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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q



|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended: March 31, 2002

OR



|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|----- | ----------------------------------------------------------------------------------------

For the transition period from ____________ to __________

Commission file number: 333-44860

SPECIALTY MORTGAGE TRUST, INC.

(Exact name of Registrant as specified in its Charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Maryland                                                       |  | 88-0382463                          
|(State or other jurisdiction of
Incorporation or organization) |  | (I.R.S. Employer
Identification No.)

|                                         |  |           
|---------------------------------------- |  | ----------
|6160 Plumas St.Reno, Nevada              |  | 89509     
|(Address of principal executive offices) |  | (Zip Code)

(775) 826-0809
(Registrants telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all documents
and 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 [   ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes
of stock, as of the last practicable date.



|Common Stock ($.01 par value) | 6,963,721 as of May 10, 2002
|----------------------------- | ----------------------------



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TABLE OF CONTENTS



|                              |                                                                                              |                                    |  |  |  |  |  | 
|----------------------------- | -------------------------------------------------------------------------------------------- | ---------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              |                                                                                              | BALANCE SHEETS                    
|                              |                                                                                              | STATEMENTS OF EARNINGS            
|                              |                                                                                              | STATEMENTS OF STOCKHOLDERS EQUITY
|                              |                                                                                              | STATEMENTS OF CASH FLOWS          
|                              |                                                                                              | NOTES TO FINANCIAL STATEMENTS     
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operation
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                          
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings.                                                                  
|                              | Item 2. Changes in Securities and Use of Proceeds.                                          
|                              | Item 3. Defaults Upon Senior Securities.                                                    
|                              | Item 4. Submission of Matters to a Vote of Security Holders.                                
|                              | Item 5. Other Information.                                                                  
|                              | Item 6. Exhibits and Reports on Form 8-K.                                                   
|SIGNATURES                   



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INDEX

PART I. FINANCIAL INFORMATION

|        |  |                                                                                       |  |      |    | 
|------- |  | ------------------------------------------------------------------------------------- |  | ---- | -- | 
|        |  |                                                                                       |  | Page
|        |  |                                                                                       |  |     
|Item 1. |  | Financial Statements  Specialty Mortgage Trust, Inc.                                 |  |      | 3  | 
|       
|       
|       
|       
|        |  | Balance Sheets                                                                        |  |      | 3  | 
|       
|       
|       
|       
|        |  | Statements of Earnings                                                                |  |      | 4  | 
|       
|       
|       
|       
|        |  | Statements of Stockholders Equity                                                    |  |      | 5  | 
|       
|       
|       
|       
|        |  | Statements of Cash Flows                                                              |  |      | 6  | 
|       
|       
|       
|       
|        |  | Notes to the Financial Statements                                                     |  |      | 7  | 
|       
|       
|       
|       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition And
Results of Operations |  |      | 10 | 
|       
|       
|       
|       
|Item 3  |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |      | 16 | 
|       
|        |  | PART II. OTHER INFORMATION                                                            |  |      |    | 
|       
|Item 1  |  | Legal Proceedings                                                                     |  |      | 17 | 
|       
|       
|       
|       
|Item 2  |  | Changes in Securities and Use of Proceeds                                             |  |      | 17 | 
|       
|       
|       
|       
|Item 3  |  | Defaults Upon Senior Securities                                                       |  |      | 17 | 
|       
|       
|       
|       
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                   |  |      | 17 | 
|       
|       
|       
|       
|Item 5  |  | Other Information                                                                     |  |      | 17 | 
|       
|       
|       
|       
|Item 6  |  | Exhibits and Reports on Form 8-K                                                      |  |      | 20 | 

2



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PART I. FINANCIAL INFORMATION




SPECIALTY MORTGAGE TRUST, INC.

BALANCE SHEETS


ASSETS

|                                     |                                                                                                                                                                                    |                                            |   |             |            |              |   |            |            | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ----------- | ---------- | ------------ | - | ---------- | ---------- | 
|                                     |                                                                                                                                                                                    |                                            |   | March 31,   |            | December 31,
|                                     |                                                                                                                                                                                    |                                            |   | 2002        |            | 2001        
|                                     |                                                                                                                                                                                    |                                            |   |             |            |             
|                                     |                                                                                                                                                                                    |                                            |   | (unaudited) |            |              |   |           
|ASSETS                               |                                                                                                                                                                                    |                                            |   |             |            |              |   |           
|                                     | Cash and cash equivalents                                                                                                                                                          |                                            | $ | 1,973,453   |            |              | $ | 58,989     |           
|                                     | Accrued interest receivable                                                                                                                                                        |                                            |   | 707,858     |            |              |   | 836,837    |           
|                                     | Real estate owned                                                                                                                                                                  |                                            |   | 3,278,587   |            |              |   | 3,228,139  |           
|                                     | Mortgage loans held for investment, net of
allowance for loan losses of $1,149,860 and $1,020,321
at March 31, 2002 and December 31, 2001, respectively                            |                                            |   | 72,767,508  |            |              |   | 72,311,338 |           
|                                     | Deferred charges                                                                                                                                                                   |                                            |   | 310,171     |            |              |   | 307,063    |           
|                                     |                                                                                                                                                                                    |                                            |   |             |            |              |   |           
|                                     |                                                                                                                                                                                    | Total assets                               |   | $           | 79,037,577 |              |   | $          | 76,742,366 | 
|                                     |                                                                                                                                                                                    |                                            |   |             |            |              |   |           
|                                    
|                                    
|                                    
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                                    |                                            |   |             |            |              |   |           
|                                    
|                                    
|                                    
|                                    
|LIABILITIES                          |                                                                                                                                                                                    |                                            |   |             |            |              |   |           
|                                     | Dividends payable                                                                                                                                                                  |                                            | $ |            |            |              | $ | 2,046,811  |           
|                                     | Accounts payable                                                                                                                                                                   |                                            |   | 67,014      |            |              |   | 99,233     |           
|                                     | Accrued interest payable                                                                                                                                                           |                                            |   | 9,435       |            |              |   | 16,699     |           
|                                     | Collateralized notes                                                                                                                                                               |                                            |   | 10,497,354  |            |              |   | 8,395,919  |           
|                                     | Collateralized notes  related party                                                                                                                                               |                                            |   | 734,513     |            |              |   | 1,079,522  |           
|                                     | Deferred revenue                                                                                                                                                                   |                                            |   | 110,888     |            |              |   | 78,144     |           
|                                     |                                                                                                                                                                                    |                                            |   |             |            |              |   |           
|                                     |                                                                                                                                                                                    | Total liabilities                          |   |             | 11,419,204 |              |   |            | 11,716,328 | 
|                                     |                                                                                                                                                                                    |                                            |   |             |            |              |   |           
|STOCKHOLDERS EQUITY                 |                                                                                                                                                                                    |                                            |   |             |            |              |   |           
|                                     | Class A Convertible Preferred Stock; $0.01 par value
0 and 3,531,915 shares authorized; 0 shares
issued and outstanding as of March 31, 2002 and
December 31, 2001, respectively   |                                            |   |            |            |              |   |           |           
|                                     | Common stock; $0.01 par value; 50,000,000 and
46,468,085 shares authorized; 6,908,716 and 6,822,703
issued and outstanding as of March 31, 2002 and
December 31, 2001 respectively |                                            |   | 69,087      |            |              |   | 68,227     |           
|                                     | Additional paid-in capital                                                                                                                                                         |                                            |   | 65,766,941  |            |              |   | 64,957,811 |           
|                                     | Retained earnings                                                                                                                                                                  |                                            |   | 1,782,345   |            |              |   |           |           
|                                     |                                                                                                                                                                                    |                                            |   |             |            |              |   |           
|                                     |                                                                                                                                                                                    | Total stockholders equity                 |   |             | 67,618,373 |              |   |            | 65,026,038 | 
|                                     |                                                                                                                                                                                    |                                            |   |             |            |              |   |           
|                                     |                                                                                                                                                                                    | Total liabilities and stockholders equity |   | $           | 79,037,577 |              |   | $          | 76,742,366 | 
|                                     |                                                                                                                                                                                    |                                            |   |             |            |              |   |           

The accompanying notes are an integral part of these statements.

