<PAGE>

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


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


                                    FORM 10-Q


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


FOR THE QUARTERLY PERIOD ENDED:  SEPTEMBER 30, 2001


                                       OR


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


FOR THE TRANSITION PERIOD FROM _____________ TO ____________


COMMISSION FILE NUMBER:  333-44860


                         SPECIALTY MORTGAGE TRUST, INC.
             (Exact name of Registrant as specified in its Charter)


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


                6160 PLUMAS ST.
                 RENO, NEVADA                                89509
   (Address of principal executive offices)               (Zip Code)


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


        Indicate by check mark whether the Registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.


                               Yes  [X]   No   [ ]


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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


Common Stock ($.01 par value)                  5,026,846 as of November 13, 2001

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

<PAGE>

                                      INDEX


                          PART I. FINANCIAL INFORMATION



<TABLE>
<CAPTION>
                                                                              Page
                                                                              ----
<S>                                                                           <C>
Item 1.        Financial Statements - Specialty Mortgage Trust, Inc.            3

               Balance Sheets                                                   3

               Statements of Earnings                                           4

               Statements of Stockholders' Equity                               5

               Statements of Cash Flows                                         6

               Notes to the Financial Statements                                7


Item 2.        Management's Discussion and Analysis of Financial Condition
               And Results of Operations                                       10


Item 3         Quantitative and Qualitative Disclosures about Market Risk      14



                           PART II. OTHER INFORMATION


Item 1         Legal Proceedings                                               16

Item 2         Changes in Securities and Use of Proceeds                       16

Item 3         Defaults upon Senior Securities                                 16

Item 4         Submission of Matters to Vote of Securityholders                16

Item 5         Other Information                                               16

Item 6         Exhibits on Form 8-K                                            17
</TABLE>






                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION



SPECIALTY MORTGAGE TRUST, INC.
BALANCE SHEETS


<TABLE>
<CAPTION>
                                     ASSETS
                                                                       SEPTEMBER 30, 2001   DECEMBER 31
ASSETS                                                                     (UNAUDITED)          2000
                                                                       ------------------   ------------
<S>                                                                    <C>                  <C>
     Cash and cash equivalents                                             $ 6,145,618      $  2,619,717
     Accrued interest receivable                                               707,728           518,340
     Investments                                                                    --           248,517
     Real estate owned                                                       3,068,175                --
     Mortgage loans held for investment, net of
      allowance for loan losses of $900,000, and $750,000
      at September 30, 2001 and December 31, 2000, respectively             65,850,937        55,113,036
     Deferred charges                                                          316,614           167,633
     Prepaid expenses                                                            3,097                --
                                                                           -----------      ------------
          Total assets                                                     $76,092,169      $ 58,667,243
                                                                           ===========      ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
     Dividends payable                                                     $        --      $  1,387,283
     Accounts payable                                                           63,328            25,545
     Deposits                                                                       --           923,406
     Accrued interest payable                                                   17,836            26,077
     Lines of credit                                                                --         4,452,500
     Collateralized notes                                                    8,611,150         5,663,505
     Collateralized notes - related party                                      970,398           889,955
     Deferred revenue                                                           87,554             8,186
                                                                           -----------      ------------
          Total liabilities                                                  9,750,266        13,376,457
                                                                           -----------      ------------
STOCKHOLDERS' EQUITY
     Class A Convertible Preferred Stock; $0.01 par value
       10,000,000 and 5,000,000 shares authorized as of
       September 30, 2001 and December 31, 2000, respectively
       6,417,633 and 4,624,276 shares issued and outstanding as of
       September 30, 2001 and December 31, 2000, respectively                   64,176            46,243

     Common stock; $0.01 par value; 40,000,000 and 45,000,000 shares
       authorized as of September 30, 2001 and December 31, 2000,
       respectively 352,118 and 334,400 shares issued and outstanding
       as of September 30, 2001 and December 31, 2000, respectively              3,521             3,344
     Additional paid-in capital                                             64,647,334        45,242,156
     Retained earnings                                                       1,626,872                --
     Accumulated other comprehensive gain (loss)                                    --              (957)
                                                                           -----------      ------------
          Total stockholders' equity                                        66,341,903        45,290,786
                                                                           -----------      ------------
          Total liabilities and stockholders' equity                       $76,092,169      $ 58,667,243
                                                                           ===========      ============
</TABLE>


The accompanying notes are an integral part of the statements.




