |
| Prepaid and  other assets                   |       | 15,735                    |       | 34,422                        |       |
| Premises and  equipment , net               |       | 13,246                    |       | 12,312                        |       |
| Deferred income  taxes                      |       | 12,077                    |       | 12,160                        |       |
| Cash margin  balances                       |       | 8,585                     |       | 16,567                        |       |
| Investment in  Impac Capital Trusts         |       | 2,761                     |       | 2,884                         |       |
| Investments for  deferred compensation plan |       | —                    |       | 8,041                         |       |
| Total other assets                          |       | $                         | 205,720    |                          | $          | 220,370 |   |

 

**Note H—SecuritizedMortgage Borrowings**

Selected information on securitized mortgageborrowings for the periods indicated consisted of the following (dollars inmillions):
| ** **                               | ** ** | ** **   | ** ** | ** **                                    | ** ** | ** **              | ** ** | **Range of Percentages:** | ** ** |
|------------------------------------------|------------|--------------|------------|-----------------------------------------------|------------|-------------------------|------------|-------------------------------------|------------|
| ** **                               | ** ** | ** **   | ** ** | ** **                                    | ** ** | ** **              | ** ** | ** **                          | ** ** | **Interest Rate** | ** ** | **Interest Rate** | ** ** |
| ** **                               | ** ** | **Original** | ** ** | **Securitized mortgage borrowings** | ** ** | ** **              | ** ** | **Margins over**               | ** ** | **Margins after** | ** ** |
| ** **                               | ** ** | **Issuance** | ** ** | **outstanding as of**               | ** ** | **Fixed Interest** | ** ** | **One-Month**                       | ** ** | **Adjustment** | ** ** |
| **Year of Issuance**           | ** ** | **Amount**   | ** ** | **6/30/2006**                                 | ** ** | **12/31/2005**          | ** ** | **Rates**                           | ** ** | **LIBOR (1)** | ** ** | **Date (2)** | ** ** |
| 2002                                     |       | $            | 3,876.1    |                                          | $          | 91.5                    |       | $                                   | 219.8      |   | 5.25 - 12.00 |   | 0.27 - 2.75 |   | 0.54 - 3.68 |   |
| 2003                                     |       | 5,966.1      |       | 1,224.9                                       |       | 1,723.0                 |       | 4.34 - 12.75                        |       | 0.27 - 3.00 |   | 0.54 - 4.50 |   |
| 2004                                     |       | 17,710.7     |       | 7,718.3                                       |       | 10,191.9                |       | 3.58 - 5.56                         |       | 0.25 - 2.50 |   | 0.50 - 3.75 |   |
| 2005                                     |       | 13,387.7     |       | 10,201.0                                      |       | 11,902.9                |       | —                              |       | 0.24 - 2.90 |   | 0.48 - 4.35 |   |
| 2006                                     |       | 923.0        |       | 888.3                                         |       | —                  |       | 6.25                                |       | 0.10 - 1.40 |   | 0.20 - 2.10 |   |
| Subtotal securitized mortgage borrowings |       | 20,124.0     |       | 24,037.6                                      |       |                    |       |                                |       |   |   |
| Accrued interest expense                 |       | 18.7         |       | 18.1                                          |       |                    |       |                                |       |   |   |
| Unamortized securitization costs         |       | (48.0        | )          | (65.3                                         | )          |                    |       |                                |       |   |   |
| Total securitized  mortgage borrowings   |       | $            | 20,094.7   |                                          | $          | 23,990.4                |       |                                |       |   |   |   |   |
|                                          |            |              |            |                                               |            |                         |            |                                     |            |  |  |  |  |  |  |  |

----

(1)             One-monthLIBOR was 5.35% as of June 30, 2006.

(2)             Interestrate margins over one-month LIBOR are generally adjusted when the unpaidprincipal balance is reduced to less than 10-20% of the original issuanceamount.

**Note I—ReverseRepurchase Agreements**

Reverse repurchase agreements are entered into tofinance our warehouse lending operations and to fund the closing and purchase ofmortgages by the mortgage and commercial operations. These facilities consistof uncommitted lines, which may be withdrawn at any time by the lender, andcommitted lines. At June 30, 2006, the Company was in compliance with thefinancial covenants associated with the reverse repurchase agreements. Duringthe second quarter of 2006, these facilities amounted to $5.2 billion, of which$1.3 billion was outstanding at June 30, 2006.

**Note J—IncomeTaxes**

During the three and six months ended June 30, 2006,income tax benefit was $12.0 million and $13.9 million, respectively.During the three and six months ended June 30, 2005, income tax benefit was$4.1 million and $6.6 million, respectively. The increase in incometax benefit was primarily due to net losses at the taxable REIT subsidiariesduring the three months ended June 30, 2006. The Company makes an estimate ofthe effective tax rate expected to be applicable for the fiscal year whenproviding for income tax expense (benefit).

15

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** **

**ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Unless the context otherwise requires, the terms “Company,”“we,” “us,” and “our” refer to Impac Mortgage Holdings, Inc. (IMH), a Marylandcorporation incorporated in August 1995, and its subsidiaries, IMH Assets Corp.(IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), and Impac FundingCorporation (IFC), together with its wholly-owned subsidiaries Impac SecuredAssets Corp. (ISAC) and Impac Commercial Capital Corporation (ICCC).

**Forward-LookingStatements**

This report on Form 10-Q contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934. Forward-lookingstatements, some of which are based on various assumptions and events that arebeyond our control, may be identified by reference to a future period orperiods or by the use of forward-looking terminology, such as “may,” “will,”“believe,” “expect,” “likely,” “should,” “anticipate,” or similar terms orvariations on those terms or the negative of those terms. The forward-lookingstatements are based on management expectations. Actual results may differmaterially as a result of several factors, including, but not limited to,failure to achieve projected earnings levels; unexpected or greater thananticipated increases in credit and bond spreads; the ability to generatesufficient liquidity; the ability to access the equity markets; increasedoperating expenses and mortgage origination or purchase expenses that reducecurrent liquidity position more than anticipated; continued increase in pricecompetition; risks of delays in raising, or the inability to raise onacceptable terms, additional capital, either through equity offerings, lines ofcredit or otherwise; the ability to generate taxable income and to paydividends; interest rate fluctuations on our assets that unexpectedly differfrom those on our liabilities; unanticipated interest rate fluctuations; changesin expectations of future interest rates; unexpected increase in prepaymentrates on our mortgages; changes in assumptions regarding estimated loan lossesor an increase in loan losses; continued ability to access the securitizationmarkets or other funding sources, the availability of financing and, ifavailable, the terms of any financing; changes in markets which the Companyserves, such as mortgage refinancing activity and housing price appreciation;and other general market and economic conditions.

For a discussion of these and other risks anduncertainties that could cause actual results to differ from those contained inthe forward-looking statements, see “Risk Factors” and “Management’s Discussionand Analysis of Financial Condition and Results of Operations” in the Company’sAnnual Report on Form 10-K for the period ended December 31, 2005, and theother reports we file under the Securities and Exchange Act of 1934. Thisdocument speaks only as of its date and we do not undertake, and specificallydisclaim any obligation, to publicly release the results of any revisions thatmay be made to any forward-looking statements to reflect the occurrence ofanticipated or unanticipated events or circumstances after the date of suchstatements.

**The MortgageBanking Industry and Discussion of Relevant Fiscal Periods**

The mortgage banking industry is continually subjectto current events that occur in the financial services industry. Such eventsinclude changes in economic indicators, interest rates, price competition,housing prices, geographic shifts, disposable income, market anticipation,customer perception as well as others. The factors that effect the industrychange rapidly.

In this environment, mortgage banking companiesgenerally anticipate the future marketplace, engage in hedging activities andcontinuously reassess business plans and strategies to effectively positionthemselves in the marketplace.

As a result, current events can diminish the relevanceof “quarter over quarter” and “year-to-date over year-to-date” comparisons offinancial information. In such instances, the Company intends to presentfinancial information in its Management Discussion and Analysis that is themost relevant to its financial information.

**General Overview**

We are a mortgage real estate investment trust, or “REIT,”that is a nationwide acquirer, originator, seller and investor ofnon-conforming Alt-A residential mortgages, or “Alt-A mortgages,” and to alesser extent, small-balance, commercial

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mortgages, or “commercialmortgages” and sub-prime residential mortgages. We also provide warehousefinancing to originators of mortgages.

We operate four core businesses:

·                    the long-terminvestment operations that is conducted by IMH and IMH Assets;

·                    the mortgageoperations that is conducted by IFC and ISAC;

·                    the warehouselending operations that is conducted by IWLG; and

·                    the commercialoperations that is conducted by ICCC.

The long-term investment operations primarily investin adjustable rate and, to a lesser extent, fixed rate Alt-A mortgages andcommercial mortgages that are acquired and originated by our mortgage andcommercial operations. Alt-A mortgages are primarily first lien mortgages madeto borrowers whose credit is generally within typical Fannie Mae and Freddie Macguidelines, but have loan characteristics that make them non-conforming underthose guidelines. Some of the principal differences between mortgages purchasedby Fannie Mae and Freddie Mac and Alt-A mortgages are as follows:

·                    credit andincome histories of the mortgagor;

·                    underwritingguidelines for debt and income ratios;

·                    documentationrequired for approval of the mortgagor; and

·                    loan balancesin excess of maximum Fannie Mae and Freddie Mac lending limits.

For instance, Alt-A mortgages may not have certaindocumentation or verifications that are required by Fannie Mae and Freddie Macand, therefore, in making our credit decisions, we are more reliant upon theborrower’s credit score and the adequacy of the underlying collateral. Webelieve that Alt-A mortgages provide an attractive net earnings profile byproducing higher yields without commensurately higher credit losses than othertypes of mortgages.

The long-term investment operations also invest incommercial mortgages that are primarily adjustable rate mortgages with initialfixed interest rate periods of two-, three-, five-, seven- and ten-years thatsubsequently convert to adjustable rate mortgages, or “hybrid ARMs,” withbalances that generally range from $500,000 to $5.0 million. Commercialmortgages have interest rate floors, which are the initial start rate, in somecircumstances lock out periods and prepayment penalty periods of three-, five-,seven- and ten-years. Commercial mortgages provide greater assetdiversification on our balance sheet as borrowers of commercial mortgagestypically have higher credit scores and commercial mortgages typically havelower loan-to-value ratios, or “LTV ratios,” and longer average life to payoffthan Alt-A mortgages.

The long-term investment operations generate earningsprimarily from net interest income earned on mortgages held for long-terminvestment, or (long-term mortgage portfolio). The long-term mortgage portfolioas reported on our consolidated balance sheet consists of mortgages held assecuritized mortgage collateral and mortgages held-for-investment. Investmentsin Alt-A mortgages and commercial mortgages are initially financed withshort-term borrowings under reverse repurchase agreements that are subsequentlyconverted to long-term financing in the form of securitized mortgageborrowings. Cash flows from the long-term mortgage portfolio, proceeds from thesale of capital stock and issuance of trust preferred securities also financenew Alt-A and commercial mortgages.

In 2005 and 2006, we completed ISAC REMIC 2005-2 andISAC REMIC 2006-1 securitizations which were treated as a sale for tax purposesbut treated as secured borrowings for generally accepted accounting principles(GAAP) purposes and consolidated in the financial statements. The associatedcollateral and borrowings have been combined with and included in securitizedmortgage collateral and borrowings, respectively, for reporting purposes.Reference to “securitized mortgage collateral” or “securitized mortgageborrowings” includes the REMIC 2005-2 and 2006-1 securitized collateral andborrowings, respectively.

In the second quarter of 2006, we completed ISAC REMIC2006-2 securitization in the amount of $834.0 million which was treated asa sale for both tax and GAAP purposes. Residual interest of approximately $29.8 millioncalculated as present value of estimated future cash flows, retained as aresult of the ISAC REMIC 2006-2 securitization, was recorded in other assets onthe balance sheet. As of June 30, 2006, the tax basis value of our residualinterests from securitization

17

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transactions was $116.4 million. Investments inresidual interest and subordinated securities represent higher risk thaninvestments in senior mortgage-backed securities because these subordinatedsecurities bear all credit losses prior to the related senior securities. Therisk associated with holding residual interest and subordinated securities isgreater than holding the underlying mortgage loans directly due to theconcentration of losses attributed to the subordinated securities. The value ofresidual interests represents the present value of future cash flows expectedto be received by us from the excess cash flows created in the securitizationtransaction. In general, future cash flows are estimated by taking the couponrate of the loans underlying the transaction less the interest rate paid to theinvestors, less contractually specified servicing and trustee fees, and aftergiving effect to estimated prepayments and credit losses. We estimate futurecash flows from these securities and value them utilizing assumptions based inpart on projected discount rates, delinquency, mortgage loan prepayment speedsand credit losses.

The mortgage operations acquire, originate, sell andsecuritize primarily adjustable rate and fixed rate Alt-A mortgages and, to alesser extent, sub-prime residential mortgages. The mortgage operationsgenerate income by securitizing and selling mortgages to permanent investors,including the long-term investment operations. This business also earns revenuefrom fees associated with mortgage servicing rights, master servicingagreements and interest income earned on mortgages held for sale. The mortgageoperations use warehouse facilities provided by the warehouse lendingoperations to finance the acquisition and origination of mortgages.

The warehouse lending operations provide short-termfinancing to mortgage loan originators, including our mortgage operations, byfunding mortgages from their closing date until sale to pre-approved investors.This business earns fees from warehouse transactions as well as net interestincome from the difference between its cost of borrowings and the interestearned on warehouse advances.

The commercial operations originate commercialmortgages that are primarily adjustable rate mortgages with initial fixedinterest rate periods of two-, three-, five-, seven- and ten-yearsthat subsequently adjust to adjustable rate mortgages, or “hybrid ARMs,” withbalances that generally range from $500,000 to $5.0 million. Commercialmortgages have interest rate floors, which is the initial start rate, in somecircumstances have lockouts and prepayment penalty periods of three-,five-, seven- and ten-years. These mortgages provide greater assetdiversification on our balance sheet as commercial mortgage borrowers typicallyhave higher credit scores and typically have lower loan-to-value ratios, or “LTVratios,” and the mortgages have longer average lives than residentialmortgages.

**CriticalAccounting Policies**

We define critical accounting policies as those thatare important to the portrayal of our financial condition and results ofoperations and may require estimates and assumptions based on our judgment ofchanging market conditions and the performance of our assets and liabilities atany given time. In determining which accounting policies meet this definition,we considered our policies with respect to the valuation of our assets andliabilities and estimates and assumptions used in determining those valuations.We believe the most critical accounting issues that require the most complexand difficult judgments and that are particularly susceptible to significantchange to our financial condition and results of operations include allowancefor loan losses, derivative financial instruments and securitization offinancial assets as financing versus sale.

**Selected FinancialResults for the Second Quarter of 2006**

·                    Estimatedtaxable income per diluted share was $0.27 compared to $0.36 for the firstquarter of 2006 and $0.54 for the second quarter of 2005;

·                    Cash dividendsdeclared per common share were $0.25 compared to $0.25 for the first quarter of2006 and $0.75 for the second quarter of 2005;

·                    Total assetswere $22.7 billion as of June 30, 2006 compared to $27.7 billion asof December 31, 2005 and $26.5 billion as of June 30, 2005;

·                    Book value percommon share was $13.91 as of June 30, 2006 compared to $13.24 as of December31, 2005 and $11.77 as of June 30, 2005;

·                    The mortgageoperations acquired and originated $2.2 billion of primarily Alt-Amortgages compared to $2.1 billion for the first quarter of 2006 and $5.5 billionfor the second quarter of 2005;

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·                    The commercialmortgage operations originated $277.9 million of commercial mortgagescompared to $202.8 million for the first quarter of 2006 and $214.6 millionfor the second quarter of 2005.

**Selected FinancialResults for the First Six Months of 2006**

·                    Estimatedtaxable income per diluted share decreased to $0.63 compared to $1.28 for thefirst six months of 2005;

·                    Cash dividendsdeclared per share decreased to $0.50 compared to $1.50 for the first sixmonths of 2005;

·                    The mortgageoperations acquired and originated $4.3 billion of primarily Alt-A mortgagescompared to $10.1 billion for the first six months of 2005;

·                    The long-terminvestment operations, excluding IMCC originations, retained for investment$694.4 million of primarily Alt-A mortgages compared to $6.4 billion for thefirst six months of 2005; and

·                    The commercialmortgage operations originated $480.7 million of commercial mortgages comparedto $379.9 million for the first six months of 2005.

