<PAGE>
 
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                                 UNITED STATES
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934
 
                  For the fiscal year ended December 31, 1998
 
                                      OR
 
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934
 
  For the transition period from         to
 
                        Commission file number: 0-23089
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
                       11601 Wilshire Blvd., Suite 2080
                             Los Angeles, CA 90025
                                (310) 231-1280
 
Incorporated in the State of Maryland    Employer Identification No. 95-4648345
 
       Securities registered pursuant to Section 12(b) of the Act: None
          Securities registered pursuant to Section 12(g) of the Act:
 
<TABLE>
<S>                                            <C>
             Title of each class                 Name of each exchange on which registered
       Common Stock, $0.0001 par value                    The Nasdaq Stock Market
</TABLE>
                               ----------------
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
 
  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. [X]
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant based upon the closing sales price of its Common Stock on March 27,
1999 on the Nasdaq Stock Market was approximately $227,280,625.
 
  Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common stock, $0.0001 par
value--28,500,000 shares as of March 27, 1999.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the Company's Proxy Statement (Commission file number 0-23089)
relating to its 1999 Annual Meeting are incorporated by reference into Part
III of this Form 10-K.
 
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<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
                         1998 FORM 10-K ANNUAL REPORT
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
 <C>      <S>                                                              <C>
                                      Part I
 Item 1.  Business                                                           3
 Item 2.  Properties                                                         8
 Item 3.  Legal Proceedings                                                  8
 Item 4.  Submission of Matters to a Vote of Security Holders                8
                                      Part II
          Market For Registrant's Common Equity and Related Stockholder
 Item 5.  Matters                                                            9
 Item 6.  Selected Consolidated Financial Data                              10
          Management's Discussion and Analysis of Financial Condition
 Item 7.  and Results of Operations                                         11
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk        19
 Item 8.  Financial Statements and Supplementary Data                       23
          Changes in and Disagreements with Accountants on Accounting
 Item 9.  and Financial Disclosure                                          47
                                     Part III
 Item 10. Directors and Executive Officers of the Registrant                47
 Item 11. Executive Compensation                                            51
 Item 12. Security Ownership of Certain Beneficial Owners and Management    51
 Item 13. Certain Relationships and Certain Transactions                    51
                                      Part IV
          Exhibits, Financial Statement Schedules, and Reports on Form
 Item 14. 8-K                                                               59
</TABLE>
 
               Where To Find Documents Incorporated By Reference
 
  Imperial Credit Commercial Mortgage Investment Corp. files annual, quarterly
and special reports, proxy statements and other information with the
Securities and Exchange Commission ("SEC"). Interested parties may read and
copy any reports, statements or other information that ICCMIC files with the
SEC at the SEC's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. These SEC filings are also
available to the public from commercial document retrieval services at the
Internet world wide web site maintained by the SEC at "http://www.sec.gov."
 
                                       2
<PAGE>
 
                                    PART I
 
Item 1. Business
 
General
 
  Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") was
organized as a Maryland corporation on July 31, 1997, commenced operations on
October 22, 1997, the date of completion of its initial public offering, and
has elected to be taxed as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"). Imperial Credit
Commercial Asset Management Corp. (the "Manager"), a wholly-owned subsidiary
of Imperial Credit Industries, Inc. ("Imperial Credit"), manages the day-to-
day operations of ICCMIC, subject to the supervision of ICCMIC's Board of
Directors (the "Board").
 
  ICCMIC has acquired investments from Imperial Credit, Southern Pacific Bank
("SPB"), a wholly-owned subsidiary of Imperial Credit formerly known as
Southern Pacific Thrift & Loan Association, and Franchise Mortgage Acceptance
Company ("FMAC"), a 38%-owned affiliate of Imperial Credit, as well as from
independent third parties. The following diagram illustrates the relationships
among ICCMIC, Imperial Credit and their affiliates.
 
  [DIAGRAM OF RELATIONSHIPS AMONG ICCMIC, IMPERIAL CREDIT AND OTHER AFFILIATES]
--------
(1) ICCMIC's outstanding Common Stock is held by Imperial Credit
    (approximately 11%) and various public stockholders (including certain
    directors, officers and employees of ICCMIC, the Manager and Imperial
    Credit, members of their respective immediate families and certain other
    persons).
(2) The Manager has entered into a Management Agreement with ICCMIC, pursuant
    to which the Manager formulates operating strategies and provides certain
    managerial and administrative functions for the Company, subject to the
    supervision of ICCMIC's Board of Directors.
(3) Imperial Credit, SPB and FMAC have sold loans and securities to ICCMIC for
    cash.
(4) See the following paragraph for a description of ICCMIC's subsidiaries.
 
  ICCMIC has established various subsidiaries to hold real estate investments
and for other purposes. The real estate subsidiaries are comprised of three
wholly-owned C corporations, six wholly-owned limited liability companies, one
indirect wholly-owned limited partnership and two substantially wholly-owned
foreign
 
                                       3
<PAGE>
 
corporations (treated as partnerships for income tax purposes) which
collectively hold the twenty one real property investments of ICCMIC. The
other subsidiaries, all wholly-owned, are Imperial Credit Commercial Mortgage
Acceptance Corp., formed for securitization transactions, a limited liability
company formed in connection with a mortgage loan originated by ICCMIC and a C
corporation formed for the potential holding of any real estate which might be
obtained through foreclosure proceedings. References herein to the "Company"
refer to ICCMIC and its subsidiaries unless the context requires otherwise.
 
  In October 1997, the Securities and Exchange Commission (the "SEC") declared
effective ICCMIC's Registration Statements on Form S-11 (File Nos. 333-32683
and 333-38015) relating to the initial public offering of 34,500,000 shares of
ICCMIC's Common Stock at an initial public offering price of $15.00 per share.
As part of ICCMIC's initial public offering, 2,970,000 shares of Common Stock
were sold to Imperial Credit and approximately 500,000 shares of Common Stock
were sold to certain directors, officers and employees of the Company, the
Manager and Imperial Credit and members of their respective immediate
families, in each case net of the underwriting discount. On October 22, 1997,
ICCMIC completed the offering of the 34,500,000 shares including 4,500,000
shares to cover over-allotments, with gross proceeds of $513.9 million and net
proceeds to ICCMIC of $479.3 million. During 1998, the Company repurchased
6,000,000 shares of its Common Stock at an average price of $9.39 per share,
pursuant to previous authorizations of the Board.
 
Forward-Looking Statements
 
  Certain statements contained herein are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended. These forward-looking statements may be
identified by reference to a future period(s) or by the use of forward-looking
terminology--such as "may," "will," "intend," "should," "expect,"
"anticipate," "estimate" or "continue" or the negatives thereof or other
comparable terminology. The Company's actual results could differ materially
from those anticipated in such forward-looking statements due to a variety of
factors, including, but not limited to, changes in national, regional or local
economic environments, competitive products and pricing, government fiscal and
monetary policies, changes in prevailing interest rates, the course of
negotiations, the fulfillment of contractual conditions, factors inherent to
the valuation and pricing of interests in commercial mortgage-backed
securities, other factors generally understood to affect the real estate
acquisition, mortgage and leasing markets and security investments, and the
other risks detailed in ICCMIC's Registration Statement on Form S-11, as
amended, filed with the SEC, periodic reports on Forms 10-Q, 8-K and 10-K and
any amendments with respect thereto filed with the SEC and other filings made
by ICCMIC with the SEC. ICCMIC does not undertake, and specifically disclaims
any obligation, to publicly release the results of any revisions which 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.
 
Investments
 
  The Company invests primarily in real estate related assets with a view to
maximizing both income for distribution to stockholders and stockholder value,
consistent with levels of risk that are perceived by the Company to be
acceptable. The Company determines whether risk levels are acceptable in
making investment decisions through asset and collateral analyses and by
evaluating investment risks and potential rewards. Pending investment of its
funds in real estate related assets, the Company has invested its funds in
readily marketable securities or interest-bearing deposit accounts, consistent
in each case with maintaining ICCMIC's status as a REIT.
 
  The Company's real estate related assets primarily consist of multifamily
and commercial mortgage loans ("Mortgage Loans"), commercial Real Property (as
defined below), and interests in multifamily and commercial mortgage-backed
securities ("CMBS"). A majority of the Mortgage Loans and all of the CMBS
interests were acquired from Imperial Credit and its affiliates. The Company
has determined that it operates in four principal
 
                                       4
<PAGE>
 
business segments for financial reporting purposes. These four business
segments are small balance Mortgage Loan pools acquired, individual large
balance Mortgage Loans originated or acquired, Real Property and securities
available-for-sale. Further business segment information is presented in note
13 to the Company's consolidated financial statements included elsewhere
herein (the "Financial Statements").
 
  As of December 31, 1998, the Company's real estate related investments
included $556.6 million ($552.9 million principal balance) of Mortgage Loans
carried at amortized cost less an allowance for loan losses, $107.7 million of
real property carried at cost less accumulated depreciation, and $57.7 million
of securities available-for-sale, carried at estimated fair value. The
Mortgage Loans were secured by properties in 40 states and included 968
multifamily loans ($270.2 million principal balance), 374 commercial loans
($264.7 million principal balance) and one construction loan participation
($18.0 million principal balance). The Mortgage Loans included 741 variable
interest rate loans and 602 fixed interest rate loans. A total of 38 out of
1,343 loans were over 90 days past due as of December 31, 1998 (see note 3 to
the Financial Statements). Loans held at December 31, 1998 that ICCMIC
acquired from affiliated companies included 985 Mortgage Loans ($353.5 million
principal balance) that it acquired from SPB and 55 loans ($54.5 million
principal balance) that it acquired from FMAC.
 
  Securities available-for-sale at December 31, 1998 included $46.7 million of
CMBS interests that were acquired from Imperial Credit and SPB upon the
closing of ICCMIC's initial public offering, $6.0 million of asset-backed
subordinated notes issued by FMAC as part of a securitization and a $5 million
investment in common stock of a private equity REIT.
 
  The Company acquired approximately $108.0 million of real property during
the year ended December 31, 1998. The real property consists of (i) the
Mission Marketplace, a 343,000 square foot shopping center in Oceanside,
California, (ii) the Atrium Tower, a 149,000 square foot office building in
Las Vegas, Nevada, (iii) The Terraces, a 178,000 square foot shopping center
in Rancho Palos Verdes, California, (iv) seventeen properties in Arizona,
Texas and New Mexico subject to "triple-net" leases with the Ugly Duckling
Corporation and (v) a 106,000 square foot office building in a suburb of
Paris, France.
 
  The Company may acquire additional Mortgage Loans and CMBS interests from
Imperial Credit, SPB and other affiliates and from independent third parties.
The Company also may acquire real property assets directly from independent
third parties. The purpose of any of these potential investments would be to
increase the Company's earnings and dividend paying capacity.
 
  The following is a summary of the guidelines setting forth the general
parameters for the Company's investments, borrowings and operations (the
"Guidelines"). The Board (including a majority of the directors not affiliated
with the Manager or its affiliates ("Independent Directors")) approved the
Guidelines, and the Guidelines may be changed by the Board without a vote of
the stockholders. The Manager is empowered to make the day-to-day investment
decisions of the Company based on the Guidelines. Such investment decisions
may include decisions to issue commitments on behalf of the Company to
purchase Mortgage Loans, Real Property, CMBS interests and other assets
meeting the investment criteria of the Company. The Independent Directors
review all transactions of the Company on a quarterly basis to insure
compliance with the Guidelines. The Independent Directors are likely to
continue to rely substantially on information and analysis provided by the
Manager to evaluate the Company's Guidelines, compliance therewith and other
matters relating to the Company's investments, borrowings and operations.
 
  The Company, in consultation with the Manager, may establish underwriting
criteria for evaluating potential investments and, if such underwriting
criteria are established, the Company, in consultation with the Manager, may
modify such underwriting criteria at any time. The Company's policy generally
is to offer a price for each asset that it contemplates acquiring not greater
than the price that the Manager estimates to be sufficient to generate an
acceptable risk-adjusted return to the Company from the acquisition of that
asset. The Company is permitted to take an opportunistic approach to its
investments, and may acquire any of the types of assets described in the
Guidelines if the Company and the Manager determine that to do so would be in
the Company's best interests. The Company has not set predefined limits on the
percentage of its assets that may be invested in
 
                                       5
<PAGE>
 
any particular asset type described in the Guidelines (except for a 20% limit
on foreign assets), so that the Company may react to opportunities that are
created by changes in market conditions in considering potential investments
and financing techniques.
 
  As of December 31, 1998, the Company had one investment outside of the
United States, an office building located in a suburb of Paris, France, which
represented less than 3% of the Company's total assets. The Company has an
outstanding commitment to fund a second mortgage loan on an office park
renovation in London, England near Heathrow Airport. This commitment is for
approximately 18 million British pounds (approximately $30 million or 4% of
total assets). The Company has no current plans to make any significant
additional investments outside of the United States.
 
  At the time of the Company's initial public offering, SPB entered into an
agreement granting to ICCMIC, for so long as the Management Agreement with the
Manager (as described below) remains in effect, a right of first offer to
purchase not less than $150 million annually of Mortgage Loans typical of
loans originated by SPB, small balance Mortgage Loans (i.e., loans less than
$3 million) secured by multifamily and commercial properties. The Company
acquired in excess of $150 million of Mortgage Loans from SPB during each of
1997 and 1998; however, the Company has not acquired any Mortgage Loans from
SPB after June 30, 1998. While the Company believes that pools of Mortgage
Loans from SPB will continue to be appropriate investments for the Company
given the Company's investment strategy and Guidelines, no assurance exists
that the Company and SPB will be able to agree upon pricing for such Mortgage
Loans or that future pools of Mortgage Loans from SPB will continue to fall
within the Company's investment strategy and Guidelines.
 
  The Company maintains a relationship with Imperial Credit and SPB in which
the Company is a ready, willing and able purchaser of not only pools of
Mortgage Loans but also of CMBS interests and Mezzanine Loans (as defined
below) that may be offered for sale from time to time by Imperial Credit and
SPB. The Company has not identified other types of assets to be purchased from
Imperial Credit and its affiliates, but it would consider purchasing any
assets in accordance with the Guidelines. Although no binding commitment
exists on the part of Imperial Credit, SPB or the Company regarding the sale
and purchase of such assets, the Company would consider the purchase of such
assets from Imperial Credit and SPB only on terms and at prices meeting the
Company's investment criteria. The Independent Directors of the Board
unanimously approved the acquisition of the investments acquired by the
Company from Imperial Credit and SPB at the time of the Company's initial
public offering and review on a quarterly basis all of the Company's
transactions with Imperial Credit and its affiliates.
 
  The Company takes an opportunistic approach to its investments and,
accordingly, the Company may invest in assets other than Mortgage Loans, Real
Property and CMBS interests. This approach allows the Company to maintain
flexibility so that other types of real estate related assets are considered
for investment when the risk-adjusted return to the Company of such investment
is acceptable given the nature and quality of the investment. The Company may
originate or invest in loans secured by junior liens on real property
("Mezzanine Loans") and loans to finance the construction or rehabilitation of
multifamily, commercial and other real property ("Construction Loans"). The
Company may invest in multifamily and commercial mortgage loans that are in
default ("Nonperforming Mortgage Loans") or for which default is likely or
imminent or for which the borrower is making monthly payments in accordance
with a forbearance plan ("Subperforming Mortgage Loans" and, together with
Nonperforming Mortgage Loans and other distressed mortgage loans, "Distressed
Mortgage Loans"). The Company may invest in mortgage loans secured by real
property located outside the United States. Mortgage Loans, Mezzanine Loans,
Construction Loans, Distressed Mortgage Loans, foreign mortgage loans and
other mortgage loans are referred to collectively as "Mortgage Loan
Investments."
 
  The Company may invest in multifamily, commercial and other real property
("Real Property"), including properties acquired at foreclosure or by deed-in-
lieu of foreclosure ("REO Property") and other underperforming or otherwise
distressed Real Property (all of such underperforming and distressed Real
Property, together with REO Property, is referred to collectively as
"Distressed Real Property"). In addition, the Company may invest in Real
Property located outside the United States. Mortgage Loan Investments, CMBS
 
                                       6
<PAGE>
 
interests and Real Property are referred to collectively as "Real Estate
Related Assets." The Company has not made any investments in Distressed
Mortgage Loans or Distressed Real Property and has no current plans to do so.
The Company also may invest in assets unrelated to real estate, subject to
REIT limitations under the Code. The Company has invested in a limited amount
of assets unrelated to real estate, such as money market funds, that are
within the REIT limitations under the Code, and may continue to do so.
 
  A summary of the Company's invested assets acquired from Imperial Credit and
its affiliates and acquired from unrelated third parties as of December 31,
1998 and 1997 is presented in the following table (in millions of dollars).
 
<TABLE>
<CAPTION>
                                                                  1998    1997
                                                                 ------  ------
     <S>                                                         <C>     <C>
     Mortgage Loans:
       Principal balance--affiliates............................ $408.0  $203.0
       Principal balance--third parties.........................  144.9    58.3
                                                                 ------  ------
       Total principal balance..................................  552.9   261.3
       Unamortized premium......................................   14.3    12.4
       Unearned loan fees.......................................   (2.6)    --
       Allowance for loan losses................................   (8.0)   (1.7)
                                                                 ------  ------
         Carrying Amount of Mortgage Loans......................  556.6   272.0
                                                                 ------  ------
     Real Property--third parties...............................  107.7     --
                                                                 ------  ------
     CMBS--affiliates...........................................   46.7    54.3
     Subordinated notes--affiliate..............................    6.0     --
     Equity REIT--third party...................................    5.0     5.0
                                                                 ------  ------
       Securities Available-for-Sale............................   57.7    59.3
                                                                 ------  ------
         Total Invested Assets.................................. $722.0  $331.3
                                                                 ======  ======
</TABLE>
 
Leverage (Dollar amounts in thousands)
 
  To create yields commensurate with its investment objectives, the Company
intends to continue to leverage its assets primarily through warehouse lines
of credit, the issuance of collateralized mortgage obligations ("CMOs"),
reverse repurchase agreements and other borrowing arrangements, pledging its
assets as collateral security for its repayment obligations. The Company's
business plan has been to use the proceeds from securitizations and other
borrowings to invest in additional Mortgage Loan Investments, CMBS interests
and other assets and, in turn, to borrow against such assets and to repeat the
process of borrowing and investing until it has significantly leveraged its
portfolio of assets. The Company expects a substantial portion of its cash
flow to consist of the difference between the income generated by its assets
and the interest expense incurred with respect to such borrowings, net of
hedging and other costs. The Company may hedge all or a portion of the
interest rate risk associated with its borrowings through the use of interest
rate protection products. Any such techniques are subject to risks and may
affect the Company's earnings adversely. The Company may bear a level of
interest rate risk that could otherwise be hedged when the Manager believes,
based on all relevant facts, that bearing such risk is prudent. As of December
31, 1998, the Company had an outstanding interest rate swap with a notional
balance of $71,954 whereby the Company collects monthly interest based on one-
month LIBOR and remits monthly interest based on a fixed rate of approximately
5.99%. The notional balance declines pursuant to a fixed amortization schedule
through April 15, 2008. This interest rate swap serves as a hedge against the
Company's floating rate debt and had a present value cost at December 31, 1998
of approximately $1,669. No assurances can be made that the Company's
investment and leverage strategy can be fully implemented or will be
successful.
 
  While there are no specific limits on the Company's leverage in the
Guidelines, there are provisions dealing with leverage. The Guidelines
generally provide, among other things, that (a) investments be made for which
leverage is either in place at the time investments are made or, in the
opinion of the Manager, readily obtainable,
 
                                       7
<PAGE>
 
(b) nonrecourse or limited recourse financing be obtained whenever reasonably
possible, (c) the leverage ratio of the Company's overall indebtedness to its
assets be at a level determined by the Company to be appropriate under the
circumstances and (d) the Company's delegation to the Manager of the authority
to arrange borrowings for the Company is subject to periodic review by the
Board.
 
  As of December 31, 1998, the Company had outstanding borrowings of $279,000
under its secured warehouse line, $3,557 from a secured bank loan and $48,575
from mortgages secured by real property. These borrowings resulted in a debt
to equity ratio of 0.81 to 1.00 or debt as a percent of total capitalization
of 45% at December 31, 1998. At December 31, 1997, the Company had no
borrowing arrangements or derivative instruments in effect.
 
Competition
 
  The Company is engaged in a business that is highly competitive and that may
become more competitive in the future as others enter the market, which may
affect adversely the Company's ability to achieve its investment objectives.
In acquiring Real Estate Related Assets, the Company will compete with other
REITs, investment banking firms, savings and loan associations, banks,
mortgage bankers, insurance companies, mutual funds, other lenders, federal
agencies and other entities purchasing similar assets, many of which have
established operating histories and procedures, may have access to greater
capital and other resources and may have other advantages over the Company in
conducting certain businesses and providing certain services. There are
several REITs similar to ICCMIC, and others may be organized in the future.
The effect of the existence of additional REITs is to increase competition for
the available supply of Real Estate Related Assets of the types the Company
contemplates acquiring. The Company's net earnings will depend, in large part,
on the Company's ability to acquire and originate Mortgage Loan Investments,
Real Property and CMBS interests having yields that produce favorable spreads
over the Company's borrowing costs. Increased competition for the acquisition
of Mortgage Loan Investments, Real Property and CMBS interests or a reduction
in the available supply of such assets could result in higher prices and thus
lower yields, which could narrow (or make negative) the yield spread on such
assets relative to the Company's borrowing costs. In addition, the Company's
competitors may seek to establish relationships with the financial
institutions and other firms from which the Company could acquire such assets.
There can be no assurance that the Company will be able to acquire sufficient
Real Estate Related Assets at favorable spreads relative to the Company's
borrowing costs to achieve the Company's objectives. In addition, there can be
no assurance that a supply of Real Estate Related Assets suitable for
acquisition by the Company will continue to be available, or that changes in
market conditions or applicable laws will not affect the availability of
suitable Real Estate Related Assets.
 
Employees
 
  As of December 31, 1998, the Company had no employees. The Company is
managed by the Manager. The Company is not a party to any collective
bargaining agreement.
 
Item 2. Properties
 
  The Company's executive offices and administrative facilities occupy
approximately 6,400 square feet of space in Los Angeles, California. The
Company leases its facilities from an unaffiliated third party pursuant to a
lease agreement expiring in 2002. Management believes that these facilities
will be adequate for the Company's foreseeable needs.
 