                                       3
<PAGE>

SPECIALTY MORTGAGE TRUST, INC.
STATEMENTS OF EARNINGS


<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED          NINE MONTHS ENDED
                                                   --------------------------- ---------------------------
                                                   SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
                                                        2001          2000          2001          2000
                                                   ------------- ------------- ------------- -------------
                                                    (unaudited)   (unaudited)   (unaudited)   (unaudited)
<S>                                                <C>           <C>           <C>           <C>
REVENUE
     Interest and dividend income
         Mortgage loans                             $2,055,257    $1,522,743    $5,529,090    $3,744,562
         Cash accounts                                  22,559         4,161        34,143       122,839
         Dividends                                          --         7,097         7,097        21,291
                                                    ----------    ----------    ----------    ----------
                Total interest and dividend
                income                               2,077,816     1,534,001     5,570,330     3,888,692
                                                    ----------    ----------    ----------    ----------
     Interest expense
         Lines of credit                                   718        25,385        51,878        49,721
         Collateralized notes                          187,956       131,776       550,475       315,476
                                                    ----------    ----------    ----------    ----------
                Total interest expense                 188,674       157,161       602,353       365,197
                                                    ----------    ----------    ----------    ----------
                Net interest and dividend income     1,889,142     1,376,840     4,967,977     3,523,495
     Provision for loan losses                         125,000       125,000       375,000       275,000
                                                    ----------    ----------    ----------    ----------
                Net revenues                         1,764,142     1,251,840     4,592,977     3,248,495
                                                    ----------    ----------    ----------    ----------
EXPENSES
     General and administrative                         78,830        18,229       288,509        83,052
     Management and directors' fees                     58,440         4,275       102,766        10,500
                                                    ----------    ----------    ----------    ----------
                Total expenses                         137,270        22,504       391,275        93,552
                                                    ----------    ----------    ----------    ----------
                Earnings before income taxes         1,626,872     1,229,336     4,201,702     3,154,943
     Income taxes                                           --            --            --            --
                                                    ----------    ----------    ----------    ----------
                NET EARNINGS                         1,626,872     1,229,336     4,201,702     3,154,943
     Preferred stock dividend                        1,413,586     1,158,922     2,815,107     2,307,968
                                                    ----------    ----------    ----------    ----------
                NET EARNINGS ATTRIBUTABLE TO
                COMMON STOCK                        $  213,286    $   70,414    $1,386,595    $  846,975

Basic earnings per share                                  0.63          0.21          4.09          2.62
                                                    ==========    ==========    ==========    ==========
Diluted earnings per share                                0.27          0.25          0.77          0.70
                                                    ==========    ==========    ==========    ==========
</TABLE>


The accompanying notes are an integral part of the statements.




                                       4
<PAGE>

SPECIALTY MORTGAGE TRUST, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                    CONVERTIBLE                         ADDITIONAL
                                  PREFERRED STOCK     COMMON STOCK        PAID-IN        RETAINED   COMPREHENSIVE
                                 SHARES     AMOUNT   SHARES    AMOUNT     CAPITAL         EARNINGS      INCOME        TOTAL
                               ---------   -------   -------   ------   ------------    ----------- -------------  ------------
<S>                            <C>         <C>       <C>       <C>      <C>             <C>            <C>         <C>
Balance, December 31, 1999     3,799,700   $37,997   320,200   $3,202   $ 37,527,205                               $ 37,568,404
Comprehensive income:
     Net earnings                     --        --        --       --             --    $ 4,543,772    $     --       4,543,772
     Net unrealized loss
       on investment
       available-for-sale             --        --        --       --             --             --        (957)           (957)
                                                                                        -----------    --------    ------------
  Total comprehensive income          --        --        --       --             --      4,543,772        (957)      4,542,815
                                                                                        -----------    --------    ------------
Stock options exercised               --        --    14,200      142         22,291             --          --          22,433
Preferred stock issued           569,890     5,699        --       --      5,679,812             --          --       5,685,511
Collaterized notes received
  for preferred stock            119,430     1,194        --       --      1,193,106             --          --       1,194,300
Dividends reinvested
  for preferred stock            135,256     1,353        --       --      1,346,933             --          --       1,348,286
Dividends declared                    --        --        --       --       (527,191)    (4,543,772)         --      (5,070,963)
                               ---------   -------   -------   ------   ------------    -----------    --------    ------------
Balance December 31, 2000      4,624,276   $46,243   334,400   $3,344   $ 45,242,156    $        --    $   (957)   $ 45,290,786
                               =========   =======   =======   ======   ============    ===========    ========    ============
Comprehensive income:
     Net earnings                     --        --        --       --             --    $ 4,201,702          --    $  4,201,702
     Net unrealized loss
       on investment
       available-for-sale             --        --        --       --             --             --      11,349          11,349
     Reclassification
       adjustment                     --        --        --       --             --             --     (10,392)        (10,392)
                                                                                        -----------    --------    ------------
  Total comprehensive income          --        --        --       --             --      4,201,702         957       4,202,659
                                                                                        -----------    --------    ------------
Stock options exercised               --        --    17,718      177         21,250             --          --          21,427
Non-employee stock
  options expense                     --        --        --       --         52,173             --          --          52,173
Dividends reinvested
  for preferred stock            126,136     1,261        --       --      1,297,511             --          --       1,298,772
Preferred stock issued,
  net of offering costs        1,667,221    16,672        --       --     18,274,521             --          --      18,291,193
Dividends declared                    --        --        --       --       (240,277)    (2,574,830)         --      (2,815,107)
                               ---------   -------   -------   ------   ------------    -----------    --------    ------------
Balance September 30, 2001
  (unaudited)                  6,417,633   $64,176   352,118   $3,521   $ 64,647,334    $ 1,626,872    $     --    $ 66,341,903
                               =========   =======   =======   ======   ============    ===========    ========    ============
</TABLE>

