##### Table of Contents



---

---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K

|      |  |                                                                                    
|----- |  | -----------------------------------------------------------------------------------
|[ X ] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2002

OR


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

For the transition period from          to

Commission file number: 333-44860

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) |  | 7,317,875 as of March 15, 2003

---

---





---

TABLE OF CONTENTS



|             |                                                                                               |                                                                          |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ |  |  |  |  |  | 
|PART I      
|             | Item 1. Business                                                                             
|             | Item 2. Properties                                                                           
|             | Item 3. Legal Proceedings                                                                    
|             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II     
|             | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                 
|             | Item 6. Selected Financial Data                                                              
|             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|             | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|             | Item 8. Financial Statements                                                                 
|             |                                                                                               | CONSOLIDATED BALANCE SHEETS                                             
|             |                                                                                               | CONSOLIDATED STATEMENTS OF EARNINGS                                     
|             |                                                                                               | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
|             |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                                   
|             |                                                                                               | CONSOLIDATED NOTES TO FINANCIAL STATEMENTS                              
|Part III    
|             | Item 10. Directors and Executive Officers of the Registrant                                  
|             | Item 11. Executive Compensation                                                              
|             | Item 12. Security Ownership of Certain Beneficial Owners and Management                     
|             | Item 13. Certain Relationships and Related Transactions                                      
|             | Item 14. Controls and Procedures                                                             
|PART IV     
|             | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES  
|Exhibit 11.1
|Exhibit 99.1
|Exhibit 99.2



---



##### Table of Contents



INDEX

PART I.

|         |  |                                                                                       |  |      |      | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ---- | ---- | 
|         |  |                                                                                       |  | Page
|         |  |                                                                                       |  |     
|Item 1.  |  | Business                                                                              |  |      | 2    | 
|Item 2.  |  | Properties                                                                            |  |      | 28   | 
|Item 3.  |  | Legal Proceedings                                                                     |  |      | 28   | 
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |      | 28   | 
|         |  | PART II.                                                                              |  |      |      | 
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                  |  |      | 28   | 
|Item 6.  |  | Selected Financial Data                                                               |  |      | 30   | 
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |  |      | 31   | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |      | 43   | 
|Item 8.  |  | Consolidated Financial Statements and Supplementary Data                              |  |      | F-1  | 
|         |  | Consolidated Balance Sheets                                                           |  |      | F-3  | 
|         |  | Consolidated Statements of Earnings                                                   |  |      | F-4  | 
|         |  | Consolidated Statements of Stockholders Equity and Comprehensive Income              |  |      | F-5  | 
|         |  | Consolidated Statements of Cash Flows                                                 |  |      | F-8  | 
|         |  | Consolidated Notes to Financial Statements                                            |  |      | F-10 | 
|         |  | PART III                                                                              |  |      |      | 
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  |      | 70   | 
|Item 11. |  | Executive Compensation                                                                |  |      | 74   | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                       |  |      | 75   | 
|Item 13. |  | Certain Relationships and Related Transactions                                        |  |      | 77   | 
|Item 14. |  | Controls and Procedures                                                               |  |      | 81   | 
|         |  | PART IV                                                                               |  |      |      | 
|Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  |      | 82   | 

1



---



##### Table of Contents






PART I.




Item 1. Business



| |  | Our business objective is to build and hold a portfolio of mortgage
loans for investment that generates net income for distribution to
stockholders. We finance our acquisitions of mortgage loans with
equity and secured borrowings. We are structured as a real estate
investment trust (REIT), thereby generally eliminating Federal
income taxes at the corporate level, the tax effect is passed to the
shareholders on income we distribute to stockholders in the form of
dividends. Because we are not structured as a traditional lender,
which 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On May 2, 2002, the Company changed its name from Specialty Mortgage
Trust, Inc. to Specialty Trust, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The Manager                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Specialty Financial, formerly Gonzo Financial, serves as our manager
(the Manager) and is responsible for loan originations, loan
servicing and our day-to-day operations, subject to the supervision
of our Board of Directors. Mr. Nello Gonfiantini, III, a director
and our chief executive officer, is also an executive officer,
director and the sole stockholder of Specialty Financial. We have no
separate employees from the Manager. We have no ownership interest
in the Manager. Specialty Financial has significant operating
discretion as to the implementation of our business strategy and
policies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Specialty Financial is regulated as a mortgage company by the state
of Nevada Financial Institutions Division, Department of Business
and Industry, has filed annual reports with that agency and has been
profitable each year since commencing operations in 1995. The
Manager operates from office space located at 6160 Plumas Street,
Reno, Nevada 89509, telephone (775) 826-0809.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Our business strategies and policies are described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Investment Strategies and Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Mortgage Loan Acquisition Strategy. Our business involves acquiring
and holding loans to borrowers primarily in the Western United
States whose borrowing needs are generally not being served by
traditional financial institutions. Although the majority of our
loans are located in the state of Nevada, we are also acquiring
loans in 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. We generally limit the amount of our investment
in any single mortgage loan or in mortgage loans to one borrower to
10% of our total assets, although exceptions may be approved by the
board. As of December 31, 2002, there was one mortgage loan, which
exceeded the 10% threshold, and one borrower whose total loans
exceeded the 10% threshold, which the board approved. Most loans
have terms of two to three years. At December 31, 2002, less than 1%
of our loan portfolio consisted of loans with originally stated
maturities of more than three years from the year of issuance. We
anticipate that approximately 90% of our mortgage loan balances will
at any one time be secured by first

2



---



##### Table of Contents





| |  | deeds of trust on the underlying real property, with the remaining
mortgage loan balances secured by second deeds of trust. 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 the 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 acquire loans originated by our Manager. Our loans target as
potential customers borrowers with relatively significant equity
value in their property, but who either:                                                                                                                                                                                                                                                                                                                                                                                         



| | - |  | require a small commercial loan;                                                                                                                                      
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | own real property which is difficult to evaluate
under typical residential underwriting guidelines or unlikely
to support a mortgage saleable in the secondary market;
|
| | - |  | are self-employed, tend to experience some
volatility in their income or have difficult-to-document
sources of income; or                                             
|
| | - |  | are otherwise unable to qualify for traditional
mortgage loans.                                                                                                       



| |  | All loans provide for monthly payments of interest. Currently,
substantially all of our loans are at fixed rates of interest. The
Company has one loan with a variable rate of interest, which was 8%
for the first six months of the loan, and thereafter increased to
11%. As part of the acquisition or refinance of a particular
mortgage loan, we may acquire a shared appreciation interest or
other participation in the property securing the loan.                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Risks by Type of Loan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Most of the loans we acquire and hold require the borrower to make a
balloon payment on the principal amount upon maturity of the loan.
At December 31, 2002, less than 1% of our loan portfolio consisted
of fully amortizing mortgage loans. To the extent that a borrower
has an obligation to pay a mortgage loan in a large lump sum
payment, its ability to satisfy this obligation may be dependent
upon its ability to obtain suitable refinancing, sell the underlying
property or otherwise raise a substantial cash amount. An increase
in interest rates over the mortgage rate applicable at the time the
loan was originated may have an adverse effect on the borrowers
ability to obtain refinancing or to pay the required monthly
payments. As a result, such loans may involve a higher risk of
default than fully amortizing loans.
|
| |  | We generally hold our mortgage loans to maturity. In addition, the
REIT provisions of the Internal Revenue Code (the Code) limit in
some respects our ability to sell mortgage loans. From time to time,
however, management may decide to sell mortgage loans. This could
occur for any number of reasons, for example, to dispose of a
mortgage loan as to which credit risk concerns have arisen, to
reduce interest rate risk, or generally to rebalance our portfolio
when management deems such action advisable. Management will select
any mortgage loans to be sold according to the particular purpose
such sale will serve. The Board of Directors has not adopted a
policy that would restrict managements authority to determine the
timing of sales or the selection of mortgage loans to be sold.                                       
|
| |  | Types of Mortgage Loans. The principal types of mortgage loans we
acquire are described below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

3



---



##### Table of Contents





| | - |  | Land Loans. Land loans are made against (a)
underdeveloped or raw land zoned for either commercial or
residential use and (b) land prepared for commercial or
residential development, typically with entitlements obtained
and basic infrastructure such as streets and utilities in
place. An example of a residential land development loan would
be a loan secured by a residential subdivision with residential
lots ready for building. While land loans are generally made at
low loan-to-value ratios, usually less than 50%, there is
generally no cash flow from the property and the borrowers
other sources of income must be relied upon to support the
periodic interest payments due under the loans.                                                                                                                                                                                                                                                                                                                                                                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | Construction Mortgage Loans. Construction loans are
loans made for the renovation of developed property, and for
the construction of new structures on undeveloped property.
Construction loans acquired and held by us will generally be
secured by first deeds of trust on commercial or residential
real property. Most of our construction loans are to developers
building the property for sale. Such loans are typically for
terms of from six months to two years. Generally we do not
disburse funds with respect to a particular construction loan
until work in the previous phase of the project on which the
loan is being made has been completed, and until an independent
inspector has verified the quality of construction and
adherence to the construction plans and has reviewed the
estimated cost of completing the project. In addition, we
require the submission of signed labor and material lien
releases by the borrower in connection with each completed
phase of the project prior to making any periodic disbursements
of proceeds of the loan to the borrower.
|
| | - |  | Commercial Building Loans. Commercial building
loans have distinct risk characteristics depending on the type
of structure on the property. Commercial building loans
generally lack standardized terms, which may complicate their
structure. Commercial buildings themselves tend to be unique
and are more difficult to value than residential properties. In
addition, commercial buildings, particularly industrial and
warehouse properties, are generally subject to relatively
greater environmental risks than non-commercial properties,
with corresponding burdens and costs of compliance with
environmental laws and regulations.                                                                                                                                                                                                                                                                                                                                                                                                                                                  



| |  | Commercial building loans are also subject to the effects of:
| |  | -------------------------------------------------------------



| | -- |  | local and other economic conditions on real estate values;                                                                                                                                                                                                                                                                                                                                                                                                
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | -- |  | the ability of tenants to make lease payments;                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | -- |  | the ability of a building to attract and
retain tenants, which may in turn be affected by local
conditions such as oversupply of space or a reduction in
demand for rental space in the area, the attractiveness of
properties to tenants, competition from other available
space, the ability of the owner to pay leasing commissions,
provide adequate maintenance and insurance, pay tenant
improvement costs and to make other tenant concessions; and
|
| | -- |  | increased operating costs, including energy
costs and real estate taxes.                                                                                                                                                                                                                                                                                                                                                                                  



| |  | While owners of commercial buildings generally will carry
comprehensive liability and casualty coverage, such coverage may
not provide full protection for the value of the underlying
property and may not protect against all casualty losses. If
underlying commercial buildings do not generate sufficient income
to meet operating expenses,
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4



---



##### Table of Contents





| |  | debt service, capital expenditures and tenant improvements,
borrowers under commercial building loans may be unable to make
payments of principal and interest in a timely fashion. Income
from and values of commercial buildings are also affected by such
factors as applicable laws, including tax laws, interest rate
levels, the availability of financing for owners and tenants, and
the impact of and costs of compliance with environmental controls
and regulations. In the event of foreclosure on a commercial
building loan, there may be costs and delays involved in
enforcing rights of a property owner against tenants in default
under the terms of leases with respect to commercial properties
and such tenants may seek the protection of the bankruptcy laws,
which can result in termination of lease contracts.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | Nonconforming Single-Family and Small Multifamily
Residential Mortgage Loans. The nonconforming single-family
residential mortgage loans are conventional mortgage loans that
vary in one or more respects from the requirements for
participation in Fannie Mae or Freddie Mac programs. Credit
risks associated with nonconforming mortgage loans may be
greater than those associated with mortgage loans that conform
to typical Fannie Mae and Freddie Mac guidelines. The principal
differences between nonconforming mortgage loans and conforming
mortgage loans include the applicable loan-to-value ratios, the
credit and income histories of the mortgagors, the
documentation required for approval of the mortgagors, the
types of properties securing the mortgage loans, loan sizes and
the mortgagors occupancy status with respect to the mortgaged
property. Nonconforming loans may include loans secured by
timeshare vacation property. As a result of these and other
factors which may cause these nonconforming mortgage loans to
experience higher risk of credit default and loss, the interest
rates charged on these loans are often higher than those
charged for conforming mortgage loans.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   |  | Small multifamily mortgage loans are generally secured by a first
lien on a 5-unit to 20-unit residential property. Multifamily
mortgage loans share many of the characteristics and risks
associated with commercial mortgage loans and are often
categorized as commercial loans rather than residential loans. We
also include loans on mobile home parks in this residential
category.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | - |  | Junior Mortgage Loans. Second, third and wraparound
mortgage loans are secured by deeds of trust on single-family
residences which are already subject to prior mortgage
indebtedness. A wraparound loan is a junior mortgage loan
having a principal amount equal to the outstanding balance
under the existing mortgage loans plus the amount actually to
be advanced under the wraparound mortgage loan. Under a
wraparound loan, we generally make principal and interest
payments on behalf of the borrower to the holders of the prior
mortgage loans. Junior mortgage loans generally have lower
qualifying loan-to-value ratios.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

5



---



##### Table of Contents



Table 1: Mortgage Loan Portfolio
(as of December 31, 2002)

|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  |  | 
|--------- | - | ---------------------------------- | ------------------------- | ------------- | ----- | --------------- | ------ | ------ | ---------- | ---------- | --------- | -------- | ------------ | --------- | --------- | -------- | ---------- | --------- |  |  | ------- | ------- | ---- |  | -- | -- | - | --- | --- |  |  |  | 
|          |   |                                    |                           |               |       |                 |        |        |            |            | Maximum   |          | Current Loan |           | Specialty |          |            |           |  |  |         |         |      |  |    |    |  
|          |   |                                    |                           |               |       |                 | ST Net |        | Commitment |            | Principal |          | Trust        |           |           |          |            |           |  |  |         |         | Lien
|Footnotes |   | Description of Loan                |                           | Interest Rate |       | Amount on Loan* |        | Amount |            | Balance   |           | Maturity |              | LTV       |           | Position
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |         
|          |   |                                    | LAND LOANS               
|          | 1 |                                    | Residential Subdivision   |               |       | 12.00           | %      |        | $          | 10,000,000 |           |          | $            | 5,776,744 |           |          | $          | 5,776,744 |  |  |         | 11/1/03 |      |  |    | 94 | % |     | 2nd
|          | 2 |                                    | Residential Raw Land      |               |       | 13.00           | %      |        |            | 3,500,000  |           |          |              | 3,500,000 |           |          |            | 3,500,000 |  |  |         | 3/1/03  |      |  |    | 33 | % |     | 1st
|          | 3 |                                    | Residential Raw Land      |               |       | 12.50           | %      |        |            | 3,056,200  |           |          |              | 3,056,200 |           |          |            | 3,056,200 |  |  |         | 1/1/05  |      |  |    | 59 | % |     | 1st
|          | 1 |                                    | Residential Raw Land      |               |       | 12.00           | %      |        |            | 2,100,000  |           |          |              | 2,100,000 |           |          |            | 2,100,000 |  |  |         | 11/1/03 |      |  |    | 94 | % |     | 1st
|          | 2 |                                    | Residential Raw Land      |               |       | 13.00           | %      |        |            | 2,500,000  |           |          |              | 2,500,000 |           |          |            | 1,020,000 |  |  |         | 7/1/03  |      |  |    | 28 | % |     | 1st
|          | 2 |                                    | Residential Raw Land      |               |       | 13.00           | %      |        |            | 2,900,000  |           |          |              | 2,900,000 |           |          |            | 1,000,000 |  |  |         | 2/1/03  |      |  |    | 29 | % |     | 1st
|          | 2 |                                    | Residential Raw Land      |               |       | 13.00           | %      |        |            | 2,185,000  |           |          |              | 539,430   |           |          |            | 539,430   |  |  |         | 4/1/04  |      |  |    | 45 | % |     | 1st
|          |   | Residential Raw Land               |                           |               | 13.00 | %               |        |        | 97,000     |            |           |          | 97,000       |           |           |          | 97,000     |           |  |  | 10/1/04 |         |      |  | 49 | %  |   | 1st
|          |   | Residential Raw Land               |                           |               | 13.00 | %               |        |        | 42,500     |            |           |          | 42,500       |           |           |          | 42,500     |           |  |  | 1/1/05  |         |      |  | 57 | %  |   | 1st
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|          |   | Residential
Raw Land Total         |                           |               |       |                 |        | $      | 26,380,700 |            |           | $        | 20,511,874   |           |           | $        | 17,131,874 |           |  |  |         |         |      |  |    |    |   |     |     | 
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|          |   | Residential Land Development       |                           |               | 12.75 | %               |        | $      | 30,000,000 |            |           | $        | 30,000,000   |           |           | $        | 10,000,000 |           |  |  | 5/1/03  |         |      |  | 36 | %  |   | 1st
|          |   | Residential Land Development       |                           |               | 13.00 | %               |        |        | 7,300,000  |            |           |          | 7,000,000    |           |           |          | 7,000,000  |           |  |  | 10/1/04 |         |      |  | 65 | %  |   | 1st
|          |   | Residential Land Development       |                           |               | 13.00 | %               |        |        | 1,920,000  |            |           |          | 1,455,200    |           |           |          | 1,455,200  |           |  |  | 9/1/04  |         |      |  | 60 | %  |   | 1st
|          |   | Residential Land Development       |                           |               | 12.25 | %               |        |        | 5,000,000  |            |           |          | 517,556      |           |           |          | 517,556    |           |  |  | 7/1/03  |         |      |  | 49 | %  |   | 1st
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|          |   | Residential Land Development Total |                           |               |       |                 |        | $      | 44,220,000 |            |           | $        | 38,972,756   |           |           | $        | 18,972,756 |           |  |  |         |         |      |  |    |    |   |     |     | 
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|          | 4 |                                    | Commercial Raw Land       |               |       | 13.00           | %      |        | $          | 8,200,000  |           |          | $            | 6,815,575 |           |          | $          | 6,815,575 |  |  |         | 4/1/05  |      |  |    | 42 | % |     | 1st
|5/9       |   | Commercial Raw Land                |                           |               | 13.00 | %               |        |        | 5,500,000  |            |           |          | 3,754,000    |           |           |          | 2,644,077  |           |  |  | 1/1/03  |         |      |  | 88 | %  |   | 1st
|5/9       |   | Commercial Raw Land                |                           |               | 12.50 | %               |        |        | 5,700,000  |            |           |          | 5,700,000    |           |           |          | 2,461,000  |           |  |  | 6/1/02  |         |      |  | 84 | %  |   | 1st
|          | 3 |                                    | Commercial Raw Land       |               |       | 12.50           | %      |        |            | 1,209,500  |           |          |              | 1,209,500 |           |          |            | 1,209,500 |  |  |         | 1/1/05  |      |  |    | 59 | % |     | 1st
|          | 3 |                                    | Commercial Raw Land       |               |       | 12.50           | %      |        |            | 1,032,500  |           |          |              | 1,032,500 |           |          |            | 1,032,500 |  |  |         | 1/1/05  |      |  |    | 57 | % |     | 1st
|          | 3 |                                    | Commercial Raw Land       |               |       | 12.25           | %      |        |            | 1,000,000  |           |          |              | 1,000,000 |           |          |            | 1,000,000 |  |  |         | 6/1/03  |      |  |    | 56 | % |     | 1st
|          | 2 |                                    | Commercial Raw Land       |               |       | 13.00           | %      |        |            | 1,400,000  |           |          |              | 1,400,000 |           |          |            | 900,000   |  |  |         | 4/1/03  |      |  |    | 38 | % |     | 1st
|          | 2 |                                    | Commercial Raw Land       |               |       | 13.00           | %      |        |            | 4,100,000  |           |          |              | 4,100,000 |           |          |            | 80,000    |  |  |         | 7/1/03  |      |  |    | 50 | % |     | 1st
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|          |   | Commercial Raw Land Total          |                           |               |       |                 |        | $      | 28,142,000 |            |           | $        | 25,011,575   |           |           | $        | 16,142,652 |           |  |  |         |         |      |  |    |    |   |     |     | 
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|          |   | TOTAL LAND LOANS                   |                           |               |       |                 |        | $      | 98,742,700 |            |           | $        | 84,496,205   |           |           | $        | 52,247,282 |           |  |  |         |         |      |  |    |    |   |     |     | 
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|          |   |                                    | CONSTRUCTION LOANS       
|          | 7 |                                    | Spec SFR Construction     |               |       | 13.00           | %      |        | $          | 3,440,000  |           |          | $            | 2,184,355 |           |          | $          | 2,184,355 |  |  |         | 12/1/03 |      |  |    | 80 | % |     | 1st
|          | 9 |                                    | Spec SFR Construction     |               |       | 13.00           | %      |        |            | 2,020,000  |           |          |              | 2,020,000 |           |          |            | 2,020,000 |  |  |         | 8/1/03  |      |  |    | 77 | % |     | 1st
|          | 8 |                                    | Spec SFR Construction     |               |       | 12.75           | %      |        |            | 1,890,000  |           |          |              | 1,890,000 |           |          |            | 1,890,000 |  |  |         | 1/1/03  |      |  |    | 70 | % |     | 1st
|          | 7 |                                    | Spec SFR Construction     |               |       | 13.00           | %      |        |            | 2,240,000  |           |          |              | 1,750,337 |           |          |            | 1,750,337 |  |  |         | 9/1/03  |      |  |    | 80 | % |     | 1st
|          | 9 |                                    | Spec SFR Construction     |               |       | 13.00           | %      |        |            | 1,650,000  |           |          |              | 1,650,000 |           |          |            | 1,650,000 |  |  |         | 5/1/03  |      |  |    | 60 | % |     | 1st
|          | 6 |                                    | Spec SFR Construction     |               |       | 13.00           | %      |        |            | 85,840     |           |          |              | 85,840    |           |          |            | 85,840    |  |  |         | 6/1/03  |      |  |    | 80 | % |     | 1st
|          | 6 |                                    | Spec SFR Construction     |               |       | 13.00           | %      |        |            | 85,840     |           |          |              | 85,840    |           |          |            | 85,840    |  |  |         | 6/1/03  |      |  |    | 80 | % |     | 1st
|          | 6 |                                    | Spec SFR Construction     |               |       | 13.00           | %      |        |            | 85,840     |           |          |              | 85,840    |           |          |            | 85,840    |  |  |         | 6/1/03  |      |  |    | 80 | % |     | 1st
|          | 6 |                                    | Spec SFR Construction     |               |       | 13.00           | %      |        |            | 85,792     |           |          |              | 85,792    |           |          |            | 85,792    |  |  |         | 6/1/03  |      |  |    | 80 | % |     | 1st
|          | 6 |                                    | Spec SFR Construction     |               |       | 13.00           | %      |        |            | 85,792     |           |          |              | 85,792    |           |          |            | 85,792    |  |  |         | 6/1/03  |      |  |    | 80 | % |     | 1st
|          | 6 |                                    | Spec SFR Construction     |               |       | 13.00           | %      |        |            | 85,792     |           |          |              | 85,792    |           |          |            | 85,792    |  |  |         | 6/1/03  |      |  |    | 80 | % |     | 1st
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|          |   | SFR Construction Total             |                           |               |       |                 |        | $      | 11,754,896 |            |           | $        | 10,009,588   |           |           | $        | 10,009,588 |           |  |  |         |         |      |  |    |    |   |     |     | 
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|          |   | Office Bldg Shell & Land           |                           |               | 13.00 | %               |        | $      | 9,000,000  |            |           | $        | 9,000,000    |           |           | $        | 9,000,000  |           |  |  | 12/1/03 |         |      |  | 67 | %  |   | 1st
|          |   | Golf Course Construction           |                           |               | 13.00 | %               |        |        | 12,500,000 |            |           |          | 11,410,000   |           |           |          | 8,315,371  |           |  |  | 7/1/04  |         |      |  | 55 | %  |   | 1st
|          | 6 |                                    | Spec . Prof. Office Const |               |       | 13.00           | %      |        |            | 5,100,000  |           |          |              | 5,100,000 |           |          |            | 5,100,000 |  |  |         | 5/1/04  |      |  |    | 73 | % |     | 1st
|          | 4 |                                    | Office Bldg Shell & Land  |               |       | 13.00           | %      |        |            | 7,800,000  |           |          |              | 3,960,000 |           |          |            | 3,960,000 |  |  |         | 1/1/05  |      |  |    | 80 | % |     | 1st
|          |   | Motel Construction                 |                           |               | 13.00 | %               |        |        | 5,108,000  |            |           |          | 1,513,500    |           |           |          | 1,513,500  |           |  |  | 11/1/04 |         |      |  | 48 | %  |   | 1st
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|          |   | Commercial Construction Total      |                           |               |       |                 |        | $      | 39,508,000 |            |           | $        | 30,983,500   |           |           | $        | 27,888,871 |           |  |  |         |         |      |  |    |    |   |     |     | 
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|          |   | TOTAL CONSTRUCTION LOANS           |                           |               |       |                 |        | $      | 51,262,896 |            |           | $        | 40,993,088   |           |           | $        | 37,898,459 |           |  |  |         |         |      |  |    |    |   |     |     | 
|          |   |                                    |                           |               |       |                 |        |        |            |            |           |          |              |           |           |          |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 

6



---



##### Table of Contents



Table 1: Mortgage Loan Portfolio - Continued
(as of December 31, 2002)

|                                                   |                     |                            |  |               |       |                 |   |             |           |           |   |              |           |           |   |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  |  | 
|-------------------------------------------------- | ------------------- | -------------------------- |  | ------------- | ----- | --------------- | - | ----------- | --------- | --------- | - | ------------ | --------- | --------- | - | ---------- | --------- |  |  | ------- | ------- | ---- |  | -- | -- | - | --- | --- |  |  |  | 
|                                                   |                     |                            |  |               |       |                 |   |             |           | Maximum   |   | Current Loan |           | Specialty |   |            |           |  |  |         |         |      |  |    |    |  
|                                                   |                     |                            |  |               |       | ST Net          |   | Commitment  |           | Principal |   | Trust        |           |           |   |            |           |  |  |         |         | Lien
|Footnotes                                          |                     | Description of Loan        |  | Interest Rate |       | Amount on Loan* |   | Amount      |           | Balance  |   | Maturity     |           | LTV       |   | Position  
|                                                   |                     |                            |  |               |       |                 |   |             |           |           |   |              |           |           |   |           
|COMMERCIAL LOANS                                  
|                                                  
|9                                                  |                     | Motel / Hotel              |  |               | 12.00 | %               |   | $           | 1,579,915 |           |   | $            | 1,579,915 |           |   | $          | 1,579,915 |  |  |         | 4/1/03  |      |  |    | 93 | % |     | 1st
|                                                   |                     | Motel / Hotel              |  |               | 13.00 | %               |   |             | 375,000   |           |   |              | 375,000   |           |   |            | 375,000   |  |  |         | 8/1/04  |      |  |    | 36 | % |     | 1st
|                                                   |                     |                            |  |               |       |                 |   |             |           |           |   |              |           |           |   |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  |  | 
|                                                   |                     | Commercial Buildings Total |  |               |       |                 |   | $           | 1,954,915 |           |   | $            | 1,954,915 |           |   | $          | 1,954,915 |  |  |         |         |      |  |    |    |   |     |     |  | 
|                                                   |                     |                            |  |               |       |                 |   |             |           |           |   |              |           |           |   |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  |  | 
|NON CONFORMING SINGLE FAMILY AND MULTIFAMILY LOANS
|                                                  
|9                                                  |                     | SFR                        |  |               | 13.25 | %               |   | $           | 2,750,000 |           |   | $            | 2,750,000 |           |   | $          | 2,750,000 |  |  |         | 10/1/03 |      |  |    | 54 | % |     | 2nd
|                                                   | SFR                 |                            |  | 10.50         | %     |                 |   | 1,950,000   |           |           |   | 1,038,490    |           |           |   | 1,038,490  |           |  |  | 7/1/03  |         |      |  | 77 | %  |   | 1st
|                                                   | SFR                 |                            |  | 13.00         | %     |                 |   | 195,000     |           |           |   | 195,000      |           |           |   | 195,000    |           |  |  | 4/1/04  |         |      |  | 48 | %  |   | 2nd
|8/9                                                |                     | SFR                        |  |               | 12.50 | %               |   |             | 150,000   |           |   |              | 150,000   |           |   |            | 150,000   |  |  |         | 6/1/03  |      |  |    | 67 | % |     | 2nd
|                                                   | SFR                 |                            |  | 13.00         | %     |                 |   | 20,000      |           |           |   | 11,248       |           |           |   | 11,248     |           |  |  | 12/1/06 |         |      |  | 73 | %  |   | 1st
|                                                   |                     |                            |  |               |       |                 |   |             |           |           |   |              |           |           |   |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|                                                   | Single Family Total |                            |  |               |       |                 | $ | 5,065,000   |           |           | $ | 4,144,738    |           |           | $ | 4,144,738  |           |  |  |         |         |      |  |    |    |   |     |     | 
|                                                   |                     |                            |  |               |       |                 |   |             |           |           |   |              |           |           |   |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 
|                                                   | TOTALS              |                            |  |               |       |                 | $ | 157,025,511 |           |           | $ | 131,588,946  |           |           | $ | 96,245,394 |           |  |  |         |         |      |  |    |    |   |     |     | 
|                                                   |                     |                            |  |               |       |                 |   |             |           |           |   |              |           |           |   |            |           |  |  |         |         |      |  |    |    |   |     |     |  |  | 