Item 3. Legal Proceedings
 
  None
 
Item 4. Submission of Matters to a Vote of Security Holders
 
  None
 
                                       8
<PAGE>
 
                                    PART II
 
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
 
  ICCMIC's Common Stock is listed on The Nasdaq Stock Market under the symbol
ICMI. The high, low, and closing sale prices for the Common Stock for the
period from October 17, 1997 through December 31, 1998 as reported by The
Nasdaq Stock Market were as follows:
 
<TABLE>
<CAPTION>
                                                                Stock Prices
                                                            --------------------
                                                             High   Low   Close
                                                            ------ ------ ------
     <S>                                                    <C>    <C>    <C>
     1997:
       Fourth quarter...................................... 19.125 14.375 14.625
     1998:
       First quarter....................................... 16.750 14.125 15.000
       Second quarter...................................... 16.500 12.875 13.063
       Third quarter....................................... 13.063  8.563  9.750
       Fourth quarter...................................... 10.375  6.500  9.375
</TABLE>
 
  On March 27, 1999, the last reported sale price of the Common Stock on The
Nasdaq Stock Market was $8.9375 per share. As of March 27, 1999, there were
approximately 2,700 holders of record (including holders who are nominees for
an undetermined number of beneficial owners) of ICCMIC's Common Stock.
 
  To maintain its qualification as a REIT, ICCMIC is required to pay dividends
to stockholders of at least 95% of its taxable income (which may not
necessarily equal net earnings as calculated in accordance with generally
accepted accounting principles ("GAAP")), determined without regard to the
deduction for dividends paid and excluding any net capital gains. ICCMIC
declares regular quarterly dividends. ICCMIC intends to distribute annually
any taxable income remaining after the distribution of the regular quarterly
or other dividends, on or prior to the first regular quarterly dividend
payment date of the following taxable year. The Company's dividend policy is
subject to revision at the discretion of the Board. Distributions in excess of
those required for ICCMIC to maintain REIT status may be made at the
discretion of the Board and would depend on the taxable earnings of ICCMIC,
the financial condition of ICCMIC and such other factors as the Board deems
relevant. ICCMIC has declared dividends based on 100% of its taxable income to
date, has not declared any distributions in excess of this amount (i.e.,
return of capital distributions) and has no current plans to do so. The Board
has not established a minimum distribution level.
 
  Distributions to stockholders generally will be taxable as ordinary income,
although a portion of such distributions may be capital gains or may
constitute a tax-free return of capital. ICCMIC will furnish annually to each
of its stockholders of record a statement setting forth distributions paid
during the preceding year and their characterization as ordinary income,
capital gain or return of capital.
 
  The table presented below details the cash dividends declared by ICCMIC for
1997 and 1998.
 
<TABLE>
<CAPTION>
                                         Amount
                                        Per Share  Record Date   Payment Date
                                        ---------  -----------   ------------
     <S>                                <C>       <C>            <C>
     1997--Initial period of
      operations.......................   $0.13    Dec. 31, 1997 Jan. 16, 1998
                                          =====
     1998:
       First Quarter...................   $0.24    Mar. 31, 1998 Apr. 14, 1998
       Second Quarter..................    0.28     Jul. 9, 1998 Jul. 23, 1998
       Third Quarter...................    0.33   Sept. 30, 1998 Oct. 14, 1998
       Fourth Quarter..................    0.33    Dec. 31, 1998 Jan. 21, 1999
                                          -----
         Year..........................   $1.18
                                          =====
</TABLE>
 
  The aforementioned dividends were all ordinary income and reportable for the
calendar years 1997 ($0.13 per share) and 1998 ($1.18 per share). The first
quarter 1998 dividend of $0.24 per share included approximately $0.0075 per
share of previously undistributed taxable income for 1997. The Company
recently announced that
 
                                       9
<PAGE>
 
its first quarter 1999 dividend of $0.30 per share included approximately
$0.0054 per share of previously undistributed taxable income for 1998 and that
the dividend would be paid on April 15, 1999 to stockholders of record on
March 31, 1999.
 
Item 6. Selected Consolidated Financial Data
 
  The following selected consolidated (a) statement of earnings data for the
year ended December 31, 1998 and the period from July 31, 1997 (Inception)
through December 31, 1997 and (b) balance sheet data as of December 31, 1998
and 1997 were derived from the Company's consolidated financial statements
audited by KPMG LLP, independent auditors, whose report with respect thereto
appears elsewhere herein. Such selected financial data should be read in
conjunction with those consolidated financial statements and the notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," also included elsewhere herein.
 
             Imperial Credit Commercial Mortgage Investment Corp.
 
                   For the year ended December 31, 1998 and
        period from July 31, 1997 (Inception) through December 31, 1997
                     and as of December 31, 1998 and 1997
 
                 (Dollars in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                               1998       1997
                                                            ----------- --------
<S>                                                         <C>         <C>
Statement of Earnings Data:
  Interest Income.......................................... $    49,737 $  6,467
  Real Property Rental Income..............................       7,684        0
                                                            ----------- --------
    Total Income...........................................      57,421    6,467
                                                            ----------- --------
Operating Expenses:
  Management fees..........................................       6,319      940
  Interest expense.........................................      11,165        0
  Provision for loan losses................................       6,300        0
  Write-down of securities available-for-sale..............       4,554        0
  Depreciation of real property............................       1,755        0
  Real property operating expenses.........................       1,872        0
  Due diligence expenses...................................       1,659      487
  Stock options issued to Manager and its employees........          97    2,550
  Other....................................................       1,456      331
                                                            ----------- --------
    Total Expenses.........................................      35,177    4,308
                                                            ----------- --------
    Net Earnings........................................... $    22,244 $  2,159
                                                            =========== ========
Earnings per share--Basic and diluted...................... $      0.68 $   0.06
                                                            =========== ========
Cash dividends declared per share.......................... $      1.18 $   0.13
                                                            =========== ========
<CAPTION>
                                                               1998       1997
                                                            ----------- --------
<S>                                                         <C>         <C>
Balance Sheet Data:
Total invested assets...................................... $   721,982 $331,330
Total assets...............................................     757,174  495,137
Total outstanding borrowings...............................     331,132        0
Total liabilities..........................................     348,365   15,435
Total stockholders' equity................................. $   408,809 $479,702
Ratio of outstanding borrowings to stockholders' equity.... 0.81 to 1.0        0
</TABLE>
 
                                      10
<PAGE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
General
 
  ICCMIC was incorporated in Maryland on July 31, 1997 for the purpose of
investing primarily in Mortgage Loans, Real Property and CMBS interests. The
Company expects to generate income for distribution to its stockholders
primarily from the net earnings derived from its investments in Real Estate
Related Assets. The Company continues to operate in a manner that permits it
to maintain its status as a REIT for federal income tax purposes.
 
  On October 22, 1997, ICCMIC completed its initial public offering of 34.5
million shares, with gross proceeds of $513.9 million and net proceeds to
ICCMIC of $479.3 million. The Company's sole activity through October 21, 1997
consisted of the organization and startup of the Company. As of December 31,
1997, ICCMIC had invested $331.3 million, or 69%, of the net proceeds of the
initial public offering. As of December 31, 1998, ICCMIC had repurchased 6.0
million shares of its Common Stock at a cost of $56.3 million, had invested
assets of $722.0 million and had outstanding borrowings of $331.1 million.
 
  The Company's invested assets are classified among four principal business
segments; small balance Mortgage Loan pools acquired, individual large balance
Mortgage Loans originated or acquired, Real Property and securities available-
for-sale ("Securities"). The Company's invested assets as of December 31, 1998
and 1997 are presented in the following table (in thousands of dollars).
 
<TABLE>
<CAPTION>
                                                                 1998     1997
                                                               -------- --------
   <S>                                                         <C>      <C>
   Mortgage Loan pools........................................ $470,142 $272,009
   Large Mortgage Loans.......................................   86,506        0
   Real Property..............................................  107,663        0
   Securities.................................................   57,671   59,321
                                                               -------- --------
     Total Invested Assets.................................... $721,982 $331,330
                                                               ======== ========
</TABLE>
 
  As of December 31, 1998, the Company had outstanding borrowings of $331.1
million of which $279.0 million was secured by mortgage pools and $52.1
million was secured by real property. There were no outstanding borrowings as
of December 31, 1997.
 
  During the year ended December 31, 1998, the Company's first full year of
operations, the Company generated total revenue of $57.4 million, resulting in
net earnings of $22.2 million or $0.68 per share of Common Stock diluted.
During the Company's initial short period of operations from October 22, 1997
(date of commencement of operations) to December 31, 1997, the Company
generated total revenue of $6.5 million, resulting in net earnings of $2.2
million or $0.06 per share of Common Stock diluted.
 
  Dollar amounts in the remainder of this Item 7, other than per share
amounts, are expressed in thousands.
 
Results of Operations
 
 Year Ended December 31, 1998 Compared to Period From July 31, 1997
 (Inception) to December 31, 1997 (Note that the Initial Short Period of
 Operations Substantively Commenced on October 22, 1997)
 
  Dividends Declared and Accrued Dividends In Excess Of Earnings. The Company
declared dividends for the periods ended December 31, 1998 and 1997 of $36,948
and $4,485 ($1.18 and $0.13 per share of Common Stock), respectively. These
dividends related to the Company's first full fiscal year ended December 31,
1998 and the Company's initial short period of operations from October 22,
1997 (date of commencement of operations) to December 31, 1997. As a result of
these dividends, the Company incurred accrued dividends in excess of earnings
of $14,704 and $2,326 for the periods ended December 31, 1998 and 1997,
respectively. The increase from 1997 to 1998 is due to the start-up and growth
of the Company's operations after the completion of its initial public
offering, which closed on October 22, 1997, and the fact that 1998 was a full
year of
 
                                      11
<PAGE>
 
operations whereas 1997 was a period in which the Company had only ten weeks
of operations (this explanation is hereinafter referred to as the Company's
"Ramp-up").
 
  Interest Income. The following table sets forth information regarding the
total amount of income from interest-earning assets and the resultant average
yields. Information is based on daily average balances during the reported
period.
<TABLE>
<CAPTION>
                                                           For the period October 22,
                                For the year ended                    1997
                                December 31, 1998             to December 31, 1997
                          ------------------------------ ------------------------------
                          Interest Average   Annualized  Interest Average   Annualized
                           Income  Balance     Yield      Income  Balance     Yield
                          -------- -------- ------------ -------- -------- ------------
<S>                       <C>      <C>      <C>          <C>      <C>      <C>
Mortgage Loan pools.....  $35,916  $419,083      8.57%    $1,676  $109,639      7.86%
Large Mortgage Loans....    4,396    43,695     10.06%       --        --        --
Securities..............    6,153    57,589     10.68%     1,403    54,505     13.24%
Repurchase agreements
 and interest
 bearing deposits.......    2,454    45,522      5.39%     3,388   314,832      5.53%
                          -------  --------               ------  --------
  Total.................  $48,919  $565,889      8.64%    $6,467  $478,976      6.94%
                                   ========               ======  ========
Additional interest from
 FMAC call..............      818
                          -------
  Total.................  $49,737
                          =======
 
  Net interest income for the periods is as follows:
 
<CAPTION>
                          Interest Interest Net Interest Interest Interest Net Interest
                           Income  Expense     Income     Income  Expense     Income
                          -------- -------- ------------ -------- -------- ------------
<S>                       <C>      <C>      <C>          <C>      <C>      <C>
Mortgage Loan pools.....  $36,734  $  8,830   $27,904     $1,676       --     $1,676
Large Mortgage Loans....    4,396       383     4,013        --        --        --
Securities..............    6,153       --      6,153      1,403       --      1,403
Other...................    2,454        42     2,412      3,388       --      3,388
                          -------  --------   -------     ------  --------    ------
  Total.................  $49,737  $  9,255   $40,482     $6,467       --     $6,467
                          =======  ========   =======     ======  ========    ======
</TABLE>
 
  The increase in interest income, interest expense and net interest income
from 1997 to 1998 is due primarily to the Company's Ramp-up and the fact that
the Company had no borrowings or interest expense in 1997. The increase in the
yield on mortgage loan pools is due in part to the increase in interest rates
on recently originated variable interest rate loans migrating out of initial
teaser interest rates and the relative mix of higher interest rate loan
portfolios outstanding during 1998 as compared to the 1997 short period. The
decrease in yield on securities during 1998 as compared to the 1997 short
period is due primarily to the higher yield in 1997 on the Company's interest-
only securities (when such securities were newly issued) as compared to 1998.
 
  Interest expense on borrowings secured by Real Property is not included
above.
 
  Real Property Rental Income. The following table sets forth information
regarding rental income and operations for the year ended December 31, 1998
from the Company's Real Property, all of which is income producing. There were
no Real Property operations in 1997 since all the acquisitions occurred during
1998. The 1998 operations are not indicative of future operations since the
Company owned each Real Property interest for only a portion of the year.
 
<TABLE>
   <S>                                                                   <C>
   Real Property rental income.......................................... $7,684
   Less Real Property operating expenses................................  1,872
                                                                         ------
   Real Property operating income.......................................  5,812
   Less interest expense................................................  1,911
                                                                         ------
   Real Property income before depreciation.............................  3,901
   Less depreciation....................................................  1,755
                                                                         ------
   Income from Real Property before REIT management fee................. $2,146
                                                                         ======
</TABLE>
 
                                      12
<PAGE>
 
  Operating Expenses. Management fees for the periods ended December 31, 1998
and 1997 of $6,319 and $940, respectively, were comprised solely of the 1% per
annum base management fee paid to the Manager for the periods (as provided in
the Management Agreement between the Company and the Manager). The Manager has
earned no incentive management fee. In addition to the management fee, the
Company incurred due diligence and asset acquisition expenses of $1,659 and
$487 in 1998 and 1997, respectively. Other expenses were comprised of
interest, insurance premiums, directors' fees, occupancy costs, investor
relations expenses, professional fees and other miscellaneous expenses. The
increase in expenses for 1997 to 1998 was due primarily to the Company's Ramp-
up.
 
  The average outstanding borrowings for the year ended December 31, 1998 was
$164,847 with interest expense of $11,165, and a resulting weighted average
interest rate of 6.77%, and the highest amount outstanding during 1998 was
$342,745. Weighted average borrowings, interest expense and resulting weighted
average interest rates for 1998 by business segment were $131,321, $8,829 and
6.72% for small balance Mortgage Loan pools, $5,911, $383 and 6.48% for large
Mortgage Loans, and $27,615, $1,911 and 6.92% for Real Property, respectively.
There were no outstanding borrowings or related interest expense during the
prior period ended December 31, 1997 since the Company had not fully invested
the proceeds from its initial public offering.
 
  Operating expenses in 1998 included certain non-cash charges of $10,854
($0.33 per share). These charges were comprised of (a) a $4,554 impairment
write-down of the Company's CMBS interest-only securities to estimated fair
value based primarily on accelerated prepayments of the underlying mortgage
loan collateral as well as market conditions and (b) a $6,300 increase in the
allowance for loan losses on the Company's Mortgage Loans primarily to address
increased delinquencies on a multifamily and commercial loan portfolio
previously acquired from an unaffiliated third party and to establish an
allowance for loan losses on Mortgage Loans acquired or originated in 1998.
There were no similar non-cash charges in 1997 for write-downs or provision
for loan losses although the Company recognized a non-cash charge of $2,550
($0.07 per share) for stock options issued to the Manager in 1997.
 
Changes in Financial Position
 
 December 31, 1998 Compared to December 31, 1997
 
  General. During the year ended December 31, 1998, total assets increased by
$262,037. This increase was comprised of $288,964 of mortgage loans and
accrued interest, $107,663 of real property, $4,275 of other assets, and
$11,496 of cash and interest bearing deposits, offset by a decrease in
repurchase agreements of $148,711 and securities available-for-sale of $1,650.
 
  Total liabilities increased by $332,930 to $348,365 during the period as a
result of increases in (a) a secured warehouse facility of $279,000, (b) a
secured bank loan of $3,557, (c) mortgage loans secured by real property of
$48,575 and (d) increases in declared but unpaid dividends of $4,920, accrued
management fees of $1,000, interest payable of $1,185 and deferred revenues
and deposits of $1,546, offset by reductions in amounts due to an affiliate
for mortgage loans acquired of $6,385 and various other payables of $468.
 
  Cash and interest bearing deposits. At December 31, 1998, the Company's
total cash and interest bearing deposits aggregated $23,398, an increase of
$11,496 over 1997. Cash deposits were comprised primarily of interest bearing
deposits.
 
  Repurchase agreements. Prior to investing the net proceeds raised from the
Company's initial public offering in longer-term investments, the Company
entered into repurchase agreements with three major investment banks whereby
the Company purchased securities from the counterparty (investment bank) and
agreed to resell the securities back to the counterparty (who agreed to
repurchase those securities) at a specified future date, usually overnight or
within one week of the original purchase. Repurchase agreements are recorded
at the amounts at which the securities will be subsequently resold plus
accrued interest, as specified in the respective agreements. The securities
purchased are held in custody for the benefit of the Company. All of the
transactions are in United States agency or investment grade securities. The
Company's exposure to credit risks
 
                                      13
<PAGE>
 
associated with the non-performance of counterparties in fulfilling their
contractual obligations can be directly impacted by market fluctuations, which
may impair the counterparties' ability to satisfy their repurchase
obligations. The Company monitors the market value of the underlying
securities relative to the amounts due under the repurchase agreements and,
when necessary, requires prompt additional collateral or reduction in loan
balance to ensure that the market value of all collateral remains sufficient
to protect the Company in the event of a default by the counterparty.
 
  The Company earned interest income of $2,454 and $3,388 during the year
ended December 31, 1998 and the period October 22, 1997 to December 31, 1997,
respectively, from its investment in interest bearing deposits and repurchase
agreements. Of such income, the Company earned $2,077 and $2,186,
respectively, from investments in repurchase agreements. No repurchase
agreements were outstanding at December 31, 1998.
 
  Mortgage loans.
 
  The carrying amount of the Company's Mortgage Loans increased by $284,639
during the year ended December 31, 1998. This increase was due to the
acquisition or origination of 608 new loans for $381,189 offset by 137 loan
payoffs and other principal reductions totaling $88,392, amortization of
premium of $1,858 and the addition to the allowance for loan losses of $6,300.
The loan acquisitions included small balance Mortgage Loan pool acquisitions
of $291,298, of which 575 loans for $288,404 were acquired from affiliates and
22 loans for $2,894 were acquired from unrelated third parties. Also, 11 large
Mortgage Loans totaling $89,891 net of unearned fees were originated or
acquired from unrelated third parties. Principal reductions and payoffs
included $85,540 for small balance Mortgage Loan pools and $2,852 of
reductions of large Mortgage Loans. Included in the small balance Mortgage
Loan pool payoffs were 8 loans totaling $20,700 which were sold back to FMAC
as a result of a call and resulted in additional interest income of $818. The
loans acquired by the Company from FMAC are subject to put and call
arrangements generally based on the purchase price of the subject loan plus
accrued interest. The carrying amount of Mortgage Loans at December 31, 1997
was the result of acquisitions made during the 1997 short period.
 
  At December 31, 1998, 38 loans in the aggregate principal amount of $5,745
were over 90 days past due as compared to one loan in the amount of $116 at
December 31, 1997. At December 31, 1998, these loans over 90 days past due had
been placed on non-accrual and impaired status and approximately $510 of
previously accrued interest income was reversed for the year then ended.
Additions to the allowance for loan losses aggregated $6,300 for the year
ended December 31, 1998. No additions to the allowance for loan losses were
made during the period from October 22, 1997 to December 31, 1997 except for
$1,727 established in connection with the acquisition of Mortgage Loans in
1997. The allowance for loan losses at December 31, 1998 represented 1.42% of
the carrying amount of all Mortgage Loans and 1.40 times the amount of loans
over 90 days past due. The allowance for loan losses at December 31, 1998 of
$8,027 was allocated $7,497 to small balance Mortgage Loan pools and $530 to
large Mortgage Loans.
 
  Real Property. During the year ended December 31, 1998, the Company acquired
$107,954 of Real Property which consisted of (i) the Mission Marketplace, a
343,000 square foot shopping center in Oceanside, California, (ii) the Atrium
Tower, a 149,000 square foot office building in Las Vegas, Nevada, (iii) The
Terraces, a 178,000 square foot shopping center in Rancho Palos Verdes,
California, (iv) seventeen properties in Arizona, Texas and New Mexico subject
to "triple-net" leases with the Ugly Duckling Corporation and (v) a 106,000
square foot office building in a suburb of Paris, France. All property is
carried at cost, net of accumulated depreciation. The California shopping
centers were acquired subject to existing first mortgage loans and the office
building in France was acquired with a contemporaneous first mortgage loan
financing. The Real Properties are all performing and substantially leased.
During 1998, the Company made Real Property improvements of $393 and
experienced unrealized foreign exchange gains of $1,071.
 
  Securities available-for-sale. The decrease in securities available-for-sale
of $1,650 during the year ended December 31, 1998 is due to $9,135 of interest
payments, impairment losses of $4,554 and other unrealized losses of $209
offset by the purchase of non-investment grade rated subordinated notes of
$6,096 from FMAC and discount amortization of $6,152.
 
                                      14
<PAGE>
 
  The Company's CMBS investments are carried at estimated fair value. Because
there is no active market from which to derive a fair value, management
estimates the fair values using a discounted cash flow methodology. The fair
value of the CMBS is affected by prepayments of the underlying mortgage loan
collateral, default and loss rates, and market yields and spreads. The
impairment loss recognized in 1998 was largely the result of accelerated
prepayments and narrowing spreads. Continued accelerated prepayments and
changes in market spreads could result in further impairment losses.
 
  The following table sets forth delinquency, loss and prepayment data for the
mortgage loan collateral underlying the Company's CMBS investments as of and
for the periods ended December 31, 1998 and 1997:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                             --------  --------
   <S>                                                       <C>       <C>
   CMBS investments......................................... $ 46,678  $ 54,321
   Mortgage Loan Collateral:
   Original principal balance...............................  480,023   480,023
   Principal balance at December 31.........................  349,447   400,025
   Delinquent principal balance at December 31..............   10,722    16,086
   Delinquent balance percent at December 31................        3%        4%
   Prepayments year to date.................................   81,511    34,225
   Prepayments for quarter..................................   22,132    14,020
   Losses year to date......................................      845         0
</TABLE>
 
  The Company includes its investments in FMAC subordinated notes and the
common stock of a private equity REIT in securities available-for-sale. No
dividends have been declared by this private equity REIT to date. The carrying
amount of securities available-for-sale at December 31, 1997 was the result of
acquisitions made during the 1997 short period.
 
