PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except share data)

	September 30, 2007			December 31, 2006
	(Unaudited)
ASSETS
Cash and cash equivalents	$	41,186		$	151,714
Securitized mortgage collateral	18,741,520			20,936,515
Allowance for loan losses	(911,218		)	(77,684		)
Mortgages held-for-sale - retail operations	133,497			—
Investment securities available-for-sale	16,274			31,582
Accrued interest receivable	103,255			107,913
Derivative assets	36,153			142,793
Real estate owned (REO), net	360,472			137,331
Assets of discontinued operations	810,574			2,086,216
Other assets	78,663			82,575
Total assets	$	19,410,376		$	23,598,955

LIABILITIES
Securitized mortgage borrowings	$	18,712,217		$	20,527,001
Reverse repurchase agreements	148,116			163,890
Trust preferred securities	98,232			97,661
Liabilities of discontinued operations	832,216			1,774,371
Derivative liabilities	41,098			14,752
Other liabilities	71,813			11,750
Total liabilities	19,903,692			22,589,425

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, 2007 and December 31, 2006, 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 September 30, 2007 and December 31, 2006, respectively	20			20
Series-C 9.125% cumulative redeemable preferred stock, $0.01 par value; liquidation value $111,765; 5,500,000 shares authorized; 4,470,600 and 4,444,000 shares outstanding as of September 30, 2007 and December 31, 2006, respectively	45			44

Common stock, $0.01 par value; 200,000,000 shares authorized; 76,083,865 shares issued and outstanding as of September 30, 2007 and December 31, 2006	761			761
Additional paid-in capital	1,173,350			1,170,872
Accumulated other comprehensive income	291			2,357
Net accumulated deficit:
Cumulative dividends declared	(800,191		)	(762,382		)
Retained earnings (deficit)	(867,592		)	597,858
Net accumulated deficit	(1,667,783		)	(164,524		)
Total stockholders’ (deficit) equity	(493,316		)	1,009,530
Total liabilities and stockholders’ equity	$	19,410,376		$	23,598,955

See accompanying notes to consolidated financial statements.

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(in thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
INTEREST INCOME:
Mortgage assets	$	313,307		$	259,359		$	932,580		$	843,845
Other	465			1,695			3,784			5,438
Total interest income	313,772			261,054			936,364			849,283

INTEREST EXPENSE:
Securitized mortgage borrowings	294,570			289,837			889,851			888,056
Reverse repurchase agreements	5,274			344			12,488			981
Other borrowings	2,230			2,299			6,721			6,986
Total interest expense	302,074			292,480			909,060			896,023

Net interest income (expense)	11,698			(31,426		)	27,304			(46,740		)
Provision for loan losses	789,445			3,533			979,740			3,638
Net interest expense after provision for loan losses	(777,747		)	(34,959		)	(952,436		)	(50,378		)

NON-INTEREST INCOME:
Change in fair value of derivative instruments	(137,553		)	(150,051		)	(138,334		)	(91,155		)
Realized gain from derivative instruments	28,815			60,595			103,840			156,582
Provision for repurchases	(4,553		)	—			(4,553		)	—
(Loss) gain on sale of other real estate owned	(5,571		)	485			(6,716		)	1,740
Amortization of mortgage servicing rights	(188		)	(380		)	(603		)	(1,112		)
Lower of cost or market writedown	(6,657		)	—			(7,396		)	—
Loss on sale of loans	(27,586		)	(20		)	(26,195		)	(1,407		)
Provision for REO losses	(40,371		)	—			(68,445		)	—
Other (expense) income	(1,056		)	8,383			4,367			26,664
Total non-interest income (expense)	(194,720		)	(80,988		)	(144,035		)	91,312

NON-INTEREST EXPENSE:
General and administrative and other expense	8,154			1,868			25,293			5,831
Occupancy expense	4,814			413			6,986			1,263
Personnel expense	6,127			2,234			14,089			4,151
Data processing expense	1,425			1,478			4,181			3,434
Professional services	622			285			2,212			1,464
Equipment expense	493			502			1,400			1,565
Total non-interest expense	21,635			6,780			54,161			17,708
Net (loss) earnings from continuing operations	(994,102		)	(122,727		)	(1,150,632		)	23,226
Income tax expense from continuing operations	3,056			1,700			12,012			8,070
Net (loss) earnings from continuing operations	(997,158		)	(124,427		)	(1,162,644		)	15,156
Loss from discontinued operations, net of tax	(194,077		)	(3,264		)	(302,806		)	(30,923		)
Net (loss) earnings	(1,191,235		)	(127,691		)	(1,465,450		)	(15,767		)
Cash dividends on cumulative redeemable preferred stock	(3,722		)	(3,672		)	(11,165		)	(11,016		)
Net loss available to common stockholders	$	(1,194,957	)	$	(131,363	)	$	(1,476,615	)	$	(26,783	)

See accompanying notes to consolidated financial statements

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Net loss	$	(1,191,235	)	$	(127,691	)	$	(1,465,450	)	$	(15,767	)
Net unrealized (losses) gains on securities:
Unrealized holding losses arising during year	(700		)	(237		)	(673		)	(2,015		)
Reclassification of (losses) gains included in net earnings	(243		)	—			(1,393		)	143
Net unrealized losses	(943		)	(237		)	(2,066		)	(1,872		)
Comprehensive loss	$	(1,192,178	)	$	(127,928	)	$	(1,467,516	)	$	(17,639	)