The accompanying notes are an integral part of these statements.




                                       5
<PAGE>

SPECIALTY MORTGAGE TRUST, INC.
STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                           NINE MONTHS ENDED
                                                                  --------------------------------
                                                                  SEPTEMBER 30,      SEPTEMBER 30,
                                                                       2001               2000
                                                                  -------------      -------------
                                                                  (UNAUDITED)        (UNAUDITED)
<S>                                                               <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net earnings                                                     $  4,201,702       $  3,154,943
                                                                  ------------       ------------
 Adjustment to reconcile net earnings to net cash provided
 by operating activities:
    Amortization                                                        53,936             35,755
    Provision for loan losses                                          375,000            275,000
    Non-cash collateralized notes interest reinvested                  470,399            225,415
    Non-cash stock compensation                                         52,173                 --
    Gain on sale of investments                                        (10,392)                --
    Changes in assets and liabilities:
       Accrued interest receivable                                    (189,388)          (149,497)
       Prepaid expenses                                                 (3,097)            (2,322)
       Other assets                                                         --           (150,000)
       Accounts payable                                                 37,783             (7,126)
       Deposits                                                       (923,406)          (225,000)
       Accrued interest payable                                         (8,241)            23,077
       Deferred revenue                                                 79,368            (10,487)
                                                                  ------------       ------------
          Total adjustments                                            (65,865)            14,815
                                                                  ------------       ------------
          Net cash provided by operating activities                  4,135,837          3,169,758
                                                                  ------------       ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of investments                                                    --           (249,474)
 Investment in real estate owned                                      (244,613)                --
 Proceeds from sale of investments                                     259,866                 --
 Purchase of mortgage loans held for investment                    (28,585,738)       (33,247,111)
 Principal repayments of mortgage loans held for investment         14,649,275         12,829,121
                                                                  ------------       ------------
          Net cash used in investing activities                    (13,921,210)       (20,667,464)
                                                                  ------------       ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from preferred stock offering, net                        15,318,065          5,685,511
 Proceeds from common stock options exercised                           21,427                330
 Cash dividends paid                                                (2,903,618)        (2,425,368)
 Net (payments)/proceeds on line of credit                          (4,452,500)         3,040,000
 Proceeds on collateralized notes                                   10,346,682          4,627,694
 Principal payments on collateralized notes                         (4,815,865)        (1,232,388)
 Loan issue costs                                                     (202,917)          (126,667)
                                                                  ------------       ------------
        Net cash provided by financing activities                   13,311,274          9,569,112
                                                                  ------------       ------------
        NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         3,525,901         (7,928,594)
                                                                  ------------       ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                       2,619,717          7,998,709
                                                                  ============       ============
CASH AND CASH EQUIVALENTS AT END OF YEAR                          $  6,145,618       $     70,115
                                                                  ============       ============
</TABLE>




