United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-Q/A
                                   Amendment 1

|X|   Quarterly Report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934. For the quarterly period ended June 30, 2002.

                                       OR

|_|   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

                          Impac Mortgage Holdings, Inc.
             (Exact name of registrant as specified in its charter)

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

            1401 Dove Street
           Newport Beach, CA                                        92660
(Address of Principal Executive Offices)                         (Zip Code)

       Registrant's telephone number, including area code: (949) 475-3600


          Securities registered pursuant to Section 12(b) of the Act:

                                                     Name of each exchange on
                 Title of each class                     which registered
           -------------------------------           ------------------------
            Common Stock $0.01 par value             American Stock Exchange
           Preferred Share Purchase Rights           American Stock Exchange

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

      On August 12, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $436.1 million, based on the
closing sales price of the common stock on the American Stock Exchange. For
purposes of the calculation only, in addition to affiliated companies, all
directors and executive officers of the registrant have been deemed affiliates.
The number of shares of common stock outstanding as of August 12, 2002 was
40,160,928.

       No documents are incorporated by reference to this Quarterly Report


                          IMPAC MORTGAGE HOLDINGS, INC.

                           FORM 10-Q QUARTERLY REPORT

                                TABLE OF CONTENTS

                          PART I. FINANCIAL INFORMATION


                                                                                 
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - IMPAC MORTGAGE HOLDINGS, INC.
        AND SUBSIDIARIES

        Consolidated Balance Sheets as of June 30, 2002 and
        December 31, 2001 .....................................................      3

        Consolidated Statements of Operations and Comprehensive Earnings (Loss)
        For the Three and Six Months Ended June 30, 2002 and 2001 .............      4

        Consolidated Statements of Cash Flows, For the Six Months Ended
        June 30, 2002 and 2001 ................................................      6

        Notes to Consolidated Financial Statements ............................      7

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS .............................................     17

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............     45

                           PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS .....................................................     48

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .............................     48

Item 3. DEFAULTS UPON SENIOR SECURITIES .......................................     48

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................     48

Item 5. OTHER INFORMATION .....................................................     48

Item 6. EXHIBITS AND REPORTS ON FORM 8-K ......................................     49

        SIGNATURE .............................................................     50



                          PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

                 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                  (dollars in thousands, except per share data)
                                  (Unaudited)



                                                                                           June 30,      December 31,
                                                                                             2002            2001
                                                                                         -----------     ------------
                                                                                                    
                                     ASSETS

Cash and cash equivalents ..........................................................     $    41,560      $    51,887
Investment securities available-for-sale ...........................................          28,138           32,989
Loans Receivable:
   CMO collateral ..................................................................       3,438,057        2,229,168
   Finance receivables .............................................................         569,311          466,649
   Mortgage loans held-for-investment ..............................................          10,678           20,078
   Allowance for loan losses .......................................................         (16,934)         (11,692)
                                                                                         -----------      -----------
     Net loans receivable ..........................................................       4,001,112        2,704,203
Accounts receivable ................................................................         134,593            3,946
Investment in Impac Funding Corporation ............................................          21,909           19,126
Accrued interest receivable ........................................................          18,825           14,565
Due from affiliates ................................................................          14,500           14,500
Derivative assets ..................................................................          11,568            5,128
Other real estate owned ............................................................           9,471            8,137
Other assets .......................................................................             238              253
                                                                                         -----------      -----------
     Total assets ..................................................................     $ 4,281,914      $ 2,854,734
                                                                                         ===========      ===========

                                   LIABILITIES

CMO borrowings .....................................................................     $ 3,474,019      $ 2,151,400
Reverse repurchase agreements ......................................................         516,065          469,491
Borrowings secured by investment securities available-for-sale .....................           9,756           12,997
Accumulated dividends payable ......................................................          17,171           14,081
Other liabilities ..................................................................           7,593            3,400
                                                                                         -----------      -----------
     Total liabilities .............................................................       4,024,604        2,651,369
                                                                                         -----------      -----------

                              STOCKHOLDERS' EQUITY

Preferred stock; $0.01 par value; 6,300,000 shares authorized; none issued or
   outstanding at June 30, 2002 and December 31, 2001, respectively ................              --               --
Series A junior participating preferred stock, $0.01 par value; 2,500,000 shares
   authorized; none issued and outstanding at June 30, 2002 and December 31, 2001 ..              --               --
Series C 10.5% cumulative convertible preferred stock, $0.01 par value; 1,200,000
   shares authorized; none outstanding at June 30, 2002 and December 31, 2001 ......              --               --
Common stock; $0.01 par value; 50,000,000 shares authorized; 39,924,628 and
   32,001,997 shares issued and outstanding at June 30, 2002 and December 31,
   2001, respectively ..............................................................             399              320
Additional paid-in capital .........................................................         421,795          359,279
Accumulated other comprehensive losses .............................................         (29,862)         (19,857)
Notes receivable from common stock sales ...........................................              --             (920)
Net accumulated deficit:
   Cumulative dividends declared ...................................................        (159,891)        (126,952)
   Retained earnings (accumulated deficit) .........................................          24,869           (8,505)
                                                                                         -----------      -----------
    Net accumulated deficit ........................................................        (135,022)        (135,457)
                                                                                         -----------      -----------
     Total stockholders' equity ....................................................         257,310          203,365
                                                                                         -----------      -----------
     Total liabilities and stockholders' equity ....................................     $ 4,281,914      $ 2,854,734
                                                                                         ===========      ===========


          See accompanying notes to consolidated financial statements.


                                       3


                 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        and COMPREHENSIVE EARNINGS (LOSS)
                 (in thousands, except earnings per share data)
                                  (Unaudited)



                                                                       For the Three Months         For the Six Months
                                                                          Ended June 30,              Ended June 30,
                                                                      ----------------------      ----------------------

                                                                        2002          2001          2002          2001
                                                                      --------      --------      --------      --------
                                                                                                    
INTEREST INCOME:
   Mortgage Assets ..............................................     $ 48,277      $ 37,011      $ 90,703      $ 75,802
   Other interest income ........................................          952           655         1,594         1,263
                                                                      --------      --------      --------      --------
      Total interest income .....................................       49,229        37,666        92,297        77,065
                                                                      --------      --------      --------      --------
INTEREST EXPENSE:
   CMO borrowings ...............................................       25,524        17,175        47,930        37,767
   Reverse repurchase agreements ................................        5,348         8,938         9,638        17,797
   Borrowings secured by investment securities ..................          475           660         1,024         1,338
   Senior subordinated debentures ...............................           --           252            --           563
   Other borrowings .............................................          328            90           504           157
                                                                      --------      --------      --------      --------
      Total interest expense ....................................       31,675        27,115        59,096        57,622
                                                                      --------      --------      --------      --------
   Net interest income ..........................................       17,554        10,551        33,201        19,443
      Provision for loan losses .................................        4,234         3,905         7,941         7,943
                                                                      --------      --------      --------      --------
   Net interest income after provision for loan losses ..........       13,320         6,646        25,260        11,500

NON-INTEREST INCOME:
   Equity in net earnings of Impac Funding Corporation ..........        5,453         3,528        10,062         4,818
   Loan servicing fees ..........................................           51           290           117           582
   Other income .................................................          903           971         1,879         1,514
                                                                      --------      --------      --------      --------
      Total non-interest income .................................        6,407         4,789        12,058         6,914

NON-INTEREST EXPENSE:
   Professional services ........................................        1,080           463         1,940         1,082
   General and administrative and other expense .................          489           549           567           925
   Personnel expense ............................................          391           272           792           576
   Loss (gain) on disposition of other real estate owned ........           42          (327)         (394)         (965)
   Write-down on investment securities ..........................           --           108         1,039           107
   Mark-to-market loss - FAS 133 ................................           --           581            --         1,445
                                                                      --------      --------      --------      --------
      Total non-interest expense ................................        2,002         1,646         3,944         3,170
                                                                      --------      --------      --------      --------
   Earnings before extraordinary item and cumulative
    effect of change in accounting principle ....................       17,725         9,789        33,374        15,244
      Extraordinary item ........................................           --        (1,006)           --        (1,006)
      Cumulative effect of change in accounting principle .......           --            --            --        (4,313)
                                                                      --------      --------      --------      --------
   Net earnings .................................................       17,725         8,783        33,374         9,925
      Less: Cash dividends on 10.5% cumulative convertible
        preferred stock .........................................           --          (787)           --        (1,575)
                                                                      --------      --------      --------      --------
   Net earnings available to common stockholders ................       17,725         7,996        33,374         8,350

Other comprehensive earnings (loss):
   Unrealized gains (losses) on securities:
      Unrealized holding gains (losses) on securities arising
        during period ...........................................          678           659          (552)        1,057
      Unrealized holding losses on hedging instruments
        arising during period ...................................      (19,700)          (88)       (9,294)          (88)
      Less: Reclassification of gains (losses) included
        in net earnings .........................................           65           (43)         (159)         (114)
                                                                      --------      --------      --------      --------
         Net unrealized gains (losses) arising during period ....      (18,957)          528       (10,005)          855
                                                                      --------      --------      --------      --------
   Comprehensive earnings (loss) ................................     $ (1,232)     $  9,311      $ 23,369      $ 10,780
                                                                      ========      ========      ========      ========



                                       4


                 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  and COMPREHENSIVE EARNINGS (LOSS), CONTINUED
                      (in thousands, except per share data)
                                  (Unaudited)



                                                            For the Three Months        For the Six Months
                                                               Ended June 30,             Ended June 30,
                                                            ---------------------     ---------------------
                                                              2002         2001         2002         2001
                                                            --------     --------     --------     --------
                                                                                       
Earnings per share before extraordinary item and
cumulative effect of change in accounting principle:
   Basic ..............................................     $   0.45     $   0.44     $   0.88     $   0.67
                                                            ========     ========     ========     ========
   Diluted ............................................     $   0.44     $   0.36     $   0.87     $   0.57
                                                            ========     ========     ========     ========
Net earnings per share:
   Basic ..............................................     $   0.45     $   0.39     $   0.88     $   0.41
                                                            ========     ========     ========     ========
   Diluted ............................................     $   0.44     $   0.33     $   0.87     $   0.37
                                                            ========     ========     ========     ========


          See accompanying notes to consolidated financial statements.


                                       5


                 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)



                                                                                                   For the Six Months
                                                                                                     Ended June 30,
                                                                                               --------------------------
                                                                                                   2002            2001
                                                                                               -----------      ---------
                                                                                                          
Cash flows from operating activities:
   Net earnings ..........................................................................     $    33,374      $  14,238
   Adjustments to reconcile net earnings to net cash provided by operating activities:
      Cumulative effect of change in accounting principle ................................              --         (4,313)
      Equity in net earnings of Impac Funding Corporation ................................         (10,062)        (4,818)
      Provision for loan losses ..........................................................           7,941          7,943
      Amortization of loan premiums and securitization costs .............................          15,619          5,161
      Gain on disposition of other real estate owned .....................................            (394)          (965)
      Write-down of investment securities available-for-sale .............................           1,039            107
      Write-off of securitization costs from senior subordinated debentures ..............              --          1,006
      Gain on sale of investment securities available-for-sale ...........................              --           (159)
      Net change in accrued interest receivable ..........................................          (4,260)           929
      Net change in other assets and liabilities .........................................        (132,879)        (7,987)
                                                                                               -----------      ---------
        Net cash provided by (used in) operating activities ..............................         (89,622)        11,142
                                                                                               -----------      ---------

Cash flows from investing activities:
   Net change in CMO collateral ..........................................................      (1,238,180)       (75,475)
   Net change in finance receivables .....................................................        (102,662)       (24,758)
   Net change in mortgage loans held-for-investment ......................................           5,428       (189,884)
   Proceeds from sale of other real estate owned, net ....................................           6,342          5,168
   Dividend from Impac Funding Corporation ...............................................           5,693          4,419
   Sale of investment securities available-for-sale ......................................              --          5,154
   Net principal reductions on investment securities available-for-sale ..................           3,056          1,079
                                                                                               -----------      ---------
        Net cash used in investing activities ............................................      (1,320,323)      (274,297)
                                                                                               -----------      ---------

Cash flows from financing activities:
   Net change in reverse repurchase agreements and other borrowings ......................          43,333        206,191
   Proceeds from CMO borrowings ..........................................................       1,736,750        357,843
   Repayments of CMO borrowings ..........................................................        (414,131)      (287,155)
   Dividends paid ........................................................................         (29,849)        (1,575)
   Retirement of senior subordinated debentures ..........................................              --         (7,747)
   Proceeds from sale of common stock ....................................................          62,454             --
   Proceeds from exercise of stock options ...............................................             141            270
   Reductions (advances) on notes receivable-common stock ................................             920            (28)
                                                                                               -----------      ---------
        Net cash provided by financing activities ........................................       1,399,618        267,799
                                                                                               -----------      ---------

   Net change in cash and cash equivalents ...............................................         (10,327)         4,644
   Cash and cash equivalents at beginning of period ......................................          51,887         17,944
                                                                                               -----------      ---------
   Cash and cash equivalents at end of period ............................................     $    41,560      $  22,588
                                                                                               ===========      =========

Supplementary information:
   Interest paid .........................................................................     $    59,013      $  58,638

Non-cash transactions:
   Transfer of mortgage loans held-for-investment to CMO collateral ......................     $ 1,617,530      $ 359,643
   Dividends declared and unpaid .........................................................          17,171            788
   Accumulated other comprehensive (loss) gain ...........................................         (10,005)           855
   Loans transferred to other real estate owned ..........................................           7,282          5,548


          See accompanying notes to consolidated financial statements.


                                       6


                 IMPAC MORTGAGE HOLDINGS, INC. and SUBSIDIARIES

                   Notes to Consolidated Financial Statements
                                   (unaudited)

1. Basis of Financial Statement Presentation

      The accompanying consolidated financial statements of Impac Mortgage
Holdings, Inc. and subsidiaries (the Company) have been prepared in accordance
with accounting principles generally accepted in the United States of America
(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 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 three-and six-month periods ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. The accompanying consolidated financial statements
should be read in conjunction with the consolidated financial statements and
related notes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.

      References to the Company refers to Impac Mortgage Holdings, Inc., a
Maryland corporation incorporated in August 1995, and its subsidiaries, IMH
Assets Corp. (IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG) and its
affiliate, Impac Funding Corporation (IFC), together with its wholly-owned
subsidiaries Impac Secured Assets Corporation and Novelle Financial Services,
Inc. References to Impac Mortgage Holdings, Inc. (IMH) are made to differentiate
IMH, the publicly traded company, as a separate entity from IMH Assets, IWLG and
IFC. IMH is organized as a real estate investment trust (REIT) for federal
income tax purposes, which generally allows it to pass through qualified income
to stockholders without federal income tax at the corporate level, provided that
it distributes 90% of its taxable income to common stockholders.

      The Company's results of operations have been presented in the
consolidated financial statements for the three- and six- months ended June 30,
2002 and 2001 and include the financial results of IMH's equity interest in net
earnings of Impac Funding Corporation (IFC), the mortgage operations. The
results of operations of IFC, of which 100% of IFC's preferred stock and 99% of
its economic interest is owned by IMH, are included in the results of operations
as "Equity in net earnings of Impac Funding Corporation." Additionally, the
Company's results of operations include the financial results of IMH Assets
Corp. (IMH Assets) and Impac Warehouse Lending Group (IWLG) as stand-alone
entities.

2. Organization

      The Company is a nationwide acquirer, originator, securitizer and investor
of primarily non-conforming Alt-A mortgage loans (Alt-A). Alt-A mortgage loans
consist primarily of mortgage loans that are first lien mortgage loans made to
borrowers whose credit is generally within typical Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac) guidelines, but that have loan characteristics that make them
non-conforming under those guidelines. For instance, the loans may have higher
loan-to-value (LTV) ratios than allowable or may have excluded certain
documentation or verifications. Therefore, in making credit decisions, the
Company is more reliant upon the borrower's credit score and the adequacy of the
underlying collateral. Management believes that Alt-A mortgage loans provide an
attractive net earnings profile by producing higher yields without
commensurately higher credit losses than other types of mortgage loans. Since
1999, the Company has acquired and originated primarily Alt-A mortgage loans.
The Company also provides warehouse and repurchase financing to originators of
mortgage loans. Our ultimate goal is to generate consistent and reliable income
for distribution to our stockholders primarily from the earnings of our
long-term investment operations.

      The Company primarily operates three core businesses: the long-term
investment operations, the mortgage operations and the warehouse lending
operations.

      The long-term investment operations, conducted by IMH and IMH Assets,
invest primarily in Alt-A mortgage loans acquired from IFC. This business
primarily generates net interest income on its mortgage loan investment


                                       7


portfolio and, to a lesser extent, its investment securities portfolio. Alt-A
mortgage loans are financed with collateralized mortgage obligations (CMO),
warehouse facilities and proceeds from the sale of capital stock.

      The mortgage operations, conducted by IFC, acquire, originate, sell and
securitize primarily Alt-A mortgage loans and, to a lesser extent, sub-prime
mortgage loans (B/C loans). The mortgage operations generate income by
securitizing and selling loans to permanent investors, including the long-term
investment operations. This business also earns revenues from fees associated
with mortgage servicing rights, master servicing agreements and interest income
earned on loans held for sale. The mortgage operations primarily use warehouse
lines of credit to finance the acquisition and origination of mortgage loans.

      The warehouse lending operations, conducted by IWLG, provide short-term
financing to mortgage loan originators by funding mortgage loans from their
closing date until they are sold to pre-approved investors. The warehouse
lending operations earn fees, as well as a spread, from the difference between
its cost of borrowings and the interest earned on advances. Generally, the
Company seeks to acquire Alt-A mortgage loans funded with warehouse facilities
provided by the warehouse lending operations which provides synergies with the
long-term investment operations and mortgage operations.

3. Summary of Significant Accounting Policies

Method of Accounting

      The consolidated financial statements are prepared on the accrual basis of
accounting in accordance with GAAP. The preparation of financial statements in
conformity with GAAP requires management to make significant estimates and
assumptions that affect the reported amounts of assets, liabilities and
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may
differ materially from those estimates. Significant estimates made by management
include accounting for derivative instruments and hedging activities and loan
loss provisions.

Recent Accounting Pronouncements

      The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets," (SFAS 142). SFAS 142 applies to all acquired intangible assets whether
acquired singularly, as part of a group, or in a business combination. SFAS 142
supersedes Accounting Principles Bulletin (APB) Opinion No. 17, "Intangible
Assets," and carries forward provisions in APB Opinion No. 17 related to
internally developed intangible assets. SFAS 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Goodwill
should no longer be amortized, but instead tested for impairment at least
annually at the reporting unit level. The accounting provisions are effective
for fiscal years beginning after December 31, 2001. As of June 30, 2002, the
Company's intangible assets and goodwill are not significant. The financial
impact of adopting this statement did not have a material impact on the
Company's financial condition and results of operations.

      SFAS No. 143, "Accounting for Asset Retirement Obligations," ("SFAS 143"),
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Management anticipates that the financial impact
of SFAS 143 will not have a material effect on the Company's financial condition
and results of operations.

      SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," ("SFAS 144"), addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a business segment. SFAS 144 also
eliminates the exception to consolidation for a subsidiary for which control is
likely to be temporary. The provisions of SFAS 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The provisions of SFAS 144 generally are to
be applied prospectively. Management anticipates that the financial impact of
SFAS 144 will not have a material effect on the Company's financial condition
and results of operations.


                                       8


      SFAS No. 145, "Rescission of SFAS Statements No. 4, 44, and 64, Amendment
of SFAS Statement No. 13, and Technical Corrections," ("SFAS 145"), updates,
clarifies and simplifies existing accounting pronouncements. SFAS 145 rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt." SFAS 145
amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for eleven certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. The provisions of SFAS 145
related to SFAS No. 4 and SFAS No. 13 are effective for fiscal years beginning
and transactions occurring after May 15, 2002, respectively. Management
anticipates that the financial impact of SFAS 145 will not have a material
effect on the Company's financial condition and results of operations.

      SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," ("SFAS 146"), requires the recognition of costs associated with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 replaces Emerging Issues Task
Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The provisions of SFAS 146 are to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. Management anticipates that the financial impact of SFAS 145 will not
have a material effect on the Company's financial condition and results of
operations.

4. Accounting for Derivative Instruments and Hedging Activities

      In June 1998, the FASB issued with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and
SFAS No. 138, collectively, (SFAS 133). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including a number of derivative
instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If specific conditions are
met, a derivative may be specifically designated as (1) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment; (2) a hedge of the exposure to variable cash flows
of a forecasted transaction; or (3) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available for sale security or a foreign-currency-denominated forecasted
transaction.

      On January 1, 2001, the Company adopted SFAS 133 and the fair market value
of derivative instruments are reflected on the Company's financial statements.
On August 10, 2001, the Derivatives Implementation Group (DIG) of the FASB
published DIG G20, which further interpreted SFAS 133. On October 1, 2001, the
Company adopted the provisions of DIG G20 and net income and accumulated other
comprehensive income were adjusted by the amount needed to reflect the
cumulative impact of adopting the provisions of DIG G20. The following table
presents certain information related to derivative instruments and hedging
activities as of June 30, 2002 (in thousands):



                                                                          Related
                            Original         Fair                         Amount in                        Related        Related
                            Notional         Value                          Other         Unamortized     Amount in        Amount
                              Face            of                        Comprehensive     Derivative      Derivative       in CMO
                             Amount       Derivatives        Index          Income        Instruments    Asset Account   Collateral
                           ----------     -----------     -----------   -------------     -----------    -------------   ----------
                                                                                                     
Caps and collars not
  associated with
  CMOs ................    $1,937,008      $ (8,739)      1 mo. LIBOR      $(12,596)        $ 3,857        $ (8,739)      $     --
Cash in margin
  account .............        20,307        20,307           N/A                --              --          20,307             --
Caps, collars and
  swaps associated
  with CMOs ...........     2,782,790       (12,324)      1 mo. LIBOR       (22,862)         10,538              --        (12,324)
99% of OCI activity
  at IFC ..............       110,000          (604)          FNMA             (255)             --              --             --
                           ----------      --------                        --------         -------        --------       --------
Totals ................    $4,850,105      $ (1,360)                       $(35,713)        $14,395        $ 11,568       $(12,324)
                           ==========      ========                        ========         =======        ========       ========



                                       9


      The following table presents certain information related to derivative
instruments and hedging activities as of December 31, 2001 (dollars in
thousands):



                                                                          Related
                            Original         Fair                         Amount in                        Related        Related
                            Notional         Value                          Other         Unamortized     Amount in        Amount
                              Face            of                        Comprehensive     Derivative      Derivative       in CMO
                             Amount       Derivatives        Index          Income        Instruments    Asset Account   Collateral
                           ----------     -----------     -----------   -------------     -----------    -------------   ----------
                                                                                                     
Caps and collars not
  associated with
  CMOs ................    $1,860,790      $(13,659)      1 mo. LIBOR      $(15,240)        $ 1,581        $(13,659)      $     --
Cash in margin
  account .............        18,787        18,787           N/A                --              --          18,787             --
Caps, collars and
  swaps associated
  with CMOs ...........     1,070,500        (4,372)      1 mo. LIBOR       (12,722)          8,350              --         (4,372)
99% of OCI activity
  at IFC ..............        36,000          (158)          FNMA              (90)             --              --             --
                           ----------      --------                        --------         -------        --------       --------
Totals ................    $2,986,077      $    598                        $(28,052)        $ 9,931        $  5,128       $ (4,372)
                           ==========      ========                        ========         =======        ========       ========


5. Reconciliation of Net Earnings per Share

      The following table presents the computation of basic and diluted net
earnings per share for the periods shown as if all stock options and 10.5%
cumulative convertible preferred stock (Preferred Stock) were outstanding for
the periods indicated (in thousands, except earnings per share):



                                                                                     For the Three Months
                                                                                        Ended June 30,
                                                                                     --------------------
                                                                                       2002        2001
                                                                                     -------     --------
                                                                                           
Numerator for earnings per share:
  Earnings before extraordinary item ...........................................     $17,725     $  9,789
   Extraordinary item ..........................................................          --       (1,006)
                                                                                     -------     --------
  Net earnings .................................................................      17,725        8,783
   Less:  Dividends paid to preferred stockholders .............................          --         (787)
                                                                                     -------     --------
Net earnings available to common stockholders ..................................     $17,725     $  7,996
                                                                                     =======     ========

Denominator for earnings per share:
Basic weighted average number of common shares outstanding during the period ...      39,522       20,421
Impact of assumed conversion of Preferred Stock ................................          --        6,356
Net effect of dilutive stock options ...........................................         715          240
                                                                                     -------     --------
   Diluted weighted average common and common equivalent shares ................      40,237       27,017
                                                                                     =======     ========

Earnings per share before extraordinary item:
   Basic .......................................................................     $  0.45     $   0.44
                                                                                     =======     ========
   Diluted .....................................................................     $  0.44     $   0.36
                                                                                     =======     ========
Net earnings per share:
   Basic .......................................................................     $  0.45     $   0.39
                                                                                     =======     ========
   Diluted .....................................................................     $  0.44     $   0.33
                                                                                     =======     ========


      The Company had none and 5,839 stock options during the three months ended
June 30, 2002 and June 30, 2001, respectively, that were not considered in the
dilutive calculation of earnings per share as the exercise price was higher than
the market price for the period.


                                       10




                                                                                      For the Six Months
                                                                                        Ended June 30,
                                                                                     --------------------
                                                                                       2002        2001
                                                                                     -------     --------
                                                                                           
Numerator for earnings per share:
Earnings before extraordinary item and cumulative effect of change in
  accounting principle .........................................................     $33,374     $ 15,244
   Extraordinary item ..........................................................          --       (1,006)
   Cumulative effect of change in accounting principle .........................          --       (4,313)
                                                                                     -------     --------
Earnings after extraordinary item and cumulative effect of change in
  in accounting principle ......................................................      33,374        9,925
   Less:  Dividends paid to preferred stockholders .............................          --       (1,575)
                                                                                     -------     --------
Net earnings available to common stockholders ..................................     $33,374     $  8,350
                                                                                     =======     ========

Denominator for earnings per share:
Basic weighted average number of common shares outstanding during the period ...      37,752       20,432
Impact of assumed conversion of Preferred Stock ................................          --        6,356
Net effect of dilutive stock options ...........................................         611           83
                                                                                     -------     --------
   Diluted weighted average common and common equivalent shares ................      38,363       26,871
                                                                                     =======     ========

Net earnings per share before extraordinary item and cumulative effect of
  change in accounting principle:
   Basic .......................................................................     $  0.88     $   0.67
                                                                                     =======     ========
   Diluted .....................................................................     $  0.87     $   0.57
                                                                                     =======     ========
Net earnings per share:
   Basic .......................................................................     $  0.88     $   0.41
                                                                                     =======     ========
   Diluted .....................................................................     $  0.87     $   0.37
                                                                                     =======     ========


      The Company had 17,127 and 15,136 stock options during the six months
ended June 30, 2002 and June 30, 2001, respectively, that were not considered in
the dilutive calculation of earnings per share as the exercise price was higher
than the market price for the period.


                                       11


6. Mortgage Assets

      Mortgage Assets consist of investment securities available-for-sale,
mortgage loans held-for-investment, CMO collateral and finance receivables. As
of June 30, 2002 and December 31, 2001, Mortgage Assets consisted of the
following (in thousands):



                                                                             June 30,      December 31,
                                                                               2002            2001
                                                                           -----------     ------------
                                                                                      
Investment securities available-for-sale:
   Subordinated securities collateralized by mortgages ...............     $    22,525      $    26,661
   Net unrealized gain (1) ...........................................           5,613            6,328
                                                                           -----------      -----------
      Carrying value of investment securities available-for-sale .....          28,138           32,989
                                                                           -----------      -----------
Loans Receivable:
CMO collateral--
   CMO collateral, unpaid principal balance ..........................       3,382,143        2,186,561
   Unamortized net premiums on loans .................................          53,531           35,397
   Securitization expenses ...........................................          14,707           11,582
   Fair value of derivative instruments allocated to CMO collateral ..         (12,324)          (4,372)
                                                                           -----------      -----------
      Carrying value of CMO collateral ...............................       3,438,057        2,229,168
Finance receivables, net of pledge balances (2)--
   Due from affiliates ...............................................         225,872          166,078
   Due from other mortgage banking companies .........................         343,439          300,571
                                                                           -----------      -----------
      Carrying value of finance receivables ..........................         569,311          466,649
Mortgage loans held-for-investment--
   Mortgage loans held-for-investment, unpaid principal balance ......          10,718           20,086
   Unamortized net discounts on loans ................................             (40)              (8)
                                                                           -----------      -----------
      Carrying value of mortgage loans held-for-investment ...........          10,678           20,078
Carrying value of Gross Loans Receivable .............................       4,018,046        2,715,895
   Allowance for loan losses .........................................         (16,934)         (11,692)
                                                                           -----------      -----------
      Carrying value of Net Loans Receivable .........................       4,001,112        2,704,203
                                                                           -----------      -----------
   Total carrying value of Mortgage Assets ...........................     $ 4,029,250      $ 2,737,192
                                                                           ===========      ===========


(1)   Unrealized gains on investment securities available-for-sale is a
      component of accumulated other comprehensive losses in stockholders'
      equity.

(2)   Outstanding advances on warehouse lines that the warehouse lending
      operations makes to affiliates and external customers.

7. Allowance for Loan Losses

      The Company makes a monthly provision for estimated loan losses on its
long-term investment portfolio as an increase to allowance for loan losses. The
provision for estimated loan losses is primarily based on a migration analysis
based on historical loss statistics, including cumulative loss percentages and
loss severity, of similar loans in the Company's long-term investment portfolio.
The loss percentage is used to determine the estimated inherent losses in the
investment portfolio. Provision for loan losses is also based on management's
judgment of net loss potential, including specific allowances for known impaired
loans, changes in the nature and volume of the portfolio, the value of the
collateral and current economic conditions that may affect the borrowers'
ability to pay. The adequacy of the allowance for loan losses is evaluated on a
monthly basis by management to maintain the allowance at levels sufficient to
provide for inherent losses. The migration system analyzes historical migration
of mortgage loans from original current status to 30-, 60- and 90-day
delinquency, foreclosure, and other real estate owned and liquidated. The
principal balance of all loans currently in the long-term investment portfolio
are included in the migration analysis until the principal balance of loans
either become real estate owned or are paid in full. The statistics generated by
the migration analysis are used to establish the general valuation for loan
losses. The following tables present activity for allowance for loan losses for
the periods shown (in thousands):

                                                         For the Three Months
                                                            Ended June 30,
                                                      -------------------------
                                                        2002             2001
                                                      --------          -------
Balance, beginning of period ................         $ 14,764          $ 6,295
Provision for loan losses ...................            4,234            3,905
Charge-offs, net of recoveries ..............           (2,064)          (2,383)
                                                      --------          -------
Balance, end of period ......................         $ 16,934          $ 7,817
                                                      ========          =======


                                       12


                                                          For the Six Months
                                                            Ended June 30,
                                                      -------------------------
                                                        2002             2001
                                                      --------          -------
Balance, beginning of period ................         $ 11,692          $ 5,090
Provision for loan losses ...................            7,941            7,943
Charge-offs, net of recoveries ..............           (2,699)          (5,216)
                                                      --------          -------
Balance, end of period ......................         $ 16,934          $ 7,817
                                                      ========          =======

8. Segment Reporting

      The Company internally reviews and analyzes its operating segments as
follows:

      o     the long-term investment operations, conducted by IMH and IMH
            Assets, invests primarily in non-conforming Alt-A residential
            mortgage loans acquired from the mortgage operations and
            mortgage-backed securities secured by or representing interests in
            such loans and in second mortgage loans;

      o     the warehouse lending operations, conducted by IWLG, provides
            warehouse and repurchase financing to affiliated companies and to
            approved mortgage bankers, a majority of which are correspondents of
            IFC, to finance mortgage loans; and

      o     the mortgage operations, conducted by IFC, Impac Lending Group
            (ILG), a division of IFC, and Novelle Financial Services (NFS), a
            subsidiary of IFC, purchases and originates primarily non-conforming
            Alt-A mortgage loans, second mortgage loans and, to a lesser extent,
            B/C loans from its network of third party correspondent sellers,
            mortgage brokers and retail customers. IFC is an unconsolidated
            taxable REIT subsidiary of IMH and its results of operations are
            shown as "Equity interest in net earnings of IFC."

      The following table shows reporting segments as of and for the six months
ended June 30, 2002 (in thousands):



                                           Long-Term        Warehouse
                                           Investment        Lending            (a)
                                           Operations       Operations      Eliminations      Consolidated
                                           ----------       ----------      ------------      ------------
                                                                                   
Balance Sheet Items
    CMO collateral                         $3,438,057        $     --        $      --         $3,438,057
    Total assets                            3,901,136         600,493         (219,715)         4,281,914
    Total stockholders' equity                397,210          79,706         (219,606)           257,310

Income Statement Items
    Interest income                        $   75,990        $ 17,257        $    (950)        $   92,297
    Interest expense                           49,928          10,118             (950)            59,096
    Equity interest in net earnings
      of IFC (b)                                   --              --           10,062             10,062
    Net earnings                               16,369           6,943           10,062             33,374


      The following table shows reporting segments for the three months ended
June 30, 2002 (in thousands):


                                                                                   
Income Statement Items
    Interest income                        $   40,535        $  9,637        $    (943)        $   49,229
    Interest expense                           26,947           5,671             (943)            31,675
    Equity interest in net earnings
      of IFC (b)                                   --              --            5,453              5,453
    Net earnings                                8,446           3,826            5,453             17,725



                                       13


      The following table shows reporting segments as of and for the six months
ended June 30, 2001 (in thousands):



                                           Long-Term        Warehouse
                                           Investment        Lending            (a)
                                           Operations       Operations      Eliminations      Consolidated
                                           ----------       ----------      ------------      ------------
                                                                                   
Balance Sheet Items
    CMO collateral                         $1,439,848        $     --        $      --         $1,439,848
    Total assets                            1,829,747         676,335         (328,609)         2,177,473
    Total stockholders' equity                268,931          67,151         (148,247)           187,835

Income Statement Items
    Interest income                        $   58,405        $ 23,264        $  (4,604)        $   77,065
    Interest expense                           44,361          17,865           (4,604)            57,622
    Equity interest in net earnings
      of IFC (b)                                   --              --            4,818              4,818
    Net earnings                                  252           4,855            4,818              9,925


      The following table shows reporting segments for the three months ended
June 30, 2001 (in thousands):


                                                                                   
Income Statement Items
    Interest income                        $   29,006        $ 11,483        $  (2,823)        $   37,666
    Interest expense                           20,947           8,991           (2,823)            27,115
    Equity interest in net earnings
      of IFC (b)                                   --              --            3,528              3,528
    Net earnings                                2,991           2,264            3,528              8,783


(a)   Elimination of inter-segment balance sheet and income statement items.

(b)   The mortgage operations are accounted for using the equity method and are
      an unconsolidated qualified REIT subsidiary of the Company.

9. Investment in Impac Funding Corporation

      The Company is entitled to 99% of the earnings or losses of IFC through
its ownership of 100% of the non-voting preferred stock of IFC. As such, the
Company records its investment in IFC using the equity method. Under this
method, original investments are recorded at cost and adjusted by the Company's
share of earnings or losses. The following tables are financial information for
IFC for the periods presented (in thousands):


                                       14


                                 BALANCE SHEETS



                                                                      June 30,      December 31,
                                                                         2002           2001
                                                                      ---------     ------------
                                                                               
                                            ASSETS
Cash                                                                  $  27,671      $  28,612
Investment securities available-for-sale                                     94          3,394
Mortgage loans held-for-sale                                            241,057        174,172
Mortgage servicing rights                                                 7,820          8,468
Premises and equipment, net                                               4,927          5,333
Accrued interest receivable                                                 240            130
Other assets                                                             30,062         19,693
                                                                      ---------      ---------
     Total assets                                                     $ 311,871      $ 239,802
                                                                      =========      =========

                             LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG                                                  $ 238,425      $ 174,136
Due to affiliates                                                        14,500         14,500
Deferred revenue                                                          3,779          4,479
Accrued interest expense                                                    336            453
Other liabilities                                                        32,701         26,914
                                                                      ---------      ---------
     Total liabilities                                                  289,741        220,482
                                                                      ---------      ---------
Shareholders' Equity:
Preferred stock                                                          18,053         18,053
Common stock                                                                182            182
Retained earnings                                                        18,885          8,722
Cumulative dividends declared                                           (14,734)        (8,984)
Accumulated other comprehensive gain (loss)                                (256)         1,347
                                                                      ---------      ---------
     Total shareholders' equity                                          22,130         19,320
                                                                      ---------      ---------
     Total liabilities and shareholders' equity                       $ 311,871      $ 239,802
                                                                      =========      =========


                            STATEMENTS OF OPERATIONS



                                                            For the Three Months         For the Six Months
                                                               Ended June 30,              Ended June 30,
                                                           ----------------------      ----------------------
                                                             2002          2001          2002          2001
                                                           --------      --------      --------      --------
                                                                                         
Interest income                                            $  7,926      $  5,253      $ 14,572      $ 12,745
Interest expense                                              5,916         4,774        10,891        11,972
                                                           --------      --------      --------      --------
   Net interest income                                        2,010           479         3,681           773

Gain on sale of loans                                        19,574        12,875        35,732        20,523
Loan servicing income                                          (391)          769          (748)        1,800
Other non-interest income                                       346            65         2,080           112
                                                           --------      --------      --------      --------
   Total non-interest income                                 19,529        13,709        37,064        22,435

Personnel expense                                             6,270         3,453        11,843         6,638
General and administrative and other expense                  4,368         3,382         8,457         5,655
Amortization of mortgage servicing rights                       993         1,188         2,493         2,445
Provision for repurchases                                       395             8           830            14
Mark-to-market loss - FAS 133                                    (8)           --          (456)          (17)
                                                           --------      --------      --------      --------
   Total non-interest expense                                12,018         8,031        23,167        14,735

Earnings before income taxes and cumulative effect
 of change in accounting principle                            9,521         6,157        17,578         8,473
   Income taxes                                              (4,013)       (2,608)       (7,415)       (3,609)
                                                           --------      --------      --------      --------
Earnings before cumulative effect of change in
 accounting principle                                         5,508         3,549        10,163         4,864
   Cumulative effect of change in accounting principle           --            --            --            17
                                                           --------      --------      --------      --------
Net earnings                                                  5,508         3,549        10,163         4,847
   Less: Cash dividends on preferred stock                   (3,713)       (2,475)       (5,693)       (4,419)
                                                           --------      --------      --------      --------
Net earnings available to common stockholders              $  1,795      $  1,074      $  4,470      $    428
                                                           ========      ========      ========      ========



                                       15


10. Accounts Receivable

      An accounting entry for $132.5 million was recorded to accounts receivable
for the pre-funding of the CMO that was completed on June 26, 2002. Pre-funding
allows the Company to complete a securitized transaction and lock-in financing
terms and conditions before mortgage loans securing CMOs are delivered to the
trustee. However, the Company must establish a pre-funding account with the
trustee whereby all or a portion of the proceeds of the sale of one or more
classes of bonds created by the CMO will be deposited in the account to be
released as additional mortgage loans are transferred. As of July 31, 2002,
mortgage loans were transferred to the trustee thereby satisfying all
requirements of the pre-funding arrangement.