Net loss per common share - Basic:
Loss from Continuing Operations	$	(13.11	)	$	(1.63	)	$	(15.28	)	$	0.20
(Loss) earnings from Discontinuing Operations	(2.55		)	(0.04		)	(3.98		)	(0.41		)
Net Loss per share	$	(15.66	)	$	(1.68	)	$	(19.26	)	$	(0.21	)

Net loss per common share - Diluted:
Loss from Continuing Operations	$	(13.11	)	$	(1.63	)	$	(15.28	)	$	0.20
(Loss) earnings from Discontinuing Operations	(2.55		)	(0.04		)	(3.98		)	(0.41		)
Net Loss per share	$	(15.66	)	$	(1.68	)	$	(19.26	)	$	(0.21	)

Net Loss per share available to common shareholders	$	(15.71	)	$	(1.73	)	$	(19.41	)	$	(0.35	)
Dividends declared per common share	$	—		$	0.25		$	0.10		$	0.75

See accompanying notes to consolidated financial statements

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Nine Months
	Ended September 30,
	2007			2006
				restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings of continuing operations	$	(1,162,644	)	$	15,156
Continuing operations adjustments to reconcile net earnings to net cash used in operating activities:
Provision for loan losses	979,740			3,638
Provision for REO losses	68,445			—
Amortization of deferred charge, net	12,071			15,872
Amortization of premiums, securitization costs and debt issuance costs	117,180			181,769
Loss (gain) on sale of other real estate owned	6,716			(1,740		)
Loss on sale of loans	26,195			1,407
Provision for repurchases	4,553			—
Loss on lower of cost or market writedown	7,396			—
Change in fair value of derivative instruments	138,334			91,155
Purchase of mortgages held-for-sale	(686,271		)	—
Sale and principal reductions on mortgages held-for-sale	546,223			—
Stock-based compensation	1,960			1,628
Goodwill impairment	12,360			—
Impairment of long lived assets	1,200			—
Write-down of securities available-for-sale	11,304
Net change in other assets and liabilities	(13,994		)	(11,869		)
Net cash provided by operating activities of continuing operations	70,768			297,016

Net loss in discontinued operations	(302,806		)	(30,923		)
Discontinued operations adjustments to reconcile net earnings to net cash used in operating activities:
Provision for repurchases	41,883			7,233
Loss on lower of cost or market writedown	133,203			15,284
Provision for loan losses	4,867			(349		)
Purchase of mortgages held-for-sale	(4,162,759		)	(8,301,684		)
Sale and principal reductions on mortgages held-for-sale	1,549,318			6,397,450
Loss (gain) on sale of loans	47,401			(37,019		)
Depreciation and amortization	3,167			4,392
Impairment of long lived assets	11,614			—
Net change in other assets and liabilities	(16,887		)	935
Net cash used in operating activities of discontinued operations	(2,690,999		)	(1,944,681		)
Net cash used in by operating activities	(2,620,231		)	(1,647,665		)

	For the Nine Months
	Ended September 30,
	2007			2006
				restated
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in securitized mortgage collateral	4,749,658			6,865,027
Net change in mortgages held-for-investment	(2,061		)	87,560
Purchase of investment securities available-for-sale	—			34,909
Purchase of premises and equipment	(6,286		)	—
Net principal change on investment securities available-for-sale	2,816			(27,180		)
Proceeds from the sale of other real estate owned	163,437			61,963
Other investing cash flows from continuing operations	—			91
Net cash provided by investing activities of continuing operations	4,907,564			7,022,370

Finance receivable advances to customers	(2,077,204		)	(3,527,463		)
Repayments of finance receivables	2,348,536			3,579,915
Net change in securitized mortgage collateral	103,117			(136,004		)
Other investing cash flows from discontinued operations	23,342			68
Net cash (used in) provided by investing activities of discontinued operations	397,791			(83,484		)
Net cash provided by investing activities	5,305,355			6,938,886

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from securitized mortgage borrowings	3,858,143			2,863,509
Repayment of securitized mortgage borrowings	(5,690,970		)	(7,186,872		)
Common stock dividends paid	(26,644		)	(53,281		)
Preferred stock dividends paid	(11,165		)	(11,016		)
Purchases of common stock	—			(951		)
Proceeds from exercise of stock options	—			824
Proceeds from sale of cumulative redeemable preferred stock	608			203
Other financing cash flows from continuing operations	—			69,364
Net cash used in investing activities of continuing operations	(1,870,028		)	(4,318,220		)

Cash disbursements under reverse repurchase agreements	(7,323,114		)	(15,905,924		)
Cash receipts from reverse repurchase agreements	6,382,254			14,948,926
Other financing cash flows from discontinued operations	—			(723		)
Net cash used in investing activities of discontinued operations	(940,860		)	(957,721		)
Net cash used in financing activities	(2,810,888		)	(5,275,941		)

