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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

Commission File Number:  1-14100

          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.

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. o

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

          As of June 28, 2002 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $531.3 million, based on the closing sales price of common stock on the American Stock Exchange on that date.  For purposes of the calculation only, in addition to affiliated companies, all directors and executive officers of the registrant have been deemed affiliates.  There were 49,165,068 shares of Common Stock outstanding as of March 26, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the Registrant’s Definitive Proxy Statement issued in connection with the 2003 Annual Meeting of Stockholders of the Registrant are incorporated by reference into Part III.

IMPAC MORTGAGE HOLDINGS, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

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PART I

Forward-Looking Statements

          This annual report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements, some of which are based on various assumptions and events that are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “plan,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms.  Actual results could differ materially from those set forth in forward-looking statements, including, among other things, failure to achieve projected earning levels, the timely and successful implementation of strategic initiatives, the ability to generate sufficient liquidity, the ability to access the capital markets, interest rate fluctuations on our assets that differ from those on our liabilities, increase in prepayment rates on our mortgage assets, changes in assumptions regarding estimated loan losses or interest rates, the availability of financing and, if available, the terms of any financing, changes in estimations of acquisition and origination and resale pricing of mortgages, changes in markets which we serve, including the market for Alt-A mortgages, changes in general market and economic conditions and other factors described in this annual report.  For a discussion of the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements see “Risk Factors” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report.  We do not undertake, and specifically disclaim any obligation, to publicly release the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Available Information

          Our Internet website address is www.impaccompanies.com.  We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statement for our annual shareholders’ meetings, as well as any amendments to those reports, available free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or “SEC.”  You can learn more about us by reviewing our SEC filings on our website by clicking on “Impac Mortgage Holdings, Inc.” located on our home page and proceeding to “SEC filings.”  The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including the Company.

General

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

          We are a mortgage real estate investment trust, or “REIT.”  Together with our subsidiaries and affiliate we are a nationwide acquirer and originator of non-conforming Alt-A mortgages, or “Alt-A mortgages.”  Alt-A mortgages are primarily first lien mortgages made to borrowers whose credit is generally within typical Fannie Mae and Freddie Mac guidelines, but have loan characteristics that make them non-conforming under those guidelines.  Some of the principal differences between mortgages purchased by Fannie Mae and Freddie Mac and Alt-A mortgages are as follows:

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          For instance, mortgages may have higher loan-to-value, or “LTV,” ratios than allowable under Fannie Mae or Freddie Mac guidelines.  However, these mortgages that we acquire and originate may include private mortgage insurance. Furthermore, mortgages may not have certain documentation or verifications that are required by Fannie Mae and Freddie Mac.  Therefore, in making our credit decisions, we are more reliant upon the borrower’s credit score and the adequacy of the underlying collateral.  We believe that Alt-A mortgages provide an attractive net earnings profile by producing higher yields without commensurately higher credit losses than other types of mortgages.  Since 1999 we have acquired and originated primarily Alt-A mortgages.  We also provide warehouse and repurchase financing to originators of mortgages.  Our goal is to generate consistent reliable income for distribution to our stockholders primarily from earnings generated by our mortgage loan investment portfolio.

          We operate three core businesses:

          The long-term investment operations invest primarily in adjustable and fixed rate Alt-A mortgages that are acquired and originated by our mortgage operations and small-balance multi-family mortgages originated by IMCC.  This business primarily generates net interest income from its mortgage loan investment portfolio and, to a lesser extent, its investment securities portfolio.  Our investment in Alt-A mortgages and small-balance multi-family mortgages, or “multi-family mortgages,” is financed with cash flow from the mortgage loan investment portfolio, collateralized mortgage obligations, or “CMO,” financing, short-term borrowings under reverse repurchase agreements and proceeds from the sale of capital stock.

          The mortgage operations acquire, originate, sell and securitize primarily adjustable and fixed rate Alt-A mortgages.  Our mortgage operations generate income by securitizing and selling loans to permanent investors, including our long-term investment operations.  This business also earns revenue from fees associated with mortgage servicing rights, master servicing agreements and interest income earned on mortgages held-for-sale.  Our mortgage operations use warehouse facilities provided by the warehouse lending operations to finance the acquisition and origination of mortgages.

          The warehouse lending operations provide short-term financing to mortgage loan originators, including the mortgage operations, by funding mortgages from their closing date until they are sold to pre-approved investors.  This business earns fees from warehouse transactions as well as net interest income from the difference between its cost of borrowings and the interest earned on warehouse advances.

          Long-Term Investment Operations

          The long-term investment operations are conducted by IMH, IMH Assets, a wholly-owned specialty purpose entity through which the long-term investment operations conducts its CMO borrowings, and IMCC, an originator of multi-family mortgages.  The long-term investment operations invest primarily in Alt-A mortgages, multi-family mortgages and, to a lesser extent, mortgage-backed securities secured by or representing interests in mortgages.  Income is primarily earned from net interest income received on mortgages and mortgage-backed securities acquired and held for long-term investment.  Mortgages and mortgage-backed securities are financed with borrowings provided from CMOs, short-term borrowings under reverse repurchase agreements, borrowings secured by mortgage-backed securities and capital.

          The mortgage operations supports the investment objectives of the long-term investment operations by supplying mortgages at prices that are comparable to those available through investment bankers and other third parties. We believe that purchasing mortgages acquired and originated by our mortgage operations affords us a competitive advantage because of our historical understanding of the underlying credit of these mortgages and the extensive information on the performance and prepayment patterns of these types of mortgages.

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Mortgage Loan Investment Portfolio

          We believe that Alt-A mortgages provide an attractive net earnings profile by producing higher yields without commensurately higher credit risks than other types of mortgages.  We primarily acquire non-conforming “A” or “A-” credit quality mortgages, collectively, Alt-A mortgages.  As defined by us, A credit quality mortgages generally have a credit score of 640 or better and A- credit quality mortgages generally have a credit score of between 600 and 639.  As a comparison, Fannie Mae and Freddie Mac generally purchase conforming mortgages with credit scores greater than 620.  We believe that by improving the overall credit quality of our mortgage investment portfolio we can more consistently generate a higher level of future cash flow and earnings.

          Alt-A mortgages that we acquire for long-term investment are primarily adjustable rate mortgages, or “ARMs,” hybrid adjustable rate mortgages, or “hybrid ARMs,” and, to a lesser extent, fixed rate mortgages, or “FRMs.”  ARMs are generally fully amortizing mortgages with maturity periods ranging from 15 to 30 years.  The interest rate on ARMs are typically tied to an index, such as the six-month London Interbank Offered Rate, or “LIBOR,” plus a spread and adjust periodically, subject to lifetime interest rate caps and periodic interest rate and payment caps.  The initial interest rates on ARMs are typically lower than the average comparable fixed rate mortgage but may be higher than average comparable FRMs over the life of the mortgage.  Hybrid ARMs are generally fully amortizing mortgages with maturity periods ranging from 15 to 30 years with initial fixed interest rate periods generally ranging from two to five years, which subsequently adjust to ARMs.  FRMs are generally fully amortizing mortgages with maturity periods ranging from 15 to 30 years.