  Borrowings under secured warehouse facility. As of December 31, 1998,
borrowings under a warehouse line of credit with Morgan Guaranty Trust Company
of New York were $279,000. The line of credit was primarily secured by
$353,477 of Mortgage Loans acquired from SPB, generally bore interest at 90
basis points over one-month LIBOR and was to mature on March 29, 1999. The
Company was notified in the fall of 1998 that the line would not be extended
beyond its maturity date due to market related factors. Subsequent to December
31, 1998, the Company closed a collateralized mortgage obligation ("CMO") bond
financing secured by certain SPB Mortgage Loans and paid off in full and
terminated the warehouse line of credit. See notes 10 and 15 to the Company's
consolidated financial statements for additional information with respect to
the Company's borrowing arrangements and the CMO bond financing.
 
  Mortgage loans secured by real property. As of December 31, 1998, mortgage
loans secured by Real Property were $48,575. These loans are secured by the
Company's shopping centers in Oceanside, CA and Rancho Palos Verdes, CA and
the Company's office building in France, bear interest at effective rates
ranging from 4.50 % to 7.85% and have final maturity dates ranging from 2012
to 2027. The secured bank loan of $3,557 was incurred to finance a value added
tax in connection with the Company's acquisition of the office building in
France. Subsequent to December 31, 1998, the value added tax was refunded to
the Company and the secured bank loan was paid off in full.
 
  Stockholders' equity. Stockholders' equity decreased $70,893 during the year
ended December 31, 1998. This decrease was primarily attributable to dividends
in excess of earnings of $14,704, the purchase of six million shares of the
company's Common Stock at a cost of $56,338 and the change in unrealized gain
(loss) on securities available-for-sale of $209, offset by foreign currency
exchange gains of $261.
 
Capital Resources and Liquidity
 
  Liquidity is a measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to fund acquisitions and
investments, repay borrowings and for other general business purposes.
 
                                      15
<PAGE>
 
The Company's primary sources of funds for liquidity consist of secured
borrowings, principal payments and repayments at maturity on loans and
securities and proceeds from the sales thereof. Management believes these
sources of liquidity are sufficient to enable the Company to meet its
obligations and loan funding commitments during 1999.
 
  The Company's operating activities provided cash of $19,160 during the year
ended December 31, 1998. During 1998, cash resources from operating activities
were provided primarily by net earnings before non-cash charges. The Company's
investment activities used cash totaling $363,525 during 1998. During the
year, cash flows from investment activities were used primarily to purchase
Mortgage Loans, Real Property and securities available-for-sale. The Company's
financing activities provided $207,150 of cash during 1998 and consisted
primarily of borrowings under the Company's warehouse line of credit.
 
  The Company's warehouse line of credit with Morgan Guaranty Trust Company of
New York made available a source of funds to the Company provided that
adequate collateral was posted with the custodian and accepted by the
custodian and the lender. As discussed above, this line of credit has been
paid off in full and terminated.
 
  The Company has signed a non-binding term sheet for a new $300 million
warehouse line of credit with a major investment bank subject to completion
and execution of loan documentation. The Company expects to complete the
execution of this new line of credit in the near future. However, the ability
of the Company to continue its growth is subject to closing this new warehouse
line of credit or alternative financing and successfully sourcing new
investments that meet the Company's investment strategy and the Guidelines.
There can be no assurance that the Company will have adequate funds available
to take advantage of investment opportunities that may become available.
 
  As of December 31, 1998, the Company's $25,000 reverse repurchase loan
facility with Merrill Lynch Mortgage Capital Inc. was not collateralized by
the pledge of any of the Company's assets, there was no outstanding balance
and there was no borrowing capacity under this facility. During 1998, the
Company borrowed up to $14,400 under this facility when one of the Company's
large balance Mortgage Loans was pledged as security. That Mortgage Loan is no
longer pledged as security under this facility and any future borrowings under
this facility would require the pledge of assets acceptable to the lender.
 
  The Company entered into a forward interest rate swap effective May 15, 1998
covering an amortizing notional balance of $77,467 over a ten-year period.
Under the swap, the Company receives monthly payments of interest based on
one-month LIBOR and remits monthly payments based on a fixed interest rate of
approximately 5.99%. During the year ended December 31, 1998, the Company paid
monthly interest on the notional balance at the fixed annual rate, which
ranged from approximately $343 to $410 per month, and collected monthly
interest at annual rates ranging from 5.28% to 5.66%, or approximately $306 to
$392 per month. The net cost of the swap ranged from $16 to $37 per month and
is included in interest expense in the Company's operating results. Such net
cost was $157 for the year ended December 31, 1998. As of December 31, 1998,
the approximate net present value cost of this swap was $1,669 and the
notional balance was $71,954. There can be no assurance that this swap will
adequately protect the Company's exposure to interest rate risk.
 
  At December 31, 1998, the Company had outstanding commitments to fund
Mortgage Loans for approximately $32,500, including a single commitment for
18,000 British pounds (approximately $30,000). The Company plans to fund these
commitments with cash on hand and anticipated future cash flow.
 
  At December 31, 1998, there was a continuing authorization by the Board for
the Company to acquire up to an additional six million shares of its Common
Stock. Given the Company's outstanding funding commitments and current lack of
substantial borrowing capacity, it is unlikely that the Company will
repurchase additional shares of its Common Stock in the immediate future until
unleveraged assets are financed or assets are sold.
 
                                      16
<PAGE>
 
Funds From Operations ("FFO")
 
  In general, FFO adjusts net earnings by adding back non-cash charges such as
depreciation, certain amortization expenses and most non-recurring gains and
losses. The Company generally considers FFO an appropriate supplementary
measure of operating performance of a REIT because that measure does not
recognize as an operating expense (i) compensation expense related to stock
options issued to the Manager and its employees and (ii) depreciation of real
property, which management believes may not be meaningful in the evaluation of
income-producing real property that historically has not depreciated in value.
While operating charges for depreciation and amortization, stock option
compensation expense and non-recurring gains and losses are valid and
significant components for determining operating results in accordance with
generally accepted accounting principles ("GAAP") and while the Company's
financial condition, results of operations and cash flows determined under
GAAP are the primary measurement tools for understanding and assessing the
Company's financial performance, the consideration of FFO as a supplement to
these primary tools provides investors with an additional means to assess the
ability of a REIT to meet dividend requirements, fund investment commitments,
fund capital expenditure needs and meet debt service requirements. However,
the Company's computation of FFO may not be comparable to other similarly
titled measures of other companies and FFO should not be construed as an
alternative to operating results or cash flows determined pursuant to GAAP.
The Company's increase or decrease in FFO should be considered in conjunction
with trends in the Company's primary measurement tools as well as dividends,
debt incurred, new investments or acquisitions, capital expenditures and other
factors.
 
  In 1995, the National Association of Real Estate Investment Trusts
("NAREIT") established new guidelines clarifying its definition of FFO and
requested that REITs adopt this new definition beginning in 1996. The Company
computes FFO in accordance with the definition recommended by NAREIT.
 
  For the periods ended December 31, 1998 and 1997, the Company's FFO was
$24,096 and $4,709, respectively, or $0.74 and $0.14 per common share,
respectively. The following table provides the calculation of the Company's
FFO.
 
<TABLE>
<CAPTION>
                                                                  1998    1997
                                                                 ------- ------
   <S>                                                           <C>     <C>
   Net Earnings................................................. $22,244 $2,159
   Depreciation of real property................................   1,755    --
   Add: Stock options issued to Manager and employees...........      97  2,550
                                                                 ------- ------
   FFO.......................................................... $24,096 $4,709
                                                                 ======= ======
</TABLE>
 
Market Conditions
 
  The current flat yield curve and low level of long-term interest rates has
hindered the Company's ability to continue to obtain whole mortgage loans at
unleveraged yields (i.e., yields from mortgage loans before taking into
account borrowing costs on borrowings used to finance the acquisition of such
mortgage loans) and in volumes consistent with management's expectations that
existed at the time of the Company's initial public offering. The Company did
not acquire any mortgage loans from SPB during the third and fourth quarters
of 1998 and may not be able to acquire mortgage loans from SPB or other
parties in the future at volumes and yield levels consistent with previous
acquisitions.
 
  Current conditions in the capital markets and equity markets for mortgage
REITs has made permanent financing transactions more difficult and more
expensive than during the first part of 1998. Consequently, there can be no
assurance that the Company will be able to effectively fund future growth.
 
Year 2000
 
  The Company is aware of the issues associated with the Year 2000 ("Y2K")
problem concerning existing computer systems. Y2K affects every computer
system and subsystem the Company operates, both in-house and
 
                                      17
<PAGE>
 
from independent servicers and vendors. The Y2K issue is whether the Company's
computer systems will properly recognize the "00" and the prefix "20" dates
when the year changes to 2000. Since many existing computer programs use only
two digits to identify a calendar year field with the assumption that the
first two digits are always "19", most computer systems that do not properly
recognize the new prefix century date of "20" and year date of "00" could
generate erroneous data or cause a computer system to fail. Systems that
calculate, compare or sort using the incorrect date may cause erroneous
results, ranging from system malfunction to incorrect or incomplete
processing. The Company believes that the Y2K compliance of the Company's
information technology needs, such as computer hardware, software and
subsystems is primarily dependent upon the Y2K compliance efforts and results
of third party vendors and service providers.
 
 State of Readiness
 
  Since the Company's computer systems are new and are based on networked
personal computers, management does not believe that Y2K compliance will
present any material problems for the Company's internal computer systems. The
Company is, however, currently evaluating the risks of Y2K issues on companies
which are now servicing the Company's mortgage loan portfolios, companies that
provide property management services for the Company's real property and
companies involved in trust, administration and servicing activities in
connection with the Company's CMBS interests. The Company is in the process of
contacting all of its major service providers and third party vendors
regarding the state of their Y2K readiness. The Company has had preliminary
oral discussions with certain third parties and affiliates and has not
received any written responses. While the discussions have indicated that such
third parties and affiliates are planning to achieve Y2K compliance, such
compliance has not yet been achieved. The Company is also in the process of
identifying and evaluating individual borrowers or tenants whose Y2K
compliance failure could materially impact the Company. The Company plans to
complete this process during the third quarter of 1999.
 
 Costs to Address Y2K
 
  The Company has not incurred any costs to date regarding Y2K compliance.
Management does not believe that the Company will likely incur material Y2K
compliance costs because the Manager and the Company's service providers are
believed to be responsible for such costs. No assurance can be given that all
service providers will adequately achieve Y2K compliance or that replacements
for deficient service providers can be obtained in a timely manner and without
additional expense to the Company.
 
 Risk of Y2K
 
  The Company is a REIT which invests primarily in mortgage loans, real
property and CMBS securities. The risk to the Company of Y2K is that any
significant investment(s) could be negatively impacted by the failure of
borrowers, tenants or service providers to achieve Y2K compliance in a manner
that impedes their ability to meet contractual obligations and normal business
needs related to real property and financial instruments underlying the
Company's investments. Since the Company has a diverse portfolio of
investments, the failure of any single borrower or tenant to achieve Y2K
compliance generally is unlikely to have a material adverse effect on the
Company's financial position and results of operations. However, a substantial
loan or loans to a single borrower or a substantial property or properties
leased to a single tenant could result in a Y2K problem with adverse
consequences to the Company. Also, the failure of any of the Company's
mortgage loan servicers, property managers or CMBS service providers to
achieve Y2K compliance could necessitate that the Company find a suitable
replacement. While the Company believes that suitable replacements could be
obtained, there is no assurance that this could be done in a timely and cost
effective manner.
 
  Various systems at the real property level do not relate to information
technology but could impact the underlying real property operations. These
systems include telecommunications, security, HVAC, fire and safety systems,
lighting and electrical systems, elevator systems and systems for power
supply. The Company does not expect to be in a position to adequately evaluate
these kinds of risks other than through inquiries of its service providers and
third party vendors.
 
                                      18
<PAGE>
 
  The worst case Y2K scenario would be one in which various real property
systems adversely impact real property operators throughout the United States
in a manner that prevents such operators from meeting their debt service and
other cash requirements. This in turn would limit the Company's collections of
payments on mortgage loans and mortgage backed securities, as well as receipts
from real property owned which, in turn, would hinder the Company's ability to
meet its own debt service, dividend and other cash requirements. While the
Company is not in a position to assess the likelihood of this scenario, if
such a scenario were to take place, the Company would expect it to impact
similarly many other real property owners, investors and mortgage holders.
 
 Contingency Plans
 
  The Company currently does not have a contingency plan in place. Once the
Company completes evaluation of responses from its major service providers and
third party vendors, it will consider development of contingency plans. The
Company plans to have contingency plans in place during the third quarter of
1999.
 
  There can be no assurance that the impact of any failure of the Company or
its borrowers, tenants, service providers or any third party vendors to be Y2K
compliant will not have a material adverse effect on the Company's business,
financial condition or results of operations.
 
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
 
  (Except as expressly indicated otherwise, information herein is as of
December 31, 1998.)
 
  As of December 31, 1998, the Company had $279,000 in outstanding borrowings
under a warehouse line of credit. The Company had been notified that the
warehouse line would not be extended beyond its March 29, 1999 maturity date.
The Company completed a securitization transaction in March 1999, the proceeds
of which were used to repay the warehouse line, and the Company is seeking
other warehouse lending arrangements. There can be no assurance that the
Company will be able to secure new financing at favorable rates to meet the
Company's future investment growth needs in accordance with the Company's
investment strategies and Guidelines.
 
  Adverse changes in interest rates could negatively impact (a) the value of
the Company's portfolio of mortgage loans and investments in CMBS securities,
(b) the levels of interest income to be derived from these assets and (c) the
cost of borrowing under permanent (i.e., borrowings obtained through a
securitization) or interim (i.e., borrowings obtained under warehouse lines or
other short-term facilities) financing that may be obtained in the future.
Adverse changes in interest rates in this context refers to (a) decreases in
indices that are a basis for calculating interest on the Company's mortgage
loans without corresponding decreases in indices that are a basis for
calculating interest on the Company's borrowings, as well as (b) increases in
indices that are a basis for calculating interest on the Company's borrowings
without corresponding increases in indices that are a basis for calculating
interest on the Company's mortgage loans.
 
  As noted above, the Company is subject to interest rate risk. The Company's
mortgage loans that are pledged as security under permanent or interim
financing arrangements include adjustable rate and fixed rate loans. The
adjustable rate loans generally are subject to semi-annual interest rate
adjustment based on changes in the underlying indices. While most of the
adjustable rate loans are based on the six-month LIBOR index, others are based
on the one-year constant maturity treasury and prime rates. The Company's
permanent or interim borrowings generally are or are currently expected to be
based on the one-month LIBOR index and subject to monthly interest rate
adjustment. Thus, most of the Company's pledged assets and all of the
Company's borrowings are subject to interest rate adjustment based on LIBOR
indices. The primary lack of interest rate correlation between the Company's
pledged assets and related borrowings is due to the amount of fixed rate
mortgage loans pledged as security under the Company's borrowing arrangements.
In order to manage this exposure, the Company has entered into an interest
rate swap agreement described below.
 
  The Company's interest rate swap provides for the collection of interest
based on one-month LIBOR and the payment of interest based on a fixed interest
rate of approximately 5.99%. The interest payments are
 
                                      19
<PAGE>
 
computed on a notional balance of $71,954 at December 31, 1998, which declines
thereafter over a period of less than ten years. There can be no assurance
that the swap will adequately protect the Company's exposure to interest rate
risk on borrowings.
 
  The Company's CMBS interests are secured by adjustable and fixed interest
rate commercial and multifamily mortgage loans. The yield to maturity on each
security depends on, among other things, the price at which such security was
purchased, the rate and timing of principal payments (including prepayments,
repurchases, defaults and liquidations), the pass-through rate and interest
rate fluctuations. The Company's interest in some of these securities is
subordinated so that, in the event of a loss, payments to senior securities
holders will be made before the Company receives its payments. Changes in
interest rates could impact prepayment rates as well as default rates, which
in turn would impact the value and yield to maturity of the Company's CMBS
interests. Yield to maturity on the Company's CMBS interests in this context
refers to the ultimate rate of return on the original investment based on the
timing and amount of payments collected by the Company over the actual life of
the applicable CMBS interest. The Company's CMBS interests primarily are
either discount bonds or interest only certificates. Changes in interest rates
generally impact the mortgage loans that serve as collateral for the CMBS
interests. Increases in interest rates generally result in lower levels of
borrower prepayments, which in turn generally would increase the yield to
maturity on interest only certificates while decreasing the yield to maturity
on discount bonds. Increases in interest rates also may result in higher
levels of borrower delinquencies, which could lead to increased loan losses
and which, depending on the severity of such losses, could reduce the yield to
maturity on interest only certificates and on discount bonds. Decreases in
interest rates generally result in higher levels of borrower prepayments,
which in turn generally would reduce the yield to maturity on interest only
certificates while increasing the yield to maturity on discount bonds.
Decreases in interest rates also may result in lower levels of borrower
delinquencies, which could lead to reduced loan losses and which, depending on
the magnitude of the loss reduction, could enhance the yield to maturity on
both types of CMBS interests. While the Company has invested in various
classes of CMBS interests, including interest only securities, in order to
diversify its exposure to such uncertainties, there can be no assurance that
the Company's strategy will be successful.
 
  The Company's mortgage loan portfolio includes fixed and variable interest
rate commercial and multifamily mortgage loans. Fluctuations in interest rates
may affect prepayment rates and default rates, notwithstanding any existing
prepayment penalty or yield maintenance provisions, and such rate changes
would in turn impact the value and yield to maturity of the Company's
portfolio of mortgage loans. While the Company has attempted to mitigate such
exposures by diversifying its loan portfolio in certain respects, there can be
no assurance that this strategy will enable the Company to avoid adverse
consequences in the future. In addition, the current low level of long-term
interest rates has resulted in lower unleveraged yields on more recently
acquired mortgage loan portfolios than on earlier acquired portfolios.
 
  Interest rates during the first quarter of 1999 generally have been
relatively stable. While significant swings in interest rates are not expected
over the near term, it is impossible to predict with certainty what interest
rate levels will be in the future.
 
  The Company's financial instruments as of December 31, 1998 are comprised of
mortgage loans, securities available-for-sale, all outstanding borrowings and
an interest rate swap arrangement. The Company believes that the carrying
amount of its mortgage loans, securities available-for-sale and outstanding
borrowings are a reasonable approximation of the estimated fair value of such
financial instruments as of December 31, 1998. Management believes that the
estimated net present value cost of the swap arrangement was $1,669 as of
December 31, 1998. The estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. Furthermore, the estimates were made as of December 31, 1998 and,
therefore, current estimates of fair value may differ significantly from the
estimates noted above.
 
  The following discussion about the impact of hypothetical interest rate
movements on the Company's stockholders' equity includes "forward-looking
statements" that involve risk and uncertainties. Set forth below are
management's projections of hypothetical net losses in fair value of
stockholders' equity of the Company's
 
                                      20
<PAGE>
 
market sensitive financial instruments if certain assumed changes in market
rates and prices were to occur (sensitivity analysis). While the Company
believes that the assumed market rate changes are possible in the near term,
actual results may differ and the differences could be material. Based on the
Company's overall exposure to interest rate risk, the Company believes that
these changes in market rates would not materially affect the consolidated
near-term financial position, results of operations or cash flows of the
Company.
 
  Assuming immediate increases of 50 and 100 basis points in interest rates,
the net hypothetical loss in fair value of stockholders' equity related to
financial and derivative instruments is estimated to be $4.6 million and $9.2
million, or 1.1% and 2.3%, of total stockholders' equity, respectively, at
December 31, 1998. The Company believes that an immediate interest rate shift
of this magnitude represents an adverse scenario.
 
  The effect of interest rate risk on potential near-term net income, cash
flow and fair value was determined based on models that project the impact of
interest rate changes based on a range of factors, including duration and
prepayment. Fair value was estimated based on the net present value of cash
flows or duration estimates, using a representative set of possible future
interest rate scenarios.
 
                                      21
<PAGE>
 
  The table presented below sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1998 that are
anticipated by the Company to reprice or mature in each of the future time
periods shown. The amount of assets and liabilities shown which reprice or
mature during a particular period was determined in accordance with the
earlier of term to repricing or the contractual terms of the asset or
liability.
 
<TABLE>
<CAPTION>
                                                                       More than  More than
                                     More than   More than  More than   3 Years    5 Years                Non
                          3 Months  3 Months to 6 Months to 1 Year to     to         to      More than  Interest
                          or Less    6 Months     1 Year     3 Years    5 Years   10 Years   10 Years   Bearing    Total
                          --------  ----------- ----------- ---------  ---------  ---------  ---------  --------  --------
<S>                       <C>       <C>         <C>         <C>        <C>        <C>        <C>        <C>       <C>
Interest-earning assets
Cash....................  $ 23,398                                                                                $ 23,398
Securities available for
 sale...................    57,671                                                                                  57,671
Mortgage Loans..........   241,542    141,136                  2,545                          180,180              565,403
                          --------   --------    --------   --------   --------   --------   --------   --------  --------
 Total interest-earning
  assets................   322,611    141,136         --       2,545        --         --     180,180        --    646,472
Less: Allowance for loan
 losses and deferrals...                                                                                  (8,755)   (8,755)
                          --------   --------    --------   --------   --------   --------   --------   --------  --------
Net interest-earnings
 assets.................   322,611    141,136                  2,545                          180,180     (8,755)  637,717
Non-interest earning
 assets.................                                                                                 119,457   119,457
                          --------   --------    --------   --------   --------   --------   --------   --------  --------
 Total assets...........  $322,611   $141,136         --    $  2,545        --         --    $180,180   $110,702  $757,174
                          ========   ========    ========   ========   ========   ========   ========   ========  ========
Interest-bearing
 liabilities
Secured warehouse
 facility...............   279,000                                                                                 279,000
Secured bank loan.......     3,557                                                                                   3,557
Mortgage loans secured
 by real property.......    14,119                                                             34,456               48,575
                          --------   --------    --------   --------   --------   --------   --------   --------  --------
 Total interest-bearing
  liabilities...........   296,676        --          --         --         --         --      34,456        --    331,132
Non-interest bearing
 liabilities............                                                                                  17,233    17,233
Shareholders' equity....                                                                                 408,809   408,809
                          --------   --------    --------   --------   --------   --------   --------   --------  --------
 Total liabilities and
  shareholders' equity..  $296,676        --          --         --         --         --    $ 34,456   $426,042  $757,174
                          ========   ========    ========   ========   ========   ========   ========   ========  ========
Interest rate
 sensitivity gap........  $ 25,935   $141,136         --    $  2,545        --         --    $145,724        --
Cumulative interest rate
 sensitivity gap........  $ 25,935   $167,071    $167,071   $169,616   $169,616   $169,616   $315,340   $315,340
Cumulative interest rate
 sensitivity gap as a %
 of total assets........      3.43%     22.07%      22.07%     22.40%     22.40%     22.40%     41.65%     41.65%
Cumulative net interest
 earning assets as a %
 of interest bearing
 liabilities............    108.74%    156.31%     156.31%    157.17%    157.17%    157.17%    195.23%    195.23%
</TABLE>
 
 
                                      22
<PAGE>
 
Item 8. Financial Statements and Supplementary Data
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Independent Auditors' Report..............................................  23
Consolidated Balance Sheets...............................................  24
Consolidated Statements of Earnings.......................................  25
Consolidated Statements of Changes in Stockholders' Equity and
 Comprehensive Income.....................................................  26
Consolidated Statements of Cash Flows.....................................  27
Notes to Consolidated Financial Statements................................  28
</TABLE>
 
                     -------------------------------------
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Stockholders
Imperial Credit Commercial Mortgage Investment Corp.:
 
  We have audited the accompanying consolidated balance sheets of Imperial
Credit Commercial Mortgage Investment Corp. and subsidiaries as of December 31,
1998 and 1997 and the related consolidated statements of earnings, changes in
stockholders' equity and comprehensive income, and cash flows for the year
ended December 31, 1998 and the period from July 31, 1997 (Inception) through
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Imperial Credit Commercial Mortgage Investment Corp. and subsidiaries as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for the year ended December 31, 1998 and the period from July 31, 1997
(Inception) through December 31, 1997, in conformity with generally accepted
accounting principles.
 