Net change in cash and cash equivalents	(125,764		)	15,280
Cash and cash equivalents at beginning of period	179,677			146,621
Cash and cash equivalents at end of period - Continuing Operations	41,186			125,659
Cash and cash equivalents at end of period - Discontinued Operations	12,727			36,242
Cash and cash equivalents at end of period	$	53,913		$	161,901

SUPPLEMENTARY INFORMATION:
Interest paid	$	962,336		$	862,033
Taxes paid	116			45

NON-CASH TRANSACTIONS:
Accumulated other comprehensive loss	$	(2,066	)	$	(1,872	)
Dividends declared but unpaid	—			19,021
Transfer of mortgages to other real estate owned	3,046			129,785
Transfer of securitized mortgage collateral to other real estate owned	419,411			—
Transfer of loans held-for-sale to securitized mortgage collateral	3,245,500			—
Transfer of securitized mortgage collateral to loans held-for-sale	27,040			—
Transfer of assets from discontinued operations to continuing operations	4,012			—

See accompanying notes to consolidated financial statements.

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data or as otherwise indicated)

Note A—Summary of Business and Significant Accounting Policies

1. Business Summary and Financial Statement Presentation

Market Conditions

Conditions in the secondary markets, which dramatically worsened during the third quarter, continue to be depressed as investor concerns over credit quality and a weakening of the United States housing market remain high. As a result, the capital markets remain very volatile and illiquid and, have effectively been unavailable to the Company. The Company believes the existing conditions in the secondary markets are unprecedented since the Company’s inception and, as such, inherently involve significant risks and uncertainty. These conditions could continue to adversely impact the performance of our long term investment portfolio. Until bond spreads and credit performance return to more rational levels, it will be impossible for the Company to execute securitizations and loan sales. As a result, in the third quarter the Company has been forced to further alter its business strategies and discontinue the correspondent and wholesale mortgage operations and the warehouse operations in response to the market conditions.

During the second quarter of 2007 the Company accumulated mortgages in the normal course of business; however, starting in July 2007, the secondary mortgage market halted their purchase of investments backed by mortgage loans. As a result the Company was unable to securitize the mortgage loans, which led to significant margin calls during the third quarter of 2007, reducing the Company’s cash position.

The Company has taken steps to reduce operating costs, including reducing staff and lease costs, to a level at which the cashflows from the long-term mortgage portfolio and its master servicing portfolio could support the Company’s ongoing operations. The Company continues to re-size the organization to a level more in line with its ongoing operations. Once the Company is able to eliminate the remaining reverse repurchase lines in discontinued operations the Company should be able to meet its liquidity needs from cash flows generated from the long-term mortgage portfolio and its master servicing fees. In an effort to maintain capital, the Company did not declare a cash dividend on our common stock during the third quarter of 2007.

As of September 30, 2007, the Company has negative net worth. While the Company continues to pay its obligations as they become due, the ability of the Company to continue is dependent upon many factors, particularly the Company’s ability to realize the value of its investment portfolio. There can be no assurance of the Company’s ability to do so.

Discontinued Operations

As a result of the Company’s inability to sell or securitize non-conforming loans, the Company has discontinued funding loans other than conforming agency loans.

As a result of the market conditions as described above, the Company discontinued the following businesses:

• the non-conforming Mortgage Operations conducted by IFC and ISAC;

• the Commercial Operations conducted by ICCC; and

• the Warehouse Lending Operations conducted by IWLG.

The Company announced plans to exit certain operations in August 2007. The amounts presented in the notes to the financial statements, include amounts solely from continuing operations, excluding Note 2, Note 4 and Note K, which include amounts related to discontinued operations.

Asset Purchase and Related Impairment

In May 2007, the Company completed the acquisition of certain production facilities from Pinnacle Financial Corporation (PFC), which is primarily located in the East Coast of the United States. In conjunction with the acquisition the Company created the Impac Home Loans (IHL) a division of IFC. The IHL retail platform originates agency loans. This transaction was recorded as a business combination for accounting purposes resulting in the Company initially recording $12.4 million in goodwill. Because of the current market environment, the goodwill was impaired and the Company had recorded an impairment charge for the full amount during the second quarter of 2007.

Business Summary

Impac Mortgage Holdings, Inc. (the Company or IMH) is a Maryland corporation incorporated in August 1995 and has the following subsidiaries: IMH Assets Corp. (IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), and Impac Funding Corporation (IFC), together with its wholly-owned subsidiaries Impac Secured Assets Corp. (ISAC), and Impac Commercial Capital Corporation (ICCC).

During the third quarter of 2007, the Company’s board of directors elected to discontinue the non-conforming mortgage operations (IFC), commercial operations (ICCC), and warehouse lending operations (IWLG).

Currently, the Company consists of:

• the Long-Term Investment operations conducted by IMH and IMH Assets; and

• the Retail Mortgage operations conducted by Impac Home Lending (IHL), a division of IFC.

The long-term investment operations generate earnings primarily from net interest income earned on mortgages held as securitized mortgage collateral and mortgages held-for-investment collectively (long-term mortgage portfolio) and associated hedging derivative cash flows. The long-term mortgage portfolio, as reported on the Company’s consolidated balance sheet, consist of mortgages held as securitized mortgage collateral and mortgages held-for-investment.