          The majority of mortgages acquired by the long-term investment operations have prepayment penalty features that have prepayment penalty periods ranging from two to five years. During 2002 the long-term investment operations acquired from the mortgage operations $3.9 billion in principal balance of primarily adjustable and fixed rate Alt-A mortgages for long-term investment. The acquisition and retention of Alt-A and origination of multi-family mortgages increased CMO collateral to $5.2 billion at year-end 2002.

          The following table presents selected information about mortgages held as CMO collateral for the periods indicated:

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          The following table presents mortgage acquisitions by loan characteristic for the periods indicated (in thousands):

(1)     Excludes $25.8 million of multi-family mortgages originated by IMCC.

          In addition to acquiring mortgages from our mortgage operations, the long-term investment operations originate multi-family mortgages through IMCC, a wholly-owned subsidiary of IMH.  IMCC was formed to primarily originate small-balance multi-family ARMs with high credit quality and conservative LTV ratios with balances ranging from $250,000 to $1.5 million.  Multi-family mortgages generally have interest rate floors, which is generally the initial start rate, and prepayment penalty periods ranging from three to five years.  Multi-family mortgages provide greater asset diversification on our balance sheet as multi-family mortgages typically have higher interest rate spreads and longer lives than residential mortgages.  IMCC originated $25.8 million of multi-family mortgages in 2002.

          For additional information regarding the mortgage loan investment portfolio refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations — Impac Mortgage Holdings, Inc.,” “Note C — Mortgages Held-for-Investment” and “Note D — CMO Collateral” in the accompanying notes to the consolidated financial statements for Impac Mortgage Holdings, Inc.

Investment Securities Portfolio

          Prior to 1998 and in connection with the issuance of mortgage-backed securities by the mortgage operations in the form of real estate mortgage investment conduits, or “REMICs,” the long-term investment operations acquired senior or subordinated securities as regular interests on a short- or long-term basis and subordinated mortgage-backed securities issued by third parties.  These securities or investments may subject us to credit, interest rate and prepayment risks.  In general, subordinated classes of a particular series of securities bear all losses prior to the related senior classes.  Losses in excess of expected losses at the time such securities are purchased would adversely affect our yield on these securities and could result in failure to recoup our initial investment.

          Since 1998 our investment strategy has been to only acquire or invest in mortgage-backed securities that are secured by Alt-A mortgages underwritten and acquired and originated by our mortgage operations due to our understanding of the underlying credit of these mortgages and their historical performance.  Since 1999 we have acquired no mortgage-backed securities from the mortgage operations and pursuant to our current investment policy we no longer acquire or invest in interest-only, principal-only or subordinate mortgage-backed securities.  Since 2000 our

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investment securities portfolio, which primarily includes subordinated mortgage-backed securities, as a percentage of total assets has declined significantly and represented less than 0.05% of total assets at year-end 2002.  For additional information regarding the investment securities portfolio refer to “Note B — Investment Securities Available-for-Sale” in the accompanying notes to the consolidated financial statements for Impac Mortgage Holdings, Inc.

Financing

          We primarily finance our long-term mortgage loan investment portfolio and investment securities portfolio as follows:

          As we accumulate mortgages we may issue CMOs secured by such mortgages as a means of financing.  The decision to issue CMOs is based on our current and future investment needs, market conditions and other factors.  Each issue of CMOs is fully payable from the principal and interest payments on the underlying mortgages securing such debt, any cash or other collateral pledged as a condition of receiving the desired rating on the debt and any investment income on mortgage collateral.  We earn a net interest spread on interest income on mortgages held as CMO collateral less interest and other expenses associated with CMO financing.  Net interest spreads may be directly impacted by levels of early prepayment of underlying mortgages and, to the extent each CMO class has variable rates of interest, may be affected by changes in short-term interest rates.  Our CMOs typically are structured as adjustable rate securities that are indexed to one-month LIBOR and fixed rate securities with interest payable monthly.  Certain CMOs are guaranteed to certificate holders by a mortgage insurer, which give the CMOs the highest rating established by a nationally recognized rating agency.  For additional information regarding CMOs refer to “Note H — CMO Borrowings” in the accompanying notes to the consolidated financial statements for Impac Mortgage Holdings, Inc.

          When we issue CMOs for financing purposes, we seek an investment grade rating for our CMOs by a nationally recognized rating agency. To secure such a rating, it is often necessary to pledge collateral in excess of the principal amount of the CMOs to be issued, or to obtain other forms of credit enhancements such as additional mortgage insurance.  The need for additional collateral or other credit enhancements depends upon factors such as the type of collateral provided, the interest rates paid, the geographic concentration of the mortgaged property securing the collateral, and other criteria established by the rating agencies.  The pledge of additional collateral reduces our capacity to raise additional funds through short-term secured borrowings or additional CMOs, and diminishes the potential expansion of our mortgage loan investment portfolio.  As a result, our objective is to pledge additional collateral for CMOs only in the amount required to obtain an investment grade rating for our CMOs by a nationally recognized rating agency. Our total loss exposure is limited to the equity invested in the CMOs at any point in time.

          Prior to the issuance of CMOs we use reverse repurchase agreements as short-term financing at interest rates that are consistent with our investment objectives.  A reverse repurchase agreement acts as a financing vehicle under which we effectively pledge our mortgages as collateral to secure a short-term loan.  Generally, the other party to the agreement makes the loan in an amount equal to a percentage of the market value of the pledged collateral. At the maturity of the reverse repurchase agreement, we are required to repay the loan and correspondingly we receive our collateral.  Our borrowing agreements require us to pledge cash, additional mortgages or additional investment securities backed by mortgages in the event the market value of existing collateral declines.  We may be required to sell assets to reduce our borrowings to the extent that cash reserves are insufficient to cover such deficiencies in collateral.  For additional information regarding reverse repurchase agreements refer to “Note G — Reverse Repurchase Agreements” in the accompanying notes to the consolidated financial statements for Impac Mortgage Holdings, Inc.

          We finance a portion of our investment securities portfolio with principal-only notes.  The principal-only notes represent senior or subordinated interests in trust funds primarily consisting of a pool of mortgages.  The principal-only notes represent non-recourse obligations.  For additional information regarding borrowings secured by investment

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securities refer to “Note I — Borrowings Secured by Investment Securities Available-for-Sale” in the accompanying notes to the consolidated financial statements for Impac Mortgage Holdings, Inc.