**Second Quarter andYear to Date 2006 Taxable Income**

Because dividend payments are based on estimatedtaxable income, dividends may be more or less than net earnings. As such, webelieve that the disclosure of estimated taxable income available to commonstockholders, which is a non-generally accepted accounting principle, or “non-GAAP,”financial measurement, is useful information for our investors.

The following table presents a reconciliation of netearnings (GAAP) to estimated taxable income available to common stockholdersfor the periods indicated (in thousands, except per share amounts):
| ** **                                                     | ** ** | **For the Three Months** | ** ** | **For the Six Months** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **Ended June 30, (1)**   | ** ** | **Ended June 30, (1)** | ** ** |
| ** **                                                     | ** ** | **2006**                                | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net earnings  (loss)                                           |       | $                                       | 26,356     |                                  | $          | (55,000 | ) | $ | 111,922 |   | $ | 118,610 |   |
| Adjustments to net  earnings: (2)                              |       |                                    |       |                                  |       |   |   |   |   |
| Loan loss (recovery of) provision (3)                          |       | (45                                     | )          | 5,711                                 |       | 105 |   | 11,785 |   |
| REMIC income (4)                                               |       | 4,374                                   |       | —                                |       | 9,096 |   | — |   |
| Tax deduction for actual loan losses (3)                       |       | (6,141                                  | )          | (2,674                                | )          | (10,547 | ) | (5,914 | ) |
| Change in fair value of derivatives (5)                        |       | (7,903                                  | )          | 90,871                                |       | (54,866 | ) | (38,008 | ) |
| Dividends on preferred stock                                   |       | (3,672                                  | )          | (3,624                                | )          | (7,344 | ) | (7,248 | ) |
| Net loss (earnings) of taxable REIT subsidiaries (6)           |       | 17,704                                  |       | 743                                   |       | 15,848 |   | (15,423 | ) |
| Dividend from taxable REIT subsidiaries (7)                    |       | 3,500                                   |       | 9,000                                 |       | 3,500 |   | 25,850 |   |
| Elimination of inter-company loan sales transactions  (8)      |       | (13,682                                 | )          | (3,943                                | )          | (20,220 | ) | 8,242 |   |
| Miscellaneous adjustments                                      |       | 119                                     |       | —                                |       | 239 |   | — |   |
| Estimated  taxable income available to common stockholders (9) |       | $                                       | 20,610     |                                  | $          | 41,084 |   | $ | 47,733 |   | $ | 97,894 |   |
| Estimated taxable  income per diluted common share (9)         |       | $                                       | 0.27       |                                  | $          | 0.54 |   | $ | 0.63 |   | $ | 1.28 |   |
| Diluted weighted  average common shares outstanding            |       | 76,420                                  |       | 75,387                                |       | 76,401 |   | 76,235 |   |

----

(1)             Estimatedtaxable income includes estimates of book to tax adjustments and can differ fromactual taxable income as calculated when we file our annual corporate taxreturn. Since estimated taxable income is a non-GAAP financial measurement, thereconciliation of estimated taxable income available to common stockholders tonet earnings is intended to meet the requirements of Regulation G aspromulgated by the SEC for the presentation of non-GAAP financial measurements.To maintain our REIT status, we are required to distribute a minimum of 90% ofour annual taxable income to our stockholders.

(2)             Certainadjustments are made to net earnings in order to calculate taxable income dueto differences in the way revenues and expenses are recognized under the twomethods.

(3)             Tocalculate estimated taxable income, actual loan losses are deducted. For thecalculation of net earnings, GAAP requires a deduction for estimated lossesinherent in our mortgage portfolios in the form of a provision for loan losses,which are not deductible for tax purposes. Therefore, as the estimated lossesprovided for under GAAP are actually realized, the losses will negatively andmay materially impact future taxable income.

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(4)             IncludesGAAP to Tax Differences related to the ISAC REMIC 2005-2 and ISAC REMIC 2006-1securitizations, which were treated as secured borrowings for GAAP purposes andsales for tax purposes.

(5)             Themark-to-market change for the valuation of derivatives at IMH is income orexpense for GAAP financial reporting but is not included as an addition ordeduction for taxable income calculations.

(6)             Representsnet earnings of IFC and ICCC, our taxable REIT subsidiaries (TRSs), which maynot necessarily equal taxable income. Starting January 1, 2006, the Companyelected to convert ICCC from a qualified REIT subsidiary to a TRS. Therefore,the three and six months ended June 30, 2005 does not include any net earningsor losses of ICCC.

(7)             Anydividends paid to IMH by the TRSs in excess of their cumulative undistributedtaxable income would be recognized as return of capital by IMH to the extent ofIMH’s capital investment in the TRSs. Distributions from the TRSs to IMH maynot equal the TRS’s net earnings, however, IMH can only recognize dividenddistributions received from the TRSs as taxable income to the extent that theTRS’s distributions are from current or prior period undistributed taxableincome. Any distributions by the TRSs in excess of IMH’s capital investment inthe TRSs would be taxed as capital gains.

(8)             Includesthe effects to taxable income associated with the elimination of gains frominter-company loan sales and other intercompany transactions between IFC, ICCC,and IMH, net of tax and the related amortization of the deferred charge.

(9)             Excludesthe deduction for common stock dividends paid and the availability of adeduction attributable to net operating loss carry-forwards. As of December 31,2005, the Company has estimated Federal net operating loss carry-forwards of$18.1 million that are expected to be utilized prior to their expiration in theyear 2020.

***Second Quarter2006 vs. First Quarter 2006***

Estimated taxable income decreased by $6.5 million to$20.6 million, or $0.27 per diluted common share, for the second quarter 2006,compared to $27.1 million or $0.36 per diluted common share, for the firstquarter 2006. The decrease in estimated taxable income was primarilyattributable to a decrease in adjusted net interest margin at the REIT of $9.6million and an increase in actual loan losses of $1.7 million, partially offsetby an increase in income of $1.9 million from REMIC securitizations and a $3.5million increase in dividend income from the taxable REIT subsidiary, IFC.

The decrease in adjusted net interest margin of $9.6million was primarily the result of a decrease in interest income of $35.3million, partially offset by a decrease in interest expense of $12.5 millionand an increase in realized gain from derivative instruments of $13.2 million. Thedecrease in interest income and interest expense was primarily due to a declinein the average balances of the securitized mortgage collateral and the relatedsecuritized mortgage borrowings. To a lesser degree the effect of adjusting theamortization of loan premiums and securitization costs based on updatedprepayment experience in the 1st quarter resulted in a catch up reduction inamortization of approximately $2.9 million favorable impact on the firstquarter of 2006.

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**FinancialCondition and Results of Operations**

*FinancialCondition*

Condensed BalanceSheet Data(dollars in thousands)
| ** **                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                           | ** ** | **2006**          | ** ** | **2005**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Cash and cash  equivalents                           |       | $                 | 180,644    |                  | $          | 146,621        |       | $          | 34,023     |   | 23 | % |
| Restricted Cash                                      |       | 661               |       | 698                   |       | (37            | )          | (5         | )          |
| Securitized  mortgage collateral                     |       | 20,508,825        |       | 24,494,290            |       | (3,985,465     | )          | (16        | )          |
| Mortgages held-for-investment                        |       | 8,390             |       | 160,070               |       | (151,680       | )          | (95        | )          |
| Finance  receivables                                 |       | 292,286           |       | 350,217               |       | (57,931        | )          | (17        | )          |
| Allowance for  loan losses                           |       | (68,072           | )          | (78,514               | )          | (10,442        | )          | (13        | )          |
| Mortgages  held-for-sale                             |       | 1,203,223         |       | 2,052,694             |       | (849,471       | )          | (41        | )          |
| Derivatives                                          |       | 312,877           |       | 250,368               |       | 62,509         |       | 25         |       |
| Accrued interest  receivable                         |       | 102,994           |       | 123,565               |       | (20,571        | )          | (17        | )          |
| Other assets                                         |       | 205,720           |       | 220,370               |       | (14,650        | )          | (7         | )          |
| **Total assets**                                     |       | $                 | 22,747,548 |                  | $          | 27,720,379     |       | $          | (4,972,831 | ) | (18 | )% |
|                                                 |       |              |       |                  |       |           |       |       |       |
| Securitized  mortgage borrowings                     |       | $                 | 20,094,718 |                  | $          | 23,990,430     |       | $          | (3,895,712 | ) | (16 | )% |
| Reverse  repurchase agreements                       |       | 1,278,485         |       | 2,430,075             |       | (1,151,590     | )          | (47        | )          |
| Other  liabilities                                   |       | 156,159           |       | 132,927               |       | 23,232         |       | 17         |       |
| Total liabilities                                    |       | 21,529,362        |       | 26,553,432            |       | (5,024,070     | )          | (19        | )          |
| Total stockholder’s equity                      |       | 1,218,186         |       | 1,166,947             |       | 51,239         |       | 4          |       |
| **Total  liabilities and stockholders’ equity** |       | $                 | 22,747,548 |                  | $          | 27,720,379     |       | $          | (4,972,831 | ) | (18 | )% |

 

Total assets were $22.7 billion as ofJune 30, 2006 as compared to $27.7 billion as of December 31, 2005. Thereduction in total assets of $5.0 billion was mainly attributable to $4.1billion in whole loan sales, REMIC securitization 2006-2 for $834.0 million,and $4.7 billion in total principal pay downs, which was only partially offsetby total year-to-date acquisitions and originations of $4.8 billion.

The following table presents selected informationabout mortgages held as securitized mortgage collateral as of the datesindicated:

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| ** **                                    | ** ** | **Residential**   | ** ** | **Commercial**        | ** ** |
|-----------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **As of**    | ** ** | **As of**        | ** ** |
| ** **                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
| ** **                                    | ** ** | **2006**          | ** ** | **2005**              | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** |
| Percent of Alt-A  mortgages                   |       | 99                |       | 99                    |       | 99 |   | N/A |   | N/A |   | N/A |   |
| Percent of  non-hybrid ARMs                   |       | 12                |       | 14                    |       | 15 |   | 2 |   | 4 |   | 7 |   |
| Percent of  hybrid ARMs                       |       | 75                |       | 75                    |       | 75 |   | 98 |   | 96 |   | 93 |   |
| Percent of FRMs                               |       | 13                |       | 11                    |       | 10 |   | 0 |   | 0 |   | 0 |   |
| Percent of  interest-only                     |       | 72                |       | 71                    |       | 66 |   | 12 |   | 11 |   | 2 |   |
| Weighted average  coupon                      |       | 6.28              |       | 6.10                  |       | 5.82 |   | 5.82 |   | 5.62 |   | 5.39 |   |
| Weighted average  margin                      |       | 3.80              |       | 3.79                  |       | 3.70 |   | 2.69 |   | 2.69 |   | 2.75 |   |
| Weighted average  original LTV                |       | 75                |       | 76                    |       | 76 |   | 67 |   | 67 |   | 67 |   |
| Weighted average  original credit score       |       | 696               |       | 695                   |       | 695 |   | 730 |   | 728 |   | 726 |   |
| Percent with  active prepayment penalty       |       | 75                |       | 75                    |       | 75 |   | 100 |   | 100 |   | 100 |   |
| Prior 3-month  constant prepayment rate       |       | 37                |       | 38                    |       | 33 |   | 10 |   | 9 |   | 8 |   |
| Prior 12-month  prepayment rate               |       | 38                |       | 37                    |       | 28 |   | 9 |   | 9 |   | 7 |   |
| Lifetime  prepayment rate                     |       | 27                |       | 25                    |       | 20 |   | 6 |   | 5 |   | 4 |   |
| Weighted average  debt service coverage ratio |       | N/A               |       | N/A                   |       | N/A |   | 1.29 |   | 1.22 |   | 1.32 |   |
| Percent of  mortgages in California           |       | 54                |       | 55                    |       | 59 |   | 66 |   | 71 |   | 79 |   |
| Percent of  purchase transactions             |       | 59                |       | 60                    |       | 59 |   | 52 |   | 52 |   | 53 |   |
| Percent of owner  occupied                    |       | 79                |       | 81                    |       | 82 |   | N/A |   | N/A |   | N/A |   |
| Percent of first lien                         |       | 99                |       | 99                    |       | 99 |   | 100 |   | 100 |   | 100 |   |

*                    N/A= Not Applicable

The following table presents selected financial dataas of the dates indicated (dollars in thousands, except share data):

|                                         | ** ** | **As of and Year-to-Date Ended,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                              | ** ** | **June 30,**                                     | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
| ** **                              | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2005** | ** ** |
| Book value per  share                   |       | $                                                     | 13.91      |   | $ | 13.24 |   | $ | 11.77 |   |
| Return on average  assets               |       | 0.88                                                  | %          | 1.01 | % | 0.92 | % |
| Return on  average equity               |       | 18.63                                                 | %          | 24.13 | % | 21.24 | % |
| Assets to equity  ratio                 |       | 18.67:1                                               |       | 23.75:1 |   | 25.28:1 |   |
| Debt to equity  ratio                   |       | 17.62:1                                               |       | 22.72:1 |   | 24.19:1 |   |
| Mortgages owned  60+ days delinquent    |       | $                                                     | 861,275    |   | $ | 733,348 |   | $ | 461,360 |   |
| 60+ day delinquency of  mortgages owned |       | 4.16                                                  | %          | 3.12 | % | 2.01 | % |

 

We believe that in order for us to generate positivecash flows and earnings we must successfully manage the following primaryoperational and market risks:

·      creditrisk;

·      prepaymentrisk;

·      liquidityrisk; and

·      interestrate risk.

*CreditRisk.* We manage credit risk by acquiring for long-terminvestment high credit quality Alt-A and commercial mortgages from ourcustomers, adequately providing for loan losses and actively managing delinquenciesand defaults. Alt-A mortgages are primarily first lien mortgages made toborrowers whose credit is generally within typical Fannie Mae and Freddie Macguidelines, but that have loan characteristics that make them non-conformingunder those guidelines.

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As of June 30, 2006, the original weighted averagecredit score of mortgages held as residential and commercial securitizedmortgage collateral was 696 and 730, respectively, and the original weightedaverage LTV ratio was 75% and 67%, respectively. During the second quarter of2006, the mortgage operations acquired or originated $2.2 billion ofresidential mortgages with an original weighted average credit score of 686 andan original weighted average LTV ratio of 73%. ICCC also originated $277.9 millionof commercial mortgages with a weighted average credit score of 733, a weightedaverage debt service cover ratio of 1.21 and an original weighted average LTVratio of 66%.

We monitor our sub-servicers to make sure that theyperform loss mitigation, foreclosure and collection functions according to ourservicing guide. This includes an effective and aggressive collection effort inorder to minimize the number of mortgages becoming seriously delinquent. Whenresolving delinquent mortgages, sub-servicers are required to take timely andaggressive action. The sub-servicer is required to determine payment collectionunder various circumstances, which will result in maximum financial benefit. Weaccomplish this by either working with the borrower to bring the mortgagecurrent or by foreclosing and liquidating the property. We perform ongoingreviews of mortgages that display weaknesses and believe that we maintain anadequate loss allowance on the mortgages. When a borrower fails to makerequired payments on a mortgage and does not cure the delinquency within 60days, we generally record a notice of default and commence foreclosureproceedings. If the mortgage is not reinstated within the time period permittedby law for reinstatement, the property may then be sold at a foreclosure sale. Atforeclosure sales, we generally acquire title to the property. As of June 30,2006, our long-term mortgage portfolio included 4.16% of mortgages that were 60days or more delinquent compared to 3.12% as of December 31, 2005.

The following table summarizes mortgages that we own,including securitized mortgage collateral, mortgages held for long-terminvestment and mortgages held-for-sale, that were 60 or more days delinquentfor the periods indicated (in thousands):

|                                   | ** ** | **At June 30,** | ** ** | **At December 31,** | ** ** |
|-----------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **2006**                  | ** ** | **2005**                      | ** ** |
| 60 - 89 days  delinquent          |       | $                         | 284,199    |                          | $          | 300,039 |   |
| 90 or more days  delinquent       |       | 283,185                   |       | 221,581                       |       |
| Foreclosures                      |       | 245,294                   |       | 161,414                       |       |
| Delinquent  bankruptcies          |       | 48,597                    |       | 50,314                        |       |
| Total 60 or more  days delinquent |       | $                         | 861,275    |                          | $          | 733,348 |   |

 

Non-performing assets consist of mortgages that are90 days or more delinquent, including loans in foreclosure and delinquentbankruptcies. It is our policy to place a mortgage on non-accrual status whenit becomes 90 days delinquent and any previously accrued interest will bereversed from revenue. When real estate is acquired in settlement of loans, orother real estate owned, the mortgage is written-down to a percentage of theproperty’s appraised value or broker’s price opinion less anticipated sellingcosts. As of June 30, 2006, non-performing assets as a percentage of totalassets was 2.89% compared to 1.73% as of December 31, 2005.