The retail mortgage operations continue to originate and sell agency conforming adjustable rate mortgages (ARMs) and fixed rate mortgages (FRMs). The retail mortgage operations generate income by selling mortgages to permanent investors. These operations also earn interest income on mortgages held-for-sale. The retail mortgage operations use short term reverse warehouse facilities to finance the origination of mortgages. The Company has been notified that its lender to the retail operations is considering winding down the available line. The Company will either dispose of the retail mortgage operations, or discontinue and wind down the operations by March 31, 2008.

Financial Statement Presentation

The accompanying unaudited consolidated financial statements of IMH and our subsidiaries (as defined above) have been prepared in accordance with GAAP for interim financial information and with the instructions 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 generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for the nine-month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

All significant inter-company balances and transactions have been eliminated in consolidation. In addition, certain amounts in the prior periods’ consolidated financial statements have been reclassified to conform to the current year presentation.

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these financial statements in conformity with GAAP. The items affected by management’s estimates and assumptions include allowance for loan losses, valuation of derivative financial instruments, net realizable value of real estate owned (REO), lower of cost or market adjustment to loans held-for-sale, repurchase liabilities related to sold loans, valuation of residual interests, asset impairment charges, restructuring charges, and the amortization of various loan premiums and discounts due to prepayment estimates. Actual results could differ materially from those estimates.

2. Discontinued Operations

During the third quarter of 2007, the Company announced plans to exit substantially all of its mortgage, the commercial, and the warehouse lending operations. Consequently, the amounts related to these operations are presented as discontinued operations in our consolidated statements of income and our consolidated statements of cash flows, and the asset groups to be exited are reported as assets and liabilities of discontinued operations in our consolidated balance sheets for the periods presented.

The following tables present discontinued operations condensed balance sheets for the periods ended September 30, 2007 and December 31, 2006;

	Discontinued Operations
	as of September 30,
	2007
				Mortgage							Total
	Warehouse			Operations (2)		Commercial		Inter-			Discontinued
Balance Sheet Items:	Lending			(IFC)		Operations		Company (1)			Operations
Securitized mortgage collateral and mortgages held-for-investment	$	—		$	—	$	—	$	—		$	—
Mortgages held-for-sale	—			592,376		129,295		—			721,671
Finance receivables	994,768			—		—		(959,818		)	34,950
Allowance for loan losses	(7,759		)	—		—		—			(7,759		)
Total assets	1,179,849			804,543		129,680		(1,303,498		)	810,574
Reverse repurchase agreements	923,733			714,182		130,581		(992,850		)	775,646

	Discontinued Operations
	as of December 31,
	2006
				Mortgage								Total
	Warehouse			Operations (2)			Commercial		Inter-			Discontinued
Balance Sheet Items:	Lending			(IFC)			Operations		Company (1)			Operations
Securitized mortgage collateral and mortgages held-for-investment	$	—		$	114,315		$	—	$	—		$	114,315
Mortgages held-for-sale	—			1,382,626			179,293		—			1,561,919
Finance receivables	1,847,097			—			—		(1,540,816		)	306,281
Allowance for loan losses	(10,598		)	(3,493		)	—		—			(14,091		)
Total assets	1,966,317			1,629,180			181,406		(1,690,687		)	2,086,216
Reverse repurchase agreements	1,716,512			1,356,524			176,800		(1,533,331		)	1,716,505

The following tables present discontinued operations condensed statement of operations for the three and nine month periods ended September 30, 2007 and 2006.

	Discontinued Operations
	for the nine months ended September 30,
	2007
			Mortgage									Total
	Warehouse		Operations (2)			Commercial			Inter-			Discontinued
Income Statement Items:	Lending		(IFC)			Operations			Company (1)			Operations
Net interest income (expense)	$	18,203	$	(7,622	)	$	(2,424	)	$	5,758		$	13,915
Provision (benefit) for loan losses	4,979		(112		)	—			—			4,867
Realized gain from derivative instruments	—		910			270			—			1,180
Change in fair value of derivative instruments	—		(3,479		)	(1,479		)	—			(4,958		)
Other non-interest (expense) income	1,481		(194,106		)	(6,376		)	(24,671		)	(223,672		)
Non-interest expense and income taxes	8,508		67,267			8,629			—			84,404
Net earnings (loss)	$	6,197	$	(271,452	)	$	(18,638	)	$	(18,913	)	$	(302,806	)

	Discontinued Operations
	for the three months ended September 30,
	2007
				Mortgage								Total
	Warehouse			Operations (2)			Commercial			Inter-		Discontinued
Income Statement Items:	Lending			(IFC)			Operations			Company (1)		Operations
Net interest income (expense)	$	6,025		$	(1,691	)	$	(2,041	)	$	789	$	3,082
Provision for loan losses	2,637			170			—			—		2,807
Realized gain from derivative instruments	—			54			52			—		106
Change in fair value of derivative instruments	—			(1,098		)	(2,780		)	—		(3,878		)
Other non-interest (expense) income	267			(146,028		)	(6,106		)	—		(151,867		)
Non-interest expense and income taxes	3,966			31,768			2,979			—		38,713
Net (loss) earnings	$	(311	)	$	(180,701	)	$	(13,854	)	$	789	$	(194,077	)

