IMPAC MORTGAGE HOLDINGS INC
10-Q, 1998-11-16
REAL ESTATE INVESTMENT TRUSTS
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<PAGE>
 
                                  United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549

                                    Form 10-Q


[X]  Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934.

     For the quarterly period ended September 30, 1998

                                 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: 0-19861

                          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.)

           20371 Irvine Avenue
     Santa Ana Heights, California                             92707
(Address of Principal Executive Offices)                    (Zip Code)

       Registrant's telephone number, including area code: (714) 556-0122

                 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


     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 November 11, 1998, the aggregate  market value of the voting stock held
by non-affiliates of the registrant was  approximately  $94.9 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 November  11, 1998 was
24,557,211.


                    Documents incorporated by reference: None
<PAGE>
 
                          IMPAC MORTGAGE HOLDINGS, INC.

                         1998 FORM 10-Q QUARTERLY REPORT

                                TABLE OF CONTENTS



  PART I. FINANCIAL INFORMATION
<TABLE>
 <S>                                                                                                               <C>

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

           Consolidated Balance Sheets, September 30, 1998 and December 31, 1997                                         3

           Consolidated Statements of Operations, For the Three Months Ended September 30, 1998 and 1997                   
           and For the Nine Months Ended September 30, 1998 and 1997                                                     4

           Consolidated Statements of Cash Flows, For the Nine Months Ended September 30, 1998 and 1997                  5

           Notes to Consolidated Financial Statements                                                                    6

  Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS                                                                                        14

  Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   29

                                                  PART II. OTHER INFORMATION

  Item 1.  LEGAL PROCEEDINGS                                                                                            30

  Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS                                                                    30

  Item 3.  DEFAULTS UPON SENIOR SECURITIES                                                                              30

  Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                          30

  Item 5.  OTHER INFORMATION                                                                                            30

  Item 6.  EXHIBITS AND REPORTS ON FORM 8-K                                                                             30

           SIGNATURES                                                                                                   31
</TABLE>
<PAGE>
 
 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)
<TABLE>
<CAPTION>

                                                                              September 30,            December 31,
                                                                                   1998                    1997
                                                                          ---------------------   ---------------------
<S>                                                                      <C>                     <C>

                                 ASSETS
Cash and cash equivalents                                                 $              2,204    $             16,214
Investment securities available-for-sale                                               111,082                  67,011
Loan Receivables:
   CMO collateral                                                                    1,291,722                 794,893
   Finance receivables                                                                 562,429                 533,101
   Mortgage loans held-for-sale                                                         61,181                       -
   Mortgage loans held-for-investment                                                   24,907                 257,717
   Allowance for loan losses                                                            (5,390)                 (5,129)
                                                                          ---------------------   ---------------------
        Net loan receivables                                                         1,934,849               1,580,582

Investment in Impac Funding Corporation                                                 23,210                  27,122
Accrued interest receivable                                                             11,270                  15,012
Premises and equipment, net                                                              8,906                   3,866
Other real estate owned                                                                  7,541                   5,662
Investment in Impac Commercial Holdings, Inc.                                            6,726                  17,985
Due from affiliates                                                                      6,706                  16,679
Other assets                                                                             3,254                   2,679
                                                                          ---------------------   ---------------------

                                                                          $          2,115,748    $          1,752,812
                                                                          =====================   =====================

                  LIABILITIES AND STOCKHOLDERS' EQUITY
CMO borrowings                                                            $          1,198,074    $            741,907
Reverse repurchase agreements                                                          619,238                 755,559
Other borrowings                                                                         9,715                       -
Due to affiliates                                                                       39,552                  12,421
Accrued dividends payable                                                               12,033                  10,371
Other liabilities                                                                        5,721                   3,524
                                                                          ---------------------   ---------------------
     Total liabilities                                                               1,884,333               1,523,782
                                                                          ---------------------   ---------------------

Stockholders' Equity:
Preferred Stock; $.01 par value; 10 million shares authorized; none
  issued or outstanding at September 30, 1998 and at December 31, 1997                       -                       -
Common Stock; $.01 par value; 50 million shares authorized;
  24,549,840 and 22,545,664 shares issued and outstanding at
  September 30, 1998 and at December 31, 1997                                              246                     225
Additional paid-in capital                                                             314,225                 283,012
Accumulated other comprehensive loss                                                    (1,354)                 (5,116)
Cumulative dividends declared                                                          (79,080)                (43,927)
Notes receivable from common stock sales                                                  (954)                 (1,330)
Retained earnings                                                                       (1,668)                 (3,834)
                                                                          ---------------------   ---------------------
     Total stockholders' equity                                                        231,415                 229,030
                                                                          ---------------------   ---------------------
                                                                          $          2,115,748    $          1,752,812
                                                                          =====================   =====================

</TABLE>


                    See accompanying notes to consolidated financial statements.
<PAGE>
 
                 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (in thousands, except earnings per share data)

<TABLE>
<CAPTION>

                                                                        For the Three Months         For the Nine Months
                                                                        Ended September 30,          Ended September 30,
                                                                    ----------------------------------------------------------
                                                                         1998           1997          1998           1997
                                                                    ---------------------------- -----------------------------
<S>                                                                <C>           <C>           <C>            <C>

Revenues:
   Interest income                                                  $     45,916  $      29,557  $    127,591  $       76,709
   Equity in net earnings (loss) of Impac Funding Corporation             (7,860)         2,429        (3,912)          6,132
   Equity in net earnings (loss) of Impac Commercial Holdings, Inc.       (1,840)           403          (998)           (778)
   Mark-to-market loss on loans held-for-sale                             (1,200)             -        (1,200)              -
   Fee and other income                                                    1,366            378         3,225             788
   Gain on sale of securities                                                  -              -             -             648
                                                                    ------------- -------------- ------------- ---------------
                                                                          36,382         32,767       124,706          83,499
                                                                    ------------- -------------- ------------- ---------------
Expenses:
   Interest on CMO borrowings and reverse repurchase agreements           34,240         21,790        94,632          54,816
   Write-down on investment securities available-for-sale                 11,584              -        12,825               -
   Loss on equity investment                                               9,076              -         9,076               -
   General and administrative and other expense                              893            227         1,811             530
   Professional services                                                     748            212         1,604             758
   (Gain) loss on sale of other real estate owned                            610           (144)          120            (121)
   Personnel expense                                                         139            135           373             227
   Advisory fees                                                               -          1,485             -           4,313
   Provision for loan losses                                                (292)         1,868         2,099           4,243
                                                                    ------------- -------------- ------------- ---------------
                                                                          56,998         25,573       122,540          64,766
                                                                    ------------- -------------- ------------- ---------------
Net earnings (loss)                                                 $    (20,616) $       7,194  $      2,166  $       18,733
                                                                    ============= ============== ============= ===============

Weighted average shares outstanding - basic                               24,351         15,621        23,699          14,738
                                                                    ============= ============== ============= ===============

Weighted average shares outstanding - diluted                             24,351         15,836        23,871          14,947
                                                                    ============= ============== ============= ===============

Net earnings (loss) per share - basic                               $      (0.85) $        0.46  $       0.09  $         1.27
                                                                    ============= ============== ============= ===============

Net earnings (loss) per share - diluted                             $      (0.85) $        0.45  $       0.09  $         1.25
                                                                    ============= ============== ============= ===============

Dividends declared per common share                                 $       0.49  $        0.43  $       0.97  $         1.22
                                                                    ============= ============== ============= ===============

</TABLE>
          See accompanying notes to consolidated financial statements.
<PAGE>
 
                 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>


                                                                               For the Nine Months Ended September 30,
                                                                                      1998                    1997
                                                                            -----------------------  ----------------------
<S>                                                                        <C>                      <C>  
Cash flows from operating activities:
 Net earnings                                                               $                2,166   $             18,733
 Adjustments to reconcile net earnings to net cash provided by
   operating activities:
     Equity in net earnings (loss) of Impac Funding Corporation                              3,912                 (6,132)
     Equity in net loss of Impac Commercial Holdings, Inc.                                     998                    778
     Loss on equity investment in Impac Commercial Holdings, Inc.                            9,076                      -
     Mark-to-market loss on mortgage loans held-for-sale                                     1,200                      -
     Provision for loan losses                                                               2,099                  4,243
     Depreciation and amortization                                                             458                     25
     Net change in accrued interest receivable                                               3,742                 (4,968)
     Net change in other assets and liabilities                                             34,547                (23,011)
                                                                            -----------------------  ----------------------
       Net cash provided by (used in) operating activities                                  58,198                (10,332)
                                                                            -----------------------  ----------------------
Cash flows from investing activities:
 Net change in CMO collateral                                                             (501,650)              (192,643)
 Net change in finance receivables                                                         (29,570)                60,942
 Net change in mortgage loans held-for-investment                                          225,410               (105,244)
 Increase in mortgage loans held-for-sale                                                  (62,381)                     -
 Proceeds from sale of other real estate owned, net                                          8,746                 (8,111)
 Purchase of investment securities available-for-sale                                      (64,589)               (19,295)
 Sale of investment securities available-for-sale                                            5,303                  9,637
 Net principal reductions on investment securities available-for-sale                        6,152                  2,635
 Write-down of investment securities available-for-sale                                     12,825                      -
 Purchase of premises and equipment                                                         (1,318)                   (64)
 Contributions to Impac Funding Corporation                                                      -                 (8,910)
 Contributions to Impac Commercial Holdings, Inc.                                                -                (15,123)
 Dividends from Impac Commercial Holdings, Inc.                                              1,184                      -
                                                                            -----------------------  ----------------------
    Net cash used in investing activities                                                 (399,888)              (276,176)
                                                                            -----------------------  ----------------------
Cash flows from financing activities:
 Net change in reverse repurchase agreements and other borrowings                         (126,606)                41,578
 Proceeds from CMO borrowings                                                              767,355                521,054
 Repayments of  CMO borrowings                                                            (311,188)              (350,422)
 Dividends paid                                                                            (33,491)               (16,585)
 Proceeds from exercise of stock options                                                       108                    701
 Net proceeds from stock issued through structured equity shelf                              3,289                      -
 Proceeds from dividend reinvestment  and stock purchase plan                               27,837                 20,970
 Proceeds from public stock offering                                                             -                 83,065
 Advances to purchase common stock, net of principal reductions                                376                  (556)
                                                                            -----------------------  ----------------------
     Net cash provided by financing activities                                             327,680                299,805
                                                                            -----------------------  ----------------------
Net change in cash and cash equivalents                                                    (14,010)                13,297
Cash and cash equivalents at beginning of period                                            16,214                 22,610
                                                                            =======================  ======================
Cash and cash equivalents at end of period                                  $                2,204   $             35,907
                                                                            =======================  ======================

Supplementary information:
    Interest paid                                                           $               94,413   $             53,626
Non-cash transactions:
   Transfer of mortgage loans from held-for investment to held-for-sale     $               62,381   $                  -
   Dividends declared and unpaid                                                            12,033                 10,371
   Decrease in accumulated other comprehensive loss                                          3,762                    843
</TABLE>

          See accompanying notes to consolidated financial statements.
<PAGE>
 
                 IMPAC MORTGAGE HOLDINGS, INC. and SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                   (unaudited)


      Unless the context otherwise requires, references herein to the "Company"'
      refer to Impac Mortgage  Holdings,  Inc. (IMH) and its  subsidiaries,  IMH
      Assets  Corporation  (IMH Assets),  Impac  Warehouse  Lending Group,  Inc.
      (IWLG),  IMH/ICH  Dove St.,  LLC  (Dove),  and Impac  Funding  Corporation
      (together  with  its   wholly-owned   subsidiary,   Impac  Secured  Assets
      Corporation, IFC), collectively. References to IMH refer to Impac Mortgage
      Holdings, Inc. as a separate entity from IMH Assets, IWLG, Dove and IFC.

      1. Basis of Financial Statement Presentation

      The accompanying  consolidated  financial statements have been prepared in
      accordance  with  generally  accepted  accounting  principles  (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  nine-month  period ended
      September 30, 1998 are not necessarily  indicative of the results that may
      be expected  for the year  ending  December  31,  1998.  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, 1997.

      The  operations of IMH have been presented in the  consolidated  financial
      statements for the three and nine months ended September 30, 1998 and 1997
      and include the financial results of IMH's equity interest in net earnings
      (loss) of IFC,  IMH's  equity  interest  in net  earnings  (loss) of Impac
      Commercial  Holdings,  Inc.  (ICH),  IMH's equity  interest in net loss of
      Impac Commercial Capital Corporation (ICCC), prior to ICH's initial public
      offering  (ICH IPO) on August 8, 1997,  and results of  operations of IMH,
      IMH  Assets,  IWLG and Dove as  stand-alone  entities,  subsequent  to the
      Company's initial public offering (IPO) on November 20, 1995.

      The results of operations of IFC, of which 99% of the economic interest is
      owned by IMH, are included in the results of  operations of the Company as
      "Equity in net earnings (loss) of Impac Funding  Corporation." The results
      of operations of ICH, of which 9.8% of ICH's Common Stock is owned by IMH,
      are  included  in the  results  of  operations  of IMH as  "Equity  in net
      earnings (loss) of Impac  Commercial  Holdings." The results of operations
      of ICCC prior to the ICH IPO, of which 95% of the  economic  interest  was
      owned by IMH,  are  included  in the  results  of  operations  of IMH as a
      component of "Fee and other income."