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SPECIALTY MORTGAGE TRUST, INC.
STATEMENTS OF EARNINGS

|                           |                                |                      |                                                     |                              |           |                    |           |                |           |           |           | 
|-------------------------- | ------------------------------ | -------------------- | --------------------------------------------------- | ---------------------------- | --------- | ------------------ | --------- | -------------- | --------- | --------- | --------- | 
|                           |                                |                      |                                                     |                              |           | Three Months Ended
|                           |                                |                      |                                                     |                              |           |                   
|                           |                                |                      |                                                     |                              |           | March 31, 2002     |           | March 31, 2001
|                           |                                |                      |                                                     |                              |           |                    |           |               
|                           |                                |                      |                                                     |                              |           | (unaudited)        |           | (unaudited)   
|Revenue                    |                                |                      |                                                     |                              |           |                    |           |               
|                           | Interest and dividend income   |                      |                                                     |                              |           |                    |           |                |          
|                           |                                | Mortgage loans       |                                                     | $                            | 2,118,520 |                    |           | $              | 1,726,918 |          
|                           |                                | Cash accounts        |                                                     |                              | 26,248    |                    |           |                | 464       |          
|                           |                                | Discount on loans    |                                                     |                              | 10,356    |                    |           |                | 3,943     |          
|                           |                                | Dividends            |                                                     |                              |          |                    |           |                | 7,097     |          
|                           |                                |                      |                                                     |                              |           |                    |           |               
|                           |                                |                      | Total interest and
dividend income                  |                              |           | 2,155,124          |           |                |           | 1,738,422 |          
|                           |                                |                      |                                                     |                              |           |                    |           |               
|                           | Interest expense               |                      |                                                     |                              |           |                    |           |                |          
|                           |                                | Lines of credit      |                                                     |                              | 970       |                    |           |                | 40,548    |          
|                           |                                | Collateralized notes |                                                     |                              | 154,441   |                    |           |                | 157,857   |          
|                           |                                |                      |                                                     |                              |           |                    |           |               
|                           |                                |                      | Total interest expense                              |                              |           | 155,411            |           |                |           | 198,405   |          
|                           |                                |                      |                                                     |                              |           |                    |           |               
|                           |                                |                      | Net interest and dividend income                    |                              |           | 1,999,713          |           |                |           | 1,540,017 |          
|                           | Provision for loan losses      |                      |                                                     | 129,539                      |           |                    |           | 125,000        |          
|                           |                                |                      |                                                     |                              |           |                    |           |               
|                           |                                |                      | Net interest income after provision for loan losses |                              |           | 1,870,174          |           |                |           | 1,415,017 |          
|                           | Other Income, net              |                      |                                                     | 10,745                       |           |                    |           |               |          
|                           |                                |                      |                                                     |                              |           |                    |           |               
|                           |                                |                      | Net revenues                                        |                              |           | 1,880,919          |           |                |           | 1,415,017 |          
|Expenses                   |                                |                      |                                                     |                              |           |                    |           |               
|                           | General and administrative     |                      |                                                     | 91,769                       |           |                    |           | 74,947         |          
|                           | Management and directors fees |                      |                                                     | 6,805                        |           |                    |           | 34,670         |          
|                           |                                |                      |                                                     |                              |           |                    |           |               
|                           |                                |                      |                                                     | Total expenses               |           |                    | 98,574    |                |           |           | 109,617   | 
|                           |                                |                      |                                                     |                              |           |                    |           |               
|                           |                                |                      |                                                     | Earnings before income taxes |           |                    | 1,782,345 |                |           |           | 1,305,400 | 
|                           | Income taxes                   |                      |                                                     |                             |           |                    |           |               |          
|                           |                                |                      |                                                     |                              |           |                    |           |               
|                           |                                |                      |                                                     | NET EARNINGS                 |           |                    | 1,782,345 |                |           |           | 1,305,400 | 
|Basic earnings per share   |                                |                      | 0.26                                                |                              |           |                    | 3.90      |               
|                           |                                |                      |                                                     |                              |           |                    |           |               
|Diluted earnings per share |                                |                      | 0.26                                                |                              |           |                    | 0.26      |               
|                           |                                |                      |                                                     |                              |           |                    |           |               

The accompanying notes are an integral part of these statements.