                                          KMPG LLP
 
Los Angeles, California
February 4, 1999
 
                                       23
<PAGE>
 
              IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
                          CONSOLIDATED BALANCE SHEETS
 
                           December 31, 1998 and 1997
 
                   (Dollars in thousands, except share data)
 
<TABLE>
<CAPTION>
                                                              1998      1997
                                                            --------  --------
<S>                                                         <C>       <C>
Assets:
  Cash and interest bearing deposits....................... $ 23,398  $ 11,902
  Repurchase agreements....................................      --    148,711
  Mortgage loans, net of allowance for loan losses ($8,027
   and $1,727, respectively)...............................  556,648   272,009
  Real property, net of accumulated depreciation...........  107,663       --
  Securities available-for-sale, at estimated fair value...   57,671    59,321
  Accrued interest receivable..............................    6,410     2,085
  Other assets.............................................    5,384     1,109
                                                            --------  --------
    Total Assets........................................... $757,174  $495,137
                                                            ========  ========
Liabilities:
  Dividends payable........................................ $  9,405  $  4,485
  Accrued expenses, payables and other liabilities.........    7,828    10,950
  Borrowings under secured warehouse facility..............  279,000       --
  Borrowings under secured bank loan.......................    3,557       --
  Mortgage loans secured by real property..................   48,575       --
                                                            --------  --------
    Total Liabilities......................................  348,365    15,435
                                                            --------  --------
Commitments and contingencies
Stockholders' Equity:
  Common stock, par value $0.0001 per share. Authorized
   500,000,000 shares, 28,500,000 and 34,500,000 shares
   issued and outstanding , respectively...................        3         3
  Additional paid-in capital...............................  425,615   481,856
  Accumulated other comprehensive income...................      221       169
  Accrued dividends in excess of earnings..................  (17,030)   (2,326)
                                                            --------  --------
    Total Stockholders' Equity.............................  408,809   479,702
                                                            --------  --------
Total Liabilities and Stockholders' Equity................. $757,174  $495,137
                                                            ========  ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       24
<PAGE>
 
              IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
                      CONSOLIDATED STATEMENTS OF EARNINGS
 
                  For the year ended December 31, 1998 and the
        period from July 31, 1997 (Inception) through December 31, 1997
 
        (Dollars in thousands, except share and earnings per share data)
 
<TABLE>
<CAPTION>
                                                            1998        1997
                                                         ----------  ----------
<S>                                                      <C>         <C>
Income:
  Mortgage loans........................................ $   41,130  $    1,676
  Securities available-for-sale.........................      6,153       1,403
  Repurchase agreements and interest bearing deposits...      2,454       3,388
                                                         ----------  ----------
    Total Interest Income...............................     49,737       6,467
  Real property rental income...........................      7,684         --
                                                         ----------  ----------
    Total Income........................................     57,421       6,467
                                                         ----------  ----------
Operating Expenses:
  Management fees.......................................      6,319         940
  Interest expense......................................     11,165         --
  Provision for loan losses.............................      6,300         --
  Write-down of securities available-for-sale...........      4,554         --
  Depreciation of real property.........................      1,755         --
  Real property operating expenses......................      1,872         --
  Due diligence expenses................................      1,659         487
  Stock options issued to Manager and its employees.....         97       2,550
  Other.................................................      1,456         331
                                                         ----------  ----------
    Total Expenses......................................     35,177       4,308
                                                         ----------  ----------
Net Earnings............................................     22,244       2,159
Dividends...............................................     36,948       4,485
                                                         ----------  ----------
Accrued dividends in excess of earnings................. $  (14,704) $   (2,326)
                                                         ==========  ==========
Earnings per share:
  Basic................................................. $     0.68  $     0.06
  Diluted...............................................       0.68        0.06
Weighted average common shares outstanding:
  Basic................................................. 32,570,974  34,500,000
  Diluted............................................... 32,588,634  34,678,550
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       25
<PAGE>
 
              IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
                                     INCOME
 
                  For the year ended December 31, 1998 and the
        period from July 31, 1997 (Inception) through December 31, 1997
 
                   (Dollars in thousands, except share data)
 
<TABLE>
<CAPTION>
                                                                                       Total
                           Number of                      Accumulated    Accrued   Stockholders'
                            Common            Additional     Other      Dividends   Equity and
                            Shares     Common  Paid-In   Comprehensive  In Excess  Comprehensive
                          Outstanding  Stock   Capital      Income     of Earnings    Income
                          -----------  ------ ---------- ------------- ----------- -------------
<S>                       <C>          <C>    <C>        <C>           <C>         <C>
Initial capitalization,
 July 31, 1997..........         100    $--    $      2      $--        $    --      $      2
                                                                                     --------
Net earnings............                                                   2,159        2,159
Unrealized gain on
 securities available-
 for-sale...............                                      169                         169
                                                                                     --------
Comprehensive income....                                                                2,328
                                                                                     --------
Net proceeds from
 initial public offering
 on October 22, 1997....  34,500,000       3    479,306                               479,309
Purchase and retirement
 of initial shares......        (100)                (2)                                   (2)
Stock options issued to
 Manager and its
 employees..............                          2,550                                 2,550
Cumulative dividends
 declared ($0.13 per
 share).................                                                  (4,485)      (4,485)
                          ----------    ----   --------      ----       --------     --------
Balance, December 31,
 1997...................  34,500,000       3    481,856       169         (2,326)     479,702
                          ----------    ----   --------      ----       --------     --------
Net earnings............                                                  22,244       22,244
Change in unrealized
 gain (loss) on
 securities available-
 for-sale...............                                     (209)                       (209)
Foreign currency
 exchange gain..........                                      261                         261
                                                                                     --------
Comprehensive income....                                                               22,296
                                                                                     --------
Purchase of stock.......  (6,000,000)           (56,338)                              (56,338)
Stock options issued to
 Manager and its
 employees..............                             97
Cumulative dividends
 declared ($1.18 per
 share).................                                                 (36,948)     (36,948)
                          ----------    ----   --------      ----       --------     --------
Balance, December 31,
 1998...................  28,500,000    $  3   $425,615      $221       $(17,030)    $408,809
                          ==========    ====   ========      ====       ========     ========
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                       26
<PAGE>
 
              IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
     For the year ended December 31, 1998 and the period from July 31, 1997
                     (Inception) through December 31, 1997
 
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                           1998       1997
                                                         ---------  ---------
<S>                                                      <C>        <C>
Cash Flows from Operating Activities:
Net Earnings............................................ $  22,244  $   2,159
Adjustments to reconcile net earnings to net cash
 provided by operating activities:
Depreciation and amortization...........................     1,850         11
Amortization of premium on mortgage loans...............     1,858         50
Amortization of discount on securities available-for-
 sale...................................................    (6,152)    (1,404)
Provision for loan losses...............................     6,300        --
Write-down of securities available-for-sale.............     4,554        --
Stock options issued to Manager and its employees.......        97      2,550
Net change in:
Accrued interest receivable.............................    (4,325)    (2,085)
Other assets............................................    (4,150)    (1,120)
Other liabilities.......................................    (3,116)    10,950
                                                         ---------  ---------
Total Cash Provided by Operating Activities.............    19,160     11,111
                                                         ---------  ---------
Cash Flows from Investing Activities:
Purchases of securities available-for-sale..............    (6,096)   (60,000)
Payments received on securities available-for-sale......     9,135      2,252
Purchases and originations of mortgage loans............  (381,189)  (273,051)
Principal reductions on mortgage loans..................    88,392        992
Purchase of real property and improvements, net of
 mortgage loans assumed.................................   (73,767)       --
                                                         ---------  ---------
Total Cash Used for Investing Activities................  (363,525)  (329,807)
                                                         ---------  ---------
Cash Flows from Financing Activities:
Dividends paid..........................................   (32,028)       --
Cash borrowings under secured warehouse facility........   279,000        --
Cash borrowings under secured bank loan.................     3,349        --
Cash borrowings under mortgage loans secured by real
 property...............................................    13,364        --
Repayments of mortgage loans secured by real property...      (197)       --
Cash borrowings under repurchase facility...............    14,400        --
Repayments under repurchase facility....................   (14,400)       --
Cash used in stock repurchases..........................   (56,338)       --
Proceeds from initial public offering, net..............       --     479,309
                                                         ---------  ---------
Total Cash Provided by Financing Activities.............   207,150    479,309
                                                         ---------  ---------
Net Increase (Decrease) in Cash and Cash Equivalents....  (137,215)   160,613
Cash and cash equivalents at beginning of period........   160,613        --
                                                         ---------  ---------
Cash and cash equivalents at end of period.............. $  23,398  $ 160,613
                                                         =========  =========
 
Supplemental Disclosure of Cash Flow Activities
Mortgage loans assumed upon real property purchases..... $  34,580  $     --
                                                         =========  =========
Cash paid for interest.................................. $   9,979  $     --
                                                         =========  =========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       27
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                 (Dollars in thousands, except share amounts)
 
1. Organization
 
  Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC" or the
"Company") was incorporated in Maryland on July 31, 1997 and was initially
capitalized on that date through the sale of 100 shares of its Common Stock,
par value $0.0001 per share (the "Common Stock"), for $2. On October 22, 1997,
ICCMIC commenced its operations upon consummation of an initial public
offering of 34,500,000 shares of its Common Stock, with gross proceeds of
$513,857 and net proceeds to the Company of $479,309 after discounts and
costs. The Company primarily invests in mortgage loans, real property and
interests in commercial mortgage-backed securities ("CMBS"). The majority of
the Company's mortgage loans and all of the Company's interests in CMBS were
acquired from Imperial Credit Industries, Inc. ("Imperial Credit") and its
affiliates. The Company's sole activity through October 21, 1997 consisted of
the organization and startup of the Company. The Company operates so as to
qualify as a real estate investment trust ("REIT") under the requirements of
the Internal Revenue Code of 1986, as amended (the "Code").
 
  The Company has entered into a management agreement (the "Management
Agreement") with Imperial Credit Commercial Asset Management Corp. (the
"Manager"), a wholly-owned subsidiary of Imperial Credit, under which the
Manager advises the Company on various aspects of its business and manages its
day-to-day operations, subject to the supervision of the Board of Directors of
the Company. Imperial Credit currently owns 3,070,000 shares (10.8%) of the
Company's outstanding common stock and the Manager has options to purchase an
additional 1,691,250 shares at $15 per share, exercisable over a three year
period. Pursuant to the Management Agreement, the Manager is entitled to
receive a base management fee of 1% per annum of the first $1 billion of
average invested assets, 0.75% of the next $250 million of average invested
assets, and 0.5% of average invested assets above $1.25 billion, payable
quarterly. In addition, the Manager is entitled to a quarterly incentive fee
generally based on 25% of Funds From Operations, as adjusted, in excess of
certain defined levels of return, as fully set forth in the Management
Agreement. Only base management fees have been earned to date.
 
  The Company operates in four principal business segments; small balance
mortgage loan pools acquired ("mortgage pools"), individual large balance
mortgage loans originated or acquired ("large mortgage loans"), real property
and securities available-for-sale ("securities"). These segments are managed
separately because each requires different levels of resources and involves
assets having different risk profiles. Segment performance is measured based
on net earnings.
 
2. Summary of Significant Accounting Policies
 
  The consolidated financial statements of ICCMIC and its subsidiaries are
prepared in accordance with generally accepted accounting principles. All
material intercompany transactions have been eliminated in consolidation.
 
  In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates and assumptions. Material estimates
subject to change include the allowance for loan losses and the carrying value
of securities available-for-sale.
 
 Cash and Cash Equivalents
 
  For purposes of the consolidated statements of cash flows, cash and cash
equivalents consists of cash, money market mutual funds and repurchase
agreements. The Company considers investments with maturities of three months
or less at date of acquisition to be cash equivalents.
 
                                      28
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
  The Company enters into repurchase agreements which are carried at the
amounts at which the securities will be subsequently resold plus accrued
interest, as specified in the respective agreements. The securities purchased
are held in custody for the benefit of the Company. All of the transactions
are in United States agency or investment grade securities. The Company's
exposure to credit risk associated with the non-performance of counterparties
in fulfilling their contractual obligations can be directly impacted by market
fluctuations, which may impair the counterparties' ability to satisfy their
obligations. The Company monitors the market value and other factors of the
underlying securities relative to the amounts due under the repurchase
agreements and, when necessary, requires prompt additional collateral or
reduction in loan balance to ensure that the market value remains sufficient
to protect itself in the event of a default by the counterparty.
 
 Mortgage Loans Held For Investment
 
  The Company purchases and originates mortgage loans to be held as long-term
investments. Mortgage loans held for investment are recorded at cost at the
date of purchase. Premiums and discounts related to these loans are amortized
over their estimated lives using the interest method. Loans are continually
evaluated for collectibility and, if appropriate, loans may be placed on non-
accrual status. Loans are placed on non-accrual status generally after they
become 90 days past due, in which case previously accrued interest is reversed
from income. Future collections of interest are included in interest income or
applied to the loan balance based on an assessment of the likelihood that the
principal will be collected.
 
  The Company maintains an allowance for losses on mortgage loans held for
investment at an amount which it believes is sufficient to provide adequate
protection against future losses in the mortgage loan portfolio. The allowance
for losses is determined primarily on the basis of management's judgment of
net loss potential, including specific allowances for known impaired loans and
other known factors such as changes in the nature and volume of the portfolio,
value of the collateral and current economic conditions that may affect the
borrowers' ability to pay.
 
  A loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. Loans are evaluated for impairment on
an individual basis. The measurement of impairment may be based on (1) the
present value of the expected future cash flows of the impaired loan
discounted at the loan's original effective interest rate, (2) the observable
market price of the impaired loan or (3) the fair value of the collateral of a
collateral-dependent loan. The amount by which the recorded investment of the
loan exceeds the measure of the impaired loan is recognized by recording a
valuation allowance with a corresponding charge to provision for loan losses.
Loans deemed by management to be uncollectible are charged to the allowance
for loan losses. Recoveries on loans previously charged off are credited to
the allowance. Interest income on impaired loans is recognized on the cash
basis only to the extent that the carrying value of the loan is supported by
its collateral value.
 
 Real Property
 
  Real property is recorded at cost. Included in such costs are acquisition
costs and certain direct capitalized costs, such as legal fees, appraisal
fees, surveys, title insurance and other costs incurred by the Company during
the diligence and closing periods. Expenditures for ordinary maintenance and
repairs are expensed to operations as incurred. Significant renovations and
improvements which improve or extend the useful life of the assets are
capitalized. Except for amounts attributed to land, real property assets are
depreciated over their estimated useful lives using the straight-line method.
The estimated useful lives of buildings and improvements range from 10 to 30
years. Leasehold improvements are amortized over the life of the lease ranging
from 3 to 10 years.
 
                                      29
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
  The Company reviews its real property investments for impairment whenever
known events or changed circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held is measured
by a comparison of the carrying amount of the asset to its future net
undiscounted cash flows expected to be generated. If such an asset is
considered to be impaired, the impairment to be recognized is measured at the
amount by which the carrying value of the asset exceeds its fair value.
 
  Rental revenue is reported on a straight-line basis over the terms of the
respective leases.
 
 Investment Securities
 
  The Company classifies investment securities as held-to-maturity, available-
for-sale, and/or trading securities at the time of purchase based upon
management's intent and the Company's ability to hold the securities. Held-to-
maturity investment securities are reported at amortized cost, available-for-
sale securities are reported at fair value with unrealized gains and losses
shown as a separate component of stockholders' equity in accumulated other
comprehensive income, and trading securities are reported at fair value with
unrealized gains and losses reported in income. Discounts obtained or premiums
paid on investment securities are amortized to interest income over the
estimated life of the investment securities using the interest method.
 
  The Company has a portfolio of purchased commercial mortgage-backed
securities ("CMBS") consisting of subordinated and interest only securities.
These securities are classified as available-for-sale and carried at estimated
fair value. Because there is not an active market from which a fair value can
be derived, management estimates the fair value of the CMBS using a discounted
cash flow methodology. Such methodology requires estimates of future
prepayments and credit losses, as well as assumptions about appropriate rates
at which the resultant cash flows are discounted.
 
  Unrealized losses on securities that reflect a decline in value which is
judged to be other than temporary are charged to earnings and are determined
using the specific identification method. At disposition, the realized net
gain or loss is included in earnings. Because the Company qualifies as a REIT
and does not pay income taxes, the unrealized gains and losses on securities
available-for-sale are reported gross in stockholders' equity as accumulated
other comprehensive income.
 
 Income Taxes
 
  The Company has elected to be taxed as a REIT under Sections 856 through 860
of the Code. A REIT generally will not be subject to federal income taxation
on that portion of its income that qualifies as REIT taxable income to the
extent that it distributes at least 95% of its taxable income to its
stockholders and complies with certain other requirements. Accordingly, no
provision has been made for federal income taxes for ICCMIC and its
subsidiaries in the accompanying consolidated financial statements. The
federal income tax basis of the Company's assets exceeds the book basis of the
assets by $14,623.
 
 Income and Expense Recognition
 
  Income and expenses are recorded on the accrual basis of accounting.
 
 Earnings Per Share
 
  Basic earnings per share is computed on the basis of the weighted average
number of shares of Common Stock outstanding for the period. Diluted earnings
per share is computed on the basis of the weighted average number of shares of
Common Stock and common equivalent shares outstanding for the period. The
beginning of the period utilized for purposes of the 1997 earnings per share
computation coincided with the commencement
 
                                      30
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
of the Company's operations on October 22, 1997. For purposes of diluted
earnings per share, the computation of the weighted average number of shares
outstanding includes the impact of the assumed exercise of the outstanding
dilutive options to purchase common stock and assumes that the proceeds from
such issuance are used to repurchase common shares at the average market price
of the Company's common stock for the period.
 
 Stock Options
 
  The Company has elected to account for stock based compensation arrangements
under the intrinsic value based method of accounting. Pro forma disclosures of
net earnings computed as if the fair value based method had been applied have
been included in the notes to the consolidated financial statements. Stock
options or other equity instruments granted for services provided by non-
employees or to acquire goods or services from outside suppliers or vendors
have been accounted for under the fair value method with expense recognized
during the service period.
 
 Reporting Comprehensive Income
 
  The Company adopted Financial Accounting Standards Board Statement 130 ("FAS
130"), "Comprehensive Income: Financial Statement Presentation," during the
first quarter of 1998. Pursuant to FAS 130, standards have been established
for reporting and displaying comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is defined
as the change in equity of a business enterprise during a period from
transactions and other events and circumstances, excluding those resulting
from investments by and distributions to owners. Comprehensive income
generally includes net income, foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on investments in
certain debt and equity investments (i.e., securities available-for-sale). The
Company has elected to adopt FAS 130 by including a separate column for
accumulated other comprehensive income and separate rows for comprehensive
income in the consolidated statements of changes in stockholders' equity. The
changes in unrealized gain (loss) on securities available-for-sale and foreign
exchange gain (loss) have been included in comprehensive income.
 
 Translation of Foreign Currencies
 
  The functional currencies of the Company's foreign subsidiaries are their
respective local currencies. Financial statement accounts of these
subsidiaries are translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation" ("FASB
52"). Under FASB 52, functional currency assets and liabilities are translated
into U.S. dollars generally using exchange rates in effect at the end of the
period and the related translation adjustments are recorded as a separate
component of comprehensive income. Income statement accounts expressed in
functional currencies are translated using average rates of exchange
prevailing during the period.
 
 Effect of New Accounting Standards
 
  In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This standard requires that all
derivative instruments be recorded in the balance sheet at fair value; the
accounting for the gain or loss due to the changes in fair value of the
derivative instrument depends on whether the derivative instrument qualifies
as a hedge. If the derivative instrument does not qualify as a hedge, the
gains or losses are reported in earnings when they occur. However, if the
derivative instrument qualifies as a hedge, the accounting varies based on the
type of risk being hedged. SFAS 133 will apply to the Company starting January
1, 2000. Management is currently evaluating the financial statement impact, if
any, of adopting SFAS 133.
 
                                      31
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
3. Mortgage Loans
 
  Mortgage loans held for investment include various types of adjustable rate
and fixed rate loans secured by mortgages on commercial and multifamily real
properties. Approximately 40.2% and 45.4% of the amount of mortgage loans held
for investment at December 31, 1998 and 1997, respectively, were
collateralized by properties located in California. Mortgage loans are
generally expected to be repaid from the operating profits of the borrowers,
refinancing by another lender or sale by the borrowers of the secured
collateral.
 