	Discontinued Operations
	for the nine months ended September 30,
	2006
				Mortgage									Total
	Warehouse			Operations (2)			Commercial			Inter-			Discontinued
Income Statement Items:	Lending			(IFC)			Operations			Company (1)			Operations
Net interest income (expense)	$	24,229		$	(4,421	)	$	251		$	(1,101	)	$	18,958
Provision for loan losses	(350		)	—			—			—			(350		)
Realized gain from derivative instruments	—			21			30			—			51
Change in fair value of derivative instruments	—			4,877			(6,324		)	—			(1,447		)
Other non-interest (expense) income	2,426			31,787			3,387			(23,059		)	14,541
Non-interest expense and income taxes	5,578			51,684			6,114			—			63,376
Net earnings (loss)	$	21,427		$	(19,420	)	$	(8,770	)	$	(24,160	)	$	(30,923	)

	Discontinued Operations
	for the three months ended September 30,
	2006
				Mortgage									Total
	Warehouse			Operations (2)			Commercial			Inter-			Discontinued
Income Statement Items:	Lending			(IFC)			Operations			Company (1)			Operations
Net interest income (expense)	$	9,659		$	(3,183	)	$	61		$	378		$	6,915
Provision for loan losses	(350		)	—			—			—			(350		)
Realized gain from derivative instruments	—			18			17			—			35
Change in fair value of derivative instruments	—			623			(6,106		)	—			(5,483		)
Other non-interest (expense) income	878			31,861			286			(12,065		)	20,960
Non-interest expense and income taxes	2,077			22,955			1,009			—			26,041
Net earnings (loss)	$	8,810		$	6,364		$	(6,751	)	$	(11,687	)	$	(3,264	)

(1) Corporate overhead expenses are allocated to the segments based on the percentage of time devoted to the segment, headcount, loan production, or other relevant measures. Income statement items include inter-company loan sale transactions and the elimination of related gains or losses. Balance sheet items include inter-company warehouse borrowings and the elimination of related interest income and interest expense.

(2) Alt-A mortgage operations of IFC.

Segments Discontinued Summary

As a result of the market conditions as described above, the Company discontinued the following businesses:

•the Non-Conforming Mortgage Operations conducted by IFC and ISAC;

•the Commercial Operations conducted by ICCC; and

•the Warehouse Lending Operations conducted by IWLG.

The mortgage operations acquired, originated, sold and securitized primarily Alt-A adjustable rate mortgages (ARMs) and fixed rate mortgages (FRMs) from correspondents, mortgage brokers and retail customers. Correspondents originated and closed mortgages under our mortgage programs and then sold the closed mortgages to the mortgage operations on a flow (loan-by-loan basis) or through bulk sale commitments. Correspondents include savings and loan associations, commercial banks and mortgage bankers. The mortgage operations generated income by securitizing and selling mortgages to permanent investors, including the long-term investment operations. The mortgage operations used warehouse facilities provided by the warehouse lending operations to finance the acquisition and origination of mortgages.

The commercial operations originated commercial mortgages, that were primarily adjustable rate mortgages with initial fixed interest rate periods of three-, five-, seven- and ten-years that subsequently convert to adjustable rate mortgages, or “hybrid ARMs,” with balances that generally ranged from $500,000 to $5.0 million or by additional underwriting exceptions up to $10 million. Commercial mortgages have an interest rate floor, which is the initial start rate; in some circumstances have lock out periods, and prepayment penalty periods of three-, five-, seven- and ten-years.

The warehouse lending operations provided short-term financing to mortgage loan originators, including the mortgage and commercial operations, by funding mortgages from their closing date until sale to pre-approved investors. This business earned fees from warehouse transactions as well as net interest income from the difference between its cost of borrowings and the interest earned on warehouse advances, both of which were tied to the one-month London Inter-Bank Offered Rate (LIBOR) rate.

Mortgage Loans Held-for-Sale

Mortgages held-for-sale for the discontinued operations for the periods indicated consisted of the following:

	At September 30,			At December 31,
	2007			2006
Mortgages held-for-sale - residential	$	714,359		$	1,381,264
Mortgages held-for-sale - commercial	128,869			177,619
Net premiums on mortgages held-for-sale - residential	2,438			18,024
Net premiums on mortgages held-for-sale - commercial	79			857
Change in fair value of residential mortgages held-for-sale	(126,849		)	(18,717		)
Net deferred costs	2,775			2,872
Total mortgages held-for-sale	$	721,671		$	1,561,919

Mortgage loans held-for-sale are recorded at the lower of cost or market determined on an aggregate basis. The change in fair value of the loans held-for-sale is recorded as an increase or decrease to non-interest income. During the three and nine months ended September 30, 2007, the discontinued operations sold $610.9 million and $1.6 billion of loans, respectively. Subsequent to September 30, 2007 the Company sold $393.4 million of the loans held-for-sale.

Repurchase Reserve

Repurchase reserve for the discontinued operations for the periods indicated consisted of the following:

	At September 30,		At December 31,
	2007		2006
Reserve for early payment defaults (1)	$	20,225	$	12,220
Reserve for misrepresentations and warranties	11,187		—
Other	791		3,126
Total repurchase reserve	$	32,203	$	15,346

(1) This figure at December 31, 2006 includes both the reserve for early payment default and the reserve for misrepresentations.