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SPECIALTY MORTGAGE TRUST, INC.
STATEMENTS OF STOCKHOLDERS EQUITY

|                                                          |                            |                                                        |            |                 |   |              |         |            |   |          |           |               |   |          |        |        |   |       |            |   |   |   |            |   |           |   |      |   |         |   |            |           |           |  
|--------------------------------------------------------- | -------------------------- | ------------------------------------------------------ | ---------- | --------------- | - | ------------ | ------- | ---------- | - | -------- | --------- | ------------- | - | -------- | ------ | ------ | - | ----- | ---------- | - | - | - | ---------- | - | --------- | - | ---- | - | ------- | - | ---------- | --------- | --------- | -
|                                                          |                            |                                                        |            | Convertible     |   |              |         |            |   |          |           |               |   |          |        |        |   |       |            |   |   |   |            |   |           |   |      |  
|                                                          |                            |                                                        |            | Preferred Stock |   | Common Stock |         | Additional |   |          |           |               |   |          |        |        |   |       |            |  
|                                                          |                            |                                                        |            |                 |   |              |         | Paid-in    |   | Retained |           | Comprehensive |   |          |        |       
|                                                          |                            |                                                        |            | Shares          |   | Amount       |         | Shares     |   | Amount   |           | Capital       |   | Earnings |        | Income |   | Total
|                                                          |                            |                                                        |            |                 |   |              |         |            |   |          |           |               |   |          |        |        |   |      
|Balance, January 1, 2001                                  |                            |                                                        | 4,624,276  |                 |   | $            | 46,243  |            |   |          | 334,400   |               |   | $        | 3,344  |        |   | $     | 45,242,156 |   |   |   |           |   |           |   | (957 | ) |         | $ | 45,290,786 |          
|Comprehensive income:                                     |                            |                                                        |            |                 |   |              |         |            |   |          |           |               |   |          |        |        |   |       |            |   |   |   |            |   |           |   |      |   |         |   |            |          
|                                                          |                            | Net earnings                                           |            |                 |  |              |         |            |  |          |           |               |  |          |        |        |  |       |            |   |  |   |            |   | 6,085,129 |   |      |   |        |   |            |           | 6,085,129 |  
|                                                          |                            | Net unrealized loss on
investments available-
for-sale |            |                 |   |              |         |            |   |          |           |               |   |          |        |        |   |       |            |   |   |   |            |   |           |   |      |   | 11,349  |   |            |           | 11,349    |  
|                                                          |                            | Reclassification adjustment                            |            |                 |   |              |         |            |   |          |           |               |   |          |        |        |   |       |            |   |   |   |            |   |           |   |      |   | (10,392 | ) |            |           | (10,392   | )
|                                                          |                            |                                                        |            |                 |   |              |         |            |   |          |           |               |   |          |        |        |   |       |            |   |   |   |            |   |           |   |      |   |         |   |            |          
|                                                          | Total comprehensive income |                                                        |            |                 |   |              |         |            |   |          |           |               |   |          |        |        |   |       |            |   |   |   |            |   |           |   |      |   |         |   |            | 6,086,086 |          
|Stock options exercised                                   |                            |                                                        |           |                 |   |              |        |            |   |          | 20,218    |               |   |          | 202    |        |   |       | 21,250     |   |   |   |           |   |           |   |     |   |         |   | 21,452     |          
|Non-employee stock option
expense                         |                            |                                                        |           |                 |   |              |        |            |   |          |          |               |   |          |       |        |   |       | 70,558     |   |   |   |           |   |           |   |     |   |         |   | 70,558     |          
|Collaterized notes received
for preferred stock           |                            |                                                        | 270,284    |                 |   |              | 2,703   |            |   |          |          |               |   |          |       |        |   |       | 2,970,425  |   |   |   |           |   |           |   |     |   |         |   | 2,973,128  |          
|Dividends reinvested for
preferred stock                  |                            |                                                        | 176,588    |                 |   |              | 1,766   |            |   |          |          |               |   |          |       |        |   |       | 1,851,982  |   |   |   |           |   |           |   |     |   |         |   | 1,853,748  |          
|Preferred stock issued (net of
offering costs of $48,982) |                            |                                                        | 1,396,937  |                 |   |              | 13,969  |            |   |          |          |               |   |          |       |        |   |       | 15,303,352 |   |   |   |           |   |           |   |     |   |         |   | 15,317,321 |          
|Conversion of preferred stock
to common stock 10/1/01     |                            |                                                        | (6,468,085 | )               |   |              | (64,681 | )          |   |          | 6,468,085 |               |   |          | 64,681 |        |   |       |           |   |   |   |           |   |           |   |     |   |         |   |           |          
|Dividends declared on
preferred stock                     |                            |                                                        |           |                 |   |              |        |            |   |          |          |               |   |          |       |        |   |       |           |   |   |   | (4,540,231 | ) |           |   |     |   |         |   | (4,540,231 | )        
|Dividends declared on
common stock                        |                            |                                                        |           |                 |   |              |        |            |   |          |          |               |   |          |       |        |   |       | (501,912   | ) |   |   | (1,544,898 | ) |           |   |     |   |         |   | (2,046,810 | )        
|                                                          |                            |                                                        |            |                 |   |              |         |            |   |          |           |               |   |          |        |        |   |       |            |   |   |   |            |   |           |   |      |   |         |   |            |          
|Balance, December 31, 2001                                |                            |                                                        |           |                 |   |              |        |            |   |          | 6,822,703 |               |   |          | 68,227 |        |   |       | 64,957,811 |   |   |   |           |   |           |   |     |   |         |   | 65,026,038 |          
|Net earnings                                              |                            |                                                        |           |                 |   |              |        |            |   |          |          |               |   |          |       |        |   |       |           |   |   |   | 1,782,345  |   |           |   |     |   |         |   | 1,782,345  |          
|Stock options exercised                                   |                            |                                                        |           |                 |   |              |        |            |   |          | 19,534    |               |   |          | 195    |        |   |       | 56,574     |   |   |   |           |   |           |   |     |   |         |   | 56,769     |          
|Non-employee stock options
expense                        |                            |                                                        |           |                 |   |              |        |            |   |          |          |               |   |          |       |        |   |       | 21,946     |   |   |   |           |   |           |   |     |   |         |   | 21,946     |          
|Dividends reinvested for
common stock                     |                            |                                                        |           |                 |   |              |        |            |   |          | 66,479    |               |   |          | 665    |        |   |       | 730,610    |   |   |   |           |   |           |   |     |   |         |   | 731,275    |          
|                                                          |                            |                                                        |            |                 |   |              |         |            |   |          |           |               |   |          |        |        |   |       |            |   |   |   |            |   |           |   |      |   |         |   |            |          
|Balance, March 31, 2002
(unaudited)                       |                            |                                                        |           |                 |   | $            |        |            |   |          | 6,908,716 |               |   | $        | 69,087 |        |   | $     | 65,766,941 |   |   | $ | 1,782,345  |   |           | $ |     |   |         | $ | 67,618,373 |          
|                                                          |                            |                                                        |            |                 |   |              |         |            |   |          |           |               |   |          |        |        |   |       |            |   |   |   |            |   |           |   |      |   |         |   |            |          

The accompanying notes are an integral part of these statements.