  As of December 31, 1998 and 1997, the Company's mortgage loan portfolio
consisted of the following:
 
<TABLE>
<CAPTION>
                                     1998                      1997
                            ------------------------- -------------------------
                                      % of    Number            % of    Number
                             Amount   Loans  Of Loans  Amount   Loans  Of Loans
                            --------  -----  -------- --------  -----  --------
   <S>                      <C>       <C>    <C>      <C>       <C>    <C>
   Principal balance:
   Multifamily loans....... $270,170   48.9%    968   $171,312   65.5%   681
   Commercial loans........  264,732   47.9%    374     90,050   34.5%   191
   Construction loan
    participation..........   18,000    3.2%      1
                            --------  -----   -----   --------  -----    ---
     Total Principal.......  552,902  100.0%  1,343    261,362  100.0%   872
                                      =====   =====             =====    ===
   Unamortized premium.....   14,344                    12,374
   Unearned loan fees......   (2,571)                      --
   Less allowance for loan
    losses.................   (8,027)                   (1,727)
                            --------                  --------
   Net carrying amount..... $556,648                  $272,009
                            ========                  ========
</TABLE>
 
  The Company acquired a substantial amount of mortgage loans from Southern
Pacific Bank ("SPB"), a wholly-owned subsidiary of Imperial Credit, and
Franchise Mortgage Acceptance Company ("FMAC"), an affiliate of Imperial
Credit. SPB was formerly known as Southern Pacific Thrift and Loan
Association.
 
  The following summary reflects loans acquired from affiliates of the Manager
which are included in the table shown above as of December 31, 1998 and 1997:
 
<TABLE>
<CAPTION>
                                                      1998            1997
                                                 --------------- ---------------
                                                  Amount  Number  Amount  Number
                                                 -------- ------ -------- ------
   <S>                                           <C>      <C>    <C>      <C>
   Principal balance of SPB loans............... $353,477   985  $196,801  568
   Principal balance of FMAC loans..............   54,501    55     6,182    2
                                                 -------- -----  --------  ---
     Total principal balance of loans acquired
      from affiliates of Manager................ $407,978 1,040  $202,983  570
                                                 ======== =====  ========  ===
</TABLE>
 
  The change in the mortgage loan balance consisted of the following during
the periods ended December 31, 1998 and 1997:
 
<TABLE>
<CAPTION>
                                                                1998     1997
                                                              -------- --------
   <S>                                                        <C>      <C>
   Mortgage loans purchased or originated, net............... $381,189 $273,051
   Less:
   Collections of principal..................................   88,392      992
   Provision for loan losses.................................    6,300        0
   Amortization of premium...................................    1,858       50
                                                              -------- --------
   Net change................................................ $284,639 $272,009
                                                              ======== ========
</TABLE>
 
                                      32
<PAGE>
 
              IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                (Dollars in thousands, except per share amounts)
 
 
  At December 31, 1998 and 1997, 602 and 378 mortgages, respectively, had fixed
interest rates and 741 and 494 mortgages, respectively, had variable interest
rates tied to the six month LIBOR, Bank of America Prime or the one-year U.S.
Treasury index. The ranges of interest rates as of December 31, 1998 and 1997
are set forth in the following table:
 
<TABLE>
<CAPTION>
                                                1998                1997
                                         ------------------- -------------------
                                                  Principal           Principal
    Range of                              Number  Balance Of  Number  Balance of
   Interest Rates                        of Loans   Loans    of Loans   Loans
   --------------                        -------- ---------- -------- ----------
   <S>                                   <C>      <C>        <C>      <C>
    7.5% or less........................     19      27,400     75     $ 35,504
    7.501 -  8.0........................     27      29,599    136       52,923
    8.001 -  8.5........................     65      35,474     63       22,894
    8.501 -  9.0........................    291     111,770     86       29,043
    9.001 -  9.5........................    262      94,145     85       23,705
    9.501 - 10.0........................    221     101,516     48       28,718
   10.001 - 10.5........................     83      45,354     28       10,389
   10.501 - 11.0........................    119      25,555    102       17,470
   11.001 - 11.5........................     85      12,956     77        9,933
   11.501 - 12.0........................     60      20,048     54       10,961
   12.001 - 12.5........................     43      34,352     39        8,138
   12.501 - 13.0........................     33       4,499     39        5,642
   13.01 or more........................     35      10,234     40        6,042
                                          -----    --------    ---     --------
     Total..............................  1,343    $552,902    872     $261,362
                                          =====    ========    ===     ========
</TABLE>
 
  The mortgage loans ranged in size from $6 to $26,240 at December 31, 1998 as
compared to from $9 to $3,747 at December 31, 1997 and as set forth in the
following table:
 
<TABLE>
<CAPTION>
                                            1998                                  1997
                            ------------------------------------- -------------------------------------
                            Weighted                              Weighted
                            Average   Final            Principal  Average   Final            Principal
                            Interest Maturity  Number  Balance of Interest Maturity  Number  Balance of
   Loan Size Range            Rate     Date   of Loans   Loans      Rate     Date   of Loans   Loans
   ---------------          -------- -------- -------- ---------- -------- -------- -------- ----------
   <S>                      <C>      <C>      <C>      <C>        <C>      <C>      <C>      <C>
   $  150,000 or less......  10.472% 06/01/28    410    $ 42,168   10.522% 11/01/27   342     $ 33,893
      150,001 -   250,000..   9.822% 06/01/28    371      70,086    9.713% 11/01/27   242       45,402
      250,001 -   500,000..   9.587% 06/01/28    314     111,278    9.298% 11/01/27   165       58,840
      500,001 -   750,000..   9.271% 06/01/28     97      59,535    8.849% 11/01/27    51       31,325
      750,001 - 1,000,000..   9.297% 06/01/28     64      55,883    8.998% 11/01/27    34       29,480
    1,000,001 - 1,500,000..   9.324% 04/01/28     48      58,685    8.592% 11/01/27    25       31,235
    1,500,001 - 2,000,000..   9.436% 08/01/27     17      29,941    8.662% 09/01/27     5        8,679
    2,000,001 - 3,000,000..   9.464% 06/01/27     14      34,652    8.714% 06/01/27     6       15,269
   Over 3,000,000.00.......   9.880% 08/01/07      8      90,674    9.970% 06/01/27     2        7,239
                                               -----    --------                      ---     --------
     Total.................                    1,343    $552,902                      872     $261,362
                                               =====    ========                      ===     ========
</TABLE>
 
                                       33
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
The Company's mortgage loans were secured by properties located in 40 states
as set forth in the following table:
 
<TABLE>
<CAPTION>
                                    December 31, 1998                  December 31, 1997
                            ----------------------------------  ---------------------------------
                                             Principal                           Principal
                             Number   % by   Balance of  % by    Number   % by    Balance   % by
   State                    of Loans Number    Loans    Amount  of Loans Number  of Loans  Amount
   -----                    -------- ------  ---------- ------  -------- ------  --------- ------
   <S>                      <C>      <C>     <C>        <C>     <C>      <C>     <C>       <C>
   Arizona.................     74    5.51%   $ 29,009   5.25%      53    6.08%  $ 22,899   8.76%
   California-Northern.....     87    6.48%     44,000   7.96%      37    4.24%    16,863   6.45%
   California-Southern.....    553   41.18%    178,089  32.21%     346   39.68%   101,822  38.96%
   Colorado................     62    4.62%     20,237   3.66%      34    3.90%    10,669   4.08%
   Connecticut.............     15    1.12%      4,859   0.88%      11    1.26%     1,939   0.74%
   Florida.................     31    2.31%     46,397   8.39%      11    1.26%     2,709   1.04%
   Georgia.................      9    0.67%      4,664   0.84%
   Illinois................     22    1.64%      2,479   0.45%      24    2.75%     4,942   1.89%
   Massachusetts...........     38    2.83%      7,268   1.31%      36    4.13%     6,156   2.36%
   Maryland................      9    0.67%      1,489   0.27%       9    1.03%     3,242   1.24%
   Maine...................      8    0.59%      3,397   0.61%
   New Hampshire...........     33    2.46%      4,951   0.90%      36    4.13%     4,792   1.83%
   New Jersey..............     67    4.99%     16,951   3.07%      55    6.31%    12,473   4.77%
   Nevada..................     13    0.97%     21,101   3.82%
   New York................     88    6.55%     20,733   3.75%      79    9.06%    17,910   6.85%
   Ohio....................     18    1.34%      1,941   0.35%      17    1.95%     1,983   0.76%
   Oregon..................     60    4.47%     26,947   4.87%      32    3.67%    16,355   6.26%
   Pennsylvania............      8    0.59%      2,326   0.42%
   Rhode Island............      8    0.59%      2,028   0.37%
   Texas...................     31    2.31%     18,174   3.29%      12    1.38%     4,946   1.89%
   Utah....................      8    0.60%      6,092   1.10%
   Washington..............     50    3.72%     29,041   5.25%      37    4.24%    21,870   8.37%
   19 other states.........     51    3.80%     60,729  10.98%      43    4.93%     9,792   3.75%
                             -----   -----    --------  -----     ----   -----   --------  -----
     Total.................  1,343   100.0%   $552,902  100.0%     872   100.0%  $261,362  100.0%
                             =====   =====    ========  =====     ====   =====   ========  =====
</TABLE>
 
  There were 38 loans totaling $5,745 over 90 days past due as of December 31,
1998 as compared to 1 loan of $116 over 90 days past due at December 31, 1997.
At December 31, 1998, all of the loans over 90 days past due were on non-
accrual status and were considered impaired loans. No specific impairment
reserve was established for these loans. Interest foregone on non-accrual
loans was $510 for 1998. The average balance of impaired loans during 1998 was
$3,347 and $223 of interest income was recognized during 1998 on those loans
that were impaired as of December 31, 1998. There were no impaired loans or
loans on non-accrual status at December 31, 1997.
 
  A summary of the activity in the allowance for loan losses for 1998 is as
follows:
 
<TABLE>
     <S>                                                                 <C>
     Balance at beginning of year....................................... $1,727
     Provision charged to earnings......................................  6,300
     Charge-offs........................................................    --
     Recoveries.........................................................    --
                                                                         ------
     Balance at end of year............................................. $8,027
                                                                         ======
</TABLE>
 
                                      34
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
  In conjunction with the acquisition of mortgage loans in 1997, the Company
established an allowance for loan losses at the time of acquisition totaling
$1,727 based on the seller's loan loss experience.
 
  The following table presents certain key data regarding the Company's
mortgage loans:
 
<TABLE>
<CAPTION>
                                                                            Principal
                                                                            Amount of
                                                                              Loans
                                                                           Subject to
                                    Final             Face      Carrying   Delinquency
                         Interest  Maturity  Prior  Amount of  Amount of     Over 90
      Description          Rate      Date    Liens  Mortgages Mortgages(A)   Days(B)
      -----------        --------  -------- ------- --------- ------------ -----------
<S>                      <C>       <C>      <C>     <C>       <C>          <C>
 Pools of predominantly
  small balance
  multifamily and
  commercial mortgage
  loans(C)..............    (D)      1999-  --Not required--    $476,994     $5,745
                                     2028
                                                                --------     ------
Total--Loan Pools.......                                         476,994      5,745
                                                                --------     ------
Construction loan
 participation(E).......   7.26%-    2007-      --    18,000      17,891        --
                           9.26%     2010
Hotel/multifamily
 apartment acquisition
 financing
  First mortgage
   loan(F)..............   7.35%     2008       --    17,916      17,602
  Mezzanine loan(G).....  11.65%     2008       --     9,500       9,343        --
Condominium conversion
 project financing(H)...   13.5%     2001       --    26,240      25,297        --
6 other large mortgage
 loans..................   9.58%-    2005-   23,700   17,948      17,548        --
                           12.5%     2008
                                            ------- --------    --------     ------
Total--Large Mortgage
 Loans..................                     23,700   89,604      87,681        --
                                            ------- --------    --------     ------
Total Loans.............                    $23,700 $552,902    $564,675     $5,745
                                            ======= ========    ========     ======
</TABLE>
--------
(A) The carrying cost for federal income tax purposes is $563,798.
 
(B) Of the total principal amount of loans subject to over 90 day delinquency,
    $913 of the loans were acquired from SPB, a related party.
 
(C) No loans were greater than 3% of the total.
 
(D) Interest rates for this category range from 5.50% to 14.00%. The weighted
    average interest rate for this category is 9.574%. The category includes
    loans with fixed as well as variable interest rates. Variable interest
    rate loans are tied to six month LIBOR, Bank of America Prime, or the one-
    year U.S. Treasury index.
 
(E) Interest only is paid quarterly. Principal and interest are due beginning
    two years from the earlier of the opening of the facility or fist loan
    draw.
 
(F) Payments on the first mortgage loan consist of principal and interest as
    follows: The first 24 payments consist of $21 principal plus accrued
    interest. The remaining payments consist of principal and interest
    calculated at a 30 year amortization rate with a balloon payment due in
    2008.
 
(G) Payments on the Mezzanine loan consist of interest only with the principal
    balance due in 2008.
 
(H) The loan is secured by all the unsold units of a condominium conversion
    project. Principal payments are due the 1st and 15th of every month based
    on unit sales. If unit sales are inadequate, the interest is paid from a
    funded interest reserve. There are no minimum principal payment amounts.
 
                                      35
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
4. Securities Available-For-Sale
 
  At December 31, 1998, the Company's securities available-for-sale consisted
of certain CMBS interests including subordinated securities and interest only
securities collateralized by commercial mortgages, certain subordinated asset-
backed notes issued by FMAC and shares of a private equity REIT. In general,
subordinated classes and interest only securities of a particular series of
securities bear all losses prior to the related senior classes. Such
securities or investments may subject the Company to credit, interest rate
and/or prepayment risks.
 
  The amortized cost and estimated fair value of the Company's securities
available-for-sale are summarized as follows:
 
<TABLE>
<CAPTION>
                                                   Gross      Gross    Estimated
                                       Amortized Unrealized Unrealized   Fair
         Balance at December 31, 1998    Cost       Gain       Loss      Value
         ----------------------------  --------- ---------- ---------- ---------
   <S>                                 <C>       <C>        <C>        <C>
   Security Description
   CMBS interests:
   Non-investment grade rated
    subordinated interests...........   $34,763    $   90     $         $34,853
   Investment grade rated senior
    interest only interests..........     3,361                   64      3,297
   Non-investment grade rated
    subordinated interest only
    interests........................     2,959                           2,959
   Non-rated subordinated interest
    only interests...................     1,386                           1,386
   Other non-rated subordinated
    interests........................     4,050       133                 4,183
                                        -------    ------     ------    -------
     Total CMBS interests............    46,519       223         64     46,678
   Non-investment grade rated
    subordinated notes...............     6,192                  199      5,993
   Common stock in private equity
    REIT.............................     5,000                           5,000
                                        -------    ------     ------    -------
     Total...........................    57,711    $  223     $  263    $57,671
                                        =======    ======     ======    =======
 
<CAPTION>
                                                   Gross      Gross    Estimated
                                       Amortized Unrealized Unrealized   Fair
         Balance at December 31, 1997    Cost       Gain       Loss      Value
         ----------------------------  --------- ---------- ---------- ---------
   <S>                                 <C>       <C>        <C>        <C>
   Security Description
   CMBS interests:
   Non-investment grade rated
    subordinated interests...........   $34,405    $1,411     $   14    $35,802
   Investment grade rated senior
    interest only interests..........     6,642                  486      6,156
   Non-investment grade rated
    subordinated interest only
    interests........................     6,645                  532      6,113
   Non-rated subordinated interest
    only interests...................     1,987                  236      1,751
   Other non-rated subordinated
    interests........................     4,473        26                 4,499
                                        -------    ------     ------    -------
     Total CMBS interests............    54,152     1,437      1,268     54,321
   Common stock in private equity
    REIT.............................     5,000                           5,000
                                        -------    ------     ------    -------
     Total...........................   $59,152    $1,437     $1,268    $59,321
                                        =======    ======     ======    =======
</TABLE>
 
                                      36
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
  The Company's CMBS interests are secured by adjustable and fixed rate
commercial and multi-family mortgage loans. The yield to maturity on each
security depends on, among other things, the rate and timing of principal
payments (including prepayments, repurchases, defaults and liquidations), the
pass-through rate and interest rate fluctuations. The estimated yield to
maturity on the CMBS interests for 1999 is 11.2%. The Company's interest in
some of these securities is subordinated so that, in the event of a loss,
payments to senior certificate holders will be made before the Company
receives its payments. All of the Company's CMBS interests were acquired from
SPB, the originator or purchaser of the underlying mortgage loans, and
Imperial Credit.
 
  During the year ended December 31, 1998, the Company determined, based
primarily on accelerated prepayments, that certain declines in the estimated
fair value of its interest only CMBS securities were other than temporary.
Accordingly, the Company took a charge to earnings of $4,554 to write down the
securities to estimated fair value and such charge is reflected in amortized
cost. The gross unrealized loss of $263 at December 31, 1998 is considered a
temporary decline in estimated fair value and has been reflected as a
component of accumulated other comprehensive income.
 
  The Company's investment in non-investment grade rated subordinated notes
was acquired from FMAC and the estimated yield to maturity on these notes for
1999 is 10.7%.
 
  The unamortized discount on securities available-for-sale was $29,317 and $
28,211 at December 31, 1998 and 1997, respectively. The Company did not sell
any securities available-for-sale during the periods ended December 31, 1998
and 1997.
 
  The contractual maturities of the mortgage loans underlying the Company's
CMBS interests are greater than ten years.
 
  Because there is no active market from which to derive a fair value for the
Company's CMBS securities, management estimates the fair values using a
discounted cash flow methodology. The ranges of assumptions used in the
December 31, 1998, valuation were as follows:
 
<TABLE>
       <S>                                                       <C>
       Monthly default rate..................................... 0.08% to 0.15%
       Loss severity............................................ 30.0%
       Cumulative loss.......................................... 1.84% to 2.50%
       Prepayment rate.......................................... 15% to 28% CPR
       Discount rate............................................ 8.40% to 25.39%
</TABLE>
 
5. Fair Value Of Financial Instruments
 
  Financial instruments include cash and interest bearing deposits, repurchase
agreements, securities available-for-sale, mortgage loans, accrued interest
receivable, borrowings and accrued interest payable. Because no active market
exists for a portion of the Company's mortgage loans and securities, fair
value estimates are based on judgments regarding credit risk, investor
expectation of future economic conditions, normal cost of administration and
other risk characteristics, including interest rate and prepayment risk. These
estimates are subjective in nature and involve uncertainties and matters of
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. In addition, the fair
value estimates presented do not include the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.
 
                                      37
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
  The Company used the following methods and assumptions in estimating its
fair value disclosures for financial instruments:
 
 Financial Assets
 
  The carrying values of cash, interest bearing deposits, and accrued interest
receivable are considered to approximate fair value. The carrying values of
securities available-for-sale approximate fair value; note 4 contains
information on how such fair value for CMBS was determined. The fair value of
the investment in a private equity REIT is based on cost since the REIT was
formed in late 1997, is not publicly traded and has had financing transactions
subsequent to the Company's investment at implied equity prices above that
paid by the Company. The fair value of mortgage loans is estimated using a
combination of techniques, including discounting estimated future cash flows
and quoted market prices for similar instruments, taking into consideration
the varying degrees of credit risk.
 
 Financial Liabilities
 
  The carrying amount of accrued interest payable is considered to approximate
fair value. The fair value of debt is based on rates currently available to
the Company for debt with similar terms and remaining maturities.
 
 Off-Balance Sheet Financial Instruments
 
  The fair value of lending commitments is estimated using the fees currently
charged to enter into similar agreements; such estimated fair value is not
material. The fair value of the interest rate swap is estimated by present
valuing the future cash flows using the contract notional amount amortization
schedule, contract interest rate, one-month LIBOR at December 31, 1998 and the
yield curve.
 
  The estimated fair values of the Company's financial instruments at December
31, 1998 and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                           December 31, 1998   December 31, 1997
                                           ------------------  ------------------
                                                    Estimated           Estimated
                                           Carrying   Fair     Carrying   Fair
                                            Amount    Value     Amount    Value
                                           -------- ---------  -------- ---------
   <S>                                     <C>      <C>        <C>      <C>
   Assets:
     Cash and interest bearing deposits... $ 23,398 $ 23,398   $ 11,902 $ 11,902
     Repurchase agreements................      --       --     148,711  148,711
     Securities available-for-sale........   57,671   57,671     59,321   59,321
     Accrued interest receivable..........    6,410    6,410      2,085    2,085
     Mortgage loans, net..................  556,648  556,648    272,009  272,009
     Borrowings...........................  331,132  331,132        --       --
     Accrued interest payable.............    1,185    1,185        --       --
     Interest rate swap...................      --    (1,669)       --       --
</TABLE>
 
  The fair value estimates as of December 31, 1998 and 1997 were based on
pertinent information available to management as of that date. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
 
                                      38
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
 
6. REAL PROPERTY
 
  The Company's real property investments were acquired during 1998. The
following table provides information regarding each of the investments.
<TABLE>
<CAPTION>
                                                  COST
                                              CAPITALIZED
                                               SUBSEQUENT
                           INITIAL COST TO         TO
                               COMPANY        ACQUISITION   GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD
                         -------------------- ------------ ---------------------------------------------------
                                  BUILDINGS                         BUILDINGS                           NET
                                     AND                               AND               ACCUMULATED  CARRYING
DESCRIPTION               LAND   IMPROVEMENTS IMPROVEMENTS  LAND   IMPROVEMENTS  TOTAL   DEPRECIATION  AMOUNT
-----------              ------- ------------ ------------ ------- ------------ -------- ------------ --------
<S>                      <C>     <C>          <C>          <C>     <C>          <C>      <C>          <C>
Mission Marketplace..... $12,909   $18,711        $ 71     $12,909   $18,782    $ 31,691    $  416    $ 31,275
Atrium Tower............   1,800    11,383         294       1,800    11,677      13,477       236      13,241
The Terraces............   4,511    13,534          28       4,511    13,562      18,073       226      17,847
Ugly Duckling
 Properties.............  12,081    15,357         --       12,081    15,357      27,438       505      26,933
Office building in
 France.................   1,676    15,992         --        1,778    16,961      18,739       372      18,367
                         -------   -------        ----     -------   -------    --------    ------    --------
  Total................. $32,977    74,997         393      33,079    76,339     109,418     1,755    $107,663
                         =======   =======        ====     =======   =======    ========    ======    ========
</TABLE>
 
  The difference between the amount at which the office building in France is
carried at December 31, 1998 as compared to the initial cost to the Company at
acquisition is due to unrealized foreign exchange gains totaling $1,071.
 
  Real property is leased to tenants under operating leases which provide for
rent and reimbursement of various expenses paid by the Company, such as common
area maintenance charges and real estate taxes.
 
  The estimated future base lease rental income to be received by the Company
for the remaining minimum lease terms for all of the Company's real property
investments is $11,326 for 1999, $10,555 for 2000, $9,880 for 2001, $9,535 for
2002, $8,944 for 2003 and $55,753 thereafter.
 