The following table summarizes mortgages that we own,including securitized mortgage collateral, mortgages held for long-terminvestment and mortgages held-for-sale, that were non-performing for theperiods indicated (in thousands):

|                                                                       | ** ** | **At June 30,** | ** ** | **At December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                                                            | ** ** | **2006**                  | ** ** | **2005**                      | ** ** |
| 90 or more days  delinquent, foreclosures and delinquent bankruptcies |       | $                         | 577,076    |                          | $          | 433,309 |   |
| Other real  estate owned                                              |       | 80,068                    |       | 46,351                        |       |
| Total  non-performing assets                                          |       | $                         | 657,144    |                          | $          | 479,660 |   |

 

*Although the balance of REO hasincreased since December 31, 2005, the weighted average aging of the REOproperties has improved.*

*PrepaymentRisk.***TheCompany uses prepayment penalties as a method of partially mitigatingprepayment risk. Mortgage industry evidence suggests that the increase in homeappreciation rates and lower payment option mortgage products over the lastthree years was a significant factor affecting borrowers refinancing decisionsthrough 2005. As a result, mortgage prepayment rates accelerated during 2005 asit appeared that borrowers were willing to pay prepayment penalties in order tocash out or obtain lower monthly payments by refinancing into other mortgageproducts. More recent

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behavior in our securitized mortgage collateralreflects some degree of reduced prepayments with the three-month constantprepayment rate (CPR) declining to 37% from 38% as of December 31, 2005.

During the six months ended June 30, 2006, 82% ofAlt-A mortgages acquired by the long-term investment operations from themortgage operations had prepayment penalty features ranging from six-months tofive years. As of June 30, 2006, 75% and 100% of mortgages held asresidential and commercial securitized mortgage collateral had prepaymentpenalties, respectively. As of June 30, 2006, the twelve-month CPRof mortgages held as securitized mortgage collateral was 38% as compared to a28% twelve-month CPR as of June 30, 2005. Prepayment penalties arecharged to borrowers for mortgages that are paid early and recorded as interestincome on our consolidated financial statements. Interest income fromprepayment penalties helps offset amortization of loan premiums andsecuritization costs. During the first six months of 2006, prepayment penaltiesreceived from borrowers were recorded as interest income and increased 10 basispoints to 21 basis points of mortgage assets as compared to 11 basis points ofmortgage assets in the first six months of 2005.

*LiquidityRisk.***Weemploy a leverage strategy to increase assets by financing our long-termmortgage portfolio primarily with securitized mortgage borrowings, reverse repurchaseagreements and capital, then using cash proceeds to acquire additional mortgageassets. We retain ARMs and FRMs that are acquired and originated fromthe mortgage and commercial operations and finance the acquisition of thosemortgages, during this accumulation period, with reverse repurchase agreements.After accumulating a pool of mortgages we sell the mortgages in the form ofsecuritized mortgage collateral, whole loan sales, or REMIC’s. Our strategy isto sell or securitize our mortgages within 90 days in order to reduce theaccumulation period that mortgages are outstanding on short-term reverserepurchase facilities, which reduces our exposure to margin calls and reducesspread risk on these facilities. Securitized mortgage borrowings are classes ofbonds that are sold to investors of mortgage-backed securities and assuch are not subject to margin calls. In addition, the securitized mortgageborrowings generally require a smaller initial cash investment as a percentageof mortgages financed than does interim reverse repurchase financing. Wecontinually monitor our leverage ratio and liquidity levels to insure that weare adequately protected against adverse changes in market conditions. Foradditional information regarding liquidity refer to “Liquidity and CapitalResources.”

*InterestRate Risk.***Referto Item 3. “Quantitative and Qualitative Disclosures About Market Risk.”

*Resultsof Operations*

*For theThree Months Ended June 30, 2006 compared to the Three Months Ended June 30,2005*

CondensedStatements of Operations Data(dollars in thousands, except share data)
| ** **                                          | ** ** | **For the Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                                            | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                          | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Interest income                                     |       | $                                                                     | 313,759    |   | $ | 309,785 |   | $ | 3,974 |   | 1 | % |
| Interest expense                                    |       | 328,506                                                               |       | 243,632 |   | 84,874 |   | 35 |   |
| Net interest income                                 |       | (14,747                                                               | )          | 66,153 |   | (80,900 | ) | (122 | ) |
| (Recovery of)  provision for loan losses            |       | (45                                                                   | )          | 5,711 |   | (5,756 | ) | (101 | ) |
| Net interest income after provision for loan losses |       | (14,702                                                               | )          | 60,442 |   | (75,144 | ) | (124 | ) |
| Total non-interest  income                          |       | 61,948                                                                |       | (79,384 | ) | 141,332 |   | 178 |   |
| Total  non-interest expense                         |       | 32,898                                                                |       | 40,182 |   | (7,284 | ) | (18 | ) |
| Income tax  benefit                                 |       | (12,008                                                               | )          | (4,124 | ) | 7,884 |   | 191 |   |
| Net earnings (loss)                                 |       | $                                                                     | 26,356     |   | $ | (55,000 | ) | $ | 65,588 |   | 119 | % |
|                                                |       |                                                                  |       |   |   |   |   |   |   |
| Net earnings  (loss) per share - diluted            |       | $                                                                     | 0.30       |   | $ | (0.78 | ) | $ | 1.08 |   | 138 | % |
| Dividends declared per  common share                |       | $                                                                     | 0.25       |   | $ | 0.75 |   | $ | (0.50 | ) | (67 | )% |

 

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*For theSix Months Ended June 30, 2006 compared to the Six Months Ended June 30, 2005*

CondensedStatements of Operations Data(dollars in thousands, except share data)
| ** **                                                     | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                                                          | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                                     | ** ** | **2006**                                                            | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Interest income                                                |       | $                                                                   | 648,964    |   | $ | 587,164 |   | $ | 61,800 |   | 11 | % |
| Interest expense                                               |       | 652,236                                                             |       | 439,905 |   | 212,331 |   | 48 |   |
| Net interest (expense) income                                  |       | (3,272                                                              | )          | 147,259 |   | (150,531 | ) | (102 | ) |
| Provision for  loan losses                                     |       | 105                                                                 |       | 11,785 |   | (11,680 | ) | (99 | ) |
| Net interest (expense) income after provision for  loan losses |       | (3,377                                                              | )          | 135,474 |   | (138,851 | ) | (102 | ) |
| Total  non-interest income                                     |       | 169,688                                                             |       | 52,421 |   | 117,267 |   | 224 |   |
| Total  non-interest expense                                    |       | 68,248                                                              |       | 75,872 |   | (7,624 | ) | (10 | ) |
| Income tax  benefit                                            |       | (13,859                                                             | )          | (6,587 | ) | 7,272 |   | 110 |   |
| Net earnings                                                   |       | $                                                                   | 111,922    |   | $ | 118,610 |   | $ | (21,232 | ) | (18 | )% |
|                                                           |       |                                                                |       |   |   |   |   |   |   |
| Net earnings per  share — diluted                         |       | $                                                                   | 1.37       |   | $ | 1.46 |   | $ | (0.09 | ) | (6 | )% |
| Dividends declared per  common share                           |       | $                                                                   | 0.50       |   | $ | 1.50 |   | $ | (1.00 | ) | (67 | )% |

 

*Net InterestIncome*

We earn interest income primarily on mortgage assetswhich include securitized mortgage collateral, mortgages held-for-investment,mortgages held-for-sale, finance receivables and investment securitiesavailable-for-sale, or collectively, “mortgage assets,” and, to a lesser extent,interest income earned on cash and cash equivalents. Interest expense isprimarily interest paid on borrowings on mortgage assets, which includesecuritized mortgage borrowings and reverse repurchase agreements.

The following table summarizes average balance,interest and weighted average yield on mortgage assets and borrowings onmortgage assets for the periods indicated (dollars in thousands):

25

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| ** **                                                            | ** ** | **For the Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| ** **                                                            | ** ** | **Average**                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Balance**                                                           | ** ** | **Interest** | ** ** | **Yield** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield** | ** ** |
| **MORTGAGE ASSETS**                                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Subordinated  securities collateralized by mortgages                  |       | $                                                                     | 17,597     |   | $ | 457 |   | 10.39 | % | $ | 25,245 |   | $ | 320 |   | 5.07 | % |
| Securitized  mortgage collateral (1)                                  |       | 21,956,653                                                            |       | 282,948 |   | 5.15 | % | 23,440,857 |   | 264,359 |   | 4.51 | % |
| Mortgages  held-for-investment and held-for-sale                      |       | 1,493,017                                                             |       | 22,826 |   | 6.12 | % | 2,397,955 |   | 38,907 |   | 6.49 | % |
| Finance  receivables                                                  |       | 270,151                                                               |       | 5,032 |   | 7.45 | % | 341,905 |   | 4,753 |   | 5.56 | % |
| Total mortgage  assets\ interest income                               |       | $                                                                     | 23,737,418 |   | $ | 311,263 |   | 5.25 | % | $ | 26,205,962 |   | $ | 308,339 |   | 4.71 | % |
|                                                                  |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| **BORROWINGS**                                                        |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Securitized  mortgage borrowings                                      |       | $                                                                     | 21,506,608 |   | $ | 302,744 |   | 5.63 | % | $ | 23,024,518 |   | $ | 216,255 |   | 3.76 | % |
| Reverse  repurchase agreements                                        |       | 1,590,151                                                             |       | 23,456 |   | 5.90 | % | 2,541,772 |   | 25,982 |   | 4.09 | % |
| Total borrowings  on mortgage assets\ interest expense                |       | $                                                                     | 23,096,759 |   | $ | 326,200 |   | 5.65 | % | $ | 25,566,290 |   | $ | 242,237 |   | 3.79 | % |
|                                                                  |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net Interest  Spread (2)                                              |       |                                                                  |       |   |   | (0.40 | ) |   |   |   |   | 0.92 | % |
| Net Interest  Margin (3)                                              |       |                                                                  |       |   |   | (0.25 | ) |   |   |   |   | 1.01 | % |
|                                                                  |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net Interest  (expense) Income on Mortgage Assets                     |       |                                                                  |       | $ | (14,937 | ) | (0.25 | ) |   |   | $ | 66,102 |   | 1.01 | % |
| Less: Accretion  of loan discounts (4)                                |       |                                                                  |       | (18,153 | ) | (0.31 | ) |   |   | (20,553 | ) | (0.31 | ) |
| Adjusted by net  cash receipts (payments) on derivatives (5)          |       |                                                                  |       | 55,868 |   | 0.94 |   |   |   | (1,456 | ) | (0.02 | ) |
| Adjusted Net  Interest Margin (6)                                     |       |                                                                  |       | $ | 22,778 |   | 0.38 | % |   |   | $ | 44,093 |   | 0.67 | % |
|                                                                  |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Effect of amortization  of loan premiums and securitization costs (7) |       |                                                                  |       | $ | 63,978 |   | (1.08 | ) |   |   | $ | 73,536 |   | (1.12 | ) |

 

26

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| ** **                                                            | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                                            | ** ** | **2005** | ** ** |
| ** **                                                            | ** ** | **Average**                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Balance**                                                         | ** ** | **Interest** | ** ** | **Yield** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield** | ** ** |
| **MORTGAGE  ASSETS**                                                  |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Subordinated  securities collateralized by mortgages                  |       | $                                                                   | 28,816     |   | $ | 1,177 |   | 8.17 | % | $ | 25,219 |   | $ | 652 |   | 5.17 | % |
| Securitized  mortgage collateral (1)                                  |       | 22,727,668                                                          |       | 580,457 |   | 5.11 | % | 22,745,368 |   | 508,734 |   | 4.47 | % |
| Mortgages  held-for-investment and held-for-sale                      |       | 1,634,161                                                           |       | 53,198 |   | 6.51 | % | 2,042,039 |   | 65,135 |   | 6.38 | % |
| Finance  receivables                                                  |       | 290,315                                                             |       | 9,807 |   | 6.76 | % | 363,242 |   | 9,839 |   | 5.42 | % |
| Total mortgage  assets\ interest income                               |       | $                                                                   | 24,680,960 |   | $ | 644,639 |   | 5.22 | % | $ | 25,175,868 |   | $ | 584,360 |   | 4.64 | % |
|                                                                  |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| **BORROWINGS**                                                        |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Securitized  mortgage borrowings                                      |       | $                                                                   | 22,257,080 |   | $ | 598,219 |   | 5.38 | % | $ | 22,387,127 |   | $ | 395,722 |   | 3.54 | % |
| Reverse  repurchase agreements                                        |       | 1,754,160                                                           |       | 49,329 |   | 5.62 | % | 2,209,170 |   | 42,744 |   | 3.87 | % |
| Total borrowings  on mortgage assets\ interest expense                |       | $                                                                   | 24,011,240 |   | $ | 647,548 |   | 5.39 | % | $ | 24,596,297 |   | $ | 438,466 |   | 3.57 | % |
|                                                                  |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net Interest  Spread (2)                                              | ** ** | ** **                                                          | ** ** | ** ** |   | (0.17 | ) | ** ** | ** ** | ** ** |   | 1.07 | % |
| Net Interest Margin  (3)                                              | ** ** | ** **                                                          | ** ** | ** ** |   | (0.02 | ) | ** ** | ** ** | ** ** |   | 1.16 | % |
|                                                                  |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net Interest  (expense) Income on Mortgage Assets                     | ** ** | ** **                                                          |       | $ | (2,909 | ) | (0.02 | ) | ** ** |   | $ | 145,894 |   | 1.16 | % |
| Less: Accretion  of loan discounts (4)                                | ** ** | ** **                                                          |       | (34,073 | ) | (0.28 | ) | ** ** |   | (37,585 | ) | (0.30 | ) |
| Adjusted by net  cash receipts (payments) on derivatives (5)          | ** ** | ** **                                                          |       | 96,004 |   | 0.78 | ** ** | ** ** |   | (15,183 | ) | (0.12 | ) |
| Adjusted Net  Interest Margin (6)                                     | ** ** | ** **                                                          |       | $ | 59,022 |   | 0.48 | % | ** ** |   | $ | 93,126 |   | 0.74 | % |
|                                                                  |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Effect of amortization  of loan premiums and securitization costs (7) | ** ** | ** **                                                          |       | $ | 126,477 |   | (1.02 | ) | ** ** |   | $ | 138,599 |   | (1.10 | ) |

----

(1)             Interestincludes amortization of acquisition cost on mortgages acquired from themortgage operations and accretion of loan discounts.

(2)             Netinterest spread on mortgage assets is calculated by subtracting the weightedaverage yield on total borrowings on mortgage assets from the weighted averageyield on total mortgage assets.

(3)             Netinterest margin on mortgage assets is calculated by subtracting interestexpense on total borrowings on mortgage assets from interest income on totalmortgage assets and then dividing by total average mortgage assets.

(4)             Yieldrepresents income from the accretion of loan discounts, as defined in (1),divided by total average mortgage assets.

(5)             Yieldrepresents net cash (payments) receipts on derivatives divided by total averagemortgage assets.

(6)             Adjustednet interest margin on mortgage assets is calculated by subtracting interestexpense on total borrowings on mortgage assets, accretion of loan discounts andnet cash (payments) receipts on derivatives from interest income on totalmortgage assets and dividing by total average mortgage assets. Net cash(payments) receipts on derivatives are a component of realized gain (loss) onderivatives on the consolidated statements of operations. Adjusted net interestmargins on mortgage assets is a non-GAAP financial measurement, however, thereconciliation provided in this table is intended to meet the requirements ofRegulation G as promulgated by the SEC for the presentation of non-GAAPfinancial measurements. We believe that the presentation of adjusted netinterest margin on mortgage assets is useful information for our investors asit more closely reflects the true economics of net interest margins on mortgageassets.