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SPECIALTY MORTGAGE TRUST, INC.
STATEMENTS OF CASH FLOWS

|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |                |         |          |            |  
|------------------------------------------------ | ---------------------------------------------------------- | ---------------------------------------- | --------------------------- | ---------------------------------------------------- | ------- | ------------------ | --------- | -------------- | ------- | -------- | ---------- | -
|                                                 |                                                            |                                          |                             |                                                      |         | Three Months Ended
|                                                 |                                                            |                                          |                             |                                                      |         |                   
|                                                 |                                                            |                                          |                             |                                                      |         | March 31, 2002     |           | March 31, 2001
|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |               
|                                                 |                                                            |                                          |                             |                                                      |         | (unaudited)        |           | (unaudited)   
|Cash flows from operating activities:            |                                                            |                                          |                             |                                                      |         |                    |           |               
|                                                 | Net earnings                                               |                                          | $                           | 1,782,345                                            |         |                    | $         | 1,305,400      |        
|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |               
|                                                 | Adjustment to reconcile net earnings to net cash           |                                          |                             |                                                      |         |                    |           |                |        
|                                                 | Provided by operating activities:                          |                                          |                             |                                                      |         |                    |           |                |        
|                                                 |                                                            | Amortization                             |                             |                                                      | 12,994  |                    |           |                | 14,517  |         
|                                                 |                                                            | Provision for loan losses                |                             |                                                      | 129,539 |                    |           |                | 125,000 |         
|                                                 |                                                            | Collateralized notes interest reinvested |                             |                                                      | 143,368 |                    |           |                | 125,807 |         
|                                                 |                                                            | Non-employee stock option expense        |                             |                                                      | 21,946  |                    |           |                | 18,104  |         
|                                                 |                                                            | Changes in assets and liabilities:       |                             |                                                      |         |                    |           |                |         |         
|                                                 |                                                            |                                          | Deferred charges            |                                                      |         | (16,690            | )         |                |         |         |           
|                                                 |                                                            |                                          | Accrued interest receivable |                                                      |         | 128,979            |           |                |         | (78,906  | )         
|                                                 |                                                            |                                          | Other Assets                |                                                      |         | 588                |           |                |         | (7,742   | )         
|                                                 |                                                            |                                          | Accounts payable            |                                                      |         | (32,219            | )         |                |         | 16,646   |           
|                                                 |                                                            |                                          | Deposits                    |                                                      |         |                   |           |                |         | (923,406 | )         
|                                                 |                                                            |                                          | Accrued interest payable    |                                                      |         | (7,264             | )         |                |         | (7,715   | )         
|                                                 |                                                            |                                          | Deferred revenue            |                                                      |         | 32,744             |           |                |         | (3,942   | )         
|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |               
|                                                 |                                                            |                                          |                             | Total adjustments                                    |         |                    | 413,985   |                |         |          | (721,637   | )
|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |               
|                                                 |                                                            |                                          |                             | Net cash provided by operating activities            |         |                    | 2,196,330 |                |         |          | 583,763    |  
|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |               
|Cash flows from investing activities:            |                                                            |                                          |                             |                                                      |         |                    |           |               
|                                                 | Purchase of mortgage loans held for investment             |                                          |                             | (15,488,186                                          | )       |                    |           | (4,646,653     | )      
|                                                 | Investment in real estate owned                            |                                          |                             | (50,448                                              | )       |                    |           |               |        
|                                                 | Principal repayments of mortgage loans held
for investment |                                          |                             | 14,902,477                                           |         |                    |           | 5,598,928      |        
|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |               
|                                                 |                                                            |                                          |                             | Net cash provided by (used in) investing activities  |         |                    | (636,157  | )              |         |          | 952,275    |  
|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |               
|Cash flows from financing activities:            |                                                            |                                          |                             |                                                      |         |                    |           |               
|                                                 | Proceeds from common stock options exercised               |                                          |                             | 56,769                                               |         |                    |           | 35             |        
|                                                 | Cash dividends paid                                        |                                          |                             | (1,315,536                                           | )       |                    |           | (913,924       | )      
|                                                 | Net (payments)/proceeds on line of credit                  |                                          |                             |                                                     |         |                    |           | (4,452,500     | )      
|                                                 | Proceeds on collateralized notes                           |                                          |                             | 3,390,288                                            |         |                    |           | 2,255,000      |        
|                                                 | Principal payments on collateralized notes                 |                                          |                             | (1,777,230                                           | )       |                    |           | (660,825       | )      
|                                                 | Debt issue costs                                           |                                          |                             |                                                     |         |                    |           | (183,089       | )      
|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |               
|                                                 |                                                            |                                          |                             | Net cash provided by (used in) financing activities  |         |                    | 354,291   |                |         |          | (3,955,303 | )
|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |               
|                                                 |                                                            |                                          |                             | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |         |                    | 1,914,464 |                |         |          | (2,419,265 | )
|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |               
|Cash and cash equivalents at beginning of period |                                                            |                                          | 58,989                      |                                                      |         |                    | 2,619,717 |               
|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |               
|Cash and cash equivalents at end of period       |                                                            | $                                        | 1,973,453                   |                                                      |         | $                  | 200,452   |               
|                                                 |                                                            |                                          |                             |                                                      |         |                    |           |               

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SPECIALTY MORTGAGE TRUST, INC.
STATEMENT OF CASH FLOWS  CONTINUED

|                                                                        |                                                                     |  |                    |         |                |  |   |           | 
|----------------------------------------------------------------------- | ------------------------------------------------------------------- |  | ------------------ | ------- | -------------- |  | - | --------- | 
|                                                                        |                                                                     |  | Three Months Ended
|                                                                        |                                                                     |  |                   
|                                                                        |                                                                     |  | March 31, 2002     |         | March 31, 2001
|                                                                        |                                                                     |  |                    |         |               
|                                                                        |                                                                     |  | (unaudited)        |         | (unaudited)   
|Supplemental cash flow information:                                     |                                                                     |  |                    |         |                |  |   |          
|                                                                        | Cash paid for interest                                              |  | $                  | 11,449  |                |  | $ | 77,045    | 
|                                                                        |                                                                     |  |                    |         |                |  |   |          
|Supplemental disclosure of non-cash investing and
financing activities: |                                                                     |  |                    |         |                |  |   |          
|                                                                        | Collateralized notes exchanged for issuance of preferred stock      |  | $                  |        |                |  | $ | 1,948,000 | 
|                                                                        |                                                                     |  |                    |         |                |  |   |          
|                                                                        | Collateralized notes interest reinvested                            |  | $                  | 143,368 |                |  | $ | 125,807   | 
|                                                                        |                                                                     |  |                    |         |                |  |   |          
|                                                                        | Dividends reinvested for preferred stock                            |  | $                  |        |                |  | $ | 473,359   | 
|                                                                        |                                                                     |  |                    |         |                |  |   |          
|                                                                        | Dividends reinvested for common stock                               |  | $                  | 731,274 |                |  | $ |          | 
|                                                                        |                                                                     |  |                    |         |                |  |   |          
|                                                                        | Mortgage loans held for investment transferred to real estate owned |  | $                  |        |                |  | $ | 2,665,564 | 
|                                                                        |                                                                     |  |                    |         |                |  |   |          



| |  | The accompanying notes are an integral part of these statements.
| |  | ----------------------------------------------------------------




SPECIALTY MORTGAGE TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)

NOTE 1. THE COMPANY

Specialty Mortgage Trust, Inc. (the Company or SMT) is a Maryland
corporation, which acquires and holds mortgage loans secured by property
located in Nevada, Arizona, California, Utah and Colorado. Our strategy is to
focus on land loans, construction loans, commercial building loans and
nonconforming single-family and small multifamily residential loans. SMT has
elected to be a real estate investment trust (REIT) under the Internal Revenue
Code of 1986, as amended. The mortgage loans are originated and serviced by
Specialty Financial (the Manager), a private mortgage finance business
operating in Nevada and wholly owned by Nello Gonfiantini III, SMTs President
and Chairman of the Board of Directors. SMT was incorporated on October 21,
1997 and began operations on January 31, 1998, following the closing of SMTs
initial private placement.

SMT has evaluated the applicability of SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which requires reporting business
segments and information, including how the segments are determined, products
and services provided, and changes in the measurement of segment accounting
from period to period. SMT operates as one business segment.

The accompanying financial statements for the three-month periods ended March
31, 2002 and 2001 are unaudited. In the opinion of management, all
adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of the Companys financial position and results of operations, for
such periods have been

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included. The accompanying unaudited financial statements should be read in
conjunction with the Companys audited financial statements for the years ended
December 31, 2001 and 2000 included in SMTs Form 10-K. The results for the
three months ended March 31, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002 or for any other
period.

NOTE 2. RECLASSIFICATIONS

The prior year financial statements reflected certain reclassifications, which
have no effect on net earnings, to conform to the classifications of the
current year.

NOTE 3. SUBSEQUENT EVENTS

On April 26, 2002, SMT filed a new registration statement covering the public
sale of up to $ 269,132,000 (including amounts remaining unsold under a prior
registration) of collaterized notes (the collaterized notes). The
registration statement was declared effective by the Securities and Exchange
Commission on May 7, 2002. This registration permits the issuance of
collaterized notes with maturities of up to five years. The collateralized
notes are secured by mortgage loans at least one and one-half times the
aggregate principal amount outstanding on the collateralized notes.

On April 29, 2002, the Company elected to establish a taxable REIT subsidiary,
Specialty Acquisition Corporation. Specialty Acquisition Corporation was
formed to enable the Company to complete transactions related to the real
estate owned properties.

On April 29, 2002, the Board of Directors elected to change the name of
Specialty Mortgage Trust to Specialty Trust.