Interest Rate Hedging

          We follow an interest rate hedge program intended to limit our exposure to changes in interest rates primarily associated with cash flows on our adjustable rate CMO borrowings.  Our primary objective is to hedge our exposure to the variability in future cash flows attributable to the variability of one-month LIBOR, which is the underlying index of our adjustable rate CMO borrowings.  We also monitor on an ongoing basis the prepayment risks that arise in fluctuating interest rate environments. Our interest rate hedge program is formulated with the intent to offset the potential adverse effects of changing interest rates on cash flows on adjustable rate CMO borrowings resulting from the following:

          To mitigate our exposure to the effect of changing interest rates on cash flows on our adjustable rate CMO borrowings, we acquire derivative instruments in the form of interest rate cap agreements, or “caps,” interest rate floor agreements, or “floors,” and interest rate swap agreements, or “swaps.”  For additional information regarding interest rate hedging refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” and “Note P — Derivative Instruments and Hedging Activities” in the accompanying notes to the consolidated financial statements for Impac Mortgage Holdings, Inc.

Mortgage Operations

          The mortgage operations are conducted by IFC, Impac Lending Group, or “ILG,” a division of IFC, and Novelle and ISAC, wholly-owned subsidiaries of IFC.   The mortgage operations acquire, originate, sell and securitize primarily adjustable and fixed rate Alt-A mortgages and, to a lesser extent, sub-prime mortgages, or “B/C mortgages,” from correspondents, mortgage brokers and retail customers.  IFC acquires primarily adjustable and fixed rate Alt-A mortgages from its network of third party correspondents on a flow (loan-by-loan) basis or on a bulk basis from other mortgage companies, which may include customers of IFC.  Correspondents originate and close mortgages under IFC’s mortgage programs.  Correspondents include savings and loan associations, commercial banks and mortgage bankers and brokers.  IFC acts as an intermediary between the originators of mortgages that do not meet the guidelines for purchase by Fannie Mae and Freddie Mac and permanent investors in mortgage-backed securities secured by or representing an ownership interest in mortgages.  ILG markets, underwrites, processes and funds mortgages for both wholesale and retail customers. ILG works directly with mortgage brokers to originate, underwrite and fund their mortgages.  Many of ILG’s wholesale customers cannot conduct business with the mortgage operations as correspondents because they do not meet the higher net worth requirements.  Through its retail channel, ILG markets mortgages directly to the public.  ILG offers the same mortgage programs to its mortgage brokers and retail customers that are offered by IFC.  Novelle is a wholly-owned subsidiary of IFC that originates B/C mortgages through a network of wholesale brokers and subsequently sells its loans to third party investors for cash gains.  Novelle began operations during September of 2001 in San Diego, California, where it is currently headquartered, with capital provided by IFC.  ISAC is a wholly-owned specialty purpose entity through which IFC issues itsREMICs. 

Marketing Strategy

          We believe that we can compete effectively with other Alt-A mortgage conduits through our efficient loan purchasing process, flexible purchase commitment options and competitive pricing and by designing Alt-A mortgages that suit the needs of our correspondents and mortgage brokers and their borrowers, which is intended to provide sufficient credit quality to our investors.  Our principle strategy is to expand our market position as a low-cost nationwide acquirer and originator of Alt-A mortgages, while continuing to emphasize an efficient centralized operating structure.  To help accomplish this, we have developed a second-generation web-based automated underwriting system called Impac Direct Access System for Lending, or “iDASLg2.”  iDASLg2 substantially increases efficiencies for our

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customers and our mortgage operations by significantly decreasing the processing time for a mortgage while improving employee productivity and maintaining superior customer service. 

          iDASLg2 is an interactive Internet-based system that allows our customers to automatically underwrite mortgages, enabling our customers to pre-qualify borrowers for various mortgage programs and receive automated approval decisions.  iDASLg2 is intended to increase efficiencies not only for our customers but also for the mortgage operations by significantly decreasing the processing time for a mortgage.  iDASLg2 improves employee production and maintains superior customer service, which together leads to higher closing ratios, improved profit margins and increased profitability at all levels of our business operations.  Most importantly, iDASLg2 allows us to move closer to our correspondents and mortgage brokers with minimal future capital investment while maintaining centralization, a key factor in the success of our operating strategy.  During 2002 average monthly volume of mortgages submitted through IDASL and iDASLg2 increased by 70% to $1.4 billion per month as compared to $794.9 million per month in 2001.  All of our correspondents submit loans via iDASLg2 and all wholesale loans delivered by mortgage brokers are directly underwritten through iDASLg2.  Mortgages purchased on a bulk basis are not underwritten through iDASLg2. 

          We also focus on expansion opportunities to attract correspondent originators and mortgage brokers to our nationwide network in order to increase mortgage acquisitions and originations in a controlled manner.  This allows us to shift the high fixed costs of interfacing with the homeowner to our correspondents and mortgage brokers. This marketing strategy is designed to accomplish three objectives as follow:

          As of February 28, 2003 we maintained relationships with 222 correspondents and approximately 4,860 mortgage bankers and brokers.  In order to accomplish our production objectives, we design and offer mortgage products that we believe are attractive to potential Alt-A borrowers and to end-investors in Alt-A mortgages and mortgage-backed securities. We have historically emphasized and continue to emphasize flexibility in our mortgage product mix as part of our strategy to attract and establish long-term relationships with our correspondents and mortgage brokers.  We also maintain relationships with numerous end-investors so that we may develop mortgage products that may be of interest to them as market conditions change, which in turn may be offered through our correspondent network.  In response to the needs of our correspondents, and as part of our strategy to facilitate the sale of our mortgages through the mortgage operations, our marketing strategy offers efficient response time in the purchase process, direct and frequent contact with our correspondents and mortgage brokers through a trained sales force and flexible commitment programs.  Finally, due to the price sensitivity of most homebuyers, we are competitive in pricing our products in order to attract sufficient numbers of mortgages.