      2. Organization

      The  Company is a  specialty  finance  company  which,  together  with its
      subsidiaries and related  companies,  primarily operates three businesses:
      (1) the Long-Term Investment Operations,  (2) the Conduit Operations,  and
      (3) the Warehouse Lending Operations.  The Long-Term Investment Operations
      invests  primarily  in  non-conforming   residential  mortgage  loans  and
      securities  backed by such loans.  The Conduit  Operations  purchases  and
      sells  or  securitizes  primarily   non-conforming   mortgage  loans.  The
      Warehouse Lending Operations  provides warehouse and repurchase  financing
      to originators  of mortgage  loans.  These latter two  businesses  include
      certain ongoing operations  contributed (the Contribution  Transaction) to
      the Company in 1995 by Imperial Credit Industries, Inc. (NASDAQ - ICII), a
      leading  specialty  finance  company.  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 the Company  distributes
      95% of its taxable income to stockholders.

      Long-Term  Investment  Operations.  The Long-Term  Investment  Operations,
      conducted  by IMH and IMH  Assets,  invests  primarily  in  non-conforming
      residential  mortgage loans and  mortgage-backed  securities secured by or
      representing  interests in such loans and, to a lesser  extent,  in second
      mortgage loans.  Non-conforming residential mortgage loans are residential
      mortgages  that  do  not  qualify  for  purchase  by  government-sponsored
      agencies such as the Federal National Mortgage  Association (FNMA) and the
      Federal Home Loan Mortgage Corporation (FHLMC). The principal  differences
      between  conforming  loans and  non-conforming  loans  include  applicable
<PAGE>
 
      loan-to-value  ratios,  credit and  income  histories  of the  mortgagors,
      documentation required for approval of the mortgagors,  type of properties
      securing the mortgage loans,  loan sizes,  and the  mortgagors'  occupancy
      status with respect to the mortgaged properties. Second mortgage loans are
      mortgage  loans  secured  by a  second  lien on the  property  and made to
      borrowers   owning   single-family   homes   for  the   purpose   of  debt
      consolidation,  home  improvements,  education  and  a  variety  of  other
      purposes.

      Conduit Operations.  The Conduit  Operations,  conducted by IFC, purchases
      primarily  non-conforming  mortgage loans and, to a lesser extent,  second
      mortgage  loans from its network of third party  correspondents  and other
      sellers,  and  subsequently  securitizes  or sells such loans to permanent
      investors,  including the Long-Term  Investment  Operations.  Prior to the
      Contribution  Transaction,  IFC was a division or subsidiary of ICII.  IMH
      owns 99% of the economic interest in IFC, while Joseph R. Tomkinson, Chief
      Executive Officer of IMH and IFC, William S. Ashmore, President of IMH and
      IFC, and Richard J. Johnson,  Executive Vice President and Chief Financial
      Officer  of IMH and IFC,  are the  holders of all the  outstanding  voting
      stock of, and 1% of the economic interest in, IFC.

      Warehouse Lending Operations. The Warehouse Lending Operations,  conducted
      by  IWLG,  provides  warehouse  and  repurchase  financing  to  affiliated
      companies and to approved mortgage banks, most of which are correspondents
      of IFC, to finance  mortgage loans during the time from the closing of the
      loans to their sale or other settlement with pre-approved investors.

      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 and
      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.

      Reclassifications

      Certain amounts in the consolidated financial statements as of and for the
      three and nine months ended  September 30, 1997 have been  reclassified to
      conform to the 1998 presentation.

      New Accounting Statements

      In June 1997,  the  Financial  Accounting  Standards  Board (FASB)  issued
      Statement of Financial  Accounting  Standards  (SFAS) No. 130,  "Reporting
      Comprehensive Income," which is effective for fiscal years beginning after
      December 15, 1997 and requires restatement of earlier financial statements
      for comparative purposes. SFAS No. 130 establishes standards for reporting
      and  the  display  of  comprehensive  income  and  its  components  in the
      financial  statements.  SFAS No.  130  requires  that  items  meeting  the
      criteria of a component of  comprehensive  income (such as gains or losses
      on  certain  investments  in debt  and  equity  securities  classified  as
      available-for-sale),  be shown in the financial  statements as adjustments
      to  reported  net  earnings  to arrive at a  disclosure  of  comprehensive
      income. SFAS No. 130 provides informative disclosure but does not and will
      not impact  previously  reported or future net  earnings  and earnings per
      share. The following table represents comprehensive income (in thousands):

<TABLE>
<CAPTION>


                                                                   For the Three Months            For the Nine months
                                                                   Ended September 30,             Ended September 30,
                                                                ---------------------------    ----------------------------
                                                                1998          1997             1998           1997
                                                            -------------- ------------   --------------- -------------

<S>                                                        <C>            <C>            <C>             <C>

Net earnings (loss)                                         $     (20,616)       7,194    $        2,166        18,733
Unrealized net (gain)/loss arising during period                      915        1,804              (528)          843
Realized net (gain)/loss included in income                         4,718            -             4,290          (648)
                                                            ============== ============   =============== =============
     Comprehensive income (loss)                            $     (14,983)       8,998    $        5,928        18,928
                                                            ============== ============   =============== =============
</TABLE>
<PAGE>
 
     In June 1997, the FASB issued SFAS No. 131,  "Disclosures about Segments of
     an Enterprise and Related  Information." SFAS No. 131 establishes standards
     for the way that public  enterprises  report  information  about  operating
     segments  in  annual  financial   statements  and  requires  that  selected
     information about those operating segments be reported in interim financial
     statements.  This statement supersedes SFAS No. 14 "Financial Reporting for
     Segments of a Business  Enterprise."  SFAS No. 131 requires that all public
     enterprises   report  financial  and  descriptive   information  about  its
     reportable operating segments. Operating segments are defined as components
     evaluated  regularly by the chief operating  decision maker in deciding how
     to allocate  resources  and in  assessing  performance.  This  statement is
     effective  for fiscal years  beginning  after  December  15,  1997.  In the
     initial year of  application,  comparative  information  for earlier  years
     should be restated.  SFAS No. 131 need not be applied to interim  financial
     statements  in  the  initial  year  of  its  application,  but  comparative
     information for interim periods in the initial year of application is to be
     reported in financial  statements for interim periods in the second year of
     application. To date, the Company is still examining the impact of SFAS No.
     131 and has not determined what operating segments will be reported.

     In June 1998,  the FASB  issued SFAS No. 133,  "Accounting  for  Derivative
     Instruments and Hedging  Activities."  SFAS No. 133 establishes  accounting
     and  reporting  standards for  derivative  instruments,  including  certain
     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
     certain conditions are met, a derivative may be specifically  designated as
     (a) a hedge of the  exposure  to changes in the fair value of a  recognized
     asset or liability or an unrecognized  firm commitment,  (b) a hedge of the
     exposure to variable cash flows of a forecasted transaction, or (c) 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. This statement is
     effective for all fiscal  quarters of fiscal years beginning after June 15,
     1999.  To date,  the Company is still  examining the impact of SFAS No. 133
     and has not  determined  its effect on  financial  position  and results of
     operations.

      4. Net Earnings (Loss) per Share

      Effective  December 31, 1997, the Company adopted SFAS No. 128,  "Earnings
      per Share."  SFAS No. 128  replaced the  previously  reported  primary and
      fully  diluted  earnings  per share with basic and  diluted  earnings  per
      share.  Unlike  primary  earnings  per  share,  basic  earnings  per share
      excludes any dilutive effects of stock options. Diluted earnings per share
      is very similar to the  previously  reported  fully  diluted  earnings per
      share.  Basic  earnings per share is computed on the basis of the weighted
      average number of shares outstanding for the period.  Diluted earnings per
      share is computed on the basis of the  weighted  average  number of shares
      and common  equivalent  shares  outstanding for the period.  The following
      tables  represent the computation of basic and diluted  earnings per share
      for the  three  and nine  months  ended  September  30,  1998 and 1997 (in
      thousands, except per share data):

<TABLE>
<CAPTION>
                                                                              For the Three          For the Three
                                                                               Months Ended           Months Ended
                                                                            September 30, 1998     September 30, 1997
                                                                         -----------------------  ---------------------

            <S>                                                         <C>                     <C> 
             Numerator:
                  Numerator for basic earnings per share--
                       Net earnings (loss)                               $              (20,616) $               7,194
                                                                         ----------------------- ----------------------
             Denominator:
                  Denominator for basic earnings per share--                             24,351                 15,621
                       Weighted average number of common shares
                          Outstanding during the period
                       Net effect of dilutive stock options                                   -                    215
                                                                         ----------------------- ----------------------
                  Denominator for diluted earnings per share                             24,351                 15,836
                                                                         ======================= ======================

                  Net earnings (loss) per share--basic                   $                (0.85) $                0.46
                                                                         ======================= ======================

                  Net earnings (loss) per share--diluted                 $                (0.85) $                0.45
                                                                         ======================= ======================

</TABLE>
<PAGE>
 
      Common  stock   options  of  148,000  were   excluded  from  the  dilutive
      calculation  of  earnings  per  share as they  were  antidilutive  for the
      quarter-ended September 30, 1998.
<TABLE>
<CAPTION>

                                                                              For the Nine            For the Nine
                                                                              Months Ended            Months Ended
                                                                           September 30, 1998      September 30, 1997
                                                                        ----------------------- -----------------------
            <S>                                                        <C>                     <C> 
             Numerator:
                  Numerator for basic earnings per share--
                       Net earnings                                     $                2,166  $              18,733
                                                                        ----------------------- -----------------------

             Denominator:
                  Denominator for basic earnings per share--                            23,699                 14,738
                       Weighted average number of common shares
                          outstanding during the period
                       Net effect of dilutive stock options                                172                    209
                                                                        ----------------------- -----------------------

                  Denominator for diluted earnings per share                            23,871                 14,947
                                                                        ======================= =======================

                  Net earnings  per share--basic                        $                 0.09  $                1.27
                                                                        ======================= =======================

                  Net earnings per share--diluted                       $                 0.09  $                1.25
                                                                        ======================= =======================
</TABLE>

      5. Mortgage Assets

      Mortgage  Assets  consist  of  investment  securities  available-for-sale,
      mortgage loans  held-for-investment,  CMO collateral,  finance receivables
      and loans  held-for-sale.  At  September  30, 1998 and  December 31, 1997,
      Mortgage Assets consisted of the following (in thousands):
<TABLE>
<CAPTION>


                                                                              September 30, 1998        December 31, 1997
                                                                           ----------------------  ---------------------
     <S>                                                                 <C>                      <C>  
      Investment securities available-for-sale:
               Subordinated securities collateralized by mortgages        $               107,050  $              66,811
               Subordinated securities collateralized by other loans                        5,386                  5,316
               Net unrealized  losses                                                      (1,354)                (5,116)
                                                                          ------------------------ ----------------------
                    Carrying value                                        $               111,082  $              67,011
                                                                          ------------------------ ----------------------

      Loan Receivables:
      CMO collateral--
               CMO collateral, unpaid principal balance                                 1,237,713                762,939
               Unamortized net premiums on loans                                           42,694                 28,617
               Securitization expenses                                                     13,315                  3,337
                                                                          ------------------------ ----------------------
                    Carrying value                                                      1,291,722                794,893
      Finance receivables--
               Due from affiliates                                                        455,650                474,317
               Due from other mortgage banking companies                                  106,779                 58,784
                                                                          ------------------------ ----------------------
                    Carrying value                                                        562,429                533,101
      Mortgage loans held-for-investment--
               Mortgage loans held-for-investment, unpaid principal                        23,520                247,026
      balance
               Unamortized net premiums on loans                                            1,387                 10,691
                                                                          ------------------------ ----------------------
                    Carrying value                                                         24,907                257,717
      Mortgage loans held-for-sale--
               Mortgage loans held-for-sale, unpaid principal balance                      61,181                      -

                          Carrying value of Gross Loan Receivables                      1,940,229              1,585,711

      Allowance for loan losses                                                            (5,390)                (5,129)

                                                                          ------------------------ ----------------------
                           Carrying value of Net Loan Receivables                       1,934,849              1,580,582
                                                                          ------------------------ ----------------------

                            Total carrying value of Mortgage Assets       $             2,045,931  $           1,647,593
                                                                          ======================== ======================
</TABLE>
<PAGE>
 
      6. Investment in Impac Funding Corporation

      The Company is  entitled  to 99% of the  earnings or losses of IFC through
      its ownership of all 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.  Gain or loss on the sale of loans
      or  securities  by IFC to IMH are deferred and  amortized or accreted over
      the estimated life of the loans or securities using the interest method.