                                       6
<PAGE>

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


<TABLE>
<CAPTION>
                                                                               NINE MONTHS ENDED
                                                                        ------------------------------
                                                                        SEPTEMBER 30,    SEPTEMBER 30,
                                                                             2001             2000
                                                                        -------------    -------------
                                                                         (UNAUDITED)      (UNAUDITED)
<S>                                                                     <C>              <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
 Cash paid for interest                                                   $  140,195      $  116,705
                                                                          ==========      ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
 FINANCING ACTIVITIES:
 Collateralized notes exchanged for issuance of preferred stock           $2,973,128      $1,194,300
                                                                          ==========      ==========
 Collateralized notes refinanced at maturity                              $8,009,318      $9,083,292
                                                                          ==========      ==========
 Collateralized notes interest reinvested                                 $  470,399      $  225,415
                                                                          ==========      ==========
 Dividends reinvested for preferred stock                                 $1,298,772      $  962,475
                                                                          ==========      ==========
 Mortgage loans held for investment transferred to real estate owned      $2,823,562      $       --
                                                                          ==========      ==========
</TABLE>


The accompanying notes are an integral part of these statements.



SPECIALTY MORTGAGE TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)

NOTE 1.  THE COMPANY

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

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

The accompanying financial statements for the three-month and nine-month periods
ended September 30, 2001 and 2000 are unaudited. In the opinion of management,
all adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of the Company's financial position and results of operations for




                                       7
<PAGE>

such periods have been included. The accompanying unaudited financial statements
should be read in conjunction with the Company's audited financial statements
for the years ended December 31, 2000 and 1999 included in SMTs Form 10-K for
the year ended December 31, 2000. The results for the three months and
nine-month periods ended September 30, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001 or for
any other period.

NOTE 2.  SUBSEQUENT EVENTS

As of October 1, 2001, management met its target of 12% return on equity, on a
taxable income basis for the previous four consecutive quarters. In accordance
with the terms of preferred shares, all of the shares of Specialty Mortgage
Trust's Class A Convertible Preferred Stock converted to Common Stock on October
1, 2001. After the conversion, the total number of shares of common stock
outstanding is as follows:

<TABLE>
      <S>                                                        <C>
      Class A Preferred Stock all converted to Common Stock      6,417,633
      Common Stock                                                 352,118
                                                                 ---------
      Total Common Stock Outstanding                             6,769,751
</TABLE>

Par Value of the Common Stock is $0.01. There are 50,000,000 shares authorized
as of October 1, 2001.


NOTE 3.  COLLATERALIZED NOTES

Prior to August 22, 2000, SMT issued in private placements its Class A
collateralized notes (the "Class A notes"). The Class A notes were
collateralized by SMT's mortgage loans in an aggregate principal amount of at
least two times the aggregate principal amount outstanding on the Class A notes.
The last of the Class A notes matured as of August 20, 2001. On January 18,
2001, SMT's registration statement covering the public sale of up to
$250,000,000 of collateralized investment notes (the "collateralized investment
notes") was declared effective by the Securities and Exchange Commission. The
collateralized investment notes are secured by at least one and one-half times
the aggregate principal amount outstanding on the collateralized investment
notes. The Class A notes and the collateralized investment notes are referred to
collectively as the "collateralized notes." The collateralized notes have
maturities ranging from one month to twelve months from the date of issue and
bear a fixed rate of interest (4.50% to 7.75% at September 30, 2001 and 6.00% to
8.75% at December 31, 2000). At September 30, 2001 and December 31, 2001, the
collateralized notes were secured by $24,853,389 and $29,670,205, respectively,
of mortgage loans pledged as collateral, respectively.

NOTE 4. DELINQUENT LOANS

On September 30, 2001, two loans totaling $2,529,850 were delinquent for
interest. A commercial land loan for $1,579,850 was delinquent for interest and
is secured by a second trust deed, behind an $8 million loan from a commercial
bank. A second commercial building loan for $950,000 was also delinquent for
interest and secured by a first deed of trust.

NOTE 5. REAL ESTATE OWNED

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

In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-lived Assets and Long-lived Assets to Be
Disposed Of, the Company periodically compares the carrying value of real estate
to expected future cash flows for the purpose of assessing the recoverability of
the recorded amounts. If the carrying value exceeds future cash flows, the
assets are reduced to fair value. There were no required reductions to the
carrying value of real estate owned for the three months ended September 30,
2001.




                                       8
<PAGE>

In September 2001, Specialty Mortgage Trust foreclosed on a loan for $408,000,
which consisted of 2 office buildings. As a result, on September 30, 2001, SMT
real estate owned totaled $3,068,175. The properties owned consist of 15
unfinished residential lots, 102 undeveloped lots, and 2 office buildings, which
were transferred from mortgage loans to real estate owned upon foreclosure.