(7)             Theamortization of loan premiums and securitization costs are components ofinterest income and interest expense, respectively. Yield represents the costof amortization of net loan premiums and securitization costs divided by totalaverage mortgage assets.

Decreases in net interest income were primarily due toa decline in net interest margins on mortgage assets primarily caused by thefollowing:

·                    increasein one-month LIBOR rate underlying borrowings only partially offset by realizedgain (loss) from derivative instruments;

27

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·                    differences in interest rateadjustment periods;

·                    prepayments of higher yieldingmortgages; and

·                    a more challenging competitiveenvironment.

*SecondQuarter 2006 vs. Second Quarter 2005*

Net interest income for the second quarter of 2006decreased to a net expense of $14.7 million as compared to net interest incomeof $66.2 million for 2005. The quarter-over-quarter decrease in netinterest income of $80.9 million was primarily due to net interest marginson mortgage assets declining by 126 basis points to (0.25)% for 2006 ascompared to 1.01% for 2005. Net interest margin on mortgage assets declined asone-month LIBOR, which is the interest rate index used to price borrowing costson securitized mortgage and reverse repurchase borrowings, rose approximately200 basis points since the second quarter of 2005 while mortgage assets overthe same period did not re-price upward as quickly. This resulted in anincrease in interest expense of 35% to $328.5 million during the quarterended June 30, 2006 as compared to $243.6 million during the quarter endedJune 30, 2005. Adjusted net interest margins on mortgage assets, as defined inthe yield table above, declined by 29 basis points to 0.38% during the secondquarter of 2006 as compared to 0.67% during the second quarter of 2005. Thedecrease in adjusted net interest margins on mortgage assets was primarily dueto a negative variance of 186 basis points in borrowing costs partially offsetby a favorable variance of 96 basis points on realized gains from derivativeassets and a favorable variance of 54 basis points on mortgage assets ascoupons adjust.

Since the second quarter of 2005, the Federal Reserveraised short-term interest rates, which effected movements in one-month LIBOR,approximately 200 basis points. This caused borrowing costs on adjustable ratesecuritized mortgage borrowings, which are tied to one-month LIBOR to re-pricemonthly without limitation, to rise at a faster pace than coupons on LIBORARMs securing securitized mortgage borrowings, which generally re-priceevery six months with limitation. LIBOR ARMs held in our long-terminvestment portfolio are subject to the following interest rate risks:

·                    interestrate adjustment limitations on mortgages held for long-term investment due toperiodic and lifetime interest rate cap features as compared to borrowingswhich are not subject to adjustment limitations;

·                    mismatchedinterest rate re-pricing periods between mortgages held for long-terminvestment, which generally re-price every six months, and borrowings, whichre-price every month in regards to securitized mortgage borrowingsand daily in regards to reverse repurchase agreements; and

·                    unevenand unequal movements in the interest rate indices used to re-price mortgagesheld for long-term investment, which are generally indexed to one-, three-and six-month LIBOR and one-year LIBOR, and borrowings, which are generallyindexed to one-month LIBOR.

Along with an increase in short-term interest rates,our expectation, based on past experience, was that we would see acorresponding decline in mortgage prepayment speeds. However, mortgageprepayment speeds continued at heightened levels during 2005. There is mortgageindustry evidence that documents a substantial increase in home appreciationrates over the last three years which has been a significant factor affectingprepayment patterns of residential borrowers. Borrowers appear willing to usehome equity to pay loan prepayment penalties in order to obtain lower monthlypayments by refinancing into other mortgage products, such as interest-only andother alternative mortgage products. More recent behavior in our securitizedmortgage collateral reflects some degree of reduced prepayments with thethree-month CPR rate declining to 35% as of June 30, 2006 from 38% as ofDecember 31, 2005.

Amortization of loan premiums and securitizationexpenses decreased by 4 basis points to 1.08% of average mortgage assets duringthe second quarter of 2006 as compared to 1.12% of average mortgage assetsduring the same period in 2005. A substantial portion of our long-term mortgageinvestment portfolio consists of mortgages with prepayment penalty featuresthat are primarily designed to help minimize the rate of early mortgageprepayments. However, if borrowers do prepay on mortgages, a prepayment penaltyis charged which helps partially offset additional amortization of loanpremiums and securitization costs related to the prepaid mortgages. During thesecond quarter of 2006, prepayment penalties received from borrowers was recordedas interest income and increased 10 basis points to 23 basis points of mortgageassets as compared to 13 basis points of mortgage assets in the second quarterof 2005.

Additionally, the net interest margin continues to beimpacted by the difficult competitive environment facing mortgage portfoliolenders. As a result, net interest margins continue to tighten on newlyoriginated loans. Furthermore, a rise

28

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in short-term rates and a decline in long term rateshas resulted in a flattening or inversion of the yield curve, adding pressureto mortgage lending profitability.

During the second quarter of 2006, adjusted netinterest margins on mortgage assets, which is a non-GAAP financial measurementas indicated in the yield table above, decreased by 29 basis points as comparedto a decline of 126 basis points on net interest margin on mortgage assets. Adjustednet interest margin on mortgage assets did not decline as much as net interestmargin on mortgage assets primarily due to a 96 basis point increase inrealized gain (loss) from derivative instruments relative to total averagemortgage assets. Realized gains from derivative instruments partially offsetthe decline in adjusted net interest margins on mortgage assets which wascaused by the factors described above.

Adjusted net interest margins were also affected bythe following during the second quarter of 2006:

·                    our interest rate risk managementpolicies generally include the employment of balance guarantees that limit ourderivatives to no more than 100% coverage of the principal amount outstandingon certain securitized mortgage borrowings at any given time; and

·                    actual mortgage prepayments and thecorresponding repayment of securitized mortgage borrowings exceeded thepre-determined amortization schedule of the notional amount of derivativeinstruments.

Our interest rate risk management policies areformulated with the intent to offset the potential adverse effects of changinginterest rates primarily associated with cash flows on adjustable rate securitizedmortgage borrowings. However, as a result of the combination of the factorslisted above, the interest rate spread differential between ARMs andadjustable rate securitized mortgage borrowings compressed, which decreased netinterest margins on mortgage assets. By design, our current interest rate riskmanagement program provides 20% to 25% coverage of the outstanding principalbalance of our six month LIBOR ARMs and 85% to 98% coverage of theoutstanding principal balance of intermediate, or hybrid, ARMs at thepoint in time that we securitize the mortgages.

*FirstHalf 2006 vs. First Half 2005*

Net interest income for the first six months of 2006decreased to a net expense of $3.3 million as compared to net interest incomeof $147.2 million for 2005. The decrease in net interest income of$150.5 million was primarily due to net interest margins on mortgageassets declining by 118 basis points to (0.02)% for 2006 as compared to 1.16%for 2005. Net interest margin on mortgage assets declined as one-month LIBOR,which is the interest rate index used to price borrowing costs on securitizedmortgage and reverse repurchase borrowings, rose approximately 200 basis pointssince the second quarter of 2005 while mortgage assets over the same period didnot re-price upward as quickly. This resulted in an increase in interestexpense of 48% to $652.2 million as of June 30, 2006 as compared to$439.9 million as of June 30, 2005. Adjusted net interest margins onmortgage assets, as defined in the yield table above, declined by 26 basispoints to 0.48% during the first half of 2006 as compared to 0.74% during thefirst half of 2005. The decrease in adjusted net interest margins on mortgageassets was primarily due to a negative variance of 182 basis points in borrowingcosts partially offset by a favorable variance of 90 basis points on realizedgains from derivative assets and a favorable variance of 58 basis points onmortgage assets as coupons adjust.

Since the second quarter of 2005, the Federal Reserveraised short-term interest rates, which effected movements in one-month LIBOR,approximately 200 basis points. This caused borrowing costs on adjustable ratesecuritized mortgage borrowings, which are tied to one-month LIBOR and re-pricemonthly without limitation, to rise at a faster pace than coupons on LIBORARMs securing securitized mortgage borrowings, which generally re-priceevery six months with limitation. LIBOR ARMs held in our long-terminvestment portfolio are subject to the following interest rate risks:

·                    interest rate adjustmentlimitations on mortgages held for long-term investment due to periodic andlifetime interest rate cap features as compared to borrowings which are notsubject to adjustment limitations;

·                    mismatched interest rate re-pricingperiods between mortgages held for long-term investment, which generallyre-price every six months, and borrowings, which re-price every month inregards to securitized mortgage borrowings and daily in regards to reverserepurchase agreements; and

·                    uneven and unequal movements in theinterest rate indices used to re-price mortgages held for long-term investment,which are generally indexed to one-, three- and six-month LIBOR andone-year LIBOR, and borrowings, which are generally indexed to one-month LIBOR.

29

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Along with an increase in short-term interest rates,our expectation, based on past experience, was that we would see acorresponding decline in mortgage prepayment speeds. However, mortgageprepayment speeds continued at heightened levels during 2005. There is mortgageindustry evidence that documents a substantial increase in home appreciationrates over the last three years which has been a significant factor affectingprepayment patterns of residential borrowers. Borrowers appear willing to usehome equity to pay loan prepayment penalties in order to obtain lower monthlypayments by refinancing into other mortgage products, such as interest-only andother alternative mortgage products. More recent behavior in our securitizedmortgage collateral reflects some degree of reduced prepayments with thethree-month CPR rate declining to 35% as of June 30, 2006 from 38% as ofDecember 31, 2005.

Amortization of loan premiums and securitizationexpenses decreased by 8 basis points to 1.02% of average mortgage assets duringthe first half of 2006 as compared to 1.10% of average mortgage assets duringthe same period in 2005. A substantial portion of our long-term mortgageinvestment portfolio consists of mortgages with prepayment penalty featuresthat are primarily designed to help minimize the rate of early mortgageprepayments. However, if borrowers do prepay on mortgages, a prepayment penaltyis charged which helps partially offset additional amortization of loanpremiums and securitization costs related to the prepaid mortgages. During thefirst six months of 2006, prepayment penalties received from borrowers wasrecorded as interest income and increased 10 basis points to 21 basis points ofmortgage assets as compared to 11 basis points of mortgage assets in the firstsix months of 2005.

Additionally, the net interest margin continues to beimpacted by the difficult competitive environment facing mortgage portfoliolenders. As a result, net interest margins continue to tighten on newlyoriginated loans. Furthermore, a rise in short-term rates and a decline in longterm rates has resulted in a flattening or inversion of the yield curve, addingpressure to mortgage lending profitability.

During the first half of 2006, adjusted net interestmargins on mortgage assets, which is a non-GAAP financial measurement asindicated in the yield table above, decreased by 26 basis points as compared toa decline of 118 basis points on net interest margin on mortgage assets. Adjustednet interest margin on mortgage assets did not decline as much as net interestmargin on mortgage assets primarily due to a 90 basis point increase inrealized gain (loss) from derivative instruments relative to total averagemortgage assets. Realized gains from derivative instruments partially offsetthe decline in adjusted net interest margins on mortgage assets which wascaused by the factors described above.

Adjusted net interest margins were also affected bythe following during the second half of 2006:

·                    our interest rate risk managementpolicies generally include the employment of balance guarantees that limit ourderivatives to no more than 100% coverage of the principal amount outstandingon certain securitized mortgage borrowings at any given time; and

·                    actual mortgage prepayments and thecorresponding repayment of securitized mortgage borrowings exceeded thepre-determined amortization schedule of the notional amount of derivativeinstruments.

Our interest rate risk management policies areformulated with the intent to offset the potential adverse effects of changinginterest rates primarily associated with cash flows on adjustable ratesecuritized mortgage borrowings. However, as a result of the combination of thefactors listed above, the interest rate spread differential between ARMs andadjustable rate securitized mortgage borrowings compressed, which compressednet interest margins on mortgage assets. By design, our current interest raterisk management program provides 20% to 25% coverage of the outstandingprincipal balance of our six month LIBOR ARMs and 85% to 98% coverage ofthe outstanding principal balance of intermediate, or hybrid, ARMs at thepoint in time that we securitize the mortgages.

For further information on our interest rate riskmanagement policies refer to Item 3. “Quantitative and Qualitative DisclosuresAbout Market Risk.”

*Provision for LoanLosses*

The Company provides for loan losses in accordancewith its policies that include a detailed analysis of historical loanperformance data which is analyzed for loss performance and prepaymentperformance by product type, origination year and securitization issuance. Theresults of that analysis are then applied to the current mortgage portfolio andan estimate is created. The Company’s general allowance for loan losses reflectsthe expectation that losses inherent in the portfolio will exceed the level ofannualized losses we are currently experiencing.

30

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The allowance for loan losses of $68.1 million atJune 30, 2006 was comprised of specific reserves for estimated hurricanelosses of $8.1 million, for finance receivables of $10.7 million anda loan portfolio reserve of $49.3 million. There was no change in thespecific reserve for finance receivables during the six month period ended June 30,2006 due to no change in status of the underlying loans. During the six monthperiod ended June 30, 2006, specific reserves on hurricane lossesdecreased by $4.7 million while the loan portfolio reserve decreased by$5.8 million. The decrease in the specific reserve for estimated hurricanelosses was due to updated property inspection report information and pay off ofloans. The decrease in the loan portfolio reserve was due to a decrease in theportfolio of securitized mortgage collateral and mortgages held for investment.The ratio of loan portfolio reserve to annualized loan losses was 2.33 at June 30,2006. The Company believes the total allowance for loan losses is adequate toabsorb losses inherent in the portfolio at June 30, 2006.

For further information on delinquencies in ourlong-term investment portfolio and non-performing assets refer to “FinancialCondition—Credit Risk.”

*Non-InterestIncome*

Changes in Non-InterestIncome(dollars in thousands)

|                                                   | ** ** | **For the Three Months Ended June 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                                            | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Realized gain  (loss) from derivative instruments |       | $                                                                     | 55,868     |   | $ | (1,456 | ) | $ | 57,324 |   | 3937 | % |
| Change in fair  value of derivative instruments   |       | 11,504                                                                |       | (97,679 | ) | 109,183 |   | 112 |   |
| Gain on sale of  loans                            |       | 16,548                                                                |       | 19,094 |   | (2,546 | ) | (13 | ) |
| Provision for  repurchases                        |       | (12,773                                                               | )          | (1,650 | ) | 11,123 |   | 674 |   |
| Loss on lower of  cost or market writedown        |       | (18,780                                                               | )          | — |   | 18,780 |   | — |   |
| Other income                                      |       | 9,581                                                                 |       | 2,307 |   | 7,274 |   | 315 |   |
| Total  non-interest income                        |       | $                                                                     | 61,948     |   | $ | (79,384 | ) | $ | 141,332 |   | 178 | % |

 

*RealizedGain (Loss) from Derivative Instruments.* Realized gain(loss) from derivative instruments increased to $55.9 million during thesecond quarter of 2006 as compared to $(1.5) million during the secondquarter of 2005, or 94 basis points of total average mortgage assets during thesecond quarter of 2006 as compared to (2) basis points of total averagemortgage assets during the second quarter of 2005. The increase in realizedgain (loss) from derivative instruments is due to the approximately 200 basispoint increase in one-month LIBOR from the end of the second quarter 2005,which has caused the floating rate payment received on swaps to increase abovethe fixed payment made. Realized gain (loss) from derivative instruments arerecorded as current period expense or revenue on our consolidated financialstatements and are included in the calculation of taxable income.

*Changein Fair Value of Derivative Instruments.***The change in fair value of derivativeinstruments increased to $11.5 million during the second quarter of 2006as compared to $(97.7) million during the second quarter of 2005. Theamount of market valuation adjustment is the result of changes in theexpectation of future interest rates. We primarily enter into derivativecontracts to offset changes in cash flows associated with securitized mortgageborrowings. In our consolidated financial statements, we record a marketvaluation adjustment for these derivatives, as well as other derivatives usedby the mortgage operations to hedge our loan pipeline and mortgage loans heldfor sale, as current period expense or revenue. The change in fair value ofderivatives at IMH is excluded for purposes of calculating taxable income asshown in the reconciliation table of net earnings to estimated taxable incomein the “Taxable Income” table.

*Gainon Sale of Loans.***The quarter-over-quarter decrease ingain on sale of loans was primarily due to a 9% decrease in loan sales volumeto $2.1 billion, or 79 basis points per loan for the second quarter of2006 as compared to $2.3 billion, or 83 basis points per loan for thesecond quarter of 2005. Additionally, we use derivatives to protect the marketvalue of mortgages when we have established a rate-lock commitment on aparticular mortgage prior to its close and eventual sale or securitization. Anychanges in interest rates on mortgages that we have committed to acquire at aparticular rate until we sell or securitize the mortgage generally results inan increase or decrease in the market value of that mortgage. During the secondquarter of 2006, the value of these derivatives resulted in a gain of $3.0 millionas compared to a loss of $8.2 million during the second quarter of 2005.