Footnotes: Loans to More Than One Borrower

|  |  |                                                                                                                                                                                                                                       
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $7,876,744                                                                                                                       
|  |  |                                                                                                                                                                                                                                       
|2 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $7,039,430                                                                                                                       
|  |  |                                                                                                                                                                                                                                       
|3 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $6,298,200                                                                                                                       
|  |  |                                                                                                                                                                                                                                       
|4 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $10,775,575                                                                                                                      
|  |  |                                                                                                                                                                                                                                       
|5 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $5,105,077                                                                                                                       
|  |  |                                                                                                                                                                                                                                       
|6 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $5,614,896                                                                                                                       
|  |  |                                                                                                                                                                                                                                       
|7 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $3,934,692                                                                                                                       
|  |  |                                                                                                                                                                                                                                       
|8 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $2,040,000                                                                                                                       
|  |  |                                                                                                                                                                                                                                       
|9 |  | Loans delinquent either in principal or interest past 30 days                                                                                                                                                                         
|  |  |                                                                                                                                                                                                                                       
|* |  | Total loan commitment for all investors                                                                                                                                                                                               
|  |  |                                                                                                                                                                                                                                       
| |  | Specialty
Trusts
participation in current loan balances as of December 31, 2002 was $96,245,394.
Specialty Trusts maximum commitment of additional funds under
existing loans was Specialty Trust's $22,028,000 at December 31,
2002

7



---



##### Table of Contents



Table 2: Types and Maturities of Mortgage Investments
(as of December 31, 2002)

|                                                             |  |        |    |              |  |   |            |  |  |         |    |   |  |  |        |  
|------------------------------------------------------------ |  | ------ | -- | ------------ |  | - | ---------- |  |  | ------- | -- | - |  |  | ------ | -
|                                                             |  | Number |    | Carrying     |  |   |            |  |  |         |    |  
|                                                             |  | of     |    | Amount       |  |   |            |  |  |         |    |  
|Type of Loan                                                 |  | Loans  |    | of Mortgages |  |   |            |  |  | Percent
|                                                             |  |        |    |              |  |   |            |  |  |        
|1st Mortgages                                                |  |        | 40 |              |  | $ | 87,373,650 |  |  |         |    |   |  |  | 90.78  | %
|2nd Mortgages                                                |  |        | 4  |              |  |   | 8,871,744  |  |  |         |    |   |  |  | 9.22   | %
|                                                             |  |        |    |              |  |   |            |  |  |         |    |   |  |  |        |  
|                                                             |  |        | 44 |              |  | $ | 96,245,394 |  |  |         |    |   |  |  | 100.00 | %
|                                                             |  |        |    |              |  |   |            |  |  |         |    |   |  |  |        |  
|Land                                                         |  |        | 21 |              |  | $ | 52,247,282 |  |  |         |    |   |  |  | 54.28  | %
|Construction                                                 |  |        | 16 |              |  |   | 37,898,459 |  |  |         |    |   |  |  | 39.38  | %
|Commercial                                                   |  |        | 2  |              |  |   | 1,954,915  |  |  |         |    |   |  |  | 2.03   | %
|Other                                                        |  |        | 5  |              |  |   | 4,144,738  |  |  |         |    |   |  |  | 4.31   | %
|                                                             |  |        |    |              |  |   |            |  |  |         |    |   |  |  |        |  
|                                                             |  |        | 44 |              |  | $ | 96,245,394 |  |  |         |    |   |  |  | 100.00 | %
|                                                             |  |        |    |              |  |   |            |  |  |         |    |   |  |  |        |  
|Maturing on or before December 31, 2003                      |  |        | 28 |              |  | $ | 55,527,370 |  |  |         | (1 | ) |  |  | 57.69  | %
|Maturing on or between January 1, 2004
and December 31, 2006 |  |        | 16 |              |  |   | 40,718,024 |  |  |         |    |   |  |  | 42.31  | %
|                                                             |  |        |    |              |  |   |            |  |  |         |    |   |  |  |        |  
|                                                             |  |        | 44 |              |  | $ | 96,245,394 |  |  |         |    |   |  |  | 100.00 | %
|                                                             |  |        |    |              |  |   |            |  |  |         |    |   |  |  |        |  



|(1) |  | Loans aggregating to $13,254,992 in principal and accrued interest were
30-245 past due at December 31, 2002
|--- |  | ------------------------------------------------------------------------------------------------------------



| |  | Other Investments. We may purchase our own stock or the debt or
equity of other mortgage REITs or other companies when we believe
that such purchases will yield attractive returns on capital
employed. Any such purchase would be for investment purposes and not
for short-term trading (turnover) gain. REIT or other debt or equity
securities may be undervalued at points in the economic cycle. When
the stock market valuation of companies are low in relation to the
market value of other assets, stock purchases can be a way for us to
acquire indirectly a beneficial interest in a pool of mortgage
assets or other types of assets at an attractive price. Also, REITs
and other companies may have attractive mortgage finance or other
businesses in which we may want to become a partial owner. We do
not, however, presently intend to invest in the securities of other
issuers for the purpose of exercising control or to underwrite
securities of other issuers. We do not limit the amount of
securities of other issuers we may acquire (beyond the limits
imposed by the REIT qualification requirements), although we do not
anticipate that such holdings will comprise a substantial portion of
our assets. At December 31, 2002, we did not own any such
securities.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8



---



##### Table of Contents





| |  | Leverage Strategies and Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We employ a debt financing strategy to increase our investment in
mortgage loans. By using our mortgage loans as collateral to borrow
funds, we are able to invest in mortgage loans with greater value
than our equity. We have a targeted ratio of debt-to-equity of
approximately 1 to 1. While there are no charter or bylaw
limitations on our use of leverage, we currently have a policy and
have agreed with our primary bank lenders not to exceed that target
by permitting our debt, whether under bank lines or our
Collateralized Note program, to exceed our equity. Our financing
strategy is designed to maintain a cushion of equity sufficient to
respond to short-term liquidity needs. We anticipate that all of our
borrowing arrangements will require us to pledge cash or additional
mortgage loans in the event the market or discounted value of
existing collateral declines. To the extent that cash reserves are
insufficient to cover such deficiencies in collateral, we may be
required to sell mortgage loans to reduce the borrowings.
|
| |  | We intend to finance our mortgage loan acquisitions through our
collateralized note program and bank warehouse credit lines. At
December 31, 2002, the amount of such credit lines was $14.5
million, with $9,336,000 outstanding at December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | On May 7, 2002, a registration statement was declared effective by
the Securities and Exchange Commission covering up to $269,312,000
of Collateralized Notes (including amounts remaining unsold under
the prior registration). 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 fixed rates of
interest (2.5% to 7.5% at December 31, 2002). As of December 31,
2002 $19,771,031 of these Notes were outstanding.                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Our goal is to strike a balance between the under-utilization of
leverage, which reduces potential returns to stockholders, and the
over-utilization of leverage, which could reduce our ability to meet
our obligations during adverse market conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Operating Strategies and Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Origination and Underwriting. Specialty Financial continuously
evaluates prospective mortgage loans to be acquired by Specialty
Trust. The Manager generates mortgage loan originations from
referrals from real estate and mortgage loan brokers, referrals from
existing customers, new loans made to or refinancing of loans to
existing customers and personal solicitations of new borrowers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | All potential mortgage loans are evaluated to determine if the
mortgage loan is of a type eligible for acquisition by Specialty
Trust. Our policy generally limits the amount of loans to one
borrower or affiliated borrowers to less than 10% of total assets
and the loan-to-value ratio for any loan to a maximum of 80%,
although in each case exceptions may be approved by the board. As
the notes to Table 1: Mortgage Loan Portfolio indicate, at
December 31, 2002 there were eight instances of loans to the same
borrower or related parties secured by different parcels of real
property. Two of these loans to the same borrower represent more
than 10% of the portfolio. In addition, the Company had one loan,
which exceeded 10% of the portfolio. We generally seek personal
guarantees from affiliates of the borrower when possible. We do not
have specific requirements with                                                                                                                                                                  

9



---



##### Table of Contents





| |  | respect to credit scores or payment histories. For income producing
properties, the net annual estimated cash flow after vacancy, and
operating expenses must equal or exceed the annual payments required
on the mortgage loan. The Manager requires full documentation of all
loan application/requests, including complete organizational
documents of the borrowing entity, if applicable, credit reports on
guarantors and borrowers, current (within 60 days) financial
statements, and a minimum of two years tax returns. A flood zone
determination must be provided. A preliminary title report is
obtained and reviewed by the underwriter. ALTA surveys, Phase I
environmental reports and geotechnical reports are required on most
loans but can be waived on a case-by-case basis upon physical
inspection and determination by Mr. Nello Gonfiantini, III.
Liability insurance is required on all loans and hazard insurance is
required on any structures. If the loan is to finance a purchase, a
copy of the purchase contract must be submitted. If the loan is for
refinance, a copy of the closing statement when purchased is
reviewed. If a loan is for construction, a copy of plans,
specifications and cost breakdown must be reviewed and a
construction control company retained. Our underwriting guidelines
are intended to evaluate the capacity and willingness of the
borrower to repay the loan and the adequacy of the collateral
securing the loan. On a case-by-case basis, exceptions to the
underwriting guidelines may be made by the President where there are
compensating factors, for example, low loan-to-value ratios or
guarantees from parties with strong financial resources or pledges
of additional collateral.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Collateral valuation receives special attention in the Managers
underwriting of our mortgage loans. The Manager places great
emphasis on the ability of our collateral to protect against losses
in the event of default by borrowers. In determining the adequacy of
the mortgaged property as collateral, the Manager obtains
independent, on-site appraisals for each mortgage property and the
property is inspected by an officer or employee of the Manager. All
independent appraisers must be licensed or qualified as independent
fee appraisers and certified by the state in which the property
being appraised is located. The appraiser is required to inspect the
property and verify that it is in good condition and that
construction, if new, has been completed. The appraisal is based on
the market value of comparable properties, the estimated rental
income, if applicable, and the cost of replacement. The appraised
value of the property being financed must be such that it currently
supports, and is anticipated to support in the event of default, the
outstanding mortgage loan balance. The Manager generally relies on
its own independent analysis and not exclusively on such appraisals
in determining whether or not to arrange a particular mortgage loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Servicing. The Manager has established its own servicing operation
in order to service the mortgage loans. Servicing includes
collecting and remitting loan payments, making required advances,
accounting for principal and interest, holding escrow or impound
funds for payment of taxes and insurance, making required
inspections of the property, contacting delinquent borrowers and
supervising foreclosures and property dispositions in the event of
unremedied defaults in accordance with the Companys guidelines. The
focus of the Managers servicing operation is on managing credit
risk in order to protect our investment in the mortgage loans. The
Manager intends to use early intervention, aggressive collection and
loss mitigation techniques in the servicing process.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Credit and Market Risk Management. We believe that proper
underwriting and efficient servicing of our mortgage loans are the
most effective methods of managing our credit risk. The Managers
focus as a servicer of mortgage loans it has originated is more on
effective credit risk management than on cost control. The Manager
does not intend to be a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

10



---



##### Table of Contents





| |  | low cost servicer, but instead puts the proper resources to work to
mitigate losses on the mortgage loans it services.
| |  | ----------------------------------------------------------------------------------------------------------------------
|
| |  | Set forth below is a table setting forth our recent delinquency,
foreclosure and loss experience:                     

Table 3: Delinquency, Foreclosure and Loss Experience

|                                                   |  |                   |            |                   |  |            |        |           |  |   |            |  |  |  |        |  
|-------------------------------------------------- |  | ----------------- | ---------- | ----------------- |  | ---------- | ------ | --------- |  | - | ---------- |  |  |  | ------ | -
|                                                   |  | December 31, 2002 |            | December 31, 2001
|                                                   |  |                   |            |                  
|                                                   |  | Principal         |            | % of              |  | Principal  |        | % of     
|                                                   |  | $ of Loans        |            | Portfolio         |  | $ of Loans |        | Portfolio
|                                                   |  |                   |            |                   |  |            |        |          
|Total Portfolio                                    |  | $                 | 96,245,394 |                   |  |            | 100.00 | %         |  | $ | 73,331,659 |  |  |  | 100.00 | %
|                                                   |  |                   |            |                   |  |            |        |           |  |   |            |  |  |  |        |  
|Period of Delinquency
(Interest and/or Principal): |  |                   |            |                   |  |            |        |           |  |   |            |  |  |  |        |  
|30-59 days                                         |  |                   | 6,570,000  |                   |  |            | 6.83   | %         |  |   | 348,121    |  |  |  | 0.48   | %
|60 to 89 days                                      |  |                   | 1,579,915  |                   |  |            | 1.64   | %         |  |   |           |  |  |  | 0.00   | %
|90 days or more                                    |  |                   | 5,105,077  |                   |  |            | 5.30   | %         |  |   | 3,462,850  |  |  |  | 4.72   | %
|                                                   |  |                   |            |                   |  |            |        |           |  |   |            |  |  |  |        |  
|Total Delinquencies
(excluding foreclosures)       |  | $                 | 13,254,992 |                   |  |            | 13.77  | %         |  | $ | 3,810,971  |  |  |  | 5.20   | %
|                                                   |  |                   |            |                   |  |            |        |           |  |   |            |  |  |  |        |  
|Foreclosures Pending                               |  |                   |           |                   |  |            | 0.00   | %         |  | $ | 950,000    |  |  |  | 1.30   | %
|Foreclosures Completed                             |  | $                 | 950,000    |                   |  |            |        |           |  | $ | 3,048,561  |  |  |  |        |  
|Losses Sustained for Period
Ending on Such Date    |  |                   |           |                   |  |            |        |           |  | $ | 226,106    |  |  |  |        |  



| |  | Specialty Trust generally institutes foreclosure proceedings on
defaulted loans when that action is determined by management to be
in the best interests of shareholders. Foreclosure may be
appropriate where the project planned for the property has
encountered slower than anticipated development or sales results or
where the developer/borrowers financial condition has deteriorated
such that completion of the project has been jeopardized. A loan
that is nearing maturity or has defaulted may be a candidate for
refinancing rather than foreclosure when management determines that
the project planned remains viable and the value of the property and
other sources of repayment such as personal guarantees are
sufficient to support a new loan. In such cases, management often
works with marketing and other real estate professionals to assist
the developer in modifying the original project to enhance its
likelihood of success.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



---



##### Table of Contents





| |  | Geographic Concentration.There are no limits on the geographic
concentration of the loans we may acquire and properties underlying
mortgage loans are located primarily in the state of Nevada. In
order to reduce our market risk exposure from investing in mortgage
loans to borrowers located primarily in the state of Nevada, we have
begun to acquire loans secured by properties in the states of
Arizona, California, Utah and Colorado.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The percentage of geographic concentration by loan amount is as follows:                                                                                                                                                                                                                                                                                                                                                                         



|           |  |    |   |                                                             
|---------- |  | -- | - | ------------------------------------------------------------
|Nevada     |  | 49 | % | (approx. 30% in the Reno area and 19% in the Las Vegas area)
|Arizona    |  | 20 | % |                                                             
|Colorado   |  | 21 | % |                                                             
|Utah       |  | 7  | % |                                                             
|California |  | 3  | % |                                                             



| |  | Interest Rate Risk Management. We seek to limit our exposure to
changes in interest rates in several ways. We generally acquire
short-term loans with fixed interest rates and maturities of less
than three years. While our loan terms exceed the terms for interest
rate adjustments on our borrowings, the resulting interest rate
exposure is mitigated by our leverage policy limits. Under our
targeted debt-to-equity ratio of approximately 1 to 1, at least 50%
of our earning assets will at all times be funded with equity. The
income from these assets will be available to cover increases in
interest expense on our borrowings, to the extent not covered by the
assets funded with such borrowings. In addition, the higher
yielding-higher risk nature of our loans provides a greater net
interest cushion that can withstand more interest rate increases on
borrowings than lower yielding-lower risk loans.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We do not hedge our interest rate risk by purchasing interest rate
caps, floors or other derivative instruments. We believe that the
cost of such hedging instruments would outweigh the potential
benefits to be gained by us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Prepayment Risk Management. The Manager seeks to minimize the
effects of faster than anticipated prepayment rates in our
portfolio, in part by originating mortgage loans with prepayment
penalties. The Manager also utilizes the production of new mortgage
loans as a hedge against prepayment risk.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Other Company Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | At the present time, we do not intend to invest directly in real
property or interests in real property. From time to time, however,
we may hold real estate owned (REO) as a result of foreclosure of
defaulted mortgage loans. Further, we do not intend to invest in
mortgage securities or to issue mortgage securities. We do not
anticipate to issue senior securities or to offer our securities in
exchange for property or stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Our Board of Directors has established the investment policies and
strategies summarized in this annual report. The Board of Directors
has the power to modify or waive such policies and strategies
without the consent of the stockholders to the extent that the Board
of Directors determines that such modification or waiver is in the
best interest of stockholders. Among other factors, developments in
the market, which affect the policies and strategies mentioned in
this annual report or which change our assessment of the market may
cause the Board of Directors to revise our policies and strategies.                                                                                                                                                                                                                                                                                                         

12



---



##### Table of Contents





| |  | Certain Federal Income Tax Considerations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following discussion summarizes certain Federal income tax
considerations relevant to the Company and its investors. This
discussion is based on existing Federal income tax law, which is
subject to change, possibly retroactively. This discussion does not
address all aspects of Federal income taxation that may be relevant
to a particular investor in light of its personal investment
circumstances or to certain types of investors subject to special
treatment under the Federal income tax laws (including financial
institutions, insurance companies, broker-dealers and, except to the
extent discussed below, tax-exempt entities and foreign taxpayers)
and it does not discuss any aspects of state, local or foreign tax
law. This discussion assumes that investors will hold their
investment in common stock or our notes as a capital asset
(generally, property held for investment) under the Internal Revenue
Code (the Code). Investors are advised to consult their tax
advisors as to the specific tax consequences to them of purchasing,
holding and disposing of our common stock or notes, including the
application and effect of Federal, state, local and foreign income
and other tax laws to their investment.
|
| |  | General. We have elected for Federal income tax purposes to be
taxed as a REIT, commencing with the taxable year ending December
31, 1998. Management believes that we have operated, and
anticipates that we will continue to operate, in a manner that
permits us to maintain our qualifications as a REIT. As described
in more detail below, because the Code generally requires REITs to
distribute at least 90% of their tax earnings each year, and further
allows the REIT to deduct such distributions, qualification as a
REIT generally eliminates the double taxation that otherwise
results under current law when a regular corporation earns income
and distributes that income to its stockholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | There can be no assurance that we will continue to qualify as a REIT
in any particular tax year, given the highly complex nature of the
rules governing REITs, the ongoing importance of factual
determinations and the possibility of future changes in the
circumstances of the Company. If we failed to qualify as a REIT in
any particular year, we would be subject to Federal income tax as a
regular, domestic corporation, and our stockholders would be subject
to tax in the same manner as stockholders of a regular corporation.
In this event, we could be subject to potentially substantial income
tax liability in respect of each taxable year that we fail to
qualify as a REIT and the amount of earnings and cash available for
distribution to our stockholders could be significantly reduced or
eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The following is a brief summary of certain technical requirements
that we must meet on an ongoing basis in order to qualify, and
remain qualified, as a REIT under the Code.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Stock ownership tests.Our capital stock must be held by at least
100 persons for at least 335 days of a twelve-month year, or a
proportionate part of a short tax year. In addition, no more than
50% of the value of our capital stock may be owned, directly or
indirectly, by five or fewer individuals at all times during the
last half of the taxable year. Under the Code, most tax-exempt
entities including employee benefit trusts and charitable trusts
(but excluding trusts described in 401(a) and exempt under 501(a))
are generally treated as individuals for these purposes. We must
satisfy these stock ownership requirements each taxable year. We
must solicit information from certain of our stockholders to verify
ownership levels and our Articles of Incorporation impose certain
repurchase obligations and restrictions regarding the transfer of
our shares in order to aid in meeting the stock                                                                                                                                                                                                                                                                                                                               

13



---



##### Table of Contents





| |  | ownership requirements. If we were to fail either of the stock
ownership tests, we would generally be disqualified from REIT
status, unless, in the case of the five or fewer requirement, the
good faith exemption is available.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Asset tests.For tax years beginning before December 31, 2000, we
were required to meet the following asset tests (the REIT Asset
Tests) at the close of each quarter of each taxable year:                                         



| | (a) |  | at least 75% of the value of our total assets must
consist of Qualified REIT Real Estate Assets, government
securities, cash, and cash items (the 75% Asset Test); and                                                                                                                        
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | the value of securities held by us but not taken
into account for purposes of the 75% Asset Test must not exceed
either (i) 5% of the value of our total assets in the case of
securities of any one non-government issuer, or (ii) 10% of the
outstanding voting securities of any such issuer.



| |  | For tax years beginning after December 31, 2000, we must generally
meet the following REIT Asset Tests at the close of each quarter of
each taxable year:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | the 75% Asset Test;                                                                                                                                                                                                                                                                                                                                  
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | not more than 25% of the value of our total assets
is represented by securities (other than those includible under
the 75% Asset Test);                                                                                                                                                                                                              
|
| | (c) |  | not more than 20% of the value of our total assets
is represented by securities of one or more taxable REIT
subsidiaries; and                                                                                                                                                                                                                        
|
| | (d) |  | the value of securities held by us, other than
those of a taxable REIT subsidiary, or taken into account for
purposes of the 75% Asset Test, must not exceed either (i) 5%
of the value of our total assets in the case of securities of
any one non-government issuer, or (ii) 10% of the outstanding
vote or value of any such issuers securities.



| |  | In applying the above REIT Asset Tests, we are generally required to
re-value all of our assets at the end of any quarter in which we
acquire a substantial amount of new securities or other property
that is not a Qualified REIT Real Estate Asset. We intend to monitor
closely the purchase, holding and disposition of our assets in order
to comply with the REIT Asset Tests. We anticipate that
substantially all of our assets will be Qualified REIT Real Estate
Assets and intend to limit, diversify or hold through a taxable REIT
subsidiary our ownership of any assets not qualifying as Qualified
REIT Real Estate Assets so as to comply with the above REIT Asset
Tests. If it is anticipated that these limits would be exceeded, we
intend to take appropriate measures, including the disposition of
non-qualifying assets within the permitted time periods for cure, so
as to avoid exceeding such limits.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14



---



##### Table of Contents





| |  | Gross income tests.We must generally meet the following gross
income tests (the REIT Gross Income Tests) for each taxable year:
| |  | ---------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | at least 75% of our gross income must be derived
from certain specified real estate sources including interest
income and gain from the disposition of Qualified REIT Real
Estate Assets, foreclosure property or qualified temporary
investment income (i.e., income derived from new capital
within one year of the receipt of such capital) (the 75% Gross
Income Test); and,                                                                                                                        
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (b) |  | at least 95% of our gross income for each taxable
year must be derived from sources of income qualifying for the
75% Gross Income Test, or from dividends, interest, and gains
from the sale of stock or other securities (including certain
interest rate swap and cap agreements, options, futures and
forward contracts entered into to hedge variable rate debt
incurred to acquire Qualified REIT Real Estate Assets) not held
for sale in the ordinary course of business (the 95% Gross
Income Test).



| |  | We intend to maintain our REIT status by carefully monitoring our
income, including income from sales of mortgage assets, to comply
with the REIT Gross Income Tests. Under certain circumstances, for
example, (i) the sale of a substantial amount of mortgage assets to
repay borrowings in the event that other credit is unavailable or
(ii) unanticipated decrease in our qualifying income which results
in the non-qualifying income exceeding 5% of gross income, we may be
unable to comply with certain of the REIT Gross Income Tests.
Inadvertent failures to comply with the REIT Gross Income Tests will
not result in our disqualification as a REIT so long as certain
disclosure and reasonable cause criteria are met and we pay a 100%
tax on an amount generally equal to the qualified income shortfall.
See Taxation of the Company below for a discussion of the tax
consequences of failure to comply with the REIT Provisions of the
Code.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Distribution requirement. For tax years before 2001, we were
generally required to distribute to our stockholders an amount equal
to at least 95% of our REIT taxable income before deduction of
dividends paid and by excluding net capital gain. Beginning with
the 2001 tax year, this REIT distribution requirement is reduced to
90%. Such distributions must be made in the taxable year to which
they relate or, if declared before the timely filing of our tax
return for such year and paid not later than the first regular
dividend payment after such declaration, in the following taxable
year.                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The Internal Revenue Service (IRS) has ruled generally that if a
REIT maintains a dividend reinvestment plan that allows stockholders
of the REIT to elect to have cash distributions reinvested in shares
of the REIT at a purchase price equal to at least 95% of the fair
market value of such shares on the distribution date, then such
distributions qualify under the above distribution requirement. We
maintain a Dividend Reinvestment Plan (DRIP) and intend that the
terms of our DRIP will comply with the IRS public ruling guidelines
for such plans.                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | If we fail to meet the distribution test as a result of an
adjustment to our taxable income by the IRS, we may be able to avoid
disqualification as a REIT by paying a deficiency dividend within a
specified time period and in accordance with other requirements set
forth in the Code. We would be liable for interest based on the
amount of the deficiency dividend. A deficiency dividend is not
permitted if the deficiency is due to fraud with intent to evade tax
or to a willful failure to file a timely tax return.                                                                                                                                                                                                                                                                                                                                                                                                                                     

15



---



##### Table of Contents





| |  | Taxation of the Company. In any year in which we qualify as a REIT,
we will generally not be subject to Federal income tax on that
portion of our REIT taxable income or capital gain that is
distributed to our stockholders. We will, however, be subject to
Federal income tax at normal corporate income tax rates upon any
undistributed taxable income or capital gain.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In addition, notwithstanding our qualification as a REIT, we may
also be subject to tax in certain other circumstances as follows:                                                                                                                                                                                                                                           



| | (a) |  | if we fail to satisfy either of the REIT Gross
Income Tests, but nonetheless maintain our qualification as a
REIT because certain other requirements are met, we will
generally be subject to a 100% tax on the greater of the amount
by which we fail either the 75% or the 95% Gross Income Test;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | we will also be subject to a tax of 100% on net
income derived from any prohibited transaction (which
includes dispositions of property classified as dealer
property). In certain circumstances, a REO that is constructed
upon or developed by us, shared appreciation mortgages and
other equity-like interests coupled with a mortgage may be
deemed to give rise to income from dealer property. In such
event, such interests might give rise to non-qualifying income
for purposes of the REIT Gross Income Tests and the 100%
prohibited transaction tax. We do not believe that we have or
will engage in transactions at the REIT level that would result
in our being classified as a dealer. However, there cannot be
any assurance that the Internal Revenue Service will agree;
|
| | (c) |  | if we have (i) net income from the sale or other
disposition of an REO that is not further developed by us but
which is deemed held primarily for sale to customers in the
ordinary course of business or (ii) other non-qualifying income
from foreclosure property, we will be subject to Federal income
tax on such income at the highest corporate income tax rate;
and                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (d) |  | in addition, a nondeductible excise tax, equal to
4% of the excess of required distributions over the amounts
actually distributed will be imposed on us for each calendar
year to the extent that dividends paid during the year, or
declared during the last quarter of the year and paid during
January of the succeeding year, are less than the sum of (1)
85% of our ordinary income, (2) 95% of our capital gain net
income, and (3) any undistributed income remaining from earlier
years. We may also be subject to the corporate alternative
minimum tax, as well as other taxes in certain situations not
presently contemplated.                                                                                                                                                     



| |  | If we fail any of the above-described REIT qualification tests in
any taxable year and the relief provisions available under the Code
do not apply, we would be subject to Federal income tax (including
any applicable alternative minimum tax) on our taxable income at the
regular corporate income tax rates. Distributions to stockholders
in any year in which we fail to qualify as a REIT would not be
deductible by us, nor would distributions generally be required to
be made under the Code. Further, unless entitled to relief under
certain other provisions of the Code, we would also be disqualified
from re-electing REIT status for the four taxable years following
the year in which we became disqualified.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16