NOTE 4. COLLATERALIZED NOTES

On January 18, 2001, the Companys initial registration statement covering the
public sale of up to $250,000,000 of collateralized notes was declared
effective by the Securities and Exchange Commission. The outstanding
collateralized notes have maturities ranging from one month to twelve months
from the date of issue and bear a fixed rate of interest (3.25% to 7.50% at
March 31, 2002 and 4.50% to 8.00% at December 31, 2001). The effective yield of
collateralized notes outstanding at March 31, 2002 and December 31, 2001 and
was 4.80% and 6.93%, respectively. At March 31, 2002 and December 31, 2001,
the collateralized notes were secured by $17,677,498 and $19,401,620,
respectively, of mortgage loans pledged as collateral, respectively.

There are several related parties who held collaterized notes with SMT. As of
March 31, 2002 and December 31, 2001, they owned approximately $735,000 and
$1,080,000 in collaterized notes, which represented approximately 6.5% and
11.4% of the total balance, respectively.

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NOTE 5. DELINQUENT LOANS

At March 31, 2002, the Company had three delinquent loans of 90 days or more
with a principal balance totaling approximately $1.9 million delinquent in
principal and interest payments and were in the process of foreclosure
proceedings. The average loan to value on these loans was 61% and the Company
has recorded a specific allowance of $61,198 at March 31, 2002. Accrued
interest on these loans at March 31, 2002 was approximately $20,000.
Management has evaluated the collectability of the loans in light of the types
and dollar amounts of the loans in the portfolio, adverse situations that may
affect the borrowers ability to repay, prevailing economic conditions and the
underlying collateral securing the loan. Accordingly, the Companys management
has recorded an allowance for loan losses based upon these factors.

NOTE 6. REAL ESTATE OWNED (HELD FOR SALE)

Real estate owned includes real estate acquired through foreclosure and is
carried at the lower of the recorded investment in the loan, inclusive of any
senior indebtedness, or the propertys estimated fair value, less estimated
costs to sell.

In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-lived Assets and Long-lived Assets to Be
Disposed Of, the Company records assets at the lower of carrying amount or fair
value less cost to sell.

On March 31, 2002, the Companys real estate owned totaled $3,278,587. The
properties owned consisted of 15 finished residential lots, 102 undeveloped
lots and 1 office buildings, which were transferred from mortgage loans to real
estate owned upon foreclosure.

NOTE 7. RELATED PARTY

On October 23, 1997, SMT entered into a Management Agreement with the Manager.
The Manager is responsible for the day-to-day operations of SMT and will
perform such services and activities relating to the assets and operations of
SMT as are provided for in the Management Agreement. The Manager originates
the mortgage loans in the name of the Manager, and sells the loans to SMT. The
Manager retains the servicing of the mortgage loans.

The Manager receives the mortgage placement fees or points, usually charged to
the borrower for and upon origination, extension or refinancing of loans, up to
2.5% of the loan balance with any additional fees or points paid to SMT
effectively discounting the purchase price of the loan from the Manager. The
Manager will also receive a fee for loan servicing equal to one-half of one
percent per annum of the total mortgage loans serviced and any late payment
charges. These fees are earned directly by the Manager and deducted from the
interest or late payments to cover costs to manage the portfolio, effectively
reducing the yield to SMT. In addition, the Manager will receive, as incentive
compensation for each fiscal quarter, an amount equal to 50% of the taxable net
income before the dividend deduction of SMT in excess of an annualized return
to SMT equal to 12%. For the quarters ended March 31, 2002 and 2001, the
Manager earned the following:

|                                    |  |      |         |      |  |   |        | 
|----------------------------------- |  | ---- | ------- | ---- |  | - | ------ | 
|                                    |  | 2002 |         | 2001
|                                    |  |      |         |     
|Loan origination and
extension fees |  | $    | 353,050 |      |  | $ | 70,631 | 
|Loan servicing fees                 |  |      | 88,093  |      |  |   | 61,229 | 
|Late payment charges                |  |      | 5,315   |      |  |   | 4,101  | 
|Incentive compensation bonus        |  |      |        |      |  |   | 30,299 | 

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Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operation

The following discussion should be read in conjunction with the Financial
Statements and Notes.

Safe Harbor Statement

Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Statements in this discussion regarding Specialty Mortgage Trust, Inc.,
and our business, which are not historical facts are forward-looking
statements that involve risks and uncertainties. For a discussion of such
risks and uncertainties, which could cause actual results to differ from those
contained in the forward-looking statements, we refer you to Risk Factors
commencing on Page 13 of our Prospectus included in the Registration Statement
on Form S-11 (File No. 333-44860) relating to our collateralized investment
notes.

Company Overview

The Company is a mortgage finance company specializing in acquiring
nonconforming residential and commercial real estate mortgage loans for the
purpose of holding the loans in its portfolio. We fund our loans chiefly
through equity and to a lesser degree with short-term debt. This short-term
debt is in the form of secured bank lines of credit or collateralized notes.

Our business objective and strategy is to build and hold a portfolio of
mortgage loans for investment that generates net income for distribution to
stockholders. Loans are made principally to borrowers in the States of Nevada,
Arizona, California, Utah, and Colorado whose needs are generally not being
served by traditional financial institutions. Our strategy is to focus on land
loans, construction loans, commercial building loans and nonconforming
single-family and small multifamily residential loans. We generally limit the
amount of our investment in any single mortgage loan or in mortgage loans to
one borrower to $5 million, although the board of directors may approve
exceptions. Most loans will have terms of two to three years. Our mortgage
loans may be secured by mortgages on unimproved as well as improved real
property and non-income producing as well as income-producing real property.
Some mortgage loans may be secured by borrowers leasehold interest in real
property. Our loans generally produce higher yields than are obtained on
traditional single-family residential mortgage loans, but are subject to higher
risks of default and loss.

We are structured as a real estate investment trust (REIT), thereby generally
eliminating federal taxes at the corporate level on income we distribute to
stockholders. Because we are not structured as a traditional lender that
accepts deposits, we are subject to substantially less regulatory oversight and
incur lower compliance expenses compared to banks, thrifts and many other
holders of mortgage loans.

Specialty Financial, serves as our manager and is responsible for loan
originations, loan servicing and our day-to-day operations, subject to the
supervision of our board of directors.

Significant Aspects of First Quarter 2002 and Year End 2001

At March 31, 2002, we owned approximately $73.9 million of mortgage loans and
approximately $3.3 million of real estate owned. Our total assets were
approximately $79.0 million. The assets were financed with approximately $11.2
million of recourse short-term debt, and approximately $67.6 million of common
equity.

As of March 31, 2002, our equity-to-assets ratio was 85.6% and our
debt-to-equity ratio was 16.9%. For the quarter ended March 31, 2002, our
annualized return on equity was 10.8%.

At December 31, 2001, we owned approximately $73.3 million of mortgage loans.
Our total assets were approximately $76.7 million. The assets were financed
with approximately $9.5 million in recourse short-term debt, approximately
$65.0 million of common equity.

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As of December 31, 2001, our equity-to-asset ratio was 84.7%; our
debt-to-equity ratio was 18.0%, and our average return on equity for the year
ended December 31, 2001 was 11.0%.

The increase in assets was the result of additional cash received from
operating activities and cash received from the collaterized notes program. In
addition, the outstanding balance of mortgage loans increased by approximately
$600,000. The decrease in liabilities was the result of dividends not being
declared until after quarter end, whereas at December 31, 2001 the dividend
payable totaled approximately $2.0 million, of which approximately $731,000 was
reinvested subsequent to December 31, 2001. This was offset against the
increase in the collaterized note program. The increase in stockholders
equity was due to dividends for the first quarter not being declared until the
second quarter of 2002. In addition, the increase was also a result of
stockholders reinvesting dividends from earnings in the dividend reinvestment
program for the dividends declared on December 31, 2001 and paid in January of
2002.