Mortgage Acquisitions and Originations

          The majority of mortgages acquired and originated by the mortgage operations are adjustable and fixed rate Alt-A mortgages.  A portion of Alt-A mortgages that are acquired and originated by the mortgage operations exceed the maximum principal balance for a conforming loan purchased by Fannie Mae or Freddie Mac, which is currently $322,700.  Mortgages that exceed such maximum principal balance are referred to as “jumbo loans.”  Alt-A mortgages generally consist of jumbo loans or other mortgages that are acquired and originated in accordance with underwriting or product guidelines that differ from those applied by Fannie Mae and Freddie Mac.  Alt-A mortgages may involve greater risk as a result of different underwriting and product guidelines.  A portion of mortgages acquired and originated through the mortgage operations are B/C mortgages, which may entail greater credit risks than Alt-A mortgages.  We generally do not acquire or originate mortgages with principal balances above $750,000 for Alt-A credit quality loans and $500,000 for B/C mortgages.  In general, B/C mortgages are residential mortgages made to borrowers with lower credit ratings than borrowers of higher credit quality, Alt-A mortgages and are normally subject to higher rates of loss and delinquency than other Alt-A mortgages acquired and originated by the mortgage operations.  As a result, B/C mortgages normally bear a higher rate of interest and are typically subject to higher fees than Alt-A mortgages.  In general, greater emphasis is placed upon the value of the mortgaged property and, consequently, the quality of

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appraisals, and less upon the credit history of the borrower in underwriting B/C mortgages than in underwriting Alt-A mortgages.  In addition, B/C mortgages are generally subject to lower LTV ratios than Alt-A mortgages.  Mortgages acquired by the mortgage operations are generally secured by first liens and, to a lesser extent, second liens on single-family residential properties with either adjustable or fixed interest rates. FRMs have a constant interest rate over the life of the loan, which is generally 15 or 30 years.  The interest rate on ARMs are typically tied to an index, such as six-month LIBOR plus a spread and adjust periodically, subject to lifetime interest rate caps and periodic interest rate and payment caps.  The initial interest rates on ARMs are typically lower than the average comparable FRM but may be higher than average comparable FRMs over the life of the loan.  We acquire and originate mortgages with the following most common loan characteristics, although we may purchase mortgages with other interest rate and maturity characteristics:

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

(1)  2002 and 2001 includes $404.9 million and $88.6 million, respectively, of B/C mortgages originated by Novelle that are subsequently sold to third party investors for cash gains.

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          Our mortgage acquisition and origination activities focus on those regions of the country where higher volumes of Alt-A mortgages are originated including California, Florida, Colorado, Georgia, New Jersey, Illinois, Texas, New York, Washington and Virginia.  The highest concentration of Alt-A mortgages acquired and originated relate to properties located in California and Florida because of generally higher property values and mortgage balances.  During the years ended December 31, 2002 and 2001 mortgages secured by California and Florida properties accounted for approximately 56% and 10%, respectively, of mortgage acquisitions and originations during both years.  Of the $5.9 billion in principal balance of mortgages acquired and originated in 2002, $2.2 billion, or 37%, were acquired from our top ten correspondents and wholesale brokers.  Express Lending Group accounted for $811.4 million, or 14%, of mortgages acquired and originated by the mortgage operations in 2002.  No other correspondents or brokers accounted for more than 10% of the total mortgages acquired and originated by the mortgage operations in 2002.

Underwriting

          We have developed comprehensive purchase guidelines for the acquisition and origination of mortgages.  Each mortgage underwritten assesses the borrower’s credit score, ability and willingness to repay the mortgage obligation and the adequacy of the mortgaged property as collateral for the mortgage.  Subject to certain exceptions and the type of mortgage product, each purchased mortgage must conform to the loan parameters and eligibility requirements specified in our seller/servicer guide with respect to, among other things, loan amount, type of property, compliance, LTV ratio, mortgage insurance, credit history, debt service-to-income ratio, appraisal and loan documentation. We also perform a full legal documentation review prior to the purchase of all mortgages.

          All mortgages acquired or originated under our loan programs are underwritten either by our employees or by contracted mortgage insurance companies or delegated sellers.  Under all of our underwriting methods, loan documentation requirements for verifying the borrower’s income and assets vary according to LTV ratios and other factors.  Generally, as the standards for required documentation are lowered, the borrowers’ down payment requirements are increased and the required LTV ratios are decreased.  The borrower is also required to have a stronger credit history, larger cash reserves and an appraisal of the property that may be validated by an enhanced desk or field review, depending on the loan program.  Lending decisions are based on a risk analysis assessment after the review of the entire mortgage file.  Each mortgage is individually underwritten with emphasis placed on the overall quality of the mortgage.

Seller Eligibility Requirements

          Mortgages acquired by the mortgage operations are originated by various sellers, including mortgage bankers, savings and loan associations and commercial banks.  Sellers are required to meet certain regulatory, financial, insurance and performance requirements established by us before they are eligible to participate in our mortgage purchase programs. Sellers must also submit to periodic reviews to ensure continued compliance with these requirements.  Our current criteria for seller participation generally includes a minimum tangible net worth requirement of $500,000, approval as a Fannie Mae or Freddie Mac seller/servicer in good standing, a Housing and Urban Development, or “HUD,” approved mortgagee in good standing or a financial institution that is insured by the Federal Deposit Insurance Corporation, or “FDIC,” or comparable federal or state agency, and that the seller is examined by a federal or state authority.

          In addition, sellers are required to have comprehensive mortgage origination quality control procedures.  In connection with its qualification, each seller enters into an agreement that generally provides for recourse by us against the seller in the event of a breach of representations or warranties made by the seller with respect to mortgages sold to us, which includes but is not limited to any fraud or misrepresentation during the mortgage loan origination process or upon early payment default on mortgages.

Securitization and Sale

          After acquiring mortgages from correspondents on a flow or bulk basis, and originating mortgages through ILG’s and Novelle’s wholesale and retail channels the mortgage operations sell or securitize mortgages to permanent investors.  The mortgage operations sell substantially all of its ARM acquisitions and originations and approximately 50% of its FRM acquisitions and originations to the long-term investment operations at prices comparable to prices available to third party investors at the date of sale.  During 2002 the mortgage operations sold $3.9 billion in principal balance of mortgages to the long-term investment operations.  Generally, the mortgage operations sell all of its

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mortgage acquisitions and originations to third party investors as servicing released, which means that we do not retain primary mortgage servicing rights.

          When a sufficient volume of FRMs with similar characteristics has been accumulated, generally $100 million to $350 million, the mortgage operations will sell bulk packages, referred to as whole loan sales, to third party investors in mortgages or will securitize them through the issuance of mortgage-backed securities in the form of REMICs.  During 2002 the mortgage operations sold $1.1 billion in principal balance of mortgages as whole loan sales and $600.0 million in principal balance of mortgages as REMICs.

          The period of time between when we commit to purchase mortgages and the time we sell or securitize mortgages generally ranges from 10 to 90 days, depending on certain factors including the length of the purchase commitment period, volume by product type and the securitization process.  REMIC transactions are generally accounted for as sales of the mortgages and can eliminate or minimize any long-term residual investment in such mortgages.  REMIC securities consist of one or more classes of “regular interests” and a single class of  “residual interest.” The regular interests are tailored to the needs of investors and may be issued in multiple classes with varying maturities, average lives and interest rates.

          REMICs created by us are structured so that one or more of the classes of securities are rated investment grade by at least one nationally recognized rating agency.  The ratings for our REMICs are based upon the perceived credit risk by the applicable rating agency of the underlying mortgages, the structure of the securities and the associated level of credit enhancement.  Credit enhancement is designed to provide protection to the security holders in the event of borrower defaults and other losses including those associated with fraud or reductions in the principal balances or interest rates on mortgages as required by law or a bankruptcy court.

Hedging Activities

          The mortgage operations hedges interest rate risk and price volatility on its mortgage loan investment portfolio during the time it commits to acquire or originate mortgages at a pre-determined rate and the time it sells or securitizes mortgages.  To mitigate interest rate and price volatility risks, IFC may enter into forward commitments and derivative transactions.  The nature and quantity of derivative transactions are determined based on various factors, including market conditions and the expected volume of mortgage acquisitions and originations.

          For additional information regarding interest rate hedging refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” and “Note K — Derivative Instruments and Hedging Activities” in the accompanying notes to the consolidated financial statements for Impac Funding Corporation.

Master Servicing

          We retain master servicing rights on substantially all of our Alt-A mortgage acquisitions and originations.  Our function as master servicer includes collecting loan payments from other loan servicers and remitting loan payments, less master servicing fees receivable and other fees, to a trustee or other purchaser for each series of mortgage-backed securities or loans master serviced.  In addition, as master servicer, we monitor compliance with our servicing guidelines and are required to perform, or to contract with a third party to perform, all obligations not adequately performed by any loan servicer.  We may also be required to advance funds to cover interest payments not received from borrower’s depending on the status of their mortgages.

          With respect to IFC’s function as a master servicer for loans owned by the long-term investment operations, IFC and IMH have entered into agreements with terms substantially similar to those of independent third parties.  Master servicing fees are generally 0.03% per annum on the declining principal balances of the loans serviced.  At year-end 2002 we master serviced 48,520 mortgages with a principal balance of $8.7 billion.

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           The following table presents the amount of delinquent mortgages in our master servicing portfolio for the periods indicated (dollars in thousands):

Servicing

          We subcontract all of our servicing obligations to independent third parties pursuant to sub-servicing agreements.  We believe that the selection of third-party sub-servicers or the sale of servicing rights is more effective than establishing a servicing department within our mortgage operations.  However, part of our responsibility is to continually monitor the performance of the sub-servicers or servicers through performance reviews and regular site visits.  Depending on sub-servicer reviews, we may in the future rely on our internal collection group to take an ever more active role to assist the sub-servicer in the servicing of mortgages.

          Servicing includes collecting and remitting loan payments, making required advances, accounting for principal and interest, holding escrow or impound funds for payment of taxes and insurance, if applicable, making required inspections of the mortgaged property, contacting delinquent borrowers, and supervising foreclosures and property dispositions in the event of un-remedied defaults in accordance with our guidelines.  Servicing fees range from 0.25% per annum for FRMs to 0.50% per annum for B/C mortgages and 0.375% for ARMs on the declining principal balances of loans serviced.  Additionally, we earn interest, or “float,” on principal and interest payments we receive from our borrowers until those payments are remitted to the investors in those mortgages.  We generally acquire all of our mortgages on a servicing released basis. To the extent the mortgage operations finances the acquisition of mortgages with warehouse facilities provided by IWLG, the mortgage operations pledges mortgages and the related servicing rights to IWLG as collateral.  As a result, IWLG has an absolute right to control the servicing of such mortgages, including the right to collect payments on the underlying mortgages, and to foreclose upon the underlying real property in the case of default.  Typically, IWLG delegates its right to service the mortgages securing the warehouse line to IFC.

          The following table presents information regarding our mortgage servicing portfolio, including mortgages held-for-sale and mortgages held-for-investment, for the periods shown (dollars in millions, except average loan size):

(1)     Includes normal principal runoff and principal prepayments.

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Warehouse Lending Operations

          The warehouse lending operations is conducted by IWLG.  The warehouse lending operations provide reverse repurchase financing to affiliated companies and to approved mortgage banks, some of which are correspondents of the mortgage operations, to finance mortgages during the time from the closing of the mortgages to their sale or other settlement with pre-approved investors.  The warehouse lending operations relies mainly on the sale or liquidation of the mortgages as a source of repayment.  Any claim of the warehouse lending operations as a secured lender in a bankruptcy proceeding may be subject to adjustment and delay.  Borrowings under the warehouse facilities are presented on our balance sheets as finance receivables.  Terms of non-affiliated warehouse lines, including the commitment amount, are determined based upon the financial strength, historical performance and other qualifications of the borrower.

Regulation

          We establish underwriting guidelines that include provisions for inspections and appraisals, require credit reports on prospective borrowers and determine maximum loan amounts.  Our mortgage acquisition and origination activities are subject to, among other laws, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Real Estate Settlement Procedures Act and Home Mortgage Disclosure Act and the regulations promulgated thereunder. These laws and regulations prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level.  Our mortgage acquisition and origination activities are also subject to state and local laws and regulations, including predatory lending laws, and may also be subject to applicable state usury statutes.  IFC, our mortgage operations, is an approved Fannie Mae and Freddie Mac seller and/or servicer.  IFC is subject to the rules and regulations of Fannie Mae and Freddie Mac with respect to acquiring, processing, selling and servicing mortgages.  In addition, IFC is required annually to submit to Fannie Mae and Freddie Mac audited financial statements, and each regulatory entity has its own financial requirements for sellers/servicers.  IFC’s affairs are also subject to examination by Fannie Mae and Freddie Mac at any time to assure compliance with applicable regulations, policies and procedures.

Competition

          In acquiring and originating Alt-A mortgages and issuing securities backed by such loans, we compete with established mortgage conduit programs, investment banking firms, savings and loan associations, banks, thrift and loan associations, finance companies, mortgage bankers, insurance companies, other lenders and other entities purchasing mortgage assets.  Consolidation in the mortgage banking industry may also reduce the number of current correspondents and independent mortgage brokers available to the mortgage operations, reducing our potential customer base and resulting in the mortgage operations acquiring and originating a larger percentage of mortgages from a smaller number of customers.  Changes of this nature could negatively impact our businesses.  Mortgage-backed securities issued by the mortgage operations and the long-term investment operations face competition from other investment opportunities available to prospective investors.  We face competition in our mortgage operations and warehouse lending operations from other financial institutions, including but not limited to banks and investment banks.  Our competitors include IndyMac Bancorp, Inc., Greenpoint Financial Corporation, Residential Funding Corporation, Aurora Loan Services, Inc. and Credit Suisse First Boston Corporation.  Competition can take place on various levels, including convenience in obtaining a mortgage, service, marketing, origination channels and pricing.  We depend primarily on correspondents and independent mortgage brokers for the acquisition and origination of mortgages.  These independent mortgage brokers deal with multiple lenders for each prospective borrower. We compete with these lenders for the independent brokers’ business on the basis of price, service, loan fees, costs and other factors.  Our competitors also seek to establish relationships with such brokers, who are not obligated by contract or otherwise to do business with us.  Many of the institutions with which we compete in our mortgage operations and warehouse lending operations have significantly greater financial resources than we have.  However, we can compete effectively with other Alt-A mortgage conduits through our efficient loan purchasing process, flexible purchase commitment options and competitive pricing and by designing Alt-A mortgages that suit the needs of our correspondents and their borrowers, which is intended to provide sufficient credit quality to our investors.