11. Stockholders' Equity

      During the six months ended June 30, 2002, accumulated other comprehensive
losses increased by $10.0 million due to a $9.3 million increase in unrealized
loss on derivative assets and a $711,000 increase in unrealized loss on
investment securities available-for-sale.

      During the six months ended June 30, 2002, the Company issued 7.4 million
shares of common stock and received net proceeds of $57.0 million.

      During the three months ended June 30, 2002, the Company sold 489,300
shares of common stock pursuant to its sales agency agreement which provided net
proceeds of approximately $5.5 million.

      On June 25, 2002, the Company declared a second quarter cash dividend of
$0.43 per common share, or $17.2 million, which was paid on July 12, 2002 to
common stockholders of record on July 3, 2002.

      On March 26, 2002, the Company declared a first quarter cash dividend of
$0.40 per common share, or $15.8 million, which was paid on April 16, 2002 to
common stockholders of record on April 3, 2002.

12. Subsequent Events

      On July 17, 2002, the Company filed an Articles of Amendment with the
State Department of Assessments and Taxation of Maryland on increasing
authorized shares of Common Stock. The increase was approved by the shareholders
on June 25, 2002.


                                       16


Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations

      This Quarterly Report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements, some of which are
based on various assumptions and events that are beyond our control, may be
identified by reference to a future period or periods or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"anticipate," "continue," or similar terms or variations on those terms or the
negative of those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, adverse economic conditions, the ability to generate sufficient
liquidity, including completing securitizations and earning interest on our
mortgage loans, different interest rate fluctuations on our assets and
liabilities, changes in the difference between short-term and long-term interest
rates, increase in prepayment rates on our mortgage assets, changes in
assumptions regarding estimated loan losses, the availability of financing and,
if available, the terms of any financing. For a discussion of the risks and
uncertainties that could cause actual results to differ from those contained in
the forward-looking statements refer to "Risk Factors" in this Quarterly Report.
We do not undertake, and specifically disclaim any obligation, to publicly
release the results of any revisions that may be made to any forward-looking
statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.

      The terms "Company," "we," "us," and "our" refer to Impac Mortgage
Holdings, Inc., a Maryland corporation incorporated in August 1995, and its
subsidiaries, IMH Assets Corp., or "IMH Assets," Impac Warehouse Lending Group,
Inc., or "IWLG," and its affiliate, Impac Funding Corporation, or "IFC,"
together with its wholly-owned subsidiaries Impac Secured Assets Corporation and
Novelle Financial Services, Inc. References to Impac Mortgage Holdings, Inc., or
"IMH," are made to differentiate IMH, the publicly traded company, as a separate
entity from IMH Assets, IWLG and IFC.

      IMH is a mortgage real estate investment trust ("REIT"). Together with our
subsidiaries and affiliate, IFC, we are a nationwide acquirer, originator,
securitizer and investor of primarily non-conforming Alt-A mortgage loans
("Alt-A"). Alt-A mortgage loans consist primarily of mortgage loans that are
first lien mortgage loans made to borrowers whose credit is generally within
typical Federal National Mortgage Association ("Fannie Mae") and the Federal
Home Loan Mortgage Corporation ("Freddie Mac") guidelines, but that have loan
characteristics that make them non-conforming under those guidelines. For
instance, the Alt-A mortgage loans may have higher loan-to-value LTV ratios than
allowable or may have excluded certain documentation or verifications.
Therefore, in making credit decisions, we are more reliant upon the borrower's
credit score and the adequacy of the underlying collateral. Alt-A credit quality
loans generally have a credit score of 600 or better while "A" credit quality
loans generally have a credit score of 640 or better.

      We believe that the non-conforming Alt-A mortgage market is expanding
because this market niche provides mortgage borrowers with valuable financing
alternatives to Fannie Mae, Freddie Mac and sub-prime lenders. We also believe
that Alt-A mortgage loans provide an attractive net earnings profile by
producing higher yields without commensurately higher credit losses than other
types of mortgage loans. Since 1999, we have acquired and originated primarily
Alt-A mortgage loans. We also provide warehouse and repurchase financing to
originators of mortgage loans. Our ultimate goal is to generate consistent and
reliable income for distribution to our stockholders primarily from the earnings
of our long-term investment operations.

Critical Accounting Policies

      Certain accounting policies require us to make significant estimates and
assumptions, which have a material impact on the carrying value of certain
assets and liabilities, and we consider these to be critical accounting
policies. The estimates and assumptions we use are based on historical
experience and other factors, which we believe to be reasonable under the
circumstances. Actual results could differ significantly from these estimates
and assumptions which could have a material impact on the carrying value of
assets and liabilities at the balance sheet dates and our results of operations
for the reporting periods. We believe the following are critical accounting
policies that require the most significant estimates and assumptions that are
particularly susceptible to significant change in the preparation of our
financial statements:

      o     Allowance for losses on loans. For further information, see note 7
            on page 12 of notes to consolidated financial statements and pages
            21 and 22 of this section; and


                                       17


      o     Accounting for Derivative Instruments and Hedging Activities. For
            further information, see note 4 on pages 9 and 10 of notes to
            consolidated financial statements and "Item 3. Quantitative and
            Qualitative Disclosures About Market Risk" on page 45.

Significant Transactions

      On February 7, 2002, IMH issued 7.4 million shares of common stock at a
price of $8.25 per share and received net proceeds of $57.0 million.

      On March 26, 2002, IMH declared a first quarter cash dividend of $0.40 per
common share, or $15.8 million, which was paid on April 16, 2002 to common
stockholders of record on April 3, 2002.

      On June 25, 2002, IMH declared a second quarter cash dividend of $0.43 per
common share, or $17.2 million, which was paid on July 12, 2002 to common
stockholders of record on July 3, 2002.

      During the three months ended June 30, 2002, IMH issued and sold 489,300
shares of common stock pursuant to its sales agency agreement at an average net
price of $11.21 per share, which provided net proceeds of approximately $5.5
million.

Operating Segments

      We primarily operate three core businesses: the long-term investment
operations, the mortgage operations, and the warehouse lending operations.

Long-Term Investment Operations

      The long-term investment operations, conducted by IMH and IMH Assets,
invest primarily in Alt-A mortgage loans. This business primarily generates net
interest income on its mortgage investment portfolio and, to a lesser extent,
its investment securities portfolio. Alt-A mortgage loans are financed with
collateralized mortgage obligations ("CMOs"), warehouse facilities and proceeds
from the sale of capital stock. During the first six months of 2002, the
long-term investment operations acquired $1.6 billion of primarily Alt-A
adjustable-rate mortgages ("ARMs") secured by first liens on residential
property from the mortgage operations. Of the Alt-A mortgages acquired during
the first six months of 2002, 72% were acquired with prepayment penalty features
with a weighted average coupon of 6.56% and a weighted average credit score of
684. As of June 30, 2002, the long-term mortgage investment portfolio was $3.4
billion of which approximately 94% were ARMs and 6% were fixed rate mortgages
("FRMs"). The long-term mortgage investment portfolio had a weighted average
coupon of 7.13%, a weighted average margin of 3.15% and an original weighted
average credit score of 676. Ninety-six percent of long-term mortgage investment
portfolio were Alt-A mortgages, 65% had prepayment penalty features with a
weighted average expiration period of 22 months and 50% were six-month London
Interbank Offered Rate ("LIBOR") indexed hybrid loans ("six month hybrids"). Six
months hybrids have initial fixed interest rate periods of two to five years,
which subsequently adjust to ARMs, and had an average interest rate adjustment
period of approximately 13 months as of June 30, 2002.

Mortgage Operations

      The mortgage operations, conducted by IFC, acquire, originate, sell and
securitize primarily Alt-A mortgage loans and, to a lesser extent, sub-prime
mortgage loans ("B/C loans"). The mortgage operations generate income by
securitizing and selling loans to permanent investors, including the long-term
investment operations. This business also earns revenues from fees associated
with mortgage servicing rights, master servicing agreements and interest income
earned on loans held for sale. The mortgage operations primarily use warehouse
lines of credit to finance the acquisition and origination of mortgage loans.
Loan acquisitions and originations by the mortgage operations were $2.6 billion
during the first six months of 2002. Of mortgages acquired or originated during
the first six months of 2002, 75% had prepayment penalty features and 69% were
ARMs. During the first six months of 2002, the mortgage operations sold $1.6
billion of mortgage loans to the long-term investment operations, issued real
estate mortgage investment conduits ("REMICs") totaling $594.7 million and sold
$308.6 million of mortgage loans to first party investors. As of June 30, 2002,
the master servicing portfolio was $6.9 billion and the loan delinquency rate of
mortgages in the master servicing portfolio which were 60 or more days past due,
inclusive of foreclosures and delinquent bankruptcies, was 4.70%.


                                       18


Warehouse Lending Operations

      The warehouse lending operations, conducted by IWLG, provide short-term
financing to mortgage loan originators by funding mortgage loans from their
closing date until they are sold to pre-approved investors. The warehouse
lending operations earn fees, as well as a spread, from the difference between
its cost of borrowings and the interest earned on advances. As of June 30, 2002,
the warehouse lending operations had $498.0 million of short-term warehouse
lines of credit available to 59 non-affiliated customers, of which $343.4
million was outstanding.

Results of Operations--Impac Mortgage Holdings, Inc.

For the Three Months Ended June 30, 2002 as compared to the Three Months Ended
June 30, 2001

      Net earnings for the second quarter of 2002 was $17.7 million, or $0.44
per diluted share, as compared to net earnings of $8.8 million, or $0.33 per
diluted share, for the second quarter of 2001. Net earnings rose as net interest
income increased $7.0 million due to an increase in average mortgage assets
while equity in net earnings of IFC, the Company's taxable REIT subsidiary,
increased $1.9 million.

      Net interest income increased 66% to $17.6 million during the second
quarter of 2002 as compared to $10.6 million during the second quarter of 2001
as total average mortgage assets rose. Total average mortgage assets increased
85% to $3.7 billion during the second quarter of 2002 as compared to $2.0
billion during the second quarter of 2001 as the long-term investment operations
acquired $2.5 billion of mortgage loans for long-term investment since the end
of the second quarter of 2001.

      Yield on Mortgage Assets declined 221 basis points to 5.26% during the
second quarter of 2002 as compared to 7.47% during the second quarter of 2001 as
interest rates on mortgage loans declined. The decline in mortgage interest
rates was the result of short-term interest rate reductions by the Federal
Reserve Bank during 2001 and 2002 in response to a faltering economy and the
events of September 11, 2001. Short-term interest rates reached historical lows
during 2002. As short-term interest rates and mortgage rates declined, borrowing
costs on Mortgage Assets declined as well. Yield on borrowings on Mortgage
Assets declined 219 basis points to 3.58% during the second quarter of 2002 as
compared to 5.77% during the second quarter of 2001.

      The decrease in net interest spread resulted in a 22 basis point decrease
in net interest margins on Mortgage Assets to 1.85% during the second quarter of
2002 as compared to 2.07% during the second quarter of 2001. Margin compression
during the second quarter of 2002 was primarily due to the acquisition of
six-month LIBOR indexed ARMs ("six month ARMs") since the end of the third
quarter of 2001. Prior to the third quarter of 2001, the long-term investment
operations primarily acquired six month hybrids which have initial fixed
interest rate periods of two to five years and subsequently change to six month
ARMs.

      The acquisition of six month ARMs compressed net interest margins as six
month ARMs typically have lower initial interest rates than six month hybrids.
The acquisition of six month ARMs dramatically changed the composition of the
mortgage loan investment portfolio and reduced its weighted average coupon.
However, since six month ARMs generally have longer expected durations than six
month hybrids, we expect that six month ARMs will generate more consistent and
reliable cash flows over a longer time horizon while at the same time reducing
interest rate risk in an ever-changing interest rate environment.

      The acquisition of six month ARMs also compressed net interest margins as
we were able to finance a higher percentage of six month ARMs securing CMOs than
we could previously finance with six month hybrids as collateral for CMOs.
Although this caused an overall increase in leverage on the mortgage loan
investment portfolio and compressed net interest margins, we were able to
efficiently use available capital and earn as comparable a return on the capital
invested in six month ARMs as we previously earned on six month hybrids.

      In addition, because we frequently finance the acquisition of mortgage
loans with CMOs, we significantly reduce our exposure to liquidity risk by
converting the financing of loans from reverse repurchase agreements, which are
subject to margin calls, to long-term debt financing, which are not subject to
margin calls. Currently, the average amount of time between when the mortgage
operations acquires and originates a mortgage loan and when the mortgage loan is
securitized is 30 to 45 days.


                                       19


      We expect a favorable interest rate environment for the remainder of 2002
as the economy slowly recovers from the current recession. The Federal Reserve
Bank did not raise short-term interest rates at its last meeting as it indicated
that the pace of the economic recovery remains uncertain. There appears to be no
imminent plans by the Federal Reserve Bank to increase short-term interest in
the near term. We feel that interest rate hedging instruments that are currently
in place, a significant volume of ARMs that have been acquired since the end of
the third quarter of 2001 and our on-going hedging policy will help to mitigate
possible adverse effects that rising interest rates may have on future earnings.

      The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the
second quarters of 2002 and 2001 and includes interest income on Mortgage Assets
and interest expense related to borrowings on Mortgage Assets only (dollars in
thousands):



                                                          For the Three Months                       For the Three Months
                                                          Ended June 30, 2002                        Ended June 30, 2001
                                                  -------------------------------------       -------------------------------------
                                                    Average                    Wtd. Avg        Average                     Wtd. Avg
                                                    Balance        Interest      Yield         Balance        Interest       Yield
                                                  -------------------------------------       -------------------------------------
                                                                                                           
          Mortgage Assets
Securities collateralized by mortgages            $   28,655       $   655        9.14%       $   32,663       $   992       12.15%

Loans receivable:
CMO collateral (1)                                 2,865,465        37,750        5.27         1,317,851        24,290        7.37
Mortgage loans held-for-investment (1)                96,062         1,231        5.13           177,195         3,108        7.02
Finance receivables:
 Affiliated                                          430,283         4,895        4.55           232,464         4,135        7.12
 Non-affiliated                                      249,362         3,746        6.01           222,019         4,486        8.08
                                                  ------------------------                    ------------------------
   Total finance receivables                         679,645         8,641        5.09           454,483         8,621        7.59
                                                  ------------------------                    ------------------------
     Total Loans receivable                        3,641,172        47,622        5.23         1,949,529        36,019        7.39
                                                  ------------------------                    ------------------------
Total Mortgage Assets                             $3,669,827       $48,277        5.26%       $1,982,192       $37,011        7.47%
                                                  ========================                    ========================

      Borrowings on Mortgage Assets
CMO borrowings (2)                                $2,769,705       $25,524        3.69%       $1,242,049       $17,175        5.53%
Reverse repurchase agreements - mortgages            719,328         5,348        2.97           595,421         8,938        6.00
Borrowings secured by investment securities           10,714           475       17.73            18,189           660       14.51
                                                  ------------------------                    ------------------------
Total Borrowings on Mortgage Assets               $3,499,747       $31,347        3.58%       $1,855,659       $26,773        5.77%
                                                  ========================                    ========================

Net Interest Spread (3)                                                           1.68%                                       1.70%
Net Interest Margin (4)                                                           1.85%                                       2.07%


(1)   Interest income includes amortization of acquisition costs.

(2)   Interest expense includes amortization of securitization costs.

(3)   Net interest spread is calculated by subtracting the weighted average
      yield on total borrowings on Mortgage Assets from the weighted average
      yield on total Mortgage Assets.

(4)   Net interest margin is calculated by subtracting interest expense on total
      borrowings on Mortgage Assets from interest income on total Mortgage
      Assets and then dividing by the total average balance for Mortgage Assets.

      Due to the acquisition of a high percentage of mortgage loans with
prepayment penalties, constant prepayment rates ("CPR") improved to 26% during
the second quarter of 2002 as compared to 41% during the second quarter of 2001.
CPR results from the unscheduled principal pay down or payoff of mortgage loans
prior to the contractual maturity date or contractual payment schedule of the
mortgage loan. Mortgage loans acquired from the mortgage operations with
prepayment penalty features help to mitigate CPR and corresponding premium and
securitization cost amortization as a result of refinancing activity. Loan
premiums paid for acquiring mortgage loans and securitization costs for
obtaining financing are amortized to interest income and interest expense over
the estimated lives of the mortgage loans or related borrowings.

      The long-term investment operations acquired $1.1 billion of primarily
Alt-A mortgage loans from the mortgage operations during the second quarter of
2002. The following table summarizes mortgage loan acquisitions for the periods
indicated (in thousands):


                                       20


                            LOAN ACQUISITION SUMMARY
                            (excludes premiums paid)



                                                       For the Three Months
                                                          Ended June 30,
                                             ---------------------------------------
                                                    2002                  2001
                                             ------------------     ----------------
                                               Balance       %       Balance      %
                                             ----------     ---     --------      --
                                                                      
Volume by Type:
  Adjustable rate ......................     $1,095,144     100     $362,048      98
  Fixed rate ...........................            867       0        5,679       2
                                             ----------             --------
     Total Loan Acquisitions ...........     $1,096,011             $367,727
                                             ==========             ========
Volume by Product:
  Six month LIBOR indexed ARMs .........     $  785,040      72     $ 20,954       6
  Six month LIBOR indexed hybrids (1) ..        310,104      28      341,094      93
  Fixed first trust deeds ..............            556       0           --
  Fixed second trust deeds .............            311       0        5,679       1
                                             ----------             --------
     Total Loan Acquisitions ...........     $1,096,011             $367,727
                                             ==========             ========
Volume by Credit Quality:
  Alt-A loans ..........................     $1,091,232     100     $365,971     100
  B/C loans ............................          4,779       0        1,756       0
                                             ----------             --------
     Total Loan Acquisitions ...........     $1,096,011             $367,727
                                             ==========             ========
Volume by Purpose:
  Purchase .............................     $  680,806      62     $233,768      64
  Refinance ............................        415,205      38      133,959      36
                                             ----------             --------
     Total Loan Acquisitions ...........     $1,096,011             $367,727
                                             ==========             ========
Volume by Prepayment Penalty:
  With prepayment penalty ..............     $  835,124      76     $228,653      62
  Without prepayment penalty ...........        260,887      24      139,074      38
                                             ----------             --------
     Total Loan Acquisitions ...........     $1,096,011             $367,727
                                             ==========             ========


(1)   Mortgage loans are fixed rate for initial two to five year periods and
      subsequently adjust to the indicated index plus a margin.

      Seventy-two percent of mortgage loans acquired by the long-term investment
operations from the mortgage operations during the second quarter of 2002 were
six month ARMs as compared to 6% during the second quarter of 2001. The shift
from acquiring primarily six month hybrids prior to the end of the third quarter
of 2001 to primarily acquiring six month LIBOR indexed ARMs reflects a widening
gap between short- and long-term interest rates and adjustable- and fixed-rate
mortgages and borrowers belief that short-term interest rates will not increase
significantly in the near term. The acquisition for long-term investment of a
higher than expected volume of ARMs from the mortgage operations has shifted
projected future earnings from less reliance on gain on sale of loans as a
source of revenue to net interest income generated from the mortgage loan
investment portfolio.

      To finance the acquisition of mortgage loans during the second quarter of
2002, the long-term investment operations issued $1.2 billion of CMOs, which
were primarily AAA rated bonds, and were priced on a weighted average basis of
one-month LIBOR plus 42 basis points. In addition, we raised $5.5 million upon
the issuance of 489,300 shares of common stock at an average net price of $11.21
per share. Common stock was sold as part of our sales agency agreement to sell
up to 3,594,082 shares from time to time, at our discretion, at market prices.

      We continue to maintain an allowance for loan losses relative to total
loans receivable at the same ratio as last year-end when total assets were $2.9
billion. We believe that maintaining sufficient levels of loan loss allowances
combined with acquiring mortgages with favorable credit profiles will help to
mitigate our credit risk. Allowance for loan losses increased 44% to $16.9
million as of June 30, 2002 as compared to $11.7 million as of December 31,
2001. Allowance for loan losses expressed as a percentage of loans receivable,
which includes CMO collateral, mortgage loans held-for-investment and finance
receivables, was 0.42% as of June 30, 2002 as compared to 0.43% as of December
31, 2001. As of June 30, 2002, total non-performing assets were $88.1 million,
or 2.06% of total assets, as compared to $69.3 million, or 2.43% of total
assets, as of December 31, 2001. Mortgage loans that were 60 or more days
delinquent, including foreclosures and delinquent bankruptcies, was 3.10% of the
long-term mortgage investment portfolio as of June 30, 2002 as compared to 3.84%
as of December 31, 2001.


                                       21


      We make monthly provisions for estimated loan losses on our long-term
investment portfolio as an increase to allowance for loan losses. The provision
for estimated loan losses is primarily based on a migration analysis based on
historical loss statistics, including cumulative loss percentages and loss
severity, of similar loans in our long-term investment portfolio. The loss
percentage is used to determine the estimated inherent losses in the investment
portfolio. Provision for loan losses is also based on management's judgment of
net loss potential, including specific allowances for known impaired loans,
changes in the nature and volume of the portfolio, the value of the collateral
and current economic conditions that may affect the borrowers' ability to pay.
During the second quarter of 2002, provision for loan losses was $4.2 million as
compared to $3.9 million for the second quarter of 2001. Actual loan losses, net
of recoveries, during the second quarter of 2002 were $2.1 million as compared
to actual loan losses, net of recoveries, of $2.4 million during the second
quarter of 2001.

      Equity in net earnings of IFC increased 57% to $5.5 million during the
second quarter of 2002 as compared to $3.5 million during the second quarter of
2001 as loan acquisitions and originations and sales volume rose. Loan
acquisitions and originations during the second quarter of 2002 was $1.4 billion
as compared to $764.9 million during the second quarter of 2001. The increase in
loan acquisitions and originations resulted in loan sales of $1.5 billion during
the second quarter of 2002 and gain on sale of loans of $19.6 million as
compared to loan sales of $786.4 million and gain on sale of loans of $12.9
million during the second quarter of 2001. Refer to "Results of
Operations--Impac Funding Corporation" for more information on the operating
results of IFC.

      Core Operating Earnings. Core operating earnings for the second quarter of
2002 increased to $17.7 million, or $0.44 per diluted share, as compared to core
operating earnings of $10.5 million, or $0.39 per diluted share, for the second
quarter of 2001. Core operating earnings reflect recurring earnings from
operations and exclude one-time, non-recurring income and expense items and the
effect of fair market accounting for derivative instruments and hedging
activities. Core operating earnings is a concept not recognized by generally
accepted accounting principles ("GAAP") and may not be comparable to core
operating earnings of other companies.

      The following table summarizes the calculation of core operating earnings
and a reconciliation of core operating earnings to net earnings (in thousands,
except earnings per share amounts):

                                                            For the Three Months
                                                               Ended June 30,
                                                            --------------------
                                                               2002      2001
                                                             -------   -------

Net earnings ..............................................  $17,725   $ 8,783
Adjustments to net earnings:
   Mark-to-market loss - FAS 133 ..........................       --       581
   Write-down on investment securities available-for-sale .       --       108
   Cumulative effect of change in accounting principle ....       --     1,006
                                                             -------   -------
Core operating earnings ...................................  $17,725   $10,478
                                                             =======   =======
Core operating earnings per share .........................  $  0.44   $  0.39
                                                             =======   =======

      Estimated Taxable Earnings. Estimated taxable earnings for the second
quarter of 2002 were $18.5 million, or $0.46 per diluted share, as compared to
$10.4 million, or $0.38 per diluted share, during the second quarter of 2001.
Estimated taxable earnings during the second quarter of 2002 were greater than
net earnings per GAAP as excess provision for loan losses cannot be deducted
from taxable earnings. During the second quarter of 2002, provision for loan
losses of $4.2 million were in excess of actual loan charge-offs, net of
recoveries, of $2.1 million. In addition, estimated taxable earnings for the
second quarter of 2002 reflects a $3.7 million dividend from IFC on its
after-tax net earnings of $5.5 million. The board of directors declared a cash
dividend of $0.43 per share during the second quarter of 2002, which was paid on
July 12, 2002 to stockholders of record on July 3, 2002.


                                       22


      The following table summarizes the calculation of estimated taxable
earnings and a reconciliation of estimated taxable earnings to net earnings (in
thousands, except earnings per share amounts):



                                                                    For the Three Months
                                                                       Ended June 30,
                                                                   ----------------------
                                                                     2002          2001
                                                                   --------      --------
                                                                           
Net earnings .................................................     $ 17,725      $  8,783
Adjustments to net earnings:
   Mark-to-market loss - FAS 133 .............................           --           581
   Write-down on investment securities available-for-sale ....           --           108
   Loan loss provision .......................................        4,234         3,905
   Dividends from IFC ........................................        3,713         2,475
   Cash received from previously charged-off assets ..........          473           438
   Tax deduction for actual loan losses ......................       (2,064)       (2,383)
   Equity in net earnings of IFC .............................       (5,453)       (3,528)
   Tax difference of amortization of derivative instruments ..         (140)           --
                                                                   --------      --------
Estimate taxable earnings (1) ................................     $ 18,488      $ 10,379
                                                                   ========      ========
Estimated taxable earnings per share (1) .....................     $   0.46      $   0.38
                                                                   ========      ========


(1)   Reflects calculation of estimated taxable earnings generated by the
      Company during periods shown. Excludes remaining quarterly tax deduction
      of $2.7 million during 2001 for amortization of the termination of the
      Company's management agreement in 1997, the deduction for dividends paid
      and the availability of a deduction attributable to a net operating loss
      carry forward. As of December 31, 2001, the Company's estimated federal
      net operating loss carry forwards were $21.5 million, which expire in the
      year 2020, and estimated state net operating loss carry forwards of $21.5
      million, which expire in the year 2010, that are available to offset
      future taxable income.

Results of Operations-- Impac Funding Corporation

For the Three Months Ended June 30, 2002 as compared to the Three Months Ended
June 30, 2001

      Net earnings increased 57% to $5.5 million during the second quarter of
2002 as compared to $3.5 million during the second quarter of 2001 as loan
acquisitions and originations and sales volume rose. Loan acquisitions and
originations increased 81% to $1.4 billion during the second quarter of 2002 as
compared to $764.9 million during the second quarter of 2001. Loan acquisitions
and originations during the second quarter of 2002 was driven by low mortgage
rates, strong housing demand, innovative loan programs and IFC's automated
underwriting system, IDASL, which enhances the origination process.

      The increase in loan acquisitions and originations resulted in loan sales
of $1.5 billion during the second quarter of 2002 which contributed to gain on
sale of loans of $19.6 million as compared to loan sales of $786.4 million which
contributed gain on sale of loans of $12.9 million during the second quarter of
2001. Additionally, profit margins on mortgage loans sold during the second
quarter of 2002 were more favorable as compared to profit margins on mortgage
loans sold during the second quarter of 2001. IFC's goal is to securitize loans
more frequently as less capital is required, higher liquidity is maintained and
less interest rate and price volatility during the mortgage loan accumulation
period results.


                                       23


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

                             LOAN PRODUCTION SUMMARY
                            (excludes premiums paid)



                                                    For the Three Months
                                                        Ended June 30,
                                            --------------------------------------
                                                   2002                 2001
                                            -----------------     ----------------
                                              Balance      %       Balance      %
                                              -------      -       -------      -
                                                                    
Volume by Type:
  Fixed rate ..........................     $  404,007     29     $401,882      53
  Second trust deeds ..................         24,191      2        9,843       1
  Adjustable rate:
     Six month LIBOR ARMs .............        624,123              22,279
     Six month LIBOR hybrids ..........        335,098             330,865
                                            ----------            --------
  Total adjustable rate ...............        959,221     69      353,144      46
                                            ----------            --------
     Total Loan Production ............     $1,387,419            $764,869
                                            ==========            ========
Volume by Channel:
  Correspondent acquisitions ..........     $1,036,472     75     $593,649      78
  Wholesale and retail originations ...        256,381     18      171,220      22
  Novelle Financial Services ..........         94,566      7           --       0
                                            ----------            --------
     Total Loan Production ............     $1,387,419            $764,869
                                            ==========            ========
Volume by Credit Quality:
  Alt-A loans .........................     $1,287,377     93     $761,211     100
  B/C loans ...........................        100,042      7        3,658       0
                                            ----------            --------
     Total Loan Production ............     $1,387,419            $764,869
                                            ==========            ========
Volume by Purpose:
  Purchase ............................     $  839,140     60     $458,997      60
  Refinance ...........................        548,279     40      305,872      40
                                            ----------            --------
     Total Loan Production ............     $1,387,419            $764,869
                                            ==========            ========
Volume by Prepayment Penalty:
  With prepayment penalty .............     $1,101,865     79     $509,564      67
  Without prepayment penalty ..........        285,554     21      255,305      33
                                            ----------            --------
     Total Loan Production ............     $1,387,419            $764,869
                                            ==========            ========


      Net interest income increased to $2.0 million during the second quarter of
2002 as compared to $479,000 during the second quarter of 2001 as average loans
held for sale increased and net interest margins widened. Average loans held for
sale increased to $450.4 million during the second quarter of 2002 as compared
to $236.1 million during the second quarter of 2001 as a result of higher loan
acquisitions and originations. Net interest margins increased to 2.09% during
the second quarter of 2002 as compared to 1.01% during the second quarter of
2001 as interest rate spreads on FRMs and ARMs widened.

      Total non-interest expense increased to $12.0 million during the second
quarter of 2002 as compared to $8.0 million during the second quarter of 2001.
The increase in total non-interest expense was primarily due to an increase in
personnel expense as staff was added to meet greater loan acquisition and
origination volumes. Although non-interest expense increased during the second
quarter of 2002, fully loaded expense to acquire and originate an Alt-A mortgage
loan declined to 76 basis points during the second quarter of 2002 as compared
to 95 basis points during the second quarter of 2001. Fully loaded expense
includes both direct costs incurred to acquire and originate Alt-A mortgage
loans, which includes loan origination and sales and marketing costs, and
indirect costs, which includes accounting, administration, legal and information
technology costs.

Results of Operations--Impac Mortgage Holdings, Inc.

For the Six Months Ended June 30, 2002 as compared to the Six Months Ended June
30, 2001

      Net earnings for the first six months of 2002 were $33.4 million, or $0.87
per diluted share, as compared to net earnings of $9.9 million, or $0.37 per
diluted share, for the same period of 2001. Net earnings rose as net interest
income increased by $13.8 million, equity in net earnings of IFC increased by
$5.3 million and mark-to-market losses on derivative instruments decreased by
$5.8 million. Since fair market adjustments on derivative instruments, in


                                       24


accordance with Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities," were
recorded to stockholders' equity during the first six months of 2002, net
earnings were unaffected. During the first six months of 2001, SFAS 133 resulted
in mark-to-market losses on derivative instruments and a corresponding reduction
to net earnings of $5.8 million.

      Net interest income increased 71% to $33.2 million during the first six
months of 2002 as compared to $19.4 million during the same period of 2001 as
total average mortgage assets rose. Total average mortgage assets increased 74%
to $3.3 billion during the first six months of 2002 as compared to $1.9 billion
during the same period of 2001 as the long-term investment operations acquired
$2.5 billion of mortgage loans for long-term investment since the end of the
second quarter of 2001. Yield on Mortgage Assets declined 238 basis points to
5.43% during the first six months of 2002 as compared to 7.81% during the same
period of 2001 as interest rates on mortgage loans declined. The decline in
mortgage interest rates was the result of short-term interest rate reductions by
the Federal Reserve Bank during 2001 and 2002 in response to a faltering economy
and the events of September 11, 2001. Short-term interest rates reached
historical lows during 2002. As short-term interest rates and mortgage rates
declined, borrowing costs on Mortgage Assets declined as well. Yield on
borrowings on Mortgage Assets declined 258 basis points to 3.69% during the
first six months of 2002 as compared to 6.27% during the same period of 2001.

      The decrease in net interest spread resulted in a 3 basis point decrease
in net interest margins on Mortgage Assets to 1.92% during the first six months
of 2002 as compared to 1.95% during the first six months of 2001. Margin
compression during the first six months of 2002 was primarily due to the
acquisition of six month ARMs since the end of the third quarter of 2001. The
acquisition of six month ARMs compressed net interest margins as six month ARMs
typically have lower initial interest rates than six month hybrids. The
acquisition of six month ARMs also compressed net interest margins as we were
able to finance a higher percentage of six month ARMs securing CMOs than we
could previously finance with six month hybrids as collateral for CMOs.

      The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the first
six months of 2002 and 2001 and includes interest income on Mortgage Assets and
interest expense related to borrowings on Mortgage Assets only (dollars in
thousands):



                                                           For the Six Months                         For the Six Months
                                                           Ended June 30, 2002                        Ended June 30, 2001
                                                  -------------------------------------       --------------------------------------
                                                    Average                    Wtd. Avg        Average                      Wtd. Avg
                                                    Balance       Interest       Yield         Balance        Interest       Yield
                                                  -------------------------------------       --------------------------------------
                                                                                                           
             Mortgage Assets
Securities collateralized by mortgages .......    $   30,500       $ 1,088        7.13%       $   34,531       $ 2,318       13.43%

Loans receivable:
CMO collateral ...............................     2,604,277        72,201        5.54         1,322,677        50,321        7.61
Mortgage loans held-for-investment ...........        55,745         1,200        4.31           133,730         4,586        6.86
Finance receivables:
 Affiliated ..................................       408,175         9,185        4.50           267,523        10,783        8.06
 Non-affiliated ..............................       244,498         7,029        5.75           183,124         7,794        8.51
                                                  ------------------------                    ------------------------
   Total finance receivables .................       652,673        16,214        4.97           450,647        18,577        8.24
                                                  ------------------------                    ------------------------
     Total Loans receivable ..................     3,312,695        89,615        5.41         1,907,054        73,484        7.71
                                                  ------------------------                    ------------------------
Total Mortgage Assets ........................    $3,343,195       $90,703        5.43%       $1,941,585       $75,802        7.81%
                                                  ========================                    ========================
     Total Mortgage Assets

       Borrowings on Mortgage Assets
CMO borrowings ...............................    $2,517,207       $47,930        3.81%       $1,244,621       $37,767        6.07%
Reverse repurchase agreements - mortgages ....       650,669         9,638        2.96           549,945        17,797        6.47
Borrowings secured by investment securities ..        11,525         1,024       17.77            19,253         1,337       13.89
                                                  ------------------------                    ------------------------
Total Borrowings on Mortgage Assets ..........    $3,179,401       $58,592        3.69%       $1,813,819       $56,901        6.27%
                                                  ========================                    ========================

Net Interest Spread                                                               1.74%                                       1.54%
Net Interest Margin                                                               1.92%                                       1.95%



                                       25


      The long-term investment operations acquired $1.6 billion of primarily
Alt-A mortgage loans from the mortgage operations during the first six months of
2002. The following table summarizes mortgage loan acquisitions for the periods
indicated (in thousands):

                            LOAN ACQUISITION SUMMARY
                            (excludes premiums paid)

                                                  For the Six Months
                                                    Ended June 30,
                                         ------------------------------------
                                               2002                2001
                                         ----------------     ---------------
                                           Balance     %      Balance      %
                                           -------     -      -------      -
Volume by Type:
  Adjustable rate ..................     $1,586,925   100     $541,216     99
  Fixed rate .......................            867     0        5,679      1
                                         ----------           --------
     Total Loan Acquisitions .......     $1,587,792           $546,895
                                         ==========           ========
Volume by Product:
  Six month LIBOR indexed ARMs .....     $1,107,973    70     $ 24,050      4
  Six month LIBOR indexed hybrids ..        478,952    30      517,166     95
  Fixed first trust deeds ..........            556     0           --
  Fixed second trust deeds .........            311     0        5,679      1
                                         ----------           --------
     Total Loan Acquisitions .......     $1,587,792           $546,895
                                         ==========           ========
Volume by Credit Quality:
  Alt-A loans ......................     $1,581,158   100     $542,738     99
  B/C loans ........................          6,634     0        4,157      1
                                         ----------           --------
     Total Loan Acquisitions .......     $1,587,792           $546,895
                                         ==========           ========
Volume by Purpose:
  Purchase .........................     $  970,825    61     $360,891     66
  Refinance ........................        616,967    39      186,004     34
                                         ----------           --------
     Total Loan Acquisitions .......     $1,587,792           $546,895
                                         ==========           ========
Volume by Prepayment Penalty:
  With prepayment penalty ..........     $1,136,649    72     $339,290     62
  Without prepayment penalty .......        451,143    28      207,605     38
                                         ----------           --------
     Total Loan Acquisitions .......     $1,587,792           $546,895
                                         ==========           ========

      Seventy percent of mortgage loans acquired by the long-term investment
operations from the mortgage operations during the first six months of 2002 were
six month ARMs as compared to 4% during the same period of 2001. The shift from
acquiring primarily six month hybrids prior to the end of the third quarter of
2001 to primarily acquiring six month LIBOR indexed ARMs reflects a widening gap
between short- and long-term interest rates and adjustable- and fixed-rate
mortgages and borrowers belief that short-term interest rates will not increase
significantly in the near term. The acquisition for long-term investment of a
higher than expected volume of ARMs from the mortgage operations has shifted
projected future earnings from a reliance on gain on sale of loans as a source
of revenue to net interest income generated from the balance sheet.

      To finance the acquisition of mortgage loans during the first six months
of 2002, the long-term investment operations issued $1.7 billion of CMOs, which
were primarily AAA rated bonds, and were priced on a weighted average basis of
one-month LIBOR plus 41 basis points. In addition, we raised net proceeds of
approximately $57.0 million upon the issuance of 7.4 million shares of common
stock and sold 489,300 shares of common stock under our sales agency agreement,
which provided net proceeds of approximately $5.5 million.

      During the first six months of 2002 and 2001, provision for loan losses
was $7.9 million. Actual loan losses, net of recoveries, during the first six
months of 2002 were $2.7 million as compared to $5.2 million during the same
period of 2001.

      Equity in net earnings of IFC increased 110% to $10.1 million during the
first six months of 2002 as compared to $4.8 million during the same period of
2001 as loan acquisitions and originations and sales volume rose. Loan
acquisitions and originations during the first six months of 2002 was $2.6
billion as compared to $1.4 billion during the same period of 2001. The increase
in loan production resulted in loan sales of $2.5 billion during the first six
months of 2002 which contributed to gain on sale of loans of $35.7 million as
compared to loan sales of $1.4 billion


                                       26


which contributed to gain on sale of loans of $20.5 million during the first six
months of 2001. Refer to "Results of Operations--Impac Funding Corporation" for
more information on the operating results of IFC.

      Core Operating Earnings. Core operating earnings for the first six months
of 2002 increased to $34.4 million, or $0.90 per diluted share, as compared to
core operating earnings of $16.8 million, or $0.63 per diluted share, for the
same period of 2001. Core operating earnings reflect recurring earnings from
operations and exclude one-time, non-recurring income and expense items and the
effect of fair market accounting for derivative instruments and hedging
activities. Core operating earnings for the first six months of 2002 were higher
than net earnings as core operating earnings exclude $1.0 million in write-down
of investment securities available-for-sale. Core operating earnings is a
concept not recognized by GAAP and may not be comparable to core operating
earnings of other companies.

      The following table summarizes the calculation of core operating earnings
and a reconciliation of core operating earnings to net earnings (in thousands,
except earnings per share amounts):



                                                                 For the Six Months
                                                                    Ended June 30,
                                                                 -------------------
                                                                   2002        2001
                                                                 -------     -------
                                                                       
Net earnings ...............................................     $33,374     $ 9,925
Adjustments to net earnings:
   Mark-to-market loss - FAS 133 ...........................          --       1,445
   Write-down on investment securities available-for-sale ..       1,039         107
   Extraordinary item ......................................          --       1,006
   Cumulative effect of change in accounting principle .....          --       4,313
                                                                 -------     -------
Core operating earnings ....................................     $34,413     $16,796
                                                                 =======     =======
Core operating earnings per share ..........................     $  0.90     $  0.63
                                                                 =======     =======


      Estimated Taxable Earnings. Estimated taxable earnings for the first six
months of 2002 were $35.4 million, or $0.92 per diluted share, as compared to
$18.9 million, or $0.71 per diluted share, during the same period of 2001.
Estimated taxable earnings during the first six months of 2002 were greater than
net earnings per GAAP as excess provision for loan losses cannot be deducted
from taxable earnings. During the second quarter of 2002, provision for loan
losses of $7.9 million were in excess of actual loan charge-offs, net of
recoveries, of $2.7 million. In addition, estimated taxable earnings for the
second quarter of 2002 reflects a $5.7 million dividend from IFC on its
after-tax net earnings of $10.2 million. The board of directors declared cash
dividends of $0.83 per share during the first six months of 2002.

      The following table summarizes the calculation of estimated taxable
earnings and a reconciliation of estimated taxable earnings to net earnings (in
thousands, except earnings per share amounts):



                                                                      For the Six Months
                                                                        Ended June 30,
                                                                    ----------------------
                                                                      2002          2001
                                                                    --------      --------
                                                                            
Net earnings ..................................................     $ 33,374      $  9,925
Adjustments to net earnings:
   Mark-to-market loss - FAS 133 ..............................           --         1,445
   Write-down on investment securities available-for-sale .....        1,039           107
   Cumulative effect of change in accounting principle ........           --         4,313
   Loan loss provision ........................................        7,941         7,943
   Dividends from IFC .........................................        5,693         4,419
   Cash received from previously charged-off assets ...........          649           827
   Tax deduction for actual loan losses .......................       (2,699)       (5,216)
   Equity in net earnings of IFC ..............................      (10,062)       (4,818)
   Tax difference of amortization of derivative instruments ...         (505)           --
                                                                    --------      --------
Estimate taxable earnings (1) .................................     $ 35,430      $ 18,945
                                                                    ========      ========
Estimated taxable earnings per share (1) ......................     $   0.92      $   0.71
                                                                    ========      ========



                                       27


(2)   Reflects calculation of estimated taxable earnings generated by the
      Company during periods shown. Excludes tax deductions of $5.4 million
      during the first six months of 2001 for amortization of the termination of
      the Company's management agreement in 1997, the deduction for dividends
      paid and the availability of a deduction attributable to a net operating
      loss carry forward. As of December 31, 2001, the Company's estimated
      federal net operating loss carry forwards were $21.5 million, which expire
      in the year 2020, and estimated state net operating loss carry forwards of
      $21.5 million, which expire in the year 2010, that are available to offset
      future taxable income.

Results of Operations-- Impac Funding Corporation

For the Six Months Ended June 30, 2002 as compared to the Six Months Ended June
30, 2001

      Net earnings increased 108% to $10.2 million during the first six months
of 2002 as compared to $4.9 million during the same period of 2001 as loan
acquisitions and originations and sales volume rose. Net earnings during the
first six months of 2002 included a gain of $1.7 million on the sale of 377,028
shares of IMH common stock which IFC acquired during 2001. The sale of IMH
common stock during the first six months of 2002 represented the remaining
shares owned by IFC.

      Loan acquisitions and originations increased 86% to $2.6 billion during
the first six months of 2002 as compared to $1.4 billion during the same period
of 2001. Loan acquisitions and originations during the first six months of 2002
were driven by low mortgage rates, strong housing demand, innovative loan
programs and IFC's automated underwriting system, IDASL, which enhances the
origination process. The increase in loan acquisitions and originations resulted
in loan sales of $2.5 billion during the first six months of 2002, which
contributed to gain on sale of loans of $35.7 million as compared to loan sales
of $1.4 billion which contributed gain on sale of loans of $20.5 million during
the first six months of 2002. Additionally, profit margins on mortgage loans
sold during the first six months of 2002 were more favorable as compared to
profit margins on mortgage loans sold during the same period of 2001.

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

                            LOAN PRODUCTION SUMMARY
                            (excludes premiums paid)



                                                      For the Six Months
                                                        Ended June 30,
                                            --------------------------------------
                                                  2002                  2001
                                            -----------------     ----------------
                                              Balance       %       Balance      %
                                              -------       -       -------      -
                                                                     
Volume by Type:
  Fixed rate ..........................     $  767,040     30     $  833,750     61
  Second trust deeds ..................         37,686      1         19,796      2
  Adjustable rate:
     Six month LIBOR ARMs .............      1,147,628                25,323
     Six month LIBOR hybrids ..........        619,450               483,168
                                             ---------            ----------
  Total adjustable rate ...............      1,767,078     69        508,491     37
                                             ---------            ----------
     Total Loan Production ............     $2,571,804            $1,362,037
                                            ==========            ==========
Volume by Channel:
  Correspondent acquisitions ..........     $1,914,214     74     $1,060,469     78
  Wholesale and retail originations ...        491,798     19        301,568     22
  Novelle Financial Services ..........        165,792      7             --      0
                                            ----------            ----------
     Total Loan Production ............     $2,571,804            $1,362,037
                                                                  ==========
Volume by Credit Quality:
  Alt-A loans .........................     $2,395,028     93     $1,352,595     99
  B/C loans ...........................        176,776      7          9,442      1
                                                                  ----------
     Total Loan Production ............     $2,571,804            $1,362,037
                                            ==========            ==========
Volume by Purpose:
  Purchase ............................     $1,487,370     58     $  841,236     62
  Refinance ...........................      1,084,434     42        520,801     38
                                            ----------            ----------
     Total Loan Production ............     $2,571,804            $1,362,037
                                            ==========            ==========
Volume by Prepayment Penalty:
  With prepayment penalty .............     $1,919,212     75     $  891,706     65
  Without prepayment penalty ..........        652,592     25        470,331     35
                                            ----------            ----------
     Total Loan Production ............     $2,571,804            $1,362,037
                                            ==========            ==========



                                       28



      Net interest income increased to $3.7 million during the first six months
of 2002 as compared to $773,000 during the same period of 2001 as average loans
held for sale increased and net interest margins widened. Average loans held for
sale increased to $420.5 million during the first six months of 2002 as compared
to $273.4 million during the same period of 2001 as a result of higher loan
production. Net interest margins increased to 2.00% during the first six months
of 2002 as compared to 0.83% during the same period of 2001 as interest rate
spreads on FRMs and ARMs widened.

      Total non-interest expense increased to $23.2 million during the first six
months of 2002 as compared to $14.7 million during the same period of 2001. The
increase in total non-interest expense was primarily due to an increase in
personnel expense as staff was added to meet greater loan acquisition and
origination volumes. Although non-interest expense increased during the first
six months of 2002, fully loaded expense to acquire and originate an Alt-A
mortgage loan declined to 77 basis points during the first six months of 2002 as
compared to 94 basis points during the first six months of 2001. Fully loaded
expense includes both direct costs incurred to acquire and originate Alt-A
mortgage loans, which includes loan origination and sales and marketing costs,
and indirect costs, which includes accounting, administration, legal and
information technology costs.

Liquidity and Capital Resources

      We recognize the need to have funds available for our operating businesses
and our customer's demands for obtaining short-term warehouse financing until
the settlement or sale of mortgage loans with us or with other investors. It is
our policy to have adequate liquidity at all times to cover normal cyclical
swings in funding availability and loan demand and to allow us to meet abnormal
and unexpected funding requirements. We plan to meet liquidity through normal
operations with the goal of avoiding unplanned sales of assets or emergency
borrowing of funds.

      Toward this goal, our asset and liability committee ("ALCO") is
responsible for monitoring our liquidity position and funding needs. ALCO is
comprised of the senior executives of the Company. ALCO meets on a weekly basis
to review current and projected sources and uses of funds. ALCO monitors the
composition of the balance sheet for changes in the liquidity of our assets in
adverse market conditions. Our liquidity consists of cash and cash equivalents,
short-term and marketable investment securities rated AAA through BBB and
mortgage loans temporarily funded in cash and maturing mortgage loans, or
"liquid assets." Our policy is to maintain a liquidity threshold of 5% of liquid
assets to warehouse borrowings, reverse repurchase agreements, dividends payable
and other short-term liabilities. During the second quarter of 2002, we were in
compliance with this policy, which ALCO reports to the board of directors at
least quarterly. As of June 30, 2002, overall liquidity was 9%.

Sources of Liquidity

      Our business operations are primarily funded as follows:

      o     monthly interest and principal payments from our mortgage loan and
            investment securities portfolios;

      o     CMO and reverse repurchase agreements secured by mortgage loans and
            mortgage-backed securities;

      o     proceeds from securitization and whole loan sale of mortgage loans;
            and

      o     cash from the issuance of securities.

      We use CMO borrowings and reverse repurchase agreements to fund
substantially all of our mortgage loan and mortgage-backed securities
portfolios. As we accumulate mortgage loans for long-term investment, we issue
CMOs secured by the mortgage loans as a means of providing long-term financing
and repaying short-term warehouse advances. The use of CMOs provides the
following benefits:

      o     allows us to lock in our financing cost over the life of the
            mortgage loans securing the CMO borrowings; and

      o     eliminates margin calls on the borrowings that are converted from
            reverse repurchase agreements to CMO financing.


                                       29


      Terms of CMO borrowings require that an independent third party custodian
hold mortgage loans as collateral. The maturity of each CMO bond class is
directly affected by the rate of early principal payments on the related
collateral. As of June 30, 2002, interest rates on adjustable rate CMOs can
range from a low of 0.26% over one-month LIBOR on "AAA" credit rated bonds to a
high of 3.60% over one-month LIBOR, or 2.10% to 4.24%. Interest rates on fixed
rate CMOs range from 6.65% to 7.25% depending on the class of CMOs issued.
Equity in the CMOs is established at the time CMOs are issued at levels
sufficient to achieve desired credit ratings on the securities from rating
agencies. We also determine the amount of equity invested in CMOs based upon the
anticipated return on equity as compared to estimated proceeds from additional
debt issuance. Total credit loss exposure is limited to the equity invested in
the CMOs at any point in time.

      During the first six months of 2002, we issued $1.737 billion of CMOs,
which included $1.647 billion of AAA rated bonds and $90.0 million of BBB rated
bonds that were priced on a weighted average basis of one-month LIBOR plus 41
basis points, to provide long-term financing for $1.750 billion of mortgage
loans securing CMOs. Because of the credit profile, historical loss performance
and prepayment characteristics of our non-conforming Alt-A mortgages, we have
been able to borrow a higher percentage against mortgage loans securing CMOs,
which means that we have to provide less capital at the time mortgage loans are
securitized. By decreasing the amount of capital we have to invest in our CMOs,
we have been able to efficiently utilize our available capital.

      Before the issuance of CMOs, we finance the acquisition of mortgage loans
primarily through borrowings on reverse repurchase agreements with third party
lenders. When we have accumulated a sufficient amount of mortgage loans, we
issue CMOs and convert short-term advances under reverse repurchase agreements
to long-term CMO financing. Since 1995, we have had an uncommitted repurchase
facility with a major investment bank to finance the acquisition of mortgage
loans as needed. In order to give us more flexibility in our borrowing
arrangements and to reduce our reliance on one lender, we entered into an
additional uncommitted repurchase facility with an investment bank in June 2002.

      Terms of the reverse repurchase agreements require that mortgage loans be
held by an independent third party custodian, which gives us the ability to
borrow against a percentage of the outstanding principal balance of the mortgage
loans. The borrowing rates vary from 85 basis points to 200 basis points over
one-month LIBOR, depending on the type of collateral provided. The advance rates
on the reverse repurchase agreements is based on the type of mortgage collateral
provided and generally range from 70% to 98% of the fair market value of the
collateral.

      The mortgage operations currently has warehouse line agreements with the
warehouse lending operations to obtain financing of up to $850.0 million to
provide interim mortgage loan financing during the period that the mortgage
operations accumulates mortgage loans until the mortgage loans are securitized
or sold. The margins on reverse repurchase agreements are based on the type of
collateral provided by the mortgage operations and generally range from 95% to
99% of the fair market value of the collateral. The interest rates on the
borrowings are indexed to prime minus 0.50%, which was 4.75% at June 30, 2002.

      We expect to continue to use short-term warehouse facilities to fund the
acquisition of mortgage loans. If we cannot renew or replace maturing
borrowings, we may have to sell, on a whole loan basis, the loans securing these
facilities which, depending upon market conditions, may result in substantial
losses. Additionally, if for any reason the market value of our mortgage loans
securing warehouse facilities decline, our lenders may require us to provide
them with additional equity or collateral to secure our borrowings, which may
require us to sell mortgage loans at substantial losses.

      When the mortgage operations accumulates a sufficient amount of mortgage
loans, it sells or securitizes mortgage loans. During the first six months of
2002, the mortgage operations securitized $594.7 million of mortgage loans as
REMICs and sold $1.6 billion, in unpaid principal balance, of mortgage loans to
the long-term investment operations. In addition, the mortgage operations sold
$308.6 million, in unpaid principal balance, of mortgage loans to other
investors. The mortgage operations sold mortgage servicing rights on all ARM and
FRM securitizations completed during the second quarter of 2002. This generated
100% cash gains on securitization and sale of mortgage loans. Cash from the sale
of mortgage servicing rights was deployed in the mortgage operations and used to
acquire and originate additional mortgage loans.

      In order to mitigate interest rate and market risk, we attempt to
securitize our mortgage loans more frequently. Although securitizing mortgage
loans more frequently adds operating and securitization costs, we believe the
added cost is offset as less capital is required and more liquidity is provided
with less interest rate and price volatility, as the


                                       30


accumulation and holding period of mortgage loans is shortened. The mortgage
operations currently has agreements in place for the sale of mortgage loans and
mortgage servicing rights with an investment bank and large mortgage loan
servicer, respectively. This allows the mortgage operations to forward price its
REMIC and CMO transactions on a servicing released basis and achieve greater
stability in the execution of its securitizations.

      On December 1, 2001, we filed a registration statement with the SEC, which
allows us to sell up to $300.0 million of securities, including common stock,
preferred stock, debt securities and warrants. This type of registration
statement is commonly referred to as a "shelf" registration process. In
conjunction with the filing of the shelf, we completed the sale of 7,402,000
shares of common stock during the first quarter of 2002, which provided net
proceeds of approximately $57.0 million.

      On May 22, 2002, we entered into a sales agency agreement with UBS Warburg
LLC ("the Agent") to sell up to 3,594,082 shares of common stock. In conjunction
with the sales agency agreement, we completed the sale of 489,300 shares of
common stock during the three months ended June 30, 2002, which provided net
proceeds of approximately $5,485,692. The Agent received an aggregate of
$169,666 which is from a commission of 3% based on the gross sales price per
share of the shares sold under the sales agency agreement.

Uses of Liquidity

      Our business operations primarily use funds as follows:

      o     acquisition and origination of mortgage loans;

      o     provide short-term warehouse financing; and

      o     pay common stock dividends.

      During the first six months of 2002, we acquired and originated $2.6
billion of mortgage loans of which we retained $1.6 billion for long-term
investment. The acquisition and origination of mortgage loans by the mortgage
operations during the second quarter of 2002 resulted in premium costs of 1.53%
of the outstanding principal balance of mortgage loans. Our equity investment in
mortgage loans is outstanding until we sell or securitize our mortgage loans,
which is one of the reasons we attempt to securitize our mortgage loans
frequently. When we complete CMOs our required equity investment generally
ranges from approximately two and one-half percent to 5% of the outstanding
principal balance of mortgage loans, depending on our premium costs,
securitization costs, interest rate hedge acquisition costs and the capital
investment required. Since we rely significantly upon securitizations to
generate cash proceeds to repay borrowings and to create credit availability,
any disruption in our ability to complete securitizations may require us to
utilize other sources of financing, which, if available at all, may be on
unfavorable terms. In addition, delays in closing securitizations of our
mortgage loans increase our risk by exposing us to credit and interest rate
risks for this extended period of time. Furthermore, gains on sales from our
securitizations represent a significant portion of our earnings.

      We utilize our uncommitted warehouse lines to provide short-term warehouse
financing to affiliates and external customers of the warehouse lending
operations. The mortgage operations has a $850.0 million warehouse facility with
the warehouse lending operations to fund the acquisition and origination of
mortgage loans until sale or securitization. The warehouse lending operations
provides financing to affiliates at prime minus 0.50%. As of June 30, 2002,
affiliates had $238.4 million outstanding on the warehouse line with the
warehouse lending operations.

      The warehouse lending operations provides financing to non-affiliates at
prime plus a spread. Non-affiliates can generally finance between 95% and 98% of
the fair market value of the mortgage loans. As of June 30, 2002, the warehouse
lending operations had $498.0 million of approved warehouse lines available to
its non-affiliate customers of which $343.4 million was outstanding. Our ability
to meet liquidity requirements and the financing need of our customers is
subject to the renewal of our credit and repurchase facilities or obtaining
other sources of financing, if required, including additional debt or equity
from time to time. Any decision our lenders or investors make to provide
available financing to us in the future will depend upon a number of factors,
including:

      o     our compliance with the terms of our existing credit arrangements;

      o     our financial performance;

      o     industry and market trends in our various businesses;

      o     the general availability of and rates applicable to financing and
            investments;

      o     our lenders or investors resources and policies concerning loans and
            investments; and


                                       31


      o     the relative attractiveness of alternative investment or lending
            opportunities.

      During the first quarter of 2002, we declared a common stock dividend of
$0.40 per common share, or $15.8 million, which was paid on April 16, 2002.

      During the second quarter of 2002, we declared a common stock dividend of
$0.43 per common share, or $17.2 million, which was paid on July 12, 2002.

Cash Flows

      Operating Activities - During the first six months of 2002, net cash used
in operating activities was $89.6 million mainly due to net change in other
assets and liabilities of $132.9 million. An entry to accounts receivable for
$132.5 million was recorded for the pre-funding of the CMO that was completed on
June 26, 2002

      Investing Activities - During the first six months of 2002, net cash used
in investing activities was $1.3 billion. Net cash flows of $1.2 billion,
including principal repayments, was used in investing activities to acquire and
originate mortgage loans and $102.7 million was used to provide short-term
advances warehouse advances to affiliates and external customers.

      Financing Activities - During the first six months of 2002, net cash
provided by financing activities was $1.4 billion. Net cash flows of $1.3
billion was provided by proceeds from CMO borrowings net of repayment of CMO
borrowings, $43.3 million was provided by advances on warehouse lines and $62.5
million was provided by the issuance of common stock.

Inflation

      The consolidated financial statements and corresponding notes to the
consolidated financial statements have been prepared in accordance with GAAP,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes 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 are monetary in nature. As a result,
interest rates have a greater impact on our performance than do the effects of
general levels of inflation. Inflation affects our operations primarily through
its effect on interest rates, since interest rates normally increase during
periods of high inflation and decrease during periods of low inflation. During
periods of increasing interest rates, demand for mortgage loans and a borrower's
ability to qualify for mortgage financing in a purchase transaction may be
adversely affected. During periods of decreasing interest rates, borrowers may
prepay their mortgages, which in turn may adversely affect our yield and
subsequently the value of our portfolio of mortgage assets.

Risk Factors

A prolonged economic downturn or recession would likely result in a reduction of
our mortgage origination activity which would adversely affect our financial
results.

      An economic downturn or a recession may have a significant adverse impact
on our operations and our financial condition. For example, a reduction in new
mortgages will adversely affect our ability to expand our mortgage portfolio,
our principal means of increasing our earnings. In addition, a decline in new
mortgage activity will likely result in reduced activity for our warehouse
lending operations and our long-term investment operations. In the case of our
mortgage operations, a decline in mortgage activity may result in fewer loans
that meet its criteria for purchase and securitization, thus resulting in a
reduction in interest income and fees and gain on sale of loans. We may also
experience larger than previously reported losses on our investment portfolio
due to a higher level of defaults on our mortgage loans.

If we are unable to generate sufficient liquidity we will be unable to conduct
our operations as planned

      If we cannot generate sufficient liquidity, we will be unable to continue
to grow our operations, grow our asset base, maintain our current hedging policy
and pay dividends. We have traditionally derived our liquidity from four primary
sources:

o     financing facilities provided to us by others to acquire or originate
      mortgage assets;


                                       32


o     whole loan sales and securitizations of acquired or originated mortgage
      loans;

o     our issuance of equity and debt securities; and

o     earnings from operations.

      We cannot assure you that any of these alternatives will be available to
us, or if available, that we will be able to negotiate favorable terms. Our
ability to meet our long-term liquidity requirements is subject to the renewal
of our credit and repurchase facilities and/or obtaining other sources of
financing, including additional debt or equity from time to time. Any decision
by our lenders and/or investors to make additional funds available to us in the
future will depend upon a number of factors, such as our compliance with the
terms of our existing credit arrangements, our financial performance, industry
and market trends in our various businesses, the lenders' and/or investors' own
resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities. If we cannot
raise cash by selling debt or equity securities, we may be forced to sell our
assets at unfavorable prices or discontinue various business activities. Our
inability to access the capital markets could have a negative impact on our
earnings and hence, our ability to pay dividends.

Any significant margin calls under our financing facilities would adversely
affect our liquidity and may adversely affect our financial results

      Prior to the fourth quarter of 1998, we generally had no difficulty in
obtaining favorable financing facilities or in selling acquired mortgage loans.
However, during the fourth quarter of 1998, the mortgage industry experienced
substantial turmoil as a result of a lack of liquidity in the secondary markets.
At that time, investors expressed unwillingness to purchase interests in
securitizations due, in part, to:

o     the lack of financing to acquire these securitization interests;

o     the widening of returns expected by institutional investors on
      securitization interests over the prevailing Treasury rate; and

o     market uncertainty.

      As a result, many mortgage loan originators, including our company, were
unable to access the securitization market on favorable terms. This resulted in
some companies declaring bankruptcy. Originators, like our company, were
required to sell loans on a whole loan basis and liquidate holdings of
mortgage-backed securities to repay short-term borrowings. However, the large
amount of loans available for sale on a whole loan basis affected the pricing
offered for these loans, which in turn reduced the value of the collateral
underlying the financing facilities. Therefore, many providers of financing
facilities initiated margin calls. Margin calls resulted when our lenders
evaluated the market value of the collateral securing our financing facilities
and required us to provide them with additional equity or collateral to secure
our borrowings.

      Our financing facilities were short-term borrowings and due to the turmoil
in the mortgage industry during the latter part of 1998 many traditional
providers of financing facilities were unwilling to provide facilities on
favorable terms, or at all. Our current financing facilities continue to be
short-term borrowings and we expect this to continue. If we cannot renew or
replace maturing borrowings, we may have to sell, on a whole loan basis, the
loans securing these facilities which, depending upon market conditions, may
result in substantial losses.

We incurred losses for fiscal years 1997, 1998 and 2000 and may incur losses in
the future

      During the year ended December 31, 2000, we experienced a net loss of
$54.2 million. The net loss incurred during 2000 included non-cash accounting
charges of $68.9 million. The non-cash accounting charges were the result of
write-downs of non-performing investment securities secured by mortgages and
additional increases in allowance for loan losses to provide for the
deteriorating performance of collateral supporting specific investment
securities. During the year ended December 31, 1998, we experienced a net loss
of $5.9 million. During the year ended December 31, 1997, we experienced a net
loss of $16.0 million. The net loss incurred during 1997 included a non-cash
accounting charge of $44.4 million that was the result of expenses related to
the termination and buyout of our management agreement with Imperial Credit
Advisors, Inc. We cannot be certain that revenues will remain at current levels
or improve or that we will be profitable in the future, which could prevent us
from effectuating our business strategy.

If we are unable to complete securitizations, we would face a liquidity shortage
which would adversely affect our operating results.


                                       33


      We rely significantly upon securitizations to generate cash proceeds to
repay borrowings and to create credit availability. Any reduction in our ability
to complete securitizations may require us to utilize other sources of
financing, which, if available at all, may be on unfavorable terms. In addition,
delays in closing securitizations of our mortgage loans increase our risk by
exposing our company to credit and interest rate risks for this extended period
of time. Furthermore, gains on sales from our securitizations represent a
significant portion of our earnings. Several factors could affect our ability to
complete securitizations of our mortgages, including:

o     conditions in the securities and secondary markets;

o     credit quality of the mortgage loans acquired or originated through our
      mortgage operations;

o     volume of our mortgage loan acquisitions and originations;

o     our ability to obtain credit enhancements; and

o     lack of investors purchasing higher risk components of the securities.

      If we are unable to profitably securitize a significant number of our
mortgage loans in a particular financial reporting period, then we could
experience lower income or a loss for that period. As a result of turmoil in the
securitization market during the latter part of 1998, many mortgage lenders,
including our company, were required to sell mortgage loans on a whole loan
basis under adverse market conditions in order to generate liquidity. Many of
these sales were made at prices lower than our carrying value of the mortgage
loans and we experienced substantial losses. We cannot assure you that we will
be able to continue to profitably securitize or sell our loans on a whole loan
basis, or at all.

      The market for first loss risk securities, which are securities that take
the first loss when mortgages are not paid by the borrowers, is generally
limited. In connection with our REMIC securitizations, we endeavor to sell all
securities subjecting us to a first loss risk. If we cannot sell these
securities, we may be required to hold them for an extended period, subjecting
us to a first loss risk.

Our borrowings and use of substantial leverage may cause losses

      Our use of collateralized mortgage obligations may expose our operations
to credit losses

      To grow our investment portfolio, we borrow a substantial portion of the
market value of substantially all of our investments in mortgage loans in the
form of CMOs. Historically, we have borrowed approximately 98% of the market
value of such investments. There are no limitations on the amount we may borrow,
other than the aggregate value of the underlying mortgage loans. We currently
use CMOs as financing vehicles to increase our leverage, since mortgage loans
held for CMO collateral are retained for investment rather than sold in a
secondary market transaction. Retaining mortgage loans as collateral for CMOs
exposes our operations to greater credit losses than does the use of other
securitization techniques that are treated as sales because as the equity holder
in the security, we are allocated losses from the liquidation of defaulted loans
first prior to any other security holder. Although our liability under a
collateralized mortgage obligation is limited to the collateral used to create
the collateralized mortgage obligation, we generally are required to make a cash
equity investment to fund collateral in excess of the amount of the securities
issued in order to obtain the appropriate credit ratings for the securities
being sold, and therefore obtain the lowest interest rate available, on the
CMOs. If we experience greater credit losses than expected on the pool of loans
subject to the CMO, the value of our equity investment will decrease and we
would have to increase the allowance for loan losses on our financial
statements.

      The cost of our borrowings may exceed the return on our assets

      The cost of borrowings under our financing facilities corresponds to a
referenced interest rate plus or minus a margin. The margin varies depending on
factors such as the nature and liquidity of the underlying collateral and the
availability of financing in the market. We will experience net interest losses
if the returns on our assets financed with borrowed funds fail to cover the cost
of our borrowings, and we did not implement any applicable financial hedges.

      If we default under our financing facilities, we may be forced to
liquidate the collateral at prices less than the amount borrowed


                                       34


      If we default under our financing facilities, our lenders could force us
to liquidate the collateral. If the value of the collateral is less than the
amount borrowed, we could be required to pay the difference in cash. If we were
to declare bankruptcy, some of our reverse repurchase agreements may obtain
special treatment and our creditors would then be allowed to liquidate the
collateral without any delay. On the other hand, if a lender with whom we have a
reverse repurchase agreement declares bankruptcy, we might experience difficulty
repurchasing our collateral, or enforcing our claim for damages, and it is
possible that our claim could be repudiated and we could be treated as an
unsecured creditor. If this occurs, our claims would be subject to significant
delay and we may receive substantially less than our actual damages or nothing
at all.

      If we are forced to liquidate we may have few unpledged assets for
distribution to unsecured creditors

      We have pledged a substantial portion of our assets to secure the
repayment of CMOs issued in securitizations, our financing facilities and our
other borrowings. We will also pledge substantially all of our current and
future mortgage loans to secure borrowings pending their securitization or sale.
The cash flows we receive from our investments that have not yet been
distributed, pledged or used to acquire mortgage loans or other investments may
be the only unpledged assets available to our unsecured creditors and you if our
company was liquidated.

Interest rate fluctuations may adversely affect our operating results

      Our operations, as a mortgage loan acquirer and originator or a warehouse
lender, may be adversely affected by rising and falling interest rates. Higher
interest rates may discourage potential borrowers from refinancing mortgages,
borrowing to purchase homes or seeking second mortgages. This may decrease the
amount of mortgages available to be acquired or originated by our mortgage
operations and decrease the demand for warehouse financing provided by our
warehouse lending operations. If short-term interest rates exceed long-term
interest rates, there is a higher risk of increased loan prepayments, as
borrowers may seek to refinance their fixed and adjustable rate mortgage loans
at lower long-term fixed interest rates. Increased loan prepayments could lead
to a reduction in the number of loans in our investment portfolio and reduce our
net interest income.

      We are subject to the risk of rising mortgage interest rates between the
time we commit to purchase mortgages at a fixed price through the issuance of
individual, bulk or other rate-locks and the time we sell or securitize those
mortgages. An increase in interest rates will generally result in a decrease in
the market value of mortgages that we have committed to purchase at a fixed
price, but have not been sold or securitized or have not been properly hedged.
As a result, we may record a smaller gain, or even a loss, upon the sale or
securitization of those mortgage loans.

We may experience losses if our liabilities re-price at different rates than our
assets

      Our principal source of revenue is net interest income or net interest
spread from our investment portfolio, which is the difference between the
interest we earn on our interest earning assets and the interest we pay on our
interest bearing liabilities. The rates we pay on our borrowings are independent
of the rates we earn on our assets and may be subject to more frequent periodic
rate adjustments. Therefore, we could experience a decrease in net interest
income or a net interest loss because the interest rates on our borrowings could
increase faster than the interest rates on our assets. If our net interest
spread becomes negative, we will be paying more interest on our borrowings than
we will be earning on our assets and we will be exposed to a risk of loss.

      Additionally, the rates paid on our borrowings and the rates received on
our assets may be based upon different indices. If the index used to determine
the rate on our borrowings, typically one-month LIBOR, increases faster than the
indices used to determine the rates on our assets, such as six-month LIBOR,
one-year CMT, or the prime rate, we will experience a declining net interest
spread, which will have a negative effect on our profitability, and may result
in losses.

An increase in our adjustable interest rate borrowings may decrease the net
interest margin on our adjustable rate mortgages

      Our long-term investment portfolio includes mortgage loans that are
hybrids ARMs. These are mortgages with fixed interest rates for an initial
period of time, after which they begin bearing interest based upon short-term
interest rate indices. We generally fund mortgages with adjustable interest rate
borrowings having interest rates that are indexed to short-term interest rates
and adjust periodically at various intervals. To the extent that there is an
increase in the interest rate index used to determine our adjustable interest
rate borrowings and that increase is not offset by a


                                       35


corresponding increase in the rates at which interest accrues on our assets or
by various interest rate hedges that we have in place at any given time, our net
interest margin will decrease or become negative. We may suffer a net interest
loss on our adjustable rate mortgages that have interest rate caps if the
interest rates on our related borrowings increase

      Adjustable rate mortgages typically have interest rate caps, which limit
interest rates charged to the borrower during any given period. Our borrowings
are not subject to similar restrictions. As a result, in a period of rapidly
increasing interest rates, the interest rates we pay on our borrowings could
increase without limitation, while the interest rates we earn on our adjustable
rate mortgage assets would be capped. If this occurs, our net interest spread
could be significantly reduced or we could suffer a net interest loss.

Increased levels of prepayments of our adjustable rate mortgage loans may
accelerate our expenses and decrease our net income

      Mortgage prepayments generally increase on our adjustable rate mortgages
when fixed mortgage interest rates fall below the then-current interest rates on
outstanding adjustable rate mortgage loans. Prepayments on mortgage loans are
also affected by the terms and credit grades of the loans, conditions in the
housing and financial markets and general economic conditions. Most of the
adjustable rate mortgages that we acquire are originated within three months of
the time we purchased the mortgages and generally bear initial interest rates
that are lower than their fully-indexed amount (the applicable index plus the
margin). If we acquire these mortgages at a premium and they are repaid prior to
or soon after the time of adjustment to a fully-indexed rate without payment of
any prepay penalty, we would not have received interest at the fully-indexed
rate during such period and we must expense the unamortized premium that was
paid for the loan at the time of the prepayment. This means we would lose the
opportunity to earn interest at that rate over the expected life of the
mortgage. Also, if prepayments on our adjustable rate mortgage loans increase
when interest rates are declining, our net interest income may decrease if we
cannot reinvest the prepayments in mortgage assets bearing comparable rates.
Prepayments on fixed rate mortgages will also decrease our net interest income
when interest rates are declining.

      We generally acquire mortgages on a servicing released basis, meaning we
acquire both the mortgages and the rights to service them. This strategy
requires us to pay a higher purchase price or premium for the mortgages. If the
mortgage loans that we acquire at a premium prepay faster than originally
projected, generally accepted accounting principles require us to write down the
remaining capitalized premium amounts at a faster speed than was originally
projected, which would decrease our current net interest income.

The value of our portfolio of mortgage-backed securities may be adversely
affected by unforeseen events

      Our prior investments in residual interest and subordinated debt
investments exposed us to greater risks as compared to those associated with
senior mortgage-backed securities

      Prior to 1998, we invested in mortgage-backed securities known as
interest-only, principal-only, residual interest or other subordinated
securities. Investments in residual interest and subordinated securities are
much riskier than investments in senior mortgage-backed securities because these
subordinated securities bear all credit losses prior to the related senior
securities. The risk associated with holding residual interest and subordinated
securities is greater than that associated with holding the underlying mortgage
loans directly due to the concentration of losses attributed to the subordinated
securities.

      If the projected value of our portfolio of residual interest and
subordinated debt instruments is incorrect we would have to write down the value
of these securities

      We estimate future cash flows from these securities and value them
utilizing assumptions based in part on projected discount rates, mortgage loan
prepayments and credit losses. If our actual experience differs from our
assumptions, we would be required to reduce the value of these securities. The
market for our asset-backed securities is extremely limited and we cannot assure
you that we could sell these securities at their reported value, or at any value
or that we could recoup our initial investment.

      In addition, we may not obtain our anticipated yield or we may incur
losses if the credit support available within certain mortgage-backed securities
is inadequate due to unanticipated levels of losses, or due to difficulties
experienced by the credit support provider. Delays or difficulties encountered
in servicing the mortgages in mortgage-


                                       36


backed securities may cause greater losses and, therefore, greater resort to
credit support than was originally anticipated, and may cause a rating agency to
downgrade certain classes of our mortgage-backed securities, which might then
equate to a reduction of the value of the security.

We undertake additional risks by acquiring and investing in mortgage loans

      We may be subject to losses on mortgage loans for which we do not obtain
credit enhancements

      We do not obtain credit enhancements such as mortgage pool or special
hazard insurance for all of our mortgage loans and investments. Generally, we
require mortgage insurance on any loan with a loan-to-value ratio greater than
80%. During the time we hold mortgage loans for investment, we are subject to
risks of borrower defaults and bankruptcies and special hazard losses that are
not covered by standard hazard insurance. If a borrower defaults on a mortgage
loan that we hold, we bear the risk of loss of principal to the extent there is
any deficiency between the value of the related mortgaged property and the
amount owing on the mortgage loan and any insurance proceeds available to us
through the mortgage insurer. In addition, since defaulted mortgage loans, which
under our financing arrangements are mortgage loans that are generally 60 to 90
days delinquent in payments, may be considered negligible collateral under our
borrowing arrangements, we could bear the risk of being required to own these
loans without the use of borrowed funds until they are ultimately liquidated or
possibly sold at a loss.

      Non-conforming Alt-A mortgage loans expose us to greater credit risks

      We are an acquirer and originator of non-conforming Alt-A residential
mortgage loans. These are residential mortgages that do not qualify for purchase
by government sponsored agencies such as the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. Our operations may
be negatively affected due to our investments in non-conforming Alt-A mortgage
loans. Credit risks associated with non-conforming Alt-A mortgage loans are
greater than those associated with conforming mortgage loans. The interest rates
we charge on non-conforming Alt-A loans are often higher than those charged for
conforming loans in order to compensate for the higher risk and lower liquidity.
Lower levels of liquidity may cause us to hold loans or other mortgage-related
assets supported by these loans that we otherwise would not hold. By doing this,
we assume the potential risk of increased delinquency rates and/or credit losses
as well as interest rate risk. Additionally, the combination of different
underwriting criteria and higher rates of interest leads to greater risk,
including higher prepayment rates and higher delinquency rates and/or credit
losses.

      Lending to non-conforming Alt-A borrowers may expose us to a higher risk
of delinquencies, foreclosures and losses

      As a lender of non-conforming Alt-A mortgage loans, our market includes
borrowers who may be unable to obtain mortgage financing from conventional
mortgage sources. Loans made to such non-conforming Alt-A borrowers generally
entail a higher risk of delinquency and higher losses than loans made to
borrowers who utilize conventional mortgage sources. Delinquency, foreclosures
and losses generally increase during economic slowdowns or recessions. The
actual risk of delinquencies, foreclosures and losses on loans made to
non-conforming Alt-A borrowers could be higher under adverse economic conditions
than those currently experienced in the mortgage lending industry in general.
Further, any material decline in real estate values increases the loan-to-value
ratios of loans previously made by us, thereby weakening collateral coverage and
increasing the possibility of a loss in the event of a borrower default. Any
sustained period of increased delinquencies, foreclosures or losses after the
loans are sold could adversely affect the pricing of our future loan sales and
our ability to sell or securitize our loans in the future. In the past, certain
of these factors have caused revenues and net income of many participants in the
mortgage industry, including us, to fluctuate from quarter to quarter.

      Our use of second mortgages exposes us to greater credit risks

      Our security interest in the property securing second mortgages is
subordinated to the interest of the first mortgage holder and the second
mortgages have a higher combined loan-to-value ratio than does the first
mortgage. If the value of the property is equal to or less than the amount
needed to repay the borrower's obligation to the first mortgage holder upon
foreclosure, our second mortgage loan will not be repaid.

      The geographic concentration of our mortgage loans increases our exposure
to risks in those areas


                                       37


      We do not set limitations on the percentage of our mortgage asset
portfolio composed of properties located in any one area (whether by state, zip
code or other geographic measure). Concentration in any one area increases our
exposure to the economic and natural hazard risks associated with that area. For
instance, certain parts of California have experienced an economic downturn in
past years and California and Florida have suffered the effects of certain
natural hazards.

Representations and warranties made by us in our loan sales and securitizations
may subject us to liability

      In connection with our securitizations, we transfer loans acquired or
originated by us into a trust in exchange for cash and, in the case of a CMO,
residual certificates issued by the trust. The trustee will have recourse to us
with respect to the breach of the standard representations and warranties made
by us at the time such loans are transferred. While we generally have recourse
to our customers for any such breaches, there can be no assurance of our
customers' abilities to honor their respective obligations. Also, we engage in
bulk whole loan sales pursuant to agreements that generally provide for recourse
by the purchaser against us in the event of a breach of one of our
representations or warranties, any fraud or misrepresentation during the
mortgage loan origination process, or upon early default on such mortgage loan.
We generally limit the potential remedies of such purchasers to the potential
remedies we receive from the people from whom we acquired or originated the
mortgage loans. However, in some cases, the remedies available to a purchaser of
mortgage loans from us may be broader than those available to us against the
sellers of the loans and should a purchaser enforce its remedies against us, we
may not always be able to enforce whatever remedies we have against our
customers.

      In the ordinary course of our business, we are subject to claims made
against us by borrowers and trustees in our securitizations arising from, among
other things, losses that are claimed to have been incurred as a result of
alleged breaches of fiduciary obligations, misrepresentations, errors and
omissions of our employees, officers and agents (including our appraisers),
incomplete documentation and our failure to comply with various laws and
regulations applicable to our business. Any claims asserted against us may
result in legal expenses or liabilities that could have a material adverse
effect on our results of operations or financial condition.

We face conflicts of interests based on the ownership of the voting stock of
Impac Funding Corporation by certain officers and directors of Impac Mortgage
Holdings, Inc.

      We are subject to conflicts of interest arising from our relationship with
Impac Mortgage Holdings, Inc., our long-term investment operations, Impac
Funding Corporation, our mortgage operations, and their officers and directors.
Our long-term investment operations acquires non-confirming Alt-A mortgage loans
from our mortgage operations. Impac Mortgage Holdings, Inc. owns all of the
preferred stock, and 99% of the economic interest in, Impac Funding Corporation.
Joseph R. Tomkinson, our Chairman and Chief Executive Officer, William S.
Ashmore, our Chief Operating Officer, President and a director, and Richard J.
Johnson, our Executive Vice President and Chief Financial Officer, are holders
of all of the outstanding voting stock of, and 1% of the economic interest in,
Impac Funding Corporation. They have the right to elect all directors of Impac
Funding Corporation and the ability to control the outcome of all matters for
which the consent of the holders of the common stock of Impac Funding
Corporation is required. Messer's Tomkinson, Ashmore and Johnson are also the
sole directors of Impac Funding Corporation. Decisions made by these officers at
one company may be at conflict with and have an adverse affect on the operations
of the other.

A substantial interruption in our use of IDASL may adversely affect our level of
mortgage loan acquisitions and originations

      We utilize the Internet in our business principally for the implementation
of our automated loan origination program, IDASL, which stands for Impac Direct
Access System for Lending. IDASL is not a lead generator for mortgage brokers.
IDASL allows our customers to pre-qualify borrowers for various loan programs
based on criteria requested from the borrower and renders an automated
underwriting decision by issuing an approval of the mortgage loan or a referral
for further review or additional information. All of our correspondents submit
loans through IDASL and all wholesale loans delivered by mortgage brokers are
directly underwritten through IDASL. IDASL may be interrupted if the Internet
experiences periods of poor performance, if our computer systems or the systems
of our third-party service providers contain defects, or if customers are
reluctant to use or have inadequate connectivity to the Internet. Increased
government regulation of the Internet could also adversely affect our use of the
Internet in unanticipated ways and discourage our customers from using our
services. If our ability to use the Internet in providing our services is
impaired, our ability to originate or acquire loans on an automated basis could
be delayed or


                                       38


reduced. Any substantial delay and reduction in our mortgage loan acquisitions
and originations will reduce our net earnings for the applicable period.

We are subject to risks of operational failure that are beyond our control

      Substantially all of our operations are located in Newport Beach,
California. Our systems and operations are vulnerable to damage and interruption
from fire, flood, telecommunications failure, break-ins, earthquake and similar
events. Our operations may also be interrupted by power disruptions, including
rolling black-outs implemented in California due to the state's continuing acute
power shortage. We do not maintain alternative power sources. Furthermore, our
security mechanisms may be inadequate to prevent security breaches to our
computer systems, including from computer viruses, electronic break-ins and
similar disruptions. Such security breaches or operational failures could expose
us to liability, impair our operations, result in losses, and harm our
reputation.

Our reliance on third-party software for the implementation of IDASL exposes us
to risks

      We have a licensing agreement with a third-party vendor for the use of
hardware and software for IDASL. All of our correspondents are submitting loans
through IDASL and all of our wholesale loans delivered by mortgage brokers are
directly underwritten through the use of IDASL. The termination or impairment of
this license could result in delays and reductions in the acquisition and
origination of mortgage loans until equivalent hardware and software could be
licensed and integrated, if at all possible, which may harm our business. In
addition, we would be harmed if the provider from whom we license software
ceases to deliver and support reliable products, enhance their current products
or respond to emerging industry standards. If the hardware or software provided
by our vendor fails for any reason, and the back-up hardware and software is not
implemented in a timely manner, it may also delay and reduce those mortgage loan
acquisitions and originations done through IDASL. The third-party hardware and
software also may not continue to be available to us on commercially reasonable
terms or at all. Any substantial delay and reduction in our mortgage loan
acquisitions and originations will reduce our net earnings for the applicable
period.

Competition for mortgage loans is intense and may adversely affect our
operations

      We compete in acquiring and originating non-conforming Alt-A mortgage
loans and issuing mortgage-backed securities with:

o     other mortgage conduit programs;

o     investment banking firms;

o     savings and loan associations;

o     banks;

o     thrift and loan associations;

o     finance companies;

o     mortgage bankers;

o     insurance companies;

o     other lenders; and

o     other entities purchasing mortgage assets.

      Some of our competitors are larger and have greater resources than we do.

      Consolidation in the mortgage banking industry may adversely affect us by
reducing the number of current customers of our mortgage operations and our
potential customer base. As a result, we may have to purchase a larger
percentage of mortgage loans from a smaller number of customers, which may
reduce our profit margins, or increase the cost to acquire these types of loans.

We are exposed to potential credit losses in providing warehouse financing

      As a warehouse lender, we lend money to mortgage bankers on a secured
basis and we are subject to the risks associated with lending to mortgage banks,
including the risks of fraud, borrower default and bankruptcy, any of which
could result in credit losses for us. Our claims as a secured lender in a
bankruptcy proceeding may be subject to adjustment and delay.

We may not pay dividends to stockholders


                                       39


      REIT provisions of the Internal Revenue Code generally require that we
distribute to our stockholders at least 90% of all of our taxable income. These
provisions restrict our ability to retain earnings and thereby renew capital for
our business activities. We may decide at a future date to terminate our REIT
status, which would cause us to be taxed at the corporate level, and cease
paying regular dividends.

      In addition, for any year that we do not generate taxable income, we are
not required to declare and pay dividends to maintain our REIT status. For
instance, due to losses incurred in 2000, we did not declare any dividends from
September 2000 until September 2001.

      To date, a portion of our taxable income and cash flow has been
attributable to our receipt of dividend distributions from Impac Funding
Corporation, our mortgage operations affiliate. Impac Funding Corporation is not
a REIT and is not, therefore, subject to the above-described REIT distribution
requirements. Because Impac Funding Corporation is seeking to retain earnings to
fund the future growth of our mortgage operations business, its board may decide
that Impac Funding Corporation should cease making dividend distributions in the
future. This would materially reduce the amount of our taxable income and in
turn, would reduce the amount we would be required to distribute as dividends.

If we fail to maintain our REIT status, we may be subject to taxation as a
regular corporation

      We believe that we have operated and intend to continue to operate in a
manner that enables us to meet the requirements for qualification as a REIT for
federal income tax purposes. We have not requested, and do not plan to request,
a ruling from the Internal Revenue Service that we qualify as a REIT.

      Moreover, no assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. Our continued qualification as a REIT will
depend on our satisfaction of certain asset, income, organizational and
stockholder ownership requirements on a continuing basis.

      If we fail to qualify as a REIT, we would not be allowed a deduction for
distributions to stockholders in computing our taxable income and would be
subject to federal income tax at regular corporate rates. We also may be subject
to the federal alternative minimum tax. Unless we are entitled to relief under
specific statutory provisions, we could not elect to be taxed as a REIT for four
taxable years following the year during which we were disqualified. Therefore,
if we lose our REIT status, the funds available for distribution to you would be
reduced substantially for each of the years involved. Failure to qualify as a
REIT could adversely affect the value of our common stock.

Delayed mortgage loan sales or securitization closings could have a material
adverse affect on our operations

      A delay in closing a particular mortgage loan sale or securitization would
increase our exposure to interest rate fluctuations by lengthening the period
during which our variable rate borrowings under our warehouse facilities are
outstanding. If we were unable to sell a sufficient number of mortgage loans at
a premium during a particular reporting period, our revenues for that period
would decline, which could have a material adverse affect on our operations.

Our share prices have been and may continue to be volatile

      Historically, the market price of our common stock has been volatile. The
market price of our common stock is likely to continue to be highly volatile and
could be significantly affected by factors including:

o     the amount of dividends paid;

o     availability of liquidity in the securitization market;

o     loan sale pricing;

o     calls by warehouse lenders or changes in warehouse lending rates;

o     unanticipated fluctuations in our operating results;

o     prepayments on mortgages;

o     valuations of securitization related assets;

o     cost of funds; and

o     general market conditions.


                                       40


      In addition, significant price and volume fluctuations in the stock market
have particularly affected the market prices for the common stock of mortgage
REIT companies such as ours. These broad market fluctuations have adversely
affected and may continue to adversely affect the market price of our common
stock. If our results of operations fail to meet the expectations of securities
analysts or investors in a future quarter, the market price of our common stock
could also be materially adversely affected and we may experience difficulty in
raising capital.

If actual prepayments or defaults with respect to mortgage loans serviced occurs
more quickly than originally assumed, the value of our mortgage servicing rights
would be subject to downward adjustment

      When we purchase loans that include the associated servicing rights, the
allocated cost of the servicing rights is reflected on our financial statements
as mortgage servicing rights. To determine the fair value of these servicing
rights, we use assumptions to estimate future net servicing income including
projected discount rates, mortgage loan prepayments and credit losses. If actual
prepayments or defaults with respect to loans serviced occur more quickly than
we originally assumed, we would have to reduce the carrying value of our
mortgage servicing rights. We do not know if our assumptions will prove correct.

Our operating results may be adversely affected by the results of our hedging
activities

      To offset the risks associated with our mortgage operations, we enter into
transactions designed to hedge our interest rate risks. To offset the risks
associated with our long-term investment operations, we attempt to match the
interest rate sensitivities of our adjustable rate mortgage assets held for
investment with the associated financing liabilities. Our management determines
the nature and quantity of the hedging transactions based on various factors,
including market conditions and the expected volume of mortgage loan purchases.
We do not limit management's use of certain instruments in such hedging
transactions. While we believe that we properly hedge our interest rate risk, we
may not, and in some cases will not, be permitted to use hedge accounting as
established by FASB under the provisions of SFAS 133 to account for our hedging
activities. The effect of our hedging strategy may result in some volatility in
our quarterly earnings as interest rates go up or down. While we believe we
properly hedge our interest rate risk, we cannot assure you that our hedging
transactions will offset the risk of adverse changes in net interest margins.

A reduction in the demand for residential mortgage loans and our non-conforming
Alt-A loan products may adversely affect our operations

      The availability of sufficient mortgage loans meeting our criteria is
dependent in part upon the size and level of activity in the residential real
estate lending market and, in particular, the demand for non-conforming Alt-A
mortgage loans, which is affected by:

o     interest rates;

o     national economic conditions;

o     residential property values; and

o     regulatory and tax developments.

o     If our mortgage loan purchases decrease, we will have:

o     decreased economies of scale;

o     higher origination costs per loan;

o     reduced fee income;

o     smaller gains on the sale of non-conforming mortgage loans; and

o     an insufficient volume of loans to generate securitizations which thereby
      causes us to accumulate loans over a longer period.

Our delinquency ratios and our performance may be adversely affected by the
performance of parties who sub-service our loans

      We contract with third-party sub-servicers for the sub-servicing of all
the loans in which we retain servicing rights, including those in our
securitizations. Our operations are subject to risks associated with inadequate
or untimely servicing. Poor performance by a sub-servicer may result in greater
than expected delinquencies and losses on our loans. A substantial increase in
our delinquency or foreclosure rate could adversely affect our ability to access
the capital and secondary markets for our financing needs. Also, with respect to
loans subject to a securitization, greater


                                       41


delinquencies would adversely impact the value of any interest-only,
principal-only and subordinated securities we hold in connection with that
securitization.

      In a securitization, relevant agreements permit us to be terminated as
servicer or master servicer under specific conditions described in these
agreements, such as the failure of a sub-servicer to perform certain functions
within specific time periods. If, as a result of a sub-servicer's failure to
perform adequately, we were terminated as servicer of a securitization, the
value of any servicing rights held by us would be adversely affected.

Potential characterization of distributions or gain on sale as unrelated
business taxable income to tax-exempt investors

      If (1) all or a portion of our assets are subject to the rules relating to
taxable mortgage pools, (2) we are a "pension-held REIT," (3) a tax-exempt
stockholder has incurred debt to purchase or hold our common stock, or (4) the
residual REMIC interests we buy generate "excess inclusion income," then a
portion of the distributions to and, in the case of a stockholder described in
(3), gains realized on the sale of common stock by such tax-exempt stockholder
may be subject to Federal income tax as unrelated business taxable income under
the Internal Revenue Code.

Classification as a taxable mortgage pool could subject us to increased taxation

      If we have borrowings with two or more maturities and, (1) those
borrowings are secured by mortgage loans or mortgage-backed securities and, (2)
the payments made on the borrowings are related to the payments received on the
underlying assets, then the borrowings and the pool of mortgage loans or
mortgage backed securities to which such borrowings relate may be classified as
a taxable mortgage pool under the Internal Revenue Code. If any part of our
company were to be treated as a taxable mortgage pool, then our REIT status
would not be impaired, but a portion of the taxable income we recognize may,
under regulations to be issued by the Treasury Department, be characterized as
"excess inclusion" income and allocated among our stockholders to the extent of
and generally in proportion to the distributions we make to each stockholder.
Any excess inclusion income would:

o     not be allowed to be offset by a stockholder's net operating losses;

o     be subject to a tax as unrelated business income if a stockholder were a
      tax-exempt stockholder;

o     be subject to the application of federal income tax withholding at the
      maximum rate (without reduction for any otherwise applicable income tax
      treaty) with respect to amounts allocable to foreign stockholders; and

o     be taxable (at the highest corporate tax rate) to us, rather than to our
      stockholders, to the extent the excess inclusion income relates to stock
      held by disqualified organizations (generally, tax-exempt companies not
      subject to tax on unrelated business income, including governmental
      organizations).

      Based on advice of our tax counsel, we take the position that our existing
financing arrangements do not create a taxable mortgage pool.

Our operations may be adversely affected if we are subject to the Investment
Company Act

      We intend to conduct our business at all times so as not to become
regulated as an investment company under the Investment Company Act. The
Investment Company Act exempts entities that are primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate.

      In order to qualify for this exemption we must maintain at least 55% of
our assets directly in mortgage loans, qualifying pass-through certificates and
certain other qualifying interests in real estate. Our ownership of certain
mortgage assets may be limited by the provisions of the Investment Company Act.
If the Securities and Exchange Commission adopts a contrary interpretation with
respect to these securities or otherwise believes we do not satisfy the above
exception, we could be required to restructure our activities or sell certain of
our assets. To insure that we continue to qualify for the exemption we may be
required at times to adopt less efficient methods of financing certain of our
mortgage assets and we may be precluded from acquiring certain types of
higher-yielding mortgage assets. The net effect of these factors will be to
lower at times our net interest income. If we fail to qualify for exemption from
registration as an investment company, our ability to use leverage would be
substantially reduced, and we would not be able to conduct our business as
described. Our business will be materially and adversely affected if we fail to
qualify for this exemption.

If we conduct future offerings the market price of our securities may be
adversely affected


                                       42


      We may elect to increase our capital resources by making additional
private or public offerings of securities in the future. We do not know:

o     the actual or perceived effect of these offerings;

o     the timing of these offerings;

o     the dilution of the book value or earnings per share of our securities
      then outstanding; and

o     the effect on the market price of our securities then outstanding.

Sales of additional common stock may adversely affect its market price

      The sale or the proposed sale of substantial amounts of our common stock
in the public market could materially adversely affect the market price of our
common stock or other outstanding securities. Based on a Schedule 13G filed with
the SEC, as of February 15, 2002, HBK Master Fund L.P. beneficially owned
3,843,888 shares of our common stock, all of which are registered with the SEC
for sale to the public pursuant to an effective registration statement. The sale
of a large amount of shares by HBK Master Fund L.P., or the perception that such
sales may occur, could adversely affect the market price for our common stock or
other outstanding securities.

We are a defendant in purported class actions and may not prevail in these
matters

      We are a defendant in seven purported class actions pending in six
different state courts; two cases in the United States District Court for the
Western District of Tennessee and one in the United States District Court for
the Northern District of Illinois. All, except for the Illinois matter, allege
generally that the loan originator improperly charged fees in violation of
various state lending or consumer protection laws in connection with mortgage
loans that we acquired. The Illinois matter alleges that we charged fees for
services that constitute the unauthorized practice of law and that were not
proper charges. Although the suits are not identical, they generally seek
unspecified compensatory damages, punitive damages, pre- and post-judgment
interest, costs and expenses and rescission of the loans, as well as a return of
any improperly collected fees. These actions are in the early stages of
litigation and, accordingly, it is difficult to predict the outcome of these
matters. We believe we have meritorious defenses to the actions and intend to
defend against them vigorously; however, an adverse judgment in any of these
matters could have a material adverse effect on us.

We may be subject to possible adverse consequences as a result of limits on
ownership of our shares

      Our charter limits ownership of our capital stock by any single
stockholder to 9.5% of our outstanding shares unless waived by the board of
directors. Our board of directors may increase the 9.5% ownership limit. In
addition, to the extent consistent with the REIT provisions of the Internal
Revenue Code, our board of directors may, pursuant to our articles of
incorporation, waive the 9.5% ownership limit for a stockholder or purchaser of
our stock. In order to waive the 9.5% ownership limit our board of directors
must require the stockholder requesting the waiver to provide certain
representations to the Company to ensure compliance with the REIT provisions of
the Internal Revenue Code. Our charter also prohibits anyone from buying shares
if the purchase would result in us losing our REIT status. This could happen if
a share transaction results in fewer than 100 persons owning all of our shares
or in five or fewer persons, applying certain broad attribution rules of the
Internal Revenue Code, owning more than 50% (by value) of our shares. If you or
anyone else acquires shares in excess of the ownership limit or in violation of
the ownership requirements of the Internal Revenue Code for REITs, we:

o     will consider the transfer to be null and void;

o     will not reflect the transaction on our books;

o     may institute legal action to enjoin the transaction;

o     will not pay dividends or other distributions with respect to those
      shares;

o     will not recognize any voting rights for those shares;

o     may redeem the shares; and

o     will consider the shares held in trust for the benefit of a charitable
      beneficiary as designated by us.

The trustee shall sell the shares held in trust and the owner of the excess
shares will be entitled to the lesser of:

(a) the price paid by the owner;


                                       43


(b) if the owner did not purchase for the excess shares, the closing price for
the shares on the national securities exchange on which the company is listed;
or

(c) the price received by the trustee from the sale of the shares.

Limitations on acquisition and change in control ownership limit

      The 9.5% ownership limit discussed above may have the effect of precluding
acquisition of control of our company by a third party without consent of our
board of directors.


                                       44


Item 3: Quantitative and Qualitative Disclosures about Market Risk

      A significant portion of our revenues and earnings are derived from net
interest income. We strive to manage our interest-earning assets and
interest-bearing liabilities to generate what we believe to be an appropriate
contribution from net interest income. When interest rates fluctuate,
profitability can be adversely affected by changes in the fair market value of
our assets and liabilities and by the interest spread earned on interest-earning
assets and interest-bearing liabilities. We derive income from the differential
spread between interest earned on interest-earning assets and interest paid on
interest-bearing liabilities. Any change in interest rates affects income
received and income paid from assets and liabilities in varying and typically
unequal amounts. Changing interest rates may compress our interest rate margins
and adversely affect overall earnings.

      Therefore, we seek to control the volatility of profitability due to
changes in interest rates through asset/liability management. We attempt to
achieve an appropriate relationship between interest rate sensitive assets and
interest rate sensitive liabilities. Although we manage other risks, such as
credit, operational, prepayment and liquidity risk in the normal course of
business, we consider interest rate risk to be a significant market risk which
could potentially have the largest material effect on our financial condition
and results of operations. As we only invest or borrow in U.S. dollar
denominated financial instruments, we are not subject to foreign currency
exchange risk.

      We believe our quantitative risk has not materially changed since our
disclosures under "Quantitative and Qualitative Disclosures About Market Risk"
in our Annual Report on Form 10-K for the year ended December 31, 2001.

      We follow a hedging program intended to limit our exposure to changes in
interest rates primarily associated with our CMO borrowings. Our primary
objective is to hedge our exposure to the variability in future cash flows
attributable to the variability of one-month LIBOR, which is generally the
underlying index of our CMO borrowings. We also monitor on an ongoing basis the
prepayment risks that arise in fluctuating interest rate environments. Our
hedging program is formulated with the intent to offset the potential adverse
effects of changing interest rates on CMO borrowings resulting from the
following: interest rate adjustment limitations on mortgage loans due to
periodic and lifetime interest rate cap features and mismatched interest rate
adjustment periods of mortgage loans and CMO borrowings.

      We primarily acquire for long-term investment six-month ARMs and six month
hybrids. Six-month LIBOR ARMs are generally subject to periodic and lifetime
interest rate caps. This means that the interest rate of each ARM is limited to
upwards or downwards movements on its periodic interest rate adjustment date,
generally six months, or over the life of the mortgage loan. Periodic caps limit
the maximum interest rate change, which can occur on any interest rate change
date to generally a maximum of 1% per semiannual adjustment. Also, each ARM has
a maximum lifetime interest rate cap. Generally, borrowings are not subject to
the same periodic or lifetime interest rate limitations. During a period of
rapidly increasing or decreasing interest rates, financing costs would increase
or decrease at a faster rate than the periodic interest rate adjustments on
mortgage loans would allow, which could effect net interest income. In addition,
if the change in market rates were to exceed the maximum interest rates
permitted change in the ARM rate, borrowing costs would increase while interest
rates on ARMs would remain constant.

      Our mortgage loan portfolio is also subject to risk from the mismatched
nature of interest rate adjustment periods on mortgage loans and interest rates
on the related borrowings. Six-month ARMs can adjust upwards or downwards every
six months, subject to periodic cap limitations, while adjustable rate CMO
borrowings adjust every month. Additionally, hybrid ARMs have an initial fixed
interest rate period generally ranging from two to three years, and to a lesser
extent five years, which subsequently convert to six-month ARMs. Again, during a
rapidly increasing or decreasing interest rate environment, financing costs
would increase or decrease more rapidly than would interest rates on mortgage
loans, which would remain fixed until their next interest rate adjustment date.

      To mitigate exposure from the effect of changing interest rates on CMO
borrowings, we purchase and sell derivative instruments in the form of interest
rate cap agreements, or caps, interest rate floor agreements, or floors, and
interest rate swap agreements, or swaps. We also simultaneously purchase or sell
caps and floors, which are referred to as collars. These derivative instruments
are referred to collectively as derivatives. An interest rate cap or floor is a
contractual agreement. If prevailing interest rates reach levels specified in
the cap or floor agreement, we may either receive or pay cash. An interest rate
swap is generally a contractual agreement that obligates one party to receive or
make cash payments based on an adjustable rate index and the other party to make
or receive cash payments based on a fixed rate. Swap agreements have the effect
of fixing borrowing costs on a similar amount of


                                       45


swaps and, as a result, we can reduce the interest rate variability of
borrowings. Our objective is to lock in a reliable stream of cash flows when
interest rates fall below or rise above certain levels. For instance, when
interest rates rise, borrowing costs increase at greater speeds than the
underlying collateral supporting the borrowings. These derivative instruments
hedge the variability of forecasted cash flows attributable to CMO borrowings
and protect net interest income by providing cash flows at certain triggers
during changing interest rate environments. In all hedging transactions,
counterparties must have at least a single "A" credit rating as determined by
various credit rating agencies.

      Caps qualify as derivative instruments under provisions of SFAS 133. The
hedging instrument is the specific LIBOR cap that is hedging the LIBOR based CMO
borrowings. The nature of the risk being hedged is the variability of the cash
flows associated with the LIBOR borrowings. Prior to the adoption of DIG G20, we
assessed the hedging effectiveness of our caps utilizing only the intrinsic
value of the caps. DIG G20 allows us to utilize the terminal value of the caps
to assess effectiveness. DIG G20 also allows us to amortize the initial fair
value of the caps over the life of the caps based on the maturity date of the
individual caplets. Upon adoption of DIG G20, net income and accumulated other
comprehensive income were adjusted by the amount needed to reflect the
cumulative impact of adopting the provisions of DIG G20. Subsequent to the
adoption of DIG G20, caps are considered effective hedges and are marked to
market each reporting period with the entire change in market value being
recognized in other comprehensive income on the balance sheet.

      Floors, swaps and collars qualify as cash flow hedges under the provisions
of SFAS 133. The hedging instrument is the specific LIBOR floor, swap or collar
that is hedging the LIBOR based CMO borrowings. The nature of the risk being
hedged is the variability of the cash flows associated with the LIBOR
borrowings. Prior to DIG G20, these derivatives were marked to market with the
entire change in the market value of the intrinsic component recognized in other
comprehensive income on the balance sheet each reporting period. The time value
component of these agreements were marked to market and recognized in
non-interest expense on the statement of operations. Subsequent to the adoption
of DIG G20, these derivatives are marked to market with the entire change in the
market value recognized in other comprehensive income on the balance sheet.

      Measuring the effectiveness of derivatives is straightforward since the
hedged item, CMO borrowings, and the hedging instrument is based on one-month
LIBOR. As both instruments are tied to the same index, the hedge is expected to
be highly effective both at inception and on an ongoing basis. We assess the
effectiveness and ineffectiveness of the hedging instruments at the inception of
the hedge and at each reporting period. Based on the fact that, at inception,
the critical terms of the hedges and forecasted CMO borrowings are the same, we
have concluded that the changes in cash flows attributable to the risk being
hedged are expected to be completely offset by the hedging derivatives, subject
to subsequent assessments that the critical terms have not changed.

      At June 30, 2002, caps allocated to CMO borrowings had a remaining
notional balance of $1.578 billion. Pursuant to the terms of the caps, we will
receive cash payments if one-month LIBOR reaches certain strike prices, ranging
from 1.84% to 10.25%, with a weighted average strike price of 4.38% over the
life of the caps.

      At June 30, 2002, collars allocated to CMO borrowings had a remaining
notional balance of $1.179 billion. Pursuant to the terms of the collars, we
will receive cash payments if one-month LIBOR reaches strike prices ranging from
2.09% to 6.53% with a weighted average strike price of 4.24% over the life of
the collars. We will make cash payments if one-month LIBOR reaches strike prices
ranging from 1.54% to 5.88% with a weighted average strike price of 3.42%.

      At June 30, 2002, swaps allocated to CMO borrowings had a remaining
notional balance of $65.0 million. Pursuant to the terms of the swaps, we will
receive cash payments based on one-month LIBOR and make cash payments at fixed
rates ranging from 4.83% to 5.17%, with a weighted average fixed rate of 4.94%
over the life of the swaps.

      The notional amounts of allocated caps, collars and swaps are amortized
according to projected prepayment rates on CMO borrowings. However, regarding
the floor component of the collar, the notional amount equals the actual
principal balance of the CMO borrowings. As of June 30, 2002, the fair market
value of the allocated caps, collars and swaps was an unrecognized loss of $12.3
million. These derivatives are marked to market each reporting period with the
entire change in market value being recognized in other comprehensive income on
the balance sheet.


                                       46


      During 2001, we purchased a collar at strike prices tied to the one-month
LIBOR forward yield curve to protect cash flows on CMO borrowings, which are
secured by hybrid ARMs with remaining fixed terms and that did not have
derivative instruments allocated to the original CMO structures. As of June 30,
2002, the collar had a notional amount of $623.9 million with a one-month LIBOR
cap strike price ranging from 4.55% to 5.42% and a weighted average strike price
of 5.04% over the life of the cap. The collar has a one-month LIBOR floor strike
price ranging from 4.35% to 4.98% and a weighted average strike price of 4.58%
over the life of the floor. The collar matures on March 25, 2004. The notional
amount of the collar is amortized according to projected prepayment rates
reflected in CMO borrowings. As of June 30, 2002, the fair market value of the
collar was an unrecognized loss of $13.2 million. The collar is marked to market
each reporting period with the entire change in market value being recognized in
accumulated other comprehensive income on the balance sheet.

      During the second quarter of 2002, we purchased a portfolio of interest
floors at strike prices tied to the prevailing one-month LIBOR forward curve to
protect hedged cash flows from the effects of continued interest rate declines
consistent with a weakening economy. As of June 30, 2002, the floors had a
notional amount of $623.9 million with one-month LIBOR floor strike prices
ranging from 1.92% to 4.78% and a weighted average strike price of 3.09% over
the life of the floor. The floor matures on March 25, 2004. The notional amount
of the floor is amortized according to projected prepayment rates reflected in
CMO borrowings. As of June 30, 2002, the fair market value of the floor was an
unrecognized gain of $4.0 million. The floor is marked to market each reporting
period with the entire change in market value being recognized in accumulated
other comprehensive income on the balance sheet.

      The most significant variable in the determination of gain on sale in a
securitization is the spread between the weighted average coupon on the
securitized loans and the pass-through interest rate. In the interim period
between loan origination or purchase and securitization or sale of such loans,
we are exposed to interest rate risk. Most of the loans are securitized or sold
within 30 to 45 days of origination of purchase. However, a portion of the loans
are held-for-sale or securitization for as long as 12 months (or longer, in very
limited circumstances) prior to securitization or sale. If interest rates rise
during the period that the mortgage loans are held, in the case of a
securitization, the spread between the weighted average interest rate on the
loans to be securitized and the pass-through interest rates on the securities to
be sold (the latter having increased as a result of market rate movements) would
narrow. Upon securitization or sale, this would result in a reduction of our
related gain or an increase in our loss on sale.

      We had interest- and principal-only strips of $2.9 million and $4.9
million outstanding at June 30, 2002 and December 31, 2001, respectively. These
instruments are carried at market value at June 30, 2002 and December 31, 2001.
We value these assets based on the present value of future cash flow streams net
of expenses using various assumptions. These assets are subject to risk of
accelerated mortgage prepayment or losses in excess of assumptions used in
valuation. Ultimate cash flows realized from these assets would be reduced
should prepayments or losses exceed assumptions used in the valuation.
Conversely, cash flows realized would be greater should prepayments or losses be
below expectations.


                                       47


                           PART II. OTHER INFORMATION

Item 1: Legal Proceedings

      The Company is a party to litigation and claims, which are normal in the
course of its 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 the Company.

Item 2: Changes in Securities and Use of Proceeds

      None.

Item 3: Defaults Upon Senior Securities

      None.

Item 4: Submission of Matters to a Vote of Security Holders

      On June 25, 2002, the Company held its annual meeting of stockholders. Of
39,422,163 shares eligible to vote, 38,175,264 votes were returned, or 97%,
formulating a quorum. At the stockholders meeting, the following matters were
submitted to stockholders for vote: Proposal I - Election of Directors, Proposal
II - Approval of an amendment to the Company's articles of incorporation
increasing the authorized shares of common stock.

      The results of voting on these proposals are as follows:

Proposal I - Election of Directors

           Director                       For             Against       Elected
           --------                       ---             -------       -------

      Joseph R. Tomkinson              37,169,606        1,005,658        Yes
      William S. Ashmore               37,169,106        1,006,158        Yes
      James Walsh                      38,020,556          154,708        Yes
      Frank P. Filipps                 38,020,556          154,708        Yes
      Stephan R. Peers                 38,020,556          154,708        Yes
      William E. Rose                  38,020,556          154,708        Yes
      Leigh J. Abrams                  38,019,556          155,708        Yes

      All directors are elected annually at the Company's annual stockholders
meeting.

Proposal II - Approval of an amendment to the Company's articles of
incorporation increasing the authorized shares of common stock

      Proposal II was approved with 35,546,864 shares voted for, 2,468,752 voted
against, and 159,645 abstained from voting thereby approving the amendment to
the Company's articles of incorporation increasing the authorized shares of
common stock from 50,000,000 common shares to 200,000,000 common shares.

Item 5: Other Information

      None.


                                       48


Item 6: Exhibits and Reports on Form 8-K

(a) Exhibits:

3.1(h)      Articles Supplementary, filed with the State Department of
            Assessments and Taxation of Maryland on July 12, 2002, reclassifying
            Series C Preferred Stock of the Registrant (incorporated by
            reference to exhibit 9 of the Registrant's Form 8-A/A, Amendment No.
            2).

3.1(i)      Articles of Amendment, filed with the State Department of
            Assessments and Taxation of Maryland on July 17, 2002, increasing
            authorized shares of Common Stock of the Registrant (incorporated by
            reference to exhibit 10 of the Registrant's Form 8-A/A, Amendment
            No. 2).

10.1        Sales Agency Agreement dated May 22, 2002 between Impac Mortgage
            Holdings, Inc. and UBS Warburg LLC (incorporated by reference to
            exhibit 1.1 of the Registrant's Current Report on Form 8-K, dated
            May 22, 2002).

(b) Reports on Form 8-K:

1     Current report on Form 8-K dated May 22, 2002 reporting Items 5 and 7,
      relating to the execution of a sales agency agreement.


                                       49


                                   SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

IMPAC MORTGAGE HOLDINGS, INC.


/s/ Richard J. Johnson
by: Richard J. Johnson
Executive Vice President
and Chief Financial Officer
(authorized officer of registrant and principal financial officer)

Date: August 22, 2002

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the Quarterly Report of Impac Mortgage Holdings, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), each
of the undersigned, in the capacities and on the dates indicated below, hereby
certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

      (1)   The Report fully complies with the requirements of Section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      (2)   The information contained in the Report fairly presents, in all
            material respects, the financial condition and results of operations
            of the Company.


/s/ Joseph R. Tomkinson
Joseph R. Tomkinson
Chief Executive Officer
August 22, 2002


/s/ Richard J. Johnson
Richard J. Johnson
Chief Financial Officer
August 22, 2002


                                       50