This repurchase liability for discontinued operations is included in liabilities of discontinued operations and represents estimated losses for normal representation and warranty terms related to previously sold whole loans. The reserve totaled approximately $32.2 million at September 30, 2007, compared to $15.3 million at December 31, 2006. In determining the adequacy of the reserve for mortgage repurchases, management considers such factors as specific requests for repurchase, known problem loans, underlying collateral values, recent sales activity of similar loans, historical experience, current market conditions and other appropriate information. For the three and nine months ended September 30, 2007, the Company recorded a provision for repurchase losses of $11.2 million and $41.9 million as compared to a benefit of $15.9 million and a provision of $7.2 million for the same periods in 2006, included in loss from discontinued operations.

Income Taxes

During the three and nine months ended September 30, 2007, income tax expense was a benefit of $0.4 million and an expense of $4.3 million, respectively, as compared to an benefit of $5.4 million and an expense of $3.8 million, respectively, during the same periods in 2006. The amount of income tax benefit for the quarter ended September 30, 2007 was the result of the loss carrybacks available to the Company for current year tax losses.

Fixed Asset and Lease Impairment

In conjunction with the discontinued operations, the Company has recorded a $11.6 million impairment charge on the property plant and equipment that the Company no longer will be utilizing. Additionally, assets with fair values that were deemed recoverable were transferred to continuing operations. During third quarter the discontinued operations of the Company incurred a lease impairment charge in the amount of $4.2 million.

3. Restated Consolidated Cash Flows for 2006 Interim Periods and Reclassifications

Certain interim amounts in the nine months ended September 30, 2006 Consolidated Statement of Cash Flows have been restated to reflect properly the specific intercompany activities related to cash receipts from loan sales and cash disbursements for loan purchases between consolidated companies. Such intercompany loan sale and purchase transaction activities had the effect of presenting separate cash inflows and outflows even though there was no cash inflow or outflow on a consolidated basis. This restatement serves to eliminate this intercompany activity from its Consolidated Statements of Cash Flows and present them as non-cash transactions.

The restatement increases cash used in operating activities and increases cash provided by investing activities. The restatement of these transactions does not change total cash and cash equivalents as previously reported. Furthermore, the restatement has no effect on the Company’s Consolidated Statements of Operations and Comprehensive Earnings, or Consolidated Balance Sheets.

The Company has reclassified the presentation of the Consolidated Statement of Operations and Comprehensive Earnings (Loss) to reflect “Amortization of mortgage servicing rights,” “Write-down on investment securities available-for-sale,” and “Loss (gain) on sale of other real estate owned” as other non-interest income rather than non-interest expense, for the third quarter of 2006 to conform to the current period presentation. In addition, the “Amortization of deferred charge” for 2006 was reclassified as income tax expense (benefit) rather than non-interest expense.

Please refer to the Company’s Form 10-K for the year ended December 31, 2006, for more information regarding these reclassifications.

4. Stock Options

The fair value of options granted, which is amortized to expense over the option vesting period, is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions:

	Nine Months
	Ended September 30,
	2007	2006
Risk-free interest rate	4.28% to 4.60%	3.90% to 4.26%
Expected lives (in years)	3	3
Expected volatility (1)	75.09%	34.75%
Expected dividend yield (2)	0.00%	11.00%
Grant date fair value of share options	$0.60	$1.41

(1)Expected volatilities are based on the historical volatility of the Company’s stock over the expected option life.

(2)Expected dividend yield is zero as a dividend on the common stock is currently not probable over the expected life of the options granted during the nine months ended September 30, 2007.

The following table summarizes activity, pricing and other information for the Company’s stock options for the nine-month period ended September 30, 2007:

			Weighted-
			Average
	Number of		Exercise
	Shares		Price ($)
Options outstanding at January 1, 2007	7,048,755		$	12.91
Options granted	2,158,500		2.56
Options exercised	—		—
Options forfeited / cancelled	(1,887,173	)	12.75
Options outstanding at end of period	7,320,082		$	9.90
Options exercisable at end of period	3,468,038		$	13.60

As of September 30, 2007, there was approximately $3.0 million and $300 thousand of total unrecognized compensation cost related to nonvested share-based, and nonvested stock-based compensation arrangements, respectively, granted under the plan. That cost is expected to be recognized over a weighted average period of 1.12 and 1.04 years, respectively.

5. Recent Accounting Pronouncements

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. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a 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 beginning after December 15, 2006. The adoption of this interpretation by the Company has not had a significant effect on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently assessing the effects SFAS 157 will have on the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), which provides reporting entities an option to report selected financial assets, which includes investment securities designated as available for sale, and liabilities, at fair value. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The standard also requires additional information to aid financial statement users’ understanding of a reporting entity’s choice to use fair value on its earnings and also requires entities to display on the face of the balance sheet the fair value of those assets and liabilities which the reporting entity has chosen to measure at fair value. SFAS 159 is effective as of the beginning of a reporting entity’s first fiscal year beginning after November 15, 2007.

The Company intends to adopt SFAS 157 and SFAS 159 as of January 1, 2008, and the effect of adoption will be reflected in the consolidated financial statements for the quarter ended March 31, 2008.