---



##### Table of Contents





| |  | We may also voluntarily revoke our election to be taxed as a REIT,
although we have no intention of doing so, in which event we will be
prohibited, without exception, from electing REIT status for the
year to which the revocation relates and the following four taxable
years.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We intend to monitor on an ongoing basis our compliance with the
REIT requirements described above. In order to maintain our REIT
status, we may be required to limit the types of assets that we
might otherwise acquire, or hold certain assets at times when we
might otherwise have determined that the sale or other disposition
of such assets would have been more prudent.                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Taxable REIT Subsidiaries. A Taxable REIT Subsidiary is any
corporation in which a REIT owns stock (directly or indirectly) and
for which the REIT and such corporation make an election to classify
the corporation as a Taxable REIT Subsidiary. Effective May 2, 2002,
Specialty Acquisition Corp (SAC) (wholly owned subsidiary created on
May 2, 2002) and the Company elected to treat SAC as a Taxable REIT
Subsidiary of the Company effective January 1, 2003. As a Taxable
REIT Subsidiary, it is not subject to the REIT asset, income and
distribution requirements nor are its assets, liabilities or income
treated as assets, liabilities or income of the Company for purposes
of each of the above REIT qualification tests.
|
| |  | The aggregate value of SAC along with any other Taxable REIT
Subsidiary that the Company may form in the future must be limited
to 20% of the total value of the Companys assets. In addition, the
Company will be subject to a 100% penalty tax on any rent, interest
or other charges that it imposes on any Taxable REIT Subsidiary in
excess of an arms length price for comparable services. The
Company anticipates that any rents, interest or other charges
imposed on SAC (or any other Taxable REIT Subsidiary that it may
form in the future) will be at arms length prices.                                                                                                                                                   
|
| |  | The Company generally anticipates to derive income from SAC by way
of dividends. Such dividends are not real estate source income for
purposes of the 75% Gross Income Test. Therefore, when aggregated
with the Companys other non-real estate source income, such
dividends must be limited to 25% of the Companys gross income each
year. The Company intends to monitor the value of its investment in
and the distributions from its Taxable REIT Subsidiaries to ensure
compliance with all applicable income and asset tests.                                                                                                                                                                                                       
|
| |  | A Taxable REIT Subsidiary doing business in the United States is
generally subject to corporate level tax on its net income and will
generally be able to distribute only net after-tax earnings to the
Company as dividend distributions. Such dividends may, however,
qualify for the dividends received deduction that has been proposed
by the President (described below) if and when such reforms are ever
enacted.                                                                                                                                                                                                                                                                                                                    
|
| |  | Other Affiliates.At present, we have no other affiliates other
than the SAC and the Manager. The Manager is an S-Corporation whose
earnings are passed through to the sole proprietor, Mr. Gonfiantini,
as an individual. The Manager is not consolidated with the Company
for tax or accounting purposes. Fees paid to the Manager are
generally required to be reasonable and arms length; otherwise they
may be recharacterized by the IRS in ways that could have adverse
tax consequences for us. We believe that the fees payable to                                                                                                                                                                                                  

17



---



##### Table of Contents





| |  | the Manager, including any incentive or termination fees, are
reasonable compensation for the services provided.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Taxation of stockholders. For any taxable year in which we are
treated as a REIT for Federal income tax purposes, distributions
(including constructive distributions) made to holders of common
stock other than tax-exempt entities (and not designated as capital
gain dividends) will generally be subject to tax as ordinary income
to the extent of our current and accumulated earnings and profits as
determined for Federal income tax purposes. If the amount
distributed exceeds a stockholders allocable share of such earnings
and profits, the excess will be treated as a return of capital to
the extent of the stockholders adjusted basis in the common stock,
which will not be subject to tax, and thereafter as a taxable gain
from the sale or exchange of a capital asset.                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Distributions designated by us as capital gain dividends can
generally be treated by shareholders as gain from the sale or
exchange of a capital asset held for more than 1 year, but only to
the extent that the designated distribution does not exceed our
actual net capital gain for the taxable year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Distributions by us, whether characterized as ordinary income or as
capital gain, are not eligible for the corporate dividends received
deduction that exists under current law. Although the Presidents
tax reform proposals recently introduced in Congress as the Jobs and
Growth Tax Act of 2003 contain provisions that would enable
taxpayers to exclude from gross income certain dividends paid or
deemed paid from previously taxed earnings, such exclusion would not
be available with respect to most dividends received from a REIT,
including the Company because REIT dividends are generally not paid
from previously taxed earnings. As currently proposed, the
exclusion could apply to dividends paid by the Company to the extent
derived from either (i) earnings attributable to a prior tax year
that exceeded dividends paid with respect to such prior tax year or
(ii) earnings attributable to dividends received from other non-REIT
corporations. Other proposals to reform the taxation of dividends
may also be introduced in Congress but it remains unclear at this
time whether any such reform proposals will ultimately be enacted
and if so, in what form or when.
|
| |  | In the event that we realize a loss for the taxable year,
stockholders will not be permitted to deduct any share of that loss.
Further, if we (or a portion of our assets) were to be treated as a
taxable mortgage pool, or if we were to hold residual interests in
REMICs (Residential Mortgage Insurance Corporation) or FASITs
(Financial Asset Security Trust), any excess inclusion income
derived there from and allocated to a stockholder would not be
allowed to be offset by a net operating loss of such stockholder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Dividends declared during the last quarter of a taxable year and
actually paid during January of the following taxable year are
generally treated as if received by the stockholder on December 31
of the taxable year in which they are declared and not on the date
actually received. In addition, we may elect to treat certain other
dividends distributed after the close of the taxable year as having
been paid during such taxable year, but stockholders will be treated
as having received such dividend in the taxable year in which the
distribution is made.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Generally, a dividend distribution of earnings from a REIT is
considered for estimated tax purposes only when the dividend is
made. However, effective December 15, 1999, any                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

18



---



##### Table of Contents





| |  | person owning at least 10% of the vote or value of a closely held
REIT must accelerate recognition of year-end dividends received from
the REIT in computing estimated tax payments. We are not currently,
and do not intend to be, a closely held REIT.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Upon a sale or other disposition of the common stock, a stockholder
will generally recognize a capital gain or loss in an amount equal
to the difference between the amount realized and the stockholders
adjusted basis in such stock, which gain or loss generally will be
long-term if the stock was held for more than twelve months.
However, where a shareholder holding common stock for six months or
less receives or is deemed to receive a capital gains dividend, any
subsequent loss on the sale of such shares will generally be treated
as a long-term capital loss to the extent of such designated capital
gains dividend. If common stock is sold after a record date but
before a payment date for declared dividends on such stock, a
stockholder will nonetheless be required to include such dividend in
income in accordance with the rules above for distributions, whether
or not such dividend is required to be paid over to the purchaser.
|
| |  | Dividend Reinvestment Plan (DRIP) participants will generally be
treated as having received a dividend distribution, subject to tax
as ordinary income, in an amount equal to the fair market value of
the common stock purchased with the reinvested dividend proceeds
generally on the date we credit such common stock to the DRIP
participants account, plus brokerage commissions, if any, allocable
to the purchase of such common stock. DRIP participants will have a
tax basis in the shares equal to such value. DRIP participants may
not, however, receive any cash with which to pay the resulting tax
liability. Shares received pursuant to the DRIP will have a holding
period beginning on the day after their purchase by the plan
administrator.                                                                                                                                                                                                   
|
| |  | We are required under Treasury Department regulations to demand
annual written statements from the record holders of designated
percentages of our capital stock disclosing the actual and
constructive ownership of such stock and to maintain permanent
records showing the information it has received as to the actual and
constructive ownership of such stock and a list of those persons
failing or refusing to comply with such demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | In any year in which we do not qualify as a REIT, distributions made
to our stockholders would be taxable in the same manner discussed
above, except that no distributions could be designated as capital
gain dividends, distributions would be eligible for the corporate
dividends received deduction, the excess inclusion income rules
would not apply, and stockholders would not receive any share of our
tax preference items. In such event, however, we would be subject
to potentially substantial Federal income tax liability, and the
amount of earnings and cash available for distribution to its
stockholders could be significantly reduced or eliminated.                                                                                                                                                                                                                                                                                           

19



---



##### Table of Contents





| |  | Taxation of tax-exempt stockholders. Subject to the discussion
below regarding a pension-held REIT, a tax-exempt stockholder is
generally not subject to tax on distributions from the Company or
gain realized on the sale of the shares, provided that such
stockholder has not incurred indebtedness to purchase or hold its
shares, that its shares are not otherwise used in an unrelated trade
or business of such stockholder, and that we, consistent with our
stated intent, do not form taxable mortgage pools or hold residual
interests in REMICs or FASITs that give rise to excess inclusion
income as defined under the Code. However, if we were to hold
residual interests in a REMIC or FASIT, or if a pool of our assets
were to be treated as a taxable mortgage pool, a portion of the
dividends paid to a tax-exempt stockholder may be subject to tax as
unrelated business taxable income (UBTI). Although we do not
intend to acquire such residual interests or believe that we, or any
portion of our assets, will be treated as a taxable mortgage pool,
no assurance can be given that the IRS might not successfully
maintain that such a taxable mortgage pool exists.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | If a qualified pension trust (i.e., any pension or other retirement
trust that qualifies under Section 401(a) of the Code) holds more
than 10% by value of the interests in a pension-held REIT at any
time during a taxable year, a substantial portion of the dividends
paid to the qualified pension trust by such REIT may constitute
UBTI. For these purposes, a pension-held REIT is a REIT (i) that
would not have qualified as a REIT but for the provisions of the
Code which look through qualified pension trust stockholders in
determining ownership of stock of the REIT and (ii) in which at
least one qualified pension trust holds more than 25% by value of
the interest of such REIT or one or more qualified pension trusts
(each owning more than a 10% interest by value in the REIT) hold in
the aggregate more than 50% by value of the interests in such REIT.
Assuming compliance with the ownership limit provisions in our
Articles of Incorporation it is unlikely that pension plans will
accumulate sufficient stock to cause us to be treated as a
pension-held REIT.                                                                                                      
|
| |  | Distributions to certain types of tax-exempt stockholders exempt
from Federal income taxation under Sections 501 (c)(7), (c)(9),
(c)(17), and (c)(20) of the Code may also constitute UBTI, and such
prospective investors should consult their tax advisors concerning
the applicable set aside and reserve requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Taxation of Note Holders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Characterization of Notes. Based on the advice of counsel, we treat
the Notes as debt for all tax purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | (a)   Status as Real Property Loans.Assuming the Notes are respected
as debt issued by us, for Federal income tax purposes: (i) Notes
held by a thrift institution taxed as a domestic building and loan
association will not constitute loans...secured by an interest in
real property within the meaning of Code Section 7701 (a) (19) (C)
(v) and (ii) interests on the Notes held by a real estate investment
trust will not be treated as interest on obligations secured by
mortgages on real property or on interest in real property within
the meaning of Code Section 856(c) (4) (B) and the Notes will not
constitute real estate assets or government securities within
the meaning of Code Section 856(c) (5) (A).                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

20



---



##### Table of Contents





| |  | (b)   Taxation of Interest Income on the Notes.Because all Notes are
anticipated to be issued at par, interest paid or accrued on the
Notes generally will be treated as ordinary income to the note
holders, and will be includible in income in accordance with the
note holders regular method of accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | (c)   Sale of Notes. Generally, if a note holder sells or otherwise
disposes of his Note, he will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and
his adjusted tax basis in the Note. Any such gain or loss recognized
will be capital gain or loss if the Note is held as a capital
asset (generally, property held for investment) with the meaning of
Code Section 1221, and will be short term capital gain or loss if
the investment has been held for not more than one year. However,
certain types of investors (such as banks, thrifts and other
financial institutions), and certain investors engaged in risk
reduction strategies with respect to the Notes, may not qualify to
treat the Notes as capital assets, or the gain or loss there from as
capital gain or loss.                                                                                                                                                                                                                                                                                                                                                             
|
| |  | In addition, someone that purchases a Note from a note holder at a
discount may become subject to the market discount rules of sections
1276-1278 of the Code. As a result, some or all of the principal
paid or the gain recognized upon the disposition of the Note by such
holder could be taxed as ordinary interest income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | (d)   Foreign investors. Assuming the Notes are respected as debt,
interest paid on the Notes to a holder that is a nonresident alien
individual, foreign corporation or other non-United States person,
referred to as a Foreign Person, will be exempt from United States
Federal income and withholding taxes under the portfolio interest
provisions so long as (i) the interest is not effectively connected
with a trade or business of the recipient in the United States and
(ii) the Foreign Person is not (a) a direct or indirect ten percent
or greater shareholder of the Company, (b) a controlled foreign
corporation, as that term is defined in the Code, related to the
Company, or (c) a bank receiving interest on an extension of credit
made pursuant to a loan agreement entered into in the ordinary
course of its trade or business. Interest paid to a Foreign Person
that is not engaged in a United States trade or business and that
does not qualify under the portfolio interest exemption will
generally be subject to a 30% United States withholding tax unless
the Foreign Person qualifies to claim a lower rate under an
applicable United States income tax treaty.
|
| |  | In all events, a holder that is a Foreign Person must provide
required information certifications in order to claim any exemptions
or reductions from withholding tax. Foreign investors are urged to
consult their tax advisors concerning regulations on withholding and
related certification requirements generally applicable to payments
made after December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | If a Note were recharacterized as ownership of an equity interest in
the Company, or if exemptions from withholding tax are not
available, certain payments related to the Notes made to Foreign
Persons would become subject to withholding tax at the rate of 30%
and, in the hands of a corporate investor, could become subject to
the branch profits tax. We are not required to indemnify a note
holder, or gross-up payments on the Notes, for any withholding
taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

21



---



##### Table of Contents





| |  | Information reporting and backup withholding. We will report to our
U.S. stockholders and the IRS the amount of distributions paid
during each calendar year, and the amount of tax withheld, if any.
Under the backup withholding rules, an investor may be subject to
backup withholding generally equal to the fourth lowest rate of
Federal income tax then in effect with respect to distributions paid
unless such investor (a) is a corporation or comes within certain
other exempt categories and, when required, demonstrates that fact;
or (b) provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies
with applicable requirements of the backup withholding rules. An
investor that does not provide us with its correct taxpayer
identification number may also be subject to penalties imposed by
the IRS. Any amount paid as backup withholding will be allowed as a
credit against the investors income tax liability. In addition, we
may be required to withhold a portion of dividends and capital gain
distributions to any investors that do not certify under penalties
of perjury their non-foreign status to us.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | State and local taxes. The Company and its investors may be subject
to state or local taxation in various jurisdictions, including those
in which it or they transact business or reside. The state and
local tax treatment of the Company and its investors may not conform
to the Federal income tax consequences discussed above.
Consequently, prospective investors should consult their own tax
advisors regarding the effect of state and local tax laws on an
investment in the Companys stock or Notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Management Agreements



| |  | Management Fees                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  | Pursuant to a management agreement, Specialty Financial receives a
management fee payable quarterly in arrears consisting of:



| | (a) |  | The mortgage loan origination fees or points,
usually charged to a borrower for and upon the origination,
extension or refinancing of a mortgage loan, up to 2.5% of the
loan balance (i.e., 2.5 points) with any additional fees or
points paid to the benefit of us. The amount of this fee is
determined by competitive conditions, may vary and may have a
direct effect on the interest rate a borrower is willing to pay
to us.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | A fee for loan servicing, equal to one-half of one
percent of the total mortgage loan portfolio held by us.
Retention of this fee by the Manager, in effect, lowers the
yield retained by us on its loans.                                                                                                                                                                                                                           
|
| | (c) |  | All late payment charges from payments made by
borrowers.                                                                                                                                                                                                                                                                                                                                                                            



| |  | We also pay to Specialty Financial as incentive compensation for
each fiscal quarter, an amount equal to 50% of the net tax based
income of Specialty Trust, before deduction of such incentive
compensation, in excess of the annualized return to Specialty Trust
equal to 12%. The incentive compensation calculation and payment
will be made quarterly in arrears. The term return to Specialty
Trust is calculated for the quarter by dividing our taxable income
for the quarter by the net worth for the quarter. For such
calculations, our taxable income means our taxable income before
the Managers incentive compensation, the deduction for dividends
paid and net operating loss deductions arising from losses in prior
periods. A deduction for our interest expenses for borrowed money is
taken when calculating taxable income. Net worth for any period
means the sum of the gross proceeds from all prior offerings of
equity securities by us, after deducting expenses and
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22



---



##### Table of Contents





| |  | costs relating to the offering (or for any period in which new
equity securities are issued, the arithmetic weighted average on the
prior offering proceeds and the new proceeds for the period), plus
our beginning retained earnings (without taking into account any
losses incurred in prior periods and excluding amounts reflecting
taxable income to be distributed as dividends and amounts reflecting
valuation allowance adjustments). The definition return to
Specialty Trust is used only for purposes of calculating the
incentive compensation payable, and is not related to the actual
distributions received by stockholders. The incentive compensation
payments to Specialty Financial are made before any income
distributions are made to our stockholders.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Managers base fee is calculated by the Manager each quarter. We
are obligated to pay the amount of the final base fee in excess of
the amount paid to Manager at the beginning of the quarter pursuant
to the Managers good faith estimate We pay the incentive fee with
respect to each fiscal quarter following the delivery to us of the
Managers written statement setting forth the computation of the
incentive fee for such quarter.                                                                                                                                                                                                                                                                                                                                 
|
| |  | Discussions are currently taking place between the Manager and the
Compensation Committee to modify the management incentive fee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Although no management fees will be payable to the Manager solely as
a result of issuance of the Notes, to the extent that proceeds of
the offering are invested in mortgage loans, the size of the
Specialty Trust mortgage portfolio will be increased with a
corresponding effect on the Managers base fee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Set forth below is a breakdown of the management fees actually paid
in 2000, 2001 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Table 4: Components of Manager Compensation
For the years ended December 31,

|     |  |             |           |           |  |         |         |          |  |              |        |              |  |   |           |  |  |   |         |  |  |   |           | 
|---- |  | ----------- | --------- | --------- |  | ------- | ------- | -------- |  | ------------ | ------ | ------------ |  | - | --------- |  |  | - | ------- |  |  | - | --------- | 
|     |  | BASE FEES   |           |           |  |         |         |          |  |             
|     |  |             |           |           |  |         |         |          |  |             
|     |  |             |           |           |  | Loan    |         | Late     |  |              |        |              |  |   |           |  |  |   |         | 
|     |  | Origination |           | Servicing |  | Payment |         | Total    |  | Incentive    |        | Total       
|     |  | Fees        |           | Fees      |  | Charges |         | Base Fee |  | Compensation |        | Compensation
|     |  |             |           |           |  |         |         |          |  |              |        |             
|2000 |  | $           | 980,176   |           |  | $       | 179,129 |          |  | $            | 44,843 |              |  | $ | 1,204,148 |  |  |   |        |  |  | $ | 1,204,148 | 
|2001 |  | $           | 1,692,100 |           |  | $       | 266,556 |          |  | $            | 35,324 |              |  | $ | 1,993,980 |  |  | $ | 88,084  |  |  | $ | 2,082,064 | 
|2002 |  | $           | 1,610,059 |           |  | $       | 361,224 |          |  | $            | 9,295  |              |  | $ | 1,980,578 |  |  | $ | 314,249 |  |  | $ | 2,294,827 | 



| |  | 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 the borrower. Late
payment charges are received directly by the Manager from the borrower.
The incentive compensation is calculated in accordance with the agreement
and paid for or accrued in Manager and Directors fees the Companys
financial statements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23



---



##### Table of Contents





| |  | Administrative Services Provided by the Manger                                                                                                                                                                    
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Specialty Financial, as manager, is responsible for our day-to-day
operations and performs such services and activities relating to the
assets and operations of Specialty Trust as may be appropriate,
including:



| | (i)    |  | representing Specialty Trust in connection with the
origination or purchase of mortgage loans;                                                                                                                                                                                                                                                          
| | ------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)   |  | in accordance with the directions of the Board of
Directors, investing or reinvesting any money of Specialty
Trust;                                                                                                                                                                                                                                     
|
| | (iii)  |  | furnishing reports and statistical and economic
research to Specialty Trust regarding Specialty Trusts real
estate lending activities and the performance of its portfolio
of mortgage loans;                                                                                                                                                          
|
| | (iv)   |  | administering the day-to-day operations of
Specialty Trust and performing administrative functions
necessary in the management of Specialty Trust, including the
collection of revenues, the payment of Specialty Trusts
expenses, debts and obligations and the maintenance of
appropriate computer services to perform such administrative
functions;
|
| | (v)    |  | counseling Specialty Trust in connection with
policy decisions to be made by the Board of Directors;                                                                                                                                                                                                                                                    
|
| | (vi)   |  | assisting Specialty Trust in its use of leverage to
finance mortgage loan acquisitions;                                                                                                                                                                                                                                                                 
|
| | (vii)  |  | overseeing the servicing of Specialty Trusts
mortgage loans;                                                                                                                                                                                                                                                                                           
|
| | (viii) |  | establishing underwriting, appraisal and quality control
procedures for the mortgage loans of Specialty Trust;                                                                                                                                                                                                                                          
|
| | (ix)   |  | conducting a legal document review of each mortgage
loan acquired to verify the accuracy and completeness of the
information contained in the mortgage loans, security
instruments and other pertinent documents in the mortgage file;                                                                                                                  
|
| | (x)    |  | providing Specialty Trust with data processing,
legal and administrative services to the extent required to
implement the business strategy of Specialty Trust;                                                                                                                                                                                         
|
| | (xi)   |  | providing all actions necessary for compliance by
Specialty Trust with all Federal, state and local regulatory
requirements applicable to Specialty Trust in respect of its
business activities, including preparing or causing to be
prepared all financial statements required under applicable
regulations and contractual undertakings;             
|
| | (xii)  |  | providing all actions necessary to enable
Specialty Trust to make required Federal, state and local tax
filings and reports and generally enable Specialty Trust to
maintain its status as a REIT, including soliciting
stockholders for required information to the extent required by
the REIT provisions of the Code;                                
|
| | (xiii) |  | communicating on behalf of Specialty Trust with the
stockholders of Specialty Trust as required to satisfy any
reporting requirements and to maintain effective relations with
such stockholders; and                                                                                                                                                   

24



---



##### Table of Contents





| | (xiv) |  | performing such other services as may be required
from time to time for management and other activities relating
to the assets of Specialty Trust as the Board of Directors
shall reasonably request or the Manager shall deem appropriate
under the particular circumstances.
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Manager may enter into subcontracts with other parties to
provide us any such services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The operating expenses required to be borne by the Manager include
compensation and other employment costs, the cost of office space
and equipment and all other administrative costs incurred in our
day-to-day operations. Those expenses do not include debt service or
taxes. While most costs are paid through the Manager from fees
earned by the Manager, we do pay directly certain REIT-related
expenses such as directors fees, legal and accounting fees, and
foreclosure and real estate owned expenses. There are no caps or
ceilings on any category of fees, compensation or other expenses
payable by us except for compensation payable to the Manager and
expenses to be borne by the Manager as described above.                                                                                                                                                                                                                                                                                                                  
|
| |  | Term and Termination                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | The management agreement had an initial term of three years
beginning January 30, 1998 and is renewed automatically for
successive one-year periods unless we timely deliver a notice of
nonrenewal. Upon nonrenewal of the management agreement without
cause, a termination fee will be payable to the Manager in an amount
equal to the greater of (i) the fair value of the management
agreement as established by an independent appraiser, or (ii) 4% of
the mortgage loan portfolio of Specialty Trust. At December 31,
2002, 4% of our mortgage loan portfolio would be approximately $3.8
million. In addition, we have the right to terminate the management
agreement at any time for cause. A majority of our unaffiliated
directors (currently 6 of 7 directors are unaffiliated) may
determine that the Manager has violated the management agreement in
a material respect and, after notice and an opportunity to cure,
terminate the agreement. Upon such a termination for cause, no
termination fee will be payable to the Manager.
|
| |  | Potential Conflicts of Interest and Limits of Responsibility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Certain provisions of the management agreement raise potential
conflicts of interest or limit the Managers responsibilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Origination Fee.The first 2.5% (2 1/2 points) of any origination
fees (points) collected from the borrower is paid to the Manager as
part of the management fee. The size of the mortgage origination
fees are market driven but may vary and may have a direct impact
upon the interest rate the borrower is willing to pay and,
therefore, on the interest income we would receive from the loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Loan Servicing Fee. As part of the management fee, one-half of one
percent of the total mortgage loan portfolio is paid to the Manager
as a loan-servicing fee. Payment of this fee, in effect, lowers the
yield on our mortgage loans. An undue emphasis on increasing the
size of the mortgage loan portfolio, thereby increasing the
Managers compensation, could result in the acquisition of riskier
or more speculative loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

25



---



##### Table of Contents





| |  | Incentive Fee.We also pay our Manager an incentive fee equal to 50%
of our quarterly taxable income in excess of an annualized return of
12% of our net worth for that quarter. If the marketplace works as
expected, i.e., higher risk, higher reward, the incentive fee
structure to the extent it encourages an undue short-term emphasis
on the acquisition of higher yielding loans could result in the
acquisition of riskier or more speculative loans.                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Services to Others. The management agreement does not limit or
restrict the right of the Manager to engage in any business or
render services of any kind to any other person, including the
purchase of, or rendering advice to others purchasing, mortgages
that meet our policies and criteria. The management agreement does
say that the Manager and its officers may not provide services to
another mortgage REIT unless a majority of our unaffiliated
directors (currently 6 of 7 directors are unaffiliated) confirm that
the other mortgage REIT has operating policies and strategies
different from ours. Neither Specialty Financial nor its sole owner
provide or intend to provide services to any mortgage REIT that is
competitive to us or invests in mortgages, which we might invest in,
but there is nothing in the management agreement that strictly
precludes it.
|
| |  | No Minimum Time Commitment. The management agreement does not impose
a minimum time commitment that the Manager and its personnel must
devote to providing services to us. The ability of the Manager to
engage in other business activities could reduce the time and affect
spent by the Manager on our management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Limits of Manager Responsibility. The Manager assumes no
responsibility other than to render the services called for under
the management agreement in good faith and shall not be responsible
for any action of the Board of Directors in following or declining
to follow any advice or recommendations of the Manager. The Manager,
its directors, officers, stockholders and employees will not be
liable to us, any subsidiary of ours, our subsidiarys stockholders
or the unaffiliated directors for any acts or omissions by the
Manager, its directors, officers, stockholders or employees under or
in connection with the management agreement, except by reason of
acts or omissions constituting bad faith, willful misconduct, gross
negligence or reckless disregard of their duties under the
management agreement.                                                      
|
| |  | Indemnification.We have agreed to indemnify the Manager, its
directors, officers, stockholders and employees with respect to all
expenses, losses, damages, liabilities, demands, charges and claims
arising from any acts or omissions of the Manager made in good faith
in the performance of its duties under the management agreement and
not constituting bad faith, willful misconduct, gross negligence or
reckless disregard of its duties.                                                                                                                                                                                                                                                                                                                                                                                                                                       

26



---



##### Table of Contents



Available Information



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We expect to file annual, quarterly and special reports, and
other information with the SEC. Our SEC filings will be available to
the public over the Internet at the SECs web site at
http://www.sec.gov. You may also read and copy any document we file
at the SECs public reference rooms in Washington, D.C., New York,
New York, and Chicago, Illinois. Please call the SEC at
1-800-SEC-0300 for further information on the public reference
rooms.



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Manager maintains a website on the World Wide Web at
www.specialtyfi.com. You may also request a free copy of any of the
above filings by writing or calling:

Specialty Trust, Inc.
6160 Plumas Street
Reno, Nevada 89509
(775) 826-0809

SPACE INTENTIONALLY LEFT BLANK

27



---



##### Table of Contents


















Item 2. Properties



| |  | Our manager, Specialty Financial, operates its executive offices
at 6160 Plumas Street, Reno, NV 89509. We do not have any
separate offices.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------

Item 3. Legal Proceedings



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

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



| |  | On July 29, 2002, Specialty Trust held its Annual Meeting of
Shareholders. The results of the meeting were as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------



| | (a) |  | The election of Class II Directors, Ernest
Martinelli, Mark Combs, and George Bull III                                   
| | --- |  | -------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Approval of the appointment of KPMG, LLP as the
Independent Auditors of the Company for the year ended December
31, 2002.