      The following is financial  information for IFC for the periods  presented
      (in thousands):

                                 BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                  September 30, 1998             December 31, 1997
                                                               ------------------------       ----------------------
     <S>                                                      <C>                             <C>
                              ASSETS
      Cash                                                     $                  1,382        $                 359
      Investment securities available-for-sale                                    7,098                        6,083
      Investment securities available-for-trading                                 5,297                            -
      Mortgage loans held-for-sale                                              464,921                      620,549
      Due from affiliates                                                        34,633                          969
      Mortgage servicing rights                                                  19,461                       15,568
      Accrued interest receivable                                                 3,235                        4,755
      Premises and equipment, net                                                 2,013                        1,788
      Other assets                                                                6,833                        6,873
                                                               --------------------------      =====================
                                                               $                544,873        $             656,944
                                                               ==========================      =====================
               LIABILITIES AND SHAREHOLDERS' EQUITY
      Borrowings from IWLG                                     $                432,659        $             458,066
      Other borrowings                                                           45,864                      149,144
      Due to affiliates                                                          27,419                        6,198
      Deferred revenue                                                           13,251                        7,048
      Other liabilities                                                           2,232                        9,092
                                                               --------------------------      ---------------------
              Total liabilities                                                 521,425                      629,548
                                                               --------------------------      ---------------------

      Shareholders' Equity:
      Preferred stock                                                            18,053                       18,053
      Common stock                                                                  182                          182
      Retained earnings                                                           5,213                        9,161
                                                               --------------------------      ---------------------
             Total shareholders' equity                                          23,448                       27,396
                                                               ==========================      =====================
                                                               $                544,873        $             656,944
                                                               ==========================      =====================

</TABLE>
<PAGE>
 
                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>


                                                        For the Three Months Ended,        For the Nine Months Ended,
                                                               September 30,                      September 30,
                                                      --------------------------------- ----------------------------------
                                                           1998              1997             1998             1997
                                                      ----------------  --------------- ----------------- ----------------
    <S>                                              <C>               <C>             <C>               <C>    

     Revenues:
        Interest income                               $        15,673   $       14,839  $         40,330  $        32,004
        Mark to market loss on  mortgage loans                (21,041)               -           (21,041)               -
        Gain on sale of loans                                  10,061            5,280            18,932           14,378
        Loan servicing income                                   1,815            1,081             4,521            3,018
        Other income                                               63              211               374              505
                                                      ----------------  --------------- ----------------- ----------------
                                                                6,571           21,411            43,116           49,905
                                                      ----------------  --------------- ----------------- ----------------
     Expenses:
        Interest on borrowings from IWLG                       12,637           11,192            27,207           25,041
        Interest on other borrowings                            1,027                -             5,206                -
        Interest on borrowings from affiliates                    623            1,310             1,181            3,495
        Personnel expense                                       2,582            1,496             7,363            5,277
        Amortization of mortgage servicing rights               1,758              947             4,683            1,896
        General and administrative and other expense            1,658            1,090             3,943            1,930
        Provision for repurchases                                  26            1,131               366            1,548
                                                      ----------------  --------------- ----------------- ----------------
                                                               20,311           17,166            49,949           39,187
                                                      ----------------  --------------- ----------------- ----------------
     Earnings (loss) before income taxes                      (13,740)           4,245            (6,833)          10,718

     Income taxes (benefit)                                    (5,800)           1,792            (2,885)           4,525
                                                      ----------------  --------------- ----------------- ----------------
     Net earnings (loss)                              $       (7,940)   $        2,453  $         (3,948) $         6,193
                                                      ================  =============== ================= ================

</TABLE>

      7.  Investment in Impac Commercial Holdings, Inc.

      Subsequent  to the ICH  IPO,  the  Company  was  entitled  to 17.4% of the
      earnings losses of ICH through its ownership of 1,394,000 shares, or 9.8%,
      of the combined ICH voting Common Stock and ICH non-voting  Class A Common
      Stock. To maintain its REIT status,  the Company cannot own more than 9.8%
      of  securities  in any  company at any time.  When ICH  issues  additional
      shares of voting Common Stock,  the  Company's  non-voting  Class A Common
      Stock can be  converted  into ICH  voting  Common  Stock on a  one-for-one
      basis.  Therefore,  when ICH issued 2,000,000  additional shares of Common
      Stock  through a  secondary  stock  offering  in June  1998,  the  Company
      converted its shares of ICH non-voting Class A Common Stock for ICH voting
      Common  Stock  not to  exceed  the  9.8%  limit.  As of the  date of ICH's
      secondary  stock  offering,  the  Company  was  entitled  to  13.9% of the
      earnings or losses of ICH through its  ownership of 937,084  shares of ICH
      voting Common Stock and 456,916  shares of ICH  non-voting  Class A Common
      Stock.  As such,  the Company  recorded  its  investment  in ICH using the
      equity method.  Under this method,  original  investments  are recorded at
      cost and adjusted by the Company's share of earnings or losses. On October
      21,  1998,  ICH  repurchased  from IMH 937,084  shares of Common Stock and
      456,916  shares of Class A Common Stock at a price of $4.375 per share for
      a repurchase of $6.1 million,  representing  a loss to IMH of $9.1 million
      that was recorded in the third quarter of 1998.
<PAGE>
 
      The following is financial  information for ICH for the periods  presented
      (in thousands):


                                 BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                            September 30, 1998     December 31, 1997
                                                                         ----------------------  ----------------------
     <S>                                                                <C>                     <C>
 
                                   ASSETS
      Cash and cash equivalents                                          $               7,177   $              15,908
      Investment securities available-for-sale                                          16,807                  19,353
      Residual interest in securitization, held-for-trading                              9,232                   9,936
      Loan receivables:
           CMO collateral                                                              340,537                   4,255
           Finance receivables                                                         176,930                  95,711
           Commercial Mortgages held-for-investment                                     25,894                  62,790
           Allowance for loan losses                                                    (1,701)                   (564)
                                                                         ----------------------  ----------------------
              Net loan receivables                                                     541,660                 162,192

      Due from affiliates                                                               44,017                   1,592
      Premises and equipment, net                                                        8,906                   3,857
      Investment in Impac Commercial Capital Corporation                               (11,531)                  4,182
      Accrued interest receivable                                                        3,606                   1,361
      Other assets                                                                       1,616                     458
                                                                         ----------------------  ----------------------
                                                                         $             621,490   $             218,839
                                                                         ======================  ======================

                     LIABILITIES AND STOCKHOLDERS' EQUITY
      CMO borrowings                                                     $             284,841   $               4,176
      Warehouse line agreements                                                        180,181                  90,374
      Reverse repurchase agreements                                                     13,895                   9,841
      Other borrowings                                                                   6,502                       -
      Due to affiliates                                                                 14,560                   8,067
      Other liabilities                                                                 10,352                   3,139
                                                                         ----------------------  ----------------------
           Total liabilities                                                           510,331                 115,597
                                                                         ----------------------  ----------------------

      Stockholders' Equity:
      Common stock                                                                          96                      73
      Class A common stock                                                                   5                       7
      Additional paid-in capital                                                       133,127                 104,761
      Accumulated other comprehensive loss                                                (930)                   (160)
          Cumulative dividends declared                                                (15,575)                 (4,250)
          Retained earnings                                                             (5,564)                  2,811
                                                                         ----------------------  ----------------------
           Total stockholders' equity                                                  111,159                 103,242
                                                                         ----------------------  ----------------------
                                                                         $             621,490   $             218,839
                                                                         ======================  ======================
</TABLE>
<PAGE>
 
                            STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                                                     
                                                                                                      For the period from
                                                     For the Three Months Ended,     For the Nine       January 15, 1997
                                                            September 30,            Months Ended       (commencement of
                                                    ------------------------------   September 30,     operations) through
                                                        1998            1997            1998           September 30, 1997
                                                    --------------  -------------- ---------------- -----------------------
     <S>                                           <C>              <C>           <C>              <C>
      Revenues:
         Interest income                            $      11,258   $       2,457  $        25,736  $                3,810
         Equity in net earnings (loss) of Impac
            Commercial Capital Corporation                (14,837)            627          (15,714)                    627
         Rental and other income                              594              58            1,021                      58
                                                    --------------  -------------- ---------------- -----------------------
                                                           (2,985)          3,142           11,043                   4,495
                                                    --------------  -------------- ---------------- -----------------------
      Expenses:
         Interest expense on warehouse line and        
            reverse repurchase agreements                   4,826             540           11,861                   1,206
         Interest expense on CMO borrowings                 2,124               -            2,259                       -
           Interest expense on other borrowings               (18)            205              593                     341
         Write-down of investment securities                1,085               -            1,085                       -
         Provision for loan losses                          1,020              22            1,137                      55
         General and administrative and
            other expense                                     997             277            1,898                     465
         Management advisory fees                             206               1              585                       1
         Stock compensation expense                             -               -                -                   2,697
                                                    --------------  -------------- ---------------- -----------------------
                                                           10,240           1,045           19,418                   4,765
                                                    --------------  -------------- ---------------- -----------------------

      Net earnings (loss)                           $     (13,225)   $      2,097  $        (8,375) $                 (270)
                                                    ==============  ============== ================ =======================
</TABLE>


      8. Stockholders' Equity

      During the nine months  ended  September  30,  1998,  the  Company  raised
      capital of $27.8  million  from the sale of 1.8  million  shares of Common
      Stock issued  through its Dividend  Reinvestment  and Stock  Purchase Plan
      (DRSPP) and $3.2 million  from the sale of 206,400  shares of Common Stock
      issued through its Structured Equity Shelf program (SES).

      On September 28, 1998,  the Company  declared a third quarter  dividend of
      $12.0  million,  or  $0.49  per  share  payable  on  October  26,  1998 to
      stockholders of record on October 9, 1998. However, on October 8, 1998 the
      Company  announced  that the third quarter  dividend  would be delayed and
      paid on January 6, 1999.

      On June 23, 1998, the Company declared a second quarter dividend of $11.8
      million,  or $0.49 per share.  This  dividend was paid on July 15, 1998 to
      stockholders of record on July 1, 1998.

      On March 30,  1998,  the Company  declared a first  quarter  dividend  of
      $11.3  million,  or $0.48 per share.  This dividend was paid on April 24,
      1998 to stockholders of record on April 9, 1998.

      9. Subsequent Events

      On October 7, 1998, the Company's Board of Directors adopted a Stockholder
      Rights Plan in which Preferred Stock Purchase Rights were distributed as a
      dividend  at the rate of one  Right for each  outstanding  share of common
      stock on October 19, 1998. The Rights are attached to the Company's common
      stock. For additional  information  regarding the Stockholder Rights Plan,
      refer to "Item 2.  Management's  Discussion  of  Financial  Condition  and
      Results of Operations-- Significant Transactions."

      On October 21, 1998,  ICH  repurchased  from IMH 937,084  shares of Common
      Stock and  456,916  Class A Common  Stock at a per share  price of $4.375,
      based upon the closing price on October 19, 1998,  for a total  repurchase
      of $6.1 million.  IMH recorded a loss of $9.1 million in the third quarter
      of 1998.On  October 27, 1998,  the Company sold to ICH its  remaining  50%
      ownership  interest in a  commercial  office  building  in Newport  Beach,
      California.  After  the sale of its 50%  ownership  interest  to ICH,  the
      Company has no remaining  ownership interest in the building.  The Company
      recorded a gain of $1.6 million on the sale.
<PAGE>
 
      ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                      RESULTS OF OPERATIONS

      Certain information contained in the following Management's Discussion and
      Analysis  of  Financial  Condition  and Results of  Operations  constitute
      forward-looking  statements  within  the  meaning  of  Section  27A of the
      Securities Act of 1933, as amended, and Section 21E of the Exchange Act of
      1934, as amended,  which can be  identified by the use of  forward-looking
      terminology  such  as  "may,"  "will,"   "expect,"   "intend,"   "should,"
      "anticipate,"  "estimate," or "believe" or the negatives  thereof or other
      variations thereon or comparable terminology. The Company's actual results
      may  differ  materially  from  those  contained  in  the   forward-looking
      statements.  Factors  which may cause a  difference  to occur  include the
      effectiveness of the Stockholder  Rights Plan,  increased costs and delays
      related  to  Year  2000   compliance,   the   availability   of   suitable
      opportunities for the acquisition,  ownership and dispositions of mortgage
      assets  (which depend on the type of mortgage  asset  involved) and yields
      available  from  time to time on such  mortgage  assets,  interest  rates,
      changes  in  estimates  of  book  basis  and  tax  basis   earnings,   the
      availability  of suitable  financing  and  investments,  and trends in the
      economy which affect  confidence and demand on the Company's  portfolio of
      mortgage assets.

      SIGNIFICANT TRANSACTIONS

      On September 25, 1998,  the Company's  Board of Directors  authorized  the
      Company to repurchase  up to $5.0 million  worth of the  Company's  common
      stock,  $.01 par value, in open market  purchases from time to time in the
      discretion  of the  Company's  management;  the  timing  and extent of the
      repurchases  will  depend on market  conditions.  The  Company  intends to
      effect such repurchases,  if any, in compliance with the Rule 10b-18 under
      the Securities Exchange Act of 1934. The acquired shares will be canceled.

      On October 7, 1998, the Company's Board of Directors adopted a Stockholder
      Rights Plan in which Preferred Stock Purchase Rights were distributed as a
      dividend  at the rate of one  Right for each  outstanding  share of common
      stock. The dividend  distribution was made on October 19, 1998, payable to
      stockholders  of  record  on that date. The  Rights  are  attached  to the
      Company's   common  stock.  The  Rights  will  be  exercisable  and  trade
      separately  only in the event that a person or group acquires or announces
      the intent to acquire 10 percent or more of the  Company's  common  stock.
      Each Right will entitle  stockholders to buy one-hundredth of a share of a
      new series of junior
      participating  preferred  stock at an  exercise  price of  $30.00.  If the
      Company is  acquired in a merger or other  transaction  after a person has
      acquired  10 percent or more of Company  outstanding  common  stock,  each
      Right  will  entitle  the   stockholder   to  purchase,   at  the  Right's
      then-current  exercise price, a number of the acquiring  Company's  common
      shares having a market value of twice such price. In addition, if a person
      or group acquires 10 percent or more of the Company's  common stock,  each
      Right will entitle the  stockholder  (other than the acquiring  person) to
      purchase,  at the Right's then-current  exercise price, a number of shares
      of the  Company's  common stock having a market value of twice such price.
      Following  the  acquisition  by a  person  of 10  percent  or  more of the
      Company's  common stock and before an acquisition of 50 percent or more of
      the common  stock,  the Board of Directors  may exchange the Rights (other
      than the Rights owned by such person) at an exchange ratio of one share of
      common  stock  per  Right.  Before a person or group  acquires  beneficial
      ownership of 10 percent or more of the Company's  common stock, the Rights
      are  redeemable  for  $.0001  per  right  at the  option  of the  Board of
      Directors.  The  Rights  will  expire on  October  19,  2008.  The  Rights
      distribution is not taxable to  stockholders.  The Rights are intended to
      enable all the  Company  stockholders  to realize the  long-term  value of
      their  investment  in the  Company.  They will not prevent a takeover  but
      should  encourage  anyone seeking to acquire the Company to negotiate with
      the Board of Directors prior to attempting a takeover.
<PAGE>
 
      On October 21, 1998,  ICH  repurchased  from IMH 937,084  shares of Common
      Stock and  456,916  Class A Common  Stock at a per share  price of $4.375,
      based upon the closing price on October 19, 1998,  for a total  repurchase
      of $6.1 million.  IMH recorded a loss of $9.1 million in the third quarter
      of 1998.

      On October 27, 1998,  the Company sold to ICH its  remaining 50% ownership
      interest in a commercial  office  building in Newport  Beach,  California.
      After the sale of its 50%  ownership  interest to ICH,  the Company has no
      remaining ownership interest in the building.  The Company recorded a gain
      of $1.6 million on the sale.

      BUSINESS OPERATIONS

      Long-Term  Investment  Operations:  During the nine months ended September
      30, 1998, the Long-Term  Investment  Operations,  conducted by IMH and IMH
      Assets,  acquired  $841.6  million of  mortgages  from IFC as  compared to
      $533.4  million  acquired  during  the  same  period  in  1997.  Mortgages
      purchased by the  Long-Term  Investment  Operations  during the first nine
      months  of 1998  consisted  of  $616.4  million  of  fixed-rate  mortgages
      ("FRMs") and $219.0 million of adjustable-rate  mortgages ("ARMs") secured
      by first liens on  residential  property  and $6.2  million of  fixed-rate
      second trust deeds  secured by  residential  property.  For the first nine
      months of 1998, IMH Assets issued CMOs totaling $768.0 million as compared
      to CMOs  totaling  $348.0  million  during the same period in 1997.  As of
      September  30, 1998,  the  Long-Term  Investment  Operations  portfolio of
      mortgage  loans  consisted of $1.3 billion of mortgage loans held in trust
      as   collateral   for  CMOs  and   $24.9   million   of   mortgage   loans
      held-for-investment  of which  approximately  56%  were  FRMs and 44% were
      ARMs. The weighted average coupon of the Long-Term  Investment  Operations
      portfolio  of  mortgage  loans  was  9.36% at  September  30,  1998 with a
      weighted average margin of 4.67%. The portfolio of mortgage loans included
      72% of "A" credit quality non-conforming mortgage loans and 28% of "B" and
      "C"  credit  quality,  non-conforming  mortgage  loans,  as defined by the
      Company. The Long-Term  Investment  Operations also sold $151.3 million of
      mortgage  loans to IFC and $4.5 million of mortgage loans to third parties
      during the first nine  months of 1998 as  compared to zero during the same
      period in 1997.  In  addition,  during the first  nine  months of 1998 the
      Long-Term  Investment  Operations  acquired  $64.6  million of  securities
      created by IFC through the  issuance  of real estate  mortgage  investment
      conduits ("REMICs") as compared to $19.3 million during the same period in
      1997. As of September 30, 1998,  the Long-Term  Investment  Operations had
      $111.1 million of investment securities available-for-sale.

      Conduit Operations: The Conduit Operations, conducted by IFC, continues to
      support the  Long-Term  Investment  Operations of the Company by supplying
      IMH  and  IMH  Assets  with  mortgages  for  IMH's  long-term   investment
      portfolio.  In acting  as the  mortgage  conduit  for the  Company,  IFC's
      mortgage acquisitions  increased 27% to $1.9 billion during the first nine
      months of 1998 as compared to $1.5  billion of mortgages  acquired  during
      the same period in 1997. In addition,  IFC  securitized  $927.9 million of
      mortgages and sold whole loans to third party  investors  totaling  $315.6
      million,  resulting in gain on sale of loans of $18.9 million,  during the
      first nine months of 1998. This compares to securitizations and whole loan
      sales to third parties of $1.1 billion, resulting in gain on sale of loans
      of $14.4 million,  during the same period in 1997. IFC had deferred income
      of $13.3  million at  September  30, 1998 as  compared to $7.0  million at
      December 31, 1997. The increase in deferred  income relates to the sale of
      $817.9  million in principal  balance of mortgages to IMH during the first
      nine months of 1998, which are deferred and amortized or accreted over the
      estimated life of the loans.  IFC's servicing  portfolio  increased 42% to
      $3.4  billion  at  September  30,  1998 as  compared  to $2.4  billion  at
      September  30,  1997.  The loan  delinquency  rate of  mortgages  in IFC's
      servicing  portfolio  which  were 60 or more days past due,  inclusive  of
      foreclosures and delinquent bankruptcies,  was 5.21% at September 30, 1998
      as  compared  to  4.29%,  3.20%,  3.05%,  and  4.03%  for  the  last  four
      quarter-end  periods.  During the third  quarter  of 1998,  352 loans were
      removed from 90 days or more delinquent status of which 153 loans, or 43%,
      were reinstated, repurchased or paid-in-full ("cure rate").

      Warehouse Lending Operations: At September 30, 1998, the Warehouse Lending
      Operations,  conducted by IWLG, had $811.4  million of warehouse  lines of
      credit available to 36 borrowers,  of which $669.6 million was outstanding
      thereunder,  including  $432.9 million  outstanding to IFC, $122.7 million
      outstanding  to the  Long-Term  Investment  Operations,  and $7.3  million
      outstanding to Walsh Securities, Inc. ("WSI"). James Walsh, Executive Vice
      President of WSI, is also a Director of IMH and ICH.
<PAGE>
 
      RESULTS OF OPERATIONS; IMPAC MORTGAGE HOLDINGS, INC. THREE MONTHS ENDED 
      SEPTEMBER 30, 1998 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997

      Net Earnings

      The Company recorded a net loss of $(20.6) million, or $(0.85) per diluted
      share,  on  revenues  of $36.4  million  for the third  quarter of 1998 as
      compared to net earnings of $7.2 million,  or $0.45 per diluted share,  on
      revenues of $32.8 million for the third quarter of 1997.  The net loss for
      the third  quarter of 1998 was  primarily  due to  non-cash  charges  that
      required the Company and its  subsidiaries to make certain  write-downs of
      its  mortgage  loans,   equity   investments  and  investment   securities
      available-for-sale portfolios. The non-cash charges included an impairment
      charge of $9.1 million on the Company's  equity  investment in ICH,  which
      reflected  the price at which the ICH common stock was sold on October 19,
      1998,  an impairment  charge of $11.6 million on the Company's  investment
      securities  available-for-sale and a non-cash mark-to-market adjustment of
      $21.0  million  at  IFC,  which   represents   losses  on  mortgage  loans
      held-for-sale.  The Company sold $250.4  million of mortgage  loans in the
      fourth quarter of 1998 on a whole loan basis, which improved the Company's
      liquidity position and helped provide additional  liquidity to protect the
      Company against any future margin calls on existing  borrowings  under its
      current warehouse lines of credit and reverse  repurchase  facilities that
      are secured by existing mortgage loans and mortgage-backed  securities. In
      addition,  net earnings were negatively  affected during the third quarter
      of 1998 by an increase of $1.2 million in general and  administrative  and
      other expense and professional  services,  a mark-to-market  loss on loans
      held-for-sale of $1.2 million, and an increase of $754,000 in loss on sale
      of other  real  estate  owned as  compared  to the third  quarter of 1997.
      However, while earnings were negatively affected by these items and by the
      non-cash  charges  recorded by the  Company in the third  quarter of 1998,
      earnings  were  positively  affected  by a $3.9  million  increase  in net
      interest  income,  a decrease of $2.2 million in provision for loan losses
      and a $1.5  million  decrease  in  advisory  fees as compared to the third
      quarter of 1997.

      Subsequent to  quarter-end,  the Company made  significant  changes in its
      business strategy and operations and completed  various  transactions that
      provided positive results in the Company's liquidity position.

      Business Strategy.

      The Company  made  changes in its  business  strategy to more  effectively
      compete in the current market environment, including:

       Raising interest rates on its loan programs.
       Decreasing the amount of premium paid on its loan acquisitions.
       Reducing staffing levels by approximately 20% at IFC.

      While  the  Company  expects  that  this  decision  will  result  in lower
      origination balances in the fourth quarter of 1998 and possibly into early
      1999, the Company  anticipates  better  results on the subsequent  sale or
      securitization of its loans.

      Liquidity.

      The Company  sold $250.4  million of  mortgage  loans and $8.9  million of
      mortgage-backed  securities  in order to generate  liquidity  and help the
      Company  with any margin  calls on  current  warehouse  lines and  reverse
      repurchase    facilities   backed   by   existing   mortgage   loans   and
      mortgage-backed  securities.  The financial result of the sale of mortgage
      loans and  mortgage-backed  securities was in line with the mark-to-market
      charge taken in the third quarter of 1998.  These sales generated net cash
      proceeds of $13.6 million after paying down the related warehouse line and
      reverse repurchase balances.

      The  Company  sold  to ICH  its  remaining  50%  ownership  interest  in a
      commercial office building in Newport Beach, California. After the sale of
      its 50% ownership interest to ICH, the Company has no remaining  ownership
      interest in the building.  The Company recorded a $1.6 million gain on the
      sale and repaid its outstanding borrowings on the property.

      Net Interest Income

      Net  interest  income  increased  50% to $11.7  million  during  the third
      quarter of 1998 as compared to $7.8  million  during the third  quarter of
      1997.  Interest  income is  primarily  interest  on  Mortgage  Assets  and
      includes  interest  income  on cash  and  cash  equivalents  and due  from
      affiliates.  Interest  expense is primarily  borrowings on Mortgage Assets
      and includes  interest  expense on due to affiliates.  The increase in net
      interest  income  was  primarily  the  result of higher  average  Mortgage
      Assets,  which  increased 57% to $2.2 billion  during the third quarter of
      1998 as compared to $1.4 billion during the same period of 1997.  However,
      net interest spread on Mortgage Assets decreased to 1.46% during the third
      quarter of 1998 as compared to 1.81%  during the third  quarter of 1997 as
      the yield on  Mortgage  Assets  decreased  to 8.06% as  compared to 8.39%,
      respectively.  The  decrease in the net  interest  spread and the yield on
      Mortgage Assets was primarily the result of a decrease in the yield on CMO
      collateral,  which  represents the largest portion of Mortgage Assets on a
      weighted-average  basis.  The net interest  spread on CMO  collateral  was
      0.77%  during the third  quarter of 1998 as compared  to 1.33%  during the
      third  quarter  of  1997.  The  yield on  borrowings  on  Mortgage  Assets
      increased  slightly to 6.60% during the third  quarter of 1998 as compared
      to 6.58%  during the third  quarter of 1997.  The Company expects that net
      interest income will be adversely affected by a reduction in mortgage loan
      originations.

      The   following   table   summarizes   average   balance,   interest   and
      weighted-average  yield on Mortgage  Assets and  borrowings  for the three
      months ended  September 30, 1998 and 1997 and includes  interest income on
      Mortgage  Assets and interest  expense  related to  borrowings on Mortgage
      Assets only (dollars in thousands):
<TABLE>
<CAPTION>

                                                              For the Three Months                 For the Three Months
                                                            Ended September 30, 1998             Ended September 30, 1997
                                                       -----------------------------------  -------------------------------------
                                                           Average                Weighted      Average                Weighted
                                                           Balance     Interest  Avg Yield      Balance     Interest   Avg Yield
                                                       ------------- ----------- ---------- -------------------------------------
<S>                                                    <C>           <C>            <C>        <C>         <C>           <C>
                   MORTGAGE ASSETS
 Investment securities available-for-sale:
  Subordinated securities collateralized by mortgages   $    102,662  $   3,234      12.60% $    56,163 $    1,747       12.44%
  Subordinated securities collateralized by other loans        5,379        153      11.38        5,348        237       17.73
                                                        ------------- ----------            ----------- -----------
    Total investment securities available-for-sale           108,041      3,387      12.54       61,511      1,984       12.90
                                                        ------------- ----------            ----------- -----------
Loan receivables:
CMO collateral                                             1,374,131     25,256       7.35      744,916     14,110        7.58
Mortgage loans held-for-investment                            62,294      1,372       8.81       37,411        834        8.92
Finance receivables:
  Affiliated                                                 610,378     13,041       8.55      531,304     11,788        8.87
  Non-affiliated                                              93,581      2,225       9.51       36,164        892        9.87
                                                        ------------- ----------            ----------- -----------                 

     Total finance receivables                               703,959     15,266       8.67      567,468     12,680        8.94
                                                        ------------- ----------            ----------- -----------
        Total Loan Receivables                             2,140,384     41,894       7.83    1,349,795     27,624        8.19
                                                        ------------- ----------            ----------- -----------                 

      TOTAL MORTGAGE ASSETS                             $  2,248,425  $  45,281       8.06% $ 1,411,306 $   29,608        8.39%
                                                        ============= ==========            =========== ===========
                                                      
                      BORROWINGS
CMO borrowings                                          $  1,277,826  $  21,027       6.58% $   693,822 $   10,834        6.25%
Reverse repurchase agreements - mortgages                    716,216     11,849       6.62      578,462     10,077        6.97
Reverse repurchase agreements - securities                    38,150        639       6.70       45,154        759        6.72
                                                        ------------  ----------            ----------- -----------
                 TOTAL BORROWINGS ON
                        MORTGAGE ASSETS                 $  2,032,192  $  33,515       6.60% $ 1,317,438 $   21,670        6.58%
                                                        ============  ==========            =========== ===========

                 NET INTEREST SPREAD                                                  1.46%                               1.81%

                 NET INTEREST MARGIN                                                  2.09%                               2.25%
</TABLE>

      Interest  Income on Mortgage  Assets:  Interest  income on CMO  collateral
      increased  79% to  $25.3  million  during  the  third  quarter  of 1998 as
      compared to $14.1 million  during the third quarter of 1997 as average CMO
      collateral  increased  88% to $1.4 billion as compared to $744.9  million,
      respectively. Average CMO collateral increased as the Long-Term Investment
      Operations  issued CMOs totaling $941.7 million which were  collateralized
      by $965.4 million of mortgages held by the Long-Term Investment Operations
      since the end of the third quarter of 1997.  Over 81%, or $768.0  million,
      of CMOs issued by the Long-Term Investment Operations since the end of the
<PAGE>
 
      third  quarter of 1997 were  issued  during the first nine months of 1998.
      The weighted-average yield on CMO collateral decreased to 7.35% during the
      third  quarter of 1998 as  compared to 7.58%  during the third  quarter of
      1997. The decreases in the yield and net interest spread on CMO collateral
      during the third  quarter  of 1998 was  primarily  due to higher  rates of
      mortgage  loan  prepayments  and  correspondingly  higher rates of premium
      amortization expense as compared to the third quarter of 1997.

      Interest  income on mortgage  loans  held-for-investment  increased 68% to
      $1.4  million  during the third  quarter of 1998 as  compared  to $834,000
      during   the   third   quarter   of  1997  as   average   mortgage   loans
      held-for-investment  increased  67% to $62.3  million as compared to $37.4
      million,  respectively.  Since the  Company  did not issue CMOs during the
      third  quarter  of  1998,   average  mortgage  loans   held-for-investment
      increased  during  the  third  quarter  of 1998 as  compared  to the third
      quarter  of  1997.   The   weighted-average   yield  on   mortgage   loans
      held-for-investment decreased to 8.81% during the third quarter of 1998 as
      compared to 8.92%  during the same  period of 1997 due to higher  rates of
      mortgage  loan  prepayments  and  correspondingly  higher rates of premium
      amortization expense as compared to the third quarter of 1997.

      Interest  income on finance  receivables  increased  20% to $15.3  million
      during the third quarter of 1998 as compared to $12.7  million  during the
      third  quarter of 1997 as average  finance  receivables  increased  24% to
      $704.0 million as compared to $567.5 million,  respectively.  The increase
      in interest  income on finance  receivables was primarily the result of an
      increase of 159% in average finance receivables to non-affiliated mortgage
      banking  companies to $93.6  million  during the third  quarter of 1998 as
      compared  to $36.2  million  during the third  quarter  of 1997.  Interest
      income on finance  receivables  to  non-affiliates  increased 147% to $2.2
      million  during the third  quarter of 1998 as compared to $892,000  during
      the third quarter of 1997. The  weighted-average  yield on  non-affiliated
      finance receivables was 9.51% during the third quarter of 1998 as compared
      to 9.87% during the third  quarter of 1997.  Average  finance  receivables
      outstanding to affiliates increased 15% to $610.4 million during the third
      quarter of 1998 as compared to $531.3  million during the third quarter of
      1997. Interest income on finance  receivables to affiliates  increased 10%
      to $13.0  million  during the third  quarter of 1998 as  compared to $11.8
      million  during the third quarter of 1997. The  weighted-average  yield on
      affiliated finance receivables decreased to 8.55% during the third quarter
      of 1998 as compared to 8.87% during the third quarter of 1997. The overall
      weighted-average  yield on finance  receivables  decreased to 8.67% during
      the third quarter of 1998 as compared to 8.94% during the third quarter of
      1997.

      Interest income on investment securities  available-for-sale increased 70%
      to $3.4  million  during  the third  quarter of 1998 as  compared  to $2.0
      million during the third quarter of 1997 as average investment  securities
      available-for-sale,  net of securities valuation allowance,  increased 76%
      to $108.0 million as compared to $61.5 million, respectively. The increase
      in average securities  available-for-sale during the third quarter of 1998
      was the  result of the  Long-Term  Investment  Operations  purchasing  and
      retaining mortgage-backed  securities of $16.9 million that were issued by
      IFC  as  REMICs.  The  weighted-average  yield  on  investment  securities
      available-for-sale decreased to 12.54% during the third quarter of 1998 as
      compared to 12.90% during the third quarter of 1997.

      Interest  expense  on  borrowings:  Interest  expense  on  CMO  borrowings
      increased  94% to  $21.0  million  during  the  third  quarter  of 1998 as
      compared  to $10.8  million  during  the third  quarter of 1997 as average
      borrowings on CMO collateral  increased 87% to $1.3 billion as compared to
      $693.8  million,  respectively.  Average CMO  borrowings  increased as the
      Long-Term Investment  Operations issued CMOs totaling $941.7 million since
      the end of the third quarter of 1997.  The  weighted-average  yield of CMO
      borrowings increased to 6.58% during the third quarter of 1998 as compared
      to 6.25% during the third quarter of 1997. This increase was the result of
      the Company  issuing  fixed-rate  CMOs totaling  $583.0 million during the
      first  nine  months  of 1998 at higher  interest  rates  than the  initial
      interest rates on  variable-rate  CMOs the Company has issued in the past.
      Although  borrowing rates on the fixed-rate CMOs are generally higher than
      the initial interest rates on  variable-rate  CMOs, the Company receives a
      comparable  interest  rate  spread  on  fixed-rate  CMOs as it does on its
      variable-rate CMOs.

      Interest  expense  on  reverse  repurchase  borrowings  used to  fund  the
      acquisition  of mortgage  loans and finance  receivables  increased 17% to
      $11.8  million  during  the third  quarter  of 1998 as  compared  to $10.1
      million  during the third  quarter of 1997.  The average  balance of these
      reverse repurchase  agreements  increased 24% to $716.2 million during the
      first  quarter  of 1998 as  compared  to $578.5  million  during the third
      quarter of 1997.  This  increase was  primarily  related to an increase in
      finance  receivables  made to IFC as IMH's  acquisition  of mortgage loans
      from IFC were lower  during the third  quarter of 1998 as  compared to the
      same  period  in  1997.  The  weighted-average   yield  of  these  reverse
      repurchase  agreements increased to 6.62% during the third quarter of 1998
      as compared 6.97% during the third quarter of 1997.
<PAGE>
 
      The Company also uses  mortgage-backed  securities as collateral to borrow
      under   reverse   repurchase   agreements   to  fund   the   purchase   of
      mortgage-backed securities and to act as an additional source of liquidity
      for the Company's operations. Interest expense on these reverse repurchase
      agreements  decreased 16% to $639,000  during the third quarter of 1998 as
      compared to $759,000 during the third quarter of 1997. The average balance
      on these  reverse  repurchase  agreements  decreased  15% to $38.2 million
      during the third quarter of 1998 as compared to $45.2  million  during the
      third quarter of 1997. This decrease was primarily the result of increased
      liquidity from other sources that reduced the Company's  reliance on these
      borrowings  as a  funding  source.  The  weighted-average  yield  of these
      reverse repurchase  agreements decreased to 6.70% during the third quarter
      of 1998 as compared 6.72% during the third quarter of 1997.

      Earnings from IFC

      Equity in net earnings (loss) of IFC decreased to a loss of $(7.9) million
      during the third  quarter of 1998 as compared to earnings of $2.4  million
      during the third quarter of 1997.  IFC's earnings during the third quarter
      of 1998 decreased primarily due to a non-cash mark-to-market adjustment of
      $21.0 million,  which represents  losses on mortgage loans  held-for-sale.
      Additionally,  IFC's  earnings  were  negatively  affected by increases in
      personnel expense,  amortization of mortgage servicing rights ("MSRs") and
      general  and  administrative   expense,  which  was  partially  offset  by
      increases  in loan  servicing  income.  The overall  increase in operating
      expenses during the third quarter of 1998 as compared to the third quarter
      of 1997 was  primarily  the result of an increase in staffing and overhead
      as the Company's loan origination  operations and loan servicing portfolio
      grew.

      Personnel  expense  increased 73% to $2.6 million during the third quarter
      of 1998 as compared to $1.5 million  during the third quarter of 1997. The
      increase in personnel  expense was  primarily  due to an increase in staff
      and incentive  compensation.  IFC increased  staff 22% to 174 at September
      30, 1998 as compared to 143 at September 30, 1997. However,  subsequent to
      quarter-end,  the Company reduced staffing at IFC by approximately  20% to
      140 employees.

      Amortization of MSRs increased to $1.8 million during the third quarter of
      1998 as  compared  to  $947,000  during  the third  quarter of 1997 due to
      continued growth of IFC's servicing  portfolio.  Since September 30, 1997,
      the Company has securitized $1.6 billion in principal  balance of mortgage
      loans  and,   accordingly,   has   capitalized   MSRs   related  to  those
      securitizations which are amortized over the estimated life of the loans.

      Loan servicing income increased as IFC generally  retains servicing rights
      on mortgages  acquired  resulting in an increase of 42% in IFC's servicing
      portfolio  to $3.4  billion at  September  30,  1998 as  compared  to $2.4
      billion at September 30, 1997.

      The Company  records 99% of the earnings or losses from IFC as the Company
      owns 100% of IFC's preferred  stock,  which represents 99% of the economic
      interest in IFC.

      Earnings from ICH

      Equity in net earnings (loss) of ICH decreased to a loss of $(1.8) million
      for the third  quarter of 1998 as compared to earnings of $403,000 for the
      third  quarter  of 1997  primarily  due to an  impairment  charge  of $1.1
      million on its residual interest in  securitization  and a decrease in net
      earnings  (loss) of Impac  Commercial  Capital  Corporation,  the  conduit
      operations of ICH, due to a non-cash  charge of $15.0 million related to a
      mark-to-market  adjustment on loans  held-for-sale.  The Company  recorded
      equity in net earnings  (loss) in ICH through the  Company's  ownership of
      9.8% of ICH's voting  common  stock and 100% of class A non-voting  common
      stock.  Subsequently,  in October 1998, ICH repurchased  937,084 shares of
      common stock and 456,916 shares of class A common stock, which represented
      all ICH stock that IMH owned.
<PAGE>
 
General and Administrative and Other Expense

      General and  administrative and other expense increased to $893,000 during
      the third quarter of 1998 as compared to $227,000 during the third quarter
      of 1997. The increase in general and administrative  expense was primarily
      related to property  expense on a commercial  office building in which the
      Company had a 50% ownership  interest prior to quarter-end and an increase
      in professional  services.  Property expense  increased to $458,000 during
      the third quarter of 1998 as compared to $30,000  during the third quarter
      of 1997. Subsequent to quarter-end,  the Company sold to ICH its remaining
      50% ownership interest. Professional services increased to $748,000 during
      the third quarter of 1998 as compared to $212,000 during the third quarter
      of 1997.  Professional  services  includes legal and public accounting and
      tax work performed for the Company.

      Advisory Fees

      Earnings  were  positively  affected  by  a  reduction  in  advisory  fees
      resulting  from the  Company's  buyout of its  management  agreement  with
      Imperial Credit Advisors,  Inc.  ("ICAI") in December 1997. As a result of
      the  buyout,  there  were no  advisory  fees paid by IMH  during the third
      quarter of 1998 as compared to $1.5  million in advisory  fees paid by IMH
      during the third quarter of 1997.

      Provision for Loan Losses

      The Company  recorded  loan loss  provisions  (recoveries)  of  $(292,000)
      during the third  quarter of 1998 as compared to $1.9  million  during the
      third  quarter of 1997.  The amount  provided  for loan losses  during the
      third quarter of 1998 decreased primarily due to the reduction in exposure
      to future losses through the sale of delinquent  loans and the transfer of
      certain loans from the held-for-investment to the held-for-sale portfolio,
      which resulted in a mark-to-market adjustment of $1.2 million.

      Credit Exposures

      The Company's total allowance for loan losses expressed as a percentage of
      Gross Loan  Receivables  which  includes  loans  held-for-investment,  CMO
      collateral  and finance  receivables  was 0.29% at  September  30, 1998 as
      compared to 0.32% at December 31, 1997. The allowance for loan losses as a
      percentage  of  Gross  Loan  Receivables  decreased  by  accelerated  loan
      charge-offs from the sale of delinquent loans, resulting in losses of $1.1
      million during 1998, which was charged against the allowance.  The Company
      sold delinquent loans in order to reduce the Company's overall exposure to
      delinquent  loans and future loan  losses.  Excluding  the loss on sale of
      delinquent  loans,  the allowance for loan losses as a percentage of Gross
      Loan  Receivables  would  have  been  0.35% at  September  30,  1998.  The
      allowance  for  loan  losses  is  determined  primarily  on the  basis  of
      management's  judgment of net loss potential including specific allowances
      for any known  impaired  loans,  changes  in the  nature and volume of the
      portfolio,  value of the collateral and current  economic  conditions that
      may affect the borrowers'  ability to pay. The Company  recorded losses on
      the  disposition of real estate owned of $610,000 during the third quarter
      of 1998 as  compared  to  gains on  disposition  of real  estate  owned of
      $144,000 during the third quarter of 1997.
<PAGE>
 
      RESULTS OF OPERATIONS; IMPAC MORTGAGE HOLDINGS, INC.
      NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO NINE MONTHS ENDED
      SEPTEMBER 30, 1997

      Net Earnings

      Net  earnings  for the  nine  months  ended  September  30,  1998 was $2.2
      million,  or $0.09 per basic and diluted common share,  as compared to net
      earnings of $18.7 million, or $1.25 per diluted common share, for the same
      period of 1997.  The net  earnings  for the first nine  months of 1998 was
      primarily  due to  non-cash  charges  that  required  the  Company and its
      subsidiaries  to make certain  write-downs of its mortgage  loans,  equity
      investments and investment securities  available-for-sale  portfolios. The
      non-cash  charges  included an  impairment  charge of $9.1  million on the
      Company's equity investment in ICH, which reflected the price at which the
      ICH common stock was sold on October 19,  1998,  an  impairment  charge of
      $12.8 million on the Company's  investment  securities  available-for-sale
      and a non-cash  mark-to-market  adjustment of $21.0 million at IFC,  which
      represents losses on mortgage loans held-for-sale. The Company sold $250.4
      million of  mortgage  loans in the fourth  quarter of 1998 on a whole loan
      basis which improved the Company's  liquidity  position and helped provide
      additional liquidity to protect the Company against future margin calls on
      existing  borrowings  under its  current  warehouse  lines of  credit  and
      reverse repurchase  facilities that are secured by existing mortgage loans
      and mortgage-backed  securities. In addition, net earnings were negatively
      affected  during  the first  nine  months of 1998 by an  increase  of $2.2
      million in general and  administrative  and other expense and professional
      services and a mark-to-market loss on loans held-for-sale of $1.2 million.
      However, while earnings were negatively affected by these items and by the
      non-cash  charges  recorded by the  Company in the third  quarter of 1998,
      earnings  were  positively  affected  by a $11.1  million  increase in net
      interest  income,  a $4.3 million decrease in advisory fees and a decrease
      of $2.1 million in provision  for loan losses during the first nine months
      of 1998 as compared to the same period of 1997.

      Tax Basis Earnings

      The  Company's  estimated  tax basis  earnings  for the nine months  ended
      September 30, 1998 was  approximately  $21.2  million,  or $0.89 basic and
      diluted  earnings per common  share.  Tax basis  earnings is calculated by
      adjusting the Company's book basis earnings by various differences between
      book basis earnings and tax basis earnings. Differences between book basis
      earnings  and tax basis  earnings  are  estimates  that are  derived  from
      management's  best  knowledge  as of September  30,1998.  Actual tax basis
      earnings may differ materially from current estimates. As of September 30,
      1998,  the  Company  declared  or paid  dividends  for the  1998  tax year
      totaling $37.9 million.  Therefore,  total dividends  declared or paid for
      the 1998 tax year exceed estimated tax basis earnings by $16.7 million, or
      $0.70 per basic and diluted common share.

      Net Interest Income

      Net interest  income  increased 51% to $33.0 million during the first nine
      months of 1998 as  compared  to $21.9  million  during the same  period in
      1997.  Interest  income is  primarily  interest  on  Mortgage  Assets  and
      includes  interest  income  on cash  and  cash  equivalents  and due  from
      affiliates.  Interest  expense is primarily  borrowings on Mortgage Assets
      and includes  interest  expense on due to affiliates.  The increase in net
      interest  income  was  primarily  the  result of higher  average  Mortgage
      Assets,  which  increased 75% to $2.1 billion during the first nine months
      of 1998 as  compared  to $1.2  billion  during  the same  period  of 1997.
      However,  net interest spread on Mortgage Assets decreased to 1.51% during
      the first nine months of 1998 as compared to 1.80%  during the same period
      of 1997 as the yield on Mortgage Assets  decreased to 8.14% as compared to
      8.19%, respectively. The decrease in the net interest spread and the yield
      on Mortgage  Assets was primarily the result of a decrease in the yield on
      CMO collateral, which represents the largest portion of Mortgage Assets on
      a  weighted-average  basis.  The net interest spread on CMO collateral was
      0.78% during the first nine months of 1998 as compared to 1.39% during the
      first nine months of 1997.  The yield on  borrowings  on  Mortgage  Assets
      increased  to 6.63%  during the first nine  months of 1998 as  compared to
      6.39% during the first nine months of 1997.
<PAGE>
 
      The   following   table   summarizes   average   balance,   interest   and
      weighted-average  yield on  Mortgage  Assets and  borrowings  for the nine
      months ended  September 30, 1998 and 1997 and includes  interest income on
      Mortgage Assets and interest  expense related to borrowings on
      Mortgage Assets only (dollars in thousands):


<TABLE>
<CAPTION>


                                                                    For the Nine Months                For the Nine Months
                                                                 Ended September 30, 1998            Ended September 30, 1997
                                                             ---------------------------------- -----------------------------------
                                                               Average                  Weighted     Average               Weighted
                                                               Balance       Interest   Avg Yield     Balance    Interest Avg Yield
                                                             ------------- ----------- ----------- ----------- ---------- ----------

    <S>                                                      <C>          <C>           <C>        <C>          <C>          <C>
                            MORTGAGE ASSETS
     Investment securities available-for-sale:
        Subordinated securities collateralized by mortgages   $     86,944 $    7,986     12.25%    $    56,174  $   5,288    12.55%

        Subordinated securities collateralized by other loans        5,356        533     13.27           6,183        802    17.29
                                                              ------------ ----------               -----------  ----------
           Total investment securities available-for-sale           92,300      8,519     12.31          62,357      6,090    13.02
                                                              ------------ -----------              -----------  ----------
     Loan receivables:
     CMO collateral                                              1,245,516     69,446      7.43         600,988     34,338     7.62
     Mortgage loans held-for-investment                            188,799     13,089      9.24         151,163      8,251     7.28
     Finance receivables:
        Affiliated                                                 445,504     28,520      8.54         400,945     25,556     8.50
        Non-affiliated                                              83,188      5,944      9.53          25,627      1,953    10.16
                                                              ------------ ----------               -----------  ----------
           Total finance receivables                               528,692     34,464      8.69         426,572     27,509     8.60
                                                              ------------ ----------               -----------  ----------
               Total Loan Receivables                            1,963,007    116,999      7.95       1,178,723     70,098     7.93
                                                              ============ ==========               ===========  ==========
                 TOTAL MORTGAGE ASSETS                        $  2,055,307 $  125,518      8.14%    $ 1,241,080  $  76,188     8.19%

                                                              ============ ==========               ===========  ==========

                              BORROWINGS
     CMO borrowings                                           $  1,156,748 $   57,714      6.65%    $  564,001   $  26,362     6.23%

     Reverse repurchase agreements - mortgages                     668,176     33,109      6.61        547,274      26,849     6.54
     Reverse repurchase agreements - securities                     25,687      1,249      6.48         30,646       1,484     6.46
                                                              ------------ ----------               ----------   ----------
                 MORTGAGE ASSETS                              $  1,850,611 $   92,072      6.63%    $1,141,921   $  54,695     6.39%

                                                              ============ ==========               ==========   ==========

                          NET INTEREST SPREAD                                              1.51%                               1.80%


                          NET INTEREST MARGIN                                              2.17%                               2.31%

</TABLE>

      Interest  income on Mortgage  Assets:  Interest  income on CMO  collateral
      increased  102% to $69.4  million  during the first nine months of 1998 as
      compared  to $34.3  million  during the same period in 1997 as average CMO
      collateral  increased 100% to $1.2 billion as compared to $601.0  million,
      respectively. Average CMO collateral increased as the Long-Term Investment
      Operations  issued CMOs totaling $941.7 million which were  collateralized
      by $965.4 million of mortgages held by the Long-Term Investment Operations
      since the end of the third quarter of 1997.  Over 82%, or $768.0  million,
      of CMOs issued by the Long-Term Investment  Operations since September 30,
      1997  were   issued   during   the  first   nine   months  of  1998.   The
      weighted-average  yield on CMO  collateral  decreased  to 7.43% during the
      first nine months of 1998 as  compared to 7.62%  during the same period in
      1997.  The decrease in the yield on CMO  collateral  during the first nine
      months  of 1998  was  primarily  due to  higher  rates  of  mortgage  loan
      prepayments  and  correspondingly  higher  rates of  premium  amortization
      expense as compared to the first nine months of 1997.

      Interest  income on mortgage  loans  held-for-investment  increased 58% to
      $13.1  million  during the first nine  months of 1998 as  compared to $8.3
      million  during  the  same  period  in  1997  as  average  mortgage  loans
      held-for-investment  increased 25% to $188.8 million as compared to $151.2
      million,   respectively.   The   increase   in  average   mortgage   loans
      held-for-investment  was the result of the Long-Term Investment Operations
      acquiring $817.9 million in principal balance of mortgages from IFC during
      the first nine months of 1998 as compared to $508.8  million in  principal
      balance  of  mortgages   during  the  first  nine  months  of  1997.   The
      weighted-average yield on mortgage loans held-for-investment  increased to
      9.24% during the first nine months of 1998 as compared to 7.28% during the
      same period in 1997.
<PAGE>
 
      Interest  income on finance  receivables  increased  25% to $34.5  million
      during the first nine months of 1998 as compared to $27.5  million  during
      the same period in 1997 as average  finance  receivables  increased 24% to
      $528.7 million as compared to $426.6 million,  respectively.  The increase
      was  primarily  the  result  of an  increase  of 225% in  average  finance
      receivables to non-affiliated  mortgage banking companies to $83.2 million
      during the first nine months of 1998 as compared to $25.6  million  during
      the same  period  in 1997.  Interest  income  on  finance  receivables  to
      non-affiliates  increased 195% to $5.9 million during the third quarter of
      1998 as compared to $2.0  million  during the third  quarter of 1997.  The
      weighted-average  yield on non-affiliated finance receivables decreased to
      9.53%  during the first nine months of 1998 as  compared to 10.16%  during
      the same  period  in 1997.  Average  finance  receivables  outstanding  to
      affiliates increased 11% to $445.5 million during the first nine months of
      1998 as  compared  to  $400.9  million  during  the  same  period  in 1997
      primarily  as a  result  of  increased  loan  acquisitions  by IFC.  IFC's
      mortgage acquisitions  increased 27% to $1.9 billion during the first nine
      months of 1998 as compared to $1.5 billion during the same period in 1997.
      Interest  income on finance  receivables  to  affiliates  increased 11% to
      $28.5  million  during  the third  quarter  of 1998 as  compared  to $25.6
      million  during the third quarter of 1997. The  weighted-average  yield on
      affiliated  finance  receivables  increased to 8.54% during the first nine
      months of 1998 as  compared to 8.50%  during the same period in 1997.  The
      overall  weighted-average  yield on finance receivables increased to 8.69%
      during the first nine months of 1998 as compared to 8.60%  during the same
      period in 1997.

      Interest income on investment securities  available-for-sale increased 39%
      to $8.5  million  during the first nine months of 1998 as compared to $6.1
      million  during the same period in 1997 as average  investment  securities
      available-for-sale,  net of securities valuation allowance,  increased 48%
      to $92.3 million as compared to $62.4 million,  respectively. The increase
      in average securities  available-for-sale  during the first nine months of
      1998 was the result of the Long-Term Investment  Operations purchasing and
      retaining mortgage-backed  securities of $64.6 million that were issued by
      IFC  as  REMICs.  The  weighted-average  yield  on  investment  securities
      available-for-sale  decreased  to 12.31%  during the first nine  months of
      1998 as compared to 13.02% during the first nine months of 1997.

      Interest  expense  on  borrowings:  Interest  expense  on  CMO  borrowings
      increased  119% to $57.7  million  during the first nine months of 1998 as
      compared  to $26.4  million  during  the same  period  in 1997 as  average
      borrowings on CMO collateral increased 113% to $1.2 billion as compared to
      $564.0  million,  respectively.  Average CMO  borrowings  increased as the
      Long-Term Investment  Operations issued CMOs totaling $941.7 million since
      the end of the third quarter in 1997.  The  weighted-average  yield of CMO
      borrowings  increased  to 6.65%  during the first  nine  months of 1998 as
      compared 6.23% during the same period of 1997. This increase is the result
      of the Company issuing  fixed-rate CMOs totaling $583.0 million during the
      first  nine  months  of 1998 at higher  interest  rates  than the  initial
      interest rates on  variable-rate  CMOs the Company has issued in the past.
      Although  borrowing rates on the fixed-rate CMOs are generally higher than
      the initial interest rates on  variable-rate  CMOs, the Company receives a
      comparable  interest  rate  spread  on  fixed-rate  CMOs as it does on its
      variable-rate CMOs.

      Interest  expense  on  reverse  repurchase  borrowings  used to  fund  the
      acquisition  of mortgage  loans and finance  receivables  increased 24% to
      $33.1  million  during the first nine  months of 1998 as compared to $26.8
      million  during  the same  period in 1997.  The  average  balance of these
      reverse repurchase  agreements  increased 22% to $668.2 million during the
      first nine months of 1998 as compared  to $547.3  million  during the same
      period in 1997.  This  increase  was  primarily  related to an increase in
      finance receivables made to non-affiliated mortgage banking companies. The
      weighted-average yield of these reverse repurchase agreements increased to
      6.61%  during the first nine months of 1998 as compared  6.54%  during the
      same period in 1997.

      The Company also uses  mortgage-backed  securities as collateral to borrow
      under   reverse   repurchase   agreements   to  fund   the   purchase   of
      mortgage-backed securities and to act as an additional source of liquidity
      for the Company's operations. Interest expense on these reverse repurchase
      agreements  decreased 20% to $1.2 million  during the first nine months of
      1998 as  compared  to $1.5  million  during the same  period in 1997.  The
      average balance on these reverse  repurchase  agreements  decreased 16% to
      $25.7  million  during the first nine  months of 1998 as compared to $30.6
      million  during the same period in 1997.  This  decrease was primarily the
      result  of  increased  liquidity  from  other  sources  that  reduced  the
      Company's   reliance  on  these  borrowings  as  a  funding  source.   The
      weighted-average yield of these reverse repurchase agreements increased to
      6.48% during the first nine months of 1998 as compared to 6.46% during the
      same period in 1997.
<PAGE>
 
      Earnings from IFC

      Equity in net earnings (loss) of IFC decreased to a loss of $(3.9) million
      during the first  nine  months of 1998 as  compared  to  earnings  of $6.1
      million during the same period in 1997.  IFC's  earnings  during the first
      nine months of 1998 decreased  primarily due to a non-cash  mark-to-market
      adjustment of $21.0  million,  which  represents  losses on mortgage loans
      held-for-sale.  Additionally,  IFC's earnings were negatively  affected by
      increases in personnel expense,  amortization of mortgage servicing rights
      ("MSRs"),  and  general and  administrative  and other  expense  which was
      partially  offset by  increases  in loan  servicing  income.  The  overall
      increase  in  operating  expenses  during the first nine months of 1998 as
      compared  to the  same  period  in 1997 was  primarily  the  result  of an
      increase  in  staffing  and  overhead as the  Company's  loan  origination
      operations and loan servicing portfolio grew.

      Personnel  expense  increased  40% to $7.4  million  during the first nine
      months of 1998 as compared to $5.3 million during the same period in 1997.
      The  increase in  personnel  expense was  primarily  due to an increase in
      staff  and  incentive  compensation.  IFC  increased  staff  22% to 174 at
      September  30, 1998 as compared to 143 at  September  30,  1997.  However,
      subsequent  to  quarter-end  the  Company  reduced   staffing  at  IFC  by
      approximately 20% to 140 employees.

      Amortization  of MSRs  increased  to $4.7  million  during  the first nine
      months of 1998 as compared to $1.9  million  during the the same period in
      1997 due to continued growth of IFC's servicing portfolio. Since September
      30, 1997, the Company has securitized $1.6 billion in principal balance of
      mortgage loans and,  accordingly,  has  capitalized  MSRs related to those
      securitizations which are amortized over the estimated life of the loans.

      Loan servicing income increased as IFC generally  retains servicing rights
      on mortgages  acquired  resulting in an increase of 42% in IFC's servicing
      portfolio  to $3.4  billion at  September  30,  1998 as  compared  to $2.4
      billion at September 30, 1997.

      Earnings from ICH

      Equity in net earnings (loss) of ICH decreased to a loss of $(1.0) million
      during the first nine months of 1998 as  compared to a loss of  $(778,000)
      for the period from January 15, 1997 (commencement of operations)  through
      September 30, 1997  primarily due to an impairment  charge of $1.1 million
      on its residual interest in securitization  and a decrease in net earnings
      (loss) of Impac Commercial Capital Corporation,  the conduit operations of
      ICH, due to a non-cash charge of $15.0 million related to a mark-to-market
      adjustment  on loans  held-for-sale.  The Company  recorded  equity in net
      earnings  (loss) in ICH through the  Company's  ownership of 9.8% of ICH's
      voting  common  stock  and  100%  of  class  A  non-voting  common  stock.
      Subsequently,  in October 1998, ICH  repurchased  937,084 shares of common
      stock and 456,916 shares of class A common stock,  which  represented  all
      ICH common stock that IMH owned.

      General and Administrative and Other Expense

      General and  administrative  and other  expense  increased to $1.8 million
      during the first nine months of 1998 as  compared  to $530,000  during the
      same period of 1997. The increase in general and  administrative and other
      expense was primarily  related to property expense on a commercial  office
      building  in which  the  Company  had a 50%  ownership  interest  prior to
      quarter-end.  Property expense increased to $793,000 during the first nine
      months of 1998 as  compared  to $30,000  during  the same  period of 1997.
      Subsequent  to  quarter-end,  the Company  sold to ICH its  remaining  50%
      ownership interest. Professional services increased to $1.6 million during
      the first nine  months of 1998 as  compared  to  $758,000  during the same
      period of 1997. Professional services includes legal and public accounting
      and tax work performed for the Company.

      Advisory Fees

      Earnings  were  positively  affected  by  a  reduction  in  advisory  fees
      resulting from the Company's buyout of its management  agreement with ICAI
      in December  1997. As a result of the buyout,  there were no advisory fees
      paid by IMH  during  the first  nine  months of 1998 as  compared  to $4.3
      million in advisory fees paid by IMH during the same period of 1997.
<PAGE>
 
      Provision for Loan Losses

      Provision  for loan losses  decreased  50% to $2.1  million as compared to
      $4.2  million  during the first nine  months of 1998 and 1997.  The amount
      provided  for loan  losses  during  the third  quarter  of 1998  decreased
      primarily due to the  reduction in exposure to future  losses  through the
      sale of  delinquent  loans and the  transfer  of  certain  loans  from the
      held-for-investment  to the held-for-sale  portfolio,  which resulted in a
      mark-to-market adjustment of $1.2 million.


      LIQUIDITY AND CAPITAL RESOURCES

      Overview.  The Company's  business  operations  are primarily  funded from
      monthly  interest  and  principal  payments  from  its  mortgage  loan and
      investment securities portfolios, reverse repurchase agreements secured by
      mortgage loans and mortgage-backed securities,  adjustable- and fixed-rate
      CMO  financing,  proceeds from the sale of mortgage loans and the issuance
      of REMICs,  short-term unsecured borrowings and proceeds from the issuance
      of Common Stock through  secondary stock  offerings,  DRSSP,  and SES. The
      acquisition  of  mortgage  loans  and  mortgage-backed  securities  by the
      Long-Term   Investment   Operations  are  primarily  funded  from  monthly
      principal  and  interest  payments,  reverse  repurchase  agreements,  CMO
      financing,  short-term  unsecured borrowings and proceeds from the sale of
      Common Stock. The acquisition of mortgage loans by the Conduit  Operations
      are funded from reverse repurchase agreements,  the sale of mortgage loans
      and  mortgage-backed  securities,  and the issuance of REMICs.  Short-term
      financing  (finance   receivables)   provided  by  the  Warehouse  Lending
      Operations are funded from reverse repurchase agreements and proceeds from
      the sale of Common  Stock.  The  Company's  ability to meet its  long-term
      liquidity  requirements  is  subject  to the  renewal  of its  credit  and
      repurchase   facilities  and/or  obtaining  other  sources  of  financing,
      including additional debt or equity from time to time. Any decision by the
      Company's  lenders and/or  investors to make additional funds available to
      the Company in the future  will  depend upon a number of factors,  such as
      the  Company's   compliance   with  the  terms  of  its  existing   credit
      arrangements,  the Company's  financial  performance,  industry and market
      trends in the Company's various  businesses,  the general  availability of
      and rates  applicable to financing and  investments,  such lenders' and/or
      investors' own resources and policies  concerning  loans and  investments,
      and the  relative  attractiveness  of  alternative  investment  or lending
      opportunities.

      During the third quarter of 1998, the deterioration of the mortgage-backed
      securities  market  created a lack of  liquidity  for the  Company  as the
      Company's  lenders  made  margin  calls on  their  warehouse  and  reverse
      repurchase   lines.   Margin  calls  result  from  the  Company's  lenders
      evaluating  the  market  value  of  underlying   collateral  securing  the
      warehouse lines of credit and requiring additional equity or collateral on
      the warehouse  lines.  These margin calls resulted in the Company delaying
      its third quarter dividend and selling mortgage loans and  mortgage-backed
      securities.  Subsequent to quarter-end,  the Company completed the sale of
      $250.4  million of  mortgage  loans and $8.9  million  of  mortgage-backed
      securities, which increased the Company's liquidity by $13.6 million after
      paying down the related warehouse line and reverse repurchase  agreements.
      Future cash flows will be negatively  impacted by the deterioration of the
      mortgage-backed  securities  market and the  subsequent  sale of  mortgage
      loans and mortgage-backed  securities as the Company will not benefit from
      positive cash flows created by these financial instruments.

      By selling  mortgage  loans,  the Company  reduced its  exposure to margin
      calls on  existing  borrowings  under  its  current  warehouse  lines  and
      repurchase  facilities  by paying  down  outstanding  borrowings  on these
      facilities.  In  addition,  the Company  expects  loan  originations  will
      decrease  in the fourth  quarter of 1998 and  possibly  through  the first
      quarter of 1999 and reduce  borrowing  needs  during this period of market
      volatility.  The Company also  expects that the  reduction in staff in the
      fourth  quarter of 1998 will provide  additional  liquidity from operating
      activities.

      Even with the sale of mortgage loans and mortgage-backed  securities,  the
      Company does not believe its current  operating  cash flows are sufficient
      to  fund  the  growth  of its  mortgage  loan  and  investment  securities
      portfolios,  lending activities,  repayment of short-term  obligations and
      payment of cash dividends due to exposure to margin calls on its warehouse
      line and reverse repurchase  agreements.  The Company continues to explore
      alternatives for increasing  liquidity through  additional asset sales and
      capital  raising  efforts.  However,  no assurances can be given that such
      alternatives  will be available,  or if available,  under comparable rates
      and terms as currently exist.
<PAGE>
 
      Long-Term Investment Operations:  The Long-Term Investment Operations uses
      CMO  borrowings  to  finance   substantially  all  of  its  mortgage  loan
      portfolio.  Terms of the CMO borrowings  require that an independent third
      party custodian hold the mortgages. The maturity of each class is directly
      affected by the rate of principal  prepayments on the related  collateral.
      Equity  in the CMOs is  established  at the time  the CMOs are  issued  at
      levels sufficient to achieve desired credit ratings on the securities from
      rating  agencies.  The amount of equity  invested in CMOs by the Long-Term
      Investment  Operations  is also  determined  by the Company based upon the
      anticipated  return on equity as compared to the  estimated  proceeds from
      additional  debt  issuance.  Total credit loss  exposure is limited to the
      equity  invested in the CMOs at any point in time.  At September 30, 1998,
      the Long-Term  Investment  Operations  had $1.2 billion of CMO  borrowings
      used to finance $1.3 billion of CMO collateral.

      IMH has a credit arrangement with ICH whereby ICH agreed to advance to IMH
      up to maximum amount of $15.0 million.  The agreement expires on August 8,
      1999.  Advances under the credit  arrangement  are at an interest rate and
      maturity  determined  at the  time  of  each  advance  with  interest  and
      principal  paid  monthly.  As of September 30, 1998 and December 31, 1997,
      there were $6.9 million and none outstanding under the credit arrangement.
      Interest  expense  recorded by IMH for the nine months ended September 30,
      1998  and  September  30,  1997  related  to  such  advances  to  ICH  was
      approximately $259,000 and none, respectively.

      IMH has a credit arrangement with ICH whereby IMH agreed to advance to ICH
      up to maximum amount of $15.0 million.  The agreement expires on August 8,
      1999.  Advances under the revolving credit  arrangement are at an interest
      rate and maturity determined at the time of each advance with interest and
      principal  paid  monthly.  As of September 30, 1998 and December 31, 1997,
      there were no borrowings  under the credit  arrangement.  Interest  income
      recorded  by IMH related to such  borrowings  from ICH for the nine months
      ended  September  30,  1998 and 1997 was  approximately  $43,000 and none,
      respectively.

      IMH entered into a revolving  credit  arrangement  with a commercial  bank
      whereby IMH can borrow up to maximum  amount of $10.0  million for general
      working capital needs. The revolving credit agreement expires on March 29,
      1999.  Advances under the revolving credit  arrangement are at an interest
      rate of prime plus 0.25%.  Interest is paid  monthly and as an  open-ended
      revolving line of credit there is no set principal payment schedule. As of
      September  30, 1998,  IMH's  outstanding  borrowings  under the  revolving
      credit arrangement was $9.7 million.

      The Long-Term Investment Operations may pledge mortgage-backed  securities
      as  collateral to borrow funds under reverse  repurchase  agreements.  The
      terms under these reverse repurchase  agreements are generally for 30 days
      with interest rates ranging from the one-month  London  Interbank  Offered
      Rate  ("LIBOR")  plus 0.45% to 2.00%  depending on the type of  collateral
      provided.  As of September 30, 1998, the Long-Term  Investment  Operations
      had $35.4 million  outstanding under these reverse  repurchase  agreements
      which  were   secured  by  $111.1   million  in  fair   market   value  of
      mortgage-backed securities.

      In October  1998,  the Company  sold to ICH its  remaining  50%  ownership
      interest in its commercial  office  building,  which resulted in a gain of
      $1.6  million and paid off the  Company's  outstanding  borrowings  on the
      property.
<PAGE>
 
      During the nine months  ended  September  30,  1998,  the  Company  raised
      capital of $27.8 million from the sale 1.8 million  shares of Common Stock
      issued  through its DRSPP and $3.2 million from the sale of 206,400 shares
      of Common Stock issued through its SES program.

      Conduit Operations: The Conduit Operations has entered into warehouse line
      agreements  to obtain  financing of up to $1.1 billion from the  Warehouse
      Lending  Operations  to provide IFC  mortgage  loan  financing  during the
      period that IFC  accumulates  mortgage  loans and until the mortgage loans
      are securitized and sold. The margins on the reverse repurchase agreements
      are based on the type of collateral  provided and generally range from 95%
      to 100% of the fair market value of the collateral.  The interest rates on
      the  borrowings  are indexed to Prime,  which was 8.50% at  September  30,
      1998.

      As of  September  30,  1998,  the  Conduit  Operations  had $45.9  million
      outstanding  under a warehouse line facility from a major  investment bank
      to finance the  acquisition of high  loan-to-value  loans. As of September
      30, 1998, the warehouse line facility expired.  Subsequent to quarter-end,
      the  Conduit  Operations  sold the  remaining  high  loan-to-value  loans,
      whereby the proceeds from the sale were used to pay off  borrowings on the
      warehouse line facility.

      During the nine months ended  September 30, 1998,  the Conduit  Operations
      securitized  $927.9  million of  mortgage  loans as REMICs and sold $315.6
      million in principal  balance of mortgage loans to third-party  investors.
      In  addition,  IFC sold $817.9  million in  principal  balance of mortgage
      loans to the Long-Term Investment  Operations during the nine months ended
      September  30, 1998. By  securitizing  and selling loans on a periodic and
      consistent  basis the warehouse  financing  facilities  were sufficient to
      handle  IFC's  liquidity  needs  during the nine  months  ended  September
      30,1998.

      Warehouse Lending  Operations:  The Warehouse Lending Operations  finances
      the acquisition of mortgage loans by the Long-Term  Investment  Operations
      and Conduit Operations  primarily through borrowings on reverse repurchase
      agreements  with  third  party  lenders.   IWLG  has  obtained  repurchase
      facilities  from major  investment  banks to provide  financing as needed.
      Terms of the reverse  repurchase  agreements require that the mortgages be
      held by an independent  third party custodian giving the Warehouse Lending
      Operations the ability to borrow against the collateral as a percentage of
      the outstanding  principal balance. The borrowing rates vary from 55 basis
      points to 95 basis points over one-month  LIBOR,  depending on the type of
      collateral provided.  The margins on the reverse repurchase agreements are
      based on the type of mortgage collateral used and generally range from 75%
      to 101% of the fair market value of the collateral.

      The following  table  presents  information  on available  warehouse  line
      agreements as of September 30, 1998 (dollars in thousands):


<TABLE>
                                                   Borrowing                    Amount
               Lender                                Limit                    Outstanding          Interest rate
- ----------------------------------------------------------------------------------------------------------------------
<S>                                    <C>                            <C>                      <C>                                
Lender A (1)                            $           399,989            $        399,989            Libor + 0.75%
Lender B (2)                                        183,878                     183,878         Libor + 0.45%-0.95%
                                          =====================================================
Total                                   $           583,867            $        583,867
                                          =====================================================
</TABLE>

      (1)  Uncommitted warehouse line facility.
      (2)  The warehouse line agreement  expired on October 22, 1998. On October
           30,  1998,  the  remaining  loans  pledged as  collateral  under this
           warehouse line agreement were sold.

      Cash Flows

      Operating Activities - During the nine months ended September 30, 1998 net
      cash provided by operating activities was $58.2 million.  Cash provided by
      operating  activities was primarily due to an increase in other assets and
      liabilities  of $34.5  million,  which was primarily the result of a $27.1
      million increase in due to affiliates.

      Investing Activities - During the nine months ended September 30, 1998 net
      cash  used in  investing  activities  was  $399.9  million.  Cash  used in
      investing activities was primarily due to an increase in CMO collateral of
      $501.7 million from the  acquisition of mortgage loans which was partially
      offset  by  decreases  in  mortgage  loans  held-for-investment  of $225.4
      million.

      Financing Activities - During the nine months ended September 30, 1998 net
      cash provided by financing activities was $327.7 million. Cash provided by
      financing activities was primarily due to an increase of $767.4 million in
      CMO  borrowings  used to fund the  acquisition of mortgage loans which was
      partially offset by a decrease in reverse repurchase  agreements of $126.6
      million.

      Inflation

      The  Financial  Statements  and Notes thereto  presented  herein 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 the Company's operations.  Unlike industrial companies,
      nearly all of the assets and  liabilities of the Company's  operations are
      monetary in nature.  As a result,  interest rates have a greater impact on
      the  Company's  operations'  performance  than do the  effects  of general
      levels of inflation.  Inflation affects the Company's 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 the Company's yield and  subsequently the value
      of its portfolio of Mortgage Assets.
<PAGE>
 
      Year 2000 Compliance

      Project Status

      The Company's Year 2000 project was  approximately  50% complete as of the
      end of October  1998.  The Company  contracted  with an outside  vendor to
      provide  coordination,  support,  testing and implementation in regards to
      Year  2000  compliance  of  hardware  and  software  systems,  both  on an
      information technology ("IT") and non-IT level.

      The Company  also has its own  in-house IT  department  that is  currently
      assisting the outside  vendor.  The Company's  primary IT systems  include
      loan servicing,  which is contracted to an outside vendor,  loan tracking,
      master  servicing and accounting and reporting.  The loan servicing system
      is  currently  in the  process  of Year 2000  compliance.  The  Company is
      provided with quarterly  status reports from our outside vendor  regarding
      the loan servicing  system.  The Company's IT department  will continue to
      monitor the vendor's  progress on Year 2000 compliance.  The loan tracking
      system is currently in  compliance  with Year 2000.  The master  servicing
      system is currently  being tested and the Company expects that this system
      will be Year 2000  compliant in the first quarter of 1999.  The accounting
      and reporting system is not currently Year 2000 compliant.  The vendor for
      this software is currently upgrading to a new version,  which will be Year
      2000 compliant in 1999.

      The Company's  non-IT systems include its file servers,  network  systems,
      workstations  and  communication  systems.  As of September 30, 1998,  the
      upgrade of the Company's  communication systems has been completed,  which
      regardless  of the Year 2000  issue,  required  an upgrade to comply  with
      terms of the service agreement.  Testing on all other in-house hardware is
      currently  underway and is expected to be complete by the end of the first
      quarter of 1999.

      The Year 2000 project is divided into two primary phases, as follows:  (1)
      define scope of project and identify  all IT and non-IT  systems,  and (2)
      testing  of  existing  systems  and  implementation  of  new  systems,  if
      required.  The outside contractor on the Year 2000 project submits monthly
      status  reports to the Company's IT manager and  communicates  with the IT
      department  on a daily basis.  The  Company's  executive  committee  which
      includes the CEO and  Chairman,  President,  and Chief  Financial  Officer
      review the progress of the  Company's  Year 2000 project  through  monthly
      status reports and reviews with the Company's IT manager.

      Phase I - Define Scope of Project

      This  phase  primarily  included  the  inventorying  of Year  2000  items,
      contacting  outside vendors,  including  reviewing  contractual  terms and
      conditions,  reviewing  internal  software for compliance and  determining
      costs to complete the project.  As of the end of October 1998,  Phase I of
      the project had been  completed.  Phase I of the project also included the
      testing and implementation or upgrade of non-IT systems.

      Phase II - Testing of Systems

      This  phase of the Year 2000  project  can be divided  into four  separate
      processes,  as  follows:  (1)  Compliance  Questionnaires,   (2)  Hardware
      Certification  Information,  (3) Software/Data  Testing,  and (4) Hardware
      Testing.

      Compliance Questionnaires and Hardware Certification  Information.  
      As of the end of October 1998, these portions of Phase II were complete.

      Software/Data  Testing.  As of the end of October  1998,  this  portion of
      Phase II was approximately  50% complete.  The remaining tasks within this
      process  include  analyzing  list of  software  being  used,  testing  all
      software  programs,  testing all data from incoming  sources,  testing all
      outgoing  data  processes  and  reporting.  The Company  expects that this
      process will be complete by March 31, 1999.
<PAGE>
 
      Hardware Testing.  As of the end of October 1998, this portion of Phase II
      had not been  started.  This  phase is  contingent  on the  completion  of
      software/data  testing.  Tasks  yet  to be  started  include  testing  all
      workstation,  servers  and  network  systems.  The  Company  expects to be
      compliant  with all  internal  Year  2000  issues  by the end of the first
      quarter of 1999.

      Costs

      The total cost associated with required  modifications or installations to
      become Year 2000 compliant is not expected to be material to the Company's
      financial  condition.  The estimated cost of the project is expected to be
      approximately  $500,000, of which approximately  $108,000 of the cost will
      be paid by ICH.  The total  estimate of the project  includes  the cost to
      upgrade the Company's communications system, which was $140,000. As of the
      end of October  1998,  the Company had paid $77,000 to the outside  vendor
      for completed work on the project. The majority of the Company's estimated
      cost for the Year 2000  compliance  has been or will be spent on  software
      upgrades  and writing new program code on existing  proprietary  software.
      Since most of the Company's  hardware has been  purchased  within the last
      two years, the cost of replacing hardware will be minimal.

      Risks

      The Company does not anticipate any material  disruption of its operations
      as a result of any failure by the Company to be compliant.  However, there
      can be no assurance that there will not be a delay in, or increased  costs
      associated with, the need to address the Year 2000 issue. The Company also
      relies,  directly and indirectly,  on other businesses such as third party
      service providers,  creditors and financial organizations and governmental
      entities.  Even if the  Company's  computer  systems  are  not  materially
      adversely  affected by the Year 2000 issue,  the  Company's  business  and
      operations  could be materially  adversely  affected by disruptions in the
      operations of the enterprises with which the Company interacts.

      Contingency Plans

      The Company believes its Year 2000 compliance  process should enable it to
      be successful in modifying its computer systems to be Year 2000 compliant.
      As  previously  stated,  acceptance  testing and  sign-off  has begun with
      respect  to the  Company's  in-house  systems.  In  addition  to Year 2000
      compliance  system  modification  plans,  the Company  has also  developed
      contingency  plans for all other  systems  classified as critical and high
      risk.  These  contingency  plans  provide  timetables  to  pursue  various
      alternatives based upon the failure of a system to be adequately  modified
      and/or  sufficiently  tested and validated to ensure Year 2000 compliance.
      However,  there can be no assurance that either the compliance  process or
      contingency plans will avoid partial or total system  interruptions or the
      costs  necessary to update hardware and software would not have a material
      adverse  effect  upon  the  Company's  financial  condition,   results  of
      operation, business or business prospects.

      Transactions with Related Parties

      On October 21, 1998,  ICH  repurchased  from IMH 937,084  shares of Common
      Stock and  456,916  Class A Common  Stock at a per share  price of $4.375,
      based upon the closing price on October 19, 1998,  for a total  repurchase
      of $6.1 million.  IMH recorded a loss of $9.1 million in the third quarter
      of 1998.

      On October 27, 1998,  the Company sold to ICH its  remaining 50% ownership
      interest in a commercial  office  building in Newport  Beach,  California.
      After the sale of its 50%  ownership  interest to ICH,  the Company has no
      remaining ownership interest in the building.  The Company recorded a gain
      of $1.6 million on the sale of the property.


      ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Not applicable.
<PAGE>
 
                                                   PART II. OTHER INFORMATION

      ITEM 1: LEGAL PROCEEDINGS

      Not applicable.

      ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

      Not applicable.

      ITEM 3: DEFAULTS UPON SENIOR SECURITIES

      Not applicable.

      ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      On July 23,1998, the Company held it's annual meeting of stockholders.  Of
      the total number of shares eligible to vote (23,927,197), 20,784,188 votes
      were returned,  or 87%, formulating a quorum. At the stockholders meeting,
      the following matters were submitted to stockholders for vote:  Proposal I
      - Election of  Directors,  Proposal  II Ratify  appointment  of  Company's
      independent auditors, KPMG Peat Marwick LLP.

      The results of voting on these proposals are as follows:

      Proposal I - Election of Directors
<TABLE>

        Director                                     For                     Against                Elected

       <S>                                      <C>                         <C>                    <C>

        Joseph R. Tomkinson                      20,650,774                  133,414                   Yes
        William S. Ashmore                       20,639,866                  144,322                   Yes
        H. Wayne Snavely                         20,641,572                  142,616                   Yes
        James Walsh                              20,643,159                  141,029                   Yes
        Frank P. Filipps                         20,643,672                  140,516                   Yes
        Stephan R. Peers                         20,642,222                  141,966                   Yes
</TABLE>

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

      Proposal II - Appointment of independent auditors

      Proposal II was approved with  20,617,549  shares voted for,  51,111 voted
      against,   and  115,528   abstained  from  voting  thereby  ratifying  the
      appointment  of  KPMG  Peat  Marwick  LLP  as  the  Company's  independent
      auditors.

      ITEM 5: OTHER INFORMATION

      On July 23, 1998,  Ronald M.  Morrison was appointed  General  Counsel and
Secretary of the Company.

      ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

      (a)  Exhibits:
27       Financial Data Schedule.

      (b) Reports on Form 8-K:

              None
<PAGE>
 
                                                           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.



      --------------------------
      By:  /s/ Richard J. Johnson
      Richard J. Johnson
      Executive Vice President
      and Chief Financial Officer

      Date:  November 16, 1998

<TABLE> <S> <C>

<PAGE>
 
<ARTICLE>                    5
<MULTIPLIER> 1,000
       
<S>                                                                              <C>
  
<PERIOD-TYPE>                                                                           9-MOS
<FISCAL-YEAR-END>                                                                 DEC-31-1997
<PERIOD-START>                                                                    JAN-01-1998
<PERIOD-END>                                                                      SEP-30-1998
<CASH>                                                                                  2,204
<SECURITIES>                                                                          111,082
<RECEIVABLES>                                                                       1,940,239
<ALLOWANCES>                                                                          (5,390)
<INVENTORY>                                                                                 0
<CURRENT-ASSETS>                                                                      643,790
<PP&E>                                                                                  9,343
<DEPRECIATION>                                                                          (437)
<TOTAL-ASSETS>                                                                      2,115,748
<CURRENT-LIABILITIES>                                                                 680,538
<BONDS>                                                                                     0
                                                                       0
                                                                                 0
<COMMON>                                                                                  246
<OTHER-SE>                                                                            231,169
<TOTAL-LIABILITY-AND-EQUITY>                                                        2,115,748
<SALES>                                                                               125,906
<TOTAL-REVENUES>                                                                      125,906
<CGS>                                                                                       0
<TOTAL-COSTS>                                                                               0
<OTHER-EXPENSES>                                                                       25,809
<LOSS-PROVISION>                                                                        3,299
<INTEREST-EXPENSE>                                                                     94,632
<INCOME-PRETAX>                                                                         2,166
<INCOME-TAX>                                                                                0
<INCOME-CONTINUING>                                                                     2,166
<DISCONTINUED>                                                                              0
<EXTRAORDINARY>                                                                             0
<CHANGES>                                                                                   0
<NET-INCOME>                                                                            2,166
<EPS-PRIMARY>                                                                            0.09
<EPS-DILUTED>                                                                            0.09
        

</TABLE>


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