NOTE 6.  RELATED PARTY

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

The Manager receives the mortgage placement fees or points, usually charged to
the borrower for and upon origination, extension or refinancing of loans, up to
2.5% of the loan balance with any additional fees or points paid to SMT
effectively discounting the purchase price of the loan from the Manager. The
Manager will also receive a fee for loan servicing equal to one-half of one
percent per annum of the total mortgage loans serviced and any late payment
charges. These fees are earned directly by the Manager and deducted from the
interest or late payments to cover costs to manage the portfolio, effectively
reducing the yield to SMT. In addition, the Manager will receive, as incentive
compensation for each fiscal quarter, an amount equal to 50% of the taxable net
income before the dividend deduction of SMT in excess of an annualized return to
SMT equal to 12%. For the quarters ended September 30, 2001 and 2000, the
Manager earned the following:

<TABLE>
<CAPTION>
                                           2001          2000
                                         --------      --------
     <S>                                 <C>           <C>
     Loan origination fees               $667,750      $134,025
     Loan servicing fees                   59,512        41,020
     Late payment charges                  16,668        11,134
     Incentive compensation bonus          49,846             -
</TABLE>

NOTE 7.  RECENT ACCOUNTING PRONOUNCEMENTS

On July 20, 2001 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:

     -  All business combinations initiated after June 30, 2001 must use the
        purchase method of accounting. The pooling of interest method of
        accounting is prohibited except for transactions initiated before July
        1, 2001.

     -  Intangible assets acquired in a business combination must be recorded
        separately from goodwill if they arise from contractual or other legal
        rights or are separable from the acquired entity and can be sold,
        transferred, licensed, rented, exchanged, either individually or as part
        of a related contract, asset or liability.

     -  Goodwill, as well as intangible assets with indefinite lives, acquired
        after June 30, 2001, will not be amortized. Effective January 1, 2002,
        all previously recognized goodwill and intangible assets with indefinite
        lives will no longer be subject to amortization.

     -  Effective January 1, 2002, goodwill and intangible assets with
        indefinite lives will be tested for impairment annually and whenever
        there is an impairment indicator.

     -  All acquired goodwill must be assigned to reporting units for purposes
        of impairment testing and segment reporting.




                                       9
<PAGE>

Although it is still reviewing the provisions of these Statements, management's
preliminary assessment is that these Statements will not have a material impact
on the Company's financial position or results of operations.

ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATION

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

               SAFE HARBOR STATEMENT

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

               COMPANY OVERVIEW

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

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

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

               Specialty Financial, formerly Gonzo 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 2001 AND YEAR END 2000

               At September 30, 2001, we owned $66.8 million of mortgage loans
               and $3.1 million of real estate owned. Our total assets were
               $76.1 million. The assets were financed with $9.8 million of
               recourse short-term debt, and $66.3 million of preferred and
               common equity.




                                       10
<PAGE>

               As reported on our September 30, 2001 balance sheet, our
               equity-to-assets ratio was 87.1% and our debt-to-equity ratio was
               14.7%. For the quarter ended September 30, 2001, our return on
               equity was 9.27%.

               At December 31, 2000, we owned $55.9 million of mortgage loans
               and $0.2 million of mortgage securities. Our total assets were
               $58.7 million. The assets were financed with $6.6 million in
               recourse short-term debt, $4.5 million in short-term
               collateralized lines of credit and $45.3 million of preferred and
               common equity. Our equity-to-asset ratio was 77.2%; our
               debt-to-equity ratio was 29.6%, and our average quarterly return
               on equity for the year ended December 31, 2000 was 10.4%.

               The increase in assets was the result of cash receipts of $18.2
               million from the sale of preferred stock on June 30, and
               September 30, 2001. The decrease in liabilities was the result of
               dividends not being declared until after quarter end, whereas at
               December 31, 2000 the dividend payable totaled approximately $1.4
               million. In addition, we did not draw on our line of credit at
               quarter end, whereas at December 31, 2000 the line of credit
               totaled approximately $4.5 million. Finally, we did not hold
               deposits on September 30, 2001 whereas we had a $.9 million
               deposit on December 31, 2000. The increase in stockholders'
               equity was the result of stockholders reinvesting dividends from
               earnings in the dividend reinvestment program for the nine months
               ended September 30, 2001, and the private placement of preferred
               stock.