PART II.

Item 5. Market for Registrants Common Equity and Related Stockholder Matters



| | (a) |  | Market Information
| | --- |  | ------------------



| |  | The Companys Common Stock has not been registered under the
Securities act or any state securities laws, and is privately held.
The fair market value of the stock, as determined by the Board of
Directors, effective December 28, 2002 is $11.00 per share
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Investors
| | --- |  | ---------



| |  | The number of record holders of the Companys Common Stock as of
December 31, 2002 and 2001, was 304 and 286, respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------



| | (c) |  | Dividends
| | --- |  | ---------



| |  | The Company currently pays cash dividends on a quarterly basis.
Total cash dividends declared by the Company to shareholders as of
December 31, 2002 and 2001 were $8,400,000 ($1.20 per share) and
$6,600,000 ($1.20 per share), respectively. In general, consistent
with the Companys underlying operational strategy, the Companys
dividends for the most part will be characterized as ordinary income
to its stockholders for federal tax purposes. However, a portion of
the Companys dividends may be characterized as capital gains or
return of capital. All of the Companys dividends for 2001 were
characterized as
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28



---



##### Table of Contents





| |  | ordinary income. A portion of the Companys dividends for 2002 was
considered capital distributions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company has a dividend reinvestment plan for shareholders who
choose to reinvest all or part of their distributions in additional
shares of common stock instead of receiving cash payments. The
reinvestment price is the fair market value as determined by our
Board of Directors. Any future discount to the then current market
price, if there is a public market for our stock, cannot exceed 5%
of the fair market value of the stock to comply with REIT
qualification requirements. The Company uses the proceeds for
mortgage loans, working capital and general corporate purposes.
|
| |  | The Company has elected to be treated as a REIT for federal tax
purposes beginning with its 1998 taxable year and, as such, has
distributed and anticipates distributing annually at least 90% (95%
prior to January 1, 2001) of its taxable income, subject to certain
adjustments. Although the Company may borrow funds to make
distributions; cash for such distributions has generally been and is
anticipated to continue to be largely generated from the Companys
results of operations.                                                                                                  
|
| |  | The Company declared the following dividends during the year ended
December 31, 2002 and 2001:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                  |  |                   |  |                  |  |       |      |       |  |       |      |           |  |           |         |              |  |              |           |  |  |  |  |  |  | 
|----------------- |  | ----------------- |  | ---------------- |  | ----- | ---- | ----- |  | ----- | ---- | --------- |  | --------- | ------- | ------------ |  | ------------ | --------- |  |  |  |  |  |  | 
|                  |  |                   |  |                  |  |       |      |       |  |       |      | Dividend  |  | Dividend  |         | Dividends    |  | Dividends   
|                  |  |                   |  |                  |  |       |      |       |  |       |      | per Share |  | per Share |         | Reinvested  |  | Reinvested

|                  |  |                   |  |                  |  |       |      |       |  |       |      | Preferred |  | Common    |         | Preferred    |  | Common      
|Declaration Date  |  | Record Date       |  | Payment Date     |  | Stock |      | Stock |  | Stock |      | Stock    
|                  |  |                   |  |                  |  |       |      |       |  |       |      |          
|2002              |  |                   |  |                  |  |       |      |       |  |       |      |           |  |           |         |              |  |              |           |  |  |  |  | 
|April 29, 2002    |  | April 29, 2002    |  | April 29, 2002   |  |       |      |       |  | $     | 0.30 |           |  |           |         |              |  | $            | 606,412   | 
|July 29, 2002     |  | July 29, 2002     |  | July 30, 2002    |  |       |      |       |  | $     | 0.30 |           |  |           |         |              |  | $            | 1,095,378 | 
|October 30, 2002  |  | October 30, 2002  |  | October 31, 2002 |  |       |      |       |  | $     | 0.30 |           |  |           |         |              |  | $            | 1,170,725 | 
|December 27, 2002 |  | December 27, 2002 |  | January 15, 2003 |  |       |      |       |  | $     | 0.30 |           |  |           |         |              |  | $            | 1,287,929 | 
|2001              |  |                   |  |                  |  |       |      |       |  |       |      |           |  |           |         |              |  |              |           |  |  |  |  | 
|April 23, 2001    |  | April 23, 2001    |  | April 26, 2001   |  | $     | 0.30 |       |  |       |      |           |  | $         | 402,153 |              |  |              |           | 
|July 16, 2001     |  | July 16, 2001     |  | July 18, 2001    |  | $     | 0.30 |       |  |       |      |           |  | $         | 423,057 |              |  |              |           | 
|October 22, 2001  |  | October 22, 2001  |  | October 23, 2001 |  | $     | 0.30 |       |  |       |      |           |  | $         | 554,975 |              |  |              |           | 
|December 28, 2001 |  | December 28, 2001 |  | January 10 ,2002 |  |       |      |       |  | $     | 0.30 |           |  |           |         |              |  | $            | 731,275   | 



| |  | Dividends are declared by the Companys Board of Directors after
considering the Companys available cash for distribution, financial
condition, ability to maintain its REIT status, and such other
factors that may be deemed relevant. See Item 7, Managements
Discussion and Analysis of Financial Conditions and Results of
Operations, for information regarding the sources of funds used for
dividends and for a discussion of factors, if any, which may
adversely affect the Companys ability to pay dividends at the same
levels in 2003 and thereafter.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The following table represents the number of securities to be
issued and available for future issuance under equity
compensation plans.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------

|                                                               |  |                               |         |                           |  |                                |      |  |  |  |         | 
|-------------------------------------------------------------- |  | ----------------------------- | ------- | ------------------------- |  | ------------------------------ | ---- |  |  |  | ------- | 
|                                                               |  |                               |         |                           |  | Number of securities remaining
|                                                               |  | Number of securities to be    |         | Weighted average exercise |  | available for future issuance 
|                                                               |  | issued upon exercise of       |         | price of outstanding      |  | under equity compensation     
|                                                               |  | outstanding options, warrants |         | options, warrants and     |  | plans (excluding securities   
|                                                               |  | and rights(a)                 |         | rights(b)                 |  | reflected in column(a))       
|                                                               |  |                               |         |                           |  |                               
|Equity compensation plans approved by security
    holders     |  |                               | 159,698 |                           |  | $                              | 8.30 |  |  |  | 471,300 | 
|Equity compensation plans not approved by
    security holders |  |                               |        |                           |  |                                |     |  |  |  |        | 
|                                                               |  |                               |         |                           |  |                                |      |  |  |  |         | 
|Total                                                          |  |                               | 159,698 |                           |  | $                              | 8.30 |  |  |  | 471,300 | 
|                                                               |  |                               |         |                           |  |                                |      |  |  |  |         | 



| |  | The total number of securities remaining for future issuance
under equity compensation plans is determined as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------

|                                         |                                                                              |  |         |         | 
|---------------------------------------- | ---------------------------------------------------------------------------- |  | ------- | ------- | 
|10% of outstanding stock                 |                                                                              |  | 718,300 |        
|Less:                                    |                                                                              |  |         |        
|                                         | Number of shares to be issued upon Exercise of
    outstanding stock options |  |         | 159,698 | 
|                                         | Number of shares previously granted and exercised                            |  |         | 87,302  | 
|                                         |                                                                              |  |         |        
|Number of securities remaining available |                                                                              |  | 471,300 |        
|                                         |                                                                              |  |         |        

29



---



##### Table of Contents






Item 6. Selected Financial Data



| |  | The information in this table should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and
Results of Operations and with the financial statements and the
notes thereto included elsewhere in this annual report.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                 |  |                                  |            |              |  |      |            |      |  |      |            |   |  |   |            |   |  |                |            |  
|------------------------------------------------ |  | -------------------------------- | ---------- | ------------ |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | - |  | -------------- | ---------- | -
|                                                 |  |                                  |            |              |  |      |            |      |  |      |            |   |  |   |            |   |  | For the Eleven
|                                                 |  | For the years ended December 31, |            | Months Ended
|                                                 |  | 2002                             |            | 2001         |  | 2000 |            | 1999 |  | 1998
|                                                 |  |                                  |            |              |  |      |            |      |  |     
|Statement of Earnings Data:                      |  |                                  |            |              |  |      |            |      |  |      |            |   |  |   |            |   |  |                |            |  
|Interest and Dividend Income                     |  | $                                | 9,726,660  |              |  | $    | 7,797,169  |      |  | $    | 5,715,590  |   |  | $ | 4,450,193  |   |  | $              | 2,279,052  |  
|Interest Expense                                 |  |                                  | 828,566    |              |  |      | 744,020    |      |  |      | 626,332    |   |  |   | 263,633    |   |  |                | 76,877     |  
|Net Revenues                                     |  |                                  | 8,167,593  |              |  |      | 6,582,893  |      |  |      | 4,689,258  |   |  |   | 3,936,560  |   |  |                | 2,202,175  |  
|Net Earnings                                     |  |                                  | 7,144,707  |              |  |      | 6,085,129  |      |  |      | 4,543,772  |   |  |   | 3,809,424  |   |  |                | 2,025,870  |  
|Preferred Stock Dividend                         |  |                                  |           |              |  |      | 4,540,231  |      |  |      | 5,070,963  |   |  |   | 4,039,923  |   |  |                | 2,111,145  |  
|                                                 |  |                                  |            |              |  |      |            |      |  |      |            |   |  |   |            |   |  |                |            |  
|Net Earnings (Loss) attributable to Common Stock |  | $                                | 7,144,707  |              |  | $    | 1,544,898  |      |  | $    | (527,191   | ) |  |   | (230,499   | ) |  | $              | (85,275    | )
|                                                 |  |                                  |            |              |  |      |            |      |  |      |            |   |  |   |            |   |  |                |            |  
|Basic Earnings (Loss) Per Share                  |  | $                                | 1.02       |              |  | $    | 0.79       |      |  | $    | (1.62      | ) |  | $ | (0.73      | ) |  | $              | (0.28      | )
|Diluted Earnings (Loss) Per Share                |  | $                                | 1.01       |              |  | $    | 0.77       |      |  | $    | (1.62      | ) |  | $ | (0.73      | ) |  | $              | (0.28      | )
|Dividends - Preferred Stock                      |  |                                  |           |              |  | $    | 4,540,231  |      |  | $    | 5,070,963  |   |  | $ | 4,039,923  |   |  | $              | 2,111,145  |  
|Dividends - Common Stock                         |  | $                                | 8,440,451  |              |  | $    | 2,046,810  |      |  |      |           |   |  |   |            |   |  |                |           |  
|Balance Sheet Data (Shown as of period end)      |  |                                  |            |              |  |      |            |      |  |      |            |   |  |   |            |   |  |                |            |  
|Mortgage Loans                                   |  | $                                | 96,245,394 |              |  | $    | 73,331,659 |      |  | $    | 55,863,036 |   |  | $ | 36,105,670 |   |  | $              | 29,600,401 |  
|Allowance for Loan Losses                        |  |                                  | (1,815,576 | )            |  |      | (1,020,321 | )    |  |      | (750,000   | ) |  |   | (350,000   | ) |  |                | (100,000   | )
|Unearned
Discount                                |  |                                  | (120,489   | )            |  |      | (78,144    | )    |  |      | (8,187     | ) |  |   | (24,237    | ) |  |                | (5,219     | )
|                                                 |  |                                  |            |              |  |      |            |      |  |      |            |   |  |   |            |   |  |                |            |  
|Total Mortgage Loans, net                        |  | $                                | 94,309,329 |              |  | $    | 72,233,194 |      |  | $    | 55,104,849 |   |  | $ | 35,731,433 |   |  | $              | 29,495,182 |  
|                                                 |  |                                  |            |              |  |      |            |      |  |      |            |   |  |   |            |   |  |                |            |  
|Real Estate Owned                                |  | $                                | 950,000    |              |  | $    | 445,424    |      |  |      |           |   |  |   |           |   |  |                |           |  
|Land Held for Residential Development            |  | $                                | 2,448,579  |              |  | $    | 2,782,715  |      |  |      |           |   |  |   |           |   |  |                |           |  
|Total Assets                                     |  | $                                | 99,323,596 |              |  | $    | 77,667,422 |      |  | $    | 58,659,056 |   |  | $ | 44,108,463 |   |  | $              | 29,830,087 |  
|Short-Term Borrowings                            |  | $                                | 29,107,031 |              |  | $    | 9,475,441  |      |  | $    | 11,005,960 |   |  | $ | 5,217,467  |   |  | $              | 8,212,000  |  
|Number of Preferred Shares Outstanding           |  |                                  |           |              |  |      |           |      |  |      | 4,624,276  |   |  |   | 3,799,700  |   |  |                | 2,169,588  |  
|Number of Common Shares Outstanding              |  |                                  | 7,183,004  |              |  |      | 6,822,703  |      |  |      | 334,400    |   |  |   | 320,200    |   |  |                | 300,000    |  

30



---



##### Table of Contents






Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations



| |  | 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., 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. 333-86962) filed on April 25, 2002,
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 10% of Specialty Trust, Inc. total
assets, although the Board of Directors may approve exceptions. As
of December 31, 2002, there was one mortgage loan, and one borrower
whose total loans exceeded the 10% threshold,, which the board
approved. Most loans will have terms of one 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

31



---



##### Table of Contents





| |  | 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 Years Ended 2002, 2001 and 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | At December 31, 2002, we owned approximately $96.2. million of
mortgage loans and approximately $3.4 million of land held for
residential development and foreclosure property. Our total assets
were approximately $99.3 million. These assets were financed with
approximately $19.8 million of collateralized notes, approximately
$9.3 million of lines of credit, and approximately $67.5 million of
equity.                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | At December 31, 2002, our
equity - to-assets ratio was 68.0% and our
debt-to-equity ratio was 43.1%, our average quarterly return on
equity for the year ended December 31, 2002 was 10.8%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | At December 31, 2001, we owned approximately $73.3 million of
mortgage loans and approximately $3.2 million of land held for
residential development and foreclosure property. Our total assets
were approximately $77.7 million. These assets were financed with
approximately $9.5 million of collateralized notes , and
approximately $65.0 million of equity.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | At December 31, 2001, our
equity - to-assets ratio was 83.7% and our
debt-to-equity ratio was 14.5%, our average quarterly return on
equity for the year ended December 31, 2001 was 11.0%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The increase in assets was the result of an increase in cash
received from operating activities and cash received from the
collateralized note program of approximately $15 million and the use
of the lines of credit of $9.3 million, which allowed the Company to
fund additional loans. The increase in liabilities was a result of
the Companys ability to draw on its lines of credit and the
increased use in the collateralized note program. Finally, we held
cash deposits of less than $100,000 on December 31, 2002 whereas we
had approximately $1.0 million of restricted cash deposits on
December 31, 2001. The increase in stockholders equity was the
result of stockholders reinvesting dividends from earnings in the
dividend reinvestment program for the year ending December 31, 2002.
|
| |  | Critical Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Management has the obligation to insure that its policies and
methodologies are in accordance with generally accepted accounting
principles. During 2002, management reviewed and evaluated its
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 subsidiary, SAC. The
preparation of consolidated financial statements in accordance with
generally accepted accounting principals requires management 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                                                                                                                                                                                                         

32



---



##### Table of Contents





| |  | time of reporting. In preparing these consolidated financial
statements, management has made its 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, included in Item 8. Management has discussed the
development and selection of these critical accounting estimates
with the audit committee of our Board of Directors and the audit
committee has reviewed our disclosure.                                                                                                                                                  
|
| |  | 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 after 90 days,
when foreclosure proceedings have been initiated, or when the
Loan-to-Value exceeds 100% whichever event occurs first. Management
believes the Companys revenue recognition policies are appropriate
to reflect the substance of the underlying transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Allowance for loan loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The Company maintains an allowance for possible loan losses on
mortgage loans. Additions to the allowance are based on an
assessment of certain factors including, but not limited
to, 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 events or changes in
circumstances indicate that the carrying amount of the assets may
not be recoverable. In managements opinion, and based on their
estimates, real estate owned and land held for development are
considered to be held for investment and are not carried at amounts
in excess of their estimated fair value. Land held for residential
development is carried at the lower of cost or fair market value less
cost to sell. Fair market 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
the 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 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 to pay substantial corporate level taxes. Many of these
requirements, however, are highly technical and complex. If the
Company were to fail to meet these requirements, the Company would
be subject to federal income tax.                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | 33                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



---



##### Table of Contents



|
|
|
|
|
|
|
|
|
|
|
|
|

34



---



##### Table of Contents





| |  | As of December 31, 2002, all 76 lots in phases I and II have been
transferred and the homebuilder has paid SAC $565,943 in conjunction
with the delivery of these completed lots. In order to complete the
lots, SAC has incurred site mapping and other engineering costs and
has incurred real estate taxes, all of which were capitalized.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As of December 31, 2002, no developed lots have been sold by the
homebuilder. The following provides a roll-forward of this account
in 2002:                                                                                                                                                                                                 

|                                                |  |   |           |  
|----------------------------------------------- |  | - | --------- | -
|Balance-December 31, 2001                       |  | $ | 2,782,715 |  
|Capitalized costs in 2002                       |  |   | 231,807   |  
|Cash payments received from homebuilder in 2002 |  |   | (565,943  | )
|                                                |  |   |           |  
|Balance-December 31, 2002                       |  | $ | 2,448,579 |  
|                                                |  |   |           |  



| |  | Real Estate Owned (Held for Sale).Real Estate Owned increased by
approximately $505,000 (113%). This increase was due to the
acquisition of an office building through foreclosure in July 2002.
This increase was offset by the sale of another office building in
early June 2002. The net gain on the sale was approximately
$36,000. Specialty Trust also had a single-family residence, which
was acquired through foreclosure in May 2002. The property was
subsequently sold in June 2002 and the Company financed 100% of the
sale. The net gain on sale was approximately $102,900, which was
deferred and will be recognized as cash principal payments are
received under the installment method.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Accrued Interest Receivable.Accrued interest receivable increased
by approximately $287,000 (34%). This increase is primarily due to
the fact that mortgage loans held for investment increased during
the year by approximately 31%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Mortgage Loans.Mortgage loans held for investment net of allowance
for loan losses and discount of loans increased by approximately
$22.1 million (31%). This increase in mortgage loans was due
primarily to new loans being underwritten and funded faster than
loans were maturing.                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Dividends Payable.Dividends Payable increased by approximately
$108,000 (5%). This increase was primarily due to the increase in
the number of common shares outstanding, which have been issued
through the Dividend Reinvestment Program                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Accounts Payable and Accrued Expense and Accounts Payable  Related
Party.Accounts Payable and Accrued Expense and Accounts Payable 
Related Party increased by approximately $323,000. This increase
was primarily due to the management fee of approximately $220,000
due to the Manager at December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Lines of Credit. Lines of credit increased by approximately $9.3
million from zero at December 31, 2001. The increase was primarily
due to the Company funding additional mortgage loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

35



---



##### Table of Contents





| |  | Collateralized Notes and Collateralized Notes  Related Party.
Collateralized Notes as a whole increased by approximately $10.3
million (100.9%) because of increased issuance of such notes due to
increased demand. Demand increased primarily because the stated
interest rates of the notes are higher than the average rate paid by
most alternative investments (banks  certificates of deposit). Our
collateralized notes were approved for public sale on January 19,
2001 in our initial registration statement. A new registration
statement was filed and declared effective on May 7, 2002.                                                                         
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 2001 Compared to 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Cash and Cash Equivalents and Restricted Cash. Cash and cash
equivalents and restricted cash decreased by approximately $1.6
million (59.5%) as of December 31, 2001, compared to prior year.
The decrease was primarily due to several large loans repaid near
the end of 2000, making cash available at year-end in 2000. In
2001, the Company did not have any large loans repay near the end of
the year. The timing of loan funding and the timing of debt or
equity issues generally determine the amount of cash held by the
Company. It is our goal to keep cash invested in loans or other
financial instruments and therefore keep cash balances low whenever
possible.
|
| |  | Real Estate Owned.Real estate owned increased by approximately
$3.2 million as of December 31, 2001, compared to prior year. There
was no real estate owned at December 31, 2000. Real estate owned
represents property, which was acquired through foreclosure. As of
December 31, 2001, Specialty Trust had foreclosed on two loans.
These properties are in various stages of development. As of
December 31, 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.                                      
|
| |  | Mortgage Loans.Mortgage loans held for investment net of allowance
for loan losses and discount of loans increased by approximately
$17.1 million (31.1%) as of December 31, 2001, compared to prior
year. This increase in mortgage loans was due primarily to
additional cash available to fund loans through the stock issuances
of June 30, 2001 and September 30, 2001 of approximately $18.3
million.                                                                                                                                                                                                                                                                      
|
| |  | Accrued Interest Receivable.Accrued interest receivable increased
by approximately $318,000 (61%). This increase is primarily due to
the fact that mortgage loans held for investment increased during
the year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Dividends Payable.Dividends payable increased by approximately
$660,000 (47.5%) as of December 31, 2001, compared to prior year.
This was primarily due to the fact that there were 2,198,427
additional shares of capital stock on which dividends were paid.
The actual payout per share remained the same. The increase in
stock was due to the two closings of a private placement of Class A
Convertible Preferred Stock on June 30, 2001 and September 30, 2001.
Further, on October 1, 2001, the Companys Class A Convertible
Preferred Stock converted to Common Stock. Due to our REIT status
the Board of                                                             

36



---



##### Table of Contents





| |  | Directors must declare dividends for the fourth quarter in December
of the earnings year. Therefore, this dividend carries over the
fiscal year and was paid in January 2002.                                                                                                                                                                                                                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Lines of Credit.Borrowings under lines of credit decreased by
approximately $4.5 million (100%) as of December 31, 2001, compared
to prior year. 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 year because the
Company sold collateralized notes to fund loans rather than use
higher cost lines of credit.
|
| |  | Collateralized Notes.Collateralized notes increased by
approximately $2.9 million (44.6%) as of December 31, 2001, compared
to the prior year. This was due primarily to notes being offered at
a lower interest rate than the interest rates on our lines of credit
to fund loans. Our collateralized notes were authorized 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.                                                                                                                                                                                                                                                                                                                               

|                 |                      |                 |       |           |                   |           |                   |          |         |          |        |           |           |           |        |           |           |           |   |         |         |         |   |           |           |           | 
|---------------- | -------------------- | --------------- | ----- | --------- | ----------------- | --------- | ----------------- | -------- | ------- | -------- | ------ | --------- | --------- | --------- | ------ | --------- | --------- | --------- | - | ------- | ------- | ------- | - | --------- | --------- | --------- | 
|                 |                      |                 |       |           | Year Ended        |           | Year Ended       
|                 |                      |                 |       |           | December 31, 2002 |           | December 31, 2001
|                 |                      |                 |       |           | Over/Under        |           | Over/Under       
|                 |                      |                 |       |           | December 31, 2001 |           | December 31, 2000
|                 |                      |                 |       |           |                   |           |                  
|                 |                      |                 |       |           | Net               |           |                   |          |         |          |        |           |           |           | Net    |           |           |           |   |         |         |         |  
|                 |                      |                 |       |           | Change            |           | Rate              |          | Volume  |          | Change |           | Rate      |           | Volume
|                 |                      |                 |       |           |                   |           |                   |          |         |          |        |           |           |           |       
|Interest Income  |                      |                 |       |           |                   |           |                   |          |         |          |        |           |           |           |        |           |           |           |   |         |         |         |   |          
|                 | Mortgage Loans       |                 | $     | 1,931,454 |                   |           | $                 | (179,223 | )       |          | $      | 2,110,677 |           |           | $      | 2,173,908 |           |           | $ | 579,376 |         |         | $ | 1,594,532 |          
|                 | Cash Accounts        |                 |       | 5,134     |                   |           |                   | (33,230  | )       |          |        | 38,364    |           |           |        | (71,038   | )         |           |   | (67,219 | )       |         |   | (3,819    | )        
|                 |                      |                 |       |           |                   |           |                   |          |         |          |        |           |           |           |        |           |           |           |   |         |         |         |   |          
|                 |                      |                 | Total |           | $                 | 1,936,588 |                   |          | $       | (212,453 | )      |           | $         | 2,149,041 |        |           | $         | 2,102,870 |   |         | $       | 512,157 |   |           | $         | 1,590,713 | 
|                 |                      |                 |       |           |                   |           |                   |          |         |          |        |           |           |           |        |           |           |           |   |         |         |         |   |          
|Interest Expense |                      |                 |       |           |                   |           |                   |          |         |          |        |           |           |           |        |           |           |           |   |         |         |         |   |          
|                 | Line of Credit       |                 | $     | (5,035    | )                 |           | $                 | (41,220  | )       |          | $      | 36,185    |           |           | $      | (117,894  | )         |           | $ | 15,544  |         |         | $ | (133,438  | )        
|                 | Notes Payable        |                 | $     | 4,623     |                   |           |                   |         |         |          |        | 4,623     |           |           |        |          |           |           |   |        |         |         |   |          |          
|                 | Collateralized
Notes |                 |       | 84,958    |                   |           |                   | (279,129 | )       |          |        | 364,087   |           |           |        | 235,582   |           |           |   | (33,738 | )       |         |   | 269,320   |          
|                 |                      |                 |       |           |                   |           |                   |          |         |          |        |           |           |           |        |           |           |           |   |         |         |         |   |          
|                 |                      |                 | Total |           | $                 | 84,546    |                   |          | $       | (320,349 | )      |           | $         | 404,895   |        |           | $         | 117,688   |   |         | $       | (18,194 | ) |           | $         | 135,882   | 
|                 |                      |                 |       |           |                   |           |                   |          |         |          |        |           |           |           |        |           |           |           |   |         |         |         |   |          
|Change in Net    |                      |                 |       |           |                   |           |                   |          |         |          |        |           |           |           |        |           |           |           |   |         |         |         |   |          
|                 |                      | Interest Income |       | $         | 1,852,042         |           |                   | $        | 107,896 |          |        | $         | 1,744,146 |           |        | $         | 1,985,182 |           |   | $       | 530,351 |         |   | $         | 1,454,831 |          
|                 |                      |                 |       |           |                   |           |                   |          |         |          |        |           |           |           |        |           |           |           |   |         |         |         |   |          



| |  | Our operating results include all of the reported income of our
mortgage finance operation. The comparison of the year ended
December 31, 2002 and 2001 is as follows:                                                                                                                                                                                                                                          
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 2002 Compared to 2001                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Interest Income, Mortgage Assets.Interest income increased
approximately $1.9 million (25%) for the year ended December 31,
2002 as compared to 2001. This increase was due primarily to
additional funds invested in mortgage loans as a result of increased
cash available from dividend reinvestments during the period and the
use of short-term borrowings to fund a corresponding increase in
loan demand.