Changes in Financial Condition

Assets

Cash and Cash Equivalents. Cash and cash equivalents increased by
approximately $1.9 million (3245%) as of March 31, 2002, compared to December
31, 2001. The timing of loan funding and the timing of debt or equity issues
generally determine the amount of cash held by the Company. It is our goal to
keep cash invested in loans or other financial instruments and therefore keep
cash balances low whenever possible.

Real Estate Owned.Real estate owned increased by approximately $50,000 (2%)
as of March 31, 2002, compared to December 31, 2001. Real estate owned
represents property, which was acquired through foreclosure. As of March 31,
2002, Specialty Mortgage Trust had foreclosed on two loans. These properties
are in various stages of development. As of March 31, 2002, the property
includes 15 unfinished residential lots that are for sale, 102 undeveloped lots
that are tentatively mapped and will be fully developed and offered for sale,
and 1 office building that is for sale.

Mortgage Loans.Mortgage loans held for investment net of allowance for loan
losses increased by approximately $456,000 (1%) as of March 31, 2002, compared
to December 31, 2001. This increase in mortgage loans was due primarily to new
loans being underwritten and funded faster than loans were maturing.

Liabilities

Dividends Payable.Dividends payable decreased by approximately $2 million
(100%) as of March 31, 2002, compared to December 31, 2001. Due to our REIT
status the Board of Directors must declare dividends in the fourth quarter for
the remaining earnings for the year. Therefore, this dividend carries over the
fiscal year end and was paid in January 2002.

Collateralized Notes.On March 31, 2002, collateralized notes increased $1.8
million (19%) over December 31, 2001 primarily because the notes could be
offered at a lower interest rate than the interest rates on our lines of credit
to fund loans. Our collateralized notes were approved for public sale January
19, 2001.

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Results of Operations

The rate volume analysis set forth in the following table analyzes changes in
net interest income for the periods indicated by their rate and volume
components.

|                 |                               |       |   |                    |         |      |  |          |          |   |   |         |         | 
|---------------- | ----------------------------- | ----- | - | ------------------ | ------- | ---- |  | -------- | -------- | - | - | ------- | ------- | 
|                 |                               |       |   | Three Months Ended
|                 |                               |       |   | March 31, 2002    
|                 |                               |       |   | Over/Under        
|                 |                               |       |   | March 31, 2001    
|                 |                               |       |   |                   
|                 |                               |       |   | Net                |         |      |  |          |          |   |   |        
|                 |                               |       |   | Change             |         | Rate |  | Volume  
|                 |                               |       |   |                    |         |      |  |         
|Interest Income  |                               |       |   |                    |         |      |  |          |          |   |   |        
|                 | Mortgage Loans                |       | $ | 391,602            |         |      |  | ($74,992 | )        |   | $ | 466,594 |        
|                 | Cash Accounts                 |       |   | 25,784             |         |      |  | (54,974  | )        |   |   | 80,758  |        
|                 |                               |       |   |                    |         |      |  |          |          |   |   |         |        
|                 |                               | Total |   |                    | 417,386 |      |  |          | (129,966 | ) |   |         | 547,352 | 
|                 |                               |       |   |                    |         |      |  |          |          |   |   |        
|Interest Expense |                               |       |   |                    |         |      |  |          |          |   |   |        
|                 | Line of Credit                |       |   | (39,578            | )       |      |  | (903     | )        |   |   | (38,675 | )      
|                 | Collateralized Notes          |       |   | (3,416             | )       |      |  | (65,045  | )        |   |   | 61,629  |        
|                 |                               |       |   |                    |         |      |  |          |          |   |   |         |        
|                 |                               | Total |   |                    | (42,994 | )    |  |          | (65,948  | ) |   |         | 22,954  | 
|                 |                               |       |   |                    |         |      |  |          |          |   |   |        
|                 | Change in net
interest income |       | $ | 460,380            |         |      |  | (64,018  | )        |   | $ | 524,398 |        
|                 |                               |       |   |                    |         |      |  |          |          |   |   |        

Our operating results include all of the reported income of our mortgage
finance operation. The comparison of the three months ended March 31, 2002 to
the three months ended March 31, 2001 is as follows:

Interest Income, Mortgage Assets.Interest income increased approximately
$400,000 (23%) for the three months ended March 31, 2002, as compared to the
comparable prior year period. This increase was due primarily to additional
funds invested in mortgage loans as a result of increased cash available from
dividend reinvestments during the period and the use of short-term borrowings
to fund a corresponding increase in loan demand, which was offset by a decrease
in interest rates.

Total Interest Expense.Interest expense decreased by approximately $43,000
(22%) for the three months ended March 31, 2002, as compared to the comparable
prior year period. The decrease was primarily due to the Companys limited use
of the line of credit and the associated decrease in interest rates. The
decrease in the line of credit use was offset by the Company utilizing its
ability to issue collaterized notes.

Total Expenses.Total expenses decreased by approximately $11,000 (10%) for
the three months ended March 31, 2002 as compared to the comparable prior year
period. This change was primarily due to a decrease in advertising expenses
and foreclosure fees. In addition, the Manager did not earn the management
incentive fee paid by the Company related to its operations during the first
quarter. This decrease was offset by an increase in professional fees paid in
conjunction with SEC reporting. General and Administrative expenses are a
small portion of our net revenues since the Manager pays for most expenses
directly.

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Interest Rate/Market/Credit Risk

We seek to manage the interest rate, credit and market risk of our portfolio.
By originating short-term loans (generally less than three years), we can
significantly reduce the risk of changing interest rates. Additionally, we
continue to stress the quality of our borrowers through our underwriting
guidelines and loss mitigation through our servicing procedures. In this way
we seek to control credit risk. Although the majority of our loans are in the
state of Nevada, we are beginning to acquire loans in Arizona, California,
Utah, and Colorado. This will help diversify the portfolio and reduce the risk
of investing in one market.

The following table sets forth the weighted average yield earned on our assets
and the weighted average expense of our liabilities for the periods shown.

|                 |                |                      |                     |       |                    |      |         |       |      |      |  
|---------------- | -------------- | -------------------- | ------------------- | ----- | ------------------ | ---- | ------- | ----- | ---- | ---- | -
|                 |                |                      |                     |       | Annualized        
|                 |                |                      |                     |       | Three Months Ended
|                 |                |                      |                     |       |                   
|                 |                |                      |                     |       | 3/31/02            |      | 3/31/01
|                 |                |                      |                     |       |                    |      |        
|Interest Income  |                |                      |                     |       |                    |      |         |      
|                 | Mortgage Loans |                      |                     | 12.40 | %                  |      |         | 12.84 | %   
|                 |                | Cash Accounts        |                     |       | 1.64               | %    |         |       | 5.12 | %   
|Interest Expense |                |                      |                     |       |                    |      |         |      
|                 |                | Line of Credit       |                     |       | 4.76               | %    |         |       | 9.16 | %   
|                 |                | Collateralized Notes |                     |       | 5.60               | %    |         |       | 7.96 | %   
|                 |                |                      | Net Interest Spread |       |                    | 5.88 | %       |       |      | 4.64 | %

Liquidity and Capital Resources

We manage our short-term liquidity (that is, our funding needs to cover
commitments and anticipated uses occurring over the next 12 months) in a number
of ways. First, the scheduled interest payments from our mortgage portfolio
produce monthly cash flow, which can be used to originate new loans or to pay
dividends to stockholders. This source provides approximately $7.3 million on
an annual basis. We generally have the ability to apply this cash flow as
needed.

Secondly, the payoff and prepayment of loans provides additional liquidity to
our portfolio. Historically, we have experienced annual loan payoffs and
prepayments of approximately 30% to 35% of our outstanding portfolio. Since our
loan terms are usually one to three years, the rate of principal payoffs is
significant. With a current portfolio of approximately $73.9 million we would
anticipate annual cash flows from principal pay downs of approximately $25.9
million. As we continue to issue collateralized notes, our portfolio will
increase as will the cash flow from principal pay downs. Again, normally these
funds are used to originate new mortgage loans, but can be used in other ways.

Thirdly, we have the ability to issue collaterized notes to provide additional
liquidity to our portfolio. As of May 7, 2002, we are able to offer
collaterized notes with maturities of up to five years. Although not a
committed source, we can utilize collaterized notes to meet a portion of our
short-term funding needs under normal market conditions.

Lastly, we have two committed lines of credit with commercial banks to provide
another level of liquidity. We can borrow up to $5.0 million on one of the
lines to provide funding for new loans and $3.0 million on the other, for an
aggregate of $8.0 million. Both lines of credit extend through July 1, 2002.
Both of the lines are

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collateralized by mortgage loans and borrowings under the lines bear interest
at the applicable banks prime or reference rate. We are required to comply
with various operating and financial covenants in the lines. Such covenants
include restrictions on (i) any change in business activities from those we are
presently engaged in, and (ii) any change in executive and management personnel
that would result in reduced qualifications and experience compared to present
personnel. Such covenants also contain requirements for (i) minimum tangible
net worth, and (ii) maximum debt-to-equity ratio. We are in compliance with
these covenants. The Company did not have an outstanding balance on these
lines of credit as of March 31, 2002 and December 31, 2001.

We believe the combination of these sources of capital allows us to manage our
short-term liquidity needs in virtually any business situation and thereby
efficiently use our capital resources.

With respect to our long-term liquidity (funding needs during periods beyond
the next 12 months), our only commitments that require funding are those
arising from our construction loans. We do not have any commitments for
material capital expenditures or payments due on long-term debt obligations.
We believe the same sources we rely on for short-term liquidity needs will be
sufficient to fund our long-term needs as well.

Risk Management and the Allowance for Loan Losses

The loan portfolio is the Companys primary asset subject to credit risk. To
reflect this credit risk, the Company sets aside an allowance or reserve for
credit losses through periodic changes to earnings. These charges are shown in
the Companys Statement of Earnings as provision for loan losses. Credit risk
is managed and monitored through the use of lending standards, a thorough
review of potential borrowers, and an on-going review of payment performance.
Asset quality administration, including early identification of problem loans
and timely resolution of problems, further enhances management of credit risk
and minimization of loan losses. All specifically identifiable and qualifiable
losses are immediately charged off against the allowance. Charged-off loans
are subject to periodic review, and specific efforts are taken to achieve
maximum recovery of principal and interest.

Management reviews the adequacy of the Allowance for Loan Losses on a quarterly
basis to determine whether the allowance is adequate to provide for probable
losses inherent in the loan portfolio as of the balance sheet date. Valuation
of the adequacy of the allowance for loan losses is based primarily on
managements periodic assessment and grading of the loan portfolio as described
below. Additional factors considered by management include the consideration
of past loan loss experience, trends in past due and nonperforming loans, risk
characteristics of the various classifications of loans, current economic
conditions, the fair value of underlying collateral, and other regulatory or
legal issues that could affect credit losses.

Loans are initially graded when originated. They are re-graded on a quarterly
basis and numerous factors are considered such as renewal, loans to the same
borrower, identified facts demonstrating heightened risk of nonpayment, or if
they have become delinquent. The loan review, or grading process attempts to
identify and measure problem and watch list loans. Problem loans are those
loans with higher than average risk with workout and/or legal action probable
within one year. These loans are reported quarterly to the directors for
action to be taken. Watch list loans are those loans considered as having
weakness detected in character, capacity to repay or balance sheet concerns and
prompt management to take corrective action at the earliest opportunity.
Problem and watch list loans generally exhibit one or more of the following
characteristics:



| |  |  | Adverse financial trends and condition                                               
| | - |  | -------------------------------------------------------------------------------------
|
| |  |  | Decline in the entire industry                                                       
|
| |  |  | Managerial problems                                                                  
|
| |  |  | Customers failure to provide financial information or other collateral documentation
|
| |  |  | Repeated delinquency, overdrafts or renewals.                                        

The loan review process reviews every significant problem credit and
assessments are performed quarterly to confirm the risk rating to that credit,
proper accounting and the adequacy of loan loss reserve assigned.

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After reviewing the loan portfolio, management will allocate or assign a
portion of the allowance for loan loss to groups of loans and individual loans
to cover managements estimate of probable loss. Allocation is related to the
grade of the loan and includes a component resulting from the application of
the measurement criteria of Statements of Financial Accounting Standards No 114
(SFAS 114) Accounting by Creditors for Impairment of a Loan and No 118 (SFAS
118) Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures. Management then compares the amounts allocated for probable
losses to the current allowance. To the extent that the current allowance is
insufficient to cover managements best estimate of probable losses, management
records additional provision for credit loss. If the allowance is greater than
required at that point in time, provision expense is adjusted accordingly.

While management uses available information to recognize losses on loans,
future adjustments to the allowance for loan loss may be necessary based on
changes in economic conditions and the impact of such changes on the Companys
borrowers.

Consistent with US GAAP and with the methodologies used in estimating the
unidentified losses in the loan loss portfolio, the allowance for loan loss
consists of two components as discussed below.

First the allowance includes a component resulting from the application of the
measurement criteria of SFAS 114 and SFAS 118.

The second or unallocated component of the allowance for loan loss is a
component that is intended to absorb losses that may not be provided for by the
first component. The primary reason that the first component discussed above
might not be sufficient to absorb the losses present in portfolios, and the
unallocated portion of the allowance for loan loss is used to provide for the
losses that have occurred is because there are limitations to any credit risk
grading process. Even for experienced loan reviewers, grading loans and
estimating losses involves a significant degree of judgment regarding the
present situation with respect to individual loans and the portfolio as a
whole. In addition, it is possible that grading and loan review may be done
without knowing whether all relevant facts are at hand. For example, troubled
borrowers may inadvertently or deliberately omit important information from
correspondence with lending officers regarding their financial condition and
the diminished strength of repayment sources.

While there exists probable asset quality problems in the loan portfolio,
management believes sufficient reserves have been provided in the allowance for
loan loss to absorb probable losses in the loan portfolio at March 31, 2002.

Non-Performing Loans

The accrual of interest income is discontinued when a loan becomes 90 days past
due as to principal or interest. If collectibility is in doubt, cash receipts
on non-accrual loans are used to reduce principal rather than recorded as
interest income.

Real Estate Owned

Real estate owned includes real estate acquired through foreclosure and is
carried at the lower of the recorded investment in the loan, inclusive of any
senior indebtedness, or the propertys estimated fair value, less estimated
costs to sell. Expenses related to the improvement of the fair market value of
the property are capitalized. All other expenses are expensed.

In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be
Disposed of, the Company periodically compares the carrying value of real
estate to expected future cash flows for the purpose of assessing the
recoverability of the recorded

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amounts. If the carrying value exceeds future cash flows, the assets are
reduced to fair value. There were no required reductions to the carrying value
of real estate owned for the three months ended March 31, 2002.

On March 31, 2002, our real estate owned totaled $3,278,587. The properties
owned consist of 15 finished residential lots, 102 undeveloped lots
and 1
office building, which were transferred from mortgage loans to real estate
owned upon foreclosure.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk includes risks that arise from changes in interest rates, foreign
currency exchange rates, commodity prices, equity prices and other market
changes that affect market sensitive instruments. We are a party to various
financial instruments that are subject to market risk. These instruments
include commercial mortgage loans, land loans, nonconforming single-family and
small multifamily residential mortgage loans, lines of credit and
collateralized notes. Our financial instruments involve elements of interest
rate risk. Our loan portfolio is also subject to real estate market risk.

None of our financial instruments have been entered into for trading purposes.
We have not entered into, nor do we intend to enter into, any financial
instruments for trading or speculative purposes. As we have no investments
outside of the United States, we are not subject to foreign currency exchange
rate risk. We do not hedge our exposure to changes in the fair value of our
loans through the use of derivative instruments. Instead, we have managed these
exposures through careful underwriting and servicing of our loans. Further, we
target as potential customers borrowers with relatively significant equity
value in their property.

Loans provide for either monthly payments of interest only and a payment of
principal in full at the end of the loan term, principal and interest payments
with a balloon payment at the end of the loan term, or interest only with
principal payments upon lot releases and principal in full at the end of the
loan term. Because of the high yield of our loans, we do not believe that a
10% increase or decrease in general interest rates (from those prevailing at
March 31, 2002) would have a significant impact on the fair value of our fixed
rate loan portfolio. A significant increase in interest rates could, however,
make it more difficult for our borrowers to sell or refinance their respective
properties. This could have a material adverse effect on us, either through
loan defaults or the need to grant extensions of the maturity dates, thereby
delaying repayment. Additionally, a real estate market decline in Nevada,
Arizona or California could have a material adverse impact on us. If real
estate values were to decline, borrowers might find it difficult, if not
impossible, to repay some or all of the principal and accrued interest in
connection with a sale or refinancing of the underlying properties. A number of
factors could lead to a real estate market decline including, but not limited
to, a slowdown in the growth of the economy, increasing commercial interest
rates and supply and demand factors. It is not possible for us to quantify the
potential loss in earnings or cash flows that might result from a real estate
market decline.

We have attempted to mitigate these risk exposures by carefully underwriting
and servicing our loans. The underwriting decision to provide a loan to an
applicant is based primarily upon the loan-to-value ratio for the underlying
collateral. Thereafter, our manager uses early intervention, aggressive
collection and loss mitigation techniques in the servicing process. While we
have attempted to mitigate these risk exposures, there can be no assurance that
these efforts will be successful.

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PART II. OTHER INFORMATION




Item 1. Legal Proceedings.

| |                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At March 31, 2002, other than litigation by the Company in the
ordinary course of business involving foreclosures or other exercise
of its rights as a creditor, there were no material pending
proceedings to which the Company was a party or of which any of its
property was subject




Item 2. Changes in Securities and Use of Proceeds.

None




Item 3. Defaults Upon Senior Securities.

Not applicable




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

None




Item 5. Other Information.

None

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Item 6. Exhibits and Reports on Form 8-K.

(a)  Exhibits

|            |  |                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Document                                                                                                
|            |  |                                                                                                         
|3.1*        |  | Articles of Incorporation                                                                               
|3.2*        |  | Articles Supplementary                                                                                  
|3.2a**      |  | Articles of Amendment of Articles Supplementary                                                         
|3.3*        |  | Bylaws                                                                                                  
|3.3.1*      |  | Amendment to Bylaws                                                                                     
|11          |  | Statement Regarding Computation of per
share earnings for the three months ended March 31, 2002
and 2001



---

|*  |  | Incorporated by reference to the correspondingly
numbered exhibit to the Registration Statement on Form S-11
(Registration No. 333-44860) filed by Specialty Mortgage Trust,
Inc. with the Securities and Exchange Commission on August 30,
2000.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|** |  | Incorporated by reference to the correspondingly
numbered exhibit to the Form 10-Q filed by Specialty Mortgage
Trust, Inc. with the Securities and Exchange Commission on
August 14, 2001.                                                       



|(b) |  | Reports on Form 8-K
|--- |  | -------------------

None

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##### Table of Contents






SIGNATURES

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

|                    |                                                          | 
|------------------- | -------------------------------------------------------- | 
|                    | SPECIALTY MORTGAGE TRUST, INC.                          
|                   
|Dated: May 10, 2002 | By:                                                      | 
|                    |                                                         
|                    | Nello Gonfiantini III
Chairman, President, and Secretary



| | (Signed in the capacity of (i) duly
authorized officer of the registrant
| | ------------------------------------------------------------------------

|                    |                                              | 
|------------------- | -------------------------------------------- | 
|Dated: May 10, 2002 | By:                                          | 
|                    |                                             
|                    | Stephanie S. Schmitt
Chief Financial Officer



| | (Signed in the capacity of (i) duly
authorized officer of the registrant and
(ii) principal Financial Officer of the
registrant)
| | --------------------------------------------------------------------------------------------------------------------------------

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SPECIALTY MORTGAGE TRUST, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11

|        |                                                                                                         |  |   |                              |  |      |   |           |  | 
|------- | ------------------------------------------------------------------------------------------------------- |  | - | ---------------------------- |  | ---- | - | --------- |  | 
|        |                                                                                                         |  |   | Three Months Ended March 31,
|        |                                                                                                         |  |   |                             
|        |                                                                                                         |  |   | 2002                         |  | 2001
|        |                                                                                                         |  |   |                              |  |     
|Basic   |                                                                                                         |  |   |                              |  |      |   |          
|        | Average Common Shares Outstanding                                                                       |  |   | 6,908,716                    |  |      |   | 334,732   | 
|        | Net Earnings Attributable to Common Stock                                                               |  | $ | 1,782,345                    |  |      | $ | 1,305,400 | 
|        | Per Share Amount                                                                                        |  | $ | 0.26                         |  |      | $ | 3.90      | 
|Diluted |                                                                                                         |  |   |                              |  |      |   |          
|        | Average Common Shares Outstanding                                                                       |  |   | 6,908,716                    |  |      |   | 334,732   | 
|        | Average Preferred Shares Outstanding                                                                    |  |   |                             |  |      |   | 4,671,632 | 
|        | Net effect of dilutive stock options outstanding
during the period  based on the treasury
stock method |  |   | 54,093                       |  |      |   | 29,428    | 
|        |                                                                                                         |  |   |                              |  |      |   |          
|        | Total                                                                                                   |  |   | 6,962,809                    |  |      |   | 5,035,792 | 
|        | Net Earnings Attributable to Common Stock                                                               |  | $ | 1,782,345                    |  |      | $ | 1,305,400 | 
|        | Per Share Amount                                                                                        |  | $ | 0.26                         |  |      | $ | 0.26      | 

20