  Three of the Company's real property investments are secured by mortgage
loans as further discussed in note 10 to the consolidated financial
statements. The construction date, acquisition date and estimated useful lives
by Real Property investment is as follows:
 
<TABLE>
<CAPTION>
                                                      LIFE ON
                                                       WHICH
                            DATE OF        DATE     DEPRECIATION
DESCRIPTION              CONSTRUCTION    ACQUIRED   IS COMPUTED         LOCATION
-----------              ------------    --------   ------------        --------
<S>                      <C>           <C>          <C>          <C>
Mission Marketplace(A)..     1989        May 1998     30 years        Oceanside, CA
Atrium Tower(B).........     1982        May 1998     30 years        Las Vegas, NV
The Terraces(A)......... 1957 and 1989  June 1998     30 years   Rancho Palos Verdes, CA
Ugly Duckling
 Properties(C)..........   1996-1997   May 1998 and 10-20 years        AZ, NM, TX
                                       August 1998
Office building in
 France.................     1994       July 1998     20 years   Suburb of Paris, France
</TABLE>
--------
(A) Shopping center.
 
(B) Office building.
 
(C) Various properties comprised predominantly of used car lots, buildings,
    and reconditioning centers.
 
  The aggregate cost for Federal income tax purposes is the same as the cost
for book purposes.
 
                                      39
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
7. Management Contract (Amounts in this footnote are in actual dollars, not
thousands)
 
  ICCMIC entered into a management agreement (the "Management Agreement") with
Imperial Credit Commercial Asset Management Corporation (the "Manager"), a
wholly-owned subsidiary of Imperial Credit, pursuant to which the Manager
advises the Company on various aspects of its business and manages its day-to-
day operations, subject to the supervision of the Board. The Manager is
entitled to receive a base management fee of 1% per annum of the first $1
billion of average invested assets, 0.75% of the next $250 million of average
invested assets, and 0.5% of average invested assets above $1.25 billion,
payable quarterly, and a quarterly incentive fee in an amount equal to (A) 25%
of the dollar amount by which (1) (a) Funds from Operations, as defined in the
Management Agreement (before the incentive fee), per share of Common Stock
(based on the weighted average number of shares outstanding), plus (b) gains
(or minus losses) from debt restructuring and sales of property per share of
common stock (based on the weighted average number of shares outstanding),
exceed (2) an amount equal to (a) the weighted average of the price per share
at the initial public offering and the prices per share at any secondary
offerings by ICCMIC multiplied by (b) the ten-year U.S. Treasury Rate plus
four percent per annum multiplied by (B) the weighted average number of shares
of Common Stock outstanding during such quarter. Base management fees for the
periods ended December 31, 1998 and 1997 were $6.3 million and $0.9 million,
respectively. No incentive fee has been earned since the Company's inception.
 
8. Stock Option Plan
 
  ICCMIC adopted a stock option plan (the "Plan") to provide a means of
incentive compensation, under which the Manager, certain executive officers
and employees of the Manager and certain officers and directors of ICCMIC were
granted options to purchase 3,045,000 shares of Common Stock exercisable at
the initial public offering price. Options to purchase a total of 7,500,000
shares have been authorized for grant under the Plan. ICCMIC granted options
to purchase 1,691,250 shares to the Manager and options to purchase 9,000
shares to an employee of the Manager, for which $2,550 was recognized as an
expense during 1997, and options to purchase 1,344,750 shares to executive
officers and directors of ICCMIC. During 1998, ICCMIC granted additional
options to purchase 162,500 shares at $15.00 per share and 883,500 shares at
$9.00 per share.
 
  For those options issued to non-employees, ICCMIC recognized $97 in expense
during 1998 based on the estimated fair value of the options. In conjunction
with the issuance of the options to purchase shares at $9.00 per share,
certain employees of the Manager exchanged options to purchase 97,000 shares
at an exercise price of $15.00 per share for options to purchase 79,000 shares
at $9.00 per share. Options vest immediately and one third of the options is
first exercisable on each of the first three anniversaries of their grant. The
exercisability of options accelerates upon a change of control as defined in
the option agreement. All options that have not been exercised as of ten years
from date of grant will expire.
 
  Included in the options granted during 1998 are options to purchase 30,000
shares granted to a Director of the Company which carry the right to put the
options back to the Company at $1.00 per share for a period of one year. The
put right was granted in recognition of the Director's extraordinary service
to the Company.
 
                                      40
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
  Stock option activity for the periods ended December 31, 1998 and 1997
follows:
 
<TABLE>
<CAPTION>
                                                        Weighted
                                                        Average
                                             Number of  Exercise    Range of
                                              Shares     Price   Exercise Price
                                             ---------  -------- --------------
   <S>                                       <C>        <C>      <C>
   1997:
   Granted.................................. 3,125,500   $15.00
   Forfeited/Cancelled......................   (80,500)  $15.00
                                             ---------
   Outstanding at December 31, 1997......... 3,045,000   $15.00
                                             ---------
   1998:
   Granted.................................. 1,046,000   $ 9.93
   Forfeited/Cancelled......................  (183,250)  $15.00
                                             ---------
   Outstanding at December 31, 1998......... 3,907,750   $13.64  $9.00 - $15.00
                                             =========
</TABLE>
 
  At December 31, 1998, options to purchase 983,250 shares were exercisable at
$15.00 per share. None were exercisable at December 31, 1997. The weighted
average remaining life for options outstanding at December 31, 1998 was
approximately nine years.
 
  If the Company had determined compensation cost based on the fair value at
the grant date for stock options granted to officers and directors, the
Company's net earnings and earnings per share for the year ended December 31,
1998 and the period from July 31, 1997 through December 31, 1997 would have
decreased to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                              December 31,
                                                  1998       December 31, 1997
                                            ---------------- ------------------
                                               As      Pro       As       Pro
                                            Reported  forma   Reported   forma
                                            -------- ------- ---------- -------
   <S>                                      <C>      <C>     <C>        <C>
   Net earnings............................ $22,224  $21,586  $   2,159 $   142
   Basic and Diluted Earnings per share.... $   .68  $   .66  $     .06 $   .00
</TABLE>
 
  The derived fair value of the options granted during 1998 was approximately
$0.73 per share for the options issued at $9.00 per share and $1.21 per share
for the options issued at $15.00 per share. The derived fair value of the
options granted during 1997 was approximately $1.50 per optioned share. The
derived fair values were estimated using the Black-Scholes option pricing
model with the following weighted average assumptions:
 
<TABLE>
<CAPTION>
                                                                 1998     1997
                                                                ------- --------
   <S>                                                          <C>     <C>
   Dividend yield..............................................  13.30%    8.32%
   Risk free interest rate.....................................   4.70%    6.50%
   Expected life............................................... 5 years 10 years
   Expected volatility.........................................  33.00%   22.15%
</TABLE>
 
9. Stockholders' Equity
 
  On October 22, 1997, the Company completed its initial public offering of
34,500,000 shares, with gross proceeds of $513,857 and net proceeds to ICCMIC
of $479,309. During the years ended December 31, 1998 and 1997, ICCMIC
declared dividends on common stock of $36,948 and $4,485, respectively, or
$1.18 and $0.13 per share, respectively. All of the dividends were ordinary
income. Undistributed earnings for income tax purposes were $153 and $257 at
December 31, 1998 and 1997, respectively.
 
                                      41
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
  During the quarter ended September 30, 1998, the Board of Directors
authorized the Company to repurchase shares of the Company's Common Stock. As
of December 31, 1998, the Company had repurchased 6,000,000 shares at a cost
of $56,338, and the Company is authorized to repurchase an additional
6,000,000 shares under certain circumstances.
 
  On September 18, 1998, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock, par value $0.0001 per share, of the
Company. The Rights dividend was payable on September 21, 1998 to stockholders
of record at the close of business on that date. The description and terms of
the Rights are set forth in an agreement between the Company and U.S. Stock
Transfer Corporation, a copy of which was included as an exhibit to the
Company's Current Report on Form 8-K, filed with the SEC on September 22,
1998. The Rights dividend was adopted in response to an unsolicited merger
proposal from Wilshire Real Estate Investment Trust Inc. and to enable the
Company to induce potentially hostile suitors to negotiate terms with the
Company's Board of Directors before initiating takeover attempts.
 
10. Outstanding Debt
 
  The Company's outstanding debt at December 31, 1998 was as follows:
 
<TABLE>
<CAPTION>
                                                    Interest
                                         Balance      Rate         Maturity
                                         -------- ------------  --------------
   <S>                                   <C>      <C>           <C>
   Borrowings under $300,000 warehouse
    line of credit...................... $279,000 LIBOR + 0.90% March 29, 1999
   Borrowings under secured bank line...    3,557 PIPOR + 0.85%  VAT receipt
   Mortgage loan secured by Mission
    Marketplace.........................   23,798 7.365% fixed  December 2012
   Mortgage loan secured by Terraces....   10,658 8.500% fixed  December 2027
   Mortgage loan secured by office
    building in France..................   14,119 PIPOR + 0.85%  August 2013
                                         --------
     Total outstanding debt............. $331,132
                                         ========
</TABLE>
 
  The warehouse line of credit, which was secured by $353,477 of SPB mortgage
loans and all of the Company's CMBS interests as of December 31, 1998, was
repaid in full and terminated on March 10, 1999 (unaudited). The source of
funds for repaying that line came from the Company's recently completed
securitization as more fully described in note 15 to the consolidated
financial statements (unaudited). The effective interest rate on that line at
year end was 6.445%. The Company has signed a non-binding term sheet for a new
$300,000 warehouse line with a major investment bank, subject to completion
and execution of loan documentation (unaudited). The ability of the Company to
continue its growth is subject to closing this new warehouse facility or
alternative financing arrangements.
 
  The Company entered into a forward interest rate swap in order to hedge the
cost of funds for outstanding borrowings under any facility which bears
interest at variable rates over the LIBOR index and to the extent that such
facility is secured by mortgage loans that bear interest at fixed rates. This
swap became effective May 15, 1998 for an amortizing notional balance of
$77,467 over a ten-year period. Under the swap, the Company receives monthly
payments of interest based on one-month LIBOR and remits monthly payments
based on a fixed interest rate of approximately 5.99%. During the year ended
December 31, 1998, the Company paid monthly interest on the notional balance
at the fixed annual rate, which ranged from approximately $343 to $410 per
month, and collected monthly interest at annual rates ranging from 5.28% to
5.66%, or approximately $306 to $392 per month. The net cost of the swap
ranged from $16 to $37 per month and is included in interest expense in the
Company's operating results. Such net cost was $157 for the year ended
December 31, 1998. As of December 31, 1998, the approximate net present value
cost of this swap was $1,669 and the notional balance was $71,954.
 
                                      42
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
  The secured bank line and mortgage loan secured by the office building in
France were obtained from the same lender and both loans had an effective
interest rate of 4.45% at year end. The secured bank line is repayable upon
receipt of the refund of value added tax (VAT) paid in connection with the
acquisition of the real property which is expected to occur in the first half
of 1999. The mortgage loan is repayable pursuant to a set amortization
schedule over a 15-year period.
 
  The mortgage loan secured by Mission Marketplace is subject to a 30-year
amortization schedule with a balloon payment due in 15 years.
 
  The mortgage loan secured by Terraces is subject to a 30-year amortization
schedule and can be prepaid without penalty after 10 years. This loan was
subject to a rebate which resulted in an effective interest rate of 7.85%, as
compared to the nominal rate of 8.50%.
 
  The Company also has a reverse repurchase line of credit for $25,000;
however, no assets were pledged and therefore no borrowing capacity existed
under this facility at year-end. In order for the Company to borrow funds
under this line, the Company would have to pledge assets acceptable to the
lender.
 
  Principal payments of debt due over the next five years are $283,408 in
1999, $442 in 2000, $791 in 2001, $821 in 2002 and $959 in 2003.
 
11. Related Party Transactions
 
  As part of ICCMIC's initial public offering, 2,970,000 shares of Common
Stock were sold to Imperial Credit and approximately 500,000 shares of Common
Stock were sold to certain directors, officers and employees of the Company,
the Manager and Imperial Credit and members of their respective immediate
families, in each case net of the underwriting discount. On December 11, 1997,
Imperial Credit acquired an additional 100,000 shares of Common Stock in an
open market transaction.
 
  Concurrently with the closing of ICCMIC's initial public offering, ICCMIC
acquired 270 mortgage loans for a purchase price of $109,130 and certain CMBS
interests for $55,000 from Imperial Credit and SPB, affiliates of the Manager.
In December 1997, ICCMIC acquired 299 loans for $97,641 from SPB and two loans
for $6,385 from FMAC, affiliates of the Manager. The FMAC purchase price is
included in accrued expenses, payables and other liabilities at December 31,
1997.
 
  During the year ended December 31, 1998, the Company acquired 480 mortgage
loans at a price of $193,726 from SPB. In addition, ICCMIC acquired certain
CMBS interests for $6,069 and 95 mortgage loans for $94,679 from FMAC. During
1998, FMAC reacquired from the Company 42 loans with a principal amount of
$46,357.
 
12. Commitments and Contingencies
 
  ICCMIC leases approximately 6,400 usable square feet of office space for its
executive offices under a lease expiring on August 15, 2002. Rent expense for
the period ended December 31, 1998 was $146 and future minimum rents due under
the lease are as follows:
 
<TABLE>
<CAPTION>
       Year                                                               Amount
       ----                                                               ------
       <S>                                                                <C>
       1999..............................................................  184
       2000..............................................................  194
       2001..............................................................  191
       2002..............................................................  107
</TABLE>
 
 
                                      43
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
  The Company has outstanding loan funding commitments of approximately
$38,000 as of December 31, 1998. The most significant of these commitments is
an 18,000 British pound (approximately $30,000) commitment to fund a mezzanine
loan for an office park renovation project in London, England near Heathrow
airport.
 
13. Segment Reporting
 
  The Company operates in four principal business segments; small balance
mortgage loan pools acquired ("mortgage loan pools"), individual large balance
mortgage loans originated or acquired ("large mortgage loans"), real property
and securities available-for-sale ("securities"). These segments are managed
separately because each requires different levels of resources and involves
assets having different risk profiles. Segment performance is measured based
on net earnings. The accounting policies of the segments conform to generally
accepted accounting principles as more fully described in note 2 to the
consolidated financial statements.
 
<TABLE>
<CAPTION>
                                Revenues by   Net Income by
                                  Segment        Segment       Assets by Segment
                               -------------- ---------------  -----------------
                                1998    1997   1998     1997     1998     1997
                               ------- ------ -------  ------  -------- --------
<S>                            <C>     <C>    <C>      <C>     <C>      <C>
Mortgage loan pools........... $36,734 $1,676 $17,908  $1,458  $475,922 $274,094
Large mortgage loans..........   4,396    --    3,044     --     87,136      --
Real property.................   7,684    --    1,563     --    111,321      --
Securities....................   6,153  1,403     975   1,296    57,671   59,321
Other.........................   2,454  3,388  (1,246)   (595)   25,124  161,722
                               ------- ------ -------  ------  -------- --------
    Total..................... $57,421 $6,467 $22,244  $2,159  $757,174 $495,137
                               ======= ====== =======  ======  ======== ========
</TABLE>
 
  Revenues by segment is comprised of interest income for all segments other
than real property, which is comprised of lease rental revenues. There are no
intersegment revenues or expenses.
 
  The mortgage loan pools segment is represented by several pools of small
balance multifamily and commercial loans that the Company acquired from SPB,
FMAC and unrelated third parties. Most of these loans are from pools which
average approximately $150 or $350 per loan. The loans are concentrated in
California and the western and eastern coasts of the United States. These
loans are generally serviced by others, including SPB and FMAC, and are
monitored by the Manager on an overall basis.
 
  The large mortgage loans segment is primarily comprised of loans originated
and serviced by the Manager. These loans are concentrated in five states and
each represents a unique investment and risk profile. These loans require much
more active monitoring and involvement by the Manager than do the loans
included in the mortgage loan pools segment.
 
  The real property segment is comprised of two operating shopping centers and
two operating office buildings managed by outside professional property
managers in California, Las Vegas and France, as well as a group of seventeen
properties located in three states that are leased to the Ugly Duckling
Corporation for use in connection with that company's used car sales and
finance business. These real property investments are monitored by asset
management personnel employed by the Manager.
 
  The securities segment is comprised of the Company's CMBS securities
obtained from SPB and Imperial Credit as well as subordinated notes acquired
from FMAC and a common stock investment in a private equity REIT. The CMBS and
subordinated note investments are administered by servicers and trustees that
were put in place at the time of the applicable securitization transaction.
Personnel employed by the Manager and its affiliates
 
                                      44
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
actively monitor these securities on a quarterly basis and update the
Company's analytic models for valuing the securities. The private equity REIT
investment is monitored by periodic financial reviews and communications with
employees of the REIT's advisor.
 
  Net earnings (loss) by segment is presented in the following tables for the
periods ended December 31, 1998 and 1997:
 
<TABLE>
<CAPTION>
                                      Year Ended December 31, 1998
                         --------------------------------------------------------
                                     Large
                          Mortgage  Mortgage   Real
                         Loan Pools  Loans   Property Securities  Other    Total
                         ---------- -------- -------- ---------- -------  -------
<S>                      <C>        <C>      <C>      <C>        <C>      <C>
Revenues................  $36,734    $4,396   $7,684    $6,153   $ 2,454  $57,421
                          -------    ------   ------    ------   -------  -------
Operating Expenses
  Management fee........    4,227       439      583       624       446    6,319
  Interest expense......    8,829       383    1,911       --         42   11,165
  Provision for loan
   losses...............    5,770       530      --        --        --     6,300
  Write-down of
   securities...........      --        --       --      4,554       --     4,554
  Depreciation..........      --        --     1,755       --         95    1,850
  Real property
   operating expenses...      --        --     1,872       --        --     1,872
  Due diligence.........      --        --       --        --      1,659    1,659
  Stock options.........      --        --       --        --         97       97
  Other.................      --        --       --        --      1,361    1,361
                          -------    ------   ------    ------   -------  -------
    Total Expenses......   18,826     1,352    6,121     5,178     3,700   35,177
                          -------    ------   ------    ------   -------  -------
      Net Earnings
       (Loss)...........  $17,908    $3,044   $1,563    $  975   $(1,246) $22,244
                          =======    ======   ======    ======   =======  =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                 Period from July 31, 1997
                                                   to December 31, 1997
                                            ------------------------------------
                                             Mortgage
                                            Loan Pools Securities Other   Total
                                            ---------- ---------- ------  ------
<S>                                         <C>        <C>        <C>     <C>
Revenues...................................   $1,676     $1,403   $3,388  $6,467
                                              ------     ------   ------  ------
Operating Expenses
  Management fee...........................      218        107      615     940
  Depreciation.............................      --         --        11      11
  Due diligence............................      --         --       487     487
  Stock options............................      --         --     2,550   2,550
  Other....................................      --         --       320     320
                                              ------     ------   ------  ------
    Total Expenses.........................      218        107    3,983   4,308
                                              ------     ------   ------  ------
      Net Earnings (loss)..................   $1,458     $1,296   $ (595) $2,159
                                              ======     ======   ======  ======
</TABLE>
 
                                      45
<PAGE>
 
             IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
               (Dollars in thousands, except per share amounts)
 
 
14. Unaudited Quarterly Information
 
<TABLE>
<CAPTION>
                                          Year Ended December 31, 1998
                                 -----------------------------------------------
                                 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
                                 ----------- ----------- ----------- -----------
   <S>                           <C>         <C>         <C>         <C>
   Interest Income
   Mortgage loans..............    12,776      12,223      10,158       5,973
   Securities available-for-
    sale.......................     1,522       1,566       1,611       1,454
   Repurchase agreements and
    interest bearing deposits..       170          98          67       2,119
                                   ------      ------      ------      ------
   Total Interest Income.......    14,468      13,887      11,836       9,546
   Real property rental income.     3,418       3,274         993         --
                                   ------      ------      ------      ------
   Total Income................    17,886      17,161      12,829       9,546
                                   ------      ------      ------      ------
   Operating Expenses
   Management fees.............     1,936       1,818       1,365       1,200
   Interest expense............     5,690       4,441       1,034         --
   Provision for loan losses...     3,000       3,200         100         --
   Write-down of securities
    available-for-sale.........     1,321       3,233         --          --
   Depreciation of real
    property...................       793         720         242         --
   Real property operating
    expenses...................       858         800         214         --
   Due diligence expenses......       793         343         375         150
   Other.......................       455         428         321         348
                                   ------      ------      ------      ------
   Total Expenses..............    14,846      14,983       3,651       1,698
                                   ------      ------      ------      ------
   Net Earnings................    $3,040      $2,178      $9,178      $7,848
                                   ======      ======      ======      ======
   Net Earnings Per Share--
    Basic and Diluted..........    $ 0.11      $ 0.07      $ 0.27      $ 0.23
                                   ======      ======      ======      ======
   Dividends Per Share.........    $ 0.33      $ 0.33      $ 0.28      $ 0.24
                                   ======      ======      ======      ======
</TABLE>
 
  Quarterly information for the short period of operations which began October
22, 1997 is identical to the information presented for the period from July
31, 1997 (Inception) to December 31, 1997 in the accompanying consolidated
statement of earnings and therefore has not been included in the table above.
Furthermore, the comparability of such information is not meaningful due to
the Company's Ramp-up as described in Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere herein.
Amounts in the table may not agree exactly with amounts in the accompanying
consolidated statement of earnings for the year ended December 31, 1998 due to
rounding.
 
15. Unaudited Subsequent Events
 
  On March 10, 1999, the Company closed a securitization transaction in which
the Company's wholly-owned business trust, ICCMAC Multifamily and Commercial
Trust 1999-1, sold approximately $250 million of collateralized mortgage
obligation ("CMO") bonds. The bonds are predominantly floating interest rate
bonds and carry a cost of funds which approximates the cost on the Company's
then existing warehouse line of credit. The bonds are collateralized by
approximately $290 million of first mortgage loans which the Company had
previously acquired from SPB. At the closing of this transaction, the Company
repaid in full and terminated its warehouse line of credit with Morgan
Guaranty Trust Company of New York. The Company expects to complete the
execution of documentation for a new $300 million warehouse line of credit
with a major investment bank in the near future.
 
  On March 23, 1999, the Company announced that its Board had declared a cash
dividend of $0.30 per share of Common Stock to stockholders of record on March
31, 1999, payable on April 15, 1999. This dividend includes a special
distribution relating to previously undistributed taxable income for 1998 in
the amount of approximately $0.0054 per share.
 
                                      46
<PAGE>
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
 
  None
 
                                   PART III
 
Item 10. Directors and Executive Officers of the Registrant
 
  ICCMIC was incorporated in the State of Maryland on July 31, 1997. The table
below sets forth certain information with respect to the directors and
executive officers of ICCMIC. Other information required by this item is
incorporated by reference to the information set forth under the caption
"Election of Directors" in ICCMIC's definitive proxy statement, which ICCMIC
intends to file no later than 120 days after the end of fiscal year 1998,
pursuant to Rule 12b-23.
 
  The executive officers and directors of the Company are as follows:
 
<TABLE>
<CAPTION>
   Name                      Age Position
   ----                      --- --------
   <C>                       <C> <S>
   H. Wayne Snavely (2)       57 Chairman of the Board
   Kevin E. Villani (1)       50 Vice Chairman of the Board
   Mark S. Karlan             40 President and Chief Executive Officer,
                                 Director
   Patric H. Hendershott (2)  60 Independent Director
   Joseph A. Jaconi, Jr. (1)  54 Independent Director
   Louis H. Masotti (1)       64 Independent Director
   Kenneth A. Munkacy (2)     44 Independent Director
   Michael Meltzer            52 Chief Financial Officer and Treasurer
   Norbert M. Seifert         43 Senior Vice President, General Counsel and
                                 Secretary
</TABLE>
--------
(1)Member of the Audit Committee
(2)Member of the Compensation Committee
 
  H. Wayne Snavely has been Chairman of the Board of the Company since its
inception in July 1997. Mr. Snavely has been Chief Executive Officer of
Imperial Credit since December 1991 and President since February 1996. From
1986 to February 1992, Mr. Snavely served as Executive Vice President of
Imperial Bancorp and Imperial Bank. From 1983 through 1986, Mr. Snavely was
employed as Chief Financial Officer of Imperial Bancorp and Imperial Bank. Mr.
Snavely served as a director of Imperial Bank until 1998. Mr. Snavely is
Chairman of the Board of Franchise Mortgage Acceptance Co. (NASDAQ--FMAX).
 
  Kevin E. Villani has been Vice Chairman of the Board of the Company since
its inception in July 1997. Mr. Villani is currently the Executive Vice
President of Finance of Imperial Credit and President and CEO of Imperial
Credit Asset Management. He has been a director of Imperial Credit since 1997.
Mr. Villani served as CFO of Imperial Credit from 1995 until his promotion to
his current position in July of 1998. From 1993 to 1996, Mr. Villani was the
Associate Professor of Clinical Finance and Real Estate for the University of
Southern California. From 1985 to 1990, he was the Executive Vice President
and Chief Financial Officer for Imperial Corporation of America. From 1982 to
1985, he served in various senior executive capacities at the Federal Home
Loan Mortgage Corporation. From 1975 to 1982, he served as the Financial
Economist, the Director for the Division of Housing and Finance Analysis, and
the Deputy Assistant Secretary for the Office of Economic Affairs and Chief
Economist for the Department of Housing and Urban Development. From 1974 to
1975, he was an economist for the Federal Reserve Bank of Cleveland. Mr.
Villani has also served as a consultant to the World Bank and USAID on
banking, housing, finance, and privatization.
 
  Mark S. Karlan has served as a member of the Board of the Company and as its
President and Chief Executive Officer since its inception in July 1997. From
1990 to 1997, Mr. Karlan was a private real estate investor managing all
aspects of approximately $100 million of real estate transactions including
the acquisition,
 
                                      47
<PAGE>
 
financing, leasing and sale of office, retail, industrial and residential
assets. From 1984 to 1990, Mr. Karlan served in the acquisition group of JMB
Realty Corporation, most recently as Senior Vice President. Mr. Karlan
acquired for institutional clients more than one hundred commercial properties
including shopping centers, office buildings, apartment complexes and hotels
located throughout the United States and Canada, with a gross asset value
exceeding $6 billion. Mr. Karlan had full responsibility for negotiating,
structuring and analyzing all assets he acquired for JMB, including valuation
and credit analyses and cash flow projections. Mr. Karlan's primary focus was
larger portfolio acquisitions. In 1987, Mr. Karlan led the 100 person JMB
acquisition team during the $5 billion leveraged acquisition of the Cadillac
Fairview, Inc. real estate company. In 1987, Mr. Karlan became the youngest
partner of JMB. Mr. Karlan received a Bachelor of Arts degree in Economics,
magna cum laude, from Harvard College in 1980 and was awarded a John Harvard
Scholarship for academic achievement of the highest distinction. Mr. Karlan
received a Master of Business Administration degree with second year honors
from the Harvard Business School and a Juris Doctor degree, cum laude, from
the Harvard Law School, both in 1984.
 
  Patric H. Hendershott has been a Director of the Company since September
1997. Dr. Hendershott holds the Galbreath Chair in Real Estate at Ohio State
University where he has been Professor of Finance since 1981. From 1969 to
1981, Dr. Hendershott was a Professor of Economics and Finance at Purdue
University where he was Chairman of the Economics Group from 1971 to 1974. Dr.
Hendershott was an Assistant Professor of Economics at Northwestern University
from 1967 to 1969, and he was a Research Economist at the Federal Reserve
Board from 1964 to 1967. He has served as a consultant to major national and
international organizations including the World Bank from 1991 to 1993, the
U.S. government Accounting Office from 1982 to 1990 and the National Swedish
Institute for Building Research since 1991. Dr. Hendershott has been a
Research Associate at the National Bureau of Economic Research since 1979 and
he was the Director of Housing and Real Estate Finance Research at Price
Waterhouse from 1994 to 1997. His honors and awards include the George Bloom
Award for Outstanding Contributions to the Field of Real Estate in 1992,
Fellow of the Homer Hoyt Advanced Studies Institute since 1991, Academic
Fellow of the Urban Land Institute since 1990, Fulbright Senior Research
Scholar in 1989, President of the American Real Estate and Urban Economics
Association in 1985 and has been a Member of the Fulbright Senior Awards
Committee since 1995. Dr. Hendershott has written more than one hundred
articles in academic and professional journals on real estate and mortgage
finance, and he currently serves on the editorial boards of seven finance and
real estate journals. Dr. Hendershott received a Ph.D. in Economics from
Purdue University in 1965.
 
  Joseph A. Jaconi, Jr. has been a Director of the Company since September
1997. Mr. Jaconi has been involved in the real estate development industry in
California since 1971. Mr. Jaconi began the development of real property for
his own account in 1976, completing projects such as the Wilshire-Grand
Building, a 16 story office building in downtown Los Angeles; the Marina
Business Center, a 400,000 square foot office and business park in Marina Del
Rey; the Village Del Amo, a 30 acre retail and office building project in
Torrance; redevelopment projects at Corte Madera Mall and Garden Grove Mall
totalling 400,000 square feet; and the 100 acre Bakersfield Airport Business
Center. From 1971 to 1976, Mr. Jaconi practiced law and specialized in real
estate development, representing clients such as Carter Hawley Hale Stores,
Inc., Ernest W. Hahn, Inc., Security Pacific National Bank, Barclay-Curci
Investment Company, Transpacific Development Company, Business Properties and
Real Property Resources. Mr. Jaconi received a Bachelor of Arts degree from
the University of Santa Clara in 1966 and he received a Juris Doctor degree
from the University of Southern California School of Law in 1969.
 
  Louis H. Masotti has been a Director of the Company since September 1997,
Dr. Masotti serves as President of Louis H. Masotti, Ltd., a management, real
estate and urban development consulting firm. Between 1992 and June 1998, Dr.
Masotti was Professor of Management and Urban Development in the Graduate
School of Management at the University of California, Irvine, where he has
served as the Director of the Program in Real Estate Management. From 1970 to
1992, Dr. Masotti was Professor of Management and Urban Development at the
Kellogg Graduate School of Management at Northwestern University, and between
1989 and 1992, Dr. Masotti also taught real estate and urban development
courses as a Visiting Professor at the Anderson Graduate School of Management
at UCLA and at Stanford Business School. In 1985, Dr. Masotti
 
                                      48
<PAGE>
 
founded the Kellogg Center for Real Estate Research at Northwestern University
and served as its Director until 1992. From 1970 to 1980, Dr. Masotti served
as the Director of the Center for Urban Policy Research at Northwestern. Dr.
Masotti has authored and edited 14 books and published many articles on real
estate, urban development and public policy issues. His views are often quoted
in the national media, including The Wall Street Journal, Barron's, The New
York Times, Business Week, Time and Newsweek. His honors and awards include
Fellow of the Homer Hoyt Advanced Studies Institute since 1993 and Senior
Fulbright Fellow in 1969. Dr. Masotti has served as a director of Samuel
Zell's Manufactured Home Communities Inc. REIT since 1993, and he served from
1993 to 1996 as a director of the Tucker Company REIT, both listed on the
NYSE. Dr. Masotti earned his Bachelor of Arts degree at Princeton University
in 1956 and he received a Ph.D. degree in political science from Northwestern
University in 1964.
 
  Kenneth A. Munkacy has been a Director of the Company since September 1997.
Mr. Munkacy is the Managing Director of TrizecHahn Asia-Pacific, a subsidiary
of TrizecHahn, a NYSE listed commercial real estate company. Mr. Munkacy is
responsible for TrizecHahn's investment and development activities in Asia.
From 1994 to 1997, Mr. Munkacy served as President of Koll Asia Pacific, an
affiliate of the Koll Real Estate Group. From 1989 to 1994, Mr. Munkacy was a
Senior Vice President and partner of Golub & Co, a Chicago based real estate
investment and development company, and he served from 1987 to 1989 as the
Director of Development and Acquisitions for Xerox Realty Corp., a Xerox
subsidiary with an $850 million real estate portfolio. Mr. Munkacy was the
Director of Development Services and a partner at Halcyon Real Estate Advisors
from 1981 to 1987. Mr. Munkacy has published articles on commercial real
estate in The Real Estate Finance Journal, Real Estate Review and Urban Land,
and his real estate perspectives have been quoted in the Wall Street Journal,
Real Estate Finance & Investment, Journal of Property Management, Commercial
Property News and Real Estate Forum. He has lectured on real estate investing
at Harvard, Wharton, Stanford, Northwestern, the University of Texas at
Austin, and the Urban Land Institute. Mr. Munkacy received a Bachelor of Arts
degree in Economics-Government from Franklin and Marshall College in 1976 and
a Masters of City Planning from the University of Pennsylvania in 1981.
 
  Michael Meltzer has been Chief Financial Officer and Treasurer of the
Company since March 1998. Prior to joining the Company he was the Chief
Financial Officer and an Executive Vice President of Landmark Entertainment
Group, a designer and producer of theme park attractions, themed entertainment
facilities and other projects. From 1993 to 1996, Mr. Meltzer was the Chief
Financial Officer and an Executive Vice President of Canal+ (U.S.), a
subsidiary of a publicly-held French conglomerate, and from 1994 to 1995 he
was a member of the Board of Directors of Carolco Pictures, Inc. From 1989 to
1993, Mr. Meltzer was the Chief Financial Officer of Imagine Films
Entertainment, Inc. and from 1985 to 1989, Mr. Meltzer served in various
senior level financial positions at Lorimar Telepictures Corporation. From
1968 to 1985, Mr. Meltzer served in the audit group at Peat, Marwick, Mitchell
& Co. (now KPMG LLP), where he became a partner in 1978. At Peat Marwick, Mr.
Meltzer's primary industry expertise was in the real estate industry, and his
principal clients included REITs, real estate developers and mortgage brokers.
Mr. Meltzer received his Bachelor of Business Administration degree from the
City College of New York in 1968 and his Juris Doctor degree from the Brooklyn
Law School in 1975.
 
  Norbert M. Seifert has been Senior Vice President and General Counsel of the
Company since September 1997 and Secretary since July 1997. Mr. Seifert was a
partner in the real estate department of the national law firm Sonnenschein
Nath & Rosenthal from 1992 to 1997. At Sonnenschein, Mr. Seifert represented
institutional lenders in the origination and sale of term loans and
construction loans secured by multifamily and commercial real estate, and he
was involved in restructuring underperforming mortgage loans. From 1989 to
1992, Mr. Seifert was a partner in the real estate department of Mayer, Brown
& Platt and from 1987 to 1989 he was a partner at Turkowitz & Seifert, a
boutique law firm specializing in retail real estate. From 1982 to 1987,
Mr. Seifert was an associate attorney in the tax and real estate departments
of Milbank, Tweed, Hadley & McCloy where he was involved in structuring the
initial public offering of the Rockefeller Center Properties, Inc. mortgage
REIT. Mr. Seifert received a Bachelor of Science degree, cum laude, from the
Wharton School of the University of Pennsylvania in 1977 and a Juris Doctor
degree from New York University School of Law in 1980.
 
                                      49
<PAGE>
 
  All directors are elected at each annual meeting of the Company's
stockholders until the next annual meeting of stockholders and until their
successors are elected and qualify. Replacements for vacancies occurring among
the Independent Directors will be elected by a majority vote of the remaining
Directors, including a majority of the Independent Directors. All officers are
elected and may be removed by the Board.
 
 Limitation Of Liability And Indemnification
 
  The Maryland General Corporation Law, as amended from time to time ("MGCL")
permits a Maryland corporation to include in its charter a provision limiting
the liability of its directors and officers to the corporation and its
stockholders for money damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonesty established by a final judgment as being
material to the cause of action. ICCMIC's Charter contains such a provision
which eliminates such liability to the maximum extent permitted by the MGCL.
 
  ICCMIC's Charter authorizes it, to the maximum extent permitted by Maryland
law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer or (b) any individual who, while a director of
ICCMIC and at its request, serves or has served another corporation,
partnership, joint venture, trust, employee benefit plan or any other
enterprise as a director, officer, partner or trustee of such corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
from and against any claim or liability to which such person may become
subject or which such person may incur by reason of his status as a present or
former director or officer of ICCMIC. ICCMIC's Bylaws obligate it, to the
maximum extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director of ICCMIC and at ICCMIC's request, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of his service
in that capacity. The Charter and Bylaws also permit ICCMIC to indemnify and
advance expenses to any person who served a predecessor of ICCMIC in any of
the capacities described above and to any employee or agent of ICCMIC or a
predecessor of ICCMIC.
 
  The MGCL requires a corporation (unless its charter provides otherwise,
which ICCMIC's Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding
to which he is made a party by reason of his service in that capacity. The
MGCL permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or
omission of the director or officer was material to the matter giving rise to
the proceeding and (1) was committed in bad faith or (2) was the result of
active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. In addition, the MGCL requires ICCMIC, as a
condition to advancing expenses, to obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by ICCMIC as authorized by the Bylaws
and (b) a written undertaking by him or on his behalf to repay the amount paid
or reimbursed by ICCMIC if it shall ultimately be determined that the standard
of conduct was not met. ICCMIC has entered into indemnification agreements
with all of its officers and directors which provide for the indemnification
of such officers and directors to the fullest extent permitted under Maryland
law.
 
  Insofar as indemnification by ICCMIC for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of ICCMIC pursuant to the indemnity agreements
referenced herein or otherwise, ICCMIC has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is, therefore, unenforceable.
 
                                      50
<PAGE>
 
Item 11. Executive Compensation
 
  Information required by this item is incorporated by reference to the
information set forth under the caption "Executive Compensation" in ICCMIC's
definitive proxy statement, which ICCMIC intends to file no later than 120
days after the end of fiscal year 1998, pursuant to Rule 12b-23.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management
 
  Information required by this item is incorporated by reference to the
information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in ICCMIC's definitive proxy statement,
which ICCMIC intends to file no later than 120 days after the end of fiscal
year 1998, pursuant to Rule 12b-23.
 
Item 13. Certain Relationships and Certain Transactions
 
Relationships with the Manager
 
 General
 
  The Manager commenced operations in August 1997. Prior to October 22, 1997,
the Manager had no prior experience in managing or operating a REIT. The
executive officers of the Manager collectively had significant experience in
purchasing, financing, servicing and investing in mortgage loans, real estate
and mortgage securities; however, prior to joining the Company they had not
previously managed a REIT. The Manager is a wholly-owned subsidiary of
Imperial Credit.
 
  ICCMIC selected an outside advisor and in particular an advisor associated
with Imperial Credit in order to efficiently and economically coordinate,
assist and manage the duties and responsibilities of the Company. The Company
believes that the Manager is well suited to advise the Company with respect to
contract negotiations and asset acquisitions, perform asset/liability modeling
and management, obtain market information and manage servicing systems and
management information systems. In addition, the Company believes that the
Manager is better equipped than the Company to manage human resources and
facilities because the Manager and Imperial Credit have substantial experience
in these areas.
 
  The address of the Company and the Manager is 11601 Wilshire Boulevard,
Suite 2080, Los Angeles, California 90025-1756, telephone (310) 231-1280.
 
 Directors and Executive Officers
 
  The executive officers and directors of the Manager are as follows:
 
<TABLE>
<CAPTION>
   Name               Age Position
   ----               --- --------
   <C>                <C> <S>
   H. Wayne Snavely    57 Chairman of the Board of Directors
   Kevin E. Villani    50 Vice Chairman of the Board of Directors
   Mark S. Karlan      40 President and Chief Executive Officer, Director
   Michael Meltzer     52 Chief Financial Officer and Treasurer
   Norbert M. Seifert  43 Senior Vice President, General Counsel and Secretary
</TABLE>
 
  Each of these persons also serves as a director and/or executive officer of
the Company.
 
  For biographical information, see Item 10, "Directors and Executive Officers
of the Registrant."
 
 Management Agreement
 
  ICCMIC entered into a Management Agreement with the Manager for an initial
term expiring on the second anniversary of the Closing Date. Thereafter,
successive extensions, each for a period of one year, may be made by agreement
between ICCMIC and the Manager, subject to the affirmative vote of a majority
of the Independent
 
                                      51
<PAGE>
 
Directors. ICCMIC may terminate, or decline to renew, the Management Agreement
without cause at any time after the initial two year term upon 60 days written
notice by a majority vote of the Independent Directors. In that event, ICCMIC
is to pay the Manager a termination fee to be determined by independent
appraisal. Such appraisal is to be conducted by a nationally-recognized
appraisal firm mutually agreed upon by ICCMIC and the Manager. If ICCMIC and
the Manager are unable to agree upon an appraisal firm, then each of ICCMIC
and the Manager is to choose an independent appraisal firm to conduct an
appraisal. In such event, (i) if the appraisals prepared by the two appraisers
so selected are the same or differ by an amount that does not exceed 20% of
the higher of the two appraisals, the termination fee is to be deemed to be
the average of the appraisals as prepared by each party's chosen appraiser,
and (ii) if these two appraisals differ by more than 20% of such higher
amount, the two appraisers together are to select a third appraisal firm to
conduct an appraisal. If the two appraisers are unable to agree as to the
identity of such third appraiser, either of the Manager or ICCMIC may request
that the American Arbitration Association ("AAA") select the third appraiser.
The termination fee then is to be the amount determined by such third
appraiser, but in no event less than the lower of the two initial appraisals
or more than the higher of such two initial appraisals.
 
  In addition, ICCMIC has the right at any time during the term of the
Management Agreement to terminate the Management Agreement without the payment
of any termination fee upon, among other things, a material breach by the
Manager of any provision contained in the Management Agreement that remains
uncured at the end of the applicable cure period (including the failure of the
Manager to use reasonable efforts to comply with the Guidelines).
 
  Pursuant to the provisions of the Management Agreement, the Manager at all
times has been, is and will be subject to the supervision of the Board and has
and will have only such functions and authority as the Company delegates to
it. The Manager advises the Board as to the activities and operations of the
Company. The Manager is responsible for the day-to-day operations of the
Company pursuant to the authority granted to it by the Board under the
Management Agreement, and the Manager performs (or causes to be performed)
such services and activities relating to the assets and operations of the
Company as is directed by the Board or as the Manager otherwise considers
appropriate, including:
 
  (i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy Guidelines by the Board;
 
  (ii) advising and representing the Company in connection with the
acquisition and commitment to acquire assets, the sale and commitment to sell
assets, and the maintenance and administration of its portfolio of assets;
 
  (iii) advising the Company regarding, and arranging for, (a) the issuance of
CMOs collateralized by the Company's Mortgage Loans, (b) reverse repurchase
agreements on the Company's CMBS Interests, and (c) other borrowings, as
appropriate;
 
  (iv) furnishing reports and statistical and economic research to the Company
regarding the Company's activities and the services performed for the Company
by the Manager;
 
  (v) monitoring and providing to the Board of Directors on an ongoing basis
price information and other data obtained from dealers that maintain markets
in assets identified by the Board of Directors from time to time, and
providing data and advice to the Board of Directors in connection with the
identification of such dealers;
 
  (vi) providing executive and administrative personnel, administering office
space and office services required in rendering services to the Company;
administering the day-to-day operations of the Company; and performing and
supervising the performance of such other administrative functions necessary
in the management of the Company, including the collection of revenues and the
payment of the Company's debts and obligations and the maintenance of
appropriate data processing and computer services to perform such
administrative functions;
 
                                      52
<PAGE>
 
  (vii) communicating on behalf of the Company with the holders of any equity
or debt securities of the Company as required to satisfy the reporting and
other requirements of any governmental bodies or agencies or trading markets
and to maintain effective relations with such holders;
 
  (viii) to the extent not otherwise subject to an agreement executed by the
Company, designating a servicer for mortgage loans sold to the Company and
arranging for the monitoring and administering of such servicers;
 
  (ix) counseling the Company in connection with policy decisions to be made
by the Board of Directors;
 
  (x) engaging in hedging activities on behalf of the Company which are
consistent with the Company's status as a REIT and with the Guidelines;
 
  (xi) upon request by the Board of Directors and in accordance with the
Guidelines, investing or reinvesting any money of the Company;
 
  (xii) counseling the Company regarding the maintenance of its exemption from
the Investment Company Act and monitoring compliance with the requirements for
maintaining exemption from that Act;
 
  (xiii) counseling the Company regarding the maintenance of its status as a
REIT and monitoring compliance with the various REIT qualification tests and
other rules set out in the Code and the income tax regulations promulgated
thereunder (the "Treasury Regulations"); and
 
  (xiv) counseling the Company as to compliance with all applicable laws,
including those that would require the Company to qualify to do business in
particular jurisdictions.
 
  The Manager performs portfolio management services on behalf of the Company
pursuant to the Management Agreement with respect to the Company's
investments. Such services include, but are not limited to, consulting the
Company on purchase, sale and other opportunities, collection of information
and submission of reports pertaining to the Company's assets, interest rates,
and general economic conditions, periodic review and evaluation of the
performance of the Company's portfolio of assets, acting as liaison between
the Company and banking, mortgage banking, investment banking and other
parties with respect to the purchase, financing and disposition of assets, and
other customary functions related to portfolio management. The Manager may
enter into subcontracts with other parties, including Imperial Credit and its
affiliates, to provide any such services to the Company.
 