37



---



##### Table of Contents





| |  | Total Interest Expense.Interest expense increased by approximately
$85,000 (11%) for the year ended December 31, 2002 as compared to
2001. The increase is primarily due to the increase in
collateralized notes from the prior year offset by lower interest
rates.                                                                                                                                                                                                                                                                                                                                                                                 
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Provision for Loan Losses:Provision for Loan Losses increased by
approximately $299,000 (60%). This increase is primarily due to the
fact that the loan portfolio increased by approximately 31% while
delinquencies increased by approximately $9.4 million from the prior
year. Further, the overall LTV on the current portfolio increased
from 51% to 62% from December 31, 2001 to 2002, respectively.                                                                                                                                                                                                                                          
|
| |  | Other Income.Other income increased by approximately $49,000 for
the year ended December 31, 2002 as compared to 2001. This increase
was primarily due to the gain on sale of real estate owned of
approximately $36,000 and the net operating income generated from
one of the foreclosure properties was approximately $26,000. The
property was subsequently sold.                                                                                                                                                                                                                                                                                
|
| |  | Total Expenses.Total expenses increased by approximately $525,000
(106%) for the year ended December 31, 2002 as compared to 2001.
The increase was in part due to an increase in professional fees
from the prior year due to increased legal fees and increased audit and tax fees due to a change in audit
firm. In addition, Management and Directors fees
increased as the Company incurred a management incentive bonus of
approximately $314,000, while the incentive bonus fee incurred in
2001 was approximately $88,000. Finally other expenses increased by
approximately $151,000, which represents foreclosure fees paid by
the Company.
|
| |  | 2001 Compared to 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Interest Income, Mortgage Loans.Interest income from mortgage
loans increased approximately $2.2 million (39.1%) for the year
ended December 31, 2001 as compared to 2000. The increase was 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 June 30, 2001 and September 30, 2001. Additional
factors included dividend reinvestments during the period, and the
use of short-term borrowings to fund a corresponding increase in
loan demand.                                                                                              
|
| |  | Total Interest Expense.Interest expense increased approximately
$118,000 (18.8%) for the year ended December 31, 2001 as compared to
2000. The increase was due primarily to higher average borrowings
outstanding as the Company utilized its ability to issue
collateralized notes to fund the increased loan demand.                                                                                                                                                                                                                                                                                                                              
|
| |  | Total Expenses.Total expenses increased approximately $353,000
(242.1%) for the year ended December 31, 2001 as compared to 2000.
The increase was due primarily to advertising costs for sale of
collateralized notes, In addition, the Company incurred expenses
related to professional services in conjunction with the SEC
reporting requirements, previously not required. Finally, the
Company incurred a management incentive bonus of approximately
$88,000 in 2001; whereas in 2000 no incentive bonus was recognized.                                                                                                                     

38



---



##### Table of Contents





| |  | 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. Although the majority of our loans are in the state
of Nevada, we are also acquiring loans in Arizona, California, Utah,
and Colorado.
|
| |  | 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.                                                                                                                                                                                               

Interest Rate/ Market/ Credit Risk
For the years ended December 31,

|                    |                      |  |      |       |      |  |      |       |   |  |      |       |  
|------------------- | -------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                    |                      |  | 2002 |       | 2001 |  | 2000
|                    |                      |  |      |       |      |  |     
|Interest Income     |                      |  |      |       |      |  |      |       |   |  |      |      
|                    | Mortgage Loans       |  |      | 12.53 | %    |  |      | 12.65 | % |  |      | 11.51 | %
|                    | Cash Accounts        |  |      | 1.63  | %    |  |      | 2.14  | % |  |      | 4.89  | %
|Interest Expense    |                      |  |      |       |      |  |      |       |   |  |      |      
|                    | Line of Credit       |  |      | 4.67  | %    |  |      | 8.81  | % |  |      | 7.96  | %
|                    | Notes Payable        |  |      | 0.50  | %    |  |      |      |   |  |      |      |  
|                    | Collateralized Notes |  |      | 5.33  | %    |  |      | 7.22  | % |  |      | 7.75  | %
|Net Interest Spread |                      |  | 7.09 | %     |      |  | 4.95 | %     |   |  | 3.38 | %    



| |  | 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, service debt and pay dividends to
stockholders. This source provides approximately $9.7 million on an
annual basis. We generally have the ability to apply this cash flow
as needed.                                                                                                                                                                                                                                
|
| |  | Secondly, the payoff and prepayment of loans provides additional
liquidity to our portfolio. Historically, we have experienced annual
loan payoffs and prepayments of approximately 30% to 35% of our
outstanding portfolio. Since our loan terms are usually one to three
years, the rate of principal payoffs is significant. With a current
portfolio of approximately $96.2 million we would anticipate annual
cash flows from principal pay downs of approximately $33.7 million
in 2003. 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.
|

| |  | The following title illustrates the scheduled maturities of
mortgage loan investments subsequent to December 31, 2002:
| |  | ----------------------------------------------------------------------------------------------------------------------

|         |  |        |            | 
|-------- |  | ------ | ---------- | 
|Maturity |  | Amount
|         |  |       
|2002     |  | $      | 2,461,000  | 
|2003     |  |        | 53,066,370 | 
|2004     |  |        | 24,590,501 | 
|2005     |  |        | 16,116,275 | 
|2006     |  |        | 11,248     | 
|         |  |        |            | 
|         |  | $      | 96,245,394 | 
|         |  |        |            | 



| |  | Under existing loans, the Company is required to find additional
loan amounts totaling $22,028,000 as of December 31, 2002.
| |  | ---------------------------------------------------------------------------------------------------------------------------



| |  | Thirdly, we have the ability to issue collateralized notes to
provide additional liquidity to our portfolio. As of May 7, 2002,
we were able to offer collateralized notes with maturities of up to
five years. Although not a committed source, we can utilize
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39



---



##### Table of Contents





| |  | 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 December 31, 2002:
| |  | --------------------------------------------------------------------------------------------

|         |  |        |            | 
|-------- |  | ------ | ---------- | 
|Maturity |  | Amount
|         |  |       
|2003     |  | $      | 18,795,351 | 
|2004     |  |        | 689,155    | 
|2005     |  |        |           | 
|2006     |  |        |           | 
|2007     |  |        | 286,526    | 
|         |  |        |            | 
|         |  | $      | 19,771,031 | 
|         |  |        |            | 



| |  | Lastly, we had three committed lines of credit with commercial banks
to provide another level of liquidity as of December 31, 2002. We
can borrow $6.5 million, $5.0 million, and $3.0 million on three
separate lines of credit to provide funding for new mortgage loans,
for an aggregate of $14.5 million in available credit. The $6.5
million and $3.0 million lines are available through July 1, 2003.
The $5.0 million line is available through October 15, 2003. On
January 23, 2003, the Company obtained a fourth line of credit
totaling $2.5 million that will mature on January 23, 2004. All
four 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)
maximum debt-to-equity ratio, and (iii) a maximum amount allowable
for lines of credit of $20.0 million. We are in compliance with
these covenants. The Company had an outstanding balance on these
lines of credit as of December 31, 2002 of approximately $9.3
million.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The following table sets out the maturity dates, total facility
and outstanding balance of each line of credit at
December 31, 2002:
| |  | ------------------------------------------------------------------------------------------------------------------------------------

|                 |       |                |           |                   |  |   |           |           | 
|---------------- | ----- | -------------- | --------- | ----------------- |  | - | --------- | --------- | 
|                 |       |                |           | Outstanding at   
|Maturity         |       | Amount of Line |           | December 31, 2002
|                 |       |                |           |                  
|July 1, 2003     |       | $              | 6,500,000 |                   |  | $ | 1,336,000 |          
|July 1, 2003     |       |                | 3,000,000 |                   |  |   | 3,000,000 |          
|October 15, 2003 |       |                | 5,000,000 |                   |  |   | 5,000,000 |          
|                 |       |                |           |                   |  |   |           |          
|                 | Total |                | $         | 14,500,000        |  |   | $         | 9,336,000 | 
|                 |       |                |           |                   |  |   |           |          



| |  | We believe the combination of these four 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
four sources we rely on for short-term liquidity needs will be
sufficient to fund our long-term needs as well.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Risk Management and the Allowance for Loan Losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The loan portfolio is the Companys primary asset subject to credit
risk. To reflect this credit risk, the Company records an allowance
for loan 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 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 informs management
of credit risk and helps minimize 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. Evaluation 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                                                                                                                                                                                                                                                                                                                                                                      

40



---



##### Table of Contents





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



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



| |  | The loan review process reviews every significant problem loan and
assessments are performed quarterly to confirm the risk rating to
that loan and the adequacy of loan loss reserve assigned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | After reviewing the loan portfolio, management evaluates the loan
portfolio and identifies those loans which they believe require a
specific allowance. After considering loans which require a
specific allowance, the Company then allocates or assigns a portion
of the allowance for loan loss to groups of loans and individual
loans to cover managements estimate of probable loss. Allocation
is related to the grade of the loan and includes a component
resulting from the application of the measurement criteria of
Statements of Financial Accounting Standards No 114 (SFAS 114),
Accounting by Creditors for Impairment of a Loan and No 118 (SFAS
118) Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures. Management then compares the amounts
allocated for probable losses to the current allowance. To the
extent that the current allowance is insufficient to cover
managements best estimate of probable losses, management records
additional provision for loan loss. If the allowance is greater
than required at that point in time, provision expense is adjusted
accordingly.
|
| |  | While management uses available information to recognize losses on
loans, future adjustments to the allowance for loan loss may be
necessary based on changes in economic conditions and the impact of
such changes on the Companys borrowers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Consistent with US GAAP and with the methodologies used in
estimating the unidentified losses in the loan loss portfolio, the
allowance for loan loss consists of several components.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | First the allowance includes a component resulting from the
application of the measurement criteria of SFAS 114 and SFAS 118.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

41



---



##### Table of Contents





| |  | The second or general component of the allowance for loan loss
is a component that is intended to absorb losses that may not be
provided for by the other component. There are several reasons that
the other components discussed above might not be sufficient to
absorb the losses present in the loan portfolio, and the unallocated
portion of the allowance for loan loss is used to provide for the
losses that have occurred because there are limitations to any
credit risk grading process. Even for experienced loan reviewers,
grading loans and estimating losses involves a significant degree of
judgment regarding the present situation with respect to individual
loans and the portfolio as a whole. In addition, it is possible
that grading and loan review may be done without knowing whether all
relevant facts are at hand. For example, troubled borrowers may
inadvertently or deliberately omit important information from
correspondence with lending officers regarding their financial
condition and the diminished strength of repayment sources.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | While there exists probable asset quality problems in the loan
portfolio, management believes sufficient reserves have been
provided in the allowance for loan loss to absorb probable losses in
the loan portfolio at December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Non-Performing Loans, Potential Problem Loans, and Other Real Estate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | 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 the
Notes, principal and accrued interest. At December 31,
2002 the Company had eight loans which were 30 to 245 days past due
totaling approximately $13.3 million in principal and accrued
interest. As of December 31, 2001, there were two loans totaling
approximately $3.8 million in principal and accrued interest, which
were past due.                                                                                                                                                                                                                                                                                                                           
|
| |  | Land Held for Residential Development and Real Estate Owned (Held
for Sale)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Land Held for Residential Development and Real Estate Owned (Held
for Sale) 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. Costs related to the
improvements to the property are capitalized to the extent that the
additional basis does not exceed the fair value of the asset. All
other costs are expensed. We use our taxable REIT subsidiary to
hold all land held for development, as the REIT rules generally
impose prohibited transaction taxes on income earned by a REIT from
development activities.                                                                                                                                                                                                                                                                                                                                                                                

42



---



##### Table of Contents





|
|
|
|
|
|
|
|
|
|
|
|
|




Item 7A. 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                                                                                                                                                       

43



---



##### Table of Contents





| |  | 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 and a payment of principal in full at the end of the
loan term, principal and interest payments with a balloon payment at
the end of the loan term, or interest only with principal payments
upon lot releases and principal in full at the end of the loan term.
Because of the high yield of our loans, we do not believe that a 5%
increase or decrease in general interest rates (from those
prevailing at December 31, 2002) would have a significant impact on
the fair value of our fixed rate loan portfolio. A significant
increase in interest rates could, however, make it more difficult
for our borrowers to sell or refinance their respective properties.
This could have a material adverse effect on us, either through loan
defaults or the need to grant extensions of the maturity dates,
thereby delaying repayment. Additionally, a real estate market
decline in Nevada, Arizona, Colorado, Utah, 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 through our
manger. The Manager carefully underwrites and services 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

44



---



##### Table of Contents






Item 8. Consolidated Financial Statements
and Supplementary Data

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Independent Auditors Report

Board of Directors

Specialty Trust, Inc. and Subsidiary


We have audited the accompanying consolidated balance sheet of
Specialty Trust, Inc. and Subsidiary (formerly Specialty
Mortgage Trust, Inc.) as of December 31, 2002, and the
related consolidated statements of earnings, stockholders
equity and comprehensive income, and cash flows for the year
then ended. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.

We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Specialty Trust, Inc. and Subsidiary as of
December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America.



| |             
| | ------------
| | /s/ KPMG LLP

Sacramento, California


March 18, 2003


F - 1



---



##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Specialty Trust, Inc.

We have audited the accompanying balance sheets of Specialty Trust, Inc.
as of December 31, 2001, and the related statements of earnings,
stockholders equity, and cash flows for each of the two years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Specialty Trust, Inc.
as of December 31, 2001, and the results of its operations and its cash
flows for each of the two year periods in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.

/s/ GRANT THORNTON LLP

Reno, Nevada
             January 25, 2002

F - 2



---



##### Table of Contents






SPECIALTY TRUST INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,

|                     |                                                                                                                                                                                             |                                            |                                      |            |            |  |      |            |            |  | 
|-------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ---------- | ---------- |  | ---- | ---------- | ---------- |  | 
|ASSETS              
|
|                     |                                                                                                                                                                                             |                                            |                                      |            | 2002       |  | 2001
|ASSETS               |                                                                                                                                                                                             |                                            |                                      |            |            |  |      |           
|                     | Cash and Cash Equivalents                                                                                                                                                                   |                                            | $                                    | 92,684     |            |  | $    | 58,989     |           
|                     | Restricted Cash                                                                                                                                                                             |                                            |                                      |           |            |  |      | 1,003,200  |           
|                     | Accrued Interest Receivable                                                                                                                                                                 |                                            |                                      | 1,123,865  |            |  |      | 836,837    |           
|                     | Land Held for Residential Development                                                                                                                                                       |                                            |                                      | 2,448,579  |            |  |      | 2,782,715  |           
|                     | Real Estate Owned (held for sale)                                                                                                                                                           |                                            |                                      | 950,000    |            |  |      | 445,424    |           
|                     | Mortgage Loans Held for Investment, Net of
allowance for loan losses of $1,815,576 and $1,020,321 and unearned discount
of $120,489 and $78,144 at December 31,
2002 and 2001, respectively |                                            |                                      | 94,309,329 |            |  |      | 72,233,194 |           
|                     | Other Assets                                                                                                                                                                                |                                            |                                      | 399,139    |            |  |      | 307,063    |           
|                     |                                                                                                                                                                                             |                                            |                                      |            |            |  |      |           
|                     |                                                                                                                                                                                             | Total Assets                               |                                      | $          | 99,323,596 |  |      | $          | 77,667,422 | 
|                     |                                                                                                                                                                                             |                                            |                                      |            |            |  |      |           
|                     |                                                                                                                                                                                             |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |            |            |  |      |            |            |  | 
|LIABILITIES          |                                                                                                                                                                                             |                                            |                                      |            |            |  |      |           
|                     | Dividends Payable                                                                                                                                                                           |                                            | $                                    | 2,154,901  |            |  | $    | 2,046,811  |           
|                     | Cash Deposits                                                                                                                                                                               |                                            |                                      |           |            |  |      | 1,003,200  |           
|                     | Accounts
Payable  Related Party                                                                                                                                                            |                                            |                                      | 241,824    |            |  |      |           |           
|                     | Accounts Payable and Accrued Expenses                                                                                                                                                       |                                            |                                      | 159,726    |            |  |      | 99,233     |           
|                     | Accrued Interest Payable                                                                                                                                                                    |                                            |                                      | 37,523     |            |  |      | 16,699     |           
|                     | Deferred Revenue                                                                                                                                                                            |                                            |                                      | 102,900    |            |  |      |           |           
|                     | Lines of Credit                                                                                                                                                                             |                                            |                                      | 9,336,000  |            |  |      |           |           
|                     | Collateralized Notes                                                                                                                                                                        |                                            |                                      | 19,074,906 |            |  |      | 8,395,919  |           
|                     | Collateralized Notes - Related Party                                                                                                                                                        |                                            |                                      | 696,125    |            |  |      | 1,079,522  |           
|                     |                                                                                                                                                                                             |                                            |                                      |            |            |  |      |           
|                     |                                                                                                                                                                                             | Total Liabilities                          |                                      | $          | 31,803,905 |  |      | $          | 12,641,384 | 
|                     |                                                                                                                                                                                             |                                            |                                      |            |            |  |      |           
|STOCKHOLDERS EQUITY |                                                                                                                                                                                             |                                            |                                      |            |            |  |      |           
|                     | Class A Convertible Preferred Stock; $0.01 par value; 0 and 3,531,915
shares authorized; 0 shares issued and outstanding as of December 31,
2002 and 2001, respectively                     |                                            |                                      |           |            |  |      |           |           
|                     | Common Stock; $0.01 par value; 50,000,000 and
46,468,085 shares authorized; 7,183,004 and 6,822,703
issued and outstanding as of December 31, 2002 and
2001, respectively                   |                                            | $                                    | 71,830     |            |  | $    | 68,227     |           
|                     | Additional Paid-in Capital                                                                                                                                                                  |                                            |                                      | 67,447,861 |            |  |      | 64,957,811 |           
|                     | Retained Earnings                                                                                                                                                                           |                                            |                                      |           |            |  |      |           |           
|                     |                                                                                                                                                                                             |                                            |                                      |            |            |  |      |           
|                     |                                                                                                                                                                                             | Total Stockholders Equity                 |                                      |            | 67,519,691 |  |      |            | 65,026,038 | 
|                     |                                                                                                                                                                                             |                                            |                                      |            |            |  |      |           
|                     |                                                                                                                                                                                             | Total Liabilities and Stockholders Equity |                                      | $          | 99,323,596 |  |      | $          | 77,667,422 | 
|                     |                                                                                                                                                                                             |                                            |                                      |            |            |  |      |           

The accompanying notes are an integral part of the statements.

F - 3



---



##### Table of Contents






SPECIALTY TRUST INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31,

|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |         |           |           |           |  
|--------------------------------- | ---------------------------- | ------------------------------ | ---------------------------------------------------------------- | ------------------------------------------------ | ------- | --------- | --------- | ------- | --------- | --------- | --------- | ------- | --------- | --------- | --------- | -
|                                  |                              |                                |                                                                  |                                                  |         | 2002      |           | 2001    |           | 2000     
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |          
|Revenues                          |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |        
|                                  | Interest and Dividend Income |                                |                                                                  |                                                  |         |           |           |         |           |           |           |         |          
|                                  |                              |                                | Mortgage Loans                                                   |                                                  | $       | 9,669,335 |           |         | $         | 7,737,881 |           |         | $         | 5,563,973 |          
|                                  |                              |                                | Cash Accounts                                                    |                                                  |         | 57,325    |           |         |           | 52,191    |           |         |           | 123,229   |          
|                                  |                              |                                | Dividends                                                        |                                                  |         |          |           |         |           | 7,097     |           |         |           | 28,388    |          
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |        
|                                  |                              |                                |                                                                  | Total Interest and Dividend Income               |         |           | 9,726,660 |         |           |           | 7,797,169 |         |           |           | 5,715,590 |  
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |        
|                                  | Interest Expense             |                                |                                                                  |                                                  |         |           |           |         |           |           |           |         |          
|                                  |                              |                                | Lines of Credit                                                  |                                                  |         | 37,737    |           |         |           | 42,772    |           |         |           | 160,666   |          
|                                  |                              |                                | Notes
Payable  Related Parties                                  |                                                  |         | 4,623     |           |         |           |          |           |         |           |          |          
|                                  |                              |                                | Collateralized Notes                                             |                                                  |         | 786,206   |           |         |           | 701,248   |           |         |           | 465,666   |          
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |        
|                                  |                              |                                |                                                                  | Total Interest Expense                           |         |           | 828,566   |         |           |           | 744,020   |         |           |           | 626,332   |  
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |        
|                                  |                              |                                |                                                                  | Net Interest and Dividend Income                 |         |           | 8,898,094 |         |           |           | 7,053,149 |         |           |           | 5,089,258 |  
|                                  | Provision for Loan Losses    |                                |                                                                  | 795,255                                          |         |           |           | 496,427 |           |           |           | 400,000 |          
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |         |           |           |          
|                                  |                              |                                | Net Interest and Dividend Income after
Provision for Loan Losses |                                                  |         | 8,102,839 |           |         |           | 6,556,722 |           |         |           | 4,689,258 |          
|                                  |                              |                                | Investment Gain                                                  |                                                  |         |          |           |         |           | 10,392    |           |         |           |          |          
|                                  |                              |                                | Other Income                                                     |                                                  |         | 64,754    |           |         |           | 15,779    |           |         |           |          |          
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |         |           |           |          
|                                  |                              |                                |                                                                  | Net Revenues                                     |         |           | 8,167,593 |         |           |           | 6,582,893 |         |           |           | 4,689,258 |  
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |         |           |           |          
|Expenses                          |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |        
|                                  |                              | General and Administrative     |                                                                  |                                                  | 480,995 |           |           |         | 389,757   |           |           |         | 133,903   |          
|                                  |                              | Management and Directors Fees |                                                                  |                                                  | 390,903 |           |           |         | 108,007   |           |           |         | 11,583    |          
|                                  |                              | Other Expense                  |                                                                  |                                                  | 150,988 |           |           |         |          |           |           |         |          |          
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |         |           |           |          
|                                  |                              |                                |                                                                  | Total Expenses                                   |         |           | 1,022,886 |         |           |           | 497,764   |         |           |           | 145,486   |  
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |         |           |           |          
|                                  |                              |                                |                                                                  | NET EARNINGS                                     |         |           | 7,144,707 |         |           |           | 6,085,129 |         |           |           | 4,543,772 |  
|                                  |                              | Preferred Stock Dividend       |                                                                  |                                                  |        |           |           |         | 4,540,231 |           |           |         | 5,070,963 |          
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |         |           |           |          
|                                  |                              |                                |                                                                  | NET EARNINGS (LOSS) ATTRIBUTABLE
TO COMMON STOCK |         | $         | 7,144,707 |         |           | $         | 1,544,898 |         |           | $         | (527,191  | )
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |        
|Basic Earnings (Loss) Per Share   |                              | $                              | 1.02                                                             |                                                  |         | $         | 0.79      |         |           | $         | (1.62     | )      
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |        
|Diluted Earnings (Loss) Per Share |                              | $                              | 1.01                                                             |                                                  |         | $         | 0.77      |         |           | $         | (1.62     | )      
|                                  |                              |                                |                                                                  |                                                  |         |           |           |         |           |           |           |        

The accompanying notes are an integral part of the statements.

F - 4



---



##### Table of Contents






SPECIALTY TRUST INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
Years ended December 31,





|                                                                           |                                                      |  |                     |   |              |   |         |   |        |  |           |   |  |   |        |   | 
|-------------------------------------------------------------------------- | ---------------------------------------------------- |  | ------------------- | - | ------------ | - | ------- | - | ------ |  | --------- | - |  | - | ------ | - | 
|                                                                           |                                                      |  | Class A Convertible |   |              |   |         |   |        |  |          
|                                                                           |                                                      |  | Preferred Stock     |   | Common Stock
|                                                                           |                                                      |  |                     |   |             
|                                                                           |                                                      |  | Shares              |   | Amount       |   | Shares  |   | Amount
|                                                                           |                                                      |  |                     |   |              |   |         |   |       
|Balance, January 1, 2000                                                   |                                                      |  | 3,799,700           |   |              | $ | 37,997  |   |        |  | 320,200   |   |  | $ | 3,202  |  
|Comprehensive income:                                                      |                                                      |  |                     |   |              |   |         |   |        |  |           |   |  |   |        |  
|                                                                           | Net earnings                                         |  |                     |  |              |   |         |  |        |  |           |  |  |   |        |  | 
|                                                                           | Net unrealized loss on
investment available-for-sale |  |                     |   |              |   |         |   |        |  |           |   |  |   |        |   | 
|                                                                           | Total Comprehensive Income                           |  |                     |   |              |   |         |   |        |  |           |   |  |   |        |   | 
|Stock options exercised                                                    |                                                      |  |                    |   |              |   |        |   |        |  | 14,200    |   |  |   | 142    |  
|Non-employee stock option expense                                          |                                                      |  |                    |   |              |   |        |   |        |  |          |   |  |   |       |  
|Preferred Stock issued (net
of offering costs of $13,389)                  |                                                      |  | 569,890             |   |              |   | 5,699   |   |        |  |          |   |  |   |       |  
|Collateralized notes received
for Preferred Stock                          |                                                      |  | 119,430             |   |              |   | 1,194   |   |        |  |          |   |  |   |       |  
|Dividends reinvested for
Preferred Stock (net of
offering costs of $4,274) |                                                      |  | 135,256             |   |              |   | 1,353   |   |        |  |          |   |  |   |       |  
|Dividends declared on
Preferred Stock                                      |                                                      |  |                    |   |              |   |        |   |        |  |          |   |  |   |       |  
|                                                                           |                                                      |  |                     |   |              |   |         |   |        |  |           |   |  |   |        |   | 
|Balance, December 31, 2000                                                 |                                                      |  | 4,624,276           |   |              | $ | 46,243  |   |        |  | 334,400   |   |  | $ | 3,344  |  
|Comprehensive income:                                                      |                                                      |  |                     |   |              |   |         |   |        |  |           |   |  |   |        |  
|                                                                           | Net earnings                                         |  |                     |  |              |   |         |  |        |  |           |  |  |   |        |  | 
|                                                                           | Net unrealized loss on
investment available-for-sale |  |                     |   |              |   |         |   |        |  |           |   |  |   |        |   | 
|                                                                           | Reclassification adjustment                          |  |                     |   |              |   |         |   |        |  |           |   |  |   |        |   | 
|                                                                           | Total Comprehensive Income                           |  |                     |   |              |   |         |   |        |  |           |   |  |   |        |   | 
|Stock options exercised                                                    |                                                      |  |                    |   |              |   |        |   |        |  | 20,218    |   |  |   | 202    |  
|Non-employee stock option
expense                                          |                                                      |  |                    |   |              |   |        |   |        |  |          |   |  |   |       |  
|Collateralized notes received
for Preferred Stock                          |                                                      |  | 270,284             |   |              |   | 2,703   |   |        |  |          |   |  |   |       |  
|Dividends reinvested for
Preferred Stock                                   |                                                      |  | 176,588             |   |              |   | 1,766   |   |        |  |          |   |  |   |       |  
|Preferred stock issued, (net of
offering costs of $48,982)                 |                                                      |  | 1,396,937           |   |              |   | 13,969  |   |        |  |          |   |  |   |       |  
|Conversion of preferred stock
to common stock                              |                                                      |  | (6,468,085          | ) |              |   | (64,681 | ) |        |  | 6,468,085 |   |  |   | 64,681 |  
|Dividends declared on
Preferred Stock                                      |                                                      |  |                    |   |              |   |        |   |        |  |          |   |  |   |       |  
|Dividends declared on
Common Stock                                         |                                                      |  |                    |   |              |   |        |   |        |  |          |   |  |   |       |  
|                                                                           |                                                      |  |                     |   |              |   |         |   |        |  |           |   |  |   |        |   | 
|Balance, December 31, 2001                                                 |                                                      |  |                    |   |              | $ |        |   |        |  | 6,822,703 |   |  | $ | 68,227 |  
|                                                                           |                                                      |  |                     |   |              |   |         |   |        |  |           |   |  |   |        |  

F - 5



---



##### Table of Contents



SPECIALTY TRUST INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME  Continued
Years ended December 31,

[Continued from above table, first column(s) repeated]

|                                                                           |                                                      |   |            |   |          |   |               |           |       |   |             |         |   |   |            |           |  
|-------------------------------------------------------------------------- | ---------------------------------------------------- | - | ---------- | - | -------- | - | ------------- | --------- | ----- | - | ----------- | ------- | - | - | ---------- | --------- | -
|                                                                           |                                                      |   |            |   |          |   |               |           |       |   | Accumulated |         |   |   |           
|                                                                           |                                                      |   | Additional |   |          |   |               |           | Other |   |             |         |  
|                                                                           |                                                      |   | Paid-in    |   | Retained |   | Comprehensive |           |       |   |            
|                                                                           |                                                      |   | Capital    |   | Earnings |   | Loss          |           | Total
|                                                                           |                                                      |   |            |   |          |   |               |           |      
|Balance, January 1, 2000                                                   |                                                      | $ | 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                           |   |            |   |          |   |               |           |       |   |             |         |   |   |            | 4,542,815 |  
|Stock options exercised                                                    |                                                      |   | 1,198      |   |          |   |              |           |       |   |            |         |   |   | 1,340      |          
|Non-employee stock option expense                                          |                                                      |   | 21,093     |   |          |   |              |           |       |   |            |         |   |   | 21,093     |          
|Preferred Stock issued (net
of offering costs of $13,389)                  |                                                      |   | 5,679,812  |   |          |   |              |           |       |   |            |         |   |   | 5,685,511  |          
|Collateralized notes received
for Preferred Stock                          |                                                      |   | 1,193,106  |   |          |   |              |           |       |   |            |         |   |   | 1,194,300  |          
|Dividends reinvested for
Preferred Stock (net of
offering costs of $4,274) |                                                      |   | 1,346,933  |   |          |   |              |           |       |   |            |         |   |   | 1,348,286  |          
|Dividends declared on
Preferred Stock                                      |                                                      |   | (527,191   | ) |          |   | (4,543,772    | )         |       |   |            |         |   |   | (5,070,963 | )        
|                                                                           |                                                      |   |            |   |          |   |               |           |       |   |             |         |   |   |            |           |  
|Balance, December 31, 2000                                                 |                                                      | $ | 45,242,156 |   |          | $ |              |           |       | $ | (957        | )       |   | $ | 45,290,786 |          
|Comprehensive income:                                                      |                                                      |   |            |   |          |   |               |           |       |   |             |         |   |   |            |          
|                                                                           | Net earnings                                         |   |            |  |          |   |               | 6,085,129 |       |   |             |        |   |   |            | 6,085,129 |  
|                                                                           | Net unrealized loss on
investment available-for-sale |   |            |   |          |   |               |           |       |   |             | 11,349  |   |   |            | 11,349    |  
|                                                                           | Reclassification adjustment                          |   |            |   |          |   |               |           |       |   |             | (10,392 | ) |   |            | (10,392   | )
|                                                                           | Total Comprehensive Income                           |   |            |   |          |   |               |           |       |   |             |         |   |   |            | 6,086,086 |  
|Stock options exercised                                                    |                                                      |   | 21,250     |   |          |   |              |           |       |   |            |         |   |   | 21,452     |          
|Non-employee stock option
expense                                          |                                                      |   | 70,558     |   |          |   |              |           |       |   |            |         |   |   | 70,558     |          
|Collateralized notes received
for Preferred Stock                          |                                                      |   | 2,970,425  |   |          |   |              |           |       |   |            |         |   |   | 2,973,128  |          
|Dividends reinvested for
Preferred Stock                                   |                                                      |   | 1,851,982  |   |          |   |              |           |       |   |            |         |   |   | 1,853,748  |          
|Preferred stock issued, (net of
offering costs of $48,982)                 |                                                      |   | 15,303,352 |   |          |   |              |           |       |   |            |         |   |   | 15,317,321 |          
|Conversion of preferred stock
to common stock                              |                                                      |   |           |   |          |   |              |           |       |   |            |         |   |   |           |          
|Dividends declared on
Preferred Stock                                      |                                                      |   |           |   |          |   | (4,540,231    | )         |       |   |            |         |   |   | (4,540,231 | )        
|Dividends declared on
Common Stock                                         |                                                      |   | (501,912   | ) |          |   | (1,544,898    | )         |       |   |            |         |   |   | (2,046,810 | )        
|                                                                           |                                                      |   |            |   |          |   |               |           |       |   |             |         |   |   |            |           |  
|Balance, December 31, 2001                                                 |                                                      | $ | 64,957,811 |   |          | $ |              |           |       | $ |            |         |   | $ | 65,026,038 |          
|                                                                           |                                                      |   |            |   |          |   |               |           |       |   |             |         |   |   |            |          

The accompanying notes are an integral part of the statements.