               In connection with the preparation of the September 30, 2001 10Q,
               the company found that the basic earnings per share as of June
               30, 2001 did not consider the preferred stock dividend paid in
               the second quarter. As a result, the basic earnings per share
               should have been recorded as (0.39) and (0.36) for the three
               months ended June 30, 2001 and June 30, 2000, respectively and
               3.47 and 2.40 for the six months ended June 30, 2001 and June 30,
               2000, respectively. Concurrently, the company has filed an
               amended 10Q for the period ended June 30, 2001.

               CHANGES IN FINANCIAL CONDITION

               ASSETS
               Cash and Cash Equivalents. Cash and cash equivalents increased by
               $3.5 million as of September 30, 2001, compared to December 31,
               2000. The timing of loan funding and the timing of debt or equity
               issues generally determine the amount of cash held by the
               Company. It is our goal to keep cash invested in loans or other
               financial instruments and therefore keep cash balances low
               whenever possible.

               Real Estate Owned. Real estate owned increased by $3.1 million as
               of September 30, 2001, compared to December 31, 2000. Real estate
               owned represents property, which was acquired through
               foreclosure. As of September 30, 2001, Specialty Mortgage Trust
               had foreclosed on two loans. These properties are in various
               stages of development. As of September 30, 2001, the property
               includes 15 unfinished residential lots that are for sale, 102
               undeveloped lots that are tentatively mapped and will be fully
               developed and offered for sale, and 2 office buildings that are
               for sale. During the third quarter of 2001, the Company sold 4
               residential lots.

               Mortgage Loans. Mortgage loans held for investment net of
               allowance for loan losses increased by $10.9 million as of
               September 30, 2001, compared to December 31, 2000. This increase
               in mortgage loans was due primarily to new loans being
               underwritten and funded faster than loans were maturing.




                                       11
<PAGE>

               LIABILITIES

               Lines of Credit. Lines of credit decreased by $4.5 million as of
               September 30, 2001 from December 31, 2000. This line item
               represents collateralized short-term borrowings from banks and
               will fluctuate over time due to loan funding needs, loan
               prepayments and other debt and equity issues. Use of lines of
               credit was minimal during the quarter because we sold
               collateralized notes to fund loans rather than use higher cost
               lines of credit.

               Collateralized Notes. On September 30, 2001, collateralized notes
               increased $3.1 million over December 31, 2000 primarily because
               the notes could be offered at a lower interest rate than the
               interest rates on our lines of credit to fund loans. Our
               collateralized notes were approved for public sale January 19,
               2001.

               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.

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED                       NINE MONTHS ENDED
                                               SEPTEMBER 30, 2001                       SEPTEMBER 30, 2001
                                                   OVER/UNDER                               OVER/UNDER
                                               SEPTEMBER 30, 2000                       SEPTEMBER 30, 2000
                                      ----------------------------------    -----------------------------------------
                                         NET                                    NET
                                       CHANGE        RATE        VOLUME        CHANGE          RATE         VOLUME
                                      --------    ---------     --------    -----------     ---------     -----------
               <S>                    <C>         <C>           <C>         <C>             <C>           <C>
               INTEREST INCOME
                   Mortgage Loans     $532,514    $ 219,799     $312,715    $ 1,784,528     $ 663,777     $ 1,120,751
                   Cash Accounts        18,398       (2,924)      21,322        (88,696)      (73,286)        (15,410)
                                      --------    ---------     --------    -----------     ---------     -----------
                          Total        550,912      216,875      334,037      1,695,832       590,491       1,105,341
                                      ========    =========     ========    ===========     =========     ===========

               INTEREST EXPENSE
                   Line of Credit      (24,667)          --      (24,667)         2,157        23,183         (21,026)
                   Collateralized
                   Notes                56,180       (9,171)      65,351        234,999         4,547         230,452
                                      --------    ---------     --------    -----------     ---------     -----------
                          Total         31,513       (9,171)      40,684        237,156        27,730         209,426
                                      ========    =========     ========    ===========     =========     ===========
                   Change in net
                   interest income    $519,399    $ 226,046     $293,353    $ 1,458,676     $ 562,761     $   895,915
                                      ========    =========     ========    ===========     =========     ===========
</TABLE>

               Our operating results include all of the reported income of our
               mortgage finance operation. The comparison of the nine and three
               months ended September 30, 2001 and September 30, 2000,
               respectively, is as follows:

               Interest Income, Mortgage Assets. Interest income increased $1.8
               million and $533,000 for the nine months and three months ended
               September 30, 2001 respectively, as compared to the comparable
               prior year periods. In each case, these increases were due
               primarily to additional funds invested in mortgage loans as a
               result of increased cash available from the private placement of
               new preferred stock on July 1, 2000 and dividend reinvestments
               during the period, increase in interest rates, and the use of
               short-term borrowings to fund a corresponding increase in loan
               demand.




                                       12
<PAGE>

               Total Interest Expense. For the nine and three months ended
               September 30, 2001, interest expense increased $237,000 and
               $32,000, respectively, as compared to the comparable prior year
               periods. In each case, these increases were primarily due to
               higher average borrowings outstanding as the company utilized its
               ability to issue collaterized notes to fund the increased loan
               demand.

               Total Expenses. Total expenses increased $300,000 and $100,000
               for the nine months and three months ended September 30, 2001
               respectively, as compared to the comparable prior year periods.
               In each case, these increases were due primarily to advertising
               costs for sale of collaterized notes, non cash compensation
               expense resulting from exercise of common stock options,
               professional fees in conjunction with SEC reporting, and
               management fees related to the operations of the company. General
               and Administrative expenses are a small portion of our net
               revenues since the Manager pays for most expenses directly.

               INTEREST RATE/MARKET/CREDIT RISK

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

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

<TABLE>
<CAPTION>
                                                      ANNUALIZED             ANNUALIZED
                                                  THREE MONTHS ENDED      NINE MONTHS ENDED
                                                ---------------------   ---------------------
                                                9/30/2000   9/30/2001   9/30/2000   9/30/2001
                                                ---------   ---------   ---------   ---------
               <S>                              <C>         <C>         <C>         <C>
               INTEREST INCOME
                     Mortgage Loans               11.45%      12.99%      11.09%      12.87%
                     Cash Accounts                 4.83%       2.50%       5.38%       1.74%

               INTEREST EXPENSE
                     Line of Credit                9.31%       0.00%       6.44%      10.29%
                     Collateralized Notes          7.74%       7.23%       7.39%       7.50%

                        Net Interest Spread        3.45%       5.16%       3.48%       4.71%
</TABLE>


               LIQUIDITY AND CAPITAL RESOURCES

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




                                       13
<PAGE>

               Secondly, the payoff and prepayment of loans provides additional
               liquidity to our portfolio. Historically, we have experienced
               annual loan payoffs and prepayments of approximately 30% to 35%
               of our outstanding portfolio. Since our loan terms are usually
               one to three years, the rate of principal payoffs is significant.
               With a current portfolio of approximately $66.8 million we would
               anticipate annual cash flows from principal pay downs of
               approximately $20.0 million. As we continue to issue
               collateralized notes, our portfolio will increase as will the
               cash flow from principal pay downs. Again, normally these funds
               are used to originate new mortgage loans, but can be used in
               other ways.

               Lastly, we have three lines of credit with commercial banks to
               provide another level of liquidity. We can borrow up to $5
               million on two of the lines to provide funding for new loans and
               $3.0 million on the third, for an aggregate of $12.5 million. The
               two $5 million lines extend through July 1, 2002 and December 1,
               2001, respectively, and the $3.0 million line extends through
               July 1, 2002. All of the lines are collateralized by mortgage
               loans and borrowings under the lines bear interest at the
               applicable bank's prime or reference rate. We are required to
               comply with various operating and financial covenants in the
               lines. Such covenants include restrictions on (i) any change in
               business activities from those we are presently engaged in, and
               (ii) any change in executive and management personnel that would
               result in reduced qualifications and experience compared to
               present personnel. Such covenants also contain requirements for
               (i) minimum tangible net worth, (ii) minimum liquidity (cash and
               available borrowings), (iii) minimum quarterly net earnings, and
               (iv) maximum debt-to-equity ratio. We are in compliance with
               these covenants. We reserve at least $2.5 million of the lines
               unused for liquidity needs.

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

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

ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

               Loans provide for either monthly payments of interest only and a
               payment of principal in full at the end of the loan term,
               principal and interest payments with a balloon payment at the end
               of the




                                       14
<PAGE>

               loan term, or interest only with principal payments upon lot
               releases and principal in full at the end of the loan term.
               Because of the high yield of our loans, we do not believe that a
               10% increase or decrease in general interest rates (from those
               prevailing at September 30, 2001) would have a significant impact
               on the fair value of our fixed rate loan portfolio. A significant
               increase in interest rates could, however, make it more difficult
               for our borrowers to sell or refinance their respective
               properties. This could have a material adverse effect on us,
               either through loan defaults or the need to grant extensions of
               the maturity dates, thereby delaying repayment. Additionally, a
               real estate market decline in Nevada, Arizona or California could
               have a material adverse impact on us. If real estate values were
               to decline, borrowers might find it difficult, if not impossible,
               to repay some or all of the principal and accrued interest in
               connection with a sale or refinancing of the underlying
               properties. A number of factors could lead to a real estate
               market decline including, but not limited to, a slowdown in the
               growth of the economy, increasing commercial interest rates and
               supply and demand factors. It is not possible for us to quantify
               the potential loss in earnings or cash flows that might result
               from a real estate market decline.

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





                                       15
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1.        LEGAL PROCEEDINGS.

               At September 30, 2001, 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.

               On June 30, 2001, Specialty Mortgage Trust completed the first
               closing of a private placement for 1,000,000 shares of Class A
               Convertible Preferred Stock at $11.00 per share for $11.0
               million. On September 30, 2001, Specialty Mortgage Trust
               completed the second closing of the private placement for 667,221
               shares of Class A Convertible Preferred Stock at $11.00 per share
               for $7.3 million. From the total offering there were 149
               investors, 117 of whom were accredited pursuant to Regulation D.
               In the placement, 1,311,619 shares were issued to individuals
               (including self-directed retirement accounts and estate planning
               entities such as family trusts), 168,055 shares were issued to
               pension plans and 187,547 shares were issued to corporate or
               partnership business entities.

               The sale of stock was exempt from the registration requirements
               of the Securities Act of 1933 pursuant to Section 4(2) thereof.
               Appropriate legends were placed on each stock certificate. No
               underwriters were involved and no underwriting commissions were
               paid. No form of general solicitation or general advertising was
               used in any of the transactions. Each investor signed a
               subscription agreement which included representations that they
               had sufficient investment experience or received sufficient
               investment advice to be capable of evaluating the merits and
               risks of their investment in our stock, and that they were able
               to bear the economic risk of the investment.

               The preferred stock, pursuant to its terms converted to Specialty
               Mortgage Trust's common stock, par value $0.01 per share as of
               October 31, 2001.

ITEM 3.        DEFAULTS UPON SENIOR SECURITIES.

               Not applicable

ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

               On July 16, 2001, Specialty Mortgage Trust held its Annual
               Meeting of Shareholders. The results of the meeting were as
               follows:

               (a)     The election of two Class I Directors, Nello Gonfiantini,
                       III and Stephen V. Novacek

               (b)     Appointment of Grant Thornton, LLP as the Independent
                       Auditors of the Company for the year 2001

ITEM 5.        OTHER INFORMATION.

               None




                                       16
<PAGE>

ITEM 6. EXHIBITS ON FORM 8-K.

               (a)    Exhibits

<TABLE>
<CAPTION>
                      Exhibit No.   Document
                      -----------   ---------
                      <S>           <C>
                      3.1*          Articles of Incorporation

                      3.2*          Articles Supplementary

                      3.2a**        Articles of Amendment of Articles Supplementary

                      3.3*          Bylaws

                      3.3.1*        Amendment to Bylaws

                      4***          Indenture dated as of January 1, 2001
                                    between Specialty Mortgage Trust, Inc. and
                                    Bankers Trust Company of California, a
                                    national banking association, as Trustee.

                      11            Statement Regarding Computation of per share
                                    earnings for the three months ended
                                    September 30, 2001 and September 30, 2000
</TABLE>

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

               **  Incorporated by reference to the correspondingly numbered
                   exhibit to the Form 10-Q files by Specialty Mortgage Trust,
                   Inc. with the Securities and Exchange Commission on August
                   14, 2001.

               *** Incorporated by reference to the correspondingly numbered
                   exhibit to the Form 8-K filed by Specialty Mortgage Trust,
                   Inc. with the Securities and Exchange Commission on February
                   2, 2001.




                                       17
<PAGE>

                                   SIGNATURES



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



                                   SPECIALTY MORTGAGE TRUST, INC.



Dated:  November 13, 2001          By: _________________________________________
                                        Nello Gonfiantini III
                                        Chairman, President, Secretary and
                                        Chief Financial Officer

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





                                       18