31

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* *

*Provisionfor Repurchases.***The provisionfor repurchases increased to $12.8 million during the second quarter 2006as compared to $1.7 million for the second quarter of 2005. The increasein provision for repurchases was primarily due to an increase in whole loansales of mortgages the Company acquired in the third and fourth quarters of2005, which were sold in the fourth quarter of 2005 and the first quarter of2006, and included timing differences in the recourse terms compared to thosethe Company provides to its investors. Many of these loans suffered earlypayment default and exhibited poor paying habits. The Company believes that it hastaken the necessary steps to reduce its exposure to similar events in thefuture. As such, the Company established a provision for estimated lossesrelated to these loans.

*Losson Lower of Cost or Market Writedown.***The loss on lower of cost or market writedown was primarilydue to the writedown on loans repurchased in the second quarter related toloans sold on a whole loan basis rather than securitized. Generally therepresentations and warranties on whole loan sales are more extensive than on asecuritization. The company repurchased approximately $100 million inloans for reasons that primarily included early payment default or exhibitedpoor pay habits. As a result, approximately 13% of loans held-for-sale at June 30,2006, were delinquent with an estimated fair value of 81%, resulting in thesignificant loss on lower of cost or market.

Changes inNon-Interest Income(dollars in thousands)

|                                                   | ** ** | **For the Six Months Ended June 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                                          | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                        | ** ** | **2006**                                                            | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Realized gain  (loss) from derivative instruments |       | $                                                                   | 96,004     |   | $ | (15,183 | ) | $ | 111,187 |   | 732 | % |
| Change in fair  value of derivative instruments   |       | 62,933                                                              |       | 33,639 |   | 29,294 |   | 87 |   |
| Gain on sale of  loans                            |       | 30,741                                                              |       | 31,945 |   | (1,204 | ) | (4 | ) |
| Provision for  repurchases                        |       | (23,110                                                             | )          | (5,364 | ) | 17,746 |   | 331 |   |
| Loss on lower of  cost or market writedown        |       | (15,283                                                             | )          | — |   | 15,283 |   | — |   |
| Other income                                      |       | 18,403                                                              |       | 7,384 |   | 11,019 |   | 149 |   |
| Total  non-interest income                        |       | $                                                                   | 169,688    |   | $ | 52,421 |   | $ | 117,267 |   | 224 | % |

 

*RealizedGain (Loss) from Derivative Instruments.* Realized gain(loss) from derivative instruments increased to $96.0 million during thefirst six months of 2006 as compared to $(15.2) million during the firstsix months of 2005, or 78 basis points of total average mortgage assets duringthe first six months of 2006 as compared to (12) basis points of total averagemortgage assets during the first six months of 2005. The increase in realizedgain (loss) from derivative instruments is due to an approximately 200 basispoint increase in one-month LIBOR from the end of the second quarter of 2005,which has caused the floating rate payment received on swaps to increase abovethe fixed payment made. Realized gain (loss) from derivative instruments isrecorded as current period expense or revenue on our consolidated financialstatements and is included in the calculation of taxable income.

*Changein Fair Value of Derivative Instruments.***The change in fair value of derivativeinstruments increased to $62.9 million during the first six months of 2006as compared to $33.6 million during the first six months of 2005. Theamount of market valuation adjustment is the result of changes in theexpectation of future interest rates. We primarily enter into derivativecontracts to offset changes in cash flows associated with securitized mortgageborrowings. In our consolidated financial statements, we record a marketvaluation adjustment for these derivatives, as well as other derivatives usedby the mortgage operations to hedge our loan pipeline and mortgage loans heldfor sale, as current period expense or revenue. The change in fair value ofderivatives at IMH is excluded for purposes of calculating taxable income asshown in the reconciliation table of net earnings to estimated taxable incomein the “Taxable Income” table.

*Gainon Sale of Loans.***The decrease in gain on sale of loansfor the six months ended June 30, 2006 was primarily due to a decrease inthe associated net gains related to the subsequent sale of whole loans. Duringthe first six months of 2006, net gains on whole loans decreased to 62 basispoints per loan as compared to 103 basis points for the same period in 2005. Additionally,we use derivatives to protect the market value of mortgages when we haveestablished an interest rate-lock commitment on a particular mortgage prior toits close and eventual sale or securitization. Any changes in interest rates onmortgages that we have committed to acquire at a particular rate until we sellor securitize the mortgage generally results in an increase or decrease in themarket value of that mortgage. During the six months ended June 30, 2006,the value of these derivatives resulted in a loss of $83 thousand ascompared to a loss of $2.9 million during the same period in 2005.

32

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* *

*Provisionfor Repurchases.***Provision forrepurchases increased to $23.1 million during the six months ended June 30,2006 as compared to $5.4 million for the six months ended June 30,2005. The increase in provision for repurchases was primarily due to anincrease in whole loan sales of mortgages the Company acquired in the third andfourth quarters of 2005, which were sold in the fourth quarter of 2005 and thefirst quarter of 2006, and included timing differences in the recourse termscompared to those the Company provides to its investors. Many of these loanssuffered early payment default and exhibited poor paying habits. The Companybelieves that it has taken the necessary steps to reduce its exposure tosimilar events in the future. As such, the Company established a provision forestimated losses related to these loans.

*Losson Lower of Cost or Market Writedown.* The loss onlower of cost or market writedown was primarily due to the writedown on loansrepurchased in the second quarter related to loans sold on a whole loan basisrather than securitized. Generally the representations and warranties on wholeloan sales are more extensive than on a securitization. The company repurchasedapproximately $100 million in loans for reasons that primarily includedearly payment default or exhibited poor pay habits. As a result, approximately13% of loans held-for-sale at June 30, 2006, were delinquent with anestimated fair value of 81%, resulting in the significant loss on lower of costor market.

*Non-InterestExpense*

Changes inNon-Interest Expense(dollars in thousands)

|                                                           | ** ** | **For the Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                                            | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                                | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Personnel  expense                                        |       | $                                                                     | 16,710     |   | $ | 20,810 |   | $ | (4,100 | ) | (20 | )% |
| General and  administrative and other expense             |       | 4,524                                                                 |       | 6,560 |   | (2,036 | ) | (31 | ) |
| Professional  services                                    |       | 2,192                                                                 |       | 2,021 |   | 171 |   | 8 |   |
| Equipment  expense                                        |       | 1,809                                                                 |       | 1,236 |   | 573 |   | 46 |   |
| Occupancy  expense                                        |       | 1,244                                                                 |       | 1,171 |   | 73 |   | 6 |   |
| Data processing  expense                                  |       | 744                                                                   |       | 836 |   | (92 | ) | (11 | ) |
| Total operating expense (1)                               |       | 27,223                                                                |       | 32,634 |   | (5,411 | ) | (17 | ) |
| Amortization of  deferred charge                          |       | 5,915                                                                 |       | 6,792 |   | (877 | ) | (13 | ) |
| Amortization and  impairment of mortgage servicing rights |       | 381                                                                   |       | 736 |   | (355 | ) | (48 | ) |
| (Gain) loss on  sale of other real estate owned           |       | (621                                                                  | )          | 20 |   | (641 | ) | 3,205 |   |
| Total non-operating expense (2)                           |       | 5,675                                                                 |       | 7,548 |   | (1,873 | ) | (25 | ) |
| Total  non-interest expense                               |       | $                                                                     | 32,898     |   | $ | 40,182 |   | $ | (7,284 | ) | (18 | )% |

 

33

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Changes inNon-Interest Expense(dollars in thousands)
| ** **                                                | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                                          | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                                | ** ** | **2006**                                                            | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Personnel  expense                                        |       | $                                                                   | 35,331     |   | $ | 39,690 |   | $ | (4,359 | ) | (11 | )% |
| General and  administrative and other expense             |       | 9,600                                                               |       | 11,473 |   | (1,873 | ) | (16 | ) |
| Professional  services                                    |       | 4,509                                                               |       | 5,440 |   | (931 | ) | (17 | ) |
| Equipment  expense                                        |       | 3,319                                                               |       | 2,383 |   | 936 |   | 39 |   |
| Occupancy  expense                                        |       | 2,612                                                               |       | 2,315 |   | 297 |   | 13 |   |
| Data processing  expense                                  |       | 2,110                                                               |       | 1,779 |   | 331 |   | 19 |   |
| Total operating expense (1)                               |       | 57,481                                                              |       | 63,080 |   | (5,599 | ) | (9 | ) |
| Amortization of  deferred charge                          |       | 11,011                                                              |       | 12,595 |   | (1,584 | ) | (13 | ) |
| Amortization and  impairment of mortgage servicing rights |       | 732                                                                 |       | 1,026 |   | (294 | ) | (29 | ) |
| (Gain) loss on  sale of other real estate owned           |       | (976                                                                | )          | (829 | ) | (147 | ) | (18 | ) |
| Total non-operating expense (2)                           |       | 10,767                                                              |       | 12,792 |   | (2,025 | ) | (16 | ) |
| Total  non-interest expense                               |       | $                                                                   | 68,248     |   | $ | 75,872 |   | $ | (7,624 | ) | (10 | )% |

----

(1)             Operatingexpenses are primarily related to the mortgage operations personnel, whichgenerally fluctuates in conjunction with increases or decreases in mortgageacquisition and origination volumes.

(2)             Non-operatingexpenses generally relate to existing assets and liabilities and are generallynot a function of increases or decreases in mortgage acquisition or originationvolumes.

*OperatingExpense.* The decrease in operating expense was primarily dueto the following:

·                    decrease inpersonnel expenses; and

·                    decrease ingeneral and administrative and other expense.

*2006 to 2005Quarterly Comparative*

Total operating expenses decreased 17% on aquarter-over-quarter basis as personnel expense decreased 20% to $16.7 millionduring the second quarter of 2006 as compared to $20.8 million for thesame period in 2005. The quarter over quarter decrease is mainly attributableto a 71% decrease in bonus and incentives to $2.0 million for the secondquarter of 2006 as compared to $6.8 million for the second quarter of2005. General and administrative and other expense decreased 31% on aquarter-over-quarter basis as business promotion decreased 58% to $1.1 millionas compared to $2.6 million for the second quarter of 2005.

*2006 to 2005 SixMonth Comparative*

Total operating expenses decreased 9% for the sixmonths ended June 30, 2006 as personnel expense decreased 11% to $35.3 millionduring the second quarter of 2006 as compared to $39.7 million for thesame period in 2005. The decrease is mainly attributable to a 57% decrease inbonus and incentives to $5.0 million for the six months ended June 30,2006 as compared to $11.7 million for the same period in 2005. General andadministrative and other expense decreased 16% for the six months ended June 30,2006 as business promotion decreased 48% to $2.2 million as compared to$4.2 million for the same period in 2005.

The following table summarizes the principal balanceof mortgage acquisitions and originations for the periods indicated (in thousands):

34

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|                                        | ** ** | **For the Three Months Ended June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **Principal**                                                         | ** ** | ** ** | ** ** | **Principal** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Balance**                                                           | ** ** | **%** | ** ** | **Balance** | ** ** | **%** | ** ** |
| By Production Channel:                 | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Correspondent  acquisitions:           | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Flow                                   |       | $                                                                     | 1,519,107  |   | 61 |   | $ | 1,912,770 |   | 34 |   |
| Bulk                                   |       | 60,079                                                                |       | 3 |   | 2,911,775 |   | 51 |   |
| Total correspondent acquisitions       |       | 1,579,186                                                             |       | 64 |   | 4,824,545 |   | 85 |   |
| Wholesale and retail originations      |       | 622,815                                                               |       | 25 |   | 638,961 |   | 11 |   |
| Total mortgage operations acquisitions |       | 2,202,001                                                             |       | 89 |   | 5,463,506 |   | 96 |   |
| Commercial Mortgage Operations         |       | 277,905                                                               |       | 11 |   | 214,597 |   | 4 |   |
| Total  acquisitions and originations   |       | $                                                                     | 2,479,906  |   | 100 |   | $ | 5,678,103 |   | 100 |   |

 

*2006to 2005 Quarterly Comparative*

As a result of the Company’s pricing strategies and amore competitive market, total residential acquisitions and originations forthe second quarter of 2006 decreased to $2.2 billion as compared to $5.5 billionfor the same period in 2005. Pricing strategies and an increasingly competitivemarket is the primary driver behind the reduction in bulk acquisitions, whichdecreased to 3% of our total correspondent acquisitions during the secondquarter of 2006 as compared to 51% for the same period in 2005. Commercialoriginations have increased to $277.9 million for the second quarter of2006 as compared to $214.6 million for the same period in 2005. Theincrease is primarily due to the expansion of our commercial operations in theWest Coast and Mid-west regions.

|                                        | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                                            | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **Principal**                                                       | ** ** | ** ** | ** ** | **Principal** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Balance**                                                         | ** ** | **%** | ** ** | **Balance** | ** ** | **%** | ** ** |
| By Production Channel:                 |       |                                                                |       |   |   |   |   |   |   |
| Correspondent  acquisitions:           |       |                                                                |       |   |   |   |   |   |   |
| Flow                                   |       | $                                                                   | 2,942,015  |   | 61 |   | $ | 4,290,170 |   | 41 |   |
| Bulk                                   |       | 191,757                                                             |       | 4 |   | 4,588,709 |   | 44 |   |
| Total correspondent acquisitions       |       | 3,133,772                                                           |       | 65 |   | 8,878,879 |   | 85 |   |
| Wholesale and retail originations      |       | 1,172,364                                                           |       | 25 |   | 1,248,744 |   | 12 |   |
| Total mortgage operations acquisitions |       | 4,306,136                                                           |       | 90 |   | 10,127,623 |   | 97 |   |
| Commercial Mortgage Operations         |       | 480,685                                                             |       | 10 |   | 379,901 |   | 3 |   |
| Total  acquisitions and originations   |       | $                                                                   | 4,786,821  |   | 100 |   | $ | 10,507,524 |   | 100 |   |

 

*2006 to 2005 SixMonth Comparative*

Acquisitions and originations decreased to $4.8 billionfor the first six months of 2006 as compared to $10.5 for the same period in2005. The reduction in acquisitions and originations at the mortgage operationsis primarily due to a 96% decrease in bulk acquisitions to $191.8 millionfor the first six months of 2006 as compared to $4.6 billion for the sameperiod in 2005. Pricing strategies and an increasingly competitive market isthe primary driver behind the reduction in bulk acquisitions. Commercialoriginations have increased 27% to $480.7 million for the first six monthsof 2006 as compared to $379.9 million for the same period in 2005 as theCompany has hired additional sales personnel to manage and support the growthof the commercial operations into other regions of the United States.

35

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***Results ofOperations by Business Segment***

*Long-TermInvestment Operations*

CondensedStatements of Operations Data(dollars in thousands)

|                                                              | ** ** | **For the Three Months Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | ** **                                                            | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                                   | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest  (expense) income                               |       | $                                                                     | (35,226    | ) | $ | 28,908 |   | $ | (64,134 | ) | (222 | )% |
| (Recovery of)  provision for loan losses                     |       | (45                                                                   | )          | 5,711 |   | (5,756 | ) | (101 | ) |
| Net interest expense income after provision for loan  losses |       | (35,181                                                               | )          | 23,197 |   | (58,378 | ) | (252 | ) |
|                                                         |       |                                                                  |       |   |   |   |   |   |   |
| Realized gain  (loss) from derivative instruments            |       | 55,851                                                                |       | (1,456 | ) | 57,307 |   | 3,936 |   |
| Change in fair  value of derivative instruments              |       | 7,903                                                                 |       | (90,872 | ) | 98,775 |   | 109 |   |
| Other  non-interest (expense) income                         |       | (518                                                                  | )          | 1,140 |   | (1,658 | ) | (145 | ) |
| Total non-interest income (loss)                             |       | 63,236                                                                |       | (91,188 | ) | 154,424 |   | 169 |   |
|                                                         |       |                                                                  |       |   |   |   |   |   |   |
| Non-interest  expense                                        |       | 3,680                                                                 |       | 4,307 |   | (627 | ) | (15 | ) |
| Net earnings  (loss)                                         |       | $                                                                     | 24,375     |   | $ | (72,298 | ) | $ | 96,673 |   | 134 | % |

 

The quarter-over-quarter increase in net earnings wasprimarily due to the change in fair value on derivative instruments whichincreased to $7.9 million for the second quarter of 2006 as compared to anet expense of $90.9 million for the second quarter of 2005. The marketvaluation adjustment is the result of changes in the expectation of futureinterest rates. Additionally, net interest income declined to a net expense of$35.2 million compared to net interest income of $28.9 million,primarily due to an increase in borrowing costs, which were substantiallyoffset by realized gain (loss) from derivative instruments, which increased to$55.9 million for the second quarter of 2006 compared to $(1.5) millionfor the second quarter of 2005. Together, net interest income and realized gain(loss) from derivative instruments declined 25% to $20.6 million for thethree months ended June 30, 2006 compared to $27.5 million for thethree months ended June 30, 2005. This decline is primarily attributableto the aforementioned net interest margin compression.