F - 6



---



##### Table of Contents



SPECIALTY TRUST INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME  Continued
Years ended December 31,

|                                     |                      |                     |   |              |   |            |   |          |  |               |   |          |   |        |   |       |   |             |   |  |   |            |           |  |   |   |   |  |   |            |           |  | 
|------------------------------------ | -------------------- | ------------------- | - | ------------ | - | ---------- | - | -------- |  | ------------- | - | -------- | - | ------ | - | ----- | - | ----------- | - |  | - | ---------- | --------- |  | - | - | - |  | - | ---------- | --------- |  | 
|                                     |                      |                     |   |              |   |            |   |          |  |               |   |          |   |        |   |       |   |             |   |  |   |            |           |  |   |   |   |  |   |           
|                                     |                      | Class A Convertible |   |              |   |            |   |          |  |               |   |          |   |        |   |       |   | Accumulated |   |  |   |           
|                                     |                      | Preferred Stock     |   | Common Stock |   | Additional |   |          |  |               |   | Other    |  
|                                     |                      |                     |   |              |   | Paid-in    |   | Retained |  | Comprehensive |   |          |   |       
|                                     |                      | Shares              |   | Amount       |   | Shares     |   | Amount   |  | Capital       |   | Earnings |   | Loss   |   | Total
|                                     |                      |                     |   |              |   |            |   |          |  |               |   |          |   |        |   |      
|Balance, December 31, 2001           |                      |                    |   |              | $ |           |   |          |  | 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 on
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 |          
|                                     |                      |                     |   |              |   |            |   |          |  |               |   |          |   |        |   |       |   |             |   |  |   |            |           |  |   |   |   |  |   |            |           | 

The accompanying notes are an integral part of the statements.

F - 7



---



##### Table of Contents






SPECIALTY TRUST INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,

|                                               |                                                                                    |                                               |                                                                         |                                           |         |          |             |             |         |          |             |             |         |          |             |  
|---------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------- | ------- | -------- | ----------- | ----------- | ------- | -------- | ----------- | ----------- | ------- | -------- | ----------- | -
|                                               |                                                                                    |                                               |                                                                         |                                           |         | 2002     |             | 2001        |         | 2000    
|                                               |                                                                                    |                                               |                                                                         |                                           |         |          |             |             |         |         
|Cash Flows from Operating Activities:          |                                                                                    |                                               |                                                                         |                                           |         |          |             |             |         |          |             |            
|                                               | Net Earnings                                                                       |                                               | $                                                                       | 7,144,707                                 |         |          | $           | 6,085,129   |         |          | $           | 4,543,772   |        
|                                               | Adjustment to Reconcile Net Earnings to Net Cash
Provided by Operating Activities: |                                               |                                                                         |                                           |         |          |             |             |         |          |             |             |        
|                                               |                                                                                    | Amortization and Depreciation                 |                                                                         |                                           | 91,135  |          |             |             | 54,117  |          |             |             | 45,235  |         
|                                               |                                                                                    | Provision for Loan Losses                     |                                                                         |                                           | 795,255 |          |             |             | 496,427 |          |             |             | 400,000 |         
|                                               |                                                                                    | Charge Off of Bad Debt                        |                                                                         |                                           |        |          |             |             | (1,107  | )        |             |             |        |         
|                                               |                                                                                    | Interest Reinvested in Collateralized Notes   |                                                                         |                                           | 683,056 |          |             |             | 611,855 |          |             |             | 355,013 |         
|                                               |                                                                                    | Amortization of Loan Points on Mortgage Loans |                                                                         |                                           | (68,628 | )        |             |             | (24,527 | )        |             |             | (26,300 | )       
|                                               |                                                                                    | Non-cash Stock Compensation                   |                                                                         |                                           | 81,013  |          |             |             | 70,558  |          |             |             | 21,093  |         
|                                               |                                                                                    | Gain on Investments                           |                                                                         |                                           |        |          |             |             | (10,392 | )        |             |             |        |         
|                                               |                                                                                    | Gain on Sale of Real Estate Owned, net        |                                                                         |                                           | (32,776 | )        |             |             |        |          |             |             |        |         
|                                               |                                                                                    | Changes in Assets and Liabilities:            |                                                                         |                                           |         |          |             |             |         |          |             |             |         |         
|                                               |                                                                                    |                                               | Deferred Charges                                                        |                                           |         |         |             |             |         | 8,391    |             |             |         |         |            
|                                               |                                                                                    |                                               | Accrued Interest Receivable                                             |                                           |         | (287,028 | )           |             |         | (318,497 | )           |             |         | (175,007 | )          
|                                               |                                                                                    |                                               | Other Assets                                                            |                                           |         | (93,604  | )           |             |         | (588     | )           |             |         | 4,650    |            
|                                               |                                                                                    |                                               | Accounts Payable (including Related Party) and Accrued
Interest Payable |                                           |         | 323,141  |             |             |         | 64,310   |             |             |         | 33,905   |            
|                                               |                                                                                    |                                               |                                                                         |                                           |         |          |             |             |         |          |             |             |        
|                                               |                                                                                    |                                               |                                                                         | Net Cash Provided by Operating Activities |         |          | 8,636,271   |             |         |          | 7,035,676   |             |         |          | 5,202,361   |  
|Cash Flows from Investing Activities:          |                                                                                    |                                               |                                                                         |                                           |         |          |             |             |         |          |             |            
|                                               | Investment in Real Estate Owned                                                    |                                               |                                                                         |                                          |         |          |             | (404,577    | )       |          |             |            |        
|                                               | Proceeds from Sale of Real Estate Owned                                            |                                               |                                                                         | 473,022                                   |         |          |             |            |         |          |             |            |        
|                                               | Investment in Land Held for Residential Development                                |                                               |                                                                         | (231,807                                  | )       |          |             |            |         |          |             |            |        
|                                               | Proceeds from Builder on Land Held For Residential
Development                     |                                               |                                                                         | 565,943                                   |         |          |             |            |         |          |             |            |        
|                                               | Purchase of Mortgage Loans Held for Investment                                     |                                               |                                                                         | (70,550,293                               | )       |          |             | (40,091,628 | )       |          |             | (47,440,952 | )      
|                                               | Principal Repayments of Mortgage Loans Held for
Investment                         |                                               |                                                                         | 46,900,431                                |         |          |             | 19,668,928  |         |          |             | 27,693,835  |        
|                                               | Proceeds from/ (purchases of) Investments                                          |                                               |                                                                         |                                          |         |          |             | 259,866     |         |          |             | (249,474    | )      
|                                               |                                                                                    |                                               |                                                                         |                                           |         |          |             |             |         |          |             |             |        
|                                               |                                                                                    |                                               |                                                                         | Net Cash Used in Investing Activities     |         |          | (22,842,704 | )           |         |          | (20,567,411 | )           |         |          | (19,996,591 | )
|Cash Flows from Financing Activities:          |                                                                                    |                                               |                                                                         |                                           |         |          |             |             |         |          |             |            
|                                               | Proceeds from Preferred Stock Offering, Net                                        |                                               |                                                                         |                                          |         |          |             | 15,317,321  |         |          |             | 5,685,511   |        
|                                               | Proceeds from Common Stock Options Exercised                                       |                                               |                                                                         | 104,594                                   |         |          |             | 21,452      |         |          |             | 1,340       |        
|                                               | Deposits received for Preferred Stock Offering                                     |                                               |                                                                         |                                          |         |          |             | 79,794      |         |          |             | 698,406     |        
|                                               | Deposit
paid out relating to Common Stock Transactions                             |                                               |                                                                         | (1,003,200                                | )       |          |             |            |         |          |             |            |        
|                                               | Cash Dividends Paid                                                                |                                               |                                                                         | (4,728,571                                | )       |          |             | (4,073,765  | )       |          |             | (3,415,269  | )      
|                                               | Net proceeds/ (payments) on Line of Credit                                         |                                               |                                                                         | 9,336,000                                 |         |          |             | (4,452,500  | )       |          |             | 4,452,500   |        
|                                               | Proceeds on Collateralized Notes                                                   |                                               |                                                                         | 15,458,602                                |         |          |             | 9,104,634   |         |          |             | 4,627,694   |        
|                                               | Principal Payments on Collateralized Notes                                         |                                               |                                                                         | (5,846,068                                | )       |          |             | (3,821,379  | )       |          |             | (2,452,414  | )      
|                                               | Debt Issue Costs Capitalized to Other Assets                                       |                                               |                                                                         | (84,429                                   | )       |          |             | (201,350    | )       |          |             | (182,530    | )      
|                                               |                                                                                    |                                               |                                                                         |                                           |         |          |             |             |         |          |             |             |        
|                                               |                                                                                    |                                               |                                                                         | Net Cash Provided by Financing Activities |         |          | 13,236,928  |             |         |          | 11,974,207  |             |         |          | 9,415,238   |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS      |                                                                                    |                                               | (969,505                                                                | )                                         |         |          | (1,557,528  | )           |         |          | (5,378,992  | )          
|Cash and Cash Equivalents at Beginning of Year |                                                                                    |                                               | 1,062,189                                                               |                                           |         |          | 2,619,717   |             |         |          | 7,998,709   |            
|                                               |                                                                                    |                                               |                                                                         |                                           |         |          |             |             |         |          |             |             |        
|Cash and Cash Equivalents at end of Year       |                                                                                    | $                                             | 92,684                                                                  |                                           |         | $        | 1,062,189   |             |         | $        | 2,619,717   |            
|                                               |                                                                                    |                                               |                                                                         |                                           |         |          |             |             |         |          |             |             |        

The accompanying notes are an integral part of the statements.

F - 8



---



##### Table of Contents



SPECIALTY TRUST INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years ended December 31,

|                                                                        |                                                                    |  |      |            |      |  |      |            |  |  |   |           | 
|----------------------------------------------------------------------- | ------------------------------------------------------------------ |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | --------- | 
|                                                                        |                                                                    |  | 2002 |            | 2001 |  | 2000
|                                                                        |                                                                    |  |      |            |      |  |     
|Supplemental Cash Flow Information:                                     |                                                                    |  |      |            |      |  |      |            |  |  |   |          
|                                                                        | Cash paid for interest                                             |  | $    | 154,686    |      |  | $    | 151,649    |  |  | $ | 245,242   | 
|                                                                        |                                                                    |  |      |            |      |  |      |            |  |  |   |           | 
|Supplemental Disclosure of Non-cash Investing
and Financing Activities: |                                                                    |  |      |            |      |  |      |            |  |  |   |          
|                                                                        | Mortgage Loan Foreclosure Transfer to Real Estate Owned            |  | $    | 1,883,000  |      |  | $    | 2,823,562  |  |  | $ |          | 
|                                                                        |                                                                    |  |      |            |      |  |      |            |  |  |   |           | 
|                                                                        | Collateralized Notes Exchanged for the Issuance
of Preferred Stock |  | $    |           |      |  | $    | 2,973,128  |  |  | $ | 1,194,300 | 
|                                                                        |                                                                    |  |      |            |      |  |      |            |  |  |   |           | 
|                                                                        | Collateralized Notes Refinanced at Maturity                        |  | $    | 12,937,398 |      |  | $    | 10,302,823 |  |  | $ | 9,083,292 | 
|                                                                        |                                                                    |  |      |            |      |  |      |            |  |  |   |           | 
|                                                                        | Collateralized Notes Interest Reinvested                           |  | $    | 683,056    |      |  | $    | 611,855    |  |  | $ | 355,013   | 
|                                                                        |                                                                    |  |      |            |      |  |      |            |  |  |   |           | 
|                                                                        | Dividends Declared but Not Paid                                    |  | $    | 2,154,901  |      |  | $    | 2,046,811  |  |  | $ | 1,387,283 | 
|                                                                        |                                                                    |  |      |            |      |  |      |            |  |  |   |           | 
|                                                                        | Dividends Reinvested for Preferred Stock                           |  | $    |           |      |  | $    | 1,853,748  |  |  | $ | 1,348,286 | 
|                                                                        |                                                                    |  |      |            |      |  |      |            |  |  |   |           | 
|                                                                        | Dividends Reinvested for Common Stock                              |  | $    | 3,603,790  |      |  | $    |           |  |  | $ |          | 
|                                                                        |                                                                    |  |      |            |      |  |      |            |  |  |   |           | 
|                                                                        | Mortgage
Loans issued to facilitate sale of real estate owned:     |  |      |            |      |  |      |            |  |  |   |           | 
|                                                                        | Investment in Real Estate Owned                                    |  | $    | 933,000    |      |  | $    |           |  |  | $ |          | 
|                                                                        |                                                                    |  |      |            |      |  |      |            |  |  |   |           | 
|                                                                        | Deferred Revenue                                                   |  |      | 102,900    |      |  |      |           |  |  |   |          | 
|                                                                        |                                                                    |  |      |            |      |  |      |            |  |  |   |           | 
|                                                                        | Mortgage Loans                                                     |  | $    | 1,035,900  |      |  | $    |           |  |  | $ |          | 
|                                                                        |                                                                    |  |      |            |      |  |      |            |  |  |   |           | 

The accompanying notes are an integral part of the statements.

F - 9



---



##### Table of Contents






SPECIALTY TRUST INC. AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Specialty Trust, Inc., formerly Specialty Mortgage Trust, and Subsidiary (the
Company) is a Maryland corporation, which acquires and holds interests in
mortgage loans secured by property located in Nevada, Arizona, Colorado,
California, and Utah. Our strategy is to focus on land loans, construction
loans, commercial building loans and nonconforming single-family and small
multifamily residential loans. The Company has elected to be a real estate
investment trust (REIT) under the Internal Revenue Code of 1986, as amended.
The mortgage loans are originated and serviced by Specialty Financial (the
Manager), a private mortgage finance business operating in Nevada and wholly
owned by Nello Gonfiantini III, 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 consolidated financial statements for the year ended December 31, 2002,
include the accounts of the Company and its wholly owned subsidiary, Specialty
Acquisition Corporation (SAC), a taxable REIT subsidiary. SAC was formed on
May 2, 2002 to enable the Company to perform development activities to land it
foreclosed upon (Note 2), and to maintain the Companys qualified REIT status.
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.

Cash Equivalents and Restricted Cash

The Company considers money market accounts to be cash equivalents.

Restricted cash represents cash
proceeds received by the Company through the exercise of options
under the stock option program. Upon exercise of stock options, individuals simultaneously sold their stock to outside investors at
the current market price. These investors paid the Company directly for
the purchase of the stock. The net funds were then distributed to the
individuals who had exercised their stock options. A corresponding
liability has been recorded to reflect the amount due to
individuals who had exercised their stock options.

Land Held for Residential Development

Land Held for Residential Development includes real estate acquired through
foreclosure and is carried at the lower of the cost or the propertys estimated
fair value, less estimated costs to sell.

F - 10



---



##### Table of Contents



NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

Real Estate Owned

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

Stock Options

The Company accounts for stock based compensation under SFAS No. 123,
Accounting for Stock-Based Compensation, which calls for companies to measure
stock compensation expense based upon the fair value method of accounting.

Advertising

The Company expenses the costs of advertising as incurred. Total advertising
expense for the years ended December 31, 2002, 2001 and 2000 was $7,080,
$59,610 and $10,000, respectively.

Mortgage Loans

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

Mortgage loans exchanged for preferred stock from affiliated enterprises were
recorded at fair value.

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 while servicing is retained by the
Manager.

F - 11



---



##### Table of Contents



NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

The Company follows the Financial
Accounting Standards Board (FASB) Statement of Financial
Accounting Standard (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures. 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 No. 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 No. 118
clarifies interest income recognition and disclosures of SFAS No. 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 management does not
believe the Companys investment in the loan is fully recoverable.

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 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 or points charged to a borrower for and upon
the origination, extension or refinancing of a mortgage loan, in excess of 2.5%
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 or points up to 2.5% are earned by
the Manager, prior to the purchase of the mortgage loans by the Company.

Deferred Charges

Deferred charges are costs associated with origination of collateralized notes
and lines of credit fees which are amortized by the effective interest method
over the contractual life of the related obligation.

Earnings per Share (EPS)
Basic EPS is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the period. Diluted EPS is computed
by dividing net income by the weighted-average common shares and common
equivalent shares outstanding during the period. For the diluted EPS
calculation, the weighted average common shares and common equivalent shares
outstanding include the average number of shares of common stock outstanding
adjusted for the dilutive effect of unexercised stock options using the
treasury method. No common share equivalents are included in the computation
of any diluted per share amount for a period in which a net operating loss is
reported.

F - 12



---



##### Table of Contents



NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

Allowance for Loan Losses

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, review of
collateral values, borrower payment ability and general economic conditions. Additions to the allowance are
provided through a charge to 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 managements periodic assessment and grading of the loan portfolio. 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. While management 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.

Income Taxes

The Company has qualified as a REIT and generally is not subject to Federal
income taxes on the portion of taxable income, which is distributed to its
stockholders. The Company is, however, subject to Federal income taxes for
taxable income not distributed.

Taxable income that is distributed is taxable to the stockholders as ordinary
income.

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of
financial statements included in the following categories:



| | (a) |  | Cash and Cash Equivalents. The carrying amount approximates
fair value because of the relatively short maturity of these
instruments.                                                                                                                                                      
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Mortgage Loans Held for Investment. The carrying value of
these instruments approximates the fair value. The fair value is
estimated based upon projected cash flows discounted at the
estimated current interest rates at which similar loans would be
made.                              
|
| | (c) |  | Lines of Credit and Collateralized Notes. The fair value of
the Companys lines of credit and collateralized notes are estimated
based on the quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of the same
remaining maturities.

Adoption of New Accounting Standards
In July 2001, the FASB issued SFAS 142 Goodwill and Other Intangible Assets
which provide guidance on how entities are to account for business combinations
and for the goodwill and other intangible assets that arise from those
combinations or are acquired otherwise. SFAS 142 requires that goodwill is no
longer amortized, but instead be tested for impairment at least annually. As
of the date of the adoption, January 1, 2002, the Company did not have any
goodwill.

F - 13



---



##### Table of Contents



NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. Under SFAS 143, the fair value of a liability for an asset
retirement obligation must be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the related
long-lived asset. SFAS 143 is effective for fiscal years beginning after June
15, 2002. The Company does not believe that SFAS 143 will have a
material impact on their financial position, or results of operations.

The Company adopted FASBs
SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, on January 1, 2002. SFAS 144 supersedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The primary objectives of
SFAS 144 are to develop one accounting model based on the framework
established in SFAS 121 for long-lived assets to be disposed of by
sale, and to address significant implementation issues regarding
impairment of long-lived assets held of use. SFAS 144 retained the
fundamental provisions of SFAS 121 for recognition and measurement of
impairment. The Companys adoption of SFAS 144 did not have a
material impact on their financial position or results of
operations.

In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of SFAS Statement No. 13, and Technical Correction.
SFAS 145 eliminates extraordinary accounting treatment for reporting a loss on
debt extinguishments, and amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, and describe
applicability under changed conditions. The provisions of SFAS 145 are
effective for the Company at the beginning of fiscal year 2003; however, early
application of SFAS 145 is encouraged. Debt extinguishments reported as
extraordinary items prior to scheduled or early adoption of SFAS 145 would be
reclassified in most cases following adoption. The Company does not anticipate
a significant impact on their financial position or results of operations from
adopting SFAS 145.

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 managements commitment to an exit plan, which is generally before
an actual liability has been incurred. Adoption of SFAS 146 is required for
the Companys fiscal year beginning January 1, 2003. The Company does not
believe that the adoption of SFAS 146 will have a significant impact on their
financial position, or results of operations.

NOTE 2. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

Financial instruments with concentrations of credit and market risk include
cash and mortgage loans.

The Company maintains cash deposit
accounts, in banks, which, at times, may exceed
Federally insured limits.

Substantially all of the loans purchased by the Company are fixed rate loans
secured by the first deed of trust on commercial, land, nonconforming, and
multi-family properties. Maturities on the mortgage loans range from one to
four years.

F - 14



---



##### Table of Contents



NOTE 2. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)

Concentration of mortgage loans exists in northern Nevada and southern Nevada
of approximately 19% and 30%, respectively in 2002. As such, the Company has a
significant geographic concentration of credit risk that may be adversely
affected by periods of economic decline.

Concentration of mortgage loan products exists primarily in land loans. As
such, the Company has a significant product concentration of credit risk that
may be adversely affected by periods of economic decline. The following table
illustrates the concentration percentages by product type:

|                    |  |                    |            |      |  |  |      |  |  |   |            |  |  |  |      | 
|------------------- |  | ------------------ | ---------- | ---- |  |  | ---- |  |  | - | ---------- |  |  |  | ---- | 
|                    |  | As of December 31,
|                    |  |                   
|                    |  | 2002               |            | 2001
|                    |  |                    |            |     
|Land                |  | $                  | 52,247,282 |      |  |  | 55%  |  |  | $ | 59,870,334 |  |  |  | 82%  | 
|Construction        |  |                    | 37,898,459 |      |  |  | 39%  |  |  |   | 7,475,997  |  |  |  | 10%  | 
|Commercial Building |  |                    | 1,954,915  |      |  |  | 2%   |  |  |   | 2,109,915  |  |  |  | 3%   | 
|Other               |  |                    | 4,144,738  |      |  |  | 4%   |  |  |   | 3,875,413  |  |  |  | 5%   | 
|                    |  |                    |            |      |  |  |      |  |  |   |            |  |  |  |      | 
|                    |  | $                  | 96,245,394 |      |  |  | 100% |  |  | $ | 73,331,659 |  |  |  | 100% | 
|                    |  |                    |            |      |  |  |      |  |  |   |            |  |  |  |      | 

A significant portion of the Companys mortgage loans will require the borrower
to make a balloon payment of the principal at maturity. To the extent that a
borrower has an obligation to pay a mortgage loan in a large lump sum payment,
its ability to satisfy this obligation may be dependent upon its ability to
refinance or raise a substantial amount of cash. An increase in interest rates
over the mortgage rate applicable at origination of the loan may have an
adverse effect on the borrowers ability to refinance the loan.



| |  | The following table illustrates the scheduled maturities of
mortgage loan investments subsequent to December 31, 2002:
| |  | ----------------------------------------------------------------------------------------------------------------------

|         |  |        |            | 
|-------- |  | ------ | ---------- | 
|Maturity |  | Amount
|         |  |       
|2002     |  | $      | 2,461,000  | 
|2003     |  |        | 53,066,370 | 
|2004     |  |        | 24,590,501 | 
|2005     |  |        | 16,116,275 | 
|2006     |  |        | 11,248     | 
|         |  |        |            | 
|         |  | $      | 96,245,394 | 
|         |  |        |            | 

Group concentration of credit risk exists in borrowers of mortgage loans. At
December 31, 2002 and 2001, 51% and 45%, respectively, of mortgage loans were
concentrated in multiple loans to eight borrowers. The amount of loss is
limited to the recorded amounts of the loans of $48,684,614 and $34,766,370 at
December 31, 2002 and 2001, respectively. Multiple loans to one borrower or to
related entities generally contain cross default provisions. At December 31,
2002 and 2001, there were no instances of loans with cross default provisions
in excess of 10% of the portfolio. However, as of December 31,
2002, the portfolio contained one loan totaling $10,000,000, which
exceeded 10% of total assets. Additionally, one borrower has loans
totaling $10,775,575, which exceeded 10% of total assets. As such, the
Company has a significant borrower concentration of credit risk that may be
adversely affected by periods of economic decline. The significant borrower
concentration of credit risk related to the top 10 borrowers of the portfolio
represent approximately 65% and 67% of the portfolio, as of December 31, 2002
and 2001, respectively. The amount of loss is limited to the recorded amounts
of the loans of $62,523,890 and $48,701,736 at December 31, 2002 and 2001,
respectively.

F - 15



---



##### Table of Contents



NOTE 3. LAND HELD FOR RESIDENTIAL DEVELOPMENT

In February 2001, the Company foreclosed on a mortgage loan in default and
obtained ownership of the residential land development project (the 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 was
used by management to value 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 this 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 $30,000 each, (ii) phase IIs 61 lots at approximately
$15,000 each, and (iii) phase IIIs 41 lots at approximately $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 assigned
the Project to SAC, its wholly owned taxable REIT subsidiary.

In June 2002, SAC entered into an agreement with a third-party homebuilder to
transfer title to the lots to the homebuilder in exchange for an upfront
payment, in cash, 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 agreed 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 also 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 and the
upfront payment received by SAC is non-refundable. 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 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.

As of December 31, 2002, all 76 lots in phases I and II have been transferred
and the homebuilder has paid SAC $565,943 in conjunction with the delivery of
these completed lots. In order to complete the lots, SAC has incurred site
mapping and other engineering costs and real estate taxes, and insurance fees,
all of which were capitalized. As of December 31, 2002, no developed lots have
been sold by the homebuilder. The following provides a roll-forward of this
account in 2002:

|                                                |  |   |           |  
|----------------------------------------------- |  | - | --------- | -
|Balance-December 31, 2001                       |  | $ | 2,782,715 |  
|Capitalized costs in 2002                       |  |   | 231,807   |  
|Cash payments received from homebuilder in 2002 |  |   | (565,943  | )
|                                                |  |   |           |  
|Balance December 31, 2002                       |  | $ | 2,448,579 |  
|                                                |  |   |           |  

F - 16



---



##### Table of Contents



NOTE 4. REAL ESTATE OWNED (HELD FOR SALE)

As of December 31, 2002 and 2001, real estate
owned totaled $950,000 and
$445,424, respectively. The property owned consists of an office
building in 2002, and homes and an office building in 2001, which were transferred from mortgage loans to real estate owned upon
foreclosure.

NOTE 5. 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 loans have similar
effective interest rates ranging from 10.5% to 13.5%. Revenue by product will
fluctuate based upon relative balances during the period. Due to the similar
nature of the effective interest rates the Company does not compile and report
revenues by product type. See Note 2 (Financial Instruments and
Concentrations of Credit Risk) for a table that sets balances by
mortgage loan product type.

Under existing loans, the Company is
required to fund additional loan amounts totaling $22,028,000 as of
December 31, 2002.

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, management believes sufficient
reserves have been provided in the allowance to absorb probable
losses in the loan portfolio at December 31, 2002 and 2001. During the years
ended December 31, 2002, 2001 and 2000, the Company has recorded a provision
for loan losses of $795,255, $496,427 and $400,000, respectively.