6. Net Investment in Securitized Trusts

Certain of the Company’s securitizations are required to be consolidated due to the following factors related to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125: the transfer of the Company’s mortgage loans to these trusts were not accounted for as sales; and the trusts did not meet the characteristics of qualifying special purpose entities. These trusts were considered variable interest entities and were consolidated because the Company was initially considered the primary beneficiary pursuant to FASB Interpretation No. 46, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51.”

The negative net investment positions in certain trusts occured because the trusts’ liabilities are greater than the trusts’ assets primarily due to large increases in the allowance for loan losses. The trust agreements are non-recourse for which the Company cannot ultimately lose more than its original net investment in each trust. Therefore, the Company is not responsible to fund losses in excess of its equity investment and subsequently is not required to advance any cash to trusts for credit or derivative loss.

The following table presents the summation of the consolidated trusts with positive and negative net investment positions, as of September 30, 2007 (in thousands):

	Securitized Mortgage Collateral		Net Investment
Trusts with positive net investment positions	$	5,353,083	$	143,694
Trusts with negative net investment positions	13,388,437		(561,673		)
	$	18,741,520	$	(417,979	)

If the securitizations with negative equity (liabilities greater than assets) had been accounted for as sales, the Company’s estimate of the fair value of the trusts would be minimal. However, some of these positive and negative net investment positions could continue to provide cash flows to the Company until estimated losses on disposition have been realized.

7. Legal Proceedings

The Company is party to litigation and claims which are normal in the course of our operations. While the results of such litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a material adverse effect on our financial condition or results of operations.

On August 17, 2007, a purported class action matter was filed in the United States District Court, Central District of California, against IMH and several of its senior officers entitled Sheldon Pittleman v. Impac Mortgage Holdings, Inc., et al. The action alleges against all defendants violations of Section 10(b) and 10b-5 of the Securities Exchange Act of 1934 (the “Exchange Act”) and against the individual defendants violations of Section 20(a) of the Exchange Act. Plaintiffs contend that the defendants caused the Company’s stock to trade at artificially inflated prices through false and misleading statements

Note B—Reconciliation of Earnings Per Share

The following table presents the computation of basic and diluted net earnings per share including the dilutive effect of stock options and cumulative redeemable preferred stock outstanding for the periods indicated:

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2007			2006			2007			2006
Numerator for basic earnings per share:
Net (loss) earnings from continuing operations	$	(997,158	)	$	(124,427	)	$	(1,162,644	)	$	15,156
Net (loss) earnings from discontinuing operations	(194,077		)	(3,264		)	(302,806		)	(30,923		)
Less: Cash dividends on cumulative redeemable preferred stock	(3,722		)	(3,672		)	(11,165		)	(11,016		)
Net loss available to common stockholders	$	(1,194,957	)	$	(131,363	)	$	(1,476,615	)	$	(26,783	)
Denominator for basic earnings per share:
Basic weighted average number of common shares outstanding during the period	76,084			76,132			76,084			76,119
Denominator for diluted earnings per share:
Diluted weighted average number of common shares outstanding during the period	76,084			76,132			76,084			76,119
Net effect of dilutive stock options	—			—			—			—
Diluted weighted average common shares	76,084			76,132			76,084			76,119

Net loss per common share - Basic:
(Loss) earnings from Continuing Operations	$	(13.11	)	$	(1.63	)	$	(15.28	)	$	0.20
Loss from Discontinuing Operations	$	(2.55	)	$	(0.04	)	$	(3.98	)	$	(0.41	)
Net loss per share	$	(15.66	)	$	(1.68	)	$	(19.26	)	$	(0.21	)

Net loss per common share - Diluted:
(Loss) earnings from Continuing Operations	$	(13.11	)	$	(1.63	)	$	(15.28	)	$	0.20
Loss from Discontinuing Operations	$	(2.55	)	$	(0.04	)	$	(3.98	)	$	(0.41	)
Net loss per share	$	(15.66	)	$	(1.68	)	$	(19.26	)	$	(0.21	)

Net loss per share available to common shareholders	$	(15.71	)	$	(1.73	)	$	(19.41	)	$	(0.35	)

For the three and nine month periods ended September 30, 2007, stock options to purchase 7.3 million shares were outstanding but not included in the above weighted average calculations because they were anti-dilutive.

For the three and nine month periods ended September 30, 2006, stock options to purchase 7.1 million shares were outstanding but not included in the above weighted average calculations because they were anti-dilutive.

Note C—Segment Reporting

During the quarter ended September 30, 2007, the Company segregated the retail mortgage origination entity from the mortgage operations as that component was deemed to be continuing operations at September 30, 2007. The following tables present reporting segments consolidated balance sheets for the periods ended September 30, 2007 and December 31, 2006:

	Reporting Segments as of the Nine Months
	Ended September 30, 2007
	Long-Term
	Investment			Retail			Discontinued			Inter-
Balance Sheet Items:	Operations			Operations			Operations			Company (1)			Consolidated
Securitized mortgage collateral and mortgages held-for-investment	$	18,866,749		$	—		$	—		$	(124,721	)	$	18,742,029
Mortgages held-for-sale	2,201			131,296			721,671			—			855,168
Finance receivables	—			185			34,950			(6		)	35,129
Allowance for loan losses	(911,218		)	—			(7,759		)	—			(918,977		)
Total assets	18,516,644			167,886			810,574			(84,728		)	19,410,376
Total stockholders’ equity	(351,016		)	(39,614		)	299,664			(402,350		)	(493,316		)