CondensedStatements of Operations Data(dollars in thousands)

|                                                     | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                                          | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                          | ** ** | **2006**                                                            | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest  (expense) income                      |       | $                                                                   | (47,314    | ) | $ | 81,027 |   | $ | (128,341 | ) | (158 | )% |
| Provision for  loan losses                          |       | 105                                                                 |       | 11,785 |   | (11,680 | ) | (99 | ) |
| Net interest income after provision for loan losses |       | (47,419                                                             | )          | 69,242 |   | (116,661 | ) | (168 | ) |
|                                                |       |                                                                |       |   |   |   |   |   |   |
| Realized gain  (loss) from derivative instruments   |       | 95,986                                                              |       | (15,183 | ) | 111,169 |   | 732 |   |
| Change in fair  value of derivative instruments     |       | 54,866                                                              |       | 38,007 |   | 16,859 |   | 44 |   |
| Other  non-interest (expense) income                |       | (782                                                                | )          | 981 |   | (1,763 | ) | (180 | ) |
| Total non-interest income                           |       | 150,070                                                             |       | 23,805 |   | 126,265 |   | 530 |   |
|                                                |       |                                                                |       |   |   |   |   |   |   |
| Non-interest  expense                               |       | 7,718                                                               |       | 7,000 |   | 718 |   | 10 |   |
| Net earnings                                        |       | $                                                                   | 94,933     |   | $ | 86,047 |   | $ | 8,886 |   | 10 | % |

 

36

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Net interest income declined to a net expense of $47.3 millioncompared to net interest income of $81.0 million, primarily due to anincrease in borrowing costs, which were substantially offset by realized gain(loss) from derivative instruments which increased to $96.0 million forthe first six months of 2006 compared to $(15.2) million for the same period in2005. Together, net interest income and realized gain (loss) from derivativeinstruments declined 26% to $48.7 million for the six months ended June 30,2006 compared to $65.8 million for the six months ended June 30,2005. This decline is primarily attributable to the aforementioned net interestmargin compression. Additionally, the change in fair value on derivativeinstruments increased to $54.9 million for the first six months of 2006 ascompared to $38.0 million for the same period in 2005. The marketvaluation adjustment is the result of changes in the expectation of futureinterest rates.

*MortgageOperations*

CondensedStatements of Operations Data(dollars in thousands)

|                                            | ** ** | **For the Three Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                                            | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                 | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest  (loss) income                |       | $                                                                     | (2,664     | ) | $ | 4,685 |   | $ | (7,349 | ) | (157 | )% |
| Gain on sale of  loans                     |       | 19,109                                                                |       | 31,515 |   | (12,406 | ) | (39 | ) |
| Provision for  repurchases                 |       | (12,773                                                               | )          | (1,650 | ) | (11,123 | ) | (674 | ) |
| Loss on lower of  cost or market writedown |       | (18,780                                                               | )          | — |   | (18,780 | ) | — |   |
| Other income  (loss)                       |       | 9,791                                                                 |       | (5,792 | ) | 15,583 |   | 269 |   |
| Non-interest  expense and income taxes     |       | 10,766                                                                |       | 29,501 |   | (18,735 | ) | (64 | ) |
| Net earnings                               |       | $                                                                     | (16,083    | ) | $ | (743 | ) | $ | (15,340 | ) | (2065 | )% |

 

*Gainon Sale of Loans.***Gain(loss) on sale of loans decreased $12.4 million to $19.1 million forthe second quarter of 2006 as compared to $31.5 million for the sameperiod in 2005. The decrease in gain on sale of loans is primarily attributableto a 9% decrease in loan sales volume to $2.1 billion for the secondquarter of 2006 as compared to $2.3 billion for the same period in 2005. Additionally,the long-term investment operations did not retain any loans for investmentpurposes during the second quarter of 2006 as compared to $3.1 billion forthe same period in 2005. However, the long-term investment operations retainedthe residual interest in the ISAC REMIC 2006-2 securitization of approximately$29.8 million. The mortgage operations use derivatives to protect themarket value of mortgages when it establishes a rate-lock commitment on aparticular mortgage prior to its close and sale or securitization. During thesecond quarter of 2006, the value of these derivatives were $3.0 millionas compared to $(8.4) million for the second quarter of 2005. Any changesin interest rates on mortgages that the mortgage operations has committed toacquire at a particular rate to the time it sells or securitizes the mortgagegenerally results in an increase or decrease in the market value of thatmortgage. The mortgage operations are reflected as a stand-alone entity forsegment financial reporting purposes; however, on the consolidated financialstatements inter-company loan sales and related gains are eliminated.

*Provisionfor Repurchases.* Provision for repurchases increasedto $12.8 million during the second quarter of 2006 as compared to $1.7 millionfor the same period in 2005 despite the decrease in the mortgage operationswhole loan sales volume. Provision for repurchases increased as a result of anincrease in repurchase requests, mainly early payment default related, duringthe second quarter of 2006. The increase was substantially related to elevatedlevels of whole loan sales during 2005.

*Losson Lower of Cost or Market Writedown.***Furthermore, net earnings decreased asthe Company recorded a LOCOM writedown of $18.8 million for the quarterended June 30, 2006 associated with repurchased loans at the mortgageoperations. Additionally, the historical timing from sale to repurchase, whichis approximately ten months, has exposed the Company to an increasingly higheramount of repurchase requests related to elevated levels of whole loan salesduring 2005 as origination volumes peaked at approximately $22 billion.The historical repurchase percentage to whole loans sales has beenapproximately 1.25%. The Company believes that repurchases have peaked duringthe second quarter of 2006 and expects repurchase activity to decline duringthe latter half of 2006 as loan volumes decrease.

*Non-InterestExpense and Income Taxes.***Non-interestexpense and income taxes decreased to $10.8 million for the second quarterof 2006 compared to $29.5 million for second quarter of 2005 primarily dueto an increase in the income tax benefit as a result of net losses at thetaxable REIT subsidiary during the second quarter of 2006. The income taxbenefit increased to $9.5 million for the second quarter of 2006 comparedto income taxes expense of $556 thousand for the second

37

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quarter of 2005. The Company expects to fully utilizethe recorded income tax benefit. The Company makes an estimate of the effectivetax rate expected to be applicable for the fiscal year when providing for taxexpense (benefit).

CondensedStatements of Operations Data(dollars in thousands)

|                                            | ** ** | **For the Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                                          | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                                 | ** ** | **2006**                                                            | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest  (expense) income             |       | $                                                                   | (1,386     | ) | $ | 6,659 |   | $ | (8,045 | ) | (121 | )% |
| Gain on sale of  loans                     |       | 39,056                                                              |       | 74,744 |   | (35,688 | ) | (48 | ) |
| Provision for  repurchases                 |       | (23,110                                                             | )          | (5,364 | ) | (17,746 | ) | (331 | ) |
| Loss on lower of  cost or market writedown |       | (15,283                                                             | )          | — |   | (15,283 | ) | — |   |
| Other income                               |       | 21,473                                                              |       | 652 |   | 20,821 |   | 3193 |   |
| Non-interest  expense and income taxes     |       | 34,581                                                              |       | 61,268 |   | (26,687 | ) | (44 | ) |
| Net earnings                               |       | $                                                                   | (13,831    | ) | $ | 15,423 |   | $ | (29,254 | ) | (190 | )% |

 

*Gainon Sale of Loans.* Gain (loss) on sale of loansdecreased to $39.1 million for the first six months of 2006 as compared to$74.7 million for the same period in 2005. The decrease is primarilyattributable to inter-company loan sale gains as the long-term investmentoperations retained for investment purposes $694.4 million for the firstsix months of 2006 as compared to $6.4 billion for the same period in2005, reducing the associated gains relating to the transfer of those loans by$38.7 million. The mortgage operations are reflected as a stand-aloneentity for segment financial reporting purposes; however, on the consolidated financialstatements inter-company loan sales and related gains are eliminated

*Provisionfor Repurchases.***Provisionfor repurchases increased to $23.1 million for the first six months of2006 as compared to $5.4 million for the same period in 2005. Provisionfor repurchases increased as a result of an increase in whole loan sale volumesat the mortgage operations to $4.1 billion during the first six months of2006 as compared to $2.5 billion for the same period in 2005 and anincrease in repurchase requests, mainly early payment default related, which isconsistent with the slowdown in the housing market, greater competition and anincrease in interest rates. The increase was substantially related to elevatedlevels of whole loan sales during 2005.

*Losson Lower of Cost or Market Writedown.***Furthermore,net earnings decreased as the Company recorded a LOCOM writedown in thesecond quarter of $18.8 million associated with repurchased loans at themortgage operations. Additionally, the historical timing from sale torepurchase, which is approximately ten months, has exposed the Company to anincreasingly higher amount of repurchase requests related to elevated levels ofwhole loan sales during 2005 as origination volumes peaked at approximately $22 billion.The historical repurchase percentage to whole loans sales has beenapproximately 1.25%. The Company believes that repurchases have peaked duringthe second quarter of 2006 and expects repurchase activity to decline duringthe latter half of 2006 as loan volumes decrease.

*Non-InterestExpense and Income Taxes.***Non-interestexpense and income taxes decreased to $34.6 million for the first sixmonths of 2006 compared to $61.3 million for the same period in 2005. Anincome tax benefit of $8.0 million was recorded during the first sixmonths of 2006 as compared to income taxes expense of $5.9 million for thesame period in 2005 as a result of net losses at the taxable REIT subsidiaryduring 2006 compared to nets gains during the same period in 2005. The Companyexpects to fully utilize the recorded income tax benefit. The Company makes anestimate of the effective tax rate expected to be applicable for the fiscalyear when providing for tax expense (benefit).

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*WarehouseLending Operations*

CondensedStatements of Operations Data(dollars in thousands)

|                                        | ** ** | **For the Three Months Ended June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                             | ** ** | ** **                                                            | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest  income                   |       | $                                                                     | 6,879      |   | $ | 13,638 |   | $ | (6,759 | ) | (50 | )% |
| Non-interest  income                   |       | 751                                                                   |       | 2,230 |   | (1,479 | ) | (66 | ) |
| Non-interest  expense and income taxes |       | 1,627                                                                 |       | 1,770 |   | (143 | ) | (8 | ) |
| Net earnings                           |       | $                                                                     | 6,003      |   | $ | 14,098 |   | $ | (8,095 | ) | (57 | )% |

 

The quarter-over-quarter decrease in net earnings wasprimarily due to a decrease in net interest income as interest income onmortgage assets decreased to $30.2 million in the second quarter of 2006as compared to $39.9 million for the same period in 2005 due to thedecline in the average balance of outstanding finance receivables. The decreasein interest income was partially offset by a decrease in interest expense onmortgage borrowings of $2.9 million. Additionally, loan fees decreased$1.5 million decreasing non-interest income. For the three months ended June 30,2006 and June 30, 2005, no provision for loan loss was recorded. Thewarehouse lending operations is reflected as a stand-alone entity for segmentfinancial reporting purposes. However, on the consolidated financial statementsinter-company finance receivables and borrowings are eliminated.

CondensedStatements of Operations Data(dollars in thousands)

|                                        | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                             | ** ** | ** **                                                          | ** ** | ** ** | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **2006**                                                            | ** ** | **2005** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Net interest  income                   |       | $                                                                   | 14,570     |   | $ | 24,980 |   | $ | (10,410 | ) | (42 | )% |
| Non-interest  income                   |       | 1,548                                                               |       | 4,257 |   | (2,709 | ) | (64 | ) |
| Non-interest  expense and income taxes |       | 3,501                                                               |       | 3,855 |   | (354 | ) | (9 | ) |
| Net earnings                           |       | $                                                                   | 12,617     |   | $ | 25,382 |   | $ | (12,765 | ) | (50 | )% |

 

The decrease in net earnings for the six months ended June 30,2006, was primarily due to a decrease in net interest income as borrowing costson mortgage assets increased to $48.7 million for the first half of 2006as compared to $42.6 million for the same period in 2005 as one-monthLIBOR, which is tied to our borrowing costs, increased approximately 200 basispoints since the end of the second quarter of 2005. Additionally, interestincome on mortgage assets decreased to $63.7 million for the six monthsended June 30, 2006, as compared to $68.1 million during the sameperiod in 2005 due to the decline in the average balance of outstanding financereceivables. Net earnings were also impacted by the decrease in loan fees of$2.6 million. For the six months ended June 30, 2006 and June 30,2005, no provision for loan loss was recorded. The warehouse lending operationsis reflected as a stand-alone entity for segment financial reporting purposes.However, on the consolidated financial statements inter-company financereceivables and borrowings are eliminated.

*CommercialOperations*

CondensedStatements of Operations Data(dollars in thousands)

|                                        | ** ** | **For the**            | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **Three Months**       | ** ** |
| ** **                             | ** ** | **Ended**                   | ** ** |
| ** **                             | ** ** | **June 30, 2006** | ** ** |
| Net interest  income                   |       | $                           | 56         |   |
| Non-interest  income                   |       | 1,019                       |       |
| Non-interest  expense and income taxes |       | 2,696                       |       |
| Net loss                               |       | $                           | (1,621     | ) |

 

On January 1, 2006, we elected to convert ImpacCommercial Capital Corporation “ICCC” from a qualified REIT subsidiary to ataxable REIT subsidiary. Therefore, there is no corresponding quarter overquarter comparison.

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Net loss for the commercial operations was $1.6 millionfor the second quarter of 2006. Non-interest income was $1.0 million inthe second quarter of 2006 due to the gain on sale of loans of $2.1 millionwhich was partially offset by the change in fair value of derivativeinstruments of $(1.0) million. Offsetting non-interest income wasnon-interest expense and income taxes of $2.7 million due to the expansionof our commercial mortgage operations. The commercial operations are reflectedas a stand-alone entity for segment financial reporting purposes; however, onthe consolidated financial statements inter-company loan sales and relatedgains are eliminated.

CondensedStatements of Operations Data(dollars in thousands)

|                                        | ** ** | **For the**            | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **Six Months**         | ** ** |
| ** **                             | ** ** | **Ended**                   | ** ** |
| ** **                             | ** ** | **June 30, 2006** | ** ** |
| Net interest  income                   |       | $                           | 190        |   |
| Non-interest  income                   |       | 2,898                       |       |
| Non-interest  expense and income taxes |       | 5,105                       |       |
| Net loss                               |       | $                           | (2,017     | ) |

 

On January 1, 2006, we elected to convert ImpacCommercial Capital Corporation “ICCC” from a qualified REIT subsidiary to ataxable REIT subsidiary. Therefore, there is no corresponding six months 2006over six months 2005 comparison.

Net loss for the commercial operations was $2.0 millionfor the first six months of 2006. Non-interest income was $2.9 million inthe first six months of 2006 due to the gain on sale of loans of $3.1 millionwhich was partially offset by the change in fair value of derivativeinstruments of $(218) thousand. Offsetting non-interest income wasnon-interest expense and income taxes of $5.1 million due to the expansionof our commercial mortgage operations. The commercial operations are reflectedas a stand-alone entity for segment financial reporting purposes; however, onthe consolidated financial statements inter-company loan sales and relatedgains are eliminated.

**Liquidity andCapital Resources**

We recognize the need to have funds available for ouroperating businesses and our customers’ demands for obtaining short-termwarehouse financing until the settlement or sale of mortgages with us or withother investors. It is our policy to have adequate liquidity at all times tocover normal cyclical swings in funding availability and mortgage demand and toallow us to meet abnormal and unexpected funding requirements. We plan to meetliquidity through normal operations with the goal of avoiding unplanned salesof assets or emergency borrowing of funds. Toward this goal, ourasset/liability committee, or “ALCO,” is responsible for monitoring ourliquidity position and funding needs.

ALCO participants include senior executives of thelong-term investment operations, the mortgage operations, the commercialoperations, and warehouse lending operations. ALCO meets on a weekly basis toreview current and projected sources and uses of funds. ALCO monitors thecomposition of the balance sheet for changes in the liquidity of our assets.Our primary liquidity consists of cash and cash equivalents; short-termsecurities available for sale, and maturing mortgages, or “liquid assets.”

We believe that current cash balances, short-terminvestments, currently available financing facilities, capital raisingcapabilities and excess cash flows generated from our long-term mortgageportfolio will adequately provide for projected funding needs and limited assetgrowth.

Our operating businesses primarily use available fundsas follows:

·                    acquisitionand origination of mortgages by the mortgage, commercial, and long-terminvestment operations;

·                    long-terminvestment in mortgages by the long-term investment operations;

·                    provideshort-term warehouse advances by the warehouse lending operations;

·                    pay intereston debt;

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·                    distributecommon and preferred stock dividends;

·                    pay operatingand non-operating expenses; and

·                    potentialbusiness acquisitions.

*Acquisitionand origination of mortgages by the mortgage, commercial, and long-terminvestment operations.* During the second quarter of2006, the mortgage operations acquired and originated $2.2 billion ofprimarily Alt-A mortgages, none of which was retained by the long-terminvestment operations for long-term investment. Capital invested in mortgagesis outstanding until we sell or securitize mortgages, which is one of thereasons we attempt to sell or securitize mortgages within 90 days of acquisitionor origination. Initial capital invested in mortgages includes premiums paidwhen mortgages are acquired and originated and our capital investment, or “haircut,”required upon financing, which is generally determined by the type ofcollateral provided. The mortgage operations acquired and originated mortgagesat a weighted average price of 101.70 during the second quarter of 2006, whichwere financed with warehouse borrowings from the warehouse lending operationsat a haircut generally between 2% to 10% of the outstanding principal balanceof the mortgages. In addition, ICCC originated $277.9 million ofcommercial mortgages at a weighted average price of 100.02 which were initiallyfinanced with short-term warehouse financing from the warehouse lendingoperations at a haircut of generally 3% of the outstanding principal balance ofthe mortgages.

*Long-terminvestment in mortgages by the long-term investment operations.*The long-term investment operations acquires primarily Alt-A mortgages from themortgage operations and finances them with warehouse borrowings from thewarehouse lending operations at substantially the same terms as the mortgageoperations. When the long-term investment operations finances mortgages withlong-term securitized mortgage borrowings, short-term warehouse financing isrepaid. Then, depending on credit ratings from national credit rating agencieson our securitized mortgage borrowings, we are generally required to provide anover-collateralization, or “OC”, of 0.35% to 1% of the principal balance ofmortgages securing securitized mortgage borrowings as compared to a haircut of2% to 10% of the principal balance of mortgages securing short-term warehousefinancing. Our total capital investment in securitized mortgage collateral generallyranges from approximately 2% to 5% of the principal balance of mortgagessecuring securitized mortgage borrowings which includes premiums paid uponacquisition of mortgages from the mortgage operations, costs paid forcompletion of securitized mortgage borrowings, costs to acquire derivatives andOC required to achieve desired credit ratings. Commercial mortgages arefinanced on a long-term basis with securitized mortgage borrowings atsubstantially the same rates and terms as Alt-A mortgages.

*Provideshort-term warehouse advances by the warehouse lending operations.***We utilize committed and uncommittedreverse repurchase facilities with various lenders to provide short-termwarehouse financing to affiliates and non-affiliated clients of the warehouselending operations. The warehouse lending operations provides short-termfinancing to the mortgage operations and non-affiliated clients from theclosing of mortgages to their sale or other settlement with investors. Thewarehouse lending operations generally finances between 90% and 98% of the fairmarket value of the principal balance of mortgages, which equates to a haircutrequirement of between 10% and 2%, respectively, at one-month LIBOR, plus aspread. The mortgage operations have uncommitted warehouse line agreements toobtain financing from the warehouse lending operations at one-month LIBOR plusa spread during the period that the mortgage operation accumulates mortgagesuntil the mortgages are securitized or sold. As of June 30, 2006, the mortgageoperations had $967.4 million of warehouse advances outstanding with thewarehouse lending operations. In addition, as of June 30, 2006, the warehouselending operations had $693.5 million of approved warehouse linesavailable to non-affiliated clients, of which $292.8 million wasoutstanding.

Our ability to meet liquidity requirements and thefinancing needs of our customers is subject to the renewal of our credit andrepurchase facilities or obtaining other sources of financing, if required,including additional debt or equity from time to time. Any decision our lendersor investors make to provide available financing to us in the future willdepend upon a number of factors, including:

·                    our compliancewith the terms of our existing credit arrangements;

·                    our financialperformance;

·                    industry andmarket trends in our various businesses;

·      thegeneral availability of, and rates applicable to, financing and investments;

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·                    our lenders orinvestors resources and policies concerning loans and investments; and

·                    the relativeattractiveness of alternative investment or lending opportunities.

*Distributecommon and preferred stock dividends.* We are requiredto distribute a minimum of 90% of our taxable income to our stockholders inorder to maintain our REIT status, exclusive of the application of any tax losscarry forwards that may be used to offset current period taxable income.Because we pay dividends based on taxable income, dividends may be more or lessthan net earnings. We declared cash dividends of $0.25 per outstanding commonshare for the second quarter of 2006 on estimated taxable income of $0.27 perdiluted common share and paid cash dividends of $0.25 per outstanding commonshare for the first quarter of 2006. In addition, we paid cash dividends of $3.7 millionon preferred stock during the second quarter of 2006.

A portion of dividends paid to IMH’s stockholders cancome from dividend distributions from the mortgage operations and commercialoperations, our taxable REIT subsidiaries, to IMH. During the second quarter of2006, the mortgage operations provided a $3.5 million dividenddistribution to IMH. Because the mortgage and commercial operations may seek toretain earnings to fund the acquisition and origination of mortgages or toexpand the mortgage operations, the board of directors of our taxable REITsubsidiaries, which is different from the board of directors of the registrant,may decide that the mortgage and/or commercial operations should cease makingdividend distributions in the future. This could reduce the amount of taxableincome that would be distributed to IMH stockholders in the form of commonstock dividend payment amounts.

During the second quarter of 2006, our operatingbusinesses are primarily funded as follows:

·                    reverserepurchase agreements and securitized mortgage borrowings;

·                    excess cashflows from our long-term mortgage portfolio;

·                    sale andsecuritization of mortgages;

And we have the flexibility to fund our business with:

·                    cash proceedsfrom the issuance of common and preferred stock; and

·                    cash proceedsfrom the issuance of trust preferred securities.

*Reverserepurchase agreements and securitized mortgage borrowings.***We use reverse repurchase agreements tofund substantially all warehouse financing to affiliates and non-affiliatedclients and for the acquisition and origination of Alt-A and commercialmortgages. As we accumulate mortgages, we finance the acquisition of mortgagesprimarily through borrowings on reverse repurchase facilities with third partylenders. We primarily use uncommitted and committed facilities with majorinvestment banks to finance substantially all warehouse financing, as needed. Duringthe second quarter of 2006 the warehouse facilities amounted to $5.2 billion,of which $1.3 billion was outstanding at June 30, 2006. The warehousefacilities provide us with a higher aggregate credit limit to fund theacquisition and origination of mortgages at terms comparable to those we havereceived in the past. These warehouse facilities may have certain covenanttests which we continue to satisfy. From time to time, we may also receiveadditional uncommitted interim financing from our lenders in excess of ourpermanent borrowing limits to finance mortgages during the accumulation phaseand prior to securitizations or whole loan sales.

From time to time, we may also utilize short-termreverse repurchase financing provided to us by underwriters who underwrite someof our securitizations. The short-term reverse repurchase financing fundsmortgages that are specifically allocated to securitization transactions, whichallows us to reduce overall borrowings outstanding on reverse repurchaseagreements with other lenders during the period immediately prior to thesettlement of the securitization. Terms and interest rates on the short-termreverse repurchase facilities are generally lower than on other reverserepurchase agreements. Short-term reverse repurchase financing are generallyrepaid within 30 days from the date funds are advanced.

We expect to continue to use short-term reverserepurchase facilities to fund the acquisition of mortgages. If we cannot renewor replace maturing borrowings, we may have to sell, on a whole loan basis, themortgages securing these facilities, which, depending upon market conditions mayresult in substantial losses. Additionally, if for any reason the market valueof

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our mortgages securing reverse repurchase facilitiesdecline, our lenders may require us to provide them with additional equity orcollateral to secure our borrowings, which may require us to sell mortgages atsubstantial losses.

In order to mitigate the liquidity risk associatedwith reverse repurchase agreements, we attempt to sell or securitize ourmortgages within 90 days from acquisition or origination. Although securitizingmortgages more frequently adds operating and securitization costs, we believethe added cost is offset as liquidity is provided more frequently with lessinterest rate and price volatility, as the accumulation and holding period ofmortgages is shortened. When we have accumulated a sufficient amount ofmortgages, we seek to issue securitized mortgage borrowings and convertshort-term advances under reverse repurchase agreements to long-termsecuritized mortgage borrowings. The use of securitized mortgage borrowingsprovides the following benefits:

·                    allowsus to use long term financing for the duration of the securitizedmortgage collateral; and

·                    eliminatesthe potential for margin calls on the borrowings that are converted fromreverse repurchase agreements to securitized mortgage borrowingsas well as associated derivatives used to manage interest rate risks on securitizedmortgage borrowings.

During the first six months of 2006, we completed$923.0 million of securitized mortgage borrowings to provide long-termfinancing for $920.1 million of primarily Alt-A and commercial mortgages.Because of the credit profile, historical loss performance and prepaymentcharacteristics of our Alt-A and commercial mortgages, we have been able toborrow a higher percentage against the principal balance of mortgages held assecuritized mortgage collateral, which means that we have to provide lessinitial capital upon completion of securitized mortgage borrowings. Capitalinvestment in the securitized mortgage borrowings is established at the timesecuritized mortgage borrowings are issued at levels sufficient to achievedesired credit ratings on the securities from credit rating agencies.

*Excesscash flows from our long-term mortgage portfolio.* Wereceive excess cash flows on mortgages held as securitized mortgage collateralafter distributions are made to investors on securitized mortgage borrowings tothe extent cash or other collateral required to maintain desired credit ratingson the securitized mortgage borrowings is fulfilled and can be used to providefunding for some of the long-term investment operations’ activities. Excesscash flows represent the difference between principal and interest payments onthe underlying mortgages, adjusted by the following:

·                    servicing andmaster servicing fees paid;

·                    premiums paidto mortgage insurers;

·                    cash payments/ receipts on derivatives;

·                    interest paidon securitized mortgage borrowings;

·                    pro-rata earlyprincipal prepayments paid on securitized mortgage borrowings;

·                    OCrequirements;

·                    actuallosses, net of any gains incurred upon disposition of other real estate ownedor acquired in settlement of defaulted mortgages;

·                    unpaidinterest shortfall;

·                    basis riskshortfall;

·                    bondwritedowns reinstated; and

·                    residualcashflow.

*Saleand securitization of mortgages.*We sell and securitize loans in thefollowing ways:

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·                    When the mortgage operationsaccumulate a sufficient amount of mortgages that are intended to be depositedinto a securitized mortgage borrowing, it sells the mortgages to the long-terminvestment operations;

·                    When selling mortgages on a wholeloan basis, the mortgage operations will accumulate mortgages and enter intosales transactions with third party investors on a monthly basis; and

·                    When the mortgage operations enterinto a securitization treated as a sale for GAAP and tax purposes itaccumulates mortgages and sells these loans periodically.

The mortgage operations sold $694.4 million ofmortgages to the long-term investment operations during the six months of 2006and sold $5.0 billion of mortgages to third party investors through wholeloan sales and REMICs. The mortgage operations sold mortgage servicing rightson all mortgages sold during the first six months of 2006. The sale of mortgageservicing rights generated substantially all cash, which was used to acquireand originate additional mortgage assets.

Since we rely significantly upon sales andsecuritizations to generate cash proceeds to repay borrowings and to createcredit availability, any disruption in our ability to complete sales andsecuritizations may require us to utilize other sources of financing, which, ifavailable at all, may be on less favorable terms. In addition, delays inclosing sales and securitizations of our mortgages increase our risk byexposing us to credit and interest rate risk for this extended period of time.

*Commonand Preferred Stock Sales Agreements.***We filed with the SEC a shelfregistration statement that allows us to sell up to $1.0 billion ofsecurities, including common stock, preferred stock, debt securities andwarrants. This registration was declared effective by the SEC on September 6,2005. By issuing new shares periodically throughout 2005 and the first half of2006, we believe that we were able to utilize new capital more efficiently andprofitably.

On September 30, 2005, the Company entered into acommon stock sales agreement with Brinson Patrick Securities Corporation(Brinson Patrick) for the sale of up to 7.5 million shares of its commonstock from time to time through Brinson Patrick as sales agent. No shares ofcommon stock were sold during the three months ended June 30, 2006.

On September 30, 2005, the Company entered into aPreferred Stock sales agreement with Brinson Patrick, for the sale of up to800,000 shares of its 9.125% Series C Cumulative Redeemable Preferred Stock(Series C Preferred Stock) from time to time through Brinson Patrick as salesagent. During the three months ended June 30, 2006, no shares of Series CPreferred Stock were sold.

For the six months ended June 30, 2006, the ratioof earnings to fixed charges and ratio of earnings to combined fixed chargesand preferred stock dividends was 1.15x and 1.14x, respectively. Earnings usedin computing the ratio of earnings to fixed charges consist of net earningsbefore income taxes plus fixed charges. Fixed charges include interest expenseon debt and the portion of rental expense deemed to represent the interestfactor.

*Inflation/Deflation*

The consolidated financial statements andcorresponding notes to the consolidated financial statements have been preparedin accordance with GAAP, which require the measurement of financial positionand operating results in terms of historical dollars without considering thechanges in the relative purchasing power of money over time due to inflation.The impact of inflation is reflected in the increased costs of our operations.Unlike industrial companies, nearly all of our assets and liabilities aremonetary in nature. As a result, interest rates have a greater impact on ourperformance than do the effects of general levels of inflation. Inflation affectsour operations primarily through its effect on interest rates, since interestrates normally increase during periods of high inflation and decrease duringperiods of low inflation. During periods of increasing interest rates, demandfor mortgages and a borrower’s ability to qualify for mortgage financing in apurchase transaction may be adversely affected. During periods of decreasinginterest rates and housing price appreciation, borrowers may prepay theirmortgages, which in turn may adversely affect our yield and subsequently thevalue of our portfolio of mortgage assets.

**ITEM 3: QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

**General Overview**

Although we manage credit, prepayment and liquidityrisk in the normal course of business, we consider interest rate risk to be asignificant market risk, which could potentially have the largest materialimpact on our financial condition and results of operations. Since asignificant portion of our revenues and earnings are derived from net interestincome, we strive

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to manage our interest-earning assets andinterest-bearing liabilities to generate what we believe to be an appropriatecontribution from net interest income. When interest rates fluctuate,profitability can be adversely affected by changes in the fair market value ofour assets and liabilities and by the interest spread earned oninterest-earning assets and interest-bearing liabilities. We derive income fromthe differential spread between interest earned on interest-earning assets andinterest paid on interest-bearing liabilities. Any change in interest ratesaffects income received and income paid from assets and liabilities in varyingand typically in unequal amounts. Changing interest rates may compress ourinterest rate margins and adversely affect overall earnings.

Interest rate risk management is the responsibility ofthe Asset Liability Committee (“ALCO”), which is comprised of senior managementand reports results of interest rate risk analysis to the IMH board ofdirectors on at least a quarterly basis. ALCO establishes policies that monitorand coordinate sources, uses and pricing of funds. ALCO also attempts to reducethe volatility in net interest income by managing the relationship of interestrate sensitive assets to interest rate sensitive liabilities. In addition,various modeling techniques are used to value interest sensitivemortgage-backed securities, including interest-only securities. The value ofinvestment securities available-for-sale is determined using a discounted cashflow model using prepayment rate, discount rate and credit loss assumptions.Our investment securities portfolio is available-for-sale, which requires us toperform market valuations of the securities in order to properly record theportfolio. We continually monitor interest rates of our investment securitiesportfolio as compared to prevalent interest rates in the market. We do notcurrently maintain a securities trading portfolio and are not exposed to marketrisk as it relates to trading activities.