At December 31, 2002 and 2001
Collateralized Notes were secured by $30,490,965 and $19,401,620,
respectively, of mortgage loans pledged as collateral.

F - 17



---



##### Table of Contents



NOTE 5. MORTGAGE LOANS HELD FOR INVESTMENT (Continued)

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

|                             |                           |   |           |          |  
|---------------------------- | ------------------------- | - | --------- | -------- | -
|Balance at January 1, 2000   |                           | $ | 350,000   |         
|                             | Provision for Loan Losses |   |           | 400,000  |  
|                             | Charge Offs               |   |           |         |  
|                             |                           |   |           |         
|Balance at December 31, 2000 |                           |   | 750,000   |         
|                             | Provision for Loan Losses |   |           | 496,427  |  
|                             | Charge Offs               |   |           | (226,106 | )
|Balance at December 31, 2001 |                           |   | 1,020,321 |         
|                             | Provision for Loan Losses |   |           | 795,255  |  
|                             | Charge Offs               |   |           |         |  
|                             |                           |   |           |         
|Balance at December 31, 2002 |                           | $ | 1,815,576 |         
|                             |                           |   |           |         

Delinquent Loans

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 eight loans until the loans
were 90 days past due; however, in accordance
with our revenue recognition policy, the Company ceases to accrue additional
interest income if these loans become 90 days past due. Accrued interest
recorded during the 90-day period remains accrued if management determines that
the underlying collateral supports recovery of the Notes, principal and accrued
interest. The accrued interest recorded on the eight delinquent loans at
December 31, 2002 was approximately $359,000. Management has evaluated the
collectability of these delinquent loans in light of the types and dollar
amounts of the loans in the portfolio, adverse situations that may affect the
borrowers ability to repay, prevailing economic conditions and the underlying
collateral securing the loan and determined that amounts are collectible.

At December 31, 2001, the company had four loans with a principal balance
totaling approximately $348,000 delinquent in interest payments only. The
average loan to value on these loans was 90% and the company has recorded a
specific allowance of approximately $3,500 for the year ended December 31, 2001
related to these loans. Also, at December 31, 2001, the company had four loans
with a principal balance totaling approximately $3.5 million delinquent in
principal and interest payments. The average loan to value on these loans was
74% and the company has recorded a specific allowance of $91,321 during the
year ended December 31, 2001. Included in the loans delinquent for principal
and interest were three loans totaling $1,883,000 that were in the process of
foreclosure proceedings or entered foreclosure proceedings after December 31,
2001. Accrued interest on all delinquent loans at December 31, 2001 was
approximately $84,000. Management has evaluated the collectability of the loans
in light of the types and dollar amounts of the loans in the portfolio, adverse
situations that may affect the borrowers ability to repay, prevailing economic
conditions and the underlying collateral securing the loan. Accordingly, the
companys management has recorded an allowance for loan losses based upon these
factors.

F - 18



---



##### Table of Contents



NOTE 6. BANK LINES OF CREDIT

At December 31, 2002, the Company maintained three revolving lines of credit.
The first line of credit allows the Company to borrow up to $6,500,000 and
matures July 1, 2003. The second line of credit allows the Company to borrow
up to $3,000,000 and matures July 1, 2003. The third line of credit allows the
Company to borrow up to $5,000,000 and matures on October 15, 2003. All three
lines bear interest at the banks prime rate (4.25% at December 31, 2002). On
December 31, 2002, the outstanding balances on the lines of credit were
$1,336,000, $3,000,000 and $5,000,000, respectively. Lines of credit
all contain renewal options for a nominal fee and management
anticipates they will renew or pay down these lines. All lines of credit are
collateralized by a secured interest in mortgage loans and require the Company
to maintain certain financial covenants. 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. The Company was in compliance with these
covenants as of December 31, 2002.

At December 31, 2001, the Company maintained two revolving lines of credit.
One line of credit allows the Company to borrow up to $3,000,000. The other
line of credit allows the Company to borrow up to $5,000,000. These lines bear
interest at the banks prime rate (4.75% at December 31,
2001) and matured July
1, 2002. On December 31, 2001, there was no outstanding balance on these lines
of credit. All lines of credit are collateralized by a secured interest in
mortgage loans and require the Company to maintain certain financial covenants
including maintaining a maximum debt to equity ratio. The Company was in
compliance with these covenants as of December 31, 2001.

NOTE 7. COLLATERALIZED NOTES

On May 7, 2002, a registration statement was declared effective by the
Securities and Exchange Commission 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 was
declared effective on January 18, 2001. 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 (2.5% to 7.5% at December 31, 2002).
The effective yield of Collateralized Notes outstanding at December 31, 2002
and 2001 was 4.76% and 6.93%, respectively. At December 31, 2002 and 2001, the
Collateralized Notes were secured by $30,490,965 and $19,401,620, respectively,
of mortgage loans pledged as collateral.

The following table reflects the maturities of collateralized
notes as of December 31, 2002:

|              |  |        |            | 
|------------- |  | ------ | ---------- | 
|Maturity Year |  | Amount
|              |  |       
|2003          |  | $      | 18,795,351 | 
|2004          |  |        | 689,155    | 
|2005          |  |        |           | 
|2006          |  |        |           | 
|2007          |  |        | 286,526    | 
|              |  |        |            | 
|              |  | $      | 19,771,031 | 
|              |  |        |            | 

F - 19



---



##### Table of Contents



NOTE 8. CONVERSION OF PREFERRED STOCK TO COMMON STOCK

As of October 1, 2001, management met its target of 12% return on equity, on an
income tax basis, for the previous four consecutive fiscal quarters. In
accordance with the terms of preferred shares, all of the shares of Specialty
Trusts Class A Convertible Preferred Stock converted to Common Stock on
October 1, 2001. Class A Convertible Preferred Stock converted to Common Stock
on a one to one basis.

SPACE INTENTIONALLY LEFT BLANK

F - 20



---



##### Table of Contents



NOTE 9. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|--------------------------------------- |  | -------- | ----- | ------- |  | ------------------- | ----- | ----------- |  | - | ----- |  |  | - | ----- | -
|                                        |  |          |       |         |  | 2002 Quarters Ended |       |             |  |  
|                                        |  |         
|                                        |  | March 31 |       | June 30 |  | September 30        |       | December 31
|                                        |  |          |       |         |  |                     |       |            
|(In thousands, except per share amount) |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|Interest and dividend income            |  | $        | 2,155 |         |  | $                   | 2,485 |             |  | $ | 2,413 |  |  | $ | 2,674 |  
|Interest expense                        |  |          | 155   |         |  |                     | 192   |             |  |   | 210   |  |  |   | 272   |  
|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|Net interest/ dividend income           |  |          | 2,000 |         |  |                     | 2,293 |             |  |   | 2,203 |  |  |   | 2,402 |  
|Other
Income (Loss)                     |  |          | 11    |         |  |                     | 121   |             |  |   | 4     |  |  |   | (71   | )
|Provision for Loan Loss                 |  |          | 130   |         |  |                     | 129   |             |  |   | 131   |  |  |   | 405   |  
|General and Administrative              |  |          | 92    |         |  |                     | 153   |             |  |   | 100   |  |  |   | 136   |  
|Management and Directors Fees           |  |          | 7     |         |  |                     | 110   |             |  |   | 13    |  |  |   | 261   |  
|Other Expenses                          |  |          |      |         |  |                     | 88    |             |  |   | 25    |  |  |   | 38    |  
|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|Net Earnings                            |  | $        | 1,782 |         |  | $                   | 1,934 |             |  | $ | 1,938 |  |  | $ | 1,491 |  
|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|Net Earnings per share  Basic          |  | $        | 0.26  |         |  | $                   | 0.28  |             |  | $ | 0.27  |  |  | $ | 0.21  |  
|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|Net
Earnings per share  Diluted        |  | $        | 0.26  |         |  | $                   | 0.28  |             |  | $ | 0.27  |  |  | $ | 0.20  |  
|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  

|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|--------------------------------------- |  | -------- | ----- | ------- |  | ------------------- | ----- | ----------- |  | - | ----- |  |  | - | ----- | -
|                                        |  |          |       |         |  | 2001 Quarters Ended |       |             |  |  
|                                        |  |         
|                                        |  | March 31 |       | June 30 |  | September 30        |       | December 31
|                                        |  |          |       |         |  |                     |       |            
|(In thousands, except per share amount) |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|Interest and dividend income            |  | $        | 1,738 |         |  | $                   | 1,754 |             |  | $ | 2,078 |  |  | $ | 2,227 |  
|Interest expense                        |  |          | 195   |         |  |                     | 218   |             |  |   | 189   |  |  |   | 142   |  
|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|Net interest/ dividend income           |  |          | 1,543 |         |  |                     | 1,536 |             |  |   | 1,889 |  |  |   | 2,085 |  
|Other Income                            |  |          |      |         |  |                     |      |             |  |   |      |  |  |   | 26    |  
|Provision for Loan Loss                 |  |          | 125   |         |  |                     | 125   |             |  |   | 125   |  |  |   | 121   |  
|General and Administrative              |  |          | 78    |         |  |                     | 131   |             |  |   | 79    |  |  |   | 102   |  
|Management and Directors Fees           |  |          | 35    |         |  |                     | 10    |             |  |   | 58    |  |  |   | 5     |  
|Net Earnings                            |  | $        | 1,305 |         |  | $                   | 1,270 |             |  | $ | 1,627 |  |  | $ | 1,883 |  
|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|Net Earnings (Loss) per share  Basic   |  | $        | 3.90  |         |  | $                   | (0.39 | )           |  | $ | 0.63  |  |  | $ | (3.35 | )
|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  
|Net
Earnings per share  Diluted        |  | $        | 0.26  |         |  | $                   | 0.25  |             |  | $ | 0.27  |  |  | $ | (0.01 | )
|                                        |  |          |       |         |  |                     |       |             |  |   |       |  |  |   |       |  

F - 21



---



##### Table of Contents



NOTE 10. EARNINGS PER SHARE

Following is a reconciliation of earnings per share
(in thousands, except per share amounts):

For the years ended December 31,

|                                                           |                                     |   |       |      |  |      |       |      |  |   |       |        |   | 
|---------------------------------------------------------- | ----------------------------------- | - | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- | ------ | - | 
|                                                           |                                     |   |       | 2002 |  | 2001 |       | 2000
|                                                           |                                     |   |       |      |  |      |       |     
|Basic:                                                     |                                     |   |       |      |  |      |       |      |  |   |       |       
|Net Earnings (Loss) Applicable to Common Stock             |                                     | $ | 7,145 |      |  | $    | 1,545 |      |  | $ | (527) |       
|                                                           |                                     |   |       |      |  |      |       |      |  |   |       |       
|Weighted Average Number of Shares  Basic                  |                                     |   | 7,033 |      |  |      | 1,955 |      |  |   | 326   |       
|                                                           |                                     |   |       |      |  |      |       |      |  |   |       |       
|                                                           | Earnings (Loss) Per Share  Basic   |   | $     | 1.02 |  |      | $     | 0.79 |  |   | $     | (1.62) |  
|                                                           |                                     |   |       |      |  |      |       |      |  |   |       |       
|Diluted:                                                   |                                     |   |       |      |  |      |       |      |  |   |       |       
|Net Earnings (Loss) for Diluted Earnings Per Share         |                                     | $ | 7,145 |      |  | $    | 1,545 |      |  | $ | (527  | )     
|                                                           |                                     |   |       |      |  |      |       |      |  |   |       |       
|Weighted Average Number of Shares  Basic                  |                                     |   | 7,033 |      |  |      | 1,955 |      |  |   | 326   |       
|                                                           |                                     |   |       |      |  |      |       |      |  |   |       |       
|Additional
shares due to dilutive stock options            |                                     |   | 39    |      |  |      | 52    |      |  |   |      |       
|                                                           |                                     |   |       |      |  |      |       |      |  |   |       |       
|Weighted Average Number of Shares  Diluted                |                                     |   | 7,072 |      |  |      | 2,007 |      |  |   | 326   |       
|                                                           |                                     |   |       |      |  |      |       |      |  |   |       |       
|                                                           | Earnings (Loss) Per Share  Diluted |   | $     | 1.01 |  |      | $     | 0.77 |  |   | $     | (1.62  | )
|                                                           |                                     |   |       |      |  |      |       |      |  |   |       |       
|Stock
options not included because they were anti-dilutive |                                     |   |      |      |  |      | 25    |      |  |   | 146   |       
|                                                           |                                     |   |       |      |  |      |       |      |  |   |       |       

NOTE 11  STOCK OPTIONS

In October 1997, the Company adopted the 1997 Executive and Non-Employee
Director Stock Option Plan (the Plan) pursuant to which 300,000 shares of the
Common Stock were reserved for issuance upon the exercise of options granted.
If the outstanding shares of Stock as reflected on the Companys balance sheet
exceeds 3,000,000, the total number of shares of Stock reserved and available
for issuance (inclusive of shares already issued) under the Plan shall
automatically be increased so as to equal 10% of the number of outstanding
shares of stock. Therefore, the total number of shares of Common Stock which
are available for issuance upon the exercise of options granted was 718,300.
Options granted may be designated as either (a) incentive stock options (ISOs)
under the Internal Revenue Code of 1986, as amended, at an exercise
price equal to the fair market value of the underlying stock,
or (b) nonqualified options at a Board of Directors determined option price.
ISOs and nonqualified options may be granted by the Board of Directors to
participating directors, officers, other employees of the Company or its
Manager, agents and consultants. Fair market value is determined periodically
by the Board of Directors.

F - 22



---



##### Table of Contents



NOTE 11  STOCK OPTIONS (CONTINUED)

25% of the shares subject to such stock options shall become exercisable on the
first anniversary of the date of grant of the stock option, and an additional
25% shall become exercisable on each of the next three anniversaries of the
date of grant. In general, vested options must be exercised within three
months after an employee leaves the Company or 10 years after the
stock options become vested.

Presented below is a summary of the Companys stock options and the related
transactions for the years ended December 31, 2002, 2001 and 2000:

|                             |  |        |         |       |  |          |       | 
|---------------------------- |  | ------ | ------- | ----- |  | -------- | ----- | 
|                             |  |        |         |       |  | Weighted
|                             |  |        |         |       |  | Average 
|                             |  |        |         |       |  | Exercise
|                             |  | Shares |         | Price
|                             |  |        |         |      
|Balance at January 1, 2000   |  |        | 104,800 |       |  | $        | 1.26  | 
|Granted                      |  |        | 36,000  |       |  |          | 5.00  | 
|Exercised                    |  |        | (14,200 | )     |  |          | 0.09  | 
|Forfeited/Expired            |  |        | (12,750 | )     |  |          | 0.99  | 
|                             |  |        |         |       |  |          |       | 
|Balance at December 31, 2000 |  |        | 113,850 |       |  | $        | 2.62  | 
|Granted                      |  |        | 55,000  |       |  |          | 7.73  | 
|Exercised                    |  |        | (20,218 | )     |  |          | 1.06  | 
|Forfeited/ expired           |  |        | (30,000 | )     |  |          | 5.00  | 
|                             |  |        |         |       |  |          |       | 
|Balance at December 31, 2001 |  |        | 118,632 |       |  | $        | 4.65  | 
|Granted                      |  |        | 85,000  |       |  |          | 11.00 | 
|Exercised                    |  |        | (32,684 | )     |  |          | 3.20  | 
|Forfeited/ expired           |  |        | (11,250 | )     |  |          | 5.00  | 
|                             |  |        |         |       |  |          |       | 
|Balance at December 31, 2002 |  |        | 159,698 |       |  | $        | 8.30  | 
|                             |  |        |         |       |  |          |       | 

F - 23



---



##### Table of Contents



NOTE 11  STOCK OPTIONS (CONTINUED)

|                  |       |        |         |         |  |             |                           |          |                           |       |   |       |  |          |        |        |  |  |   |       | 
|----------------- | ----- | ------ | ------- | ------- |  | ----------- | ------------------------- | -------- | ------------------------- | ----- | - | ----- |  | -------- | ------ | ------ |  |  | - | ----- | 
|                  |       |        |         |         |  |             | Stock Options Outstanding |          | Stock Options Exercisable
|                  |       |        |         |         |  |             |                           |          |                          
|                  |       |        |         |         |  |             | Weighed                   |          |                           |       |   |       |  |          |       
|                  |       |        |         |         |  | Average     |                           |          |                           |       |   |       |  |         
|Exercise          |       |        |         |         |  | Contractual |                           | Exercise |                           |       |   |       |  | Exercise
|Prices            |       | Shares |         | Life    |  | Price       |                           | Shares   |                           | Price
|                  |       |        |         |         |  |             |                           |          |                           |      
|December 31, 2002 |       |        |         |         |  |             |                           |          |                           |       |   |       |  |          |        |       
|$                 | 0.01  |        |         | 23,148  |  |             |                           | 4.81     |                           |       | $ | 0.01  |  |          |        | 23,148 |  |  | $ | 0.01  | 
|                  | 0.05  |        |         | 2,500   |  |             |                           | 5.09     |                           |       |   | 0.05  |  |          |        | 2,500  |  |  |   | 0.05  | 
|                  | 3.15  |        |         | 2,500   |  |             |                           | 5.59     |                           |       |   | 3.15  |  |          |        | 2,500  |  |  |   | 3.15  | 
|                  | 5.00  |        |         | 21,550  |  |             |                           | 7.02     |                           |       |   | 5.00  |  |          |        | 7,300  |  |  |   | 5.00  | 
|                  | 11.00 |        |         | 110,000 |  |             |                           | 9.70     |                           |       |   | 11.00 |  |          |        | 6,250  |  |  |   | 11.00 | 
|                  |       |        |         |         |  |             |                           |          |                           |       |   |       |  |          |        |        |  |  |   |      
|Totals            |       |        | 159,698 |         |  |             |                           |          |                           |       |   |       |  |          | 41,698 |        |  |  |   |      
|                  |       |        |         |         |  |             |                           |          |                           |       |   |       |  |          |        |        |  |  |   |      
|December 31, 2001 |       |        |         |         |  |             |                           |          |                           |       |   |       |  |          |        |       
|$                 | 0.01  |        |         | 30,047  |  |             |                           | 5.81     |                           |       | $ | 0.01  |  |          |        | 30,047 |  |  | $ | 0.01  | 
|                  | 0.05  |        |         | 5,000   |  |             |                           | 6.08     |                           |       |   | 0.05  |  |          |        |       |  |  |   |      | 
|                  | 3.15  |        |         | 9,000   |  |             |                           | 6.58     |                           |       |   | 3.15  |  |          |        | 6,500  |  |  |   | 3.15  | 
|                  | 5.00  |        |         | 49,585  |  |             |                           | 8.12     |                           |       |   | 5.00  |  |          |        | 9,700  |  |  |   | 5.00  | 
|                  | 11.00 |        |         | 25,000  |  |             |                           | 9.75     |                           |       |   | 11.00 |  |          |        |       |  |  |   |      | 
|                  |       |        |         |         |  |             |                           |          |                           |       |   |       |  |          |        |        |  |  |   |      
|Totals            |       |        | 118,632 |         |  |             |                           |          |                           |       |   |       |  |          | 46,247 |        |  |  |   |      
|                  |       |        |         |         |  |             |                           |          |                           |       |   |       |  |          |        |        |  |  |   |      
|December 31, 2000 |       |        |         |         |  |             |                           |          |                           |       |   |       |  |          |        |       
|$                 | 0.01  |        |         | 40,750  |  |             |                           | 6.81     |                           |       | $ | 0.01  |  |          |        | 22,000 |  |  | $ | 0.01  | 
|                  | 0.05  |        |         | 10,000  |  |             |                           | 7.08     |                           |       |   | 0.05  |  |          |        |       |  |  |   |      | 
|                  | 3.15  |        |         | 9,800   |  |             |                           | 7.58     |                           |       |   | 3.15  |  |          |        | 4,800  |  |  |   | 3.15  | 
|                  | 5.00  |        |         | 53,300  |  |             |                           | 9.19     |                           |       |   | 5.00  |  |          |        | 4,800  |  |  |   | 5.00  | 
|                  |       |        |         |         |  |             |                           |          |                           |       |   |       |  |          |        |        |  |  |   |      
|Totals            |       |        | 113,850 |         |  |             |                           |          |                           |       |   |       |  |          | 31,600 |        |  |  |   |      
|                  |       |        |         |         |  |             |                           |          |                           |       |   |       |  |          |        |        |  |  |   |      

The fair value of the Companys stock options was estimated as of the grant
date using the Black-Scholes Option Pricing Model with the following weighted
average assumptions for the years ended December 31, 2002, 2001 and 2000:
Dividend yield of 12.0%, expected volatility of 0.0%, 0.0% and 0.0%,
respectively, and an expected holding period of five years. The weighted
average risk free interest rate of 1.8%, 2.2%, and 5.4% was used as of
December 31, 2002, 2001, and 2000, respectively. Based on these assumptions,
compensation expense was $81,013, $70,558 and $21,093 for the years ended
December 31, 2002, 2001 and 2000 respectively.

The weighted average fair value of options granted during the years ended
December 31, 2002, 2001 and 2000 was $0, $0, and $1.36, respectively.

F - 24



---



##### Table of Contents



NOTE 12. CAPITAL TRANSACTIONS

On July 1, 2000 the Company issued 689,320 additional shares of Preferred
Stock, at $10 per share, for cash of $5,698,900 and collateralized notes of
$1,194,300.

On June 30, 2001, the Company 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, the Company
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.

Assets received for the purchase of Preferred Stock from officers, directors or
other related parties, are recorded at fair value. Assets received by
non-related parties are recorded at fair value.

NOTE 13. RELATED PARTY

On October 23, 1997, the Company entered into a Management Agreement with the
Manager. The Manager is responsible for the day-to-day operations of the
Company and will perform such services and activities relating to the assets
and operations of the Company 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 the Company. 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 the
Company. 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.
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 the Company. In addition, the Manager will receive, as incentive
compensation for each fiscal quarter, an amount equal to 50% of the net income
before the dividend deduction of the Company in excess of an annualized return
to the Company equal to 12%. For the years ended December 31, 2002, 2001, and
2000 the Manager earned the following:

|                                    |  |      |           |      |  |      |           |  |  |   |           | 
|----------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                    |  | 2002 |           | 2001 |  | 2000
|                                    |  |      |           |      |  |     
|Loan Origination and
Extension Fees |  | $    | 1,610,059 |      |  | $    | 1,692,100 |  |  | $ | 980,176   | 
|Loan Servicing Fees                 |  |      | 361,224   |      |  |      | 266,556   |  |  |   | 179,129   | 
|Late Payment Charges                |  |      | 9,295     |      |  |      | 35,324    |  |  |   | 44,843    | 
|                                    |  |      |           |      |  |      |           |  |  |   |           | 
|Total Base Fees                     |  |      | 1,980,578 |      |  |      | 1,993,980 |  |  |   | 1,204,148 | 
|Incentive Compensation Bonus        |  |      | 314,249   |      |  |      | 88,084    |  |  |   |          | 
|                                    |  |      |           |      |  |      |           |  |  |   |           | 
|Total Compensation                  |  | $    | 2,294,827 |      |  | $    | 2,082,064 |  |  | $ | 1,204,148 | 
|                                    |  |      |           |      |  |      |           |  |  |   |           | 

F - 25



---



##### Table of Contents



NOTE 13. RELATED PARTY  CONTINUED

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 the borrower. Late payment charges are
received directly by the Manager from the borrower. The incentive compensation
is calculated in accordance with the agreement and paid for or accrued in
Manager and Directors fees the Companys financial statements.

There are several related parties who held collateralized notes with the
Company. As of December 31, 2002 and 2001, they owned approximately $696,000
and $1,080,000 in collateralized notes, which represents approximately 3.5% and
11.4% of the total balance, respectively.

In addition, SAC currently has an agreement with a realtor related to the
development of the property at Wildcreek. SAC will pay the realtor a finders
fee of $300 per lot and a 3.5% commission for each home sold. The realtor is
an employee of a real estate company which is owned by an independent director
and member of the audit committee. As of December 31, 2002, SAC had an
outstanding payable to the realtor of $18,300 related to the finders fee on
Phase II. There have been no homes sales closed as of December 31, 2002.

NOTE 14. SUBSEQUENT EVENTS

On January 23, 2003, the Company obtained a fourth line of credit totaling $2.5
million that will mature on January 23, 2004.

As of January 17, 2003, the Company created a second subsidiary, SAC II
incorporated in Delaware. SAC II is a qualified REIT subsidiary. 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. Therefore, it is subject to the 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 or
income of the REIT and its activities are treated as activities of the REIT of
the Company for purposes the REIT qualification tests and prohibitive
transaction limits

SPACE INTENTIONALLY LEFT BLANK

F - 26



---



##### Table of Contents






Part III




Item 10. Directors and Executive Officers of the Registrant



| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | The directors, executive officers and senior officers of Specialty
Trust and their positions are:

|                            |  |                                                         
|--------------------------- |  | --------------------------------------------------------
|Name                        |  | Position                                                
|Nello Gonfiantini III (1)   |  | Chairman of the Board of Directors,
President, Secretary
|                            |  |                                                         
|George E. Bull III(2)(3)    |  | Director                                                
|Roger M. Peltyn(2)(4)       |  | Director                                                
|Stephen V. Novacek(2)(4)(6) |  | Director                                                
|Ernest Martinelli(2)(3)(5)  |  | Director                                                
|Harvey C. Fennell(2)(3)     |  | Director                                                
|Mark Combs (2)(5)(6)        |  | Director                                                
|                            |  |                                                         
|Stephanie S. Schmitt        |  | Chief Financial Officer and Principal
Accountant        



| |                                                 
| | ------------------------------------------------
| | (1) Founder and promoter of Specialty Trust.    
|
| | (2) Independent Director                        
|
| | (3) Member of the Audit Committee               
|
| | (4) Member of the Manger Oversight Committee    
|
| | (5) Member of the Loan Review Committee         
|
| | (6) Member of the Corporate Governance Committee



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Information regarding the business background and experience of
Specialty Trusts directors and executive officers follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | NELLO GONFIANTINI III, age 48, was the sole founder and promoter of
Specialty Trust and serves as its Chairman of the Board, President,
and Secretary. Mr. Gonfiantini has owned and managed Specialty
Financial, a private mortgage finance and real estate development
business in Reno, Nevada, since 1994. From 1986 until 1994, Mr.
Gonfiantini was the Chairman, CEO and President of Home Federal
Savings Bank of Nevada, where he oversaw the commercial and
residential real estate lending operations. Prior to taking that
position in 1986, Mr. Gonfiantini was the Executive Vice President
of Home Mortgage Company, a mortgage banking firm and predecessor to
Home Federal Savings Bank of Nevada. Mr. Gonfiantini has a BA and an
MBA from the University of Denver.
|
| | GEORGE E. BULL III, age 54, is Chairman of the Board and Chief
Executive Officer and a founder in 1994 of Redwood Trust, Inc., Mill
Valley, California, a mortgage REIT. Mr. Bull was the President of
GB Capital until March 1997, and had served in that capacity since
he founded the predecessor of GB Capital in 1983. GB Capital
assisted banks, insurance companies and savings and loans in
managing                                                                                                                                                                                                                                                                                                                                                                         

70



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | portfolios of securitized and unsecuritized mortgage loans, in
arranging collateralized borrowings, in hedging balance sheet risks
and with other types of capital markets transactions. In addition,
GB Capital managed and advised troubled commercial real estate and
corporate investments. In 1991 and 1992, Mr. Bull served as Acting
Chief Investment Officer of First Capital Life Insurance Company,
managing its $4 billion securities portfolio and over $200 million
in commercial real estate loans. He also worked during this period
in various aspects of fixed income portfolio management with Wood
Island Associates, Inc. From 1991 through 1993, Mr. Bull oversaw the
management of the $350 million portfolio of commercial real estate
investments and the $8 billion securities portfolio of Executive
Life Insurance Company (in Rehabilitation) on behalf of the
California Department of Insurance. Mr. Bull formerly served as a
director of Eureka Bank in San Francisco and as a director of Home
Federal Savings Bank in Nevada.
|
| | ROGER M. PELTYN, age 60, has been President of the structural
engineering firm, Martin & Peltyn, Inc., Las Vegas, Nevada since
1981. Mr. Peltyn is a director of Southern Nevada Seismic Safety
Counsel; a director of Martin & Peltyn, Inc., Civil Engineers; and a
member of the American Society of Civil Engineers, American
Institute of Steel Construction, and the National Society of
Professional Engineers, Las Vegas, Nevada. He is a member of the
board of trustees of the Nevada Development Authority, President of
the Alliance for the Arts, and a director of the Clark County Public
Education Foundation.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | STEPHEN V. NOVACEK,age 57, has been a shareholder in the law firm,
Hale, Lane, Peek, Dennison, Howard and Anderson, located in Reno,
Las Vegas and Carson City, Nevada, since 1978. Mr. Novacek
specializes in real estate law and finance representing various
institutional lenders in residential and commercial transactions. He
is a member of the State Bar of Nevada and the American Bar
Association.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | ERNEST MARTINELLI, age 74, retired as Vice Chairman of Bank of
America Nevada in 1993 after a career in the banking business in
Nevada. He is Vice Chair of the Board of Directors of St. Marys
Healthcare Network and President of Martinelli Properties, Inc., a
commercial real estate development and investment company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | HARVEY C. FENNELL, age 55, is the Chief Financial Officer of Dickson
Realty, Inc., Reno, Nevada, and has been a realtor since 1987. Mr.
Fennell specializes in land and commercial real estate sales. He has
been a member of the Reno/ Sparks Association of Realtors and has
served on its Board of Directors. He is a member of the Nevada Real
Estate Commission, a state regulatory agency. Prior to 1987, Fennell
was a partner in the accounting firm of KPMG He formerly served as a
director of Home Federal Savings Bank in Reno, Nevada.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

71



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | MARK COMBS,age 56, is a private lender and investor specializing in
large commercial loans for land development and commercial
construction. Mr. Combs has completed numerous development projects
including; Saddlehorn, a 532 lot subdivision, in Reno, Nevada. In
1978, after obtaining his real estate brokers license, Mr. Combs
joined his wife Fianna in Dickson Realty, a real estate company
located in Reno, Nevada. Over the next twelve years, Dickson Realty
had grown to over 70 agents. In 1990, Mr. Combs sold his interest
in Dickson Realty to pursue the private lending business. Mr. Combs
is a native Nevadan and graduated from the University of Nevada with
a finance degree in 1969.
|
| | STEPHANIE S. SCHMITT, age 33, has been the Chief Financial Officer
and Principal Accountant of Specialty Trust and Specialty Financial
since August 2001. Ms. Schmitt is a Certified Public Accountant
with public accounting experience with Grant Thornton, LLP and KPMG,
LLP. Ms. Schmitt has a BA and a BS from the University of Colorado
 Boulder. She also has an MBA with an emphasis in Finance from
Villanova University.                                                                                                                                                                                                                                                                           



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Terms of Directors and OfficersSpecialty Trusts Board of Directors consists of such number of
persons as shall be fixed by the Board of Directors from time to
time by resolution to be divided into three classes, designated
Class I, Class II and Class III, with each class to be as nearly
equal in number of directors as possible. Currently there are seven
directors. At each annual meeting, the successors to the class of
directors whose term expires at that time are to be elected to hold
office for a term of three years, and until their respective
successors are elected and qualified, so that the term of one class
of directors expires at each such annual meeting.

|                      |  |                  
|--------------------- |  | -----------------
|Class I Directors     |  |                  
|                      |  |                  
|Nello Gonfiantini III |  | Term Expires 2005
|                      |  |                  
|Stephen Novacek       |  | Term Expires 2005
|                      |  |                  
|Class II Directors    |  |                  
|                      |  |                  
|George Bull III       |  | Term Expires 2004
|                      |  |                  
|Ernest Martinelli     |  | Term Expires 2004
|                      |  |                  
|Mark Combs            |  | Term Expires 2004

72



---



##### Table of Contents



|                    |  |                  
|------------------- |  | -----------------
|Class III Directors |  |                  
|                   
|Roger Peltyn        |  | Term Expires 2003
|                   
|Harvey Fennell      |  | Term Expires 2003



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the case of any vacancy on the Board of Directors, including a
vacancy created by an increase in the number of directors, the
vacancy may be filled by election of the Board of Directors or the
stockholders, with the director so elected to serve until the next
annual meeting of stockholders, if elected by the Board of
Directors, or for the remainder of the term of the director being
replaced, if elected by the stockholders; any newly-created
directorships or decreases in directorships are to be assigned by
the Board of Directors so as to make all classes as nearly equal in
number as possible. Directors may be removed only for cause and then
only by vote of a majority of the combined voting power of
stockholders entitled to vote in the election for directors. Subject
to the voting rights of the holders of the common stock, the Charter
may be amended by the vote of a majority of the combined voting
power of stockholders, provided that amendments to the Article
dealing with directors may only be amended if it is advised by at
least two-thirds of the Board of Directors and approved by vote of
at least two-thirds of the combined voting power of stockholders.
The effect of the foregoing as well as other provisions of Specialty
Trusts Charter and Bylaws may discourage takeover attempts and make
more difficult attempts by stockholders to change management.
Prospective investors are encouraged to review the Charter and
Bylaws in their entirety.
|
| | Officers are elected annually and serve at the discretion of the
Board of Directors. There are no family relationships between the
executive officers or directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Committees of the Board                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Audit Committee. The Audit Committee is composed of Messrs. Bull,
Martinelli and Fennell. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews
with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the
independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and
non-audit fees and reviews the adequacy of the Companys internal
accounting controls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Manager Oversight Committee. The Manager Oversight Committee is
composed of Messrs. Peltyn and Novacek. The Committee reviews
periodically the Management Agreement and the Managers performance
under that Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | The Loan Review Committee. The Loan Review Committee is composed of
Messr. Martinelli and Combs. The Committee reviews all loans and
the risk rating assignments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

73



---



##### Table of Contents





| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Corporate Governance Committee. The Corporate Governance Committee
is composed of Messr. Combs and Novacek. The Committee will help to
review and establish the corporate standards for ethics.                                                       
|
| | Other Committees. The Board of Directors may establish other
committees as deemed necessary or appropriate from time to time,
including, but not limited to, an Executive Committee of the Board
of Directors.                                        
|
| | In 2002, the Board of Directors met 5 times, each time with full
attendance. The audit committee met 3 times, the loan review
committee met 2 times, the manager oversight committee met 3 times,
and the corporate governance committee did not meet.
|
| | Compensation Committee Interlocks                                                                                                                                                                                                                     
|
| | No interlocking relationship exists between our Board of Directors
or officers responsible for compensation decisions and the Board of
Directors or compensation committee of any other company.                                                      




Item 11. Executive Compensation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Compensation of Directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | None of our directors has received any separate compensation for
service on the Board of Directors or on any committee thereof. We
pay directors who are not employed by Specialty Trust, independent
directors, $1,500 for each meeting attended in person and $750 for
each teleconference meeting. Committee members receive $500 for
each meeting attended in person and $250 for each teleconference
meeting. In addition, each Director referred to as an Independent
Director is granted options to purchase 10,000 shares of common
stock at the fair market value of the common stock upon becoming a
director. All directors receive reimbursement of reasonable
out-of-pocket expenses incurred in connection with meetings of the
Board of Directors. No director who is an employee of Specialty
Trust or the Manager will receive separate compensation for services
rendered as a director.
|
| | Executive Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Employee salaries and bonuses are paid through the Manager,
Specialty Financial, as part of and not in addition to the
management fee. For the years ended December 31, 2002, 2001 and
2000, Specialty Financial earned $1,980,578, $1,993,980 and
$1,204,148, respectively, in total base fees. Specialty Financial
also received an incentive compensation bonus of $314,249, $88,084
and $0 for the years ended, 2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                    

74



---



##### Table of Contents






Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information known to Specialty Trust
with respect to beneficial ownership of the Companys Capital Stock as of
December 31, 2002, by each person other than members of management known to
Specialty Trust to beneficially own more than five percent (5%) of the
Companys Capital Stock. Unless otherwise indicated in the footnotes to the
table, the beneficial owners named have, to the knowledge of the Company, sole
voting and investment power with respect to the shares beneficially owned,
subject to community property laws where applicable.

|                                 |  |                      |         |         |  |  |      |  
|-------------------------------- |  | -------------------- | ------- | ------- |  |  | ---- | -
|                                 |  | Beneficial Ownership
|                                 |  | of                  
|                                 |  | Capital Stock(1)    
|                                 |  |                     
|Name of Beneficial Owner         |  | Number               |         | Percent
|                                 |  |                      |         |        
|Raymond J. Poncia (1)            |  |                      | 527,645 |         |  |  | 7.35 | %
|Angelo Petrini (2)               |  |                      | 413,457 |         |  |  | 5.76 | %
|Julius and Joanne Ballardini (3) |  |                      | 406,775 |         |  |  | 5.66 | %
|Nello Gonfiantini, Jr. (4)       |  |                      | 366,161 |         |  |  | 5.10 | %



---



|(1) |  | Consists of 263,822 shares of Common Stock held by the Raymond
J. Poncia, Jr. Family Trust and 263,823 shares of Common Stock held
by Hotel-Casino Management, Inc. of which Mr. Poncia is President.                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Consists of 372,762 shares of Common Stock held by the 1987
Petrini Family Trust of which Mr. Petrini is co-trustee with his wife
Joan and 40,695 shares of Common Stock held by Delta Saloon Profit
Sharing Plan of which Mr. Petrini is trustee.                                                                                                                                                                                                                                                                                                                            
|   
|(3) |  | Consists of 406,775 shares of Common Stock held by the Julius
and Joanne Ballardini Family Trust Dated 4/14/92 of which Mr. & Mrs.
Ballardini are trustees.                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(4) |  | Consists of 195,842 shares of Common Stock held by the
Gonfiantini Family Trust of which Mr. Gonfiantini Jr. is trustee,
2,427 shares of Common Stock held by the Gonfiantini Family Decedent
Trust of which Mr. Gonfiantini is trustee, 75,846 shares of Common
Stock held by Mr. Gonfiantini, Jr. individually, 43,182 shares of
Common Stock held by Gonzo Properties of which Mr. Gonfiantini, Jr.
is a partner, and 48,864 shares of Common Stock which represents the
Gonfiantini Family Trusts 25% interest, as a tenant in common, in
195,455 shares of Common Stock.

75



---



##### Table of Contents



Beneficial Ownership of Capital Stock by Directors and Management

The following table sets forth certain information known to Specialty Trust
with respect to beneficial ownership of the Companys Capital Stock as of
December 31, 2002, by each director and by all directors and executive officers
as a group. Unless otherwise indicated in the footnotes to the table, the
beneficial owners named have, to the knowledge of the Company, sole voting and
investment power with respect to the shares beneficially owned, subject to
community property laws where applicable.

|                                                            |  |                      |         |         |  |  |       |  
|----------------------------------------------------------- |  | -------------------- | ------- | ------- |  |  | ----- | -
|                                                            |  | Beneficial Ownership
|                                                            |  | of                  
|                                                            |  | Capital Stock(1)    
|                                                            |  |                     
|Name of Beneficial Owner                                    |  | Number               |         | Percent
|                                                            |  |                      |         |        
|Nello Gonfiantini III (2)                                   |  |                      | 433,708 |         |  |  | 6.04  | %
|Ernest Martinelli (3)                                       |  |                      | 200,000 |         |  |  | 2.78  | %
|George E. Bull III (4)                                      |  |                      | 62,500  |         |  |  | *     |  
|Roger M. Peltyn (5)                                         |  |                      | 29,126  |         |  |  | *     |  
|Stephen V. Novacek (6)                                      |  |                      | 16,264  |         |  |  | *     |  
|Harvey Fennell (7)                                          |  |                      | 58,593  |         |  |  | *     |  
|Mark Combs                                                  |  |                      | 0       |         |  |  | *     |  
|Stephanie S. Schmitt (8)                                    |  |                      | 6,250   |         |  |  | *     |  
|                                                            |  |                      |         |         |  |  |       |  
|All Directors and Executive Officers as a Group (8 persons) |  |                      | 806,441 |         |  |  | 11.23 | %
|                                                            |  |                      |         |         |  |  |       |  



---

|*   |  | Less than one percent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | Assuming no exercise of the non-employee director options
(except by the Security holder named, separately).                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) |  | Consists of 341,662 shares of Common Stock held in the Nello
Gonfiantini III 1981 Trust of which Nello Gonfiantini III is trustee,
43,182 shares of Common Stock held by Gonzo Properties of which Nello
Gonfiantini III is a partner, and 48,864 shares which represents the
Nello Gonfiantini III 1981 Trusts 25% interest, as tenant in common,
of 195,455 shares of Common Stock; but does not include 713,077
shares of Common Stock beneficially owned by persons related by blood
or marriage to Mr. Gonfiantini with respect to which he has neither
voting nor investment power.
|   
|(3) |  | Consists of 150,000 shares of Common Stock held in the Ernest
Martinelli Family Trust of which Mr. Martinelli is trustee, and
50,000 shares of Common Stock held in the Martinelli Family
Partnership of which Mr. Martinelli is a partner.                                                                                                                                                                                                                                                                                                                                               
|   
|(4) |  | Consists of 2,500 shares of Common Stock issuable upon the
exercise of options and 60,000 shares of Common Stock held in the
Bull Trust of which Mr. Bull is trustee.                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(5) |  | Consists of 29,126 shares of Common Stock held in the Roger and
Sandy Peltyn Family Trust of which Mr. Peltyn is co-trustee.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(6) |  | Consists of 2,500 shares of Common Stock issuable upon the
exercise of options and 13,764 shares of Common Stock held
individually by Mr. Novacek.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(7) |  | Consists of 18,269 shares of Common Stock held in the Harvey
and Nancy Fennell Family Trust of which Mr. Fennell is co-trustee,
37,824 shares of Common Stock held in the Dickson Realty Profit
Sharing Plan of which Mr. Fennell is co-trustee and 2,500 shares of
Common Stock issuable upon the exercise of options after February 10,
2003.                                                                                                                                                                                                                                           
|   
|(8) |  | Consists of 6,250 shares of Common Stock issuable upon the
exercise of options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

76



---



##### Table of Contents






Item 13. Certain Relationships and Related Transactions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Manager                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Specialty Financial, serves as our manager and is responsible for
loan originations, loan servicing and our day-to-day operations. Mr.
Gonfiantini, a director and our sole executive officer, is also an
executive officer, director and the sole stockholder of Specialty
Financial. We have no separate employees from the Manager and we
share its facilities. We have no ownership interest in the Manager.
Specialty Financial has significant operating discretion as to the
implementation of our business strategy and policies.
|
| | Administrative Services Provided by the Manger                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Specialty Financial, as Manager, is responsible for our day-to-day
operations and performs such services and activities relating to the
assets and operations of Specialty Trust (the Company) as may be
appropriate, including:                                                                                                                                                                                                                                                                                                       



| | (i)    |  | representing the Company in connection with the
origination or purchase of mortgage loans;                                                                                                                                                                                                                                                  
| | ------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)   |  | in accordance with the directions of the Board of
Directors, investing or reinvesting any money of the Company;                                                                                                                                                                                                                             
|
| | (iii)  |  | furnishing reports and statistical and economic
research to the Company regarding the Companys real estate
lending activities and the performance of its portfolio of
mortgage loans;                                                                                                                                                      
|
| | (iv)   |  | administering the day-to-day operations of the
Company and performing administrative functions necessary in
the management of the Company, including the collection of
revenues, the payment of the Companys expenses, debts and
obligations and the maintenance of appropriate computer
services to perform such administrative functions;
|
| | (v)    |  | counseling the Company in connection with policy
decisions to be made by the Board of Directors;                                                                                                                                                                                                                                            
|
| | (vi)   |  | assisting the Company in its use of leverage to
finance mortgage loan acquisitions;                                                                                                                                                                                                                                                         
|
| | (vii)  |  | overseeing the servicing of the Companys mortgage
loans;                                                                                                                                                                                                                                                                                   
|
| | (viii) |  | establishing underwriting, appraisal and quality control
procedures for the mortgage loans of the Company;                                                                                                                                                                                                                                  
|
| | (ix)   |  | conducting a legal document review of each mortgage
loan acquired to verify the accuracy and completeness of the
information contained in the mortgage loans, security
instruments and other pertinent documents in the mortgage file;                                                                                                      
|
| | (x)    |  | providing the Company with data processing, legal
and administrative services to the extent required to implement
the business strategy of the Company;                                                                                                                                                                                     

77



---



##### Table of Contents





| | (xi)   |  | providing all actions necessary for compliance by
the Company with all Federal, state and local regulatory
requirements applicable to the Company in respect of its
business activities, including preparing or causing to be
prepared all financial statements required under applicable
regulations and contractual undertakings;
| | ------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (xii)  |  | providing all actions necessary to enable the
Company to make required Federal, state and local tax filings
and reports and generally enable the Company to maintain its
status as a REIT, including soliciting stockholders for
required information to the extent required by the REIT
Provisions of the Code;                   
|
| | (xiii) |  | communicating on behalf of the Company with the stockholders
of the Company as required to satisfy any reporting
requirements and to maintain effective relations with such
stockholders; and                                                                                                                                      
|
| | (xiv)  |  | performing such other services as may be required
from time to time for management and other activities relating
to the assets of the Company as the Board of Directors shall
reasonably request or the Manager shall deem appropriate under
the particular circumstances.                                                         



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Manager may enter into subcontracts with other parties to
provide us any such services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Management Incentive Fee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | We pay to Specialty Financial as incentive compensation for each
fiscal quarter, an amount equal to 50% of the tax net income of
Specialty Trust, before deduction of such incentive compensation, in
excess of the annualized return to Specialty Trust equal to 12%. The
incentive compensation calculation is calculated in accordance with
the agreement and paid for or accrued in Managers and Directors fees
in the Companys financial statements. The term return to Specialty
Trust is calculated for the quarter by dividing our taxable income
for the quarter by the net worth for the quarter. For such
calculations, the taxable income of the Company means the taxable
income of the Company before the Managers incentive compensation,
the deduction for dividends paid and net operating loss deductions
arising from losses in prior periods. A deduction for the Companys
interest expenses for borrowed money is taken when calculating
taxable income. Net worth for any period means the sum of the
gross proceeds from all prior offerings of its equity securities by
the Company, after deducting expenses and costs relating to the
offering (or for any period in which new equity securities are
issued, the arithmetic weighted average on the prior offering
proceeds and the new proceeds for the period), plus the Companys
beginning retained earnings (without taking into account any losses
incurred in prior periods and excluding amounts reflecting taxable
income to be distributed as dividends and amounts reflecting
valuation allowance adjustments). The definition return to
Specialty Trust is used only for purposes of calculating the
incentive compensation payable, and is not related to the actual
distributions received by stockholders. The incentive compensation
payments to Specialty Financial are made before any income
distributions are made to our stockholders.

78



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Managers base fee is calculated by the Manager and delivered to
us each quarter. We are obligated to pay the amount of the final
base fee in excess of the amount paid to the Manager at the
beginning of the month pursuant to the Managers good faith
estimate. We pay the incentive fee with respect to each fiscal
quarter following the delivery to us of the Managers written
statement setting forth the computation of the incentive fee for
such quarter.                                                                                                                                             
|
| | Discussions are currently taking place between the Manager and the
Compensation Committee to modify the management incentive fee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | For the years ended December 31, 2002, 2001 and 2000, we incurred
management incentive fees of $314,249, $88,084, $0, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Servicing Fee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Loan Servicing Fee. As part of the management fee, one-half of one
percent of the total mortgage loan portfolio is paid to the Manager
as a loan-servicing fee. 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 the borrower.
Payment of this fee, in effect, lowers the yield on our mortgage
loans. An undue emphasis on increasing the size of the mortgage loan
portfolio, thereby increasing the Managers compensation, could
result in the acquisition of riskier or more speculative loans.
|
| | For the years ended December 31, 2002, 2001 and 2000 we incurred
loan-servicing fees of $361,224, $266,556 and $ 179,129,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Loan Origination Fees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Origination Fee. The first 2.5% (2 1/2 points) of any origination
fees (points) collected from the borrower is paid to the Manager as
part of the management fee. The loan origination fees are received
by the Manger as part of the initial funding of the loan. The size
of the mortgage origination fees are market driven but may vary and
may have a direct impact upon the interest rate the borrower is
willing to pay and, therefore, on the interest income we would
receive from the loan.                                                                                                                 
|
| | For the years ended December 31, 2002, 2001 and 2000, the Manager
retained loan origination fees of $1,610,059, $1,692,100 and
$980,176, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Late Payment Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Late Payment Charges. Any loan payment which is past due 10 days is
charged a late payment charge of 10% of the total payment. Late
payment charges are received directly by the Manager from the
borrower. The late fee may be waived at the discretion of the
Companys management.                                                                                                                                                                                                                                                                                                                                 
|
| | For the years ended December 31, 2002, 2001 and 2000 the Manager
retained late charges of $9,295, $35,324, and $44,843, respectively                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

79



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | The operating expenses required to be borne by the Manager include
compensation and other employment costs, the cost of office space
and equipment and all other administrative expenses incurred in our
day-to-day operations. Those expenses do not include debt service or
taxes. While most costs are paid through the Manager from fees
earned by the Manager, we do pay directly certain REIT-related
expenses such as directors fees and legal and accounting fees.
There are no caps or ceilings on any category of fees, compensation
or other expenses payable by us except for compensation payable to
the Manager and expenses to be borne by the Manager as described
above.                                                                                                                                                                                                                                                                                                                                                              
|
| | Transactions with Management and Others                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Specialty Financial serves as our manager and is responsible for
loan originations, loan servicing and our day-to-day operations. Mr.
Gonfiantini, a director and our sole executive officer, is also an
executive officer, director and the sole stockholder of Specialty
Financial. We have no separate employees from the Manager and we
share its facilities. We have no ownership interest in the Manager.
Specialty Financial has significant operating discretion as to the
implementation of our business strategy and policies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Term and Termination                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | The management agreement had an initial term of three years
beginning January 30, 1998 and is renewed automatically for
successive one-year periods unless we timely deliver a notice of
non-renewal. Upon non-renewal of the management agreement without
cause, a termination fee will be payable to the Manager in an amount
equal to the greater of (i) the fair value of the management
agreement as established by an independent appraiser, or (ii) 4% of
the mortgage loan portfolio of Specialty Trust. At December 31,
2002, 4% of our mortgage loan portfolio would be approximately $3.8
million. In addition, we have the right to terminate the management
agreement at any time for cause. A majority of our unaffiliated
directors (currently 6 of 7 directors are unaffiliated) may
determine that the Manager has violated the management agreement in
a material respect and, after notice and an opportunity to cure,
terminate the agreement. Upon such a termination for cause, no
termination fee will be payable to the Manager.

80



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Collateralized Notes                                                                                                                                                                                                                                                  
|
| | There are several related parties who hold collateralized notes with
Specialty Trust. As of December 31, 2002, there were four (4)
related parties who owned approximately $696,000 in collateralized
notes, which represents approximately 3.5% of the total balance.




Item 14. Controls and Procedures



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A review and evaluation was performed by the Companys management,
including the Companys President and Secretary and Chief Financial
Officer (the CFO), of the effectiveness of the design and
operation of the Companys disclosure controls and procedures as of
a date within 90 days prior to the filing of this Annual Report on
Form 10-K. Based on that review and evaluation, the President and
Secretary and CFO have concluded that the Companys current
disclosure controls and procedures, as designed and implemented,
were effective. There have been no significant changes in the
Companys internal controls or in other factors that could
significantly affect the Companys internal controls subsequent to
the date of their evaluation. There were no significant material
weaknesses identified in the course of such review and evaluation,
and therefore, no corrective measures were taken by the Company.

SPACE INTENTIONALLY LEFT BLANK

81



---



##### Table of Contents






PART IV




Item 15. Exhibits, Financial Statement Schedules, 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                                                                                                                                              
|            |        |          |  |                                                                                                                                                                  
|            | 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.
|            |        |          |  |                                                                                                                                                                  
|            | 11.1   |          |  | Schedules IV for the years ended December 31,
2002, 2001 and 2000                                                                                                
|            |        |          |  |                                                                                                                                                                  
|            | 99.1   |          |  | Statement of Chief Executive Officer Regarding Form
10-K for Year Ending December 31, 2002                                                                       
|            |        |          | 
|            | 99.2   |          |  | Statement of Chief Financial Officer Regarding Form
10-K for Year Ending December 31, 2002                                                                       



---

|*  |  | 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 8-K filed by Specialty Mortgage
Trust, Inc. with the Securities and Exchange Commission on
February 2, 2001.                                                       

(b)  Reports on Form 8-K



| |                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 11, 2002, the Company filed a current report on Form
8-K under Item 4 that Grant Thornton LLP was dismissed as
principal accountant and KPMG LLP was selected as the Companys
independent public accountants for the fiscal year ending
December 31, 2002.
|
| | On October 25, 2002, The Company filed a current report on Form
8-K/A Amendment No.1 to the current report on Form 8-K dated
October 11, 2002 to make certain technical corrections to the
original Form 8-K filed.                                                   

82



---



##### 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: March 15, 2003 |  | By:                   |  | /s/ Nello
Gonfiantini, III                                                                                                      
|                      |  |                       |  | Nello Gonfiantini, III
Chairman, President, and Secretary                                                                       
|                      |  |                       |  |                                                                                                                                 
|                      |  |                       |  | (Signed in the capacity of (i) duly
authorized officer of the registrant)                                                       
|                      |  |                       |  |                                                                                                                                 
|Dated: March 15, 2003 |  | By:                   |  | /s/ Stephanie S. 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)
|                      |  |                       |  |                                                                                                                                 

83



---



##### Table of Contents



Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

|                           |  |                                                                  |  |               
|-------------------------- |  | ---------------------------------------------------------------- |  | --------------
|Signature                  |  | Title                                                            |  | Date          
|                          
|/s/ Nello Gonfiantini, III |  | Nello Gonfiantini, III
Chairman of the Board
President
Secretary |  | March 15, 2003
|                          
|/s/ Stephanie S. Schmitt   |  | Stephanie Schmitt
Chief Financial Officer
Principal Accountant   |  | March 15, 2003
|                          
|/s/ George E. Bull III     |  | George E. Bull III
Director                                      |  | March 15, 2003
|                          
|/s/ Roger M. Peltyn        |  | Roger M. Peltyn
Director                                         |  | March 15, 2003
|                          
|                           |  | Stephen V. Novacek
Director                                      |  | March 15, 2003
|                          
|/s/ Ernest Martinelli      |  | Ernest Martinelli
Director                                       |  | March 15, 2003
|                          
|/s/ Harvey Fennell         |  | Harvey Fennell
Director                                          |  | March 15, 2003
|                          
|                           |  | Mark Combs
Director                                              |  | March 15, 2003

84



---



##### Table of Contents



CERTIFICATION

I, Nello Gonfiantini, III, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Specialty Trust, Inc.                                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                               



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants Board of Directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                            |  |                                  
|----------------------------------------------------------------------------------------------------------- |  | ---------------------------------
|/s/ Nello Gonfiantini III

Name: Nello Gonfiantini IIITitle : Chairman of the Board, Presidentand Secretary |  | Dated this 15th day of March 2003

85



---



##### Table of Contents



CERTIFICATION

I, Stephanie Schmitt, III, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Specialty Trust, Inc.                                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                               



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants Board of Directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                              |  |                                   
|----------------------------------------------------------------------------- |  | ----------------------------------
|/s/ Stephanie Schmitt

Name: Stephanie SchmittTitle : Chief Financial Officer |  | Dated this 15th day of March, 2003

86



---



##### Table of Contents



Independent Auditors Report on Schedule

The Board of Directors

Specialty Trust, Inc. and Subsidiary:


Under date of March 18, 2003, we reported on the
consolidated balance sheet of Specialty Trust, Inc. and
Subsidiary (the Company) as of December 31, 2002, and the related
consolidated statements of earnings, stockholders equity
and comprehensive income, and cash flows for the year then
ended, which are included in the Company's 2002 Annual Report on Form 10-K. In connection
with our audit of the aforementioned consolidated financial
statements, we audited the related consolidated financial
statement schedule included in such Form 10-K. This financial
statement schedule is the responsibility of the Companys
management. Our responsibility is to express an opinion on this
financial statement schedule based on our audit.

In our opinion,
such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set
forth therein.



| |             
| | ------------
| | /s/ KPMG LLP

Sacramento, California


March 18, 2003


87



---



##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Specialty Trust, Inc.

In connection with our audits of the financial statements of Specialty
Trust, Inc. referred to in our report dated January 25, 2002, which is
included in the annual report to security holders, we have also audited
Schedules II and IV for each for the two years in the period ended
December 31, 2001. In our opinion, these schedules when considered in
relation to the basic financial statements taken as a whole, present
fairly, in all material respects, the information required to be set forth
therein.

/s/ GRANT THORNTON LLP

Reno, Nevada
January 25, 2002

88