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Employees

          At year-end 2002 we had 432 full- and part-time employees and temporary and contract employees.  The mortgage operations employed 393 full- and part-time employees and temporary and contract employees, of which 85 were employed by Novelle.  IWLG and IMCC employed 30 and 9 full- and part-time employees and temporary and contract employees, respectively.  Management believes that relations with its employees are good.  The Company is not a party to any collective bargaining agreement.

Revisions in Policies and Strategies

          Our board of directors has approved the Company’s investment and operating policies and strategies.  Our core operations involve the acquisition and origination of mortgages and their subsequent securitization and sale.  We also act as a warehouse lender providing financing facilities to mortgage originators.  These operations, their associated policies and strategies, are further described herein.  Our board of directors has delegated our asset/liability management to the Asset/Liability Committee, or “ALCO,” which reports to the board of directors at least quarterly.  See a further discussion of ALCO in Item 7. “Management’s Discussion of Financial Condition and Results of Operations” and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”  Any of our policies, strategies and activities may be modified or waived by our board of directors without stockholder consent.  Developments in the market, which affect the policies and strategies mentioned herein or which change our assessment of the market, may cause our board of directors to revise our policies and financing strategies.

          We have elected to qualify as a REIT for tax purposes.  We have adopted certain compliance guidelines, which include restrictions on the acquisition, holding and sale of assets.  Prior to the acquisition of any asset, we determine whether the asset meets REIT requirements.  Substantially all of the assets that we have acquired and will acquire for investment are expected to qualify as REIT assets.  This requirement limits our investment strategies.

          The long-term investment operations primarily invest in Alt-A mortgages and, to a lesser extent, B/C mortgages that are acquired from our mortgage operations.  Our mortgage operations generally do not acquire or originate mortgages with principal balances above $750,000 for Alt-A credit quality mortgages and $500,000 for B/C mortgages.  The long-term investment operations does not have a limit on the proportion of its assets that may be invested in each type of mortgage.  Our goal is that mortgage-backed securities do not consist more than 10% of our total assets.

          We closely monitor our acquisition and investment in mortgage assets and the sources of our income, including income from our hedging strategies, to ensure at all times that we maintain our qualifications as a REIT.  We have developed certain accounting systems and testing procedures to facilitate our ongoing compliance with the REIT provisions of the Internal Revenue Code.  No changes in our investment policies and operating strategies, including credit criteria for mortgage asset investments, may be made without the approval of our board of directors.

          We may at times and on terms that our board of directors deems appropriate:

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          We may also underwrite the securities of other issuers, although we have not done so in the past and have no present intention to do so.  Historically, we have and intend to continue to distribute annual reports to our stockholders, including financial statements certified by independent auditors, describing our current business and strategy.

Risk Factors

          The following risk factors reference our mortgage loan investment portfolio, which consists of CMO collateral, mortgages held-for-investment and finance receivables.  For information on the characteristics of the mortgage loan investment portfolio refer to “Note C—Mortgages Held-for-Investment”, “Note D—CMO Collateral” and “Note E — Finance Receivables” in the accompanying notes to the consolidated financial statements for Impac Mortgage Holdings, Inc.

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

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

Terrorist attacks or military action may adversely affect our financial results.

          The effects that terrorist attacks in the United States or other incidents and related military action, or possible military action by U.S. forces in Iraq or other regions, may have on the mortgage operations’ ability to acquire or originate mortgages, the performance of the mortgages held by the long-term investment operations or on the values of mortgaged properties cannot be determined at this time.  As a result of terrorist activity or military action, there may be a reduction in new mortgages, which will adversely affect our ability to expand our mortgage portfolio.  In addition, a decline in new mortgage activity will likely result in reduced activity for our warehouse lending operations and our long-term investment operations.  Mortgages held by our long-term investment operations may experience higher rates of delinquency, default and prepayment.  These potential consequences of terrorist attacks or military action will have

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an adverse affect on our financial results.  Federal agencies and non-government lenders have, and may continue to, defer, reduce or forgive payments and delay foreclosure proceedings in respect of loans to borrowers affected in some way be recent and possible future events.  In addition, activation of a substantial number of U.S. military reservists or members of the National Guard may significantly increase the proposition of mortgages whose mortgage rates are reduced by application of the Soldiers’ and Sailors’ Civil Relief Act of 1940 or similar state laws, and neither the master servicers nor the servicers will be required to advance for any interest shortfall caused by any such reduction.  Interest payable to senior and subordinate certificate holders will be reduced on a pro rata basis by any reductions in the amount of interest collectible as a result of application of the Soldiers’ and Sailors’ Civil Relief Act of 1940 or similar state laws.

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

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

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

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

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

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

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value of the collateral securing our financing facilities and required us to provide them with additional equity or collateral to secure our borrowings.

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

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

          During the year ended December 31, 2000 we experienced a net loss of $54.2 million. The net loss incurred during 2000 included accounting charges of $68.9 million. The accounting charges were the result of write-downs of non-performing investment securities secured by mortgages and additional increases in the provision for loan losses to provide for the deterioration of the performance of collateral supporting specific investment securities.  During the year ended December 31, 1998 we experienced a net loss of $5.9 million primarily as the mortgage industry experienced substantial turmoil as a result of a lack of liquidity in the secondary markets which caused us to sell mortgages at losses to meet margin calls on our warehouse facilities. During the year ended December 31, 1997 we experienced a net loss of $16.0 million. The net loss incurred during 1997 included an accounting charge of $44.4 million that was the result of expenses related to the termination and buyout of our management agreement with Imperial Credit Advisors, Inc. We cannot be certain that revenues will remain at current levels or improve or that we will be profitable in the future, which could prevent us from effectuating our business strategy.

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

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

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

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

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Our borrowings and use of substantial leverage may cause losses.

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

          To grow our investment portfolio, we borrow a substantial portion of the market value of substantially all of our investments in mortgages in the form of CMOs.  Historically, we have borrowed approximately 98% of the market value of such investments. There are no limitations on the amount we may borrow, other than the aggregate value of the underlying mortgages. We currently use CMOs as financing vehicles to increase our leverage, since mortgages held for CMO collateral are retained for investment rather than sold in a secondary market transaction.

          Retaining mortgages as collateral for CMOs exposes our operations to greater credit losses than does the use of other securitization techniques that are treated as sales because as the equity holder in the security, we are allocated losses from the liquidation of defaulted loans first prior to any other security holder. Although our liability under a collateralized mortgage obligation is limited to the collateral used to create the collateralized mortgage obligation, we generally are required to make a cash equity investment to fund collateral in excess of the amount of the securities issued in order to obtain the appropriate credit ratings for the securities being sold, and therefore obtain the lowest interest rate available, on the CMOs. If we experience greater credit losses than expected on the pool of loans subject to the CMO, the value of our equity investment will decrease and we would have to increase the allowance for loan losses on our financial statements.

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

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

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

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

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

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

Interest rate fluctuations may adversely affect our operating results.

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

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term fixed interest rates. Increased loan prepayments could lead to a reduction in the number of loans in our investment portfolio and reduce our net interest income.

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

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

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

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

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

          Our long-term investment portfolio includes mortgages that are hybrid ARMs. These are mortgages with fixed interest rates for an initial period of time, after which they begin bearing interest based upon short-term interest rate indices and adjust periodically. We generally fund mortgages with adjustable interest rate borrowings having interest rates that are indexed to short-term interest rates and adjust periodically at various intervals. To the extent that there is an increase in the interest rate index used to determine our adjustable interest rate borrowings and that increase is not offset by a corresponding increase in the rates at which interest accrues on our assets or by various interest rate hedges that we have in place at any given time, our net interest margin will decrease or become negative. We may suffer a net interest loss on our adjustable rate mortgages that have interest rate caps if the interest rates on our related borrowings increase.

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

Increased levels of prepayments of our adjustable rate mortgages may accelerate our expenses and decrease our net income.

          Mortgage prepayments generally increase on our adjustable rate mortgages when fixed mortgage interest rates fall below the then-current interest rates on outstanding adjustable rate mortgages. Prepayments on mortgages are also affected by the terms and credit grades of the mortgages, conditions in the housing and financial markets and general economic conditions. If we acquire mortgages at a premium and they are subsequently repaid, we must expense the unamortized premium at the time of the prepayment.  We could possibly lose the opportunity to earn interest at a higher rate over the expected life of the mortgage. Also, if prepayments on our adjustable rate mortgages increase when interest rates are declining, our net interest income may decrease if we cannot reinvest the prepayments in mortgage assets bearing comparable rates. Prepayments on fixed rate mortgages will also decrease our net interest income when interest rates are declining.

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

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

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

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

          In addition, we may not obtain our anticipated yield or we may incur losses if the credit support available within certain mortgage-backed securities is inadequate due to unanticipated levels of losses, or due to difficulties experienced by the credit support provider. Delays or difficulties encountered in servicing mortgages securing mortgage-backed securities may cause greater losses than anticipated and, therefore, we may have a higher rate of mortgage insurance claims than were originally anticipated.  This may cause a rating agency to downgrade certain classes of our mortgage-backed securities and cause a reduction of the value of the security.

We undertake additional risks by acquiring and investing in mortgages.

          We may be subject to losses on mortgages for which we do not obtain credit enhancements.

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

          Alt-A mortgages expose us to greater credit risks.

          We are an acquirer and originator of Alt-A mortgages. These are residential mortgages that do not qualify for purchase by government sponsored agencies such as Fannie Mae and Freddie Mac. Our operations may be negatively affected due to our investments in Alt-A mortgages. Credit risks associated with Alt-A mortgages are greater than those associated with conforming mortgages. The interest rates we charge on Alt-A loans are often higher than those charged for conforming loans in order to compensate for the higher risk and lower liquidity. Lower levels of liquidity may cause us to hold loans or other mortgage-related assets supported by these loans that we otherwise would not hold. By doing

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this, we assume the potential risk of increased delinquency rates and/or credit losses as well as interest rate risk. Additionally, the combination of different underwriting criteria and higher rates of interest leads to greater risk, including higher prepayment rates and higher delinquency rates and/or credit losses.

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

          As a lender of Alt-A mortgages, our market includes borrowers who may be unable to obtain mortgage financing from conventional mortgage sources. Mortgages made to such Alt-A borrowers generally entail a higher risk of delinquency and higher losses than mortgages made to borrowers who utilize conventional mortgage sources. Delinquency, foreclosures and losses generally increase during economic slowdowns or recessions. The actual risk of delinquencies, foreclosures and losses on mortgages made to Alt-A borrowers could be higher under adverse economic conditions than those currently experienced in the mortgage lending industry in general.

          Further, any material decline in real estate values increases the loan-to-value ratios of mortgages previously made by us, thereby weakening collateral coverage and increasing the possibility of a loss in the event of a borrower default. Any sustained period of increased delinquencies, foreclosures or losses after the mortgages are sold could adversely affect the pricing of our future loan sales and our ability to sell or securitize our mortgages in the future. In the past, certain of these factors have caused revenues and net income of many participants in the mortgage industry, including us, to fluctuate from quarter to quarter.

          Our use of second mortgages exposes us to greater credit risks.

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

          The geographic concentration of our mortgages increases our exposure to risks in those areas.

          We do not set limitations on the percentage of our mortgage asset portfolio composed of properties located in any one area (whether by state, zip code or other geographic measure). Concentration in any one area increases our exposure to the economic and natural hazard risks associated with that area.  Historically, a majority of our mortgage acquisitions and originations by the mortgage operations and mortgages held for investment by our long term investment operations were secured by properties in California and, to a lesser extent, Florida.  For instance, certain parts of California have experienced an economic downturn in past years and California and Florida have suffered the effects of certain natural hazards.  Declines in those residential real estate markets may reduce the values of the properties collateralizing the mortgages, increase foreclosures and losses and have material adverse effect on our results of operations or financial condition.

          Furthermore, if borrowers are not insured for natural disasters, which are typically not covered by standard hazard insurance policies, then they may not be able to repair the property or may stop paying their mortgages if the property is damaged.  This would cause increased foreclosures and decrease our ability to recover losses on properties affected by such disasters.  This would have a material adverse effect on our results of operations or financial condition.

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

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

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remedies we have against our customers.  Furthermore, if we discover, prior to the sale or transfer of a loan, that there is any fraud or misrepresentation with respect to the mortgage and the originator fails to repurchase the mortgage, then we may not be able to sell the mortgage or we may have to sell the mortgage only at a discount. 

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

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

          We are subject to conflicts of interest arising from our relationship with Impac Mortgage Holdings, Inc., our long-term investment operations, Impac Funding Corporation, our mortgage operations, and their officers and directors. Our long-term investment operations acquires Alt-A mortgages from our mortgage operations. Impac Mortgage Holdings, Inc. owns all of the preferred stock, and 99% of the economic interest in, Impac Funding Corporation. Joseph R. Tomkinson, our Chairman and Chief Executive Officer, William S. Ashmore, our Chief Operating Officer, President and a director, and Richard J. Johnson, our Executive Vice President and Chief Financial Officer, are holders of all of the outstanding voting stock of, and 1% of the economic interest in, Impac Funding Corporation. They have the right to elect all directors of Impac Funding Corporation and the ability to control the outcome of all matters for which the consent of the holders of the common stock of Impac Funding Corporation is required. Messer’s Tomkinson, Ashmore and Johnson are also the sole directors of Impac Funding Corporation. Decisions made by these officers at one company may be at conflict with and have an adverse affect on the operations of the other.  We are currently negotiating with management to purchase the common shares of Impac Funding Corporation, however, we cannot assure you that terms will be agreed upon or that a transaction will be completed.

A substantial interruption in our use of iDASLg2 may adversely affect our level of mortgage loan acquisitions and originations.

          We utilize the Internet in our business principally for the implementation of our automated mortgage origination program, iDASLg2, which stands for the second generation of Impac Direct Access System for Lending.  iDASLg2 allows our customers to pre-qualify borrowers for various mortgage programs based on criteria requested from the borrower and renders an automated underwriting decision by issuing an approval of the mortgage loan or a referral for further review or additional information. Substantially, all of our correspondents submit mortgages through iDASLg2 and all wholesale mortgages delivered by mortgage brokers are directly underwritten through the use of iDASLg2.  iDASLg2 may be interrupted if the Internet experiences periods of poor performance, if our computer systems or the systems of our third-party service providers contain defects, or if customers are reluctant to use or have inadequate connectivity to the Internet. Increased government regulation of the Internet could also adversely affect our use of the Internet in unanticipated ways and discourage our customers from using our services.   If our ability to use the Internet in providing our services is impaired, our ability to originate or acquire mortgages on an automated basis could be delayed or reduced.  Furthermore, we rely on a third party hosting company in connection with the use of iDASLg2.  If the third party hosting company fails for any reason, and adequate back-up is not implemented in a timely manner, it may delay and reduce those mortgage acquisitions and originations done through iDASLg2.  Any substantial delay and reduction in our mortgage acquisitions and originations will reduce our net earnings for the applicable period.

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

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

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Competition for mortgages is intense and may adversely affect our operations.

          We compete in acquiring and originating Alt-A mortgages and issuing mortgage-backed securities with other mortgage conduit programs, investment banking firms, savings and loan associations, banks, thrift and loan associations, finance companies, mortgage bankers, insurance companies, other lenders, and other entities purchasing mortgage assets.

          We also face intense competition from Internet-based lending companies where entry barriers are relatively low.  Some of our competitors are much larger than we are, have better name recognition than we do, and have far greater financial and other resources.  Government-sponsored entities, in particular Fannie Mae and Freddie Mac, are also expanding their participation in the Alt-A mortgage industry. These government-sponsored entities have a size and cost-of-funds advantage over us that allows them to price mortgages at lower rates than we are able to offer.  This phenomenon may seriously destabilize the Alt-A mortgage industry. In addition, if as a result of their less-conservative, risk-adjusted pricing these government-sponsored entities experience significantly higher-than-expected losses, it would likely adversely affect overall investor perception of the Alt-A mortgage industry because the losses would be made public due to the reporting obligations of these entities.

          The intense competition in the Alt-A mortgage industry has also led to rapid technological developments, evolving industry standards and frequent releases of new products and enhancements. As mortgage products are offered more widely through alternative distribution channels, such as the Internet, we may be required to make significant changes to our current retail and wholesale structure and information systems to compete effectively. Our inability to continue enhancing our current Internet capabilities, or to adapt to other technological changes in the industry, could have a material adverse effect on our business, financial condition, liquidity and results of operations.

          The need to maintain mortgage loan volume in this competitive environment creates a risk of price competition in the Alt-A mortgage industry. Competition in the industry can take many forms, including interest rates and costs of a loan, less stringent underwriting standards, convenience in obtaining a loan, customer service, amount and term of a loan and marketing and distribution channels. Price competition would lower the interest rates that we are able to charge borrowers, which would lower our interest income. Price-cutting or discounting reduces profits and will depress earnings if sustained for any length of time. If our competition uses less stringent underwriting standards we will be pressured to do so as well, resulting in greater loan risk without being able to price for that greater risk. Our competitors may lower their underwriting standards to increase their market share. If we do not relax underwriting standards in the face of competition, we may lose market share. Increased competition may also reduce the volume of our loan originations and acquisitions. Any increase in these pricing and credit pressures could have a material adverse effect on our business, financial condition, liquidity and results of operations.

We are exposed to potential credit losses in providing warehouse financing.

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

We may not pay dividends to stockholders.

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

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

          To date, a portion of our taxable income and cash flow has been attributable to our receipt of dividend distributions from IFC. IFC is not a REIT and is not, therefore, subject to the above-described REIT distribution requirements. Because IFC is seeking to retain earnings to fund the future growth of our mortgage operations business, its board of

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directors may decide that IFC should cease making dividend distributions in the future. This would materially reduce the amount of our taxable income and in turn, would reduce the amount we would be required to distribute as dividends.

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

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

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

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

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

          A delay in closing a particular mortgage sale or securitization would increase our exposure to interest rate fluctuations by lengthening the period during which our variable rate borrowings under our warehouse facilities are outstanding.  Any disruption in our ability to complete securitizations may require us to utilize other sources of financing, which, if available at all, may be on unfavorable terms.  If we were unable to sell a sufficient number of mortgages at a premium during a particular reporting period, our revenues for that period would decline, which could have a material adverse affect on our operations.

Our share prices have been and may continue to be volatile.

          Historically, the market price of our common stock has been volatile. During 2002 our stock reached a high of $13.48 per share on June 28, 2002 and a low of $7.80 on February 1, 2002. The market price of our common stock is likely to continue to be highly volatile and could be significantly affected by factors including:

          In addition, significant price and volume fluctuations in the stock market have particularly affected the market prices for the common stock of mortgage REIT companies such as ours. These broad market fluctuations have

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adversely affected and may continue to adversely affect the market price of our common stock. If our results of operations fail to meet the expectations of securities analysts or investors in a future quarter, the market price of our common stock could also be materially adversely affected and we may experience difficulty in raising capital.

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

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

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

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

A reduction in the demand for residential mortgages and our Alt-A loan products may adversely affect our operations.

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