**Changes inInterest Rates**

Interest rate risk management policies intended tolimit our exposure to changes in interest rates primarily associated with cashflows on our adjustable rate securitized mortgage borrowings. Our primaryobjective is to limit our exposure to the variability in future cash flowsattributable to the variability of one-month LIBOR, which is the underlyingindex of our adjustable rate securitized mortgage borrowings. We also monitoron an ongoing basis the prepayment risks that arise in fluctuating interestrate environments. Our interest rate risk management policies are formulatedwith the intent to offset potential adverse effects of changing interest rateson cash flows on adjustable rate securitized mortgage borrowings.

We primarily acquire for long-term investment ARMs andhybrid ARMs and, to a lesser extent, FRMs. ARMs are generally subject toperiodic and lifetime interest rate caps. This means that the interest rate ofeach ARM is limited to upwards or downwards movements on its periodic interestrate adjustment date, generally six months, or over the life of the mortgage.Periodic caps limit the maximum interest rate change, which can occur on anyinterest rate change date to generally a maximum of 1% per semiannual adjustment.Also, each ARM has a maximum lifetime interest rate cap. Generally, borrowingsare not subject to the same periodic or lifetime interest rate limitations.During a period of rapidly increasing or decreasing interest rates, financingcosts could increase or decrease at a faster rate than the periodic interestrate adjustments on mortgages would allow, which could affect net interestincome. In addition, if market rates were to exceed the maximum interest ratelimits of our ARMs, borrowing costs could increase while interest rates on ARMswould remain constant. We also acquire hybrid ARMs that have initial fixedinterest rate periods generally ranging from two to seven years whichsubsequently convert to ARMs. During a rapidly increasing or decreasing interestrate environment financing costs would increase or decrease more rapidly thanwould interest rates on mortgages, which would remain fixed until their nextinterest rate adjustment date. In order to provide protection against potentialresulting basis risk shortfall on the related liabilities, we purchasederivatives.

We measure the sensitivity of our net interest incometo changes in interest rates affecting interest sensitive assets andliabilities using various simulations. These simulations take intoconsideration changes that may occur in investment and financing strategies,the forward yield curve, interest rate risk management strategies, mortgageprepayment speeds and the volume of mortgage acquisitions and originations. Aspart of various interest rate simulations, we calculate the effect of potentialchanges in interest rates on our interest-earning assets and interest-bearingliabilities and their affect on overall earnings. The simulations assumeinstantaneous and parallel shifts in interest rates and to what degree thoseshifts affect net interest income.

We estimate net interest income along with net cashflows from derivatives for the next twelve months using balance sheet data andthe notional amount of derivatives as of April 30, 2006 and 12-monthprojections of the following primary drivers affecting net interest income:

·                    futureinterest rates using forward yield curves, which are considered marketconsensus estimates of future interest rates;

·                    mortgageacquisitions and originations;

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·                    mortgageprepayment rate assumptions; and

·                    forward swaprates.

We refer to the 12-month projection of net interestincome along with the 12-month projection of net cash flows from derivatives asthe “base case.” For financial reporting purposes, net cash flows fromderivatives are included in realized gain (loss) from derivative instruments onthe consolidated financial statements. However, for purposes of interest raterisk analysis we include net cash flows from derivatives in our base casesimulations as we acquire derivatives to offset the effect that changes ininterest rates have on variable borrowing costs, such as securitized mortgageand warehouse borrowings. We believe that including net cash flows fromderivatives in our interest rate risk analysis presents a more usefulsimulation of the effect of changing interest rates on net cash flows generatedby our long-term mortgage portfolio.

Once the base case has been established, we “shock”the base case with instantaneous and parallel shifts in interest rates in 100basis point increments upward and downward. Calculations are made for each ofthe defined instantaneous and parallel shifts in interest rates over or underthe forward yield curve used to determine the base case and include any associatedchanges in projected mortgage prepayment rates caused by changes in interestrates. The results of each 100 basis point change in interest rates are thencompared against the base case to determine the estimated dollar and percentagechange to base case. The simulations consider the affect of interest ratechanges on interest sensitive assets and liabilities as well as derivatives.The simulations also consider the impact that instantaneous and parallel shiftin interest rates have on prepayment rates and the resulting affect ofaccelerating or decelerating amortization of premium and securitization costs.

In the following table, the up 100 basis pointscenario as of April 30, 2006 represents our projection of the net changefrom base case net interest income, which is derived from assumptions aspreviously discussed, if market interest rates were to immediately rise by 100basis points. This means that we increase interest rates at all data pointsalong our projected forward yield curve by 100 basis points and recalculate ourprojection of net interest income over the next 12 months. In addition, basedon changes in interest rates, or changes in our forward yield curve, our modeladjusts mortgage prepayment rates and recalculates amortization of acquisitionand securitization costs and net cash receipts or payments on derivatives aspart of the calculation of net interest income. Thus, if a 100 basis pointinterest rate increase occurred, the projected volatility to net interestincome is negatively impacted by $535 thousand, or a decrease of less than1% relative to projected base case net interest income.

The interest rate risk profile of our balance sheet ismore sensitive to changes in interest rates related to our liabilities. We usederivatives extensively in order to manage the interest rate, or price risk,inherent in our assets, liabilities and loan commitments. Our main objective inmanaging interest rate risk is to moderate the impact of changes in interestrates on our earnings over time. Our interest rate risk management strategiesmay result in significant earnings volatility in the short term. The success ofour interest rate risk management strategy is largely dependent on our abilityto predict the earnings sensitivity of our loan production operations and longterm investment operations in various interest rate environments. There aremany market factors that impact the performance of our interest rate riskmanagement activities including interest rate volatility, prepayment behavior,the shape of the yield curve and the spread between mortgage interest rates andTreasury or Swap rates. The success of this strategy impacts our net income.This impact, which can be either positive or negative, can be material.

The following table estimates the financial impact tobase case, including net cash flow from derivatives, from various instantaneousand parallel shifts in interest rates based on both our on-balance sheetstructure and off-balance sheet structure, which refers to the notional amountof derivatives that are not recorded on our balance sheet as of April 30,2006 (dollar amounts in thousands):

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| ** **                                                                                     | ** ** | **Changes in base case as of April 30, 2006 (1)** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **Excluding net cash**                                                               | ** ** | **Net cash flow** | ** ** | **Including net cash** | ** ** |
| ** **                                                                                     | ** ** | **flow on derivatives**                                                              | ** ** | **on derivatives** | ** ** | **flow on derivatives** | ** ** |
| **Instantaneous and Parallel Change in Interest Rates (2)** | ** ** | **$**                                                                                          | ** ** | **(%)** | ** ** | **$** | ** ** | **$** | ** ** | **(%)** | ** ** |
| Up 300 basis  points, or 3% (3)                                                                |       | (409,923                                                                                       | )          | (4,575 | ) | 351,769 |   | (58,154 | ) | (35 | ) |
| Up 200 basis  points, or 2%                                                                    |       | (258,752                                                                                       | )          | (2,888 | ) | 234,513 |   | (24,239 | ) | (15 | ) |
| Up 100 basis  points, or 1%                                                                    |       | (117,792                                                                                       | )          | (1,314 | ) | 117,257 |   | (535 | ) | — |   |
| Down 100 basis  points or 1%                                                                   |       | 112,216                                                                                        |       | 1,252 |   | (117,256 | ) | (5,040 | ) | (3 | ) |
| Down 200 basis  points or 2%                                                                   |       | 228,469                                                                                        |       | 2,550 |   | (234,513 | ) | (6,044 | ) | (4 | ) |
| Down 300 basis points  or 3%                                                                   |       | 346,037                                                                                        |       | 3,862 |   | (351,769 | ) | (5,732 | ) | (3 | ) |

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(1)             Thedollar and percentage changes represent base case for the next twelve monthsversus the change in base case using various instantaneous and parallelinterest rate change simulations, excluding the effect of amortization of loandiscounts to base case.

(2)             Instantaneousand parallel interest rate changes over and under the projected forward yieldcurve.

(3)             Thissimulation was added to our analysis as it is relevant in light of the interestrate environment as of April 30, 2006 and the projected forward yieldcurve for 2006 and 2007.

Using information as presented above, and otheranalysis, the Company reviews its interest rate risk profile. Based on thisreview, the Company makes certain decisions on how to mitigate its interestrate risk.

The use of derivatives to manage risk associated withchanges in interest rates is an integral part of our strategy. The amount ofcash payments or cash receipts on derivatives is determined by (1) thenotional amount of the derivative and (2) current interest rate levels inrelation to the various strikes or coupons of derivatives during a particulartime period. As of June 30, 2006 and December 31, 2005, we hadnotional balances of interest rate swaps, caps, and floors of $17.8 billionand $20.2 billion, respectively, with fair values of $312.0 millionand $248.2 million, respectively, pertaining to our current and pendingsecuritizations. By using derivatives, we attempt to minimize the effect ofboth upward and downward interest rate changes on our long-term mortgageportfolio. Our goal is to moderate significant changes to base case net interestincome, including net cash flows from derivatives, as interest rates change. Weprimarily acquire swaps to essentially convert our adjustable rate securitizedmortgage borrowings into fixed rate borrowings. For instance, we receiveone-month LIBOR on swaps, which offsets interest expense on adjustable ratesecuritized mortgage borrowings, and we pay a fixed interest rate.

**ITEM 4: CONTROLSAND PROCEDURES**

**Evaluation ofDisclosure Controls and Procedures**

Disclosure controls and procedures are controls andother procedures of the Company that are designed to ensure that informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms. Disclosure controls and procedures include withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by the Company in its reports that it files or submitsunder the Exchange Act is accumulated and communicated to the Company’smanagement, including its principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timely decisionsregarding required disclosure.

As of June 30, 2006, our CEO and CFO, with theparticipation of other management of the Company, evaluated the effectivenessof our disclosure controls and procedures, as such term is defined underRule 13a-15(e) or 15(d)-15(e) promulgated under the Exchange Act, andbased upon that evaluation, our CEO and CFO concluded that these disclosurecontrols and procedures were effective to ensure that information required tobe disclosed by us in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

**Internal ControlOver Financial Reporting**

During the quarter ended June 30,2006, there have been no changes to our internal control over financialreporting that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

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**PART II. OTHERINFORMATION**

**ITEM 1: LEGALPROCEEDINGS**

The Company’s Form 10-K for the year ended December 31,2005 reported securities class actions filed against the Company and its seniorofficers and directors. On May 1, 2006, the U.S. District Court, CentralDistrict of California approved the consolidation of the federal securitiesclass actions and appointed lead plaintiff and lead counsel. A consolidatedcomplaint was filed in this action on July 24, 2006. The Company and itsofficers and directors intend to move to dismiss the consolidated complaint.

The Company’s Form 10-K for the year ended December 31,2005 and Form 10-Q for the period ended March 31, 2006 reportedshareholder derivative actions filed against the Company and its seniorofficers and directors in the U.S. District Court, Central District ofCalifornia and Orange County Superior Court. On April 20, 2006, the OrangeCounty Superior Court approved the consolidation of the state shareholderderivative actions and appointed lead plaintiff and lead counsel. Aconsolidated amended complaint was filed in this action on May 12, 2006.The Company and its officers and directors have moved to stay the stateshareholder derivative action pending resolution of the federal securitiesclass actions and federal shareholder derivative actions. On June 7, 2006, theU.S. District Court, Central District of California approved the consolidationof the federal shareholder derivative actions and appointed lead plaintiff andlead counsel. 

We believe that we have meritorious defenses to theabove claims and intend to defend these claims vigorously. Nevertheless,litigation is uncertain and we may not prevail in the lawsuits and can expressno opinion as to their ultimate resolution. An adverse judgment in any of thesematters could have a material adverse effect on us. 

Please refer to IMH’s report on Form 10-K for theyear ended December 31, 2005 and report on Form 10-Q for the periodended March 31, 2006 for a further description of litigation and claims.

**ITEM 1A: RISKFACTORS**

In addition to other information set forth in thisreport, you should carefully consider the factors discussed in Part I, “Item IARisk Factors” in our Annual Report on Form 10-K for the year ended December 31,2005 and Part II, “Item IA Risk Factors” in our Quarterly Report on Form 10-Qfor the period ended March 31, 2006, which could materially affect ourbusiness, financial condition, or future results.

**ITEM 2: UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

**ITEM 3: DEFAULTSUPON SENIOR SECURITIES**

None.

**ITEM 4: SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

On June 1, 2006, we held our annual meeting ofstockholders. Of 76,112,963 shares eligible to vote, 71,917,120, or 94.5%,votes were returned, formulating a quorum. At the annual stockholders meeting,the following matters were submitted to stockholders for vote Proposal I —Election of Directors, Proposal II - Ratification of the appointment of Ernst& Young LLP as our independent auditors for the year ending December 31,2006. 

**ProposalI—Election of Directors**

The results of voting on these proposals are asfollows:

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| Director             | ** ** | **For**    | ** ** | **Against** | ** ** | **Elected** | ** ** |
|----------------------|------------|------------|------------|-------------|------------|-------------|------------|
| Joseph R.  Tomkinson |       | 69,974,917 |       | 1,942,203   |       | Yes         |       |
| William S.  Ashmore  |       | 70,012,380 |       | 1,904,740   |       | Yes         |       |
| James Walsh          |       | 70,064,829 |       | 1,852,291   |       | Yes         |       |
| Frank P. Filipps     |       | 69,816,670 |       | 2,100,450   |       | Yes         |       |
| Stephan R. Peers     |       | 70,084,859 |       | 1,832,261   |       | Yes         |       |
| William E. Rose      |       | 70,107,021 |       | 1,810,099   |       | Yes         |       |
| Leigh J. Abrams      |       | 70,098,732 |       | 1,818,388   |       | Yes         |       |

 

All directors are elected at our annual stockholdersmeeting.

**Proposal II — Ratification of the appointment of Ernst& Young LLP as our independent auditors for the year ending December 31,2006.**

Proposal II was approved with 70,954,220 shares votedfor, 692,930 voted against and 269,966 abstained from voting, thereby,ratifying the appointment of Ernst & Young LLP as our independent auditorsfor the year ending December 31, 2006.

**ITEM 5: OTHERINFORMATION**

None

**ITEM 6: EXHIBITS**

(a)   Exhibits:
| 10.1  |   | Amendment, dated as of May 1, 2006, to  Employment Agreement between Impac Funding Corporation and William S.  Ashmore.                                                          |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2  |   | Amendment, dated as of May 1, 2006, to  Employment Agreement between Impac Funding Corporation and Richard J.  Johnson.                                                          |
| 10.3  |   | Employment Agreement dated as of May 1, 2006,  between Impac Commercial Capital Corporation and William D. Endresen.                                                             |
| 10.4  |   | Guaranty, dated May 1, 2006, granted by Impac  Mortgage Holdings, Inc. in favor of William D. Endresen.                                                                          |
| 12.1  |   | Statements re: computation of ratios                                                                                                                                                       |
| 21.1  |   | Subsidiaries of the Registrant                                                                                                                                                             |
| 31.1  |   | Certification of Chief Executive Officer pursuant to  Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                  |
| 31.2  |   | Certification of Chief Financial Officer pursuant to  Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                  |
| 32.1* |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002. |

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*                    Thisexhibit shall not be deemed “filed” for purposes of Section 18 of theSecurities Exchange Act of 1934 or otherwise subject to the liabilities of thatsection, nor shall it be deemed incorporated by reference in any filing underthe Securities Act of 1933 or the Securities Exchange Act of 1934, whether madebefore or after the date hereof and irrespective of any general incorporationlanguage in any filings.

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.
| **IMPAC MORTGAGE HOLDINGS, INC.**                                   | ** ** |
|---------------------------------------------------------------------|------------|
|                                                                |       |
| /s/ Gretchen D. Verdugo                                             |       |   |
| by: Gretchen D. Verdugo                                             |       |
| Executive Vice President                                            |       |
| and Chief Financial Officer                                         |       |
| (authorized officer of registrant and principal  financial officer) |       |
|                                                                |       |
| Date: August 9, 2006                                                |       |
|                                                                     |            |  |

 

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