  The Manager performs monitoring services on behalf of the Company pursuant
to the Management Agreement with respect to loan servicing activities provided
by third parties and with respect to the Company's special servicing rights.
Such monitoring services include, but are not limited to, the following
activities: negotiating special servicing agreements; acting as a liaison
between the servicers of the Mortgage Loans and the Company; review of
servicers' delinquency, foreclosures and other reports on Mortgage Loans;
supervising claims filed under any mortgage insurance policies; and enforcing
the obligation of any servicer to repurchase Mortgage Loans. The Manager may
enter into subcontracts with other parties, including its affiliates, to
provide any such services for the Manager.
 
 Limits of Responsibility
 
  Pursuant to the Management Agreement, the Manager does not assume any
responsibility other than to render the services called for thereunder and is
not responsible for any action of the Board in following or declining to
follow its advice or recommendations. The Manager, its directors and its
officers are not liable to the Company, any subsidiary of the Company, the
Independent Directors, ICCMIC's stockholders or any subsidiary's stockholders
for acts performed in accordance with and pursuant to the Management
Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties under the
Management Agreement. The Company has agreed to indemnify the Manager, its
directors and its officers with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from
 
                                      53
<PAGE>
 
acts of the Manager not constituting bad faith, willful misconduct, gross
negligence or reckless disregard of duties, performed in good faith in
accordance with and pursuant to the Management Agreement.
 
  The Management Agreement does not limit or restrict the right of the Manager
or any of its officers, directors, employees or Affiliates to engage in any
business or to render services of any kind to any other person, including the
purchase of, or rendering advice to others purchasing, assets that meet the
Company's policies and criteria, except that the Manager may not manage or
advise another REIT or other entity that invests or intends to invest
primarily in commercial and multifamily Mortgage Loans or subordinated CMBS
Interests.
 
 Management Fees
 
  The Manager is entitled to receive a base management fee calculated as a
percentage of the Average Invested Assets of the Company for each calendar
quarter and equal to 1% per annum of the first $1 billion of such Average
Invested Assets, 0.75% of the next $250 million of such Average Invested
Assets, and 0.50% of Average Invested Assets above $1.25 billion. The term
"Average Invested Assets" for any period means the average of the aggregate
book value of the assets of the Company, including the assets of all of its
direct and indirect subsidiaries, before reserves for depreciation or bad
debts or other similar noncash reserves, computed by taking the daily average
of such values during such period. The Manager did not receive any management
fee for the period prior to the initial public offering of the Company's
Common Stock. The base management fee is intended to compensate the Manager,
among other things, for its costs in providing management services to the
Company. The Board of Directors may adjust the base management fee in the
future if necessary to align the fee more closely with the costs of such
services.
 
  The Manager is entitled to receive incentive compensation for each fiscal
quarter in an amount equal to the product of (A) 25% of the dollar amount by
which (1)(a) Funds from Operations of the Company (before the incentive fee)
per share of Common Stock (based on the weighted average number of shares
outstanding) plus (b) gains (or minus losses) from debt restructuring and
sales of property per share of Common Stock (based on the weighted average
number of shares outstanding), exceed (2) an amount equal to (a) the weighted
average of the price per share at the initial offering and the prices per
share at any secondary offerings by the Company multiplied by (b) the Ten-Year
U.S. Treasury Rate plus four percent per annum multiplied by (B) the weighted
average number of shares of Common Stock outstanding during such quarter.
"Funds From Operations" as defined by NAREIT and as used in the calculation of
the compensation that the Company is to pay to the Manager means net earnings
(computed in accordance with GAAP) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization on
real estate assets, and after adjustments for unconsolidated partnerships and
joint ventures. Funds from Operations does not represent cash generated from
operating activities in accordance with GAAP and should not be considered as
an alternative to net earnings as an indication of the Company's performance
or to cash flows as a measure of liquidity or ability to make distributions.
As used in calculating the Manager's compensation, the term "Ten Year U.S.
Treasury Rate" means the arithmetic average of the weekly average yield to
maturity for actively traded current coupon U.S. Treasury fixed interest rate
securities (adjusted to constant maturities of ten years) published by the
Federal Reserve Board during a quarter, or, if such rate is not published by
the Federal Reserve Board, any Federal Reserve Bank or agency or department of
the federal government selected by the Company. If the Company determines in
good faith that the Ten Year U.S. Treasury Rate cannot be calculated as
provided above, then the rate shall be the arithmetic average of the per annum
average yields to maturities, based upon closing asked prices on each business
day during a quarter, for each actively traded marketable U.S. Treasury fixed
interest rate security with a final maturity date not less than eight nor more
than twelve years from the date of the closing asked prices as chosen and
quoted for each business day in each such quarter in New York City by at least
three recognized dealers in U.S. government securities selected by the
Company.
 
  The ability of the Company to generate Funds from Operations in excess of
the Ten Year U.S. Treasury Rate, and of the Manager to earn the incentive
compensation described in the preceding paragraph, is dependent upon the level
and volatility of interest rates, the Company's ability to react to changes in
interest rates and to utilize successfully the operating strategies described
herein, and other factors, many of which are not within the Company's or the
Manager's control.
 
                                      54
<PAGE>
 
  The Manager is expected to use the proceeds from its base management fee and
incentive compensation in part to pay compensation to its officers and
employees who, notwithstanding that certain of them also are officers of the
Company, will receive no cash compensation directly from the Company.
 
 Costs and Expenses
 
  The Company does not now employ, and does not expect to employ, full-time
salaried personnel. Instead it relies on the facilities, personnel and
resources of the Manager to conduct its operations. The Manager is reimbursed
for (or charges the Company directly for) the Manager's costs and expenses in
employing third-parties to perform due diligence tasks on assets purchased or
considered for purchase by the Company. Expense reimbursement is made
quarterly.
 
  The management fees are payable in arrears. The Manager's base and incentive
fees and reimbursable costs and expenses are calculated by the Manager within
45 days after the end of each quarter, and such calculation is promptly
delivered to the Company. The Company is obligated to pay such fees, costs and
expenses within 60 days after the end of each fiscal quarter upon the
Manager's delivery of the calculation of its fee. A base management fee of
$940 and expenses and initial public offering costs of $989 were accrued
and/or paid for the period ended December 31, 1997. A base management fee of
$6,319 was accrued and/or paid for the year ended December 31, 1998. No
incentive fees have been earned to date. The following table illustrates the
management fees accrued and or paid for the year ended December 31, 1998 and
the period ended December 31, 1997:
 
<TABLE>
<CAPTION>
                                       Base        Incentive        Total
                                  management fee management fee management fee
                                  -------------- -------------- --------------
     <S>                          <C>            <C>            <C>
     Period ended December 31,
      1997.......................     $  940           --           $  940
     Year ended December 31,
      1998.......................     $6,319           --           $6,319
</TABLE>
 
 Certain Relationships; Conflicts of Interest
 
  Imperial Credit and its affiliates, including SPB, expect to continue to
originate Mortgage Loans and CMBS Interests. SPB has entered into an agreement
granting to the Company, as long as the Management Agreement is in effect, a
right of first offer to purchase not less than $150 million annually of
multifamily and commercial Mortgage Loans typical of those originated by SPB.
Although not contractually committed to do so, the Company intends to continue
to consider purchasing Mortgage Loans offered to it pursuant to the foregoing
right of first offer, subject to compliance with the Guidelines and
underwriting criteria as established and modified from time to time by the
Company's Independent Directors.
 
  The Company has maintained a relationship with Imperial Credit and SPB in
which the Company has been a ready, willing and able purchaser of not only
Mortgage Loans, but other assets that may be sold from time to time by
Imperial Credit and SPB. Although no binding commitment exists on the part of
Imperial Credit, SPB or the Company regarding the sale and purchase of such
assets, the Company may be able to purchase such assets from Imperial Credit
and SPB at prices and on terms meeting the Company's investment criteria.
Imperial Credit and SPB may offer to sell assets to the Company on terms and
at prices that, in the aggregate, will be fair to both parties, subject to
compliance with the Guidelines, but there can be no assurances that Imperial
Credit and SPB will offer to sell assets to the Company on such terms and for
such prices. In deciding whether to acquire any such asset, the Manager may
consider, among other factors, whether acquisition of the asset will enhance
the Company's ability to achieve or exceed the Company's risk adjusted target
rate of return established for that period by the Company's Board, whether the
asset otherwise is well-suited for the Company and whether the Company is
financially able to take advantage of the investment opportunity. If an asset
that otherwise meets all of the Company's criteria for asset acquisition is
being offered to the Company at a price that is greater, or on terms that are
less favorable, than would be required by third parties for similar assets in
bona fide arm's length transactions, the Manager would be expected to
recommend that the Company decline to acquire that asset at the quoted price
and terms, notwithstanding the relationship among the Company, Imperial Credit
and SPB.
 
                                      55
<PAGE>
 
  The Company, on the one hand, and Imperial Credit and its affiliates, on the
other, may enter into transactions, some of which may give rise to conflicts
of interest. Moreover, three of the members of the Board and all of the
Company's officers also are employed by the Manager or its affiliates. The
transactions between the Company, on the one hand, and Imperial Credit and its
affiliates, on the other, are and will continue to be governed by the
Guidelines that have been approved by a majority of the Independent Directors.
The Guidelines establish general parameters for the Company's investments,
borrowings and operations, including quantitative and qualitative limitations
on the Company's assets that may be acquired. The Guidelines assist and
instruct the Manager generally, and establish restrictions applicable to
transactions with Imperial Credit and its affiliates. The Independent
Directors unanimously approved the acquisition of the investments acquired by
the Company from Imperial Credit and SPB at the time of the Company's initial
public offering. Subsequent to the acquisition of those investments, the
Manager has entered into transactions on behalf of the Company with Imperial
Credit and its affiliates based upon the Guidelines approved by the
Independent Directors. Such transactions are reviewed on a quarterly basis to
insure compliance with the Guidelines.
 
  Although the Independent Directors review the Guidelines periodically and
monitor compliance with those Guidelines, in conducting this review the
Independent Directors rely and likely will continue to rely primarily on
information provided to them by the Manager. The Manager has obtained and may
obtain in the future the prices paid by unrelated third parties for similar
Mortgage Loans and CMBS Interests in arm's length purchases and sales (if
available) or brokers' opinions as to the market price for Mortgage Loans and
CMBS Interests (if the prices paid by bona fide third parties are not
available and such price opinions are available), and appraisals for
Distressed Real Properties purchased from Imperial Credit or its affiliates,
but the Independent Directors have relied and are likely to continue to rely
substantially on information and analysis provided by the Manager to evaluate
the Company's Guidelines, compliance therewith and other matters relating to
the Company's investments. Moreover, broker price opinions and appraisals are
not always reliable indicators of the value of assets. In particular, broker
price opinions may be obtained from the underwriter or placement agent of the
CMBS, who may have an incentive to overstate the value of the CMBS. Moreover,
the market for unregistered CMBS is illiquid, and therefore accurate prices
are difficult to estimate.
 
  The Company has acquired assets from Imperial Credit and its affiliates, and
may continue to do so in the future. Any such acquisitions will be in
accordance with the Guidelines. The terms of a particular transaction,
however, will not be approved in advance by the Company's Independent
Directors in all cases. The Independent Directors review any such transactions
quarterly to insure compliance with the Guidelines, but in doing so they, by
necessity, rely and likely will continue to rely primarily on information and
analysis provided to them by the Manager. While it is envisioned that the
Independent Directors will review such transactions after the fact, it is
possible that the Manager might request approval in advance if a particular
transaction is perceived as exceptionally significant to the Company or as
presenting unusual risks. Management believes that the terms on which assets
have been acquired by the Company from Imperial Credit and its affiliates are
as favorable as could have been obtained from unrelated third parties.
 
  If the Independent Directors determine in their periodic review of
transactions that a particular transaction does not comply with the
Guidelines, then the Independent Directors will consider what corrective
action, if any, can be taken. If the transaction is one with Imperial Credit
or an affiliate, and if the Independent Directors so direct, the Manager shall
use its best reasonable efforts to cause Imperial Credit or the relevant
affiliate to repurchase the asset at the purchase price to the Company.
Moreover, if transactions are consummated that materially deviate from the
Guidelines, then the Independent Directors have the option, under the terms of
the Management Agreement, to terminate the Manager.
 
  The Management Agreement prohibits the Manager from managing or advising any
REIT or other entity that invests or intends to invest primarily in commercial
and multifamily Mortgage Loans or subordinated CMBS Interests, but it does not
limit or restrict the right of the Manager to engage in any business or
rendering services to REITs that compete in certain respects with the Company.
While the Manager has not provided, and is unlikely in the near future to
provide, any services to other REITs, the types of services that could be
provided would include the rendering of advice in connection with the
acquisition or commitment to acquire or sell real
 
                                      56
<PAGE>
 
property, consultation regarding formulation of investment criteria, the
furnishing of reports and research regarding such REIT's activities and other
advisory services similar to those provided to the Company.
 
  Imperial Credit purchased 2,970,000 shares of Common Stock on the Closing
Date at a price equal to the initial public offering price, net of any
underwriting discounts or commissions. On December 11, 1997, Imperial Credit
purchased an additional 100,000 shares of Common Stock in an open market
transaction. These purchases and the Company's subsequent repurchase of
6,000,000 shares of its Common Stock have resulted in Imperial Credit's
ownership of 10.8% of the total shares of Common Stock of the Company. The
Manager also has received stock options pursuant to the Company's Stock Option
Plan. Imperial Credit has advised the Company that Imperial Credit is
obligated to retain its shares of Common Stock of the Company for at least two
years after the Company's initial public offering of shares of Common Stock as
a result of a lock-up agreement entered into by Imperial Credit and the lead
underwriter, but may dispose of its shares any time thereafter.
Notwithstanding the foregoing, if the Company terminates the Management
Agreement, Imperial Credit may dispose of its shares at that time.
 
  The market in which the Company acquires assets has been characterized by
rapid evolution of products and services and, thus, there may in the future be
relationships between the Company, the Manager, and affiliates of the Manager
in addition to those described herein.
 
1997 Stock Option Plan
 
  The Company adopted, and its sole stockholder approved, the Imperial Credit
Commercial Mortgage Investment Corp. 1997 Stock Option Plan (as amended to
date, the "Plan") under which the Compensation Committee of the Board or, if
none, the Board (the "Committee") is authorized to grant options to purchase
shares of Common Stock ("Options"). The maximum aggregate number of shares of
Common Stock that may be issued pursuant to the exercise of Options granted
during the term of the Plan is 7,500,000. As of December 31, 1998, the Company
had granted Options for 3,045,000 shares of Common Stock at a price of $15.00
and 883,500 shares of Common Stock at a price of $9.00. These grants include
1,691,250 shares to the Manager and 2,084,000 shares primarily to executive
officers and Directors of the Company. In general, one third of all the
options is exercisable on each of the first three anniversaries of their grant
and all of the options that have not been exercised within 10 years of the
date of grant will expire. In the event of a change in control as defined in
the Plan, all options become fully exercisable.
 
  Eligibility And Awards. All employees (including officers), directors and
others providing services to the Company, as well as the Manager and employees
(including officers) and directors of the Manager (collectively, the "Eligible
Recipients"), are eligible to receive Options at the discretion of the
Committee. The Committee is authorized to determine which Eligible Recipients
shall receive Options, and the terms and conditions on which Options shall be
granted, but not less than 30% of the total number of shares of Common Stock
subject to Options granted as of any date shall have been granted to employees
of the Manager (the "Manager Reserve"), and at least one-third of such Manager
Reserve shall have been granted to the President of the Manager. Options
granted pursuant to the Plan are and may be either nonqualified stock options
or incentive stock options. Options granted pursuant to the Plan generally are
not transferable except that, to the extent permitted by the Committee, a
grantee may transfer Options to members of his immediate family (including
spouse, parents, children and siblings) and the Manager may transfer its
Options to any other Eligible Recipient. Grants of Options under the Plan to
persons or entities other than executive officers and directors of the Company
may result in a charge against the Company's earnings for financial reporting
purposes under GAAP. Any such charge to earnings will be recognized in the
appropriate period.
 
  Exercise Price And Exercisability. The exercise price of all Options is and
will be not less than 100% of the fair market value of the Common Stock
subject to the Options on the date of grant. Options generally become
exercisable not earlier than one year following the date of award or as
otherwise determined by the Committee at the time of the award. The exercise
price of an Option may be paid by any one or more of the following: (i) cash
or its equivalent, (ii) shares of Common Stock, (iii) cancellation of any
indebtedness owed by the
 
                                      57
<PAGE>
 
Company, (iv) a full-recourse promissory note, if approved by the Committee,
(v) a "cashless" exercise pursuant to a sale through a broker of all or a
portion of the shares covered by the Option or (vi) by making payment with
shares of Common Stock simultaneously acquired on exercise of the Option
pursuant to procedures approved by the Committee.
 
  Termination Of Employment. If an Eligible Recipient's affiliation with the
Company is terminated for cause or if such Eligible Recipient terminates his
affiliation voluntarily, all of such Eligible Recipient's unexercised Options
will terminate immediately upon such termination. Except as otherwise
determined by the Committee, if an Eligible Recipient has a termination of
affiliation because of death or permanent disability or for any other reason
(other than a voluntary termination or a termination for cause), all of such
Eligible Recipient's unexercised Options may be exercised by the Eligible
Recipient or his beneficiary or legal representative to the extent such
Options are or become exercisable in accordance with their terms for up to one
year after the later of (i) the date of such Eligible Recipient's termination
of affiliation or (ii) the date the Options first become exercisable, but in
no event later than the expiration of the Option term.
 
  Amendment And Termination. The Board generally may amend the Plan at any
time, except that approval by ICCMIC's stockholders will be required for any
amendment that increases the aggregate number of shares of Common Stock that
may be issued pursuant to the Plan, that materially changes the class of
persons eligible to receive such Options, that extends the maximum Option
term, that decreases the exercise price of any Option to less than the fair
market value of the Common Stock on the date of grant or that materially
increases benefits accruing to the participants under the Plan. Shares of
Common Stock subject to Options that expire, are terminated or otherwise are
surrendered to the Company will be available for issuance in connection with
future awards under the Plan. No Option term may exceed ten years from the
date of grant, and no Option grant may be made under the Plan after the tenth
anniversary of the date the Plan was adopted by the Board. In 1998, the Board
amended the Plan to provide for accelerated exercisability in the event of a
change in control and to make certain technical amendments.
 
                                      58
<PAGE>
 
                                    PART IV
 
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
 
  (a) Consolidated Financial Statements included in the Form 10-K are:
 
    Consolidated Balance Sheets as of December 31, 1998 and 1997;
    Consolidated Statements of Earnings for the year ended December 31, 1998
       and the period from July 31, 1997 (Inception) through December 31,
       1997;
    Consolidated Statements of Changes in Stockholders' Equity and
       Comprehensive Income for the year ended December 31, 1998 and the
       period from July 31, 1997 (Inception) through December 31, 1997;
    Consolidated Statements of Cash Flows for the year ended December 31,
       1998 and the period from July 31, 1997 (Inception) through December
       31, 1997; and
    Notes to Consolidated Financial Statements.
 
  All schedules have been omitted because they are either not applicable, not
required or the information required has been disclosed in the financial
statements and related notes or otherwise in the Form 10-K.
 
  (b) Exhibits
 
<TABLE>
   <C>    <S>
   3.1*   Charter of the Company
   3.2    Bylaws of the Company, as amended December 14, 1998
   10.1+  Imperial Credit Commercial Mortgage Investment Corp. 1997 Stock
          Option Plan
   10.2+  Management Agreement dated October 22, 1997 between the Company and
          Imperial Credit Commercial Asset Management Corp.
   10.3+  Agreement for Purchase and Sale of Real Estate Loans between Southern
          Pacific Bank and the Company dated as of October 1, 1997
   10.4+  Agreement for Purchase of Mortgage-Backed Securities between Southern
          Pacific Bank and the Company dated as of October 22, 1997
   10.5+  Agreement for Purchase of Mortgage-Backed Securities between Imperial
          Credit Industries, Inc. and the Company dated as of October 22, 1997
   10.6++ Master Loan and Security Agreement dated as of March 30, 1998 between
          ICCMIC as Borrower and Morgan Guaranty Trust Company of New York, as
          Lender
   23     Consent of KPMG LLP
   27     Financial Data Schedule
</TABLE>
--------
* Incorporated by reference to the Company's Form S-11 Registration No. 333-
  32683
+ Incorporated by reference to the Company's Form 10-Q as of September 30,
  1997.
++Incorporated by reference to the Company's Form 10-Q as of March 31, 1998.
 
  (c) Reports on Form 8K
 
  A Form 8-K was filed with the Commission on November 4, 1998 with the
Company's press release covering earnings for the period ended September 30,
1998.
 
  A Form 8-K was filed with the Commission on December 22, 1998 with the
Company's press release covering the dividend declared during the fourth
quarter of 1998.
 
 
                                      59
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
 
                                     Imperial Credit Commercial Mortgage
                                      Investment Corp.
 
Date: March 30, 1999                 By /s/      Mark S. Karlan
                                       -----------------------------------
                                                   Mark S. Karlan
                                       President and Chief Executive Officer
                                           (Principal Executive Officer)
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
             Signature                           Title                    Date
             ---------                           -----                    ----
<S>                                  <C>                           <C>
       /s/ H. Wayne Snavely          Chairman of the Board of        March 30, 1999
____________________________________ Directors
          H. Wayne Snavely
 
       /s/ Kevin E. Villani          Vice Chairman of the Board      March 30, 1999
____________________________________ of Directors
          Kevin E. Villani
        /s/ Mark S. Karlan           President, Chief Executive      March 30, 1999
____________________________________ Officer and Director
           Mark S. Karlan
       /s/ Michael Meltzer           Chief Financial Officer         March 30, 1999
____________________________________ (Principal Financial and
          Michael Meltzer            Accounting Officer)
                                     Director
____________________________________
       Patric H. Hendershott
    /s/ Joseph A. Jaconi, Jr.        Director                        March 30, 1999
____________________________________
       Joseph A. Jaconi, Jr.
       /s/ Louis H. Masotti          Director                        March 30, 1999
____________________________________
          Louis H. Masotti
      /s/ Kenneth A. Munkacy         Director                        March 30, 1999
____________________________________
         Kenneth A. Munkacy
</TABLE>
 
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