	Reporting Segments as of the year
	Ended December 30, 2006
	Long-Term
	Investment			Discontinued			Inter-
Balance Sheet Items:	Operations			Operations			Company (1)			Consolidated
Securitized mortgage collateral and mortgages held-for-investment	$	21,072,413		$	114,315		$	(134,018	)	$	21,052,710
Mortgages held-for-sale	—			1,561,919			—			1,561,919
Finance receivables	—			306,281			13			306,294
Allowance for loan losses	(77,684		)	(14,091		)	—			(91,775		)
Total assets	21,516,202			2,086,216			(3,463		)	23,598,955
Total stockholders’ equity	829,494			319,792			(139,756		)	1,009,530

The following tables present reporting segments consolidated statements of operations for the three and nine month periods ended September 30, 2007 and 2006:

	Reporting Segments as of and for the Nine Months
	Ended September 30, 2007
	Long-Term
	Investment			Retail			Discontinued			Inter-
Income Statement Items:	Operations			Operations			Operations			Company (1)		Consolidated
Net interest income (expense)	$	383		$	(312	)	$	13,915		$	27,233	$	41,219
Provision for loan losses	979,740			—			4,867			—		984,607
Realized gain from derivative instruments	103,840			—			1,180			—		105,020
Change in fair value of derivative instruments	(136,701		)	(1,633		)	(4,958		)	—		(143,292		)
Other non-interest (expense) income	(102,767		)	(8,921		)	(223,672		)	2,147		(333,213		)
Non-interest expense and income taxes	19,702			34,459			84,404			12,012		150,577
Net (loss) earnings	$	(1,134,687	)	$	(45,325	)	$	(302,806	)	$	17,368	$	(1,465,450	)

	Reporting Segments as of and for the Nine Months
	Ended September 30, 2006
	Long-Term
	Investment			Discontinued			Inter-
Income Statement Items:	Operations			Operations			Company (1)		Consolidated
Net interest (expense) income	$	(91,593	)	$	18,958		$	44,853	$	(27,782	)
Provision for loan losses	3,638			(350		)	—		3,288
Realized gain from derivative instruments	156,582			51			—		156,633
Change in fair value of derivative instruments	(95,185		)	(1,447		)	4,030		(92,602		)
Other non-interest income	21,332			14,541			4,553		40,426
Non-interest expense and income taxes	17,708			63,376			8,070		89,154
Net (loss) earnings	$	(30,210	)	$	(30,923	)	$	45,366	$	(15,767	)

	Reporting Segments as of and for the Three Months
	Ended September 30, 2007
	Long-Term
	Investment			Retail			Discontinued			Inter-
Income Statement Items:	Operations			Operations			Operations			Company (1)		Consolidated
Net interest income (expense)	$	3,040		$	(116	)	$	3,082		$	8,774	$	14,780
Provision for loan losses	789,445			—			2,807			—		792,252
Realized gain from derivative instruments	28,815			—			106			—		28,921
Change in fair value of derivative instruments	(135,347		)	(2,206		)	(3,878		)	—		(141,431		)
Other non-interest (expense) income	(76,159		)	(10,832		)	(151,867		)	1,009		(237,849		)
Non-interest expense and income taxes	7,262			14,373			38,713			3,056		63,404
Net (loss) earnings	$	(976,358	)	$	(27,527	)	$	(194,077	)	$	6,727	$	(1,191,235	)

Reporting Segments as of and for the Three Months

Ended September 30, 2006

Long-Term

Investment

Discontinued

Inter-

Income Statement Items:

Operations

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

For the quarterly period ended September 30, 2007 or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 1-14100

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

	PART I. FINANCIAL INFORMATION
		Page
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS	2
	Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	2
	Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2007 and 2006	3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006	5
	Notes to Unaudited Consolidated Financial Statements	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
	Forward-Looking Statements	24
	The Mortgage Banking Industry and Discussion of Relevant Fiscal Periods	24
	Review of Performance	25
	Critical Accounting Policies	29
	Selected Financial Results for the Third Quarter of 2007	31
	Third Quarter and Year-to-date 2007 Taxable Income	32
	Financial Condition and Results of Operations	34
	Liquidity and Capital Resources	55

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	57

ITEM 4.	CONTROLS AND PROCEDURES	60

	PART II. OTHER INFORMATION	61

ITEM 1.	LEGAL PROCEEDINGS	61

ITEM 1A.	RISK FACTORS	61

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	64

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	64

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	64

ITEM 5.	OTHER INFORMATION	65

ITEM 6.	EXHIBITS	65

	SIGNATURES	66

	CERTIFICATIONS

	EXPLANATORY NOTE

	During the third quarter of 2007, the Company’s Board of Directors elected to discontinue the Alt-A mortgage operations (IFC), commercial operations (ICCC), and warehouse lending operations (IWLG). The information contained throughout this document is presented on a continuing operations basis, unless otherwise stated.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

FORM 10-Q QUARTERLY REPORT

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS