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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: September 30, 2003

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: 333-86972

SPECIALTY TRUST, INC.

(Formerly Specialty Mortgage Trust, Inc.)  (Exact name of Registrant as specified in its Charter)


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

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

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

|Yes [   ] |  | No [X]
|--------- |  | ------

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) |  | 7,682,409 as of November 12, 2003
|----------------------------- |  | ---------------------------------

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TABLE OF CONTENTS



|                              |                                                                                              |                                                                                                                 |  |  |  |  |  | 
|----------------------------- | -------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM I. FINANCIAL STATEMENTS                                                                
|                              |                                                                                              | SPECIALTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS                                             
|                              |                                                                                              | SPECIALTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS                                     
|                              |                                                                                              | SPECIALTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
|                              |                                                                                              | SPECIALTY TRUST, INC. AND SUBSIDIARIES CONSOLIDATED 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                          
|                              | ITEM 4. CONTROLS AND PROCEDURES.                                                            
|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                   
|Exhibit 31.1                 
|Exhibit 31.2                 
|Exhibit 32.1                 
|Exhibit 32.2                 



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INDEX

|       |  |                                                                                                                                                            |  |      |    | 
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|       |  |                                                                                                                                                            |  | Page
|       |  |                                                                                                                                                            |  |     
|       |  | PART I. FINANCIAL INFORMATION                                                                                                                              |  |      |    | 
|Item 1 |  | Financial Statements  Specialty Trust, Inc. (Unaudited)                                                                                                   |  |      | 3  | 
|       |  | Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002                                                                                 |  |      | 3  | 
|       |  | Consolidated Statements of Earnings for the Three and Nine months
Ended September 30, 2003 and 2002                                                        |  |      | 4  | 
|       |  | Consolidated Statements of Stockholders Equity and Comprehensive
Income for the Nine months Ended September 30, 2003 and the Year
Ended December 31, 2002 |  |      | 5  | 
|       |  | Consolidated Statements of Cash Flows for the Nine months
Ended September 30, 2003 and 2002                                                                |  |      | 6  | 
|       |  | Notes to Consolidated Financial Statements                                                                                                                 |  |      | 8  | 
|Item 2 |  | Managements Discussion and Analysis of Financial Condition And
Results of Operations                                                                      |  |      | 19 | 
|Item 3 |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                 |  |      | 31 | 
|Item 4 |  | Controls and Procedures                                                                                                                                    |  |      | 32 | 
|       |  | PART II. OTHER INFORMATION                                                                                                                                 |  |      |    | 
|Item 1 |  | Legal Proceedings                                                                                                                                          |  |      | 32 | 
|Item 2 |  | Changes in Securities and Use of Proceeds                                                                                                                  |  |      | 32 | 
|Item 3 |  | Defaults Upon Senior Securities                                                                                                                            |  |      | 32 | 
|Item 4 |  | Submission of Matters to a Vote of Security Holders                                                                                                        |  |      | 32 | 
|Item 5 |  | Other Information                                                                                                                                          |  |      | 32 | 
|Item 6 |  | Exhibits and Reports on Form 8-K                                                                                                                           |  |      | 33 | 

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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM I. FINANCIAL STATEMENTS




SPECIALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                                                                            |                                            |   |                    |             |                   |   |            |            | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------------ | ----------- | ----------------- | - | ---------- | ---------- | 
|                                     |                                                                                                                                                                                                            |                                            |   | September 30, 2003 |             | December 31, 2002
|                                     |                                                                                                                                                                                                            |                                            |   |                    |             |                  
|                                     |                                                                                                                                                                                                            |                                            |   | (UNAUDITED)       
|ASSETS                              
|ASSETS                              
|                                     | Cash and Cash Equivalents                                                                                                                                                                                  |                                            | $ | 43,680             |             |                   | $ | 92,684     |           
|                                     | Accrued Interest Receivable                                                                                                                                                                                |                                            |   | 1,141,782          |             |                   |   | 1,123,865  |           
|                                     | Accounts Receivable                                                                                                                                                                                        |                                            |   | 36,477             |             |                   |   | 11,996     |           
|                                     | Land Held for Residential Development                                                                                                                                                                      |                                            |   | 2,422,749          |             |                   |   | 2,448,579  |           
|                                     | Real Estate Owned (Held for Sale)                                                                                                                                                                          |                                            |   | 7,643,769          |             |                   |   | 950,000    |           
|                                     | Mortgage Loans Held for Investment, Net of
Allowance for Loan Losses of $1,522,507 and $1,815,576 and
Unearned Discount of $128,037 and $120,489 at September 30,
2003 and December 31, 2002, Respectively |                                            |   | 97,284,342         |             |                   |   | 94,309,329 |           
|                                     | Other Assets                                                                                                                                                                                               |                                            |   | 545,004            |             |                   |   | 387,143    |           
|                                     |                                                                                                                                                                                                            |                                            |   |                    |             |                   |   |           
|                                     |                                                                                                                                                                                                            | Total Assets                               |   | $                  | 109,117,803 |                   |   | $          | 99,323,596 | 
|                                     |                                                                                                                                                                                                            |                                            |   |                    |             |                   |   |            |           
|LIABILITIES AND STOCKHOLDERS EQUITY
|LIABILITIES                          |                                                                                                                                                                                                            |                                            |   |                    |             |                   |   |           
|                                     | Dividends Payable                                                                                                                                                                                          |                                            | $ |                   |             |                   | $ | 2,154,901  |           
|                                     | Accounts Payable, Accrued Expenses and Other Liabilities                                                                                                                                                   |                                            |   | 262,778            |             |                   |   | 159,726    |           
|                                     | Accounts Payable  Related Party                                                                                                                                                                           |                                            |   | 127,652            |             |                   |   | 241,824    |           
|                                     | Accrued Interest Payable                                                                                                                                                                                   |                                            |   | 68,514             |             |                   |   | 37,523     |           
|                                     | Deferred Revenue                                                                                                                                                                                           |                                            |   | 120,400            |             |                   |   | 102,900    |           
|                                     | Lines of Credit                                                                                                                                                                                            |                                            |   | 5,965,000          |             |                   |   | 9,336,000  |           
|                                     | Collateralized Notes                                                                                                                                                                                       |                                            |   | 29,196,837         |             |                   |   | 19,074,906 |           
|                                     | Collateralized Notes - Related Party                                                                                                                                                                       |                                            |   | 393,883            |             |                   |   | 696,125    |           
|                                     |                                                                                                                                                                                                            |                                            |   |                    |             |                   |   |           
|                                     |                                                                                                                                                                                                            | Total Liabilities                          |   |                    | 36,135,064  |                   |   |            | 31,803,905 | 
|                                     |                                                                                                                                                                                                            |                                            |   |                    |             |                   |   |           
|STOCKHOLDERS EQUITY                 |                                                                                                                                                                                                            |                                            |   |                    |             |                   |   |           
|                                     | Common Stock; $0.01 Par Value; 50,000,000 Shares Authorized,
7,560,276 and 7,183,004 Shares Issued and Outstanding as of
September 30, 2003 and December 31, 2002, Respectively                            |                                            |   | 75,603             |             |                   |   | 71,830     |           
|                                     | Additional Paid-in Capital                                                                                                                                                                                 |                                            |   | 70,460,787         |             |                   |   | 67,447,861 |           
|                                     | Retained Earnings                                                                                                                                                                                          |                                            |   | 2,446,349          |             |                   |   |           |           
|                                     |                                                                                                                                                                                                            |                                            |   |                    |             |                   |   |           
|                                     |                                                                                                                                                                                                            | Total Stockholders Equity                 |   |                    | 72,982,739  |                   |   |            | 67,519,691 | 
|                                     |                                                                                                                                                                                                            |                                            |   |                    |             |                   |   |           
|                                     |                                                                                                                                                                                                            | Total Liabilities and Stockholders Equity |   | $                  | 109,117,803 |                   |   | $          | 99,323,596 | 
|                                     |                                                                                                                                                                                                            |                                            |   |                    |             |                   |   |           

The accompanying notes are an integral part of these unaudited statements.

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SPECIALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |         |           |           |           | 
|------------------------- | ---------------------------------------- | ----------------------------------------------------------------- | -------------------------------- | ------------ | --------- | ------------------ | --------- | ----------------- | --------- | --------- | --------- | -------- | --------- | --------- | --------- | ------- | --------- | --------- | --------- | 
|                          |                                          |                                                                   |                                  |              |           | Three Months Ended |           | Nine Months Ended
|                          |                                          |                                                                   |                                  |              |           |                    |           |                  
|                          |                                          |                                                                   |                                  |              |           | September 30,      |           | September 30,    
|                          |                                          |                                                                   |                                  |              |           |                    |           |                  
|                          |                                          |                                                                   |                                  |              |           | 2003               |           | 2002              |           | 2003      |           | 2002    
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |         
|                          |                                          |                                                                   |                                  |              |           | (UNAUDITED)        |           | (UNAUDITED)      
|Revenue                   |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|                          | Interest and Dividend Income:            |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |         |          
|                          |                                          | Mortgage Loans                                                    |                                  | $            | 2,905,338 |                    |           | $                 | 2,397,291 |           |           | $        | 8,651,667 |           |           | $       | 7,003,517 |          
|                          |                                          | Cash Accounts                                                     |                                  |              | 2         |                    |           |                   | 15,545    |           |           |          | 61        |           |           |         | 49,769    |          
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|                          |                                          |                                                                   | 2,905,340                        |              |           |                    | 2,412,836 |                   |           |           | 8,651,728 |          |           |           | 7,053,286 |        
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|Interest Expense:         |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|                          |                                          | Lines of Credit                                                   |                                  |              | 77,877    |                    |           |                   | 266       |           |           |          | 337,280   |           |           |         | 2,813     |          
|                          |                                          | Notes Payable                                                     |                                  |              | 475       |                    |           |                   | 1,796     |           |           |          | 3,371     |           |           |         | 3,121     |          
|                          |                                          | Collateralized Notes                                              |                                  |              | 373,128   |                    |           |                   | 208,417   |           |           |          | 956,369   |           |           |         | 543,645   |          
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|                          |                                          |                                                                   | Total Interest Expense           |              |           | 451,480            |           |                   |           | 210,479   |           |          |           | 1,297,020 |           |         |           | 549,579   |          
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|                          |                                          |                                                                   | Net Interest and Dividend Income |              |           | 2,453,860          |           |                   |           | 2,202,357 |           |          |           | 7,354,708 |           |         |           | 6,503,707 |          
|                          | Provision for Loan Losses, net           |                                                                   |                                  | (359,523     | )         |                    |           | 131,266           |           |           |           | 123,388  |           |           |           | 389,322 |          
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|                          |                                          | Net Interest and Dividend Income
After
 Provision for Loan Losses |                                  |              | 2,813,383 |                    |           |                   | 2,071,091 |           |           |          | 7,231,320 |           |           |         | 6,114,385 |          
|                          | Gain (Loss) on Sale of Real Estate Owned |                                                                   |                                  | 89,712       |           |                    |           |                  |           |           |           | (118,604 | )         |           |           |        |          
|                          | Other Income (Loss)                      |                                                                   |                                  | (36,853      | )         |                    |           | 3,559             |           |           |           | 15,391   |           |           |           | 85,167  |          
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|                          |                                          |                                                                   | Net Revenues                     |              |           | 2,866,242          |           |                   |           | 2,074,650 |           |          |           | 7,128,107 |           |         |           | 6,199,552 |          
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|Expenses                  |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|                          | General and Administrative               |                                                                   |                                  | 137,440      |           |                    |           | 100,300           |           |           |           | 393,166  |           |           |           | 349,404 |          
|                          | Manager and Directors Fees              |                                                                   |                                  | 108,395      |           |                    |           | 13,244            |           |           |           | 372,679  |           |           |           | 130,491 |          
|                          | Other Expenses                           |                                                                   |                                  | 174,058      |           |                    |           | 24,768            |           |           |           | 457,500  |           |           |           | 65,164  |          
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|                          |                                          |                                                                   | Total Expenses                   |              |           | 419,893            |           |                   |           | 138,312   |           |          |           | 1,223,345 |           |         |           | 545,059   |          
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|                          |                                          |                                                                   |                                  | NET EARNINGS |           | $                  | 2,446,349 |                   |           | $         | 1,936,338 |          |           | $         | 5,904,762 |         |           | $         | 5,654,493 | 
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|Basic Earnings per Share  |                                          | $                                                                 | 0.32                             |              |           | $                  | 0.27      |                   |           | $         | 0.80      |          |           | $         | 0.81      |        
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        
|Diluted Earning per Share |                                          | $                                                                 | 0.32                             |              |           | $                  | 0.27      |                   |           | $         | 0.79      |          |           | $         | 0.81      |        
|                          |                                          |                                                                   |                                  |              |           |                    |           |                   |           |           |           |          |           |           |           |        

The accompanying notes are an integral part of these unaudited statements.

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SPECIALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
(UNAUDITED)

|                                      |  |        |           |        |  |         |        |          |  |            |            |          |  |   |            |   |  |   |            |  
|------------------------------------- |  | ------ | --------- | ------ |  | ------- | ------ | -------- |  | ---------- | ---------- | -------- |  | - | ---------- | - |  | - | ---------- | -
|                                      |  |        |           |        |  |         |        |          |  | Additional |            |          |  |   |            |   |  |  
|                                      |  |        |           |        |  |         |        |          |  | Paid-in    |            | Retained |  |   |            |  
|                                      |  | Shares |           | Amount |  | Capital |        | Earnings |  | Total     
|                                      |  |        |           |        |  |         |        |          |  |           
|Balance, January 1, 2002              |  |        | 6,822,703 |        |  | $       | 68,227 |          |  | $          | 64,957,811 |          |  | $ |           |   |  | $ | 65,026,038 |  
|Net Earnings and Comprehensive Income |  |        |          |        |  |         |       |          |  |            |           |          |  |   | 7,144,707  |   |  |   | 7,144,707  |  
|Stock Options Exercised               |  |        | 32,684    |        |  |         | 327    |          |  |            | 104,267    |          |  |   |           |   |  |   | 104,594    |  
|Non-Employee Stock Options Expense    |  |        |          |        |  |         |       |          |  |            | 81,013     |          |  |   |           |   |  |   | 81,013     |  
|Dividends Reinvested in
Common Stock  |  |        | 327,617   |        |  |         | 3,276  |          |  |            | 3,600,514  |          |  |   |           |   |  |   | 3,603,790  |  
|Dividends Declared on
Common Stock    |  |        |          |        |  |         |       |          |  |            | (1,295,744 | )        |  |   | (7,144,707 | ) |  |   | (8,440,451 | )
|                                      |  |        |           |        |  |         |        |          |  |            |            |          |  |   |            |   |  |   |            |  
|Balance, December 31, 2002            |  |        | 7,183,004 |        |  | $       | 71,830 |          |  | $          | 67,447,861 |          |  | $ |           |   |  | $ | 67,519,691 |  
|Net Earnings and Comprehensive
Income |  |        |          |        |  |         |       |          |  |            |           |          |  |   | 5,904,762  |   |  |   | 5,904,762  |  
|Stock Options Exercised               |  |        | 19,402    |        |  |         | 194    |          |  |            | 46,814     |          |  |   |           |   |  |   | 47,008     |  
|Dividends Reinvested in
Common Stock  |  |        | 351,870   |        |  |         | 3,519  |          |  |            | 3,867,053  |          |  |   |            |   |  |   | 3,870,572  |  
|Stock
Granted to Board Members        |  |        | 6,000     |        |  |         | 60     |          |  |            | 65,940     |          |  |   |           |   |  |   | 66,000     |  
|Dividends Declared on
Common Stock    |  |        |          |        |  |         |       |          |  |            | (966,881   | )        |  |   | (3,458,413 | ) |  |   | (4,425,294 | )
|                                      |  |        |           |        |  |         |        |          |  |            |            |          |  |   |            |   |  |   |            |  
|Balance September 30, 2003            |  |        | 7,560,276 |        |  | $       | 75,603 |          |  | $          | 70,460,787 |          |  | $ | 2,446,349  |   |  | $ | 72,982,739 |  
|                                      |  |        |           |        |  |         |        |          |  |            |            |          |  |   |            |   |  |   |            |  

The accompanying notes are an integral part of these unaudited statements.

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SPECIALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                 |                                                                                     |                                             |                                                                         |                                           |         |                   |            |             |         |           |            |  
|------------------------------------------------ | ----------------------------------------------------------------------------------- | ------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------- | ------- | ----------------- | ---------- | ----------- | ------- | --------- | ---------- | -
|                                                 |                                                                                     |                                             |                                                                         |                                           |         | Nine Months Ended
|                                                 |                                                                                     |                                             |                                                                         |                                           |         | September 30,    
|                                                 |                                                                                     |                                             |                                                                         |                                           |         |                  
|                                                 |                                                                                     |                                             |                                                                         |                                           |         | 2003              |            | 2002       
|                                                 |                                                                                     |                                             |                                                                         |                                           |         |                   |            |            
|                                                 |                                                                                     |                                             |                                                                         |                                           |         | (UNAUDITED)      
|Cash Flows from Operating Activities             |                                                                                     |                                             |                                                                         |                                           |         |                   |            |            
|                                                 | Net Earnings                                                                        |                                             | $                                                                       | 5,904,762                                 |         |                   | $          | 5,654,493   |        
|                                                 | Adjustments to Reconcile Net Earnings to Net Cash
Provided by Operating Activities: |                                             |                                                                         |                                           |         |                   |            |             |        
|                                                 |                                                                                     | Amortization and Depreciation               |                                                                         |                                           | 40,030  |                   |            |             | 71,562  |          
|                                                 |                                                                                     | Provision for Loan Losses                   |                                                                         |                                           | 123,388 |                   |            |             | 389,322 |          
|                                                 |                                                                                     | Loss (gain) on Sale of Real Estate Owned    |                                                                         |                                           | 118,604 |                   |            |             | (56,292 | )        
|                                                 |                                                                                     | Amortization of Loan Fees on Mortgage Loans |                                                                         |                                           | (67,450 | )                 |            |             | (45,166 | )        
|                                                 |                                                                                     | Non-Cash Stock Compensation                 |                                                                         |                                           | 49,500  |                   |            |             | 70,422  |          
|                                                 |                                                                                     | Changes in Assets and Liabilities:          |                                                                         |                                           |         |                   |            |             |         |          
|                                                 |                                                                                     |                                             | Accounts Receivable                                                     |                                           |         | (24,481           | )          |             |         |          |           
|                                                 |                                                                                     |                                             | Accrued Interest Receivable                                             |                                           |         | (184,374          | )          |             |         | (64,035   | )         
|                                                 |                                                                                     |                                             | Other Assets                                                            |                                           |         | 8,694             |            |             |         | (85,553   | )         
|                                                 |                                                                                     |                                             | Deferred Loan Points                                                    |                                           |         | 75,000            |            |             |         |          |           
|                                                 |                                                                                     |                                             | Deferred Revenue                                                        |                                           |         | 17,500            |            |             |         |          |           
|                                                 |                                                                                     |                                             | Accounts Payable (Including Related Party) and Accrued Interest Payable |                                           |         | 19,871            |            |             |         | 29,644    |           
|                                                 |                                                                                     |                                             |                                                                         |                                           |         |                   |            |             |        
|                                                 |                                                                                     |                                             |                                                                         | Net Cash Provided by Operating Activities |         |                   | 6,081,144  |             |         |           | 5,964,397  |  
|                                                 |                                                                                     |                                             |                                                                         |                                           |         |                   |            |            
|Cash Flows from Investing Activities:            |                                                                                     |                                             |                                                                         |                                           |         |                   |            |            
|                                                 | Investment in Real Estate Owned                                                     |                                             |                                                                         | (105,120                                  | )       |                   |            |            |        
|                                                 | Investment in Land Held for Residential Development                                 |                                             |                                                                         | (166,090                                  | )       |                   |            | (199,919    | )      
|                                                 | Proceeds from Sale of Real Estate Owned                                             |                                             |                                                                         | 3,142,739                                 |         |                   |            | 446,710     |        
|                                                 | Proceeds from Sale of Land Held for Residential Development                         |                                             |                                                                         | 191,920                                   |         |                   |            | 565,943     |        
|                                                 | Purchase of Mortgage Loans Held for Investment                                      |                                             |                                                                         | (60,475,229                               | )       |                   |            | (37,741,681 | )      
|                                                 | Principal Repayments of Mortgage Loans Held for Investment                          |                                             |                                                                         | 47,560,743                                |         |                   |            | 34,458,740  |        
|                                                 |                                                                                     |                                             |                                                                         |                                           |         |                   |            |            
|                                                 |                                                                                     |                                             |                                                                         | Net Cash Used in Investing Activities     |         |                   | (9,851,037 | )           |         |           | (2,470,207 | )
|                                                 |                                                                                     |                                             |                                                                         |                                           |         |                   |            |            
|Cash Flows from Financing Activities:            |                                                                                     |                                             |                                                                         |                                           |         |                   |            |            
|                                                 | Proceeds from Common Stock Options Exercised                                        |                                             |                                                                         | 47,008                                    |         |                   |            | 106,095     |        
|                                                 | Cash Dividends Paid                                                                 |                                             |                                                                         | (2,709,623                                | )       |                   |            | (3,776,326  | )      
|                                                 | Net Payments on Lines of Credit                                                     |                                             |                                                                         | (3,371,000                                | )       |                   |            |            |        
|                                                 | Proceeds on Collateralized Notes                                                    |                                             |                                                                         | 13,755,235                                |         |                   |            | 10,984,292  |        
|                                                 | Interest Reinvested in Collateralized Notes                                         |                                             |                                                                         | 785,003                                   |         |                   |            | 483,888     |        
|                                                 | Principal Payments on Collateralized Notes                                          |                                             |                                                                         | (4,720,549                                | )       |                   |            | (4,920,090  | )      
|                                                 | Debt Issue Costs                                                                    |                                             |                                                                         | (65,185                                   | )       |                   |            | (102,123    | )      
|                                                 |                                                                                     |                                             |                                                                         |                                           |         |                   |            |            
|                                                 |                                                                                     |                                             | Net Cash Provided by Financing Activities                               |                                           |         | 3,720,889         |            |             |         | 2,775,736 |           
|                                                 |                                                                                     |                                             |                                                                         |                                           |         |                   |            |             |        
|                                                 |                                                                                     |                                             | Net (Decrease) Increase In Cash and Cash Equivalents                    |                                           |         | (49,004           | )          |             |         | 6,269,926 |           
|Cash and Cash Equivalents at Beginning of Period |                                                                                     |                                             | 92,684                                                                  |                                           |         |                   | 58,989     |            
|                                                 |                                                                                     |                                             |                                                                         |                                           |         |                   |            |            
|Cash and Cash Equivalents at End of Period       |                                                                                     | $                                           | 43,680                                                                  |                                           |         | $                 | 6,328,915  |            
|                                                 |                                                                                     |                                             |                                                                         |                                           |         |                   |            |            

The accompanying notes are an integral part of these unaudited statements

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##### Table of Contents



SPECIALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

|                                                                        |                        |   |                   |           |      |   |           |         | 
|----------------------------------------------------------------------- | ---------------------- | - | ----------------- | --------- | ---- | - | --------- | ------- | 
|                                                                        |                        |   | Nine Months Ended
|                                                                        |                        |   | September 30,    
|                                                                        |                        |   |                  
|                                                                        |                        |   | 2003              |           | 2002
|                                                                        |                        |   |                   |           |     
|                                                                        |                        |   | (UNAUDITED)      
|Supplemental Cash Flow Information:                                     |                        |   |                   |           |      |   |           |        
|                                                                        | Cash Paid for Interest |   | $                 | 1,266,029 |      |   | $         | 541,157 | 
|                                                                        |                        |   |                   |           |      |   |           |        
|Supplemental Disclosure of Non-Cash Investing and Financing Activities: |                        |   |                   |           |      |   |           |        
|Dividends Reinvested for Common Stock                                   |                        | $ | 3,870,572         |           |      | $ | 2,433,065 |        
|                                                                        |                        |   |                   |           |      |   |           |        
|Common Stock Grants                                                     |                        | $ | 16,500            |           |      | $ |          |        
|                                                                        |                        |   |                   |           |      |   |           |        
|Foreclosure of Property                                                 |                        | $ | 10,224,992        |           |      | $ | 1,903,215 |        
|                                                                        |                        |   |                   |           |      |   |           |        
|Mortgage Loan Received for Sale of Foreclosed Property                  |                        | $ |                  |           |      | $ | 1,035,900 |        
|                                                                        |                        |   |                   |           |      |   |           |        
|Charge
off of Allowance for Loan Losses to Real Estate Owned            |                        | $ | 416,457           |           |      | $ |          |        
|                                                                        |                        |   |                   |           |      |   |           |        
|Note Received for Sale of Foreclosed Property                           |                        | $ | 125,000           |           |      | $ |          |        
|                                                                        |                        |   |                   |           |      |   |           |        

The accompanying notes are an integral part of these unaudited statements

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##### Table of Contents






SPECIALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
(UNAUDITED)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Specialty Trust, Inc., formerly Specialty Mortgage Trust, and Subsidiaries
(Company) is a Maryland corporation, which acquires and holds interests in
mortgage loans secured by real property located in Nevada, Arizona, Colorado,
California, and Utah. The Companys strategy is to acquire land loans,
construction loans, commercial building loans and nonconforming single-family
and small multifamily residential loans. The Company has elected to be treated
as 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 (Manager), a private mortgage finance company operating in Nevada,
wholly owned by Nello Gonfiantini III, the Companys President and Chairman of
the Board of Directors. The Company was incorporated on October 21, 1997 and
began operations on January 31, 1998, following the closing of the Companys
initial private placement of its preferred stock.

The unaudited consolidated financial statements of the Company are prepared in
accordance with accounting principles generally accepted in the United States
of America (US GAAP) for interim financial information and in accordance with
the instructions to Form 10-Q. In the opinion of the Company all adjustments
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented have been included and are
normal and recurring in nature. The results for the nine months ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003 or for any other period. These
unaudited consolidated financial statements should be read in conjunction with
the audited financial statements included in the Companys annual report on
Form 10-K for the year ended December 31, 2002.

The unaudited consolidated financial statements for the nine months ended
September 30, 2003 include the accounts of the Company and its wholly owned
subsidiaries, Specialty Acquisition Corporation (SAC), a taxable REIT
subsidiary and Specialty Acquisition Corp. II (SAC II), a qualified REIT asset.
SAC was formed on May 2, 2002 to enable the Company to perform development
activities to land it had foreclosed upon (Note 4), and to maintain the
Companys qualified REIT status. SAC II was formed on January 17, 2003 to
enable the Company to hold property (Note 5). All inter-company accounts and
transactions have been eliminated upon consolidation.

The prior year financial statements contain certain reclassifications to
conform to the current year classifications. These reclassifications had no
effect on net earnings.

Mortgage Loans

The Company has both the intent and the ability to hold mortgage loans until
maturity. Therefore, mortgage loans are classified and accounted for as held
for investment and are carried at cost.

The mortgage loans are originated by the Manager, in the name of the Manager,
and simultaneously sold, in whole or in part, to the Company. Loan servicing
is retained by the Manager.

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SPECIALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2003 (Continued)
(UNAUDITED)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)

Allowance for Loan Losses

The Company follows the Financial Accounting Standards Boards (FASB) Statement
of Financial Accounting Standards (SFAS) 114, Accounting by Creditors for
Impairment of a Loan, and SFAS 118, Accounting by Creditors for Impairment of
a Loan-Income Recognition and Disclosure. Under SFAS 114, a loan is impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect the contractual interest and principal payments of a
loan according to the contractual terms of the loan agreement. SFAS 114
requires that impaired loans be measured on the present value of expected
future cash flows discounted at the loans effective interest rate or, as a
practical expedient, at the loans observable market price or the fair value of
the collateral, if the loan is collateral dependent. The Company generally
obtains a third party appraisal on the underlying collateral for impaired loans
to determine the amount of impairment, if any. SFAS 118 clarifies interest
income recognition and the disclosure requirements of SFAS 114.

The Company does not recognize interest income on loans once they are
determined to be impaired until the interest is collected in cash. Cash
receipts are allocated to interest income, except when such payments are
specifically designated as principal reduction or when the Company does not
believe the Companys investment in the loan is fully recoverable.

The Company maintains an allowance for loan losses on mortgage loans.
Additions to the allowance are based on an assessment of certain factors
including, but not limited to, a review of collateral values, borrower payment
ability and general economic conditions. Additions to the allowance are
provided through a charge to current earnings. Actual losses on loans are
recorded as a charge-off or a reduction to the loan loss allowance. Subsequent
recoveries of amounts previously charged off are added back to the allowance.

Evaluation of the adequacy of the allowance for loan losses is based primarily
on the Companys periodic assessment and grading of the loan portfolio.
Additional factors considered by the Company include the consideration of past
loan loss experience, trends in past due and non-performing 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 loan losses. While the Company uses available
information to recognize losses on loans, future adjustments to the allowance
for loan losses may be necessary based on changes in economic conditions and
the impact of such changes on the Companys borrowers.

Land Held for Residential Development

Land held for residential development consists of real estate acquired through
foreclosure and is carried at the lower of cost or the propertys estimated
fair value, less estimated costs to sell.

Real Estate Owned

Real estate owned consists of real estate acquired through foreclosure. It is
carried at the lower of cost or the propertys estimated fair value, less
estimated costs to sell.

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SPECIALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2003 (Continued)
(UNAUDITED)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)

Stock Options

The Company accounts for stock based compensation under SFAS 123, Accounting
for Stock-Based Compensation,which requires the measurement of stock
compensation expense using the fair value method of accounting.

Revenue Recognition

Revenue is recognized on performing loans when interest has been earned
according to the terms of the loan. However, revenue ceases to be recognized
when the loan becomes 90 days delinquent, when foreclosure proceedings have
been initiated, or when the loan-to-value ratio exceeds 100%, whichever event
occurs first.

Mortgage loan origination fees in excess of 2.5% of the loan principal balance
charged to a borrower for and upon the origination, extension or refinancing of
a mortgage loan are paid to the Company, effectively discounting the purchase
price of the loan and are amortized by the effective interest method over the
contractual life of the loan. These amounts are classified as unearned
discounts. Mortgage loan origination fees up to 2.5% of the principal balance
are earned by the Manager prior to the purchase of the mortgage loans by the
Company.

Earnings per Share

Basic Earnings Per Share (EPS) is computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the
period. Diluted EPS is computed by dividing net earnings by the
weighted-average common shares and potentially dilutive securities outstanding during
the period. For the diluted EPS calculation, the weighted average common
shares and potentially dilutive securities outstanding include the average number of
shares of common stock outstanding, adjusted for the dilutive effect of
unexercised stock options using the treasury method.

Income Taxes

Our financial results generally do not reflect provisions for current or
deferred income taxes. Management believes that we have and intend to continue
to operate in a manner that will allow the Company to be taxed as a
REIT and as a result, does not anticipate the payment of substantial corporate
level taxes. Many of these requirements, however, are highly technical and
complex. If we were to fail to meet any of these requirements, we would be
subject to federal income tax.

On May 2, 2002, we formed Specialty Acquisition Corp. (SAC) a wholly owned
taxable REIT subsidiary effective January 1, 2003. A taxable REIT subsidiary
is generally subject to corporate level income tax on its income and will
generally be able to distribute only its net after tax earnings to the Company
as dividends. Management believes that the deferred tax assets
related to net operating losses will most likely not be recovered.

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SPECIALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2003 (Continued)
(UNAUDITED)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)

As of January 17, 2003, we formed a Qualified REIT Subsidiary (SAC II). A
Qualified REIT subsidiary is a corporation in which a REIT owns 100% of the
stock and which is not a taxable REIT subsidiary. As a Qualified REIT
Subsidiary, SAC II is not treated as a separate corporation from the REIT for
tax purposes. Therefore, it is subject to the IRS REIT asset, income and
distribution requirements. In addition, all of its assets, liabilities and
items of income, deduction and credit are treated as assets, liabilities and
income, deductions and credit of the REIT. Also, its activities are treated as
activities of the REIT for purposes of the REIT qualification tests and
prohibitive transaction limits.

Recent Accounting Pronouncements

In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements Nos. 4,
44, and 64, Amendment of SFAS Statement No. 13, and Technical Corrections.
SFAS 145 eliminates extraordinary accounting treatment for reporting a loss on
debt extinguishments, and amends other existing authoritative pronouncements to
make various technical corrections, to clarify meanings, and to describe
applicability under changed conditions. The provisions of SFAS 145 were
implemented for the Companys fiscal year beginning January 1, 2003. Debt
extinguishments reported as extraordinary items prior to scheduled or early
adoption of SFAS 145 would be reclassified in most cases following adoption.
SFAS 145 did not have a significant impact on the Companys financial position
or results of operations.

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 requires the recording of costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon the Companys commitment to an exit plan, which is generally
before an actual liability has been incurred. Adoption of SFAS 146 was
implemented for the Companys fiscal year beginning January 1, 2003. SFAS 146
did not have a significant impact on the Companys financial position, or
results of operations.

FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees Including Indirect Guarantees of Indebtedness of
Others, (Interpretation 45), requires disclosures in interim and annual financial
statements about obligations under certain guarantees issued by the Company.
Furthermore, it requires recognition at the beginning of a guarantee of a
liability for the fair value of the obligation undertaken in issuing the
guarantee, with limited exceptions including: i) a parents guarantee of a
subsidiarys debt to a third party, and ii) a subsidiarys guarantee of the
debts owed to a third party by either its parent or another subsidiary of that
parent. The interpretation was effective for the Company on January 1, 2003;
however, this interpretation had no impact on the Company as the Company does
not guarantee any indebtedness.

On December 31, 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS 148 amends SFAS 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. The disclosure requirements of SFAS 148 for interim financial
statements containing consolidated financial statements are effective for
interim periods beginning in 2003. The Company has previously adopted the fair
value method of accounting for stock-based compensation of SFAS 123, and
accordingly, SFAS 148 did not have a material impact on the Companys reported
results of operations or financial position in 2003.

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##### Table of Contents



SPECIALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2003 (Continued)
(UNAUDITED)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)

FASB Interpretation No. 46, Consolidation of Variable Interest Entities.
This Interpretation addresses consolidation by business enterprises of variable
interest entities, which have at least one of the following characteristics: 1)
the equity investment at risk is not sufficient to permit the entity to finance
its activities without additional financial support from other parties, or 2)
the equity investors lack one or more of the following essential
characteristics of a controlling financial interest: a) the direct or indirect
ability to make decisions about the entitys activities through voting or
similar rights, b) the obligation to absorb the expected losses of the entity
if they occur, or c) the right to receive the expected residual returns of the
entity if they occur. This Interpretations effective date was postponed from
June 30, 2003 to December 31, 2003 and requires existing variable interest
entities to be consolidated if those entities do not effectively disburse risks
among parties involved. However, the FASB will be proposing modifications to
the Interpretation by the end of December 2003. The Company will be assessing
the impact, if any, the proposed modifications will have on the financial
condition or operating results of the Company, specifically Land Held
for Residential Development.

FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This Statement establishes
standards for issuer classifications and measurements of certain financial
instruments with characteristics of both debt and equity. This Statement was
effective on July 1, 2003. This Statement requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). The Company does not have any financial instruments with
characteristics of both liabilities and equity; therefore this Statement did
not have a material effect on the financial condition or operating results of
the Company.

NOTE 2. MORTGAGE LOANS HELD FOR INVESTMENT

Mortgage Loan Products

The Company has four mortgage loan products consisting of land, construction,
commercial building and other. Substantially all mortgage loan products have
similar stated interest rates ranging from 10.50% to 13.25%. Due to the
similar nature of the effective interest rates among the four loan products,
the Company does not compile or report revenues by product type.

Pursuant to existing loan agreements, the Company is committed to fund
additional loan advances totaling approximately $27.8 million as of September
30, 2003.

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SPECIALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2003 (Continued)
(UNAUDITED)

NOTE 2. MORTGAGE LOANS HELD FOR INVESTMENT (Continued)

Allowance for Loan Losses

The Company sets aside an allowance for loan losses through periodic charges to
earnings. While there exists probable asset quality problems in the loan
portfolio, the Company believes sufficient reserves have been provided in the
allowance to absorb probable losses in the loan portfolio at September 30, 2003
and December 31, 2002.

The following table presents a roll-forward of the allowance for loan loss:

|                              |                           |   |           |          |  
|----------------------------- | ------------------------- | - | --------- | -------- | -
|Balance at January 1, 2002    |                           | $ | 1,020,321 |         
|                              | Provision for Loan Losses |   |           | 795,255  |  
|                              | Charge Offs               |   |           |         |  
|                              |                           |   |           |         
|Balance at December 31, 2002  |                           |   | 1,815,576 |         
|                              | Provision for Loan Losses |   |           | 123,388  |  
|                              | Charge Offs               |   |           | (416,457 | )
|                              |                           |   |           |         
|Balance at September 30, 2003 |                           | $ | 1,522,507 |         
|                              |                           |   |           |         

NOTE 3. DELINQUENT LOANS

At September 30, 2003, the Company had four loans that were 30 to 304 days past
due, totaling approximately $6.9 million in principal and accrued interest.
Accrued interest was not recorded on two of the four delinquent loans with
principal balances of approximately $2.8 million because the Company determined
that the underlying collateral values did not support the accrual of interest.
The Company accrued interest on two of the four delinquent loans with principal
balances of approximately $4.0 million until the loans were 90 days past due;
however, in accordance with the Companys revenue recognition policy, the
Company ceased to accrue additional interest income when the loans became over
90 days past due. Accrued interest recorded during the 90-day period remains
accrued if the Company determines that the underlying collateral supports
recovery of the full principal and accrued interest. The accrued interest
recorded on the four delinquent loans at September 30, 2003 was approximately
$153,000. The Company has evaluated the collectibility of these delinquent
loans including accrued interest regardless 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 and has determined that the amounts are collectible.

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SPECIALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2003 (Continued)
(UNAUDITED)

NOTE 3. DELINQUENT LOANS (Continued)

At December 31, 2002, the Company had eight loans that were 30 to 245 days past
due, totaling approximately $13.3 million in principal and accrued interest.
The Company accrued interest on these loans until the loans were 90 days past
due; however, in accordance with the Companys revenue recognition policy, the
Company ceased to accrue additional interest income when these loans became 90
days past due. Accrued interest recorded during the 90-day period remains
accrued if the Company determines that the underlying collateral supports
recovery of the full principal and accrued interest. The accrued interest
recorded on the eight delinquent loans at December 31, 2002 was approximately
$359,000. The Company has evaluated the collectibility of these delinquent
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 and has
determined that the amounts are collectible.

NOTE 4. LAND HELD FOR RESIDENTIAL DEVELOPMENT

In February 2001, the Company foreclosed on a mortgage loan in default and
subsequently obtained ownership to the residential land development project
(Project) securing the loan. The Companys recorded investment in the loan at
the time of foreclosure was approximately $2.7 million. The Company obtained a
third-party appraisal of the Project at the time of the foreclosure, which
valued the Project at approximately $2.5 million, net of estimated costs to
sell. A loss of $225,000 was recorded upon recording the initial carrying
value of the Project upon foreclosure. The three phases comprising the
Project, which totaled 117 lots, were in various stages of completion. The
appraisal provided an allocation of the fair value as follows: (i) phase Is 15
lots at $35,000 each, (ii) phase IIs 61 lots at $15,000 each, and (iii) phase
IIIs 41 lots at $15,000 each. The appraisal was based on the current
condition of the lots and did not consider costs that the Company or its
assignee would incur to prepare these lots for the commencement of
homebuilding. The Company subsequently contributed the Project to Specialty
Acquisition Corporation (SAC), its wholly owned taxable REIT subsidiary.

In June 2002, SAC entered into a non-refundable agreement with a third-party
homebuilder to transfer title to the lots on a phased basis to the homebuilder
in exchange for an upfront cash payment equal to a portion of the original
appraised value of the uncompleted lots. Additionally, the homebuilder is
responsible to pay SAC the difference between the original appraisal value per
lot and the cash previously received, upon sale of the homes to third parties.
SAC is also entitled to 50% of the profits, if any, realized by the homebuilder
upon closing of the sale of each home, as well as repayment of infrastructure
costs borne by the Company prior to the agreement.

SAC receives a security interest in each lot transferred to the homebuilder,
subordinate to the senior interest held by the homebuilders construction
lender. SAC is not obligated for any future project costs relating to a lot
once the lot is delivered to the homebuilder. This arrangement is accounted
for as a real estate investment by which cash received upon delivery of the
completed lots reduces SACs investment in the land held for residential
development. Upon the sale of completed homes by the homebuilder to an
independent third-party, SAC will reduce land held for residential development
based on all cash proceeds received under the cost recovery method. After the
investment has been fully recovered, SAC will recognize revenue equal to its
share of the profits realized and received from home sales and may record a
provision for income taxes if SAC is anticipated to generate taxable income for
the year.

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SPECIALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2003 (Continued)
(UNAUDITED)

NOTE 4. LAND HELD FOR RESIDENTIAL DEVELOPMENT (Continued)

On June 20, 2003, the homebuilder
did not exercise his option to purchase
Phase III of the project. The Company is in the process of evaluating
various options.

All 76 lots in phases I and II were transferred to the homebuilder in 2002 upon
payment to SAC of $565,943. In order to complete delivery of the lots, SAC
incurred site mapping costs, other engineering costs, real estate taxes, and
insurance fees in 2002, all of which were capitalized. Nine completed homes
were sold during the nine months ended September 30, 2003. The following table
provides a roll-forward of this account:

|                                |  |   |           |  
|------------------------------- |  | - | --------- | -
|Balance at December 31, 2002    |  | $ | 2,448,579 |  
|Capitalized costs in 2003       |  |   | 166,090   |  
|Net Proceeds from Sale of Homes |  |   | (191,920  | )
|                                |  |   |           |  
|Balance at September 30, 2003   |  | $ | 2,422,749 |  
|                                |  |   |           |  

NOTE 5. REAL ESTATE OWNED (HELD FOR SALE)

As of September 30, 2003 and December 31, 2002, real estate owned totaled
approximately $7,644,000 and $950,000, respectively. The property owned
consists of an office building, commercial land and a single family home in
2003, and an office building in 2002, which were transferred from mortgage
loans to real estate owned upon foreclosure.

NOTE 6. QUALIFIED REIT ASSET

As of January 17, 2003, the Company created a second subsidiary, SAC II (a
Qualified REIT Subsidiary), incorporated in Delaware. A Qualified REIT
Subsidiary is any corporation in which a REIT owns 100% of the stock. As a
Qualified REIT Subsidiary, SAC II is not treated as a separate corporation from
the REIT for tax purposes. Therefore, it is subject to the IRS REIT asset,
income and distribution requirements. In addition, all of its assets,
liabilities and items of income, deduction and credit are treated as assets,
liabilities and items of income, deductions and credits of the REIT. Also, its
activities are treated as activities of the REIT for purposes of the REIT
qualification tests and prohibitive transaction limits.

As of September 30, 2003, SAC II had approximately $213,000 in assets
consisting of land. These assets are included in Real Estate Owned on the
Balance Sheets.

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##### Table of Contents



SPECIALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2003 (Continued)
(UNAUDITED)

NOTE 7. COLLATERALIZED NOTES

On May 7, 2002, the Companys registration statement (2002 Registration) was
declared effective by the Securities and Exchange Commission (SEC) increasing
the amount of Collateralized Notes available for sale up to $269,312,000
(including amounts remaining unsold under the prior registration) from the
original $250,000,000, which had been declared effective by the SEC on January
18, 2001. This 2002 Registration permits the issuance of Collateralized 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. The outstanding Collateralized Notes
have maturities ranging from one month to five years from the date of issue and
bear a fixed rate of interest ranging from 2.50 % to 7.50% at September 30,
2003 and at December 31, 2002. The effective yield of Collateralized Notes
outstanding at September 30, 2003 and December 31, 2002 was 5.52% and 4.76%,
respectively. At September 30, 2003 and December 31, 2002, the Collateralized
Notes had a balance of $29,590,720 and $19,771,031, respectively, and were secured by $51,941,985 and $30,490,965, respectively, of mortgage
loans pledged as collateral.

On July 28, 2003, the Company filed post effective amendment No.1 to the 2002
Registration statement effective May 7, 2002. The amendment covers the public
sale of up to $232,586,000 (the amount remaining unsold under the prior
registration) of Collateralized Notes. The amendment was declared
effective by the Securities and Exchange Commission on August 7, 2003. This
amendment increases the maximum in principal amount of Collateralized Notes
that may be outstanding at any time to $100,000,000. There is no minimum amount
of notes that may be sold. The Collateralized Notes are secured by mortgage
loans at least one and one-half times the aggregate principal amount
outstanding on the Collateralized Notes.

NOTE 8. RELATED PARTY

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

The Manager receives 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 the
Company. The Manager also receives a fee for loan servicing equal to one-half
of one percent per annum of all loans serviced. These fees are earned directly
by the Manager and are deducted from the interest payments paid to the Company
to cover the Managers costs to manage the portfolio, effectively reducing the
yield to the Company. In addition, the Manager receives, as incentive
compensation for each fiscal quarter, an amount equal to 50% of the tax-based
net income before the dividend deduction of the Company, in excess of an
annualized return to the Company equal to 12%.

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##### Table of Contents



SPECIALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2003 (Continued)
(UNAUDITED)

NOTE 8. RELATED PARTY (Continued)

Fees earned by the Manager for the three and nine months ended September 30,
2003 and 2002, are as follows:

|                                    |  |                    |           |                   |  |      |         |      |  |   |           |  |  |   |           | 
|----------------------------------- |  | ------------------ | --------- | ----------------- |  | ---- | ------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                    |  | Three Months Ended |           | Nine Months Ended
|                                    |  | September 30,      |           | September 30,    
|                                    |  |                    |           |                  
|                                    |  | 2003               |           | 2002              |  | 2003 |         | 2002
|                                    |  |                    |           |                   |  |      |         |     
|Loan Origination and Extension Fees |  | $                  | 839,120   |                   |  | $    | 216,691 |      |  | $ | 1,864,070 |  |  | $ | 927,519   | 
|Loan Servicing Fees                 |  |                    | 106,121   |                   |  |      | 93,125  |      |  |   | 325,416   |  |  |   | 269,778   | 
|Late Payment Charges                |  |                    | 1,610     |                   |  |      | 1,470   |      |  |   | 11,165    |  |  |   | 9,295     | 
|                                    |  |                    |           |                   |  |      |         |      |  |   |           |  |  |   |           | 
|Total Base Fees                     |  |                    | 946,851   |                   |  |      | 311,287 |      |  |   | 2,200,651 |  |  |   | 1,206,592 | 
|Incentive Compensation Bonus        |  |                    | 83,417    |                   |  |      |        |      |  |   | 273,692   |  |  |   | 93,977    | 
|                                    |  |                    |           |                   |  |      |         |      |  |   |           |  |  |   |           | 
|Total Compensation                  |  | $                  | 1,030,268 |                   |  | $    | 311,287 |      |  | $ | 2,474,343 |  |  | $ | 1,300,569 | 
|                                    |  |                    |           |                   |  |      |         |      |  |   |           |  |  |   |           | 

The loan origination fees are received by the Manager as part of the initial
funding of the loan. Loan servicing fees reduce the amount of interest income
recognized by the Company as the Manager withholds the servicing fee from
interest payments received from borrowers. Late payment charges are received
directly by the Manager from the borrower. The Managers incentive
compensation is calculated in accordance with the Agreement and is paid for or
accrued in the line item, Manager and Directors Fees, in the Companys
financial statements.

There are several related parties who held Collateralized Notes issued by the
Company. As of September 30, 2003 and December 31, 2002, they owned $393,883
and $696,125, respectively, in Collateralized Notes, which represents
approximately 1.3% and 3.5% of the total Collateralized Note balance,
respectively.

SAC and SAC II have agreements with a realtor for the sale of property acquired
through foreclosure. Further, SAC currently has an agreement with a realtor
related to the development of the land held for residential development
discussed in Note 4. SAC paid the realtor a finders fee of $300 per lot and
will pay a 3.5% sales commission for each home sold. The realtor is an
employee of a real estate company in which an independent director and member
of the Companys Audit Committee has an ownership interest. As of September
30, 2003 and December 31, 2002, SAC had an outstanding payable to the realtor
of $0 and $18,300, respectively, related to the finders fee on phase II.
Total fees paid to the real estate company for the nine months ended September
30, 2003 and 2002 were approximately $166,190 and $4,500, respectively.

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SPECIALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 2003 (Continued)
(UNAUDITED)

NOTE 9. EARNINGS PER SHARE

The following is a reconciliation of earnings per share (in thousands, except
share and per share amounts):

|                                                                                                                   |                              |   |                    |      |                   |   |           |      |      |   |           |      |  |   |           |      | 
|------------------------------------------------------------------------------------------------------------------ | ---------------------------- | - | ------------------ | ---- | ----------------- | - | --------- | ---- | ---- | - | --------- | ---- |  | - | --------- | ---- | 
|                                                                                                                   |                              |   | Three Months Ended |      | Nine Months Ended
|                                                                                                                   |                              |   | September 30,      |      | September 30,    
|                                                                                                                   |                              |   |                    |      |                  
|                                                                                                                   |                              |   | 2003               |      | 2002              |   | 2003      |      | 2002
|                                                                                                                   |                              |   |                    |      |                   |   |           |      |     
|Basic:                                                                                                             |                              |   |                    |      |                   |   |           |      |      |   |           |      |  |   |           |     
|Net earnings applicable to common stock                                                                            |                              | $ | 2,446,349          |      |                   | $ | 1,936,338 |      |      | $ | 5,904,762 |      |  | $ | 5,654,493 |     
|                                                                                                                   |                              |   |                    |      |                   |   |           |      |      |   |           |      |  |   |           |     
|Weighted average number of shares  basic                                                                          |                              |   | 7,556,380          |      |                   |   | 7,075,801 |      |      |   | 7,404,365 |      |  |   | 6,983,196 |     
|                                                                                                                   |                              |   |                    |      |                   |   |           |      |      |   |           |      |  |   |           |     
|                                                                                                                   | Earnings per share  basic   |   | $                  | 0.32 |                   |   | $         | 0.27 |      |   | $         | 0.80 |  |   | $         | 0.81 | 
|                                                                                                                   |                              |   |                    |      |                   |   |           |      |      |   |           |      |  |   |           |     
|Diluted:                                                                                                           |                              |   |                    |      |                   |   |           |      |      |   |           |      |  |   |           |     
|Net earnings applicable to diluted earnings per share                                                              |                              | $ | 2,446,349          |      |                   | $ | 1,936,338 |      |      | $ | 5,904,762 |      |  | $ | 5,654,493 |     
|                                                                                                                   |                              |   |                    |      |                   |   |           |      |      |   |           |      |  |   |           |     
|Weighted average number of shares  basic                                                                          |                              |   | 7,556,380          |      |                   |   | 7,075,801 |      |      |   | 7,404,365 |      |  |   | 6,983,196 |     
|Weighted average shares of dilutive stock
options using average period stock price
under the treasury stock method |                              |   | 25,125             |      |                   |   | 39,154    |      |      |   | 25,125    |      |  |   | 39,154    |     
|                                                                                                                   |                              |   |                    |      |                   |   |           |      |      |   |           |      |  |   |           |     
|Weighted average number of shares  diluted                                                                        |                              |   | 7,581,505          |      |                   |   | 7,114,955 |      |      |   | 7,429,490 |      |  |   | 7,022,350 |     
|                                                                                                                   |                              |   |                    |      |                   |   |           |      |      |   |           |      |  |   |           |     
|                                                                                                                   | Earnings per share  diluted |   | $                  | 0.32 |                   |   | $         | 0.27 |      |   | $         | 0.79 |  |   | $         | 0.81 | 
|                                                                                                                   |                              |   |                    |      |                   |   |           |      |      |   |           |      |  |   |           |     

NOTE 10. SUBSEQUENT EVENTS

The Chairman of the Board declared a
cash dividend equal to $0.30 per share of the Companys common
stock which was approved by the Board of Directors, both on
October 27, 2003. The cash dividend was paid on October 29,
2003 to all Common Stockholders of record as of September 30,
2003.

On October 16, 2003, the Company increased its lines of credit from $17,500,000
to $19,500,000.

On October 28, 2003, the Company
entered into a sales contract to sell an office building which had been
recorded in real estate owned for $1.3 million. The sale is expected to close
by December 15, 2003 and the Company expects a gain of approximately
$340,000.

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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 Consolidated
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 Trust, Inc., our
subsidiaries and our business that are not historical facts are
forward-looking statements that involve risks and uncertainties. For a
discussion of such risks and uncertainties that could cause actual results to
differ from those contained in the forward-looking statements, please refer to
Risk Factors commencing on Page 13 of our Prospectus included in the
Registration Statement on Form S-11 (File No. 333-86972) relating to our
Collateralized Notes Program.

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 primarily
with equity and to a lesser degree with short-term debt. This short-term debt
consists of secured bank lines of credit and the Collateralized Note Program.

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, Colorado, California and Utah 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 multi-family residential loans. We generally limit the
amount of our investment in any single mortgage loan or in mortgage loans to
one borrower to approximately 10% of our total assets (not to exceed $10
million), although the Board of Directors may approve exceptions. Most loans
will have terms of one to three years. Our mortgage loans may be secured by
unimproved as well as improved real property and non-income producing property
as well as income-producing real property. Some mortgage loans may be secured
by a borrowers leasehold interest in real property. Our loans generally
produce higher yields than those 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 as compared to banks, thrift institutions 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 Third Quarter 2003 and Year End 2002

At September 30, 2003, we owned approximately $98.9 million of mortgage loans
(gross), approximately $2.4 million of land held for residential development
and approximately $7.6 million in real estate owned and held for resale. Our
total assets were approximately $109.1 million. These assets are financed with
approximately $35.6 million of recourse short-term debt and approximately $73.0
million of equity.

As of September 30, 2003, our equity-to-assets ratio was 67.0%, our
debt-to-equity ratio was 48.7% and our annualized return on equity was 11.1%
for the nine months ended September 30, 2003.

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At December 31, 2002, we owned approximately $96.2 million of mortgage loans
(gross), approximately $2.4 million of land held for residential development
and $950,000 in real estate owned and held for resale. Our total assets were
approximately $99.3 million. The assets were financed with approximately $28.1
million in recourse
short-term debt, approximately $1.0 million of long-term debt and approximately
$67.5 million of common equity.

As of December 31, 2002, our equity-to-asset ratio was 68.0%, our
debt-to-equity ratio was 43.1%, and our average return on equity was 10.8% for
the year ended December 31, 2002.

The increase in assets at September 30, 2003 resulted primarily from cash
received from the Collateralized Note program and the use of the lines of
credit, which allowed the Company to fund additional mortgage loans. The
increase in liabilities was a result of the Companys ability to draw on its
lines of credit and increased sales of the Collateralized Note Program. The
increase in stockholders equity at September 30, 2003 was due to retained
earnings not yet being declared as dividends until the fourth quarter of 2003
and a result of stockholders reinvesting dividends in common stock through the
dividend reinvestment program for the dividends declared on
April 28, 2003 and  July 17, 2003 and paid on May 1,
2003 and July 28, 2003, respectively.

Critical Accounting Policies

The Companys management is responsible to insure that its policies and
methodologies are in accordance with US GAAP. During the second quarter of
2003, management reviewed and evaluated the Companys critical accounting
policies and believes them to be appropriate.

The Companys consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, SAC and SAC II. The preparation of
consolidated financial statements in accordance with US GAAP requires us to
make estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying consolidated financial statements. These
estimates are based, in part, on our judgment and assumptions regarding various
economic conditions that we believe are reasonable based on facts and
circumstances existing at the time of reporting. In preparing these
consolidated financial statements, we have used our best estimates and
judgments of certain amounts included in the consolidated financial statements,
giving due consideration to materiality. The Company does not believe that
there is a great likelihood that materially different amounts would be reported
related to accounting policies described below. However, application of these
accounting policies involves the exercise of judgment and use of assumptions as
to future uncertainties and, as a result, actual results could differ from
those estimates.

The following summarizes the components of our consolidated financial
statements where understanding accounting policies is critical to understanding
and evaluating our reported financial results, especially given the significant
estimates used in applying the policies. The discussion is intended to
demonstrate the significance of estimates to our financial statements and the
related accounting policies. Detailed accounting policies are described in
Note 1 to the Companys consolidated financial statements. Management has
discussed the development and selection of these critical accounting estimates
with the Audit Committee of our Board of Directors. The Audit Committee has
reviewed these disclosures.

Revenue Recognition

Revenue is recognized on performing loans when interest has been earned
according to the terms of the loan. However, revenue is no longer recognized
when the loan has become delinquent for 90 days, when foreclosure proceedings
have been initiated, or when the loan-to-value ratio exceeds 100%, whichever
event occurs first. Management believes the Companys revenue recognition
policies are appropriate to reflect the substance of the underlying
transactions.

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Allowance for Loan Loss

The Company maintains an allowance for loan losses on its mortgage loans.
Additions to the allowance are based on an assessment of certain factors
including, but not limited to, a review of collateral values, borrower payment
ability and general economic conditions. Management believes that the
Companys policies and methodology are appropriate to reflect the potential
loss on the current loan portfolio.

Impairment of Long-Lived Assets

Real estate investments held represent long-lived assets for accounting
purposes. The Company periodically reviews long-lived assets for impairment in
value whenever any event or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. In managements opinion, and
based on our estimates, real estate owned is considered to be held for sale and
is not carried at amounts in excess of estimated fair value less selling costs.
Land held for residential development is carried at the lower of cost
or fair value less estimated costs to sell. Fair value is derived using
estimates and assumptions relating to eventual sales prices and estimates for
costs to complete. Management believes the assumptions used in determining
fair value are based on the best information available at the time of analysis.

Income Taxes

The Companys financial results generally do not reflect provisions for current
or deferred income taxes. Management believes that the Company has and intends
to continue to operate in a manner that will continue to allow it to be taxed
as a REIT and as a result, does not anticipate the payment of substantial
corporate level taxes. Many of these requirements, however, are highly
technical and complex. If the Company was to fail to meet any of these
requirements, the Company would be subject to federal income tax.

On May 2, 2002, the Company formed Specialty Acquisition Corp. (SAC) a wholly
owned taxable REIT subsidiary effective January 1, 2003. A taxable REIT
subsidiary is generally subject to corporate level income tax on its income and
will generally be able to distribute only its net after tax earnings to the
Company as dividends.

As of January 17, 2003, the Company formed a Qualified REIT Subsidiary, SAC II.
A Qualified REIT subsidiary is a corporation in which a REIT owns 100% of the
stock and which is not a taxable REIT subsidiary. As a Qualified REIT
Subsidiary, SAC II is not treated as a separate corporation from the REIT for
tax purposes. Therefore, it is subject to the IRS REIT asset, income and
distribution requirements. In addition, all of its assets, liabilities and
items of income, deduction and credit are treated as assets, liabilities and
items of income, deductions and credit of the REIT. Also, its activities are
treated as activities of the REIT for purposes of the REIT qualification tests
and prohibitive transaction limits.

As of September 30, 2003, SAC had a net operating loss (NOL) of approximately
$198,000 on an income tax basis. This loss has been recorded on the books as a
NOL and will be carried forward, available to offset any future tax gains.
However, due to the uncertainty as to SACs ability to generate income in the
future, a valuation allowance has been recorded against the tax benefits
associated with this NOL.

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Changes in Financial Condition

AssetsLand Held for Residential Development

Land held for residential development decreased by approximately $26,000 (1%)
as a result of the sale of nine completed homes during the nine months ended
September 30, 2003 at a total profit of approximately $8,000. This decrease is
partially offset by the capitalization of additional costs of approximately
$166,000. Land held for residential development consists of three phases of
undeveloped lots (Project), which were obtained by the Company through
foreclosure in February 2001 of the collateral securing a mortgage loan. This
Project originally included 117 lots, which were in various stages of
completion at the time of foreclosure. An appraisal was obtained at the time
of foreclosure which provided an allocation of the fair value as follows: (i)
phase Is 15 lots at $35,000 each, (ii) phase IIs 61 lots at $15,000 each and
(iii) phase IIIs 41 lots at $15,000 each. The appraisal was based on the
current condition of the lots and did not consider costs, which the Company or
its assignee would incur to prepare these lots for the commencement of
homebuilding. The Company subsequently contributed the Project to Specialty
Acquisition Corp. (SAC), its wholly owned taxable REIT subsidiary formed in May
2002.

In June 2002, SAC entered into an agreement with a third-party homebuilder to
transfer title to the lots on a phased basis to the homebuilder in exchange for
an upfront cash payment equal to a portion of the original appraised value of
the uncompleted lots. Additionally the homebuilder is responsible to pay SAC
the difference between the original appraisal value per lot and the cash
previously received, upon sale of the homes to third parties. SAC is also
entitled to 50% of the profits, if any, realized by the homebuilder upon
closing of the sale of each home built, as well as repayment of infrastructure
costs borne by the Company prior to the agreement. SAC receives a security
interest in each lot transferred to the homebuilder, subordinate to the senior
interest held by the homebuilders construction lender. SAC is not obligated
for any future costs of the Project once a completed lot is delivered to the
homebuilder. This arrangement is accounted for as a real estate investment by
which cash received upfront upon delivery of the completed lots reduces SACs
investment in the land held for residential development. Upon the sale of lots
and completed homes by the homebuilder to a third-party, SAC will record
proceeds as a reduction to the land held for residential development under the
cost recovery method.

On June 20, 2003, the homebuilder
did not exercise his option to purchase
Phase III of the project. The Company is in the process of evaluating
various options.

All 76 lots in phases I and II were transferred to the homebuilder in 2002 upon
payment to SAC of $565,943. In order to complete delivery of the lots, SAC
incurred site mapping costs, other engineering costs, real estate taxes, and
insurance fees, in 2002, all of which were capitalized. Nine completed homes
were sold during the nine months ended September 30, 2003. The following table
a roll-forward of this account:

|                                       |  |   |           |  
|-------------------------------------- |  | - | --------- | -
|Balance at December 31, 2002           |  | $ | 2,448,579 |  
|Additions to Land Held for Development |  |   | 166,090   |  
|Net Proceeds from Sale of Homes        |  |   | (191,920  | )
|                                       |  |   |           |  
|Balance at September 30, 2003          |  | $ | 2,422,749 |  
|                                       |  |   |           |  

Real Estate Owned

Real estate owned increased by approximately $6.7 million (705%) as the result
of the acquisition of property, net of related sales, through foreclosure
during the third quarter of 2003. The properties acquired during the third
quarter of 2003 were as follows:

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Changes in Financial Condition (Continued)



| |  |  | A personal residence in Telluride, Colorado acquired on September 25,
2003 with a loan balance of approximately $1.7 million. There is a 75
day redemption period in which the borrower may rectify the outstanding
balance. If this occurs, the property will revert back to the borrower.                                    
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Two parcels of raw land in Mesquite, Nevada acquired in August of
2003 with loan balances of approximately $2.6 million and $2.5 million.                                                                                                                                                                                      
|
| |  |  | A speculative home in Aspen, Colorado with a loan balance of
approximately $1.9 million. During the third quarter, the property was
sold. As a result, the Company recognized a gain of approximately
$90,000 and has a note receivable in the amount of $125,000 which has
been included in Other Assets in the Balance Sheet.

The Company had write downs of $250,000 related to the Mesquite, Nevada
properties included in the net balance of Real Estate Owned.

On April 4, 2003, the Company acquired real estate owned property through a
foreclosure on a mortgage loan whose outstanding balance at the time of
foreclosure was approximately $1.6 million, including principal and accrued
interest. The properties consisted of a hotel and three parcels of land, which
were transferred from mortgage loans to real estate owned upon foreclosure.
During the quarter ended June 30, 2003, the Company sold the hotel and two of
the three parcels of land resulting in a loss of approximately $181,000 and
$27,000, respectively.

Mortgage Loans

Mortgage loans held for investment net of allowance for loan losses and
unearned discounts increased by approximately $3.0 million (3%). This increase
was due primarily to the funding of new loans and advances on existing loans of
approximately $60.4 million, more than offsetting pay-offs and other repayments
of approximately $47.6 million and foreclosures of approximately $10.2 million.
The allowance for loan losses was increased by approximately $123,000 during
the period, net of approximately $416,000 in loan charge offs, to provide for
potential future loan losses.

Other Assets

Other assets increased approximately
$158,000 (41%) as of September 30, 2003
primarily due to a note receivable of approximately $125,000 related to the
sale of an REO during the third quarter, and debt issuance costs of
approximately $65,000 related to the an amendment to the S-11 to increase from
$50 million to $100 million the amount of collateralized notes that may be
outstanding at any given time.

Liabilities

Dividends Payable

Dividends Payable decreased by approximately $2.2 million (100%) as of
September 30, 2003. In order to preserve the Companys REIT status the Board
of Directors declared dividends in the fourth quarter of 2002 out of the
remaining earnings for the year. Therefore, this dividend carried over to the
current fiscal year and was paid in January 2003.

Accounts Payable  Related Party

Accounts Payable  Related Party decreased by approximately $114,000 (47%) as
of September 30, 2003 due to payment of the management fee in the first quarter
of 2003 that was earned in the fourth quarter of 2002. This management fee was
significantly higher than the management fee earned during the third quarter of
2003.

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Changes in Financial Condition (Continued)

Lines of Credit

Borrowings on the Companys lines of credit decreased by approximately $3.4
million (36%) as the result of the net increase in the issuance of
collateralized notes of approximately $9.8 million. Lines of credit are
collateralized short-term borrowing facilities from banks used to fund mortgage
investments and will fluctuate over time due to loan funding requirements, loan
repayments and the level of other debt and equity sources.

Collateralized Notes and Collateralized Notes  Related Party

Collateralized Notes increased by approximately $9.8 million (50%) primarily
due to increased demand, net of related party decreases of approximately
$302,000. The Companys stated interest rates are higher than the average
rates paid by state and federal banks. Increased advertising and marketing
efforts have allowed more investors to become aware of the interest rate
differences and as a result have moved their deposits from state and federal
banks to the Companys collateralized note program. Collateralized Notes 
Related Party decreased primarily due to cash requirements of Specialty
Financial. The collateralized notes were authorized for public sale on January
19, 2001.

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 |         | Nine months Ended 
|                |                                        |       |  | September 30, 2003 |         | September 30, 2003
|                |                                        |       |  | Over/Under         |         | Over/Under        
|                |                                        |       |  | September 30, 2002 |         | September 30, 2002
|                |                                        |       |  |                    |         |                   
|                |                                        |       |  | Net                |         |                    |  |          |          |        |  |         |         | Net    |  |           |           |  |  |          |          |  
|                |                                        |       |  | Change             |         | Rate               |  | Volume   |          | Change |  | Rate    |         | Volume
|                |                                        |       |  |                    |         |                    |  |          |          |        |  |         |         |       
|Interest Income |                                        |       |  |                    |         |                    |  |          |          |        |  |         |         |        |  |           |           |  |  |          |          |   |  |          
|                | Mortgage Loans                         |       |  | 508,047            |         |                    |  | (162,530 | )        |        |  | 670,577 |         |        |  | 1,648,150 |           |  |  | (755,776 | )        |   |  | 2,403,926 |          
|                | Cash Accounts                          |       |  | (15,543            | )       |                    |  | (15      | )        |        |  | (15,528 | )       |        |  | (49,708   | )         |  |  | (78      | )        |   |  | (49,630   | )        
|                |                                        |       |  |                    |         |                    |  |          |          |        |  |         |         |        |  |           |           |  |  |          |          |   |  |          
|                |                                        | Total |  |                    | 492,504 |                    |  |          | (162,545 | )      |  |         | 655,049 |        |  |           | 1,598,442 |  |  |          | (755,854 | ) |  |           | 2,354,296 | 
|                |                                        |       |  |                    |         |                    |  |          |          |        |  |         |         |        |  |           |           |  |  |          |          |   |  |          
|Expense         |                                        |       |  |                    |         |                    |  |          |          |        |  |         |         |        |  |           |           |  |  |          |          |   |  |          
|                | Line of Credit                         |       |  | 77,611             |         |                    |  | (10,970  | )        |        |  | 88,581  |         |        |  | 334,467   |           |  |  | 205,595  |          |   |  | 128,872   |          
|                | Notes Payable                          |       |  | (1,321             | )       |                    |  | 535      |          |        |  | (1,856  | )       |        |  | 250       |           |  |  | (966     | )        |   |  | 1,216     |          
|                | Collateralized Notes                   |       |  | 164,711            |         |                    |  | (13,816  | )        |        |  | 178,527 |         |        |  | 412,724   |           |  |  | (10,973  | )        |   |  | 423,697   |          
|                |                                        |       |  |                    |         |                    |  |          |          |        |  |         |         |        |  |           |           |  |  |          |          |   |  |          
|                |                                        | Total |  |                    | 241,001 |                    |  |          | (24,251  | )      |  |         | 265,252 |        |  |           | 747,441   |  |  |          | 193,656  |   |  |           | 553,785   | 
|                |                                        |       |  |                    |         |                    |  |          |          |        |  |         |         |        |  |           |           |  |  |          |          |   |  |          
|                | Change
in Interest and Dividend Income |       |  | 251,503            |         |                    |  | (138,294 | )        |        |  | 389,797 |         |        |  | 851,001   |           |  |  | (949,510 | )        |   |  | 1,800,511 |          
|                |                                        |       |  |                    |         |                    |  |          |          |        |  |         |         |        |  |           |           |  |  |          |          |   |  |          

A comparison of the three and nine months ended September 30, 2003 to the three
and nine months ended September 30, 2002 follows:

Interest Income  Mortgage Assets

Interest income increased approximately $493,000 (20%) and $1.6 million (23%)
for the three and nine months ended September 30, 2003, respectively, as
compared to the same periods of 2002, 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.

24



---



##### Table of Contents



Changes in Financial Condition (Continued)

Interest Expense  Lines of Credit

Interest expense on lines of credit increased by approximately $78,000 (292%)
and $334,000 (119%) for the three and nine months ended September 30, 2003,
respectively, as compared to the same periods of 2002, primarily due to the
increase in borrowings under lines of credit during the three
quarters ended September 30, 2003 compared to the same period in 2002.

Interest Expense  Collateralized Notes

Interest expense on Collateralized Notes increased by approximately $165,000
(79%) and $413,000 (76%) for the three and nine months ended September 30,
2003, respectively, as compared to the same periods of 2002. The increase was
primarily due to an increase in Collateralized Notes outstanding of
approximately $9.8 million compared to the same period of 2002.

Provision for Loan Losses

The provision for loan losses decreased approximately $491,000 (374%) and
$266,000 (68%) for the three and nine months ended September 30, 2003,
respectively, as compared to the same periods in 2002. This decrease was
primarily due to a resolution of some of the delinquent or high risk rated
loans. In addition, the Company acquired four foreclosed properties (see Real
Estate Owned) and subsequently sold one of them.

Gain (Loss) on Sale of Real Estate Owned

Gain on sale of real estate owned was approximately $90,000 and $0 for the
three months ended September 30, 2003 and 2002, respectively and net losses on
sale of real estate owned was approximately $119,000 and $0 for the nine months
ended September 30, 2003 and 2002, respectively. A hotel acquired though Real
Estate Owned in Reno, Nevada was sold at a loss of approximately $181,000. Two
parcels of land (residential lots) in Reno, Nevada were sold at a loss of
approximately $27,000. These losses were offset by the sale of a personal
residence in Colorado in the third quarter at a gain of approximately $90,000.

General and Administrative

General and administrative expenses
increased $37,000 (37%) and $44,000 (13%) for the three and nine
months ended September 30, 2003, respectively, as compared to
the same periods in 2002. This was primarily due to an increase in
advertising and marketing expenses of approximately $24,000 and an
increase in debt offering costs of approximately $11,000, both for
the Collateralized Note program.

Manager and Directors Fees

Manager and directors fees increased approximately $95,000 (718%) and $242,000
(186%) for the three and nine months ended September 30, 2003, respectively, as
compared to the same periods in 2002. This was primarily due to an increase in
the number of board members, and a new board retainer fee in which board
members are to be annually granted 500 shares of common stock each on January 1
and July 1. In addition, the Company earned a larger management fee for the
three and nine months ended September 30, 2003 as compared to the three and
nine months ended September 30, 2002.

Other Expenses

Other expenses increased approximately $149,000 (603%) and $392,000 (602%) for
the three and nine months ended September 30, 2003, respectively, compared to
the same periods in 2002, as a result of increased expenses relating to
delinquent loans and foreclosures. In accordance with US GAAP, the Company
expenses costs relating to foreclosures as incurred.

25



---



##### Table of Contents



Interest Rate/Market/Credit Risk

We seek to manage the interest rate risk, credit risk and market risk to 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 monitor the quality of our loans through the consistent
application of our underwriting guidelines and loss mitigation practices of our
servicing procedures. In this way we seek to control credit risk. The
majority of our loans are located in Nevada; however, the Company is also
acquiring loans in Arizona, Colorado, California and Utah to 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         |       | Annualized       
|                 |                      |  | Three Months Ended |       | Nine Months Ended
|                 |                      |  | September 30,      |       | September 30,    
|                 |                      |  |                    |       |                  
|                 |                      |  | 2003               |       | 2002              |  | 2003 |       | 2002
|                 |                      |  |                    |       |                   |  |      |       |     
|Interest Income  |                      |  |                    |       |                   |  |      |       |      |  |  |       |   |  |  |      
|                 | Mortgage Loans       |  |                    | 11.56 | %                 |  |      | 12.20 | %    |  |  | 11.51 | % |  |  | 12.52 | %
|                 | Cash Accounts        |  |                    | 0.20  | %                 |  |      | 1.68  | %    |  |  | 0.73  | % |  |  | 1.71  | %
|Interest Expense |                      |  |                    |       |                   |  |      |       |      |  |  |       |   |  |  |      
|                 | Lines of Credit      |  |                    | 4.24  | %                 |  |      | 4.84  | %    |  |  | 4.24  | % |  |  | 4.75  | %
|                 | Note Payable         |  |                    | 6.01  | %                 |  |      | 6.01  | %    |  |  | 4.34  | % |  |  | 5.59  | %
|                 | Collateralized Notes |  |                    | 5.12  | %                 |  |      | 5.32  | %    |  |  | 5.29  | % |  |  | 5.36  | %
|                 | Net Interest Spread  |  |                    | 6.64  | %                 |  |      | 6.40  | %    |  |  | 6.55  | % |  |  | 6.69  | %

Liquidity and Capital Resources

We manage our short-term liquidity (defined as our funding needs to cover
commitments and anticipated uses occurring over the next twelve 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
and to pay dividends to stockholders. This source provided approximately $2.9
million and $8.6 million during the three and nine months ended September 30,
2003, respectively.

Secondly, the payoff and the prepayment of loans provide 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 $98.9 million, we anticipate annual cash flows from principal
pay-downs of approximately $34.6 million. Typically, these principal pay-downs
are used to originate new mortgage loans, but there are no restrictions on the
use of the funds.

26



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##### Table of Contents



Liquidity and Capital Resources (Continued)

The following table illustrates the scheduled maturities of mortgage loan investments:

|                                     |  |        |            | 
|------------------------------------ |  | ------ | ---------- | 
|Maturity                             |  | Amount
|                                     |  |       
|Prior to October 1, 2003             |  | $      | 3,853,607  | 
|October 1, 2003 to December 31, 2003 |  |        | 15,532,415 | 
|2004                                 |  |        | 48,988,293 | 
|2005                                 |  |        | 27,127,000 | 
|2006                                 |  |        | 3,433,571  | 
|                                     |  |        |            | 
|                                     |  | $      | 98,934,886 | 
|                                     |  |        |            | 

The Company is obligated to fund additional loan amounts totaling approximately
$27.8 million as of September 30, 2003. The maturities shown above that are
prior to October 1, 2003 represent the principal portion of past due loans.

Thirdly, we have the ability to issue Collateralized Notes to provide
additional liquidity. Starting May 7, 2002, as a result of the 2002
Registration, the Company was permitted to offer Collateralized Notes with
maturities of up to five years. Although not a committed source, we may
utilize Collateralized Notes to meet a portion of our short-term funding needs
under normal market conditions.

The following table reflects the maturities of Collateralized Notes as of
September 30, 2003:

|                                     |  |        |            | 
|------------------------------------ |  | ------ | ---------- | 
|Maturity                             |  | Amount
|                                     |  |       
|October 1, 2003 to December 31, 2003 |  | $      | 7,412,797  | 
|2004                                 |  |        | 20,980,222 | 
|2005                                 |  |        | 358,878    | 
|2006                                 |  |        |           | 
|2007                                 |  |        | 284,627    | 
|2008                                 |  |        | 554,196    | 
|                                     |  |        |            | 
|                                     |  | $      | 29,590,720 | 
|                                     |  |        |            | 

Lastly, we had four committed lines of credit with commercial banks aggregating
$17.5 million to provide additional liquidity as of September 30, 2003. The
Company renewed and increased one of the lines of credit by $2.0 million in
October 2003, thereby increasing total availability to $19.5 million. All four
lines of credit are collateralized by mortgage loans. 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 regarding 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 and the
Company has been in compliance since inception of the facilities.

27



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##### Table of Contents



Liquidity and Capital Resources (Continued)

The following table sets out the maturity dates, total facility and outstanding
balance of each line of credit at September 30, 2003:

|                 |       |                |           |                    |  |   |                |           | 
|---------------- | ----- | -------------- | --------- | ------------------ |  | - | -------------- | --------- | 
|                 |       |                |           |                    |  |   | Outstanding at
|Maturity         |       | Amount of Line |           | September 30, 2003
|                 |       |                |           |                   
|October 15, 2003 |       | $              | 5,000,000 |                    |  | $ | 5,000,000      |          
|January 23, 2004 |       |                | 2,500,000 |                    |  |   |               |          
|April 15, 2004   |       |                | 3,500,000 |                    |  |   | 925,000        |          
|June 15, 2004    |       |                | 6,500,000 |                    |  |   | 40,000         |          
|                 |       |                |           |                    |  |   |                |          
|                 | Total |                | $         | 17,500,000         |  |   | $              | 5,965,000 | 
|                 |       |                |           |                    |  |   |                |          

The Company renewed and increased its line of credit by $2.0 million in October
2003, thereby increasing total availability to $19.5 million.

We believe the combination of these sources of capital allows us to manage our
anticipated short-term liquidity needs 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. At September 30, 2003, the Company was
committed to advancing an additional amount of approximately $27.8 million
related to its construction loans. There are no commitments for material
capital expenditures or payments due on long-term debt obligations except
Collateralized Notes with maturities in excess of one year. 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
account for this credit risk, the Company sets aside an allowance or reserve
for credit losses through periodic charges 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 prudent 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 the management of credit risk and the minimization of loan losses.
All specifically identifiable and quantifiable 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 loan losses.

28



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Risk Management and the Allowance for Loan Losses (Continued)

Loans are initially risk graded prior to loan origination. They are re-graded
quarterly. 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 Companys Board of
Directors for action. Watch list loans are those loans considered as having
weakness detected in character, capacity to repay or balance sheet concerns,
which 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 conditions                                              
| | - |  | -------------------------------------------------------------------------------------
|
| | - |  | 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 Committee of the Board of Directors reviews every significant
problem loan and assessments are performed quarterly to confirm the risk rating
to that loan, proper accounting and the adequacy of loan loss reserve assigned.

After reviewing the loan portfolio, management will allocate or assign a
portion of the allowance for loan loss to groups of loans and to 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 SFAS 114 Accounting by Creditors
for Impairment of a Loan and 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 estimated probable losses,
management records an 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 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.

29



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##### Table of Contents



Risk Management and the Allowance for Loan Losses (Continued)

The second or general component of the allowance for loan loss is intended to
absorb inherent losses that may not be provided for by the first component.
The primary reason that the first component might not be sufficient to absorb
the losses present in the portfolio (and the unallocated portion of the
allowance for loan loss is used to provide for the losses that have occurred)
is due to the inherent 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 performed without the assurance that all
relevant facts are available to the reviewer. For example, troubled borrowers
may inadvertently or deliberately omit important information from
correspondence with the reviewer regarding the borrowers financial condition
and the diminished strength of repayment sources.

While there exists probable asset quality problems in the Companys loan
portfolio, management believes sufficient reserves have been provided in the
allowance for loan loss to absorb probable losses in the loan portfolio at
September 30, 2003.

Non-Performing Loans, Potential Problem Loans, and Other Real Estate

As a Company policy 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. Accrued interest recorded during the 90-day
period remains accrued if management determines that the underlying collateral
supports recovery of principal and accrued interest. At September 30, 2003 the
Company had four loans which were 30 to 304 days past due totaling
approximately $6.9 million in principal and accrued interest.

Land Held for Residential Development and Real Estate Owned (Held for Sale)

Land held for residential development and real estate owned (held for sale)
consists of 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 selling
costs. Costs related to the improvements to the property are capitalized. Any
other costs are expensed.

Inflation

Virtually all of the Companys assets and liabilities are financial in nature.
As a result, interest rates and other factors drive the Companys performance
far more than does inflation. Changes in interest rates do not necessarily
correlate with inflation rates and changes in inflation rates. The Companys
consolidated financial statements are prepared in accordance with US GAAP,
while dividends are based on net income calculated for tax purposes. In each
case, the Companys Consolidated Statements of Earnings and Consolidated
Balance Sheets are measured with reference to historical cost or fair market
value without considering inflation.

Forward Looking Statements

When used in this Quarterly Report on Form 10-Q, in future SEC filings, or in
other written or oral communications, the words or phrases will likely
result, are expected to, will continue, is anticipated, estimate,
project, or similar expressions are intended to identify forward-looking
statements for purposes of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(Exchange Act), and as such may involve known and unknown risks, uncertainties
and assumptions.

30



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##### Table of Contents



Forward Looking Statements (Continued)

These forward-looking statements are subject to various risks and
uncertainties, including, but not limited to, risks relating to: increases in
prepayment rates on the mortgage loans; changes in short-term interest rates;
the Companys ability to use borrowings to finance its assets; risks associated
with investing in real estate, including changes in business conditions and the
general economy; changes in government regulations affecting the Companys
business; and the Companys ability to maintain its qualification as a REIT for
Federal income tax purposes. These risks, uncertainties, and factors could
cause the Companys actual results to differ materially from those projected in
any forward-looking statements it makes.

All forward-looking statements speak only as the date they are made. The
Company does not undertake, and specifically disclaims any obligation to update
any forward-looking statements to reflect events or circumstances after the
date of such statements. Readers are cautioned that the Companys actual
results could differ materially from those set forth in such forward-looking
statements.




|        |  |                                                           
|------- |  | ----------------------------------------------------------
|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, borrowings under lines of credit
and the issuance of 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 has 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.

For the most part, our loans provide for either monthly payments of interest
only with a payment of principal in full at the end of the loan term, or
monthly payments of 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 100 to 200 basis point increase or decrease in
general interest rates (from those prevailing at September 30, 2003) 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, Colorado,
California, or Utah 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, the 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.

31



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##### Table of Contents






|        |  |                        
|------- |  | -----------------------
|ITEM 4. |  | CONTROLS AND PROCEDURES



| | (a) |  | Disclosure Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                       
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The undersigned principal executive officer and principal
financial officer of Specialty Trust, Inc. conclude that
Specialty Trust, Inc.s disclosure controls and procedures are
effective as of September 30, 2003 based on their evaluation
of these controls and procedures required by paragraph (b) of
Exchange Act Rule 15d-15.                                                                   
|
| | (b) |  | Changes in Internal Control over Financial
Reporting                                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | There has been no change in Specialty Trust, Inc.s internal
control over financial reporting identified in connection with
the evaluation required by paragraph (d) of Exchange Act Rule
15d-15 that occurred during the quarter ended September 30,
2003 that has materially affected, or is reasonably likely to
materially affect, Specialty Trust, Inc.s internal control
over financial reporting.




PART II. OTHER INFORMATION




|        |  |                                                                                                                                                                                                                                                                                              
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM 1. |  | LEGAL PROCEEDINGS.                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                              
|        |  | At September 30, 2003, 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.                                                                    
|        |  |                                                                                                                         
|        |  | On August 11, 2003, Specialty Trust held its Annual Meeting of
Shareholders. The results of the meeting were as follows:



| | (a) |  | The election of Class III Directors:
Roger M. Peltyn and Harvey Fennell.
| | --- |  | ------------------------------------------------------------------------



| | (b) |  | Approval of the appointment of
KPMG LLP as the Independent Auditors of the Company for the year
ended December 31, 2003.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------




|        |  |                   
|------- |  | ------------------
|ITEM 5. |  | OTHER INFORMATION.
|        |  |                   
|        |  | None              

32



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##### Table of Contents



|        |  |                                  
|------- |  | ---------------------------------
|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K.






| | (a) |  | Exhibits
| | --- |  | --------

| |             |          |  |                                                                                                   
| | ----------- | -------- |  | --------------------------------------------------------------------------------------------------
| | Exhibit No. | Document
| |             |         
| |             | 3.1*     |  | Articles of Incorporation                                                                         
| |             |          |  |                                                                                                   
| |             | 3.3*     |  | Bylaws                                                                                            
| |             |          |  |                                                                                                   
| |             | 3.3.1*   |  | Amendment to Bylaws                                                                               
| |             |          |  |                                                                                                   
| |             | 31.1     |  | Certification of Chief Executive
Officer Regarding Form for Quarter Ending September
30, 2003     
| |             |          |  |                                                                                                   
| |             | 31.2     |  | Certification of Chief Financial
Officer Regarding Form 10-Q for Quarter Ending September
30, 2003
| |             |          |  |                                                                                                   
| |             | 32.1     |  | Statement of Chief Executive Officer
Regarding Form 10-Q for Quarter Ending September 30, 2003    
| |             |          |  |                                                                                                   
| |             | 32.2     |  | Statement of Chief Financial Officer
Regarding Form 10-Q for Quarter Ending September 30, 2003    



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



| | (a) |  | Reports on Form 8-K
None filed during the quarter ended September 30, 2003
| | --- |  | --------------------------------------------------------------------------

33



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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 TRUST, INC.
|                         |                       |                                          |                           | 
|Dated: November 12, 2003 |                       | By:                                      | /s/ Nello Gonfiantini III
|                         |                       |                                          |                           | 
|                         |                       | Nello Gonfiantini III                    |                          
|                         |                       | Chairman, President, and Secretary       |                          
|                         |                       |                                          |                           | 
|                         |                       | (Signed in the capacity of duly          |                          
|                         |                       | authorized officer of the registrant     |                          
|                         |                       |                                          |                           | 
|Dated: November 12, 2003 |                       | By:                                      | /s/ Stephanie Schmitt     | 
|                         |                       |                                          |                           | 
|                         |                       | 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